INVESTMENT SERVICES & CAPITAL MARKETS
ESMA will not publish August SI regime data for non-equity instruments other than bonds and CTP data
On 28 June 2022, ESMA announced that it will not publish the 1 August 2022 publication of the systematic internaliser (SI) regime data for non-equity instruments other than bonds, as well as that of the consolidated tape (CTP) data. This is due to operational constraints which prevent it from performing the scheduled calculations.
ESMA, upon request of market participants, has been computing, on a voluntary and best effort basis, the total volume and number of transactions executed in the EU in order to help market participants meet their obligations since that data is not otherwise easily available.
Systematic Internaliser Regime
The non-publication of the data means the mandatory SI regime will not apply from 15 August to 14 November 2022, and investment firms will not need to perform the SI-test for non-equity instruments other than bonds. However, investment firms can continue to opt into the SI-regime in the interim period.
The SI-calculations for non-equity instruments other than bonds will resume on 1 November 2022, based on an observation period from 1 April 2022 to 30 September 2022. Investment firms will then be required to perform the SI determination by 15 November 2022.
The CTP calculations will resume at the next regular publication date on 1 February 2023 based on an observation period from 1 July 2022 to 31 December 2022.
ESMA reminds reporting entities of their obligations to continue reporting transparency data also in the absence of the August publication for non-equity instruments other than bonds, in order to ensure that the transparency data covers trading activity necessary for subsequent transparency calculations.
ESMA updates MAR Q&A
On 23 June 2022, ESMA published an updated version of its Q&A on the Market Abuse Regulation (MAR).
The new Q&A 9.2, in the section on market soundings, is on the scope of Article 11(1a) of MAR.
ESMA explains that the scope of Article 11(1a) of MAR is limited to the communication of information to the potential qualified investors who negotiate the terms and conditions to subscribe to the bonds only. Article 11(1a) sets forth an exception from the market soundings regime provided in Article 11(1), which has to be interpreted narrowly. The communication of information to potential investors contacted after the terms and conditions have been determined therefore falls in the scope of Article 11(1), as it takes place prior to the announcement of a transaction, in order to gauge the interest of potential investors in a possible transaction and the conditions relating to it.
Further, Recital 6 of Regulation (EU) 2019/21151 clarifies that the aim of the communication of information in that negotiation phase is to structure and complete the transaction as a whole, and not to gauge the interest of potential investors as regards a predefined transaction. This reasoning is based on the fact that the negotiation phase of the transaction essentially differs from the communication of information to gauge the interest of potential investors. Therefore, the exception provided in Article 11(1a) relates only to private placements being the result of negotiations between an issuer and a limited number of potential qualified investors, aiming to determine the contractual terms and conditions of the transaction.
European Commission extends EMIR temporary exemption for pension scheme arrangements until June 2023
On 9 June 2022, the European Commission published a report on the temporary exemption under EMIR from the central clearing obligation for entities operating Pension Scheme Arrangements (PSAs), in relation to certain types of over-the-counter (OTC) derivatives.
The current central clearing exemption expires on 18 June 2022. EMIR REFIT allows the Commission to extend this temporary exemption for the last time until 18 June 2023, were it to conclude that market participants need additional time to further develop and adopt appropriate technical solutions, and that the adverse effects of centrally clearing derivative contracts on the retirement incomes of pensions remain unchanged.
Since 2019, there has been substantial progress towards central clearing for PSAs, including some PSAs partially moving to central clearing on a voluntary basis. Nevertheless, further operational steps are needed. In particular, EU CCPs should use the allotted time to further develop their facilitated access and collateral transformation models, to increase their attractiveness to PSAs, in particular smaller ones, which seem currently to be more reluctant to clear. At the same time, pension funds should ensure that they possess sufficient organisational competences and capacities to handle clearing of their derivative portfolios.
For these reasons, the Commission will prolong the clearing exemption for PSAs for a final year. From 19 June 2023, PSAs will be required under EMIR to clear.
ESAs propose extending temporary exemptions regime for intragroup contracts during EMIR review
On 13 June 2022, the ESAs published a final report with draft regulatory technical standards (RTS) proposing to amend the Commission Delegated Regulation on the risk mitigation techniques for over-the-counter (OTC) derivatives not cleared by a Central Clearing Counterparty (CCP) under the European Market Infrastructure Regulation (EMIR).
The draft RTS propose extending the current temporary exemptions regime for intragroup contracts by three years. This will accommodate the ongoing assessment of third-country equivalence and allow for a review of the intragroup exemptions framework under the EMIR review.
ESMA re-prioritisation of 2022 deliverables
On 30 June 2022, ESMA published a letter sent to the Chair of the European Commission setting out which deliverables it has identified that can be deprioritised or postponed in order for it to deliver on its 2022 work programme, which include: (i) annual reports in relation to CSDR implementation, accepted market practices under MAR and supervisory measures and penalties under EMIR (no reports in 2022); (ii) two reports in relation to the EMIR Refit; (iii) a report on the efficiency of SFTR reporting and on SFTR fees; and (iv) the STS Peer Review (delayed till 2024). The specific reasons for the delay/deprioritisation of each of the deliverables are summarised in the annex and have been discussed with Commission staff in the relevant groups and committees.
New EU Authority for Anti-money laundering: Council agrees its partial position
On 29 June 2022, the Council of the European Union announced that it had agreed its partial position on the proposed Regulation establishing a dedicated Anti-money laundering Authority (AMLA). In its position, the Council adds powers to the Authority to directly supervise certain types of credit and financial institutions, including crypto asset service providers, if they are considered risky. It also entrusts the Authority to supervise up to 40 groups and entities – at least in the first selection process – and to ensure a complete coverage of the internal market under its supervision. More powers are also given to the general board in the governance of AMLA.
The Council’s position is partial as it has not yet agreed on the location at which the new Authority will have its seat.
UCITS Directive and AIFMD
Council agrees its position on updated rules for hedge funds, private debt funds, and other alternative investment funds and UCITS Directive
On 17 June 2022, the Council of the European Union agreed its position on the proposed Directive amending the AIFMD and the UCITS Directive regarding delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services and loan origination by alternative investment funds.
In a related press release, the Council stressed the importance of consistent harmonisation in the area of liquidity risk management. In particular, it underlined the need to improve the availability of liquidity management tools, with new requirements on managers to provide for the activation of these instruments. This will help ensure that fund managers are well equipped to deal with significant outflows in times of financial turbulence.
The Council also supports the creation, as proposed by the European Commission, of an EU framework for loan-originating funds, i.e. funds that provide credit to companies, supplemented with several requirements to alleviate risks for financial stability and to ensure an appropriate level of investor protection.
The Council further clarifies the rules for outsourcing and the delegation of certain functions by fund managers to third parties and increases the supervisory cooperation in this area. It also introduces new reporting requirements on delegation arrangements for the purpose of an improved monitoring and supervision of the application of the EU regulatory framework. Precise reporting obligations on outsourcing will reduce the possibilities for creating letterbox companies.
Other key issues for the Council concern the framework for the provision of cross-border services by depositaries, new reporting obligations for UCITS for the purpose of risk monitoring and new transparency rules to enhance investor protection.
Council Presidency final compromise text of proposed Directive amending AIFMD and UCITS Directive
On 21 June 2022, the Council of the EU published a note containing the Presidency’s final compromise text of the proposed Directive amending the AIFMD and UCITS Directive regarding delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services and loan origination by alternative investment funds. The Council announced on 17 June that it had agreed its general approach (please see above).
Delegated Regulation postponing application date of certain PRIIPs-related disclosures
On 24 June 2022, the European Commission published the delegated regulation which postpones the application date of certain PRIIPs-related disclosures to 1 January 2023 (instead of 1 July 2022).
The delegated regulation also prolongs the application of Article 14(2) of Commission Delegated Regulation (EU) 2017/653 until 31 December 2022 (instead of 30 June 2022) concerning the ability to use UCITS Key Investor Information to provide specific information for the purposes of disclosures relating to PRIIPs offering a range of options for investment.
While the entry into force of the delegated act will take place 20 days after its publication in the Official Journal, that is to say on 14 July 2022, the intention of the co-legislators is clearly to
- postpone the start of application of the new rules included in Delegated Regulation 2021/2268 to 1 January 2023
- prolong the application of Article 14(2) of Delegated Regulation (EU) 2017/653 until 31 December 2022
National competent authorities should take into account these elements of timing when discharging their supervisory tasks.
European Commission requests input from ESAs on greenwashing risks and supervision of sustainable finance policies
On 30 June 2022, the European Commission published a request for input to the ESAs relating to greenwashing risks and the supervision of sustainable finance policies. The ESAs are requested to provide:
- input on the occurrence of greenwashing and potential for greenwashing risks as well as an overview and assessment of supervisory practices, experience, convergence and supervisory capacities related to the prevention of greenwashing through available tools and powers at the time of this request. This should include whether existing tools and data are sufficient to adequately monitor and address greenwashing
- a common high-level understanding of the key features of greenwashing complemented with more specific sectorial definitions where relevant and necessary; and
- early insight on whether current legal definitions aimed at addressing greenwashing are understood consistently by supervisors and market participants.
The European Commission requests that the ESAs publish progress reports in 12 months and final reports in 24 months.
ESMA publishes results of its call for evidence on ESG ratings
On 27 June 2022, ESMA published a letter (dated 24 June 2022) to the European Commission providing its findings from the Call for Evidence to gather information on the market structure for ESG rating providers in the European Union.
The key findings are:
- ESG rating providers – the structure of the market shows that there is a small number of very large non-EU providers, and a large number of significantly smaller EU entities. While the legal entities of respondents are spread out across almost half of the EU Member States, a large number of these are clustered in a small number of Member States;
- Users of ESG ratings are typically contracting for these products on an investor-pays basis from several providers simultaneously. Their reasons for selecting several providers are to increase coverage, either by asset class or geographically, or in order to receive different nature of ESG assessments. The most common shortcomings identified by the users were a lack of coverage of a specific industry or a type of entity, insufficient granularity of data, and a lack of transparency around methodologies used by ESG rating providers. However, the provision of ESG ratings on an issuer-pays basis was also evidenced and more prevalent than anticipated; and
- Entities covered by ESG ratings dedicate at least some level of resourcing to their interactions with ESG rating providers, although the amount largely depends on the size of the rated entity itself. Most respondents highlighted some degree of shortcoming in their interactions with the rating providers, most notably on the level of transparency as to the basis for the rating, the timing of feedback or the correction of errors.
The feedback received is indicative of an immature but growing market which, following several years of consolidation, has seen the emergence of a small number of large non-EU headquartered providers.
ESMA will continue supporting the European Commission in their assessment of the need for introducing regulatory safeguards for ESG ratings.
Findings of the assessment of Compliance Officers’ Annual Reports and Internal Audit Reports on the prevention of money laundering and terrorist financing, for the year 2020
On 2 June, the CySEC through the issuance of circular C516 informed Regulated Entities (Investment Firms, ASPs, Fund Managers and Self-Managed Funds, Crypto Asset Service Providers etc.) of the CySEC’s findings following assessments of the AML Compliance Officer and Internal Auditor’s annual reports on AML for the year 2020.
The CySEC identified a number of common weaknesses and deficiencies across the 2 reports which it listed in the Circular. CySEC reminded Regulated Entities of their obligations regarding the content and the information that the reports must contain. The CySEC further expects Regulated Entities to consider the findings of the circular when preparing the reports for 2021 and onwards.