Financial Services Regulation and Compliance - Investment Firms Jan 2021
Financial Services Regulation and Compliance - Investment Firms Jan 2021
CBI consults on competent authority discretions in IFD / IFR
The Central Bank of Ireland (CBI) issued consultation paper CP135 Consultation on Competent Authority Discretions in the Investment Firms Directive and the Investment Firms Regulation on 14 January 2021. The consultation paper sets out the CBI's proposals on the specific discretions available to national competent authorities (NCAs) set out in the Investment Firms Directive and Investment Firms Regulation (IFD / IFR), the new prudential regime for MiFID investment firms which is due to be implemented in June 2021. While IFD / IFR are applicable from 26 June 2021, the consultation paper notes the CBI's expectation that all firms will have already begun considering the impact of IFD/IFR and commenced preparations to ensure that they will be in a position to comply with the new regime from that date.
Interested stakeholders have until 26 March 2021 to submit a response. The CBI will consider the feedback received in relation to the consultation to assist with the preparation of a regulatory notice on the implementation of NCA discretions in IFD / IFR which it intends to publish by the end of June 2021.
Speech by Gerry Cross, Director of Policy & Risk and Asset Management and Investment Banks, on the new prudential regime for investment firms
Mr Gerry Cross, Director of Policy & Risk and Asset Management and Investment Banks at the CBI, delivered a speech at the KPMG Investment Firms Regulation and Directive Webinar on 27 January 2021. In his speech, Mr Cross discussed the new prudential regime for investment firms set out in IFD / IFR. Mr Cross noted that the framework reflects significant progress in terms of the regulation of investment firms and the evolution of the financial system and non-bank sector. Mr Cross stated that the framework is based on the principles of risk-relevance and proportionality which are fundamental aspects of the CBI's approach to regulation.
Mr Cross discussed the framework under the headings of the changing landscape for investment firms, the international dimension of IFD / IFR, and the principles of good regulation in IFD / IFR. Mr Cross emphasised the CBI's expectation that firms will by now have prepared for the IFD / IFR and will have begun their implementation projects. He stated that firms ought to have carried out their analysis and determined which class of firm they will be. Mr Cross highlighted that clarity on this issue is essential as this classification will determine firms' own funds requirements and the extent of the applicability of other requirements including reporting, governance, and disclosure.
Mr Cross concluded by stating that the new prudential requirements for investment firms constitute a bespoke regime for investment firms, one which is hoped to strengthen the financial resilience of and consumer protections offered by MiFID investment firms. It is hoped that the increased resilience and risk-readiness of investment firms as a result of the introduction of this new regime will bring greater investor confidence.
ESMA reminds firms of MiFID II rules on reverse solicitation
ESMA has issued a public statement as a reminder to firms of the MiFID II requirements on the provision of investments services to retail or professional clients by firms not established or situated in the EU. In its statement, ESMA re-iterates that “where a third-country firm solicits clients or potential clients in the Union or promotes or advertises investment services or activities together with ancillary services in the Union, it should not be deemed as a service provided at the own exclusive initiative of the client” regardless of "any contractual clause or disclaimer purporting to state, for example, that the third country firm will be deemed to respond to the exclusive initiative of the client”. ESMA emphasised that service providers risk administrative or criminal proceedings if they provide investment services in the EU without proper authorisation. ESMA also highlighted that investors may lose the protections granted to them under relevant EU rules if they avail of the services of investment service providers who are not properly authorised.
EBA publishes final draft technical standards to identify investment firms’ risk takers and to specify the instruments used for the purposes of variable remuneration
On 21 January 2021, the EBA published two final draft regulatory technical standards (RTS) on:
the criteria to identify all categories of staff whose professional activities have a material impact on the investment firm’s risk profile or asset it manages (‘risk takers’)
the classes of instruments that adequately reflect the credit quality of the investment firm and possible alternative arrangements that are appropriate to be used for the purposes of variable remuneration
The purpose of these RTS is to define and harmonise the criteria for the identification of such staff and the use of instruments or alternative arrangements for the purposes of variable remuneration in order to ensure a consistent approach across the EU. The RTS set out qualitative and quantitative criteria which can be used to identify material risk takers. Staff will be considered to have a material impact on an institution's risk profile if they meet at least one of the qualitative or quantitative criteria in the RTS. The qualitative criteria have been revised in order to enhance the principle of proportionality.
Requirements for investment firms regarding additional Tier 1, Tier 2 and other instruments used for the purposes of variable remuneration have also been introduced by the final draft RTS in order to ensure that the credit quality of the investment firm is appropriately reflected as well as to specify possible alternative arrangements for the pay out of variable remuneration where investment firms do not issue any of the instruments referred to in Article 32 of the IFD.
CFTC and ESMA sign enhanced MOU related to certain recognised central counterparties
The Commodity Futures Trading Commission (CFTC) and ESMA have signed a new memorandum of understanding (MOU) in relation to cooperation and the exchange of information with respect to certain registered derivatives clearing organisations established in the United States that are central counterparties (CCPs) recognised by ESMA under the European Market Infrastructure Regulation (EMIR). ESMA and the CFTC have expressed their desire for enhanced cooperation as to the larger U.S. CCPs operating in the European Union with provisions that expand upon the collaboration set out in the 2016 CFTC-ESMA MOU related to recognised CCPs.
Publication of transparency calculations update after the end of the Brexit transition period
ESMA has published its first financial Instruments Transparency System (FITRS) file following the end of the Brexit transition period. The equity transparency calculation results delta file (DLTECR) published by ESMA contains updated transparency calculation results for equity instruments which previously had a UK venue as the most relevant market. The processing of FITRS files received during the maintenance window will be resumed between 9 and 11 January 2021 and ESMA will resume the processing of DVCAP files received during the window on 11 January in accordance with the Brexit data operational plan on ESMA's website.
ESMA agrees position limits under MIFID II
Two opinions on position limits regarding commodity derivatives under MiFID II/MIFIR were published by ESMA on 13 January 2021. The opinions agree with the proposed positon limits in relation to EEX Phelix DE Power Base contracts and EEX Phelix DE/AT Power Base contracts. ESMA is of the opinion that the position limits are consistent with the objectives of MiFID II and with the methodology developed for setting those limits. ESMA will assess notifications received and issue opinions on an ongoing basis in order to ensure the position limits comply with the MiFID II framework.
ESMA reports on the resources and staffing it will need to apply new rules for third-country firms under MiFIR
ESMA has published a report assessing its staffing and resourcing needs arising from its powers and duties under new MiFIR regime for third-country firms. The report follows the changes to the MiFIR regime for the provision of investment services and activities in the EU by third-country firms, which were introduced by the IFR. Having assessed the staffing and resourcing needs, ESMA has submitted a report on the results of this assessment to the European Parliament, Council and Commission.
ESMA updates SFTR Q&A
ESMA has updated its Q&A related to reporting under the Securities Financing Transactions Regulation (SFTR). The updated Q&As provide clarifications in relation to reporting of events that were not duly reported on time, updates to records of outstanding SFTs by the Trade Repositories based on reports made by the counterparties and operational aspects concerning the reporting by financial counterparties on behalf of small non-financial counterparties pursuant to the Article 4(3) of SFTR. The updated set of Q&A complements ESMA’s guidance on reporting under SFTR.
ESMA updates its Q&A relating to the Prospectus Regulation
ESMA has updated its Q&A on the Prospectus Regulation with six new Q&As. The updated Q&As provide clarity on the following topics:
order of information in a prospectus
financial information which only covers short periods
use of the same prospectus to make several offers
disclosure requirements concerning statements prepared by an expert
application of an exemption in Article 1(5) of the Prospectus Regulation
which disclosure annexes should be applied when drawing up a prospectus
ESMA updates EMIR Q&A
ESMA has updated its Q&A on practical questions regarding reporting issues under the European Markets Infrastructure Regulation (EMIR). Trade Repository Q&A 3b has been updated to explain how to report the direction of derivatives in specific cases that are described. The new Q&A provides clarity as to the steps which must be taken for the due termination of derivatives when the reporting counterparty ceases to exist. The update also provides guidance as to how to deal with non-terminated reports of inactive (dissolved) counterparties to ensure that accurate information is provided to the authorities.
ESMA consults on appropriateness and execution-only under MiFID II
ESMA has launched a consultation on guidelines on the application of certain aspects of the appropriateness and execution-only requirements under MiFID II. The MiFID II requirements provide an important element of investor protection in the provision of investment services other than investment advice or portfolio management. MiFID II requires that investment firms providing non-advised services request information on the knowledge and experience of clients or potential clients to assess whether the investment service or product envisaged is appropriate, and to issue a warning in case the investment service or product is deemed inappropriate.
There is an exemption to this assessments in certain cases, including where a firm issues a warning to the client. This consultation paper adds to ESMA’s guidelines on certain aspects of the MiFID II suitability requirements, and adjusts these to the appropriateness and execution-only framework. The consultation paper also considers the insights of supervisory activities conducted by national competent authorities on the application of the appropriateness and execution-only requirements, particularly those resulting from the 2019 common supervisory action on appropriateness. ESMA has invited interested stakeholders to provide feedback in relation to the proposed guidelines. The deadline for submissions is 29 April 2021 and it is expected that ESMA will issue its final guidelines in Q3 2021.
ESMA calls for legislative action on ESG ratings and assessment tools
ESMA has written to the European Commission expressing it views on key challenges in the area of ESG (environmental, social, and governance) ratings and assessment tools. ESMA noted that the growth in demand for these products must be matched with appropriate regulatory requirements to ensure their quality and reliability. ESMA highlighted several key issues which ought to be considered including:
The current lack of regulation and supervision in the market for ESG ratings and other assessment tools. When combined with increasing regulatory demands for consideration of ESG information, there are increased risks of greenwashing, capital misallocation and mis-selling.
There should be a common definition of ESG ratings covering the wide spectrum of possible ESG assessments currently on offer in order to future-proof any regulatory framework and mitigate against possible obsolescence.
The supervisory and regulatory regime should be adapted to the current market structure and accommodate both large multi-national providers who may be subject to existing regulatory frameworks, as well as smaller entities.
ESG rating providers can be part of larger groups providing services such as green bond certification and credit ratings. However, smaller players would also benefit from having access to an EU-wide regime. Given this overlap and to benefit from economies of scale in supervision, ESMA is ready to support possible future supervisory responsibilities in this area.
This letter builds on ESMA's response to the European Commission's consultation on the Renewed Sustainable Finance Strategy in July 2020 which raised specific issues in relation to ESG ratings and assessment tools.
Targeted consultation on the establishment of a European single access point for financial and non-financial information publicly disclosed by companies - First action of the capital markets union action plan
The European Commission has launched a public consultation on the establishment of a European single access point (ESAP) for financial and non-financial information publicly disclosed by companies. The consultation will run from 20 January 2021 to 3 March 2021. The European Commission has stated that a shortened consultation period is appropriate on the basis that there have already been a number of public consultations on the topic of a single/centralised access to company data and that it is politically imperative to deliver the legislative proposal under a very tight time frame.
The Commission also notes that it set up an expert group in June 2020 to provide a detailed recommendation on the ESAP. The objective of the consultation is to seek general and technical views on the means of establishing the ESAP for companies’ financial and sustainable investment-related information made public pursuant to EU legislation. The Commission notes that the establishment of the ESAP is the first action in its new action plan on the capital markets union.
ESMA consults on changes to CRA supervisory fees
A public consultation has been launched by ESMA on the revision of the Delegated Regulation regarding fees charged to credit rating agencies (CRAs). The consultation paper sets out proposals which seek to ensure that the supervisory fees charged reflect the costs of registration, certification and on-going supervision whilst remaining proportionate to CRAs’ turnover. The proposed charges are as follows:
a single registration fee of €45,000
annual supervisory fees of €20,000 to registered CRAs with annual revenues of between €1m and €10m
an annual endorsement fee of €20,000 to all CRAs endorsing credit ratings for use in the EU
annual fees to all certified CRAs
ESMA hopes these proposals will align with the approach to collecting CRA supervisory fees with the approach taken under ESMA’s other supervisory mandates to facilitate an easier fee collection process in the future.