INVESTMENT SERVICES & CAPITAL MARKETS
MIFID / MIFIR
ESMA analysis of the cross-border investment activity of firms
On 19 July 2023, ESMA and national competent authorities (NCAs) completed an analysis of the cross-border provision of investment services during 2022.
The increase in the cross-border provision of financial services has benefits for consumers and firms, as it fosters competition, expands the offer available to consumers and the market for firms. However, it also requires that NCAs intensify their efforts and focus more on the supervision of cross-border activities and cooperation to tackle the issues arising from these activities.
The data collected and analysed across 29 jurisdictions allows ESMA and NCAs to shed light on various aspects of the market for retail investors that receive investment services by credit institutions and investment firms established in other Member States.
Key findings of the data collection include:
- A total of around 380 firms provided services to retail clients on a cross-border basis in 2022. The majority of them (59%) are investment firms, while 41% are credit institutions.
- Approximately 7.6 million clients in the EU/EEA received investment services from firms located in other EU/EEA Member States in 2022.
- In terms of number of firms, Cyprus is the primary location for firms providing cross-border investment services in the EU/EEA, accounting for 23% of the total firms passporting investment services. Luxembourg and Germany follow with 16% and 13% of all firms, respectively.
- Looking at the number of EU/EEA retail clients receiving cross-border investment services, more than 75% are served by firms based in three jurisdictions: Cyprus, Germany, and Sweden. Cyprus based firms reported activity to around 2.5 million cross-border retail clients, German-based firms to around 2 million retail clients and Sweden-based firms to more than 1 million retail clients. All other firms in the scope of the exercise reported a total of around 1.8 million cross-border retail clients, accounting for about a quarter of the total number of retail clients.
- The average number of cross-border retail clients per firm varied from 189 (for the only firm in Italy) to about 140,000 retail clients (for the 8 firms based in Sweden). Overall, the average number of retail clients per firm was about 19,000.
- As host Member States, Germany, Spain, France and Italy are the most significant destinations (in terms of number of retail clients) for investment firms providing services cross-border in other Member States.
- Approximately 5,700 complaints were recorded by firms relating to the provision of cross-border investment services to retail clients in 2022. The number of complaints received is proportional to the number of clients served by firms providing cross-border investment services.
- The data analysis highlighted that client of cross-border investment services primarily lodged complaints about “terms of contract/fees/charges” and about “issues pertaining to general admin/customer services”. Fewer complaints were reported on the topics of “investment products not appropriate/suitable for the client” and “market event related”.
ESMA aims to continue performing the data collection exercise on annual basis and endeavours to publish a Report on the findings at the next iteration of the exercise in 2024.
ESMA sees prevailing market uncertainty as downside risks rise
On 31 August 2023, ESMA published the second Trends, Risks and Vulnerabilities (TRV) Report of 2023.
ESMA sees that financial markets are adapting to the new economic environment of durably higher inflation and interest rates; however risks remain high in ESMA’s remit. Markets are set to remain very sensitive to potential deteriorations in economic fundamentals or risks in the financial sector.
Financial markets rebounded in the first half of 2023 against the background of lower energy prices and expectations of a slower pace of monetary tightening. However, this improvement remains fragile. The downside risks have increased while there remains a high degree of market and investor nervousness.
- Securities markets: Equity markets rose in 1H23, even though the market stress related to US banks led to increased volatility and bid-ask spreads in March and April. Credit risk indicators showed mixed signals, with early signs of deterioration such as increasing corporate high-yield defaults and sovereign downgrades but limited movements on sovereign credit spreads.
- Asset management: The EU fund sector partly recovered after the historical decline experienced in 2022, primarily due to valuation effects. Bond funds received inflows, which contrasts with the outflows in 2022. Fixed income funds which reduced their maturity and interest rate sensitivity during the monetary tightening are now positioned to benefit from higher yields. Fund risks remain high due to prevailing credit, valuation, liquidity and interest rate risks, especially for funds combining several vulnerabilities, such as in the real estate fund sector.
- Consumers: Investor sentiment remained negative amid lingering uncertainty and weak expectations on long-term developments. Performance of retail investments remained subdued, reflecting sustained price pressures in the underlying asset markets.
- Infrastructures and services: The first half of 2023 saw renewed growth in equity trading volumes. Infrastructures under ESMA’s remit proved stable and well-functioning faced with high volatility linked to the banking sector. After the peak in 2H22, CCP margins relating to commodity products decreased in 1H23, in line with the drop in energy derivative prices.
- Market-based finance: The ability of non-financial corporations to raise funds through capital markets slightly picked up in 1H23 from the lows observed in 2022. Corporate bond issuance peaked, with concentration in shorter term maturities given monetary policy expectations.
- Sustainable finance: The EU market for ESG products and sustainable investments has continued to grow at a robust pace. The demand for funds with a sustainable investment objective remained strong.
- Crypto-assets and financial innovation: Crypto-asset valuations rebounded in early 1H23 but remained far below their historical peak. Persistently elevated cyber risks remain an important source of concern for the EU financial sector. Financial markets have started exploring potential implications of Artificial Intelligence after the launches of various Generative AI tools in 1H23.
The composition of CCP colleges under Article 18(2) of Regulation 648/2012 (EMIR)
On 16 August 2023, ESMA updated its list of Central Counterparties (CCPs) that have published the composition of its EMIR college in accordance with Article 18(2) of EMIR.
Central Securities Depositary Regulation (CSDR)
Amended RTS under CSDR on the penalty mechanism for settlement fails
On 11 August 2023, Delegated Regulation 2023/1626 amending the RTS laid down in Delegated Regulation (EU) 2018/1229 as regards the penalty mechanism for settlement fails relating to cleared transactions submitted by CCPs for settlement was published in the Official Journal.
The Regulation amends Article 19 of Delegated Regulation 2018/1229, by removing the specific collection and distribution process by CCPs for cash penalties and places Central Securities Depositaries (CSDs) in charge of the process to collect from and distribute to their relevant participants, pursuant to Articles 16, 17 and 18 of Delegated Regulation (EU) 2018/1229. It is believed that this amendment will remove the operational risks, technical complexities and costs to the process of collecting and distributing cash penalties for settlement fails relating to cleared transactions.
This Regulation entered into force on 31 August 2023 and will apply from 2 September 2024.
Q&A on the European crowdfunding service providers for business Regulation (ECSPR)
On 3 August 2023, ESMA updated its Q&A on the ECSPR to include five more questions and answers on the scope of ECSPR, on the provision of other services by a crowdfunding service provider (CSP), on the notification of changes to national competent authorities and on the appointment of a legal person as responsible of the management of a CSP.
EBA publishes its third Report on the functioning of anti-money laundering and countering the financing of terrorism
On 10 August 2023, the European Banking Authority (EBA) published its third Report on the functioning of anti-money laundering and countering the financing of terrorism (AML/CFT) colleges.
The Report finds that competent authorities had taken important steps to improve the functioning of AML/CFT colleges. Nevertheless, many colleges had not reached full maturity. The Report highlights good practices that will be useful for competent authorities to further improve the effectiveness of AML/CFT colleges and of supervisory outcomes.
European Commission adopts amendments to list of high-risk countries under MLD4
On 18 August 2023, the European Commission adopted a Delegated Regulation amending the list of high-risk third countries with strategic AML and CTF deficiencies produced under the Fourth Anti-Money Laundering Directive (MLD4).
The list of countries is amended periodically to take account of information from international organisations and standard setters in the field of anti-money laundering / countering the financing of terrorism (AML/CFT) such as the Financial Action Task Force (FATF).
The Delegated Regulation will add Cameroon and Vietnam to the table of third countries that have been identified as having strategic AML/CTF deficiencies in point I of the Annex to Delegated Regulation (EU) 2016/1675.
The Delegated Regulation will be submitted to the Council of the EU and the European Parliament for scrutiny. If neither object, it will enter into force 20 days after it is published in the Official Journal.
Circular C591: Appointment of an Alternate Director to attend a meeting of the Board of Directors of a CIF
On 3 of August 2023, CySEC issued Circular C591 (the ‘Circular’) to provide guidance to the Regulated Entities regarding the conditions under which, a member of the Board of Directors of a CIF, may appoint an Alternate Director to attend a meeting of the Board of Directors of the CIF.
The Circular states that:
- CySEC does not oppose the appointment of an Alternate Director, given that the cumulative conditions in the Circular are met.
- The CIF must notify CySEC of the appointment of the Alternate Director by filling in the notification form found in the Circular and submitting it at email@example.com.
- The appointment of an Alternate Director and/or the frequency of appointment of an Alternate Director should not be made improperly and/or breach the CIF’s obligation under the Law.
- No fee is payable for the filling of the notification and no charge shall be deemed to take place (as per section 9(15) of the Law) considering that an existing director of the CIF shall be appointed as the Alternate Director.
CySEC requires to be notified of the appointment of the Alternate Director at least one (1) day prior to the Board Meeting at which the Alternate Director will be attending.
Circular C592: Technical clarifications concerning Reporting Obligation under Articles 4(3)(d) and 31(1), (2) and (4) of the AIFM Law
On 3 of August 2023, CySEC issued Circular C592 (hereinafter ‘the Circular’) to inform the Regulated Entities on the AIFMD reporting updated IT technical guidance (2013-1358 – revision 6), which will be applicable from November 2023 onwards.
The new technical guidance revision 6 introduces new validation rules making more fields mandatory or with stricter rules to improve data quality. Regulated Entities can locate the new changes in the tab ‘change history’ of the excel document of the new technical guidance.
The Regulated Entities must use the new version revision 6 to submit reports required under Articles 4(3)(d) and 31(1), (2) and (4) of the AIFM Law (as further specified with Articles 5(3) and 110 of the Commission Delegated Regulation (EU) 231/2013) by November 2023 with the relevant reference period as referenced in the Circular.
Circular C593: New reporting standards under Regulation (EU) 648/2012 on OTC Derivatives, Central Counterparties and Trade Repositories, as amended (‘EMIR’)
On 3 of August 2023, CySEC issued Circular C593 (the ‘Circular’), which wishes to highlight new reporting requirements under the European Market Infrastructure Regulation (EMIR), which will become applicable on 29th April 2024.
The Circular lists several amending regulatory frameworks as per the below list:
- Regulation (EU) 2022/1855 repealing Regulation (EU) 148/2023, specifying the minimum details of the data to be reported to trade repositories (TRs) and the type of reports to be used.
- Regulation (EU) 2022/1860 repealing Regulation (EU) 1247/2012, with regards to the standards, formats, frequency and methods and arrangements for reporting.
- Regulation (EU) 2022/1856 amending Regulation (EU) 151/2013, by further specifying the procedure for accessing details of derivatives as well as the technical and operational arrangements for their access.
- Regulation (EU) 2022/1858 supplementing Regulation (EU) 648/2012, specifying the procedures for the reconciliation of data between trade repositories and the procedures to be applied by the trade repository to verify the compliance of the reporting counterparty or submitting entity with the reporting requirements and to verify the completeness and correctness of the data reported.
- Final Report on Guidelines for reporting under EMIR (https://www.esma.europa.eu/data-reporting/emir-reporting).
- Validation rules, reconciliation tolerances and template for the notification of errors and omissions in reporting (EMIR Reporting (europa.eu)) and,
- XML EMIR Reporting Schemas (EMIR Reporting (europa.eu)).
The Circular provides an analysis of the main changes, the impact of the new rules and the transitional arrangements relating to the new reporting requirements.
Starting from 29th April 2024, all reports submitted to TRS should comply with the new requirements. Outstanding derivatives i.e., derivatives reported before the 29th of April 2024 and were not terminated by the said date will need to be updated to conform with the new reporting requirements no later than 180 calendar days from the reporting start date (with a few exceptions).
Circular C594: ESMA launches a Common Supervisory Action (‘CSA’) with NCAs on the sustainability-related disclosures and the integration of sustainability risks in the Investment Fund Sector
On 23 of August, CySEC issued Circular C594 (the ‘Circular’, hereby attached), which wishes to inform Funds and Fund Managers (including sub-threshold AIFMs) that the European Securities and Markets Authority (ESMA) has launched the 2023 and 2024 Investment Fund Sector CSA with national competent authorities (NCAs), on the sustainability-related disclosures and the integration of sustainability risks.
The CSA 2023 aims to assess the compliance of the said entities with the relevant provisions in the Sustainable Finance Disclosure Regulation (SFDR), to assess whether market participants adhere to applicable rules and standards in practice, to gather further information on greenwashing risks in the investment management sector and to identify further relevant supervisory and regulatory intervention to address the issue.
CySEC is planning to engage in relevant supervisory actions on samples of Funds and Fund Managers, in order to assess compliance regarding the integration of sustainability risks and disclosures.
Circular C595: ESMA Final Report on the 2022 Common Supervisory Action (‘CSA’) on Valuation
On 31 of August 2023, CySEC issued Circular C595 (‘the Circular’, hereby attached) to inform the Regulated Entities of the content of ESMA’s Final Report on the 2022 Common Supervisory Action (the ‘CSA’) on valuation (the ‘Report’).
The CSA’s target was for Regulated Entities to strengthen their valuation principles, policies and procedures in order to be compliant with the applicable rules and obligations on assets valuation.
The Report is the product of the January 2022 CSA launched by ESMA along with the supervisory authorities and it includes findings on several topics such as:
- Appropriateness of valuation policies and procedures.
- Independence of the valuation function and use of third-party valuers.
- Early detection mechanisms for valuation errors and transparency to investors.