INVESTMENT SERVICES & CAPITAL MARKETS
MIFID and MIFIR
ESMA clarifies certain best execution reporting requirements under MIFID II
On 13 February 2024, issued a Public Statement providing market participants with clarity concerning their reporting requirements under RTS28, pending full application of the new rules under MIFID II.
ESMA expects National Competent Authorities (NCAs) not to prioritise supervisory actions towards investment firms relating to the periodic RTS 28 reporting obligation, from 13 February 2024 until the forthcoming transposition into national legislation in all Member States of the MIFID II review.
Under the reviewed MIFID II/MIFIR framework, investment firms are no longer required to annually report detailed information on trading venues and execution quality through RTS 28 reports, and the statement will promote coordinated action by NCAs under MIFID II.
Council adopts new rules to strengthen market data transparency
On 20 February 2024, the Council adopted changes to MIFID and MIFIR. The aim of the new rules is to empower investors, in particular by making consolidated market data easily available at EU level.
Consolidated market data
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 rules 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. The consolidated tapes 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. 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.
Payment for order flow
The new rules also impose a general ban on ‘payment for order flow’ (PFOF), a practice through which brokers receive payments for forwarding client orders to certain trading platforms. Member states where the practice of PFOF already existed may allow investment firms under its jurisdiction to be exempt from the ban, provided that PFOF is only provided to clients in that member state. However, this practice must be phased out by 30 June 2026.
Commodity derivatives
The review also introduces new rules on commodity derivatives.
This is the final step of the adoption procedure. The texts will now be published in the EU’s Official Journal and enter into force 20 days later. The regulation will apply immediately in all EU countries, whereas the member states will have 18 months to bring into force the laws, regulations and administrative provisions necessary to comply with the directive.
Market Abuse Regulation (MAR)
ESMA issues a warning notice on requirements when posting investments recommendations on social media
On 6 February 2024, ESMA issued a warning notice on posting investment recommendations on social media.
ESMA is raising awareness of the requirements established by the Market Abuse Regulation which apply when posting investment recommendations on social media. They are also warning about the risks of market manipulation in such publications.
When posting on social media, transparency and accuracy are key, especially when making recommendations about investments. That is why, if you are a finance influencer, a technical expert, or someone with just interest in financial investments, you need to be aware of the rules established under the MAR Framework and be able to recognise an investment recommendation.
What is an Investment Recommendation?
According to the MAR it can be any post, video, or any other type of public communications, including social media, in which a person gives advice or ideas, directly or indirectly, about buying or selling a financial instrument or on how to compose a portfolio of financial instruments.
Even if a person is using “non-technical” language, gives advice or ideas, directly or indirectly, about buying or selling a financial instrument or on how to compose a portfolio of financial instruments, it may constitute an investment recommendation.
Where are the rules set out?
In the MAR Framework, composed of Regulation No 596-2014 and the relevant Delegated and Implementing Regulations.
What are the specific requirements?
The general set of requirements require any person producing investment recommendations to:
- Include the identification of the producers of the recommendation: name, job title of all the persons involved., and the date and time of the recommendation.
- Ensure the objective presentation of investment recommendations: facts clearly distinguished from interpretations, estimates and opinions. Confirm all sources of information are reliable and, where in doubt, clearly indicate it.
- Disclose any conflicts of interest in a clear way, so investor would take notice of it. When recommendations are voiced via different social media channels, each of them must include a disclosure of interests or conflicts of interest.
The additional requirements require “professionals” and “experts” to disclose:
- A summary of any basis of valuation/methodology and the underlying assumptions used.
- The length of time of the investment and an appropriate risk warning.
- The planned frequency of updates to the recommendation.
- If the recommendation has been amended after being disclosed to the issuer.
- If they hold a net long or short position above 0.5% of the total issued share capital of the issuer.
What happens if you do not comply?
National Competent Authorities can impose administrative or criminal sanctions that may vary according to the member state for certain types of infringements.
EMIR
ESMA updates Q&A on EMIR
On 2 February 2024, ESMA updated its Q&As on EMIR in relation to:
- exchange traded derivatives (ETD) reporting;
- reporting under the Settle-to-Market/Collateralise-to-Market model;
- updating client codes;
- reporting of a counterparty falling within scope of Article 1(4)(a) and (b);
- portability of schedules;
- subsidiaries
Apart from the Q&A on ETD reporting, the Q&As are available in ESMA’s Q&A IT-tool, rather than the previous Q&A document.
Digital Operational Resilience Act (DORA)
New content on ESMA website
On 20 February 2024, ESMA created new content on its website on Digital Operational Resilience Act (DORA).
ESMA
ESA’s Joint Board of Appeal confirms ESMA’s decision to withdraw the recognition of Dubai Commodities Clearing Corporation
On 6 February 2023 the ESA’s Joint Board of Appeal confirmed ESMA’s decision to withdraw the recognition of Dubai Commodities Clearing Corporation.
The Joint Board of Appeal (“the Board”) of the European Supervisory Authorities (EBA, EIOPA and ESMA – the ESAs) unanimously decided to dismiss the appeal brought by the Dubai Commodities Clearing Corporation (“DCCC”) against the European Securities and Markets Authority (“ESMA”) and to therefore confirm the ESMA decision to withdraw its recognition.
The application was brought in relation to ESMA’s Decision to withdraw the recognition of DCCC as a Tier 1 third-country central counterparty (CCP). The decision was a consequence of the United Arab Emirates (UAE) being included by the European Commission on the list of high-risk third countries presenting strategic deficiencies in their national anti-money laundering and counter financing of terrorism (“AML/CFT”) regime, provided for in the Commission Delegated Regulation (EU) 2016/1675.
FINANCIAL CRIME
Anti-money laundering
Council of the EU publishes texts of political agreement on proposed MLD6 and AML Regulation
On 14 February 2024, the Council of the EU published the compromise texts (dated 12 and 13 February) for the following proposals:
- a Directive on the mechanisms to be put in place by the Member States for the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and repealing Directive (EU) 2015/849 (MLD6); and
- a Regulation on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (AML Regulation).
In an accompanying ‘I’ item note (dated 12 February), the Council of the EU explains that the compromise texts reflect the provisional political agreement reached by the Council of the EU and EP in January.
Delegated Regulation in relation to AML/CFT central database published in Official Journal
On 16 February 2024, Commission Delegated Regulation (EU) 2024/595 supplementing the EBA Regulation with regard to RTS specifying the materiality of weaknesses, the type of information collected, the practical implementation of the information collection and the analysis and dissemination of the information contained in the AML/CFT central database referred to in Article 9a(2) of that Regulation, was published in the Official Journal.
The RTS relate to “EuReCA” which is the EU’s central database of information for AML/CFT launched in January 2022. Primarily, the RTS specify:
- when weaknesses are material;
- which information competent authorities have to report and how they have to report it;
- how the EBA will analyse this information and make it available to competent authorities; and
- the rules that will apply to ensure confidentiality and the protection of personal data contained in the database.
The Delegated Regulation enters into force on 7 March 2024, 20 days after its publication in the Official Journal.
EBA issues guidance to crypto-asset service providers (CASPs) to effectively manage their exposure to ML/TF risks.
Frankfurt to host the EU’s new anti-money laundering authority AMLA
On 22 February 2024, the Council and the European Parliament representatives reached an agreement on the seat of the future European authority for anti-money laundering and countering terrorist financing (AMLA).
AMLA will be based in Frankfurt and begin operations mid-2025. It will have over 400 staff members.
The new authority is the centrepiece of the reform of the EU’s anti-money laundering framework. AMLA will have direct and indirect supervisory powers over obliged entities and the power to impose sanctions and measures.
Regarding the location of the authority, the Council and the Parliament worked together to ensure a selection process that is transparent, fair and equitable to all candidates. Nine member states submitted applications to host AMLA: Belgium (Brussels), Germany (Frankfurt), Ireland (Dublin), Spain (Madrid), France (Paris), Italy (Rome), Latvia (Riga), Lithuania (Vilnius) and Austria (Vienna).
The location of the seat will be included in the AMLA regulation and formally adopted as part of the text.
FUNDS
UCITS and AIFs
Council adopts new rules on alternative investment fund managers and plain-vanilla EU investment funds
On 26 February 2024, the Council adopted a directive (dated 15 February 2024) amending AIFMD and UCITS directive to improve European capital markets and strengthen investor protection in the EU.
The directive amends the alternative investment fund managers directive, which governs managers of hedge funds, private equity funds, private debt funds, real estate funds and other alternative investment funds in the EU.
The directive also modernises the framework for undertakings for collective investment in transferable securities (UCITS), i.e. plain-vanilla EU-harmonised retail investment funds such as unit trusts and investment companies.
The new rules enhance the integration of asset management markets in Europe and modernise the framework for key regulatory aspects.
They improve the availability of liquidity management tools, with new requirements for 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 amending directive also covers an EU framework for loan-originating funds, i.e. funds that provide credit to companies, supplemented with several requirements to alleviate risks to financial stability and to ensure an appropriate level of investor protection.
The directive introduces enhanced rules for delegation by investment managers to third parties. This will enable them to better tap the best resources from market specialists, subject to reinforced supervision and preserving market integrity.
Other key components of the new rules include improved data sharing and cooperation between authorities, and new measures to identify undue costs that could be charged to funds, and hence their investors, as well as on preventing possible misleading names to better protect investors.
The directive will now be published in the European Union’s official Journal and enter into force 20 days later. Member states will have 24 months after the entry into force to transpose the rules into national legislation.
SUSTAINABLE FINANCE
ESG Rating Regulation
Council and Parliament reach provisional agreement on ESG Ratings Regulation
On 5 February 2024, the Council and European Parliament reached a provisional agreement on a proposal for a regulation on environmental, social and governance (ESG) rating activities, which aims to boost investor confidence in sustainable products.
ESG ratings provide an opinion on a company’s or a financial instrument’s sustainability profile, by assessing its exposure to sustainability risks and its impact on society and the environment. ESG ratings have an increasingly important impact on the operation of capital markets and on investor trust in sustainable products.
The new rules aim to strengthen the reliability and comparability of ESG ratings by improving the transparency and integrity of the operations of ESG ratings providers and preventing potential conflicts of interests.
Under the new rules, ESG rating providers in the EU will need to be authorised and supervised by ESMA and comply with transparency requirements, in particular with regard to their methodology and sources of information.
The Council and the Parliament clarified the circumstances under which ESG ratings fall under the scope of the regulation, providing further details on the applicable exclusions. The agreement also clarifies the territorial scope of the regulation, by setting out what constitutes operating in the EU.
The Council and Parliament agreed that if financial market participants or financial advisers disclose ESG ratings as part of their marketing communications, they will include information about the methodologies used in such ESG ratings on their website. This was done through an amendment of the Sustainable Finance Disclosure Regulation.
The agreement clarifies that ESG ratings encompass environmental, social and human rights or governance factors. The agreement foresees the possibility to provide separate E, S and G ratings. However, if a single rating is provided, the weighting of the E, S and G factors should be explicit.
ESG rating providers established in the EU will need to obtain an authorisation from ESMA. ESG rating providers established outside the EU that wish to operate in the EU will need to obtain an endorsement of their ESG ratings by an EU authorised ESG rating provider, a recognition based on a quantitative criterion or be included in the EU registry of ESG rating providers on the basis of an equivalence decision in relation to the country of its origin and following a dialogue held between ESMA and the relevant third-country competent authority.
The Council and Parliament introduced a lighter, temporary and optional registration regime of three years for small undertakings and groups providing ESG ratings.
The agreement introduces as a principle a separation of business and activities, with a possibility for ESG ratings providers not to set up a separate legal entity for certain activities, provided that there is a clear separation between activities and that they put in place measures to avoid potential conflicts of interests. However, this derogation would not apply to ESG rating providers that carry out consulting activities, audit activities and credit rating activities. ESG rating providers may develop benchmarks if ESMA considers that sufficient measures have been put in place to address conflicts of interests.
The provisional political agreement is subject to approval by the Council and the Parliament before going through the formal adoption procedure. The regulation will start applying 18 months after its entry into force.
Corporate Sustainability Reporting Directive (CSRD)
Council and Parliament agree to delay sustainability reporting for certain sectors and third-country companies by two years
On 7 February 2024, the Council and the European Parliament reached a provisional deal on a directive on the time limits for the adoption of sustainability reporting standards for certain sectors and for certain third-country undertakings amending the Corporate Sustainability Reporting Directive.
The agreement will give more time for companies to prepare for the sectorial European Sustainability Reporting Standards (ESRS) and for specific standards for large non-EU companies, which will be adopted in June 2026, two years later than the originally scheduled date.
Commission proposal
EU law requires that listed companies should disclose information about the risks and opportunities arising from social and environmental issues to help investors, civil society, consumers and other stakeholders to evaluate the green and social sustainability of their activities. On 31 July 2023, the Commission adopted the first cross-cutting standards and standards for all sustainability topics to facilitate this reporting. These must be followed by sector-specific standards and standards for third country companies with a €150 million turnover in the EU and which have at least one subsidiary or branch in the EU. All these new standards were scheduled for 30 June 2024.
The directive, agreed on 7 February 2024 by the co-legislators postpones the adoption of the new standards to 30 June 2026. This will allow companies to focus on the implementation of the first set of ESRS. It will also allow more time to develop sector-specific sustainability standards as well as standards for specific third-country companies. The date of application for third country companies will remain the financial year 2028, as set out in the CSRD.
The provisional agreement reached with the European Parliament now needs to be endorsed and formally adopted by both institutions.
Sustainable Finance
ESMA Risk Analysis on impact investing
On 1 February 2024, ESMA published a Risk analysis paper “impact investing – Do SDG funds fulfil their promises?
Impact investing attracts growing interest from investors and may be prone to misleading, inaccurate or unsubstantiated claims. These claims suggest a positive contribution to the fulfilment of the United Nations Sustainable Development Goals (SDGs).
ESMA proposes and summarises a methodological approach towards identifying SDG funds and assessing the extent to which their holdings align with their claims by bringing together a unique set of different data sources.
SDG funds do not significantly differ from non-SDG counterparts or ESG peers regarding their alignment with the United Nations SDGs. This raises questions as to whether funds claiming to contribute to the SDGs are actually fulfilling their promise to investors.
SANCTIONS
The EU adopts 13th package of individual and economic sanctions
On 23 February 2024, the European Council adopted the 13th package of restrictive measures against Putin’s regime.
The Council decided to impose restrictive measures on an additional 106 individuals and 88 entities responsible for actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine.
Those designated are subject to an asset freeze and EU citizens and companies are forbidden from making funds available to them. Natural persons are additionally subject to a travel ban, which prevents them from entering or transiting through EU territories.
Additionally, the Council added 27 new entities to the list of those directly supporting Russia’s military and industrial complex.
CySEC DEVELOPMENTS
Circular C619: ESMA Guidelines on transfer of data between Trade Repositories under EMIR and SFTR
On the 5 February 2024, CySEC issued Circular C619 (‘C619’) to remind the regulated entities that the European Securities and Markets Authority (ESMA) has published the Guidelines on transfer of data between Trade Repositories under EMIR and SFTR (the ‘Guidelines’) on 05 of January 2024, translated in all official languages of the EU.
The Guidelines will apply to trade repositories (TRs) registered or recognised by ESMA, to national competent authorities (NCAs), and to reporting counterparties or the entities reporting on their behalf.
The Guidelines will apply in relation to:
- the reporting without duplication of details of derivatives by counterparties and CCPs under Article 9(1) of EMIR;
- the procedures for portability under Article 78(9) of EMIR;
- the transfer of derivatives between TRs at the request of the counterparties, or the entity reporting on their behalf, or in the situation where the registration of a TR has been withdrawn covered by Article 79(3) of EMIR;
- the record-keeping of details of derivatives in accordance with Article 80(3) of EMIR;
- and Article 21(2) of RTS on registration (EMIR).
The objectives of these guidelines are to establish consistent, efficient and effective supervisory practices within the ESFS and to ensure the common, uniform and consistent application of by providing clarification for TRs, reporting counterparties and ERR on how to ensure compliance at all times with the EMIR provisions, as stated in paragraph 4 of C619.
The Guidelines are based on Article 16(1) of ESMA Regulation, which provides that “The Authority shall, with a view to establishing consistent, efficient and effective supervisory practices within the ESFS, and to ensuring the common, uniform and consistent application of Union law, issue guidelines addressed to all competent authorities or all financial market participants and issue recommendations to one or more competent authorities or to one or more financial market participants.”
The Guidelines address separately the situations where (i) the transfer is due to withdrawal of registration of the TR from the cases in which (ii) the transfer is done on a voluntary basis and under normal market conditions. Guidelines 1 to 15 and Guidelines 33 and 34 apply to both situations; Guidelines 16 to 22 apply only to voluntary porting; and 11 Guidelines 23 to 32 apply only to withdrawal of registration of a TR. The incentives and motivations for the relevant parties in each of the two cases would be different and therefore there is a need for a specific approach in each particular situation.
The existing guidelines on data transfer under EMIR apply as of 16 October 2017. The amendments to these Guidelines apply as of 3 October 2022.
CySEC has adopted the Guidelines by incorporating them into its supervisory practices and regulatory approach.
Circular C620: Adoption of the European Βanking Αuthority (the ‘EBA’) Guidelines on the monitoring of the threshold and the procedural aspects on the establishment of intermediate EU undertakings under Article 21b of Directive 2013/36/EU
On 6 February 2024, CySEC issued Circular C620 (‘C620’) to bring to the attention of the Cyprus Investment Firms (the “CIFs”) the following EBA Guidelines which were issued on July 28, 2021, on the monitoring of the threshold and the procedural aspects on the establishment of intermediate EU undertakings under Article 21b of Directive 2013/36/EU (the ‘Guidelines’) and the EBA Decision concerning supervisory reporting for IPU threshold monitoring (EBA/DC/441) issued on May 13, 2022.
CySEC has adopted the Guidelines, under section 80(7) of the Law to provide for the capital adequacy of investment firms 97(I)/2021, which transposes Article 21b(6) of the Directive 2013/36 by its incorporation into the supervisory practices and regulatory approach.
The Guidelines apply to all CIFs, which belong to a third country group, meaning a group of which the parent undertaking is established in a third country (Article 3(64) of the Directive 2013/36).
In case a CIF belongs to a third country group with total value of assets equal to or greater than EUR 40bn, CySEC will expect from the group to establish an EU parent undertaking in order to be able to apply prudential consolidation supervision on an EU level.
CIFs which belong to a third country group are required to provide on a quarterly basis to CySEC the Template for IPU threshold monitoring, via the XBRL portal by the designated deadlines described within C620.
Circular C621: Clarifications on the data to be submitted regarding Recommendation 2022/9 of the European Systemic Risk Board (ESRB) on the vulnerabilities in the commercial real estate sector in the European Economic Area
On the 8 February 2024, CySEC issued Circular C621 (‘C621’). With C621, and following Circular C617, CySEC provided further instructions on how to complete the ‘Index’ tab of the CRE-IF Form.
CySEC specified that the Form was NOT to be digitally signed and that for the file name, between the name of the sub fund/fund and the ‘CRE-IF’, two (2) underscores must have been included as per the example provided in point 3 of C621.