Background

The Alternative Investment Fund Managers Directive ("AIFMD") puts in place a comprehensive framework for the regulation of alternative investment fund managers within Europe.

ESMA is required to play an active role in building a common supervisory culture by promoting common supervisory approaches and practices. It does this by providing responses to questions raised by the general public and competent authorities in relation to the practical application of the AIFMD.

What's new?

On 5 October 2017, ESMA has updated its Q&A document on the AIFMD.

ESMA has published three additional questions/answers on the following topics: remuneration and periodic reporting under SFTR.

• Remuneration:
  ESMA clarifies that remuneration-related disclosure requirements in the annual report of an AIF also apply to the staff of the delegate of an AIFM to whom portfolio management or risk management activities have been delegated. This information is to be provided on an aggregated basis for all delegates. Additionally, ESMA confirms that the remuneration related disclosures should be included in the Annual report and not linked to another document, without prejudice to references in the annual report to other documents where additional information may be found.
• Periodic reporting under SFTR:
  ESMA clarifies how each relevant data item should be reported in the annual and/or half-yearly report of funds. ESMA confirms that all data items should be reported as a snapshot at the end of the reporting period, with the exception of (i) the data on reuse of collateral and (ii) data on return and costs for each type of SFTs and total return swaps. ESMA provides for a definition of each field of the reporting requirements.

ESMA's Q&A on the AIFMD is available here.

What's next?

This Q&As document on the AIFMD is intended to be continually edited and updated as and when new questions are received.

Background

The Undertakings for Collective Investment in Transferable Securities ("UCITS") Directive puts in place a comprehensive framework for the regulation of harmonised investment funds within Europe.

ESMA is required to play an active role in building a common supervisory culture by promoting common supervisory approaches and practices. It does this by providing responses to questions posed by the general public and competent authorities in relation to the practical application of the UCITS Directive.

What's new?

On 5 October 2017, ESMA has updated its Q&A document on the UCITS Directive.

ESMA has published one additional question/answer relating to periodic reporting under SFTR.

ESMA clarifies how each relevant data item should be reported in the annual and/or half-yearly report of funds. ESMA confirms that all data items should be reported as a snapshot at the end of the reporting period, with the exception of (i) the data on reuse of collateral and (ii) data on return and costs for each type of SFTs and total return swaps. ESMA provides for a definition of each field of the reporting requirements.

ESMA’s Q&A on the UCITS Directive is available here.

What's next?

This Q&As document on the UCITS Directive is intended to be continually edited and updated as and when new questions are received.

Background

The Regulation (EU) 2015/847 on information accompanying transfers of funds applies since 26 June 2017 (the "Regulation", available here). The Regulation aims to bring EU legislation in line with Recommendation 16 of the International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation that the Financial Action Task Force, an international anti-money laundering standard setter, adopted in 2012 (the "FATF Recommendation", available here).

In order to ensure the transmission of information throughout the payment chain, the Regulation provides for a system imposing the obligation on payment service providers ("PSPs") to accompany transfers of funds with information on the payer and the payee.

According to Article 25 of the Regulation, the European Supervisory Authorities ("ESAs") shall issue guidelines addressed to the competent authorities and the PSPs on measures to be taken in accordance with this Regulation, in particular as regards the implementation of Articles 7, 8, 11 and 12.

On 5 April 2017, the ESAs launched their consultation on draft joint guidelines to prevent money laundering and terrorist financing (the "Consultation Paper", available here). Through these guidelines, the ESAs aim to promote the development of a common understanding, by PSPs and competent authorities across the EU, of what effective procedures to detect and manage transfers of funds that lack required information on the payer and the payee are, and how they should be applied.

What's new?

On 22 September 2017, based on the feedback received to the Consultation Paper, the ESAs published their joint final guidelines on the measures PSPs should take to detect missing or incomplete information on the payer or the payee, and the procedures they should put in place to manage a transfer of funds lacking the required information (JC/GL/2017/16 – the "Guidelines").

Where appropriate, the Guidelines contain clarifications/modifications to the draft guidelines as published in the Consultation Paper in relation to (i) the risk-based approach, (ii) linked transactions, (iii) the proportionality of real-time transaction monitoring, and (iv) the implementation timeline (i.e. a six-month implementation period should help PSPs and payment or messaging system providers to make the necessary adjustments).

The Guidelines are available here.

What's next?

Competent authorities shall notify the respective ESA whether they comply or intend to comply with the Guidelines, or otherwise with reasons for non-compliance, by 22 November 2017.

The implementation date has been set at six months from the date when the Guidelines are translated into all EU official languages.

Background

On 8 June 2016, the EU Parliament and the Council issued the Regulation (EU) 2016/1011 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (the "BMR", available here). The BMR entered into force on 30 June 2016 and will apply across the EU as from 1 January 2018.

Article 51(4) of the BMR allows relevant competent authorities to permit the continued use of a benchmark which does not meet the requirements of the BMR in financial instruments or contracts that already reference that benchmark if ceasing or changing that benchmark to comply with the BMR requirements would result in a force majeure event, frustrate or otherwise breach the terms of any financial contract or instrument which references that benchmark (the "Breaches").

According to Article 51(6) of the BMR, the EU Commission is empowered to develop a consistent approach for relevant competent authorities on how to assess when these circumstances arise.

On 10 November 2016, upon invitation from the EU Commission, the ESMA published its final report on technical advice under the BMR (ESMA/2016/1560 – the "Technical Advice", available here). It included criteria to be taken into account by national competent authorities considering the permission to use existing benchmarks which do not comply with the BMR requirements in the EU.

What's new?

On 3 October 2017, based on the Technical Advice, the EU Commission published the draft delegated regulation (EU).../... supplementing the BMR with regard to the establishment of the conditions to assess the impact resulting from the cessation of or change to existing benchmarks (C(2017) 6537 final, the "Draft Regulation"). It sets out a non-exhaustive list of criteria to conclude if these events affecting benchmarks could reasonably result in the abovementioned Breaches.

The criteria to be considered by competent authorities on a case-by-case basis are:

• Changing the benchmark would demand a material change to the: (i) nature of the input data, (ii) methodology to determine that data, (iii) data gathering process or (iv) other elements of the benchmark provision, which would lead to a significantly different benchmark’s value;
• Changing the nature of the input data or the methodology to determine that data (in order to make the benchmark compliant with the BMR) would undermine the representativeness of the benchmark of the market or the economic reality the benchmark is intended to measure, ultimately inducing a change in the benchmark’s nature;
• There is no substitute benchmark which: (i) meets the requirements of the BMR, (ii) measures the same market or the same economic reality, (iii) is included in or provided by an administrator which is included in ESMA register of administrators and benchmarks;
• Existing financial contracts, instruments and investment funds referencing the benchmark, and accompanying documents, do not provide for a substitute benchmark or do not contain any rules or measures on how it shall be determined;
• The transitioning of the benchmark from one administrator to another would lead to a substantial change in the benchmark.

The Draft Regulation is available here.

What's next?

The Draft Regulation is subject to the right of the EU Parliament and the Council to express objections.

The final version of the Draft Regulation shall enter into force on the 20th day following that of its publication in the OJEU.

Background

The regulation (EU) 2016/1011 on indices used as benchmark in financial instruments and financial contracts entered into force on 30 June 2016 and will apply across the EU as from 1 January 2018 (the "BMR", available here). BMR introduces a common framework to ensure the accuracy and integrity of benchmarks referenced in financial instruments, financial contracts or investment funds in the EU.

Upon request from the EU Commission, the ESMA published its final report concerning technical advice on possible delegated acts supplementing BMR on 10 November 2016 (ESMA/2016/1560 – the "Technical Advice", available here). The Technical Advice is dedicated to the five following areas: (i) some elements of definitions set out in BMR, (ii) measurement of the reference value of benchmarks, (iii) criteria for the identification of critical benchmarks, (iv) endorsement of a benchmark/family of benchmarks provided in a third country, and (v) transitional provisions.

For its part, the EU Commission held bilateral meetings with various stakeholders and experts to discuss the delegated acts in 2016 and in Q1 2017.

On 30 March 2017, the ESMA published its second final report on 11 draft technical standards under BMR (ESMA70-145-48 – the "Report 2", available here).

What's new?

On 29 September 2017, based on the Technical Advice, the EU Commission issued the following three draft delegated regulations supplementing BMR (the "Draft Regulations"):

• Delegated regulation specifying how the nominal amount of financial instruments other than derivatives, the notional amount of derivatives and the net asset value of investment funds are to be assessed (C(2017) 6464 final – the "DR 6464"). In particular, it is to be noted that Article 1 of the DR 6464 sets out the approach for making calculations in the initial phase if the data required are not available when the final version of this delegated regulation enters into force;
• Delegated regulation specifying how the criteria of Article 20(1)(c)(iii) of BMR are to be applied for assessing whether certain events would result in significant and adverse impacts on market integrity, financial stability, consumers, the real economy or the financing of households and businesses in one or more Member States (C(2017) 6469 final– the "DR 6469"). In particular, Article 1(2) specifies that "where competent authorities expect that such a significant and adverse impact shall occur in more than one Member State, they shall perform a separate assessment for each Member State concerned, as well as a general assessment for all Member States"; and
• Delegated regulation specifying technical elements of the definitions laid down in paragraph 1 of Article 3 of BMR (C(2017) 6474 final – the "DR 6474"). In particular, the DR 6474 further specifies the meaning of "making available to the public" and "administering the arrangements for determining a benchmark".

The DR 6464 is available here.

The DR 6469 is available here.

The DR 6474 is available here.

What's next?

The Draft Regulations are subject to the right of the EU Parliament and the Council of the EU to express objections.

The final version of the Draft Regulations shall enter into force on the 20th day following that of their publication in the OJEU.

Background

The Benchmarks Regulation was published in the Official Journal of the European Union on 29 June 2016, entered into force the following day, and will be fully applicable as of 1 January 2018.

On 30 March 2017 ESMA submitted its draft regulatory and implementing technical standards to the European Commission. These technical standards apply to critical and significant benchmarks.

For non-significant benchmarks the Benchmarks Regulation envisages that ESMA may issue Guidelines in relation to four areas of the Regulation.

What's new?

On 29 September 2017, ESMA has launched a consultation on Guidelines detailing the obligations which apply to non-significant benchmarks under the Benchmarks Regulation.

This Consultation paper is organised in four chapters, each dedicated to one of the areas for which the Benchmarks Regulation suggests ESMA to develop Guidelines for non-significant benchmarks:

• Procedures, characteristics and positioning of oversight function;
• Appropriateness and verifiability of input data;
• Transparency of methodology; and
• Governance and control requirements for supervised contributors.

Each chapter summarises the relevant proposals and their objectives and provides an explanation of the related policy issues.

This paper may be specifically of interest to administrators of benchmarks and to any investor dealing with financial instruments and financial contracts whose value is determined by a benchmark or with investment funds whose performances are measured by means of a benchmark.

ESMA’s Consultation paper is available here.

What's next?

ESMA will consider all comments received by 30 November 2017.

ESMA expects to publish a Final Report after the publication by the European Commission of the Commission Delegated Regulations that relate to the same topics.

Background

The purpose of this questions and answers ("Q&As") document is to promote common, uniform and consistent supervisory approaches and practices in the day-to-day application of Benchmarks Regulation ((EU) 2016/1011, "BMR").

It does this by providing responses to questions asked by the public, financial market participants, competent authorities and other stakeholders.

What's new?

On 29 September 2017, ESMA has updated its questions and answers document on the Benchmarks Regulation.

The Q&As document contains four new questions and answers:

• BMR does not apply to EU nor to third country central banks. Benchmarks provided by EU and third country central banks are not to be included in the register referred in Article 36 of the BMR, but ESMA considers that supervised entities in the Union are nevertheless allowed to use such benchmarks.
• The provision of a single reference price for any financial instrument is exempted from BMR. ESMA provides for a definition of ‘single reference price’.
• Definition of "family of benchmarks": ESMA considers that benchmarks of all levels of reference values (i.e. critical, significant and non-significant) can be grouped into the same family because a benchmark’s degree of use is not part of any of the elements of Article 3(1)(4) of the BMR defining a family of benchmarks.
• Definition of "use of a benchmark": ESMA provides for a definition of situations where supervised entities (trading venue, investment firm acting in the capacity of a systematic internaliser, a CCP and each party to a transaction of a derivative) would be viewed as using a benchmark.

ESMA’s Q&As document is available here.

What's next?

This Q&As document on BMR is intended to be continually edited and updated as and when new questions are received.

Background

Regulation (EU) No 909/2014 on Central Securities Depositories (CSDR) entered into force on 17 September 2014.

The purpose of this Q&As document is to promote common supervisory approaches and practices in the application of CSDR. It provides responses to questions posed by the general public, market participants and NCAs in relation to the practical application of CSDR.

It is addressed to NCAs under the CSDR to ensure that in their supervisory activities their actions are converging along the lines of the responses adopted by ESMA. It should also help, CSDs, their participants, investors and other market participants by providing clarity on the implementation of CSDR requirements.

What's new?

On 2 October 2017, ESMA has updated its Q&As on practical questions regarding the implementation of Central Securities Depositories Regulation.

ESMA has included 3 new questions/answers regarding: Protection of securities of participants and those of their clients, Provision of banking-type ancillary services and Requirements for CSD links.

• Protection of securities of participants and those of their clients:
  ESMA clarifies that in the context of standard links with a TC-CSDs, no specific account segregation requirements apply whereas for the indirect links with TC-CSDs a specific account segregation requirement applies but can be waived provided that an adequate level of protection of securities is ensured.
• Provision of banking-type ancillary services:
  ESMA sets out that when calculating (i) the total value of cash settlement through accounts opened with bank institutions and (ii) the total value of securities transactions against cash settled in the books of the CSD, the CSD should consider all and only the settlement instructions of that participant that are eligible to be included in the calculations of the indicators for determination of the most relevant currencies.
• Requirements for CSD links:
  A requesting CSD does not need to provide its participants with information concerning any further CSD links up to the issuer CSD. Moreover, ESMA clarifies that if necessary for the local legislation assessment, it should include any information about the receiving TC-CSD’s further CSD links that may impact in terms of entitlement of the requesting CSD to the securities or of insolvency proceedings effects.

The ESMA Q&As on CSDR is available here.

What's next?

This Q&As document on the CSDR is intended to be continually edited and updated as and when new questions are received.

Background

On 4 July 2012, the EU Parliament and the Council issued the Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories ("EMIR", available here). EMIR requires all counterparties and central counterparties ("CCPs") to report to a trade repository ("TR") the details of any OTC derivative contract they have concluded and of any modification or termination of the contract.

Article 81 (paragraphs 1 and 3) of EMIR requires trade repositories to regularly publish aggregate data on OTC derivative positions and to grant access to the details of derivative contracts to a certain number of clearly specified entities. Pursuant to Article 81(5) of EMIR, the European Securities and Markets Authority (the "ESMA") is required to develop draft regulatory technical standards ("RTS") specifying: (i) the frequency and the details of this information and (ii) the operational standards required in order to aggregate and compare data across trade repositories and for these entities to have access to information as necessary.

At the time of drafting the RTS (2011-2012), there was limited practical experience and ongoing international discussions on the aggregation of data across TRs. In 2012 Committee for Payment and Settlement Systems of Bank for International Settlements and International Organization of Securities Commissions ("CPSS-IOSCO") issued a report on OTC derivatives data reporting and aggregation requirements (available here). In 2014, the FSB published a feasibility study on aggregation of OTC derivatives TR data (available here).

In September 2012, the ESMA draft RTS were submitted to the EU Commission which, on 19 December 2015, adopted them as its Delegated Regulation (EU) No 151/2013 (the "1st Delegated Regulation", available here). The implementation of the 1st Delegated Regulation highlighted particular instances where improvements could usefully be made, in particular with respect to the monitoring of systemic risk and increased OTC derivatives transparency.

Between 11 December 2015 and 1 February 2016, the ESMA held a public consultation regarding proposed amendments to the 1st Delegated Regulation (the final report is available here). Taking into account the consultation result, the amendments were submitted to the EU Commission.

On 29 June 2017, the EU Commission issued a draft deleted regulation (the "Draft 2nd Delegated Regulation" C(2017) 4408 final, available here). It reflects recent developments and experience gained in the area of trade reporting and access to data. The Draft 2nd Delegated Regulation introduces several modifications to the 1st Delegated Regulation:

• It modifies Article 4 on the operational standards for aggregation and comparison of data, including output formats by replacing paragraph 1 with a new paragraph which states explicitly that TRs must grant access directly and immediately to all entities listed in Article 81(3) of EMIR to the data referred to in Article 2 and Article 3 of the 1st Delegated Regulation using an XML template according to ISO 20022 methodology. It deletes the 2nd paragraph which required the counterparties to generate a unique trade identifier for each derivative contract.
• It modifies Article 5 on the operational standards for access to data, including data exchange procedures between TRs and the competent authorities by adding new paragraphs which:
  
  • Requires the establishment of secure FTP connections between TRs and entities and the use of standardised data exchange supported by ISO 20022 methodology;
  • Specifies the data to which the entities mentioned in Article 81(3) of EMIR shall have access;
  • Requires that TRs allow the use of recurrent and predefined queries and list the data fields which can be included in an ad hoc request;
  • Sets a fixed frequency (i.e. a deadline) for the TRs to provide data to the relevant entities;
  • Obliges the TRs to validate each request to access data and to provide standardised feedback in a timely manner; and
  • Requires the use of an electronic signature and data encryption protocols.

What's new?

On 7 October 2017, the final Commission delegated regulation (EU) 2017/1800 of 29 June 2017 amending Delegated Regulation (EU) No 151/2013 supplementing EMIR was published in the Official Journal of the European Union with the text of the Draft 2nd Delegated Regulation (the "Published Regulation").

The Published Regulation is available here.

What's next?

The Published Regulation entered into force on 27 October 2017 (the 20th day following that of its publication in the Official Journal of the European Union). It is applicable since 1 November 2017.

The Published Regulation shall be binding in its entirety and directly applicable in all EU Member States.

Background

The EMIR Regulation entered into force on 16 August 2012. On 19 December 2012 the European Commission adopted the regulatory technical standards developed by ESMA. These technical standards were published in the Official Journal on 23 February 2013 and entered into force on 15 March 2013.

The purpose of this document is to promote common supervisory approaches and practices in the application of EMIR. It provides responses to questions posed by the general public, market participants and competent authorities in relation to the practical application of EMIR.

What's new?

On 2 October 2017, ESMA has updated its Question and Answers ("Q&As") document on the implementation of EMIR.

ESMA has updated a question/answer on the definition of OTC derivatives and has published a new question/answer on ongoing monitoring of collateral requirements.

• Definition of OTC derivatives:
  ESMA clarifies that the definition includes derivative contracts traded on MTFs and OTFs in the context of EMIR and derivative contracts executed on third-country markets which have not been considered to be equivalent to an EU regulated market will count for the determination of the clearing threshold.
• Ongoing monitoring of collateral requirements:
  ESMA sets out that in regard to the membership of the CCP college, determination of the most relevant currencies would be performed on the basis of the relative share of each currency in the estimated volumes. As to the monitoring, ESMA clarifies that CCPs should monitor on an on-going basis liquidity, credit risk and market risk and defines more clearly which tools CCPs should use for that and how to make it more efficient. However, they also emphasize that CCPs can demonstrate that the set of indicators in place cover these factors.

ESMA Q&A on EMIR implementation is available here.

What's next?

ESMA will periodically review this Q&As and update it where required.

Background

On 21 July 2010, the Senate and House of Representatives of the USA in Congress Assembled, issued the Dodd-Franck Wall Street Reform and Consumer Protection Act 12 USC 5301 (the "Dodd-Franck Act", available here). It is effective since 21 July 2010. Together with its specific implementing rules adopted by the Commodity Futures Trading Commission (the "CFTC Regulations", available here), the Dodd-Franck Act lays down the legal, supervisory and enforcement arrangements (the "Arrangements") applicable in the USA for over-the-counter ("OTC") derivative contracts and provides for comprehensive regulation of swaps as defined in its section 721(a)(21).

On 4 July 2012, the EU Parliament and the Council issued the Regulation (EU) No 648/2012 on OTC derivatives, central counterparties ("CCPs") and trade repositories ("EMIR", available here). EMIR applies since 16 August 2012. It has been supplemented by the Commission delegated regulation (EU) 2016/2251 (the "Delegated Regulation", available here).

Subpart I of Part 23 of the CFTC Regulations and Article 11 (paragraphs 1 and 2) of EMIR address operational risk-mitigation techniques for OTC derivative contracts not cleared by a CCP. In particular, they contain requirements regarding timely confirmation, portfolio compression, portfolio reconciliation, transaction valuation and dispute resolution. The Subpart I of Part 23 of the CFTC Regulations and Article 11 (3) of EMIR together with its Delegated Regulation, address requirements in relation to the exchange of collateral margins between counterparties.

In this context, Article 13 of EMIR empowers the EU Commission to adopt implementing acts declaring that the Arrangements in respect of operational risk migration techniques and margin requirements of a 3rd country are equivalent to the EU Arrangements laid down in Article 11 of EMIR.

On 1 September 2013, the ESMA issued its Final Report providing technical advice to the EU Commission on US regulatory equivalence under EMIR (ESMA/2013/1157, available here). It was assessed that the Arrangements of the USA ensure that OTC derivative contracts not cleared by the CCP and entered into by a counterparty established in the USA do not expose EU financial markets to higher level of risk than in case if that type of derivative contracts would be entered into by EU established counterparties.

On 10 February 2016, the EU Commission and the CFTC announced a common approach regarding requirements for central clearing counterparties (press releases available here and here). They indicated that the EU Commission intends to adopt an equivalence decision with respect to CFTC requirements for US CCPs which will allow ESMA to recognise US CCPs.

What's new?

On 14 October 2017, the EU Commission’s adopted implementing decision (EU) 2017/1857 on the recognition of the Arrangements of the USA for derivatives transactions supervised by the CFTC as equivalent to certain requirements of Article 11 of EMIR, was published in the OJEU (the "Equivalence Decision").

The Equivalence Decision states that the Arrangements of the USA for:

• Operational risk-mitigation techniques that are applied to transactions regulated as ‘swaps’ by the CFTC and that are not cleared by a CCP shall be considered as equivalent to the requirements set out in Article 11 (paragraphs 1 and 2) of EMIR, where at least one of the counterparties to those transactions is established in the USA and registered with the CFTC as a swap dealer or major swap participant;
• The exchange of collateral that are applied to transactions regulated as swaps by the CFTC and that are not cleared by a CCP shall be considered as equivalent to the requirements of Article 11(3) of EMIR, where at least 1 of the counterparties to those transactions is established in the USA and registered with the CFTC as a swap dealer or major swap participant, and that counterparty is subject to the Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants and the Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants - Cross Border Application of the Margin Requirements.

The Equivalence Decision is available here.

What's next?

The Equivalence Decision shall enter into force on 3 November 2017.

Background

The Regulation (EU) No 648/2012 dealing with over-the-counter ("OTC") derivatives, central counterparties ("CCPs") and trade repositories applies since 16 August 2012 ("EMIR", available here).

In order to clear OTC derivatives, a counterparty may become a clearing member, the client of a clearing member or establish indirect clearing arrangements with a clearing member, provided that those arrangements do not increase counterparty risk and ensure that the assets and positions of the counterparty benefit from protection equivalent to that referred to in Articles 39 and 48 of EMIR.

On 15 March 2013, the Commission delegated regulation (EU) No 149/2013 supplementing EMIR with regard to regulatory technical standards ("RTS") on indirect clearing arrangements, the clearing obligation, the public register, access to a trading venue, non-financial counterparties, and risk mitigation techniques for OTC derivatives contracts not cleared by a CCP entered into force (the "Delegated Regulation 149/2013", available here).

Pursuant to Article 1(b) of the Delegated Regulation 149/2013, "indirect clearing arrangement" means 'the set of contractual relationships between the CCP, the clearing member, the client of a clearing member and indirect client that allows the client of a clearing member to provide clearing services to an indirect client'.

Against this background, the Regulation (EU) No 600/2014 on markets in financial instruments entered into force on 2 July 2014 and will apply as from 3 January 2018 ("MiFIR", available here).

In accordance with Article 30(1) of MiFIR, indirect clearing arrangements with regard to exchange-traded derivatives ("ETDs") are permissible provided that those arrangements do not increase counterparty risk and ensure that the assets and positions of the counterparty benefit from protection with equivalent effect to that referred to in Articles 39 and 48 of EMIR.

On 26 May 2016, the ESMA published its final report concerning draft RTS on indirect clearing arrangements under EMIR and MiFIR (ESMA/2016/725 – the "Draft RTS", available here). The Draft RTS most notably (i) specify the types of indirect clearing arrangements for ETDs and (ii) ensure consistency with the provisions established for OTC derivatives, by amending certain aspects of the Delegated Regulation 149/2013 in order to reflect recent developments and experience gained in the area of clearing.

What's new?

On 22 September 2017, based on the Draft RTS, the EU Commission issued the following delegated regulations:

• Commission delegated regulation supplementing MiFIR with regard to RTS on indirect clearing arrangements (C(2017) 6268 final – the "MiFIR Delegated Regulation");
• Commission delegated regulation amending the Delegated Regulation 149/2013 with regard to RTS on indirect clearing arrangements (C(2017) 6270 final – the "EMIR Delegated Regulation").
• The MiFIR Delegated Regulation and the EMIR Delegated Regulation aim to:
• Simplify and clarify the requirements that relate to the management of the default of a client providing indirect clearing services;
• Adapt account structures in order to rationalise the offering of indirect clearing services;
• Allow indirect clearing services to be provided in chains going beyond the client of a direct client provided that appropriate and equivalent protection is ensured throughout the chain;
• Set out homogeneous requirements for indirect clearing arrangements relating to both OTC derivatives and ETDs.

It is to be noted that the term "indirect clearing arrangements" has been amended as follows: 'the set of contractual relationships between providers and recipients of indirect clearing services provided by a client, an indirect client or a second indirect client'.

The MiFIR Delegated Regulation is available here.

The EMIR Delegated Regulation is available here.

What's next?

The final version of the MiFIR Delegated Regulation and of the EMIR Delegated Regulation shall apply as from 3 January 2018.

Background

On 9 December 2002, the EU Parliament and the Council issued the Directive 2002/92/EC on insurance mediation ("IMD," available here). EU countries had to transpose it by 14 January 2005.

On 15 May 2014, the EU Parliament and the Council issued the Directive 2014/65/EU on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU ("MiFID II", available here). Together with its delegated acts, MiFID II shall apply as of 3 January 2018. On 25 April 2016, the EU Commission issued the delegated regulation (EU) 2017/565 supplementing MiFID II as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of MiFID II ("MiFID II Delegated Regulation", available here).

On 20 January 2016, the EU Parliament and the Council issued the Directive (EU) 2016/97 on insurance distribution ("IDD", available here). IDD replaces IMD. The EU countries have to transpose IDD by 23 February 2018.

Provisions included in IDD are essentially changes driven by MiFID II.

IDD provides updated rules applicable to the distribution of insurance and reinsurance products, including insurance-based investment products. It aims at ensuring a greater transparency of insurance distributors with regard to the price and costs of their products, better and more comprehensible product information and improved conduct of business rules, in particular with regard to advice.

Certain elements of IDD need to be further specified in delegated acts by the EU Commission. Those include measures regarding: (i) conflicts of interest (Articles 27 and 28(4)) and inducements (Article 29 (2)), and (ii) assessment of suitability and appropriateness (Article 30 (5)).

With regard to conflicts of interest, the provisions of IDD are closely aligned with those of MiFID II. Both MiFID II and IDD provide rules framing the payment of inducements, i.e. fees, commissions or non-monetary benefits paid or provided by any party except the customer (as commissions paid by insurance companies to agents). However, there are differences. Under IDD, the payment of inducements is only allowed if it does not have a detrimental impact on the quality of the relevant service to the customer. The EU Commission is empowered to specify the criteria for assessing if inducements paid or received by an insurance intermediary or an insurance undertaking have such impact.

Under IDD, EU countries may allow sales without even an assessment of appropriateness with regard to so-called 'non-complex insurance based investment products'. Their definition follows largely the rules of MiFID II, however the EU Commission is empowered to specify the criteria for such products.

What's new?

On 21 September 2017, the EU Commission issued a draft Commission Delegated Regulation …/... supplementing IDD with regard to information requirements and conduct of business rules applicable to the distribution of insurance-based investment products (C(2017) 6229 final – "IDD Delegated Regulation"). It sets out rules on: (i) conflicts of interests and inducements and (ii) assessment of suitability and appropriateness. They follow closely MiFID II Delegated Regulation.

IDD Delegated Regulation rules on conflicts of interests consist of an article on the identification of such conflicts, describing situations which should be taken into account in their assessment. This is followed by provisions on conflicts of interest policy which detail the organisational measures to be taken by insurance intermediaries and insurance undertakings to manage a conflict of interest.

The IDD Delegated Regulation rules on inducements are based on the principle of an overall assessment, requiring insurance intermediaries and insurance undertakings to assess all relevant factors which increase or decrease the risk of detrimental impact on the quality of the relevant service to the customer. They provide a list of criteria for assessing if inducements paid or received by an insurance intermediary or an insurance undertaking increase the risk of the detrimental impact.

IDD Delegated Regulation rules regarding assessment of suitability and appropriateness describe the detailed conditions for: (i) the assessment of suitability which applies in the case of sales with advice and (ii) the assessment of appropriateness which applies in sales where the customer, in conformity with the applicable national law requires no advice.

IDD Delegated Regulation rules specify the criteria for so-called ‘non-complex insurance based investment products’. The relevant article is based on the corresponding provision in MiFID II Delegated Regulation, however, in order to accommodate the specific structures of insurance products an additional condition concerning the existence of a guarantee is provided.

The IDD Delegated Regulation is available here.

What's next?

The IDD Delegated Regulation shall enter into force on 23 February 2018 along with IDD, following scrutiny by the EU Parliament and the Council of the EU.

Background

On 9 December 2002, the EU Parliament and the Council issued the Directive 2002/92/EC of on insurance mediation ("IMD", available here). The EU countries had to transpose it by 14 January 2005.

On 20 January 2016, the EU Parliament and the Council issued the Directive (EU) 2016/97 on insurance distribution, ("IDD", available here). IDD replaces IMD. The EU countries have to transpose IDD by 23 February 2018. IDD provides an updated framework of rules applicable to the distribution of insurance and reinsurance products ("Products"), including insurance-based investment products.

IDD introduces generalised product oversight and governance ("POG") into EU insurance distribution law. IDD aims to ensure that Products for sale meet the needs of their specific target market in order to avoid and reduce from an early stage risks of failure to comply with customer protection rules. The main addressees of POG rules are manufacturers of Products. They have to maintain POG policy to ensure that Products marketed are appropriate for their specific target market. Further, insurance distributors have to ensure that they have the information needed to sell the Products in line with the POG policy.

According to Article 25(2) of IDD, the EU Commission is empowered to further specify the principles set out in Article 25 of IDD on POG requirements.

What's new?

On 21 September 2017, the EU Commission issued a draft Commission Delegated Regulation …/... supplementing IDD with regard to POG requirements for insurance undertakings and insurance distributors (C(2017) 6218 final – the "Delegated Regulation"). The new rules on POG for the first time oblige insurers to prioritize the interest of consumers when designing, developing and distributing all Products.

The manufacturers have a core obligation to maintain, operate and review a product approval process for all newly developed products and for significant adaptations of existing products. This process includes the identification of a target market for each of Products. Manufacturers shall: (i) ensure on a continuous basis that Products are aligned with the interests, objectives and characteristics of the customers belonging to the target market; (ii) undertake appropriate testing of Products and to continuously monitor and regularly review their Products; (iii) take necessary care in the selection and monitoring of distribution channels.

The Delegated Regulation includes also a provision specifying the conditions under which an insurance intermediary has to be considered as manufacturer in view of its decision-making influence on the design and development of particular Products.

The measures on POG requirements for insurance distributors (that are selling Products which they do not manufacture) are based on the core obligation to have distribution arrangements that allow them to obtain from the manufacturer all the information required to understand the Products, comprehend the identified target market and distribute the Products in accordance with the best interests of the customers.

The Delegated Regulation is available here.

What's next?

The Delegated Regulation shall enter into force on 23 February 2018 along with IDD, following scrutiny by the EU Parliament and the Council.

Background

On 24 November 2010, the EU Parliament and the Council issued a regulation (EU) No 1094/2010 establishing European Insurance and Occupational Pensions Authority or the "EIOPA" (the "Regulation", available here). According to Article 16 of the Regulation, the EIOPA shall facilitate efficient supervisory practices and consistent application of EU law by issuing guidelines to competent authorities or financial institutions. It shall conduct public consultations regarding the guidelines.

On 15 May 2014, the EU Parliament and the Council issued the Directive 2014/65/EU on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU ("MiFID II", available here). Together with its delegated acts, MiFID II shall apply as of 3 January 2018. On 25 April 2016, the EU Commission issued the delegated regulation (EU) 2017/565 supplementing MiFID II as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of MiFID II ("MiFID II Delegated Regulation", available here).

On 20 January 2016, the EU Parliament and the Council issued the Directive (EU) 2016/97 on insurance distribution ("IDD", available here). The EU countries have to transpose IDD by 23 February, 2018. The provisions included in IDD relate to MiFID II regarding to the distribution of insurance-based investment products (the "IBIPs"). IDD aims at enhancing transparency with regard to comprehensible product information, costs of products and improved conduct of business rules.

According to Article 30 (paragraphs 1 and 2) of IDD, sale of an IBIP requires an assessment of its suitability for the customer by the insurance undertaking or intermediary. Article 30(3) of IDD permits the EU Member States to derogate from this obligation where various conditions are met (the "Derogation"), then the IBIP may be sold without the suitability test i.e. on an ‘execution-only’ basis.

One of the conditions to determine if an IBIP can be distributed as an execution-only sale, relates to complexity of the IBIP. Complexity assessment is based on the nature of the financial instruments to which an IBIP provides investment exposure as well as on the structure of the insurance contract between insurance distributor and the customer. The complexity of the instruments to which the IBIP provides investment exposure depends on Article 25(4)(a) of MiFID II as well as Article 57 of MiFID II Delegated Regulation and relevant ESMA guidelines (ESMA/2015/1787, available here).

Under Article 30(3)(a) of IDD a distinction is made between those IBIPs (i) which provide investment exposure to instruments deemed non-complex under MiFID II framework and (ii) other non-complex IBIPs. According to Article 30 (paragraphs 7 and 8) of IDD, the EIOPA shall issue guidelines for the assessment of both kinds of IBIPs.

On 2 February 2017, the EIOPA published a consultation paper on the proposal for guidelines under IDD on IBIPs that incorporate a structure which makes it difficult for the customer to understand the risks involved (EIOPA_CP_17/001, the "Consultation Paper", available here).

What's new?

On 11 October 2017, the EIOPA published its final report on guidelines under IDD on IBIPs that incorporate a structure which makes it difficult for the customer to understand the risks involved, as adopted by the Board of Supervisors on 28 September 2017 (EIOPA_BoS_17/204, the "Final Report").

The Final Report includes a feedback review of issues raised by stakeholders responding the Consultation Paper and how the EIOPA has addressed them by developing guidelines (the "Final Guidelines"), notably by distinguishing requirements which apply to 2 types of IBIPs. The Final Report also includes the Final Guidelines, their explanatory text and impact assessment.

The Final Guidelines cover issues relevant to the assessment of the complexity of IBIPs and include criteria to identify contractual structures and product features that make it difficult to understand the associated risks. The Final Guidelines hence seek to ensure that only those IBIPs for which risks can be readily understood are able to be sold via execution only.

The 1st part of the Final Guidelines concerns requirements that apply to contracts which only provide investment exposure to financial instruments deemed non-complex under Article 3o(3)(a)(i) of IDD. It addresses the following contractual features:

1. Changes to the nature of the contract and the ability for the customer to surrender the product;
2. Determination of the maturity of surrender value or pay out upon death;
3. The costs (significant changes in charges paid by the customer, including those based on the performance of the investment);
4. The non-standard definition of beneficiary in the insurance contract.

The 2nd part of the Final Guidelines addresses points 2-5 as above in relation to ‘other non-complex IBIPs’ under Article 30(3)(a)(ii) of IDD.

The Final Report is available here.

What's next?

The Final Guidelines will be translated into all EU official languages. Once the translations are published, competent authorities shall confirm to the EIOPA if they comply or intend to comply with them, with reasons for non-compliance, within 2 months after the issuance of the translations.

The Final Guidelines shall apply from the date of publication of the translated versions. They shall be subject to a review by the EIOPA and updated periodically in accordance with Article 30 of IDD.

The Final Guidelines will only be applicable within EU Member States which use the Derogation.

Background

The Market Abuse Regulation (MAR) came into effect on 3 July 2016. It aims at increasing market integrity and investor protection, enhancing the attractiveness of securities markets for capital raising.

ESMA is required to play an active role in building a common supervisory culture by promoting common supervisory approaches and practices. It does this by providing responses to questions raised by the general public and competent authorities in relation to the practical application of MAR.

What's new?

On 29 September 2017, the ESMA has published an updated version of its Q&As document on MAR.

The ESMA has added one new question/answer which refers to delayed inside information that lost the feature of the price sensitivity.

Where the issuer has delayed the disclosure of inside information in accordance with Article 17(4) of MAR and the information subsequently loses the element of price sensitivity that information ceases to be inside information and thus is considered outside the scope of Article 17(1) of MAR.

Therefore, the issuer is neither obliged to publicly disclose that information nor to inform the competent authority in accordance with the last paragraph of Article 17(4) that disclosure of such information was delayed.

However, given that the information had been inside information for a certain period of time, the issuer had to comply with all relevant obligations relating to the drawing up and updating of insider lists and the maintenance of the information relating to the delay of disclosure, stemming from MAR and its delegated and implementing Regulations.

The ESMA Q&As document on the MAR is available here.

What's next?

This Q&As document on MAR is intended to be continually edited and updated as and when new questions are received.

Background

On 15 May 2014, the EU Parliament and the Council issued the Directive 2014/65/EU on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU ("MiFID II", available here). It will apply as from 3 January 2018, except for provisions of Article 65(2) regarding post trade organisational requirements for trading venues in respect of non-equity financial instruments, which will apply from 3 September 2018.

MiFID II introduces a new type of services that are subject to authorisation and supervision: data reporting services ("DRSs"). DRS include the operation of consolidated tapes. Consolidated tape providers ("CTPs") will collect post-trade information published by trading venues and approved publication arrangements ("APAs"), consolidate them into a continuous live data stream and make the data available to the public, both for equity and non-equity instruments.

On 2 June 2016, the EU Commission issued its Delegated Regulation (EU) 2017/571 supplementing MiFID II with regard to regulatory technical standards ("RTS") on the authorisation, organisational requirements and the publication of transactions for DRS providers (the "Delegated Regulation", available here). It endorsed the ESMA draft RTS of September 2015 ("2015 RTS", available here).

The Delegated Regulation contains the organisational requirements for DRS providers, including CTPs for equity instruments. In particular, Article 15 specifies the ‘scope of the consolidated tape for shares, depositary receipts, ETFs, certificates and other similar financial instruments.’ The details regarding non-equity instruments are not included in it due to more difficult implementation and later application date of relevant Article 65(2) of MiFID II on organisational requirements concerning CTPs.

On 31 March 2017, the ESMA issued draft RTS setting out the financial instruments data of which must be provided in the data stream and specifying the trading venues and APAs which need to be included for non-equity instruments ("2017 RTS", available here).

What's new?

On 29 September 2017, based on 2017 RTS, the EU Commission issued the draft Commission Delegated Regulation EU.../... amending Commission Delegated Regulation (EU) 2017/571 supplementing MiFID II with regard to 2017 RTS on the authorization, organizational requirements and the publication of transactions for DRS providers (C(2017) 6337 final – the "Amending Regulation").

The Amending Regulation inserts in the Delegated Regulation Article 15a on ‘scope of the consolidated tape of bonds, structured finance products, emission allowances and derivatives’.

Under the Amending Regulation,

• CTPs are allowed to operate a consolidated tape covering only one asset class or combination of several asset classes;
• CTPs have to ensure that they publish the required information on transactions covering at least 80 % of the total volume and number of transactions published in the preceding 6 months for each relevant asset class by APAs and trading venues (with an aim to ensure that CTPs publish information that is of significance from a user perspective while avoiding high costs stemming from including all information published by all APAs and all trading venues);
• CTPs are allowed sufficient time to meet the coverage ratios set out in the Amending Regulation if they need to add new trading venues and APAs to their data stream.

The Amending Regulation is available here.

What's next?

The Amending Regulation is subject to the right of the EU Parliament and the Council of the EU to express objections.

The final version of the Amending Regulation shall enter into force on the 20th day following that of its publication in the OJEU. It shall apply from 3 January 2018. However, Articles 14(2), 15(1), (2) and (3), and 20(b) shall apply from 3 September 2019.

To ensure a smooth transition to the new regime, the Amending Regulation Article 15a(4) provides for transitional provisions requiring that the first assessment period for determining the coverage ratios by CTPs would apply as of 1 January 2019.

Background

MiFID II/MiFIR requires performing various transparency calculations in relation to trading of equity and all non-equity instruments. Those calculations will have to be performed both for the transition from MiFID I to MiFID II/MiFIR as well as on an ongoing basis once MiFID II/MiFIR applies. National Competent Authorities ("NCAs") are responsible for performing the transparency calculations under MiFID II/MiFIR, both for transitional purposes as well as the ongoing calculations.

ESMA was requested to coordinate the exercise in the transitional phase for the delegating NCAs. ESMA staff performed the transitional transparency calculations using data related to 2016 trading activity provided by trading venues.

This document aims at gathering frequently asked questions and answers regarding the publication of the MiFID II Transitional Transparency Calculations ("TTC") for all non-equity instruments in accordance with delegated Regulation 2017/583 on transparency requirements in respect of bonds, structured finance products, emission allowances and derivatives under MiFIR.

What's new?

On 18 October 2017, ESMA has published a first set of a Question and Answers ("Q&As") document on interim transparency calculations under MiFID II.

The new Q&As document addresses 15 questions on the following issues: General information, Data availability, Files structure and File content.

• General information:
  ESMA clarifies that NCAs have the power to waive the obligation for market operators and investment firms operating a trading venue to make public pre-trade information for non-equity instruments for which there is not a liquid market. Furthermore, transactions in non-equity instruments for which there is not a liquid market may also benefit from deferred publication. ESMA also provides definition for the following: asset-class, sub-asset class and sub-classes, large in scale (LIS) and size-specific to the instrument ("SSTI").
• Data availability:
  ESMA specifies that the published TTC do not contain information for equity/ETF/bonds as accordingly to the transitional provisions in the Commission’s delegated acts, interim transparency calculations for equity and ETFs shall be published by 06/12/2017. Liquidity assessment of individual bonds will be published by 01/12/2017.
• Files structure:
  ESMA sets that the TTC files are structured according to asset classes for all non-equity instruments in line with Annex III of delegated Regulation 2017/583. Only asset classes with at least one liquid sub-class are published.
• File content:
  ESMA clarifies that the TTC files contain reference data (e.g., notional currency, time-to-maturity bucket, etc.) and LIS and SSTI thresholds for pre-trade and post-trade transparency purposes per sub-class when they have been classified as liquid. The affected sub-asset classes are as follows: Credit derivatives - CDS index options, CFDs (Equity, Bond, Equity future/forward, Equity option) and Interest rate derivatives - Fixed-to-Float ‘single currency swaps’ and futures/forwards on Fixed-to-Float ‘single currency swaps’. ESMA then provides for a series of technical specifications regarding the interim transparency calculations file content.

ESMA Q&A on interim transparency calculations is available here.

What's next?

The outcomes of the TTC are applied from 03 January 2018 until 31 May 2019 for derivatives and bonds with respect to LIS and SSTI thresholds.

The outcomes of the TTC are applied from 03 January 2018 until 15 May 2018 for bonds with respect to liquidity indicators.

ESMA will periodically review this Q&As and update it where required.

Background

The MiFID II Directive encompasses the rules on governance, products, investor protection and information disclosure.

MiFID II and MiFIR, together with the Commission delegated acts as well as regulatory and implementing technical standards, will be applicable from 3 January 2018.

The purpose of the Q&As document is to promote common supervisory approaches and practices in the application of MiFID II on investor protection issues.

What's new?

On 10 October 2017, ESMA has published its Question and Answers (Q&As) document on MiFID II and MiFIR post-trade issues.

ESMA has so far included 1 Q&A relating to Pre-trade checks waiver.

ESMA clarifies that, in the context of trading venue members/participants entering into trades on behalf of their clients, a trading venue’s rules should provide that the member/participant must be satisfied that such clients have direct or indirect clearing arrangements to become counterparty to the cleared transaction resulting from that trade.

ESMA Q&A on post-trade issues under MiFID II is available here.

What's next?

ESMA will periodically review this Q&As and update it where required.

Background

The MiFID II Directive encompasses the rules on governance, products, investor protection and information disclosure.

MiFID II and MiFIR, together with the Commission delegated acts as well as regulatory and implementing technical standards, will be applicable from 3 January 2018.

The purpose of the Q&As document is to promote common supervisory approaches and practices in the application of MiFID II on investor protection issues.

What's new?

On 3 October 2017, ESMA has updated its Q&As document on the implementation of investor protection topics under the MiFID II.

ESMA has included 12 new Q&A relating to Best execution, Recording of telephone conversations and electronic communications, Post-sale reporting, Information on costs and charges and Client categorization.

• Best execution:
  ESMA clarifies that an investment firm using Direct Electronic Assess (DEA) services to specifically direct an order to a particular venue would be expected to list the intermediary firm providing that service. Furthermore, ESMA considers that the investment firms should also disclose the identity of the main venues it commonly selects via DEA arrangements and the existence of any close links and specific arrangements with such execution venues, in its summary of execution quality.
• Recording of telephone conversations and electronic communications:
  ESMA states that the applicable scope of the record keeping requirements set out in Article 16(7) of MiFID covers at least the recording of communications in relation to the client order services, and the conversations and communications that are "intended to result in" the provision of these services. In practice, other investment services like investment advice may be provided at the point when there is an intention to provide a client order services.
• Post-sale reporting:
  ESMA clarifies that investment firms should have the possibility to agree with their clients on the possibility to assess the 10% depreciation on an aggregated basis rather than on an instrument by instrument basis. ESMA explicitly states that MiFID does not allow firms to agree with clients to assess depreciation on a higher threshold than 10 %.
• Costs and charges:
  ESMA defines that the firms shall use actually incurred costs as a proxy when calculating expected costs and charges to be provided to the client on an ex-ante basis. ESMA also highlights that any costs and charges that are caused by the occurrence of underlying market risk shall not be included in the aggregated information about costs and charges; so the price for the position of a firm is the current value of the financial instrument held by the firm when the firm offers the instrument to the client or when it sells it. Furthermore, when investment firms are required to provide their clients annual ex-post information about costs and charges, ESMA expects firms to provide such information on the basis of a time period that ends at the latest one year after the date on which the ongoing relationship has started.
• Client categorization:
  ESMA states that firms only have to notify information on the categorisation to new clients and clients whose categorisation has changed.

ESMA Q&A on investor protection under MiFID II is available here.

What's next?

ESMA will periodically review this Q&As and update it where required.

Background

The MiFID II Directive encompasses the rules on governance, products, investor protection and information disclosure.

MiFID II and MiFIR, together with the Commission delegated acts as well as regulatory and implementing technical standards, will be applicable from 3 January 2018.

The purpose of the Q&As document is to promote common supervisory approaches and practices in the application of MiFID II on investor protection issues.

What's new?

On 3 October 2017, ESMA has updated its Q&As document on MiFID II and MiFIR market structures topics.

ESMA has included 7 new Q&As relating to Direct Electronic Access ("DEA"), the tick size regime and multilateral and bilateral systems.

• Direct Electronic Access:
  ESMA focuses on the DEA provider’s controls and suitability checks saying that this is also applicable to clients that are not investment firms authorised in the EU.
• Tick size regime:
  ESMA clarifies that in the absence of the publication of the average daily number of transactions (ADNT), the relevant trading venues need to apply a harmonised default tick size and assign the highest liquidity band pending such publication. It also clarifies that in the case of the simultaneous dual listing, one NCA will be appointed for the purpose of determining the estimated average daily number of shares and applicable tick size.
• Multilateral and bilateral systems:
  ESMA clarifies that the OTF cannot offer trading in C(6) REMIT wholesale energy products only. ESMA highlights that OTF trading both financial instruments and REMIT carve-out products should identify, prevent or otherwise manage any potential adverse consequences that trading in REMIT carve-out products may have on trading in financial instruments and on its ability to meet its MiFID obligations on an on-going basis. Also, ESMA states that in case where third party brokers are clients of the OTF or provide DEA, the OTF should be implementing its own best execution policy. ESMA also clarifies that Systematic Internaliser (SI) may execute orders at a better price than the quoted prices, provided that the price falls within a public range close to market conditions, when those prices are meaningful and reflect the minimum tick size applicable to the same financial instrument traded on a trading venue.

ESMA Q&A on market structures under MiFID II is available here.

What's next?

ESMA will periodically review this Q&As and update it where required.

Background

The MiFID II Directive encompasses the rules on governance, products, investor protection and information disclosure.

MiFID II and MiFIR, together with the Commission delegated acts as well as regulatory and implementing technical standards, will be applicable from 3 January 2018.

The purpose of the Q&As document is to promote common supervisory approaches and practices in the application of MiFID II on investor protection issues.

What's new?

On 3 October 2017, ESMA has updated its Q&As document on MiFID II and MiFIR transparency topics.

ESMA has included 10 new Q&A relating to General Q&As on transparency, non-equity transparency and the systematic internaliser regime.

• General Q&As on transparency:
  ESMA clarifies when the operator of an RFQ system should provide pre-trade transparency giving the examples of where trading interests become executable after a pre-defined period of time. Moreover, it is now clear that the real time post-trade transparency applies equally to trading venues and SIs.
• Non-equity transparency:
  ESMA sets out that the deferral regime applicable to the investment firms trading OTC is the one determined by the Member State where the investment firm that has to make the transaction public is established. It further highlights that it is not relevant in which Member State the relevant instrument is traded. Furthermore, ESMA states that in case of less than 5 transactions executed in a day, there is no need for details of those transactions to be made public in an aggregated form. ESMA also confirms that package orders/transactions have to be exclusively composed of non-equity instruments.
• Systematic internaliser regime:
  ESMA clarified that threshold calculation should be performed at the most granular class level for derivatives, for the structured financed products it should be done on the ISIN level and for the emission allowance the calculation should be performed at the level of the emission allowance type. They also set out what is a class of bonds and that it is possible to distinguish between corporate bonds and convertible bonds. ESMA also deems that whenever an investment firm is dealing with a counterparty that is not a financial institution authorised or regulated under the EU law or law of a Member State, it will be considered as executing a client order and the transaction should count towards the calculations. SIs are allowed to limit the number of transactions they undertake to enter into with clients to 1 transaction.

ESMA Q&A on transparency under MiFID II is available here.

What's next?

ESMA will periodically review this Q&As and update it where required.

Background

MiFIR’s trading obligation will move over-the-counter ("OTC") trading in liquid derivatives onto organised venues. Trading derivatives on-venue will bring transparency into the OTC sphere, benefiting investors and regulators alike. Enhanced transparency will provide better information on prices, liquidity and risk thus fostering market integrity.

MiFIR, which implements parts of the MiFID II framework, outlines the process for determining which derivatives should be traded on-venue. The trading obligation only applies to classes of derivatives that are sufficiently liquid and available for trading on at least one trading venue.

This final report presents the revised draft RTS specifying the trading obligation for derivatives for classes of interest rate swaps and credit default swaps as foreseen in Articles 28 and 32 of MiFIR. The final report explains the revised approach taking into account feedback received from stakeholders to the September 2016 discussion paper and June 2017 consultation paper.

What's new?

On 29 September 2017, ESMA has published its final draft Regulatory Technical Standard implementing the trading obligation for derivatives under MiFIR.

The final report contains mainly 4 sections: (i) the overall approach and provides feedback received to questions raised in the consultation, (ii) ESMA’s final approach for interest rate swap ("IRS") classes that should be subject to the trading obligation, (iii) ESMA’s final approach for credit default swap (CDS) classes and (iv) ESMA’s approach for the date from which the trading obligation should apply.

Regarding the draft RTS and ESMA’s approaches for IRS and CDS, it has decided to make the following fixed-to-float indices subject to on-venue trading:

• Fixed-to-float interest rate swaps denominated in EUR;
• Fixed-to-float interest rate swaps denominated in USD;
• Fixed-to-float interest rate swaps denominated in GBP; and
• Index CDS - iTraxx Europe Main and iTraxx Europe Crossover.

ESMA’s draft RTS are available here.

What's next?

ESMA’s draft RTS have been submitted to the European Commission for its endorsement. The Commission expressed to ESMA its strong commitment to apply the trading obligation from the start date of the MiFID II framework. ESMA has therefore maintained 3 January 2018 as the envisaged date of application.

Background

The Legal Entity Identifier ("LEI") is a 20-digit, alpha-numeric code that enables clear and unique identification of legal entities participating in financial transactions. LEIs, like other identifiers, are needed by firms to fulfil their reporting obligations under financial regulations and directives. LEIs are also key for matching and aggregating market data, both for transparency and regulatory purposes.

The code is linked to a set of key reference information relating to the legal entity in question e.g. name and address. Once a legal entity obtains a LEI code, the code is assigned to that legal entity for its entire life.

MiFIR introduces requirements for a number of various entities to be identified through the LEI:

• investment firms that execute transactions in financial instruments;
• the clients (buyer, seller) on whose behalf the investment firm executes transactions, when the client is a legal entity;
• the client of the firm on whose behalf the trading venue is reporting under MIFIR Article 26.5, when the client is a legal entity;
• the person who makes the decision to acquire the financial instrument, when this person is a legal entity e.g. this includes investment managers acting under a discretionary mandate on behalf of its underlying clients;
• the firm transmitting the order;
• the entity submitting a transaction report (i.e. trading venue, ARM, investment firm); and
• the issuer of any financial instrument listed and/or traded on a trading venue.

What's new?

On 9 October 2017, ESMA has published a Briefing on the Legal Entity Identifier as part of its efforts to raise industry awareness and facilitate compliance with the LEI requirements under MiFID II/MiFIR.

ESMA recalls that the use of an LEI is already required under a number of EU regulations and directives (EMIR, MAR, CRR, AIFMD, CSDR, SFTR…).

Any legal entity can apply for an LEI.

Obtaining an LEI is straightforward. An interested entity should contact the preferred LEI issuing organisation (LEI issuer, also known as Local Operating Unit). The list of LEI issuers is available on the Global LEI Foundation ("GLEIF") website.

Under MiFIR the above entities will need to be identified with an LEI even if they had no previous legal obligation to obtain one and regardless of where they are operating or legally based.

ESMA’s Briefing on the LEI is available here.

What's next?

ESMA expects market participants to take all necessary steps to ensure full compliance with the LEI requirements under MiFID II/MiFIR ahead of its 3 January 2018 launch.

ESMA urges reporting entities not to delay in addressing this important matter, as advance preparation will help in avoiding backlogs and ensuring that all market participants are ready for the new regime.

Background

The requirements of Article 27 of MiFIR and related technical standards oblige trading venues and systematic internalisers to submit reference data, from 3 January 2018, for the relevant financial instruments to national competent authorities ("NCAs") who will subsequently transmit it to ESMA for publication.

In order to allow for a smooth transition to the new MiFIR reporting regime, ESMA began the first phase of Financial Instrument Reference Database (FIRDS) in July 2017 by collecting financial instrument reference data from reporting entities.

What's new?

On 17 October 2017, ESMA has launched the second phase of its Financial Instrument Reference Database ("FIRDS").

The launch involves providing access to the database containing the currently available reference data that will eventually enable market participants to identify instruments subject to MiFID II/MiFIR reference data reporting requirements.

The availability of this information at this early stage will play an important role in assuring the quality of data that market participants report to NCAs. This will allow market participants to prepare their reporting systems ahead of the go-live date on 3 January 2018.

ESMA Financial Instrument Reference Database is available here.

What's next?

In preparation for 3 January 2018, ESMA encourages market participants to begin using the published data following the instructions provided on how to access the data, download the machine-readable files as well as the reporting instructions.

Background

The purpose of these guidelines is to develop common standards to be taken into consideration by market operators and data reporting services providers (DRSPs) under MiFID II when appointing new and assessing current members of the management body and to provide guidance on how information should be recorded by market operators and DRSPs in order to make it available to the competent authorities for the exercise of their supervisory duties.

These guidelines apply to national competent authorities, market operators and data reporting services providers. Competent authorities should comply by incorporating them into their supervisory practices, including where particular guidelines within the document are directed primarily at financial market participants.

What's new?

On 29 September 2017, ESMA has published its Guidelines on suitability assessment for the management body of market operators and data reporting service providers.

The Guidelines provide for the following provisions:

• Sufficient time commitment: Market operators and DRSPs should have a written policy detailing the functions and responsibilities of the management body and setting out ex ante a comprehensive job description and the anticipated time commitment required for each position.
• Knowledge, skills and experience: Market operators and DRSPs should ensure that their management body has, collectively, the managerial competence required to perform its role and duties and a sufficient understanding of the firm’s activities and the risks such activities entail according to the scale of the management body.
• Honesty and integrity: When assessing the honesty and integrity of a prospective member of their management body, market operators and DRSPs should request and check the accuracy of the documents set out in Delegated Regulation 2017/571 on DRSPs.
• Independence of mind: Members or prospective members of a market operator/DRSP’s management body should identify and report to the management body any circumstances which may give rise to conflicts of interest that may impede their ability to perform their duties independently and objectively.
• Adequate human and financial resources: Individual members of the management body of market operators should be and remain suitable, including through training, for their position. Market operators should establish a policy for the induction of the members of their management body.
• Diversity: Market operators should, in accordance with the nature, scale and complexity of their activity, put in place a recruitment and diversity policy to ensure that a broad set of qualities and competences are considered when recruiting members of the management body.
• Record-keeping: Market operators and DRSPs should record and maintain for at least five years in a durable medium and make available on request of the national competent authority basics elements.

ESMA’s Guidelines are available here.

What's next?

These guidelines apply from 3 January 2018.

Background

On 15 May 2014, the EU Parliament and the Council issued the Regulation (EU) No 600/2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 ("MiFIR", available here). It entered into force on 2 July 2014 and is due to become applicable on 3 January 2018. Its framework introduces a market structure which aims to ensure that trading, wherever appropriate, takes place on regulated platforms and is made transparent to ensure efficient and fair price formation.

Articles 1(6) and 1(7) of MiFIR specify an exemption from pre and post trade transparency requirements with regard to non-equity financial instruments that benefits regulated markets, market operators and investment firms in respect of a transaction where the counterparty is a member of the European System of Central Banks (the "ESCB") and where that transaction is entered into in performance of monetary, foreign exchange and financial stability policy which that member of the ESCB is legally empowered to pursue and where that member has given prior notification to its counterparty that the transaction is exempt.

According to Article 1(9) of MiFIR, the EU Commission is empowered to adopt delegated acts in order to extend this exemption to certain central banks of 3rd countries as well as to the Bank of International Settlements which for the purposes of this exemption is considered akin to a 3rd country central bank.

The EU Commission used an external study for examining the legal treatment of the 3rd country central banks in relation to pre and post trade transparency, the transparency of their operational framework and the degree of trading activity within the EU.

On 9 June 2017, the EU Commission presented a report (COM(2017) 298 final, available here) analysing the treatment of central banks, including the members of ESCB, within the legal framework of 3rd countries and the impact that regulatory disclosure requirements in the EU may have on 3rd country central bank transactions. The EU Commission concluded that it would be appropriate to grant an exemption from the MiFIR pre and post trade transparency requirements to certain 3rd country central banks.

On 12 June 2017, the EU Commission issued the draft delegated regulation supplementing MiFIR as regards the exemption of certain 3rd country central banks in their performance of monetary, foreign exchange and financial stability policies from pre and post trade transparency requirements (C(2017) 3890 final – "Draft Regulation", available here). The exempted banks were listed in the Annex (available here). The Draft Regulation was subject to the right of the EU Parliament and the Council to express objections.

What's new?

On 7 October 2017, the final Commission delegated regulation of 12 June 2017 supplementing MiFIR as regards the exemption of certain 3rd countries central banks in their performance of monetary, foreign exchange and financial stability policies from pre and post trade transparency requirements was published in the Official Journal of the European Union ((EU) 2017/1799, the "Published Regulation").

The Published Regulation is available here.

What's next?

The Published Regulation shall enter into force on 27 October 2017. It shall be binding in its entirety and directly applicable in all EU Member States as of 3 January 2018.

Background

The regulation (EU) 1286/2014 on key information documents ("KIDs") for packaged retail and insurance-based investment products entered into force on 29 December 2014 and will apply as from 1 January 2018 (the "PRIIPs Regulation", available here).

On 30 June 2017, the Insurance Europe developed two templates that aim to facilitate the exchange of information between insurers and asset managers in order to help them fulfill their PRIIPs regulatory obligations (version 1.0 – the "Templates", available here). The Templates are composed of the following documents:

• The European PRIIPs template ("EPT"), which includes the minimum data necessary for insurers to produce a KID - Asset managers will deliver these files for free; and
• The "Comfort" EPT ("CEPT"), which includes more data, so its delivery depends on ad hoc bilateral agreements between insurers and asset managers.

What's new?

On 6 October 2017, the Insurance Europe and EFAMA published an updated version of the Templates (version 1.1 – the "Updated Templates").

The changes introduced by the Updated Templates are highlighted below:

• The EPT was amended by two optional parts (items 82 to 101). The first addition is relevant only for funds/structured products offered in the German market, whereas the second part amends the EPT for data fields related to structured products which were not catered for in the initial template; and
• The CEPT does not make any content changes, but merely provides two possible methods for the VaR-equivalent volatility ("VEV") calculation for regular premium.

It is to be noted that the use of the Updated Templates is not compulsory.

The Updated Templates are available here.

What's next?

As from 1 January 2018, PRIIPs manufacturers shall produce their KIDs in accordance with the PRIIPs Regulation.

Background

The Prospectus Directive 2003/71/EC became effective on 1 July 2005.

Prospectus Regulation 2017/1129 ("PR") on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market and supplementing Directive 2003/71/EC was published in the Official Journal of the European Union on 30 June 2017.

The PR entered into force 20 days after its publication and shall apply from 21 July 2019

The purpose of this document is to promote common supervisory approaches and practices in the application of the PR and its implementing measures. It does this by providing responses to questions posed by the general public and competent authorities in relation to the practical application of the PR.

The content of this document is aimed at competent authorities under the PR to ensure that in their supervisory activities their actions are converging along the lines of the responses adopted by ESMA. However, these responses are also meant to provide market participants with an indication of what constitutes proper implementation of the PR rules.

What's new?

On 20 October 2017, ESMA has updated its Q&A on Prospectuses.

The updates consists in a deletion (question 27 on Convertible or exchangeable securities) and in the update of four existing questions:

• Q&A 29 on conversion or exchange of non-transferable securities and exemption from publishing a prospectus;
• Q&A 31 on exemption for admission to trading provided for in point (a) of the first subparagraph of Article 1(5) of PR;
• Q&A 32 on exemptions from the obligation to publish a prospectus in Article 1(5) of PR as stand-alone exemptions;
• Q&A 44 on obligation to publish a prospectus for admission of securities to trading on a regulated market.

These changes do not relate to the substance of the Q&As and come as a result of the PR becoming applicable on 20 July 2017.

ESMA’s updated Q&A on Prospectuses is available here.

What's next?

This Q&As document on Prospectuses is intended to be continually edited and updated as and when new questions are received.

Background

The Directive 2014/65/EU ("MiFID II", available here) entered into force on 2 July 2014. MiFID II will be applicable as from 3 January 2018.

According to Article 25 (1) of MiFID II, investment firms shall ensure and demonstrate to competent authorities on request that natural persons giving investment advice or information about financial instruments, investment services or ancillary services to clients on behalf of the investment firm possess the necessary knowledge and competence to fulfill their obligations.

On 3 January 2017, the ESMA released the Guidelines to specify the criteria for the assessment of knowledge and competence required under Article 25(1) of MiFID II (ESMA71-1154262120-153 EN – the "Guidelines", available here). The Guidelines were published on the ESMA website on 22 March 2017 and apply to the below entities:

• Investment firms as defined in Article 4 (1)(1) of MiFID II;
• Credit institutions when selling or advising clients in relation to structured deposit;
• UCITS management companies and external AIFMs insofar as they are providing the investment services of individual portfolio management or non-core services and only in connection with these services (respectively within the meaning of Article 6(3)(a) and (b) of the UCITS Directive and Article 6(4)(a) and (b) of the AIFMD).

On 3 August 2017, the CSSF published its circular 17/665 implementing the Guidelines in Luxembourg’s financial sector (the "Circular 17/665", only available in French here) and setting in particular the following:

• The criteria for assessing the knowledge and competence of staff giving information about investment products, investment services or ancillary services;
• The criteria for assessing the knowledge and competence for staff giving investment advice; and
• The organisational requirements for assessment, maintenance and updating knowledge and competence.

What's new?

On 13 October 2017, the CSSF issued the Circular 17/670 (the "Circular") setting forth (i) the minimum criteria to be included in the external training referred to in Circular 17/665, and (ii) the details of the content of the application file that organisations wishing to offer external training solutions need to submit to the CSSF.

The Circular is available here (only in French).

What's next?

The Circular applies as from 13 October 2017.

Background

The Directive 2007/44/EC of the European Parliament and of the Council of 5 September 2007 established the legal framework for the prudential assessment of acquisitions by natural or legal persons of a qualifying holding in a credit institution, assurance, insurance or reinsurance undertaking or an investment firm (the "2007 Directive", available here).

The 2007 Directive was transposed into the Luxembourg Law of 5 April 1993 on the financial sector, as amended by the Law of 17 July 2008 relating to acquisitions in the financial sector which entered into force on 21 March 2009 (the "Law", available here). The Law was to be read in conjunction with the Circular CSSF 09/392 transposing the joint CEBS/2008/214, the CEIOPS-3L3-19/08 and the CESR/08 Guidelines for the prudential assessment of acquisitions and increases in holdings in the financial sector (the "Circular 09/392", available here only in French).

On 20 December 2016, the ESAs published their final report on joint guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (JC/GL/2016/01 – the "ESAs' Guidelines", available here). The ESAs' Guidelines shall apply as from 1 October 2017 and repeal from that date the joint CEBS, CESR and CEIOPS Guidelines.

What's new?

On 29 September 2017, the CSSF issued its circular 17/669 concerning the adoption of the ESAs' Guidelines and the repeal of Circular 09/392 (the "Circular 17/669").

It is to be noted that the Circular 17/669 does not to apply to the authorisation of any professional of the financial sector ("PFS") or credit institution who wishes to have a qualifying holding in accordance with Article 57(1) of the Law.

The CSSF applies the ESAs' Guidelines in the context of the assessment of qualifying holdings in the following target entities, whoever the proposed acquirer is:

• Credit institution as defined under Article 4 1-(1) of the Regulation (EU) No 575/2013 ("CRR", available here);
• Investment firm as defined under Article 4 1-(1) of the Directive 2014/65/EU ("MiFID II", available here);
• CCP as defined under Article 2 (1) of the Regulation (EU) No 648/2012 ("EMIR", available here).

The Circular 17/669 shall be read in conjunction with the 2007 Directive, the sectoral directives and regulations applicable to target companies, as well as national applicable provisions. In particular, the rules applicable to the prudential assessment of acquisitions and increases of qualifying holdings can differ according to the type of target entities.

The Circular 17/669 is available here (only in French).

What's next?

The Circular 17/669 enters into force on 1 October 2017 and repeals from that date the Circular 09/392.

Background

In 2009, the G20 leaders agreed that all over-the-counter ("OTC") derivatives contracts should be reported to trade repositories ("TRs") as part of their commitment to improve transparency, mitigate institution-specific and system-wide risk, and protect against market abuse. To ensure that authorities can obtain a comprehensive view of OTC derivatives market it is necessary to have aggregation of the data reported across TRs.

In September 2014, the Financial Stability Board ("FSB") published a study on the feasibility of options to produce and share global aggregate data (available here). Based on its conclusions, the FSB asked the Committee on Payments and Markets Infrastructures ("CPMI") and the International Organisation of Securities Commissions ("IOSCO") to develop global guidance regarding the definition, form and usage of OCT derivatives data elements reported to TRs, including the code and associated reference data of the Unique Product Identifier ("UPI").

On 29 September 2017, CPMI and IOSCO published a technical guidance report on harmonization of UPI (the "Technical Guidance"). The Technical Guidance contemplates the existence of one or more UPI service providers to assign UPIs. It envisions a system under which a unique UPI code would be assigned to each distinct OTC derivative product and each UPI code would map to a set of data comprised of reference data elements with specific values that together describe the product. The collection of reference data elements and their values for each product would reside in a corresponding UPI reference data library.

The Technical Guidance does not address the governance arrangements of the implementation of UPI, however, its features have implications for governance and FSB shall coordinate their consistency.

What's new?

On 3 October 2017, the FSB published a consultation document on proposed governance arrangements for the UPI (the "Consultation Document") which:

• Describes the concept and characteristics of the globally harmonised UPI and the contents of the Technical Guidance that are relevant to governance considerations;
• Sets out the key criteria the FSB has preliminarily identified to assess UPI governance arrangements and seeks views of any interested person on what governance criteria should be fulfilled by any future UPI governance structure;
• Outlines the potential governance functions that the FSB anticipates should be performed and asks views what governance functions any future governance structure should undertake;
• Seeks specific feedback on certain issues relating to UPI service provider(s), cost recovery and fee models, and the reference data library that will underlie the UPI system;
• Requires comments on the FSB considerations on one versus many UPI service providers, however, this consultation does not seek comments on particular candidates for UPI service provider(s).

The Consultation Document is available here.

What's next?

The FSB welcomes comments and responses to the questions by 13 November 2017.

The FSB contemplates to publish a further consultation in early 2018 on proposals for the allocation of the UPI governance functions to various entities and further aspects of the UPI service provider model.

It is envisaged that one or more UPI service providers will be selected during 2018.

Background

On 25 October 2016, the European Commission ("EC") published four draft Directives including one aimed at extending existing double taxation dispute resolution mechanisms in the EU so that a taxpayer may ask its national court to set up an Arbitration Committee to deliver binding decision within a fixed time frame under a Dispute Resolution Mechanism.

What's new?

On 10 October 2017, the ECOFIN Council formally adopted the Directive on tax dispute resolution mechanisms in the EU with the objective of establishing a more effective and efficient procedure to resolve disputes related to the interpretation of tax treaties within the EU.

The Directive is built on the existing Convention 90/436/EEC on the elimination of double taxation in connection with the adjustment of profits of associated enterprises ("EU Arbitration Convention"). Unlike the EU Arbitration Convention, which is limited to disputes over double taxation arising from transfer pricing and the attribution of profits to permanent establishments, the new EU Directive has a more extensive scope and guarantees taxpayers’ rights and access to the tax dispute resolution mechanism.

One of the key point of the new Directive is that Member States will now have clear deadlines to agree on a binding solution, giving citizens and companies more timely decisions.

More information is available here.

What's next?

Members States have until 30 June 2019 to transpose the directive into national laws and regulations. The Directive will apply to any complaint submitted from 1 July 2019 onwards relating to disputes concerning income or capital earned in a tax year commencing on or after 1 January 2018.