March 2021 Regulatory Roundup

MIFID/MIFIR

ESMA second annual report on waivers and deferrals for equity and non-equity instruments under MiFIR

On 2 February, ESMA published its annual report on the application of waivers and deferrals for equity instruments under MiFIR. The report included an analysis based on waivers for equity and equity-like instruments for which ESMA issued an opinion to the competent authority in the period between 1 January and 31 December 2019. The report also includes an overview of the deferral regime for equity and equity-like instruments applied across the different member states.

On 24 February, ESMA published its second annual report on waivers and deferrals for non-equity instruments under MiFIR, for which ESMA issued an opinion to the NCAs in the period between 1 January and 31 December 2019. It also includes an overview of the deferral regime for non-equity instruments applied across the different Member States.

European Parliament and Council of the EU adopt amendments to MiFID II and Prospectus Regulation – Covid-19

On 15 February, the Council of the EU announced that it had adopted targeted amendments to MiFID II and the Prospectus Regulation to facilitate the recapitalisation of EU companies in the wake of the Covid-19 crisis, as part of the Capital Markets Recovery Package.

MIFID II
The MiFID II rules have been amended to simplify information requirements in a targeted manner, while safeguarding investor protection. Changes include:

• A reduction of the information on costs and charges that must be provided to professional investors and eligible counterparties.
• Paper-based investment information will be phased out, except for retail clients if they ask to continue to receive it.
• Allowing banks and financial firms to bundle research and execution costs when it comes to research on small and mid-cap issuers to help to increase research on such issuers and their access to funding.
• Adaptations to the position limit regime for commodity derivatives to support the emergence and growth of euro-denominated commodity derivatives markets.

Prospectus Regulation
The Prospectus Regulation has been amended mainly to establish a new ‘EU recovery prospectus’ – this shorter prospectus will make it easier for companies to raise capital to meet their funding needs, while ensuring adequate information is provided to investors. The recovery prospectus will be available for capital increases of up to 150% of outstanding capital within a period of 12 months, and the new regime will apply until the end of 2022.

ESMA updates Q&As on MiFID II and MiFIR market structures topics

On 3 February, ESMA published its updated Q&As on MiFID II and MiFIR market structures topics. The updated Q&As provide clarification on: (i) the classification of direct electronic access (DEA) trades; and (ii) matched principal trading by investment firms.

ESMA consults on guidelines on certain aspects of the MiFID II appropriateness and execution-only requirements

On 29 January, ESMA published a consultation paper on draft guidelines on certain aspects of the MiFID II appropriateness and execution-only requirements. ESMA noted that the purpose of these draft guidelines (set out in Annex III) is to enhance clarity and foster convergence in the application of certain aspects of the appropriateness and execution-only requirements.

The consultation builds on relevant parts from ESMA’s guidelines on certain aspects of the MiFID II suitability requirements, while adjusting these to the appropriateness and execution-only framework. In addition, the report takes into account the results of supervisory activities conducted by national competent authorities on the application of the appropriateness and execution-only requirements, in particular resulting from the 2019 common supervisory action on appropriateness. The deadline for comments is 29 April 2021.

ESMA launches a common supervisory action with NCAs on MIFID II product governance rules
On 1 February 2021, ESMA announced that it was launching a common supervisory action (CSA) with national competent authorities (NCAs) on the application of MiFID II product governance rules across the European Union (EU). The CSA will be conducted during 2021.

This action will allow ESMA and the NCAs to assess the progress made by manufacturers and distributors of financial products in the application of these key requirements. The CSA will help in the analysis of:

• how manufacturers ensure that financial products’ costs and charges are compatible with the needs, objectives and characteristics of their target market and do not undermine the financial instrument’s return expectations;
• how manufacturers and distributors identify and periodically review the target market and distribution strategy of financial products; and
• what information is exchanged between manufacturers and distributors and how frequently this is done.

EMIR

Delegated Regulations under EMIR on clearing obligation and risk mitigation published in the Official Journal

On 17 February, two Delegated Regulations made under EMIR were published in the Official Journal.

First, Commission Delegated Regulation (EU) 2021/236 was published which amends the regulatory technical standards (RTS) laid down in Delegated Regulation (EU) 2016/2251 as regards to the timing of when certain risk management procedures will start to apply for the purpose of the exchange of collateral.

Second, Commission Delegated Regulation (EU) 2021/237 was published which amends the RTS laid down in Delegated Regulations (EU) 2015/2205, (EU) 2016/592 and (EU) 2016/1178 as regards the date at which the clearing obligation takes effect for certain types of contracts.

The Delegated Regulations entered into force on 18 February 2021.

Investor protection – Social media driven trading

ESMA Chair on GameStop share trading and related phenomena

On 23 February, ESMA published an introductory statement made by Steven Maijoor, ESMA Chair, to the European Parliaments’s Economic and Monetary Affairs Committee (ECON) relating to GameStop share trading and related phenomena.

Mr Maijoor explained that the GameStop situation refers to the unprecedented trading situation centred in the second half of January on the shares of firms such as US videogame retailer GameStop, which saw their equity prices surge amid high trading volumes and extreme volatility. The shares were heavily promoted by certain internet sites and on social media, which encouraged massive purchases by retail investors using leverage, and was amplified by forced buying from short sellers and underwriters of options, resulting in a so called “short squeeze”.

Mr Maijoor described several regulatory and supervisory issues that this touches on:

• investor protection concerns – ESMA has stressed the importance of gathering investment information from reliable sources before taking an investment decision and has alerted retail investors to the significant risks of investing in stocks characterised by very high price volatility, which will be even more profound for investors using leverage;
• the use of new technology – while it can help increase retail investors participation, there are concerns that specific aspects of online brokers’ business models may incentivise the adoption of risky short-term trading strategies by retail investors. Moreover, there are concerns about the transparency of the fee structure and Zero-commission trading. Mr Maijoor called for: (a) the practice of payment for order flow to be carefully assessed against the MiFID II requirements on conflicts of interest, best execution and inducements; and (b) scrutiny as to the use of investment apps combined with the gamification of investing, potentially impacting retail investors’ risk awareness and contributing to the popularity of leveraged trading strategies;
• market integrity – the GameStop situation posed certain questions regarding the applicable market abuse regime requirements and prohibitions. Mr Maijoor emphasised that any trading strategy likely to give misleading signals as to the supply, demand or price of a financial instrument, or likely to secure its price at an abnormal or artificial level, may represent market manipulation; and
• the suspension of buy orders on certain platforms. Mr Maijoor noted that the likelihood of similar events happening in the EU appears limited.

ESMA highlights risks to retail investors of social media driven share trading

On 17 February 2021, ESMA released a statement to highlight to retail investors the risks connected with trading decisions based exclusively on exchanges of views, informal recommendations and sharing of trading intentions through social networks and unregulated online platforms. The statement was issued as part of ESMA’s investor protection objective to safeguard retail investors, whose participation is key to the development of the Capital Markets Union.

Several recent episodes have seen certain US stocks experience high price volatility based on information shared on social media. Although market rules and structures are different in the European Union, it cannot be ruled out that similar circumstances may develop here. 

The statement highlighted the following issues:

• Investors need to use reliable information for investment decisions;
• Increased risk of investor loss due to price volatility; and
• Risk of committing market abuse.

Crowdfunding

ESMA first Q&As on Crowdfunding
On 25 February, ESMA published its first Q&As on the Regulation on European crowdfunding service providers for business (ECSPR). The Q&A provide clarifications on the use of Special Purpose Vehicles (SPV) under the ECSPR, addressing: (i) the circumstances and conditions in which an SPV can be created for the provision of crowdfunding services; (ii) the types of instruments that can be offered to investors via an SPV; (iii) whether an SPV can give exposure to more than one underlying asset; (iv) the type of underlying asset an SPV can give exposure to; and (v) when an asset should be deemed to be illiquid or indivisible within the meaning of the ECSPR.

ESMA consultation on draft technical standards under the Regulation on European crowdfunding service providers (ECSPR)
On 26 February, ESMA published a consultation paper on its draft technical standards under the ECSPR, seeking input on the following issues: (i) complaint handling; (ii) conflicts of interest; (iii) business continuity plans; (iv) applications for authorisation; (v) information to clients on default rate of projects; (vi) entry knowledge tests and simulation of the ability to bear loss; (vii) key investment information sheets; (viii) reporting by crowdfunding service providers to NCAs (and NCAs to ESMA); and (ix) publication of national provisions concerning marketing requirements. The deadline for comments is 28 May 2021.

Crypto-assets

European Central Bank issues an opinion on a proposal for a regulation on Markets in Crypto-assets
On 19 February 2021, the European Central Bank issued an opinion on a proposal for a regulation on Markets in Crypto-assets. The ECB has welcomed the aims of the Regulation, though it proposes the following clarifications:

• The Regulation does not apply to the issuance by central banks of central bank money based on distributed ledger technology or in digital form as a complement to existing forms of central bank money.
• A distinction should be made between cryptoassets that may be characterised as financial instruments (falling under the scope of MiFID II) and those which would fall under the scope of the Regulation.

The ECB also sets out issues relating to the conduct of monetary policy, the operation of payment systems and the prudential supervision of credit institutions and financial stability affected by the Regulation. The European Commission adopted the legislative proposal for the Regulation in September 2020.

Packaged retail and insurance-based investment products (PRIIPS)

ESAs final report on changes to the packaged retail and insurance-based investment products key information document (KID)

On 3 February 2021, the European Supervisory Authorities (ESAs) (the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority) submitted to the European Commission draft Regulatory Technical Standards (RTS) on amendments to the key information document for packaged retail and insurance-based investment products (PRIIPs).

Following a request from the European Commission in December 2020, EIOPA’s Board of Supervisors further analysed the draft RTS which was adopted today by a qualified majority of EIOPA’s Board. While some national competent authorities at EIOPA’s Board continued to express reservations on the draft RTS, they supported the proposal based on the further details provided by the European Commission on their approach to the broader review of PRIIPs Regulation, namely that the review will thoroughly examine the application of the PRIIPs framework, including:

• how to achieve better alignment between PRIIPs, Insurance Distribution Directive and Markets in Financial Instruments Directive II regarding provisions on costs disclosure;
• the scope of products as foreseen by the PRIIPs Regulation;
• how to ensure that the KID contains the key information necessary for retail investors while avoiding too much or too complex information for these investors;
• how to allow the creation of a digitalised KID allowing layered information and reviewing the default paper basis of the KID, taking into account the specific challenges for different types of products (e.g. multi-option products (MOPs));
• the need for a more tailored approach, such as for MOPs, in order to maximise understanding and use of the information, while continuing to allow for comparability of similar products.

Sustainable Finance Disclosure Regulation (SFDR)

ESAs recommendations on the application of SFDR

On 25 February 2021, the European Supervisory Authorities published a joint supervisory statement on the effective and consistent application and national supervision of the SFDR. The statement aims to achieve an effective and consistent application and national supervision of the SFDR, promoting a level playing field and protecting investors.

In the statement, the three ESAs recommend the draft RTS be used as a reference when applying the provisions of the SFDR in the interim period between the application of SFDR (as of 10 March 2021) and the application of the RTS at a later date.

The ESAs have also set out in an Annex more specific guidance on the application of timelines of some specific provisions of the SFDR, in particular on the application timeline for entity-level principal adverse impact disclosures and for financial products’ periodic reporting. In addition, the Annex includes a summary table of the relevant application dates of the SFDR, the Taxonomy Regulation and the related RTS. The statement complements the recently released Final Report including the draft regulatory technical standards issued by the ESAs Joint Committee on 4 February 2021 – see below.

ESAs Final Report and draft RTS on disclosures under SFDR

On 4 February 2021, the European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) delivered to the European Commission the Final Report, including the draft Regulatory Technical Standards (RTS), on the content, methodologies and presentation of disclosures under the EU Regulation on sustainability-related disclosures in the financial services sector (SFDR).

The proposed RTS aim to strengthen protection for end-investors by improving Environmental, Social and Governance (ESG) disclosures to end-investors on the principal adverse impacts of investment decisions and on the sustainability features of a wide range of financial products. This will help to respond to investor demands for sustainable products and reduce the risk of greenwashing.

The European Commission is expected to endorse the RTS within 3 months of their publication.  While financial market participants and financial advisers are required to apply most of the provisions on sustainability-related disclosures laid down in the SFDR from 10 March 2021, the application of the RTS will be delayed to a later date according to the EC letter to the ESAs. The ESAs have proposed in these draft RTS that the application date of the RTS should be 1 January 2022.  The ESAs plan to issue a public supervisory statement before the application date of SFDR in order to achieve an effective and consistent application of the SFDR’s requirements and consistent national supervision of the SFDR.