Financial Services Regulation and Compliance - Investment Firms Feb 2021
Financial Services Regulation and Compliance - Investment Firms Feb 2021
Prudential Regulatory Flexibility Measures: Securities Markets, Investment Management, Investment Firms and Fund Service Providers
The Central Bank of Ireland (CBI) has issued a statement addressing the flexibility measures afforded to firms and market participants in recognition of the challenges faced by them as a result of the COVID-19 pandemic.
In its statement, the CBI noted that the following measures have expired and will not be extended:
regulatory remittance dates for investment firms, fund service providers and investment funds
Pillar 3 disclosures
the submission of assurance reports in respect of investment firms and fund service providers’ arrangements for the safeguarding of client assets or investor money
The CBI also set out its expectation in relation to risk mitigation programme implementation dates and clarified its expectations as regards the application of Pillar 2 Guidance by MiFID investment firms subject to CRR/CRD IV. The statement provides that the CBI will continue to apply relevant announcements made by the European Supervisory Authorities, to the extent they have not expired on their terms, and in order to allow limited and time-bound flexibility in specified areas.
Securities Markets Risk Outlook Report - Conduct Risks in an Uncertain World
The CBI has published its first Securities Markets Risk Outlook Report. The purpose of the report is to inform regulated financial service providers, investors and market participants of the main conduct risks the CBI sees to securities markets, particularly wholesale securities markets. The report also sets out the CBI's expectation of firms in relation to the identification, mitigation and management of these risks. The report notes that the CBI will take necessary supervisory action where firms have failed to consider the risks set out in the report or where behaviour falls below the CBI's expectations. Areas of conduct risk where the CBI expects firms to take proactive measures in 2021 include:
dealing with the impact of external shocks, including shocks arising from COVID-19 and Brexit
successfully managing the migration to greener securities markets
managing the increasing complexity in securities markets and the rules that govern them
ensuring meaningful transparency for investors and other market participants, in particular on costs and fees
understanding the risks and implications of the increased use of indices, as well as being transparent with the market on their use
bolstering systems to identify, mitigate and manage misconduct risk, with a particular focus on the risk of market abuse
ensuring governance arrangements are fit for purpose and properly resourced, including as businesses expand or change
improving the quality of the data firms use in their business and report to the CBI
In addition, the report also sets out the work items the CBI has planned including an industry-wide review of compliance with the Market Abuse Regulation and additional work arising from findings in its 2020 thematic reviews in the funds sector. The report also notes that the CBI will continue to collaborate with ESMA and fellow EU regulators to progress Common Supervisory Actions in relation to UCITS (in the field of liquidity risk management and in costs and fees) as well as carrying out its ongoing trigger-based supervision of conduct risk in securities markets.
ESMA launches Common Supervisory Action with NCAs on MiFID II product governance rules
ESMA is launching a common supervisory action (CSA) with national competent authorities (NCAs) on the application of MiFID II (Markets in Financial Instruments Directive) product governance rules across the EU. The CSA will be carried out during 2021. The purpose of the CSA is to assess the progress made by manufacturers and distributors of financial products in the application of these key requirements. It is envisaged that the CSA will assist with 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
what information is exchanged between manufacturers and distributors and how frequently this is done
ESMA has published guidelines on this topic as a series of Q&As which will all be considered as part of its 2021 CSA. It is hoped that this initiative and the resulting sharing of practices across NCAs will facilitate consistent implementation and application of EU rules and enhance the protection of investors in line with ESMA’s objectives.
ESMA finalises rules on standardised information to facilitate cross-border distribution of funds
ESMA has published a final report on implementing technical standards (ITS) under the regulation on cross-border distribution of funds. The draft ITS set out rules in relation to the publication of information by NCAs on their websites, the notification of information by NCAs to ESMA and the publication of information by ESMA on its website. The final report and ITS mirror the original consultation proposals and focus on the information to be published on NCAs websites in relation to the national rules governing marketing requirements for funds, and the regulatory fees and charges levied by NCAs in relation to fund managers’ cross-border activities. The draft ITS set out provisions in relation to the communication of information by NCAs to ESMA for the purpose of developing and maintaining a central database listing UCITS and AIFs marketed cross-border on ESMA’s website. The European Commission will decide within three months whether the draft ITS should be adopted.
ESMA publishes report on proposed fees for Benchmarks Administrators
ESMA has published the final report on its technical advice regarding supervisory fees for benchmarks administrators under the BMR. The objective of the final report is to advise the European Commission on fees to be paid by benchmark administrators that will be supervised by ESMA starting in January 2022. Supervisory fees will be collected from administrators of critical benchmarks and those of third-country benchmarks that are subject to the EU recognition regime. The type of fees, the services for which fees are due, the amount of the fees and the frequency of payment are set out in the report. There are four main categories fees including:
one-off recognition fees to be paid by third country administrators applying for recognition
one-off authorisation fees to be paid by critical benchmark administrators applying for authorisation
annual supervisory fees to be paid by third country administrators
annual supervisory fees to be paid by critical benchmark administrators
ESMA publishes annual report on the application of waivers and deferrals for equity instruments
ESMA has published its annual report on the application of waivers and deferrals for equity instruments under MiFIR. The report provides 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 sets out an overview of the deferral regime for equity and equity-like instruments applied across the different EU Member States. Key findings of the report include:
the LIS (Large In Scale) waiver is the most used
shares are the instrument type for which waivers are requested most frequently
the volume under the waivers, both in turnover and number of transactions, is for largely executed in shares
ETFs are the instruments with the highest percentage of dark trading with respect to the overall volume traded in those instruments
compared to 2018, the percentage of segment MICs applying the LIS deferral regime slightly fell
the UK was the country that submitted the highest number of waiver notifications in 2019
The report is the second report published by ESMA since the application of MiFIR in 2018. The next annual reports will cover the analysis of the application of the waivers and deferral regimes in 2020 and will be published by ESMA in the second half of 2020.
ESMA updates Q&As on MiFID II and MiFIR market structure topics
ESMA has updated its Q&As regarding market structure issues under MiFID II and MiFIR. The updated Q&As provide clarity on the classification of DEA trades and Matched Principal Trading by investment firms. The Q&As are updated on an ongoing basis and aim to promote common supervisory approaches and practices in the application of MiFID II and MiFIR. They address questions raised by the general public and market participants in relation to the practical application of level one and level two provisions for transparency and market structures topics.
Financial benchmarks: Council adopts new rules addressing LIBOR cessation
The Council has adopted amendments to the Benchmark Regulation addressing the termination of financial benchmarks. The amendments have been made in light of the expected phasing-out of the London Inter-Bank Offered Rate (LIBOR) by the end of 2021. The new rules aim to reduce legal uncertainty and avoid risks to financial stability by ensuring that a statutory replacement rate can be implemented by the time LIBOR is no longer in use. The new framework grants the Commission the power to replace 'critical benchmarks' if their termination would result in a substantial disruption in the functioning of the financial markets in the EU, or pose a systemic risk for the financial system in the EU.
The new rules also address the replacement of a benchmark designated as critical in one Member State, through national legislation. These amendments extend the transition period for the use of third-country benchmarks until the new rules governing the use of such benchmarks are applied. EU supervised entities will be able to use third-country benchmarks until the end of 2023. This period may be further extended by the Commission until the end of 2025 in a delegated act to be adopted by 15 June 2023, if there is evidence that such an extension is necessary.
EBA launches public consultation on the draft technical standards on supervisory disclosure under the Investment Firms Directive
The EBA has launched a public consultation on its draft implementing technical standards (ITS) on the information concerning the new prudential requirements that competent authorities will be required to disclose publicly for all types of investment firms authorised under MiFID II. The draft ITS are part of the phase two mandates of the EBA Roadmap on investment firms. The draft ITS seek to ensure that the disclosed information is comprehensive and comparable across all Member States. The consultation runs until 11 May 2021. Information competent authorities will be required to disclose includes the following:
the text of laws, regulations, administrative rules and general guidance adopted in each Member State
options and discretions in the application of the prudential requirements
criteria and methodologies of the supervisory review and evaluation process (SREP)
aggregated statistical data on prudential requirements
The date for the first disclosure under the draft ITS is 30 June 2022. The deadline for submitting comments in relation to the consultation paper is 11 May 2021. A public hearing in relation to the consultation will take place on 19 March 2021.
ESMA highlights risks to retail investors of social media driven share trading
ESMA has released a statement to emphasise 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 safeguarding of retail investors is one of ESMA's key objectives and the statement forms part of ESMA's investor protection initiative. The statement discusses the following key topics:
investors need to use reliable information for investment decisions
increased risk of investor loss due to price volatility
risk of committing market abuse
ESMA publishes second annual report on waivers and deferrals for non-equity instruments
ESMA has published its second annual report on waivers and deferrals for non-equity instruments under MiFIR. The report provides an analysis of the waivers for non-equity instruments, in respect of which ESMA issued an opinion to the NCAs in the period between 1 January and 31 December 2019. The report also sets out an overview of the deferral regime for non-equity instruments applied across the different Member States. The key findings of the report were as follows:
80% of the requests concerned the illiquid waiver (27%), the LIS waiver (24%), the OMF waiver (18%) and the SSTI waiver (11%)
the non-equity waivers assessed related to a variety of non-equity instruments, but mainly bonds (19%), IR derivatives and equity derivatives (13% each)
for post-trade transparency, deferrals for LIS transactions are commonly used across trading venues for the different types of non-equity instruments
for pre-trade transparency waivers, the Netherlands submitted the largest number of waiver notifications in 2019 reflecting the establishment of subsidiaries of trading venues operating in the UK in the context of Brexit
The publication of the 2019 report was delayed as a result of both Brexit and the COVID-19 pandemic and its publication was divided in two. The next annual reports will be published by ESMA in the second half of 2021 and will provide analysis of the application of the waivers and deferral regimes in 2020.
EBA consults on draft technical standards to improve supervisory cooperation for investment firms
The EBA has launched two public consultations on regulatory technical standards (RTS) and implementing technical standards (ITS) on cooperation and information exchange between competent authorities involved in prudential supervision of investment firms. The draft standards set out a framework for cooperation in the supervision of investment firm groups though colleges of supervisors and for information exchange for investment firms operating through branches or the free provision of services. These draft standards form part of the phase two mandates of the EBA roadmap on investment firms. The purpose of the draft standards is to improve cooperation and information exchanges between the supervisors of investment firms. Both consultations run until 23 April 2021.
ESMA publishes Guidelines to CCP supervisory reviews and evaluation under EMIR
ESMA has published the final report on guidelines aimed at assisting competent authorities in the application of EMIR provisions that deal with the review and evaluation of central counterparties (CCPs). The guidelines provide guidance in relation to common procedures and methodologies for the review of arrangements, strategies, processes and mechanisms used by CCPs including the evaluation of risks, covering requirements for CCPs to address financial, organisational, operational, and prudential risks as set out in EMIR. The purpose of the guidelines is to ensure consistent formatting, frequency and depth of CCP supervisory reviews and evaluation processes. The guidelines provide guidance in relation to the review and evaluation of the following matters:
conduct of business
Once the guidelines have been translated and published on ESMA's website, national competent authorities will have two months to notify ESMA whether they comply or intend to comply with the guidelines.
ESMA consults on regulating crowdfunding
ESMA has launched a consultation on draft technical standards on crowdfunding under Regulation (EU) 2020/1503 on European crowdfunding service providers for business (ECSPR). Under the new regulation, lending-based and equity-based crowdfunding services will be regulated at EU level for the first time. The regulation sets out a single set of requirements applicable to CSPs across the EU and includes strict rules in relation to the protection of investors. Under ECSPR, ESMA is required to develop 12 technical standards – eight regulatory technical standards (RTS) and four implementing technical standards (ITS) – on a range of important issues. The consultation paper requests input on the draft technical standards in relation to the following issues:
conflicts of interest
business continuity plan
application for authorisation
information to client on default rate of projects
entry knowledge test and simulation of the ability to bear loss
key investment information sheet
reporting by crowdfunding service providers to NCAs (and NCAs to ESMA)
publication of national provisions concerning marketing requirements
Stakeholders who wish to submit a response must do so by 28 May 2021. The majority of these technical standards will be submitted to the European Commission for adoption before 10 November 2021 while the remainder will be delivered by 10 May 2022.
ESMA publishes first Q&A on crowdfunding
ESMA has published a Q&A on the special purpose vehicle (SPV) aspects of the ECSPR. The Q&A aims to promote a uniform application of the provisions the ECSPR and provide responses to possible questions posed by the general public, market participants and competent authorities. The Q&A covers the following matters:
the circumstances and conditions in which a SPV can be created for the provision of crowdfunding services
the types of instruments that can be offered to investors via a SPV
whether a SPV can give exposure to more than one underlying asset
the type of underlying asset a SPV can give exposure to
when an asset should be deemed to be illiquid or indivisible within the meaning of the ECSPR
ESMA consults on methodology to calculate a benchmark in exceptional circumstances
ESMA has launched a consultation on the draft guidelines setting out the obligations applicable to administrators that use a methodology to calculate a benchmark in exceptional circumstances under the Benchmarks Regulation (BMR). The purpose of the consultation paper is to seek input in relation to clarifications and specifications in relation to the adjustment of benchmarks in exceptional circumstances particularly in relation to transparency of methodology, oversight function and record keeping requirements. The draft guidelines also require benchmark administrators to have in place a transparent framework when consulting on material changes to the methodology in a short time period. The consultation will close on 30 April 2021 and the final guidelines are expected to be published by ESMA in Q3 2021.