INVESTMENT SERVICES & CAPITAL MARKETS
MIFID/ MIFIR
ESMA launches Call for Evidence on sustainability in suitability and product governance
On 16 June 2023, ESMA launched a Call for Evidence on integrating sustainability preferences into suitability assessment and product governance arrangements under MIFID II.
The objective of this Call for Evidence is to gather industry feedback that will help better understand the evolution of the market and provide answers as to how firms apply the new MiFID rules on sustainability.
In particular, the Call for Evidence aims to help ESMA:
- develop a better understanding of how MIFID II requirements are being implemented and applied by firms across the Union and the challenges firms face in their application;
- gain a better understanding of investor experience and reactions to the inclusion of sustainability factors in investment advice and portfolio management services; and
- collect information, views and data on main trends on aspects related to the provision of sustainable investment products and services to retail clients.
ESMA has previously updated its Guidelines on suitability and product governance requirements following the inclusion of sustainability-related requirements for investment firms into MIFID II.
Next steps
ESMA, together with the National Competent Authorities (NCAs), will assess the responses to this Call for evidence and continue monitoring the application by firms of the MIFID II requirements on suitability and product governance, including the related ESMA Guidelines.
Provisional agreement on proposals to improve MIFID II market data access and transparency
On 29 June 2023, the European Parliament and the Council of the EU announced they had reached provisional political agreement on the proposed amendments to MIFIR and MIFID II which were introduced to improve access to market data and trade transparency.
Negotiators came to an agreement in relation to three key issues:
- An EU-wide consolidated tape (CT), Currently, trading data is scattered across multiple platforms, such as stock exchanges and investment banks, making it difficult for investors to access the accurate and up-to-date information they need to take decisions.
The revision agreed will establish EU-level ‘consolidated tapes’ or centralised data feeds for different kinds of assets, bringing together market data provided by platforms on which financial instruments are traded in the EU. This will make it easier for both professional and retail investors to access key information such as the price of instruments and the volume and time of transactions. Market data from all trading platforms will be included in consolidated tapes, which will aim to publish the information as close as possible to real time. As a result, investors will have access to up-to-date transaction information for the whole of the EU.
- Payment for order flows: the practice through which brokers receive payments for forwarding client orders to certain trading platforms (‘payment for order flows’ (PFOF)) will be banned across Europe immediately, with the exception of certain countries where PFOF is more common. which will have to implement the ban before 30 June 2026
- Commodity derivatives: the co-legislators also reached an agreement on amendments proposed by the European Parliament on commodity derivatives.
Next steps
Once the text of the provisional political agreement has been consolidated, it will need to be formally adopted by both the Council and the Parliament, before it can be published in the EU’s Official Journal and enter into force.
Central Securities Depository Regulation
Provisional agreement reached on CSDR Refit Regulation
On 27 June 2023, the Council of the EU announced that it has reached provisional political agreement with the European Parliament on the proposed Central Securities Depository Regulation (CSDR) Refit Regulation. The Council highlights that the new Regulation:
- clarifies and simplifies the passporting rules, reducing the barriers to cross-border settlement and easing the administrative and financial burden;
- improves cooperation between supervisors by requiring a supervisory college to be set up in cases where a Central Securities Depository’s (CSD) activities in at least two other member states are considered to be of substantial importance to the functioning of the securities markets and investor protection. Supervisors will also have access to better information about the activities of non-EU CSDs operating in the EU;
- contains measures to improve efficiency by amending certain elements of the settlement discipline regime, including the preconditions for applying so-called mandatory buy-ins; and
- adjusts the conditions under which a CSD can access banking-type services, including through other CSDs. As a result, offering services for a broader range of currencies as well as across borders will be facilitated.
The provisional agreement still needs to be formally adopted by the Council and the European Parliament.
EMIR
ESMA launches Fifth Stress Test Exercise for Central Counterparties
On 31 May 2023, EMSA launched its fifth Stress Test Exercise for Central Counterparties (CCPs) under the European Markets Infrastructure Regulation (EMIR). The CCP Stress Test framework is complemented by an adverse market scenario provided by the European Systemic Risk Board (ESRB).
Fourteen CCPs authorised in the EU and two UK CCPs classified as Tier 2 (LCH Ltd, ICE Clear Europe Ltd) are included in this exercise.
Components of ESMA’s CCP stress test framework: ESMA, in cooperation with the National Competent Authorities (NCAs) and the European Systemic Risk Board (ESRB), developed the framework covering the following components:
- Credit Stress: assesses the sufficiency of CCPs’ resources to absorb losses under a combination of market price shocks and member default scenarios;
- Concentration risk: assesses the impact of liquidation costs derived from concentrated positions;
- Liquidity Stress: assesses the sufficiency of CCPs’ liquid resources under a combination of market price shocks, member/liquidity provider default scenarios and additional liquidity stress assumptions;
- Climate risk: assesses the degree to which the CCP’s business model is affected by the transition to a carbon-neutral economy, the consequences of the transition on the collateral posted by clearing members, and explores the impact of physical risk on CCPs; and
- Reverse Stress: increases the severity of the contemplated scenarios and identifies breaking points of the eco-system for credit, concentration and liquidity risks.
Market Stress Scenarios
The resilience of CCPs is tested under stress scenarios reflecting extreme but plausible market conditions. The European Central Bank (ECB), in close collaboration with the ESRB and ESMA, developed a new adverse market scenario, including a macro-economic narrative and adverse market shocks.
ESMA will also carry out an analysis of CCPs’ resources and participants.
Next steps
The data submitted by the reporting entities will first be validated by ESMA and the NCAs and later analysed. The results are scheduled to be published in a final report in H2 2024.
ESMA periodically assesses the resilience and safety of authorised EU and Tier 2 Third Country CCPs to adverse market developments with the aim of identifying any potential shortcomings in their set-up/risk management.
European Supervisory Authorities letter to European Commission on EMIR bilateral margining framework and equity options
On 13 June 2023, the European Supervisory Authorities (ESAs) published a letter sent to the European Commission relation to the exemption for non-centrally cleared OTC derivatives that are single-stock equity options or index options (‘equity options’) from the bilateral margining framework, as set out in the Bilateral Margin RTS.
The ESAs note that the exemption, together with an exemption for intragroup derivative contracts, has been repeatedly extended, most recently at the request of the European Commission, but is now set to expire on 4 January 2024. They therefore seek clarity on what the permanent treatment of equity options should be. The ESAs note that there is some disagreement on the desirability of the exemption and therefore consider that the ongoing EMIR review should look into the issue further.
ECON draft reports on EMIR 3 legislative package
ECON published its draft reports on the European Commission’s legislative proposals for:
- a Regulation amending EMIR, the Capital Requirements Regulation and the Money Markets Funds Regulation as regards measures to mitigate excessive exposures to third-country CCPs and improve the efficiency of Union clearing (EMIR 3) (dated 13 June); and
- a Directive on the treatment of concentration risk towards CCPs and the counterparty risk on centrally cleared derivative transactions (dated 9 June).
The draft reports set out ECON’s suggested amendments to the European Commission’s proposed texts.
ESMA
ESMA five-year Data Strategy
On 15 June 2023, ESMA launched a five-year Data Strategy. Over the next five years, ESMA intends to:
- become an enhanced data hub – focusing on improved data and information accessibility, interoperability and usability, and achieving synergies and economies of scale;
- ensure access to data of public interest – contribute to providing easily accessible and usable information to the market participants, including to retail investors, in machine readable formats and via user-friendly search and analytical interfaces;
- promote data-driven supervision – enable cutting-edge, smart and effective data-driven supervision by joint developments and use of novel technologies;
- increase data collaboration – achieve better data standardisation, quality and reusability, and to promote the adoption of innovative technologies;
- produce efficient data policy output – reduce the compliance burden for reporting entities by reducing duplicative and inconsistent requirements, optimising reporting flows, effective and efficient data sharing, and exploiting emerging technologies; and
- facilitate systematic data use – establish processes, methodologies and tools enabling systematic use of data for evidence-based policy development, supervision and risk assessment.
This strategy is intended to be revisited over time as new legislative, technological or any relevant types of development emerge that need to be addressed in a way that would require adjustments.
SFTR
ESMA Q&A on SFTR data reporting
On 7 June 2023, ESMA published a Q&A on SFTR data reporting. The purpose of the Q&A is to promote common supervisory approaches and practices in the application of SFTR in relation to regulatory data reporting topics. It provides responses to questions posed by the general public, market participants and competent authorities in relation to the practical application of SFTR. ESMA will update and expand the Q&A as and when appropriate.
FINANCIAL CRIME
EBA finds that money laundering and terrorist financing risks in payments institutions are not managed effectively
On 16 June 2023, the European Banking Authority (EBA) published its Report on money laundering and terrorist financing (ML/TF) risks associated with EU payment institutions. Its findings suggest that ML/TF risks in the sector may not be assessed and managed effectively by institutions and their supervisors.
In 2022, the EBA assessed the scale and nature of ML/TF risk in the payment institutions sector. It considered how payment institutions identify and manage ML/TF risks and what supervisors do to mitigate those risks when considering an application for the authorisation of a payment institution and during the life of a payment institution.
The EBA’s findings suggest that generally institutions in the sector do not manage ML/TF risk adequately. AML/CFT internal controls in payment institutions are often insufficient to prevent ML/TF. This is in spite of the high inherent ML/TF risk to which the sector is exposed.
The EBA’s findings also suggest that not all competent authorities are currently doing enough to supervise the sector effectively. As a result, payment institutions with weak AML/CFT controls can operate in the EU, for example by establishing themselves in Member States where authorisation and AML/CFT supervision processes are less stringent to passport their activities cross-border afterwards.
Failure to manage ML/TF risks in the payment institutions sector can impact the integrity of the EU’s financial system. The EBA’s work on access to financial services further suggests that failure to address those risks will also undermine efforts to improve access by payment institutions to payment accounts.
Several of these findings relate to issues addressed in EBA Guidelines. A more robust implementation by supervisors and institutions of provisions in these guidelines will mitigate the sector’s exposure to ML/TF risks.
Delegated Regulation updates list of high-risk third countries
On 26 June 2023, Delegated Regulation (EU) 2023/1219, which amends Delegated Regulation (EU) 2016/1675 on the list of high-risk third countries with strategic anti-money laundering and countering terrorism financing (AML/CFT) deficiencies under the Fourth Money Laundering Directive (MLD4), was published in the Official Journal.
The Delegated Regulation adds Nigeria and South Africa to the list, while also removing Cambodia and Morocco. It will enter into force on 16 July 2023 (20 days after its publication in the Official Journal).
FUNDS
UCITS
ESMA updates Q&As on application of UCITS Directive
On 14 June 2023, ESMA updated its Q&A on the application of the UCITS Directive. ESMA has added new Q&As on: (i) the management of AIFs and pension schemes by UCITS management companies; (ii) the de-notification of marketing arrangements for UCITS; and (iii) the scope of activities passported by UCITS management companies.
European Commission requests technical advice from ESMA on review of Eligible Assets Directive
On 16 June 2023, ESMA published a letter (dated 6 June 2023) it received from the European Commission formally requesting technical advice on the review of the Eligible Assets Directive (EAD).
The European Commission plans to review the EAD, to take stock of the market practices to ensure that the eligibility rules are implemented in a uniform manner in all Member States, also taking into account market and regulatory developments that have occurred over the last 16 years.
Therefore, the European Commission has mandated ESMA to carry out an assessment of the implementation of the EAD in Member States, to analyse whether any divergences have arisen in this area and to provide the European Commission with a set of recommendations on how the EAD should be revised to keep it in line with market developments. In particular, the European Commission requests ESMA to:
- propose clarifications on the key definitions and the criteria against which the eligibility of an asset is assessed;
- analyse whether and to what extent cross-references to other EU legal frameworks could improve legal clarity and, where appropriate, consistency between these frameworks;
- assess the risks and benefits of UCITS gaining exposures to asset classes that are not directly investable for UCITS;
- advise on possible legislative clarifications to address the shortcomings identified in the context of its supervisory convergence work;
- conduct a data gathering exercise on the manner and the extent to which UCITS have gained direct and indirect exposures to certain asset categories that may give rise to divergent interpretations and/or risk for retail investors (e.g. structured/leveraged loans, catastrophe bonds, emission allowances, commodities, crypto assets, unlisted equities, and other relevant asset classes); and
- make a preliminary assessment of the impacts of the proposed regulatory adjustments, if any, taking into account the characteristics of the underlying market.
The European Commission has requested that ESMA delivers its technical advice by 31 October 2024.
AIFMD
ESMA issues AIMFD reporting IT technical guidance (rev 6)
On 8 June 2023, ESMA published an updated IT technical guidance for AIFMD reporting that introduces new validation rules making more fields mandatory or with stricter rules to improve data quality and will be applicable from November 2023 onwards. The IT technical guidance revision 6 replaces the IT technical guidance revision 5 published in January 2023.
Reporting entities should use the version revision 6 to submit reports required under Articles 3(3)(d) and 24(1), (2) and (4) of AIFMD by November 2023. The reference period for the first reporting is Y1, H2, Q4 or X2 2023.
ESMA updates Q&A on the application of AIFMD
On 14 June 2023, ESMA also updated its Q&A on the application of the AIFMD. It has added new Q&As in relation to: (i) notifications of AIFs – specifically in relation to third party investment strategies, the pre-marketing notification and de-notification obligations when there are no investors in a host Member State; (ii) notification of AIFMs – specifically in relation to passporting and ancillary investment management functions; and (iii) calculating leverage – specifically in relation to calculating the leverage of an AIF whose core investment policy is to invest in real estate.
SUSTAINABLE FINANCE
Network for Greening the Financial System
Network for Greening the Financial System survey results on climate scenarios
On 6 June 2023, the Network for Greening the Financial System (NGFS) published the results of its first public feedback survey on climate scenarios.
Of the 213 respondents from 57 countries, over 70% use the NGFS scenarios, primarily to assess how climate risks could affect their organisation, individual financial institutions, or financial stability. Looking ahead, key priorities identified by survey respondents align with and reinforce ongoing improvements planned for the next release of the NGFS scenarios, anticipated by the end of 2023.
Sustainable finance
European Commission sustainable finance package
On 13 June 2023, the European Commission published a package of measures for the EU sustainable finance framework, which includes:
- a proposal for a Regulation on the transparency and integrity of ESG rating activities – the European Commission aims for new organisational principles and clear rules on the prevention of conflicts of interest to increase the integrity of the operations of ESG rating providers. ESG rating providers will be authorised and supervised by ESMA.
The European Commission will now engage in discussions with the European Parliament and Council on the proposal; - a new set of EU Taxonomy criteria for economic activities making a substantial contribution to one or more of the non-climate environmental objectives, namely: sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control and protection and restoration of biodiversity and ecosystems.
To complement this, the European Commission has also adopted targeted amendments to the EU Taxonomy Climate Delegated Act, which expand on economic activities contributing to climate change mitigation and adaptation not included so far – in particular in the manufacturing and transport sectors.
The European Commission has also adopted amendments to the EU Taxonomy Disclosures Delegated Act, to clarify the disclosure obligations for the additional activities.
Once all EU official languages are available, the Delegated Acts will be officially adopted and transmitted to the European Parliament and the Council for their scrutiny. They are expected to apply as of January 2024; - recommendations on transition finance to provide guidance as well as practical examples for companies and the financial sector; and
- an overview of the recent measures and tools put forward to address key implementation issues and questions raised by stakeholders, including an EU Taxonomy User Guide.
CySEC DEVELOPMENTS
Circular C580: Guidance on identifying, assessing and understanding Terrorist Financing risks in the context of Crypto Αssets activities
On 1 June 2023, CySEC issued Circular C580, to inform Regulated Entities about the issuance of a guide which includes information that should be considered when identifying and assessing terrorist financing risks associated with crypto-asset activities.
Circular C576: Adoption of the EBA Guidelines on benchmarking exercises on remuneration practices and gender pay gap and on data collection exercises regarding high earners
On 2 June 2023, CySEC issued Circular C576, to inform CIFs of the adoption of the following EBA Guidelines which were issued on June 30, 2022:
The above guidelines apply to CIFs with initial capital requirement of €150.000 and €750.000. Reporting obligations apply to CIFs further to the above Guidelines.
Circular C577: EBA public Consultation Paper on amendments to EBA’s Guidelines on money laundering and terrorist financing risk factors, to include crypto-asset service providers
On 6 June 2023, CySEC issued Circular C577, to inform Regulated Entities about a public consultation launched by EBA on 31st May 2023, on amendments to its Guidelines on money laundering and terrorist financing risk factors.
The amendments introduce new sector-specific guidance for CASPs and guidance to other financial institutions on risks to consider when engaging with CASPs or when they are otherwise exposed to crypto assets. Regulated Entities may respond to the public consultation by submitting their comments through the EBA’s consultation page by 31st August 2023.
Circular C578: ESMA Guidelines on certain aspects of the MIFID II remuneration requirements
On 6 June 2023, CySEC issued Circular C578, to inform Regulated Entities that it has adopted the ESMA Guidelines on certain aspects of the MiFID II remuneration requirements, published on April 3, 2023.
These Guidelines apply as from October 5, 2023 and the Guidelines on remuneration policies and practices (MiFID), issued under MiFID I, will cease to apply on the same date (ESMA/2013/606).
Circular C579: ESMA35-43-3172 – Guidelines on certain aspects of the MiFID II suitability requirements
On 6 June 2023, CySEC published Circular C579, which informs the Regulated Entities that ESMA published on 4 April 2023 the ESMA Guidelines on certain aspects of the MiFID II suitability requirements, translated in all official languages of the EU.
The Guidelines apply in relation to Article 25(2) of MiFID II and Articles 54 and 55 of MiFID II Delegated Regulation EU 2017/565 and apply to the provision of the following investment services listed in Section A of Annex I of MiFID II:
- investment advice;
- portfolio management.
The Guidelines principally address situations where services are provided to retail clients. They should also apply, to the extent they are relevant, when services are provided to professional clients, taking into account the provisions under Article 54(3) of the MiFID II Delegated Regulation and Annex II of MiFID II. The Guidelines apply as from October 5, 2023. The previous ESMA guidelines issued under MiFID II, as well as CySEC’s Circular C290, will cease to apply on the same date.
CySEC has adopted the Guidelines by incorporating them into its supervisory practices and regulatory approach.
Circular C582: Annual Report of the Unit for Combating Money Laundering (MOKAS) for 2022
On 23 June 2023, CySEC, issued Circular C582 through which it informs the Regulated Entities that the Unit for Combating Money Laundering (‘MOKAS’) has published its Annual Report for 2022.
The Annual Report includes an analysis of the Suspicious Activity Reports (SARs) and Suspicious Transaction Reports (STRs) and examines the most commonly selected indicators of suspicion that triggered the submission of the reports, with reference to useful real-life case examples. MOKAS presents some important indicators which will help entities identify possible fraud or misdemeanor.