INVESTMENT SERVICES & CAPITAL MARKETS
ESMA review of MIFID II framework on best execution reports by investment firms
On 25 May 2022, ESMA published a final report (dated 16 May) on a review of the MiFID II framework on best execution reports.
ESMA explains that due to the European Commission’s proposals to remove best execution reporting requirements for venues under RTS 27, as part of the MIFID II framework review, it has looked solely at reporting requirements for investment firms under RTS 28. Among other things, ESMA proposes possible improvements:
- deleting the obligation to report, as part of the list of top five venues used by a firm, the percentage of the executed orders that were passive and aggressive orders, as this information provided only little added value in revealing firms’ execution quality;
- to require firms to explicitly confirm in their summaries of execution quality, if they do not report on the required parameters;
- requiring firms to publish the quantitative information of RTS 28 reports in the CSV format in order to facilitate end-users’ access and comparison of this data; and
- clarifying the reporting obligations both for firms executing client orders and for firms providing the services of reception and transmission.
ESMA notes that some proposals would require potential changes to the Level 1 legislation (Article 27(6) of MiFID II). ESMA will send the final report to the European Commission in order to provide initial support to the European Commission in its assessment of the adequacy of the best execution reporting obligation for investment firms, and any subsequent technical work to shape a well-functioning reporting regime.
ESMA updates Q&As on MIFID II transparency
On 20 May 2022, ESMA updated its Q&As on MIFID II and MIFIR transparency topics relating to non-equity transparency.
Central Securities Depositary Regulation (CSDR)
ESMA updates its Q&As
On 20 May 2022, ESMA updated its Q&As by adding a Q&A relating to the review and evaluation of central securities depositories.
ESMA publishes technical standards to suspend the CSDR buy-in regime
On 2 June 2022, ESMA published its Final Report on amending the regulatory technical standards (RTS) on settlement discipline to postpone the application of the CSDR mandatory buy-in regime for three years.
The proposed amendment is based on the expected changes to the CSDR buy-in regime presented in the Commission’s legislative proposal for the CSDR Review which allows ESMA to propose a later start date for the CSDR buy-in regime.
The CSDR settlement discipline regime has started applying on 1 February 2022.
In December 2021, ESMA published a statement to clarify that while the application and supervision of most CSDR settlement discipline requirements, in particular the settlement fails reporting and the cash penalties regimes, would go ahead as planned, ESMA expects National Competent Authorities (NCAs) not to prioritise supervisory actions in relation to the application of the buy-in regime.
ESMA’s statement will remain in place until the buy-in regime is formally suspended.
This draft RTS is sent to the European Commission for endorsement in the form of a Commission Delegated Regulation. Following the endorsement by the European Commission, the Commission Delegated Regulation will then be subject to the non-objection of the European Parliament and of the Council.
ESMA public statement on implications of events in Ukraine on half-yearly financial reports
On 13 May 2022, ESMA issued a Public Statement to promote transparency and consistent application of European requirements for information provided in half-yearly financial reports with regards to Russia’s invasion of Ukraine.
ESMA recognises that Russia’s invasion of Ukraine and the sanctions imposed against Russia and Belarus pose significant challenges to business activities and introduce a high degree of uncertainty on the expected development of those activities and the associated knock-on effects on the economic and financial system, at both European and international level.
This Statement addresses the preparation of interim financial statements according to IFRS Accounting Standards and the interim management reports for the 2022 half-yearly reporting periods. It highlights the need for issuers to provide information that is useful to users and adequately reflects the current and, to the extent possible, expected impact of Russia’s invasion of Ukraine on the financial position, performance and cash-flows of issuers. ESMA also highlights the importance of providing information on the identification of the principal risks and uncertainties to which issuers are exposed.
ESMA reminds issuers of their obligation to disclose as soon as possible any relevant material information about the impact of Russia’s invasion of Ukraine on their fundamentals, prospects or financial situation in accordance with their transparency obligations under the Market Abuse Regulation.
ESMA provides specific guidance on certain topics including:
- The application of IAS 34
- Disclosures reflecting judgements made, significant uncertainties and going concern risks linked to Russia’s invasion of Ukraine
- Impairment of non-financial assets
- Impairment of financial instruments and other financial risks
- Loss of control, joint control or the ability to exercise significant influence
- IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
ESAs publish the joint report on the withdrawal of authorisation for serious breaches of AML/CFT rules
On 1 June 2022, the European Supervisory Authorities (ESAs) published a joint Report, which provides a comprehensive analysis on the completeness, adequacy and uniformity of the applicable laws and practices on the withdrawal of license for serious breaches of the rules on anti-money laundering and countering the financing of terrorism (AML/CFT).
The joint Report advocates for the introduction in all relevant EU sectoral laws of a specific legal ground to revoke licences for serious breaches of AML/CFT rules. The joint Report also calls for the inclusion of assessments by competent authorities of the adequacy of the arrangements and processes to ensure AML/CFT compliance as one condition for granting authorisation or registration. For this purpose, cooperation and information exchange between prudential supervisors and AML/CFT supervisors should be ensured.
The joint Report highlights the importance of the appropriate integration of AML/CFT issues into prudential regulation and supervision, including in the proposal for the Markets in Crypto-Assets Regulation (MiCA), currently under negotiation.
Furthermore, the joint Report clarifies the nature of the decision to revoke licenses as a last resort measure, subject to a discretionary and proportionality assessment. It also lays down uniform criteria for the notion of serious breach of AML/CFT rules, highlighting that the identification of a serious breach is subject to a case-by-case assessment by the AML/CFT supervisor.
Finally, the joint Report provides a preliminary analysis of the interaction between serious breaches of AML/CFT rules and the crisis management and resolution frameworks as well as a first mapping of operational and legislative criticalities.
UCITS Directive and AIFMD
ESMA consultation on notifications for cross-border marketing and management of funds
On 17 May 2022, ESMA published a consultation paper on draft technical standards on the notifications for cross-border marketing and cross-border management of alternative investment funds (AIFs) and UCITS.
This consultation paper sets out the draft RTS under the UCITS Directive and the AIFMD to specify the information to be notified by management companies and AIFMs to the relevant national competent authorities (NCAs) when notifying their intention to carry out their activities in other member states together with draft ITS specifying the form and content of the notification letters.
The closing date for comments is 9 September 2022. ESMA expects to publish a final report by the beginning of 2023.
ESMA updates its Q&As on AIFMD and UCITS Directive
On 20 May 2022, ESMA updated its:
- Q&A on the application of the AIFMD – it has updated Q&As, and added a new Q&A, relating to ESMA’s guidelines on performance fees in UCITS and certain types of AIFs; and
- Q&A on the application of the UCITS Directive – it has updated the Q&A on the performance reference period for the benchmark model and there is a new Q&A on the performance reference period for the hurdle rate model.
ESAs call for improvements in product descriptions intended for retail investors
On 9 May 2022, the European Supervisory Authorities (ESAs) issued a joint supervisory statement regarding the ‘What is this product?’ section of the key information document (KID) for packaged retail and insurance-based investment products (PRIIPs). The expectations put forward in the supervisory statement aim at improving the quality of descriptions provided by PRIIPs manufacturers and thereby contribute to better protection of retail investors.
The ESAs have identified a range of poor practices in how PRIIP manufacturers describe products under this section. Most issues relate to a general lack of clarity in the text, which makes it difficult for retail investors to understand the key features of products.
The supervisory statement provides an overview of these issues and sets out the authorities’ expectations in each area to ensure that information is presented to retail investors in an adequate, clear and accessible manner.
Some of the main issues identified include:
- the use of overly broad, general categories when specifying the type of product;
- poor practices regarding the overall clarity of the language and layout of the text, including as a result of automation in creating such texts;
- insufficient information regarding capital protection levels and potential losses for the investor;
- imprecise description of early termination features;
- lack of clarity concerning the nature and timing of the coupon payments;
- limited information about the specific nature of the underlying assets to which investors are exposed;
- inadequate description of any leverage factors and the risks related to them;
- undifferentiated and abstract descriptions for the ‘intended retail investor’.
European long-term investment funds
Council adopts its position on revision of the ELTIF Regulation
On 24 May 2022, the Council adopted its position to improve the European long-term investment funds (ELTIFs) regulation to facilitate long-term investment in the real economy. Since 2015, the ELTIF regulatory framework has set up this new type of funds dedicated to long-term investments which can be distributed on a cross-border basis to both professional and retail investors. However, since its adoption, only a limited number of ELTIFs have been launched, and only in four member states (France, Italy, Luxembourg and Spain), due to significant constraints in the distribution process and stringent rules on portfolio composition.
The review will:
- Make the creation of such funds more attractive for asset managers, by updating the scope of eligible assets and investments, the portfolio composition and diversification requirements, the borrowing of cash and other fund rules, the requirements pertaining to the authorisation, investment policies and operating conditions of ELTIFs.
- Make it easier for retail investors to invest in ELTIFs, in particular by removing the minimum €10,000 investment threshold, while ensuring strong investor protection.
In its position, the Council underlined three priorities:
- Channel more financing to SMEs and long-term projects
- Enhance the role of retail investors by making ELTIFs more attractive to them, and by lifting the barriers to entry
- Maintain high investor protection standards
Now that the Council has adopted its position, it will enter negotiations with the European Parliament in order to agree on a final version of the text, once the latter has set its position.
ESMA statement for fund managers on obligations owed to investors amid Ukraine invasion
On 16 May 2022, ESMA published a statement for fund managers on their obligations owed to investors amid Russia’s invasion of Ukraine.
The statement aims to promote investor protection and convergence, and provides overarching messages to fund managers including high-level guidance on: (i) the appropriate action in case of exposures to Russian, Belarusian and Ukrainian assets, given valuation and liquidity uncertainties; (ii) the process fund managers should follow when evaluating these assets; and (iii) whether fund managers may consider using side pockets or similar arrangements to segregate these assets. ESMA expects fund managers of investment funds with exposures to assets facing liquidity issues to assess whether a fair value of these assets can still be determined and adapt the valuation without undue delay.
This statement concerns in particular the obligations of the following fund managers:
- Authorised external Alternative Investment Fund Managers (AIFMs) and internally managed Alternative Investment Funds (AIFs) subject to the AIFM
- EuVECA managers subject to the European Venture Capital Funds (EuVECA) Regulation
- EuSEF managers subject to the European Social Entrepreneurship Funds (EuSEF) Regulation
- UCITS management companies and self-managed UCITS investment companies (together ‘UCITS managers’) subject to the UCITS Directive
to manage investment funds in the best interest of investors, have adequate liquidity management systems in place and ensure fair valuation of assets.
ESMA will continue to closely monitor the situation and take or recommend any measures necessary to mitigate the impact of the Russian invasion of Ukraine on investment funds. ESMA will, where necessary, reassess any potential need to supplement the guidance provided in its statement or provide additional guidance on other issues arising from this crisis.
Sustainable Finance Disclosure Regulation and Taxonomy Regulation
European Commission requests ESAs to review SFDR Delegated Regulation
On 6 May 2022, ESMA published a letter (dated 8 April 2022) from the European Commission to the ESAs requesting that they propose amendments to the RTS in relation to the information that should be provided in pre-contractual documents, on websites, and in periodic reports about the exposure of financial products to investments in fossil gas and nuclear energy activities.
The European Commission explains that it adopted a Complementary Climate Delegated Regulation (CCDR) covering nuclear and fossil gas activities after the ESAs had completed its draft RTS in October 2021 and therefore those RTS need to be amended to reflect the CCDR. The European Commission requests the ESAs submit the amendments to these RTS by 30 September 2022.
The European Commission has also in a separate letter (dated 11 April 2022) requested that the ESAs review the SFDR RTS in order to cater for the increased request for transparency in areas that extend beyond the environment and to strengthen the disclosure and effectiveness of decarbonisation actions. In particular, the review should:
- aim at broadening the disclosure framework and addressing the main technical issues that have emerged since the SFDR was originally agreed, which concern sustainability indicators in relation to principal adverse impacts as referred to in Article 4(6) and (7) SFDR
- propose amendments in relation to the information provided in relation to financial products in pre-contractual documents, on websites, and periodic reports on decarbonisation targets, including intermediary targets and milestones, where relevant, and actions pursued; and
- consider whether the provisions in RTS regarding financial products referred to in Article 5 and 6 of the Taxonomy Regulation sufficiently address the disclosure and information on environmentally sustainable economic activities.
The European Commission requests that the ESAs submit their proposed amendments within 12 months from receiving the letter.
European Commission adopts answers to the European Supervisory Authorities’ questions
On 25 May 2022, ESMA published a Commission Decision in which the European Commission adopts a set of answers to questions (as an Annex) sent to it by the European Supervisory Authorities (ESAs) on interpreting provisions in the Taxonomy Regulation and SFDR.
The ESAs’ questions and European Commission’s answers relate to topics including:
- disclosing individual financial products principal adverse impacts (PAI);
- financial advisers’ disclosure obligations;
- information financial advisers need to collect on products or instruments it recommends in relation to PAI disclosures;
- the types of employees covered by the Article 17 SFDR exemption;
- whether Articles 6 and 7 SFDR apply to portfolio management financial products existing before the date of application, including those that are no longer made available to investors;
- good governance practices under Articles 8 and 9, including in relation to financial products investing solely in government bonds; and
- the application of Articles 5 and 6 of the Taxonomy Regulation.
ESMA provides supervisors with guidance on the integration of sustainability risks and disclosures in the area of asset management
On 1 June 2022, ESMA published a Supervisory Briefing to ensure convergence across the European Union in the supervision of investment funds with sustainability features, and in combating greenwashing by investment funds.
This work will help combat greenwashing by establishing common supervisory criteria for National Competent Authorities (NCAs), to effectively supervise investment funds with sustainability features.
This briefing covers the following areas:
- Guidance for the supervision of fund documentation and marketing material, as well as guiding principles on the use of sustainability-related terms in funds’ names; and
- Guidance for convergent supervision of the integration of sustainability risks by AIFMs and UCITS managers
ESMA will work closely with NCAs to combat greenwashing, by promoting further supervisory convergence in supervising investment funds with sustainability features. This may include updating the supervisory briefing if needed considering experiences after the SFDR RTS starts applying on 1 January 2023.
ESAs provide clarifications on key areas of the RTS under SFDR
On 2 June 2022, the European Supervisory Authorities (ESAs) published a statement providing clarifications on the draft regulatory technical standards (RTS) issued under the Sustainable Finance Disclosure Regulation (SFDR), which include the financial product disclosures under the Taxonomy Regulation.
The statement provides clarification on key areas of the SFDR disclosures, including:
- use of sustainability indicators;
- principal adverse impact (PAI) disclosures;
- financial product disclosures;
- direct and indirect investments;
- taxonomy-related financial product disclosures;
- “do not significantly harm” (DNSH) disclosures; and
- disclosures for products with investment options
The statement is part of the ESAs’ on-going efforts to promote a better understanding of the disclosures required under the technical standards of the SFDR ahead of the planned application of the rules on 1 January 2023.
The ESAs will continue to promote a better understanding of the RTS as adopted in the Delegated Regulation under the SFDR through practical application Q&As, after the publication of the Delegated Regulation in the Official Journal.
ESMA WORKING PAPERS
ESMA Working Paper No.2, 2022 Financial stability risks from cloud outsourcing
On the 12th of May 2022 ESMA published a Working Paper on the Financial Stability risks arising from cloud outsourcing. It should be noted that while Working Papers are prepared by ESMA staff they do not necessarily reflect the views of ESMA. Nevertheless, said papers provide useful analysis of events and or trends in the financial world.
The Working Paper discusses the issue of financial firms outsourcing some of their IT infrastructure to Cloud Service Providers (CSP) and how concentrated the CSP space. That concentration risk may lead to higher systemic risk for financial firms if dominant CSPs suffer outages.
The Working Paper discusses several options that financial firms can deploy to mitigate the said risk. Finally the authors call on policymakers to assess risks and benefits from the use of CSPs noting the mandate given to the ESAs from the EU’s proposal for a Digital Operational Resilience Act (DORA).
Circular C507: Guidelines on sound remuneration policies under Directive (EU) 2019/2034 (EBA/GL/2021/13)
On the 5th of May 2022 CySEC through the issuance of Circular C507 informed CIFs that it is adopting into its supervisory practices EBA’s Guidelines on sound remuneration policies under Directive (EU) 2019/2034 (EBA/GL/2021/13) which came into force on the 30th of April 2022. CIFs that fall under the IFD/IFR scope should take all necessary actions to comply with EBA’s Guidelines. Additionally, remuneration policies must be adapted to comply with the Guidelines for the year starting after 31st of December 2021.
Circular C508: ΕΒΑ Guidelines on internal governance under Directive (EU) 2019/2034 (EBA/GL/2021/14)
On the 5th of May 2022 CySEC through the issuance of Circular C508 informed CIFs that it is adopting into its supervisory practices ΕΒΑ Guidelines on internal governance under Directive (EU) 2019/2034
(EBA/GL/2021/14) which came into force on the 30th of April 2022. CIFs that fall under the IFD/IFR scope should take all necessary actions to comply with EBA’s Guidelines.
The Guidelines provide details on the practical application of IFD/IFR governance provisions, organisation of the management body and the CIF, including the creation of sound and transparent structures for the management body to effectively supervise a CIF’s activities.
Circular C511: Reporting of cyber-attack incidents
On the 11th of May 2022 CySEC through Circular C512 informed, CIFs, AIFMS, UCITS MCs and the CSE that it will collect information on cyber security incidents on an ongoing basis, in order to further assess risk and take actions. The Information submitted to CySEC by the aforesaid entities will be exchanged with other EU NCAs and ESMA on an anonymous basis enabling them to identify potential targets in their respective jurisdictions.
Circular C513: CIFs on-going monitoring of their prudential requirements
CySEC, on the 19th of May, through the issuance of Circular C513 reminded CIFs of their obligations under the IFD/IFR framework and in particular the steps they must take when they no longer meet their own funds requirements as well as their obligation to have sound administrative and accounting practices as well as robust internal controls.
Moreover, CySEC has noticed that a number of CIFs that they have not met the requirements of Articles 11 and 37 of the IFR notified CySEC of the event via forms 165-01 or 165-02 which takes place 40 days after the reporting reference date, CySEC notes that this practice is not acceptable.
Circular C514: New Form CA-CIF (‘Country Analysis’ Form), for the provision of Investment Services and Activities per country
On the 20th of May, CySEC through the issuance of Circular C514 announced to CIFs that it is issuing Form CA-CIF in order for CySEC to collect statistical information on the CIF’s provision of investment services and activities by country.
The form will be submitted on a quarterly basis in accordance to the following schedule:
|Quarter||Reporting Period||Submission Deadline|
Should CIFs have any queries on the completion of the CA-CIF they can be addressed to CySEC in writing via the email address email@example.com prior to Friday 24 June 2022.