Europe

European Commission Adopts Delegated Regulation on RTS for the Application of Position Limits to Commodity Derivatives

 

On December 1, 2016, the European Commission adopted a Delegated Regulation supplementing the MiFID II Directive (2014/65/EU) in relation to regulatory standards (“RTS“) for the application of position limits to commodity derivatives (2016) 4362 final).

The MiFID II Directive requires that competent authorities, in line with ESMA’s methodology, establish and apply position limits on the size of a net position a person can hold in certain commodity derivatives and economically equivalent OTC (EEOTC) contracts. Article 57(3) and (12) of the MiFID II Directive empowers ESMA to develop RTS providing the basis of the methodology for the calculation and application of the position limits.

In September 2015, ESMA submitted the draft RTS to the Commission. The Commission then notified ESMA in April 2016 that it intended to endorse the RTS, provided that a number of changes were made. ESMA submitted revised draft RTS to the Commission in May 2016. The Commission explains that the amended provisions create a more stringent regime for liquid contracts whose underlying product is food for human consumption. Further, it caps the upper position for new and illiquid contracts to 40%, but stipulates that upper position limits of up to 50% can be imposed on a temporary basis. The proposed methodology also highlights how competent authorities are to consider volatility when setting position limits.

The Council of the EU and the European Parliament are now to consider the Delegated Regulation. Should neither of them object, it will enter into force 20 days after its publication in the Official Journal of the EU (OJ).

European Parliament Votes to Delay PRIIPS Regulation Application Date

 

On December 1, 2016, the European Parliament published a press release announcing that it has voted to delay the Regulation on key information documents (“KIDs“) for packaged retail and insurance-based investment products (“PRIIPs“) (Regulation 1286/2014) (PRIIPs Regulation).

The press release highlights that MEPs had criticized previous proposed standards requiring providers of PRIIPs to produce a KID as “flawed and misleading.” The Parliament has also published the text of the legislative resolution delaying the application date of the PRIIPs Regulation to January 1, 2018. This additional time is to enable those concerned to comply with the new requirements.

In September 2016, the Parliament announced that it had rejected the Delegated Regulation that the European Commission had adopted supplementing the PRIIPS Regulation with regard to regulatory technical standards (RTS) on the presentation, content, review and revision of KIDs. The Commission also proposed to extend the application of the PRIIPS Regulation by one year earlier in November 2016.

European Commission Adopts Delegated Regulation on RTS on Criteria for Establishing When an Activity Is Considered to Be Ancillary to the Main Business

 

The European Commission adopted, on December 1, 2016, a Delegated Regulation supplementing the MiFID II Directive (2014/65/EU) in relation to regulatory technical standards (“RTS“) on the criteria for establishing when an activity is considered to be ancillary to a firm’s main business (C(2016) 7643 final).

The MiFID II Directive exempts persons dealing on their own account, or providing investment services to clients, in commodity derivatives and emission allowances, provided that activity is ancillary to their main business and their main business is not the provision of investment services or banking activities. Article 2(4) of the MiFID II Directive gives the Commission power to adopt RTS specifying the criteria for establishing when an activity is to be considered ancillary to the main business of a group.

ESMA submitted draft RTS to the Commission in September 2015. The Commission notified ESMA in April 2016 that it intended to endorse the draft RTS, subject to several amendments being made. In May 2016, ESMA submitted a formal opinion and a revised draft of the RTS to the Commission.

It is now for the Council of the EU and the European Parliament to consider the Delegated Regulation. Should neither of them object, it will enter into force 20 days after its publication in the Official Journal of the EU (OJ) and will apply from January 3, 2018.

European Systemic Risk Board (ESRB) Publishes Country-Specific Warning on Vulnerabilities in the Residential Real Estate Sector

 

On November 28, 2016, the European Systemic Risk Board (“ESRB“) published a report on vulnerabilities in the EU residential real estate sector, together with eight country-specific warnings and a Q&As document.

The warnings on medium-term vulnerabilities in the residential real estate sector are addressed to the relevant ministers in eight Member States: Austria, Belgium, Denmark, Finland, Luxembourg, the Netherlands, Sweden and the UK. The ESRB decided to issue the warnings following a forward-looking EU-wide assessment of vulnerabilities relating to residential real estate. These vulnerabilities may be a source of systemic risk to financial stability in the medium term. As a result, on September 22, 2016, the ESRB adopted warnings addressed to the eight member states and decided to make the warnings public. The member states were given a period of time to respond.

For the remaining member states, the ESRB has either not identified a build-up of any material vulnerabilities relating to the residential real estate sector, or such vulnerabilities have been identified but the current policy stance is sufficient to address them. The ESRB advises that the latter is the case for Estonia and Slovakia. It also advises that, for the UK, it has not assessed whether policies in place are appropriate and sufficient given the uncertain impact of the vote to leave the EU on the medium-term outlook for the UK housing market.

The ESRB has also published a recommendation on closing real estate data gaps (Recommendation ESRB/2016/14), which it adopted on October 31, 2016. The recommendation, which covers both the residential and commercial real estate sectors, aims to establish a more harmonized framework for monitoring developments in EU real estate markets. It provides a common set of indicators that national authorities are recommended to monitor in assessing risks originating from the real estate sector, along with working definitions of these indicators. The deadline for implementing the recommendation is the end of 2020. ESMA will monitor compliance with the recommendation via an “act of explain” mechanism. As follow-up work to the recommendation, the ESRB believes that a regular data collection on these indicators should take place at the EU level, and considers that the European Central Bank (ECB) is well placed to play a leading role in this.

European Commission Adopts Delegated Regulation Amending List of High-Risk Third Countries Under the Fourth Money Laundering Directive

 

On November 28, 2016, the Council of the EU published a Commission Delegated Regulation (C(2016) 7495 final) amending Commission Delegated Regulation (EU) 2016/1675 supplementing the Fourth Money Laundering Directive ((EU) 2015/849) (“MLD4“) by identifying high-risk third countries with strategic deficiencies.

The Commission adopted Delegated Regulation (EU) 2016/1675 in July 2016. The Delegated Regulation, for the first time, identified high-risk third countries with strategic anti-money laundering (“AML“) and counter-terrorist financing (“CTF“) deficiencies. The Commission advised at the time that it had taken into account the most recent Financial Action Task Force (“FATF“) public statements and that it would review the list, where appropriate.

The explanatory memorandum to the new Delegated Regulation explains that, as stressed in recital 28 to MLD4, the Commission will adapt its assessment to changes made to information sources from international organizations and standard setters, such as those issued by the FATF. As a consequence, the Commission aims to update the list to reflect the progress, or the lack of progress, made by high-risk third countries in removing the strategic deficiencies.

According to this latest information available to the Commission, it was found that Guyana has made significant progress on AML and CTF matters. On the basis of the progress made, with Guyana substantially completing all the action plan items agreed upon with the FATF, the FATF decided to conduct an on-site visit to Guyana to confirm that implementation had begun and that there is political commitment to continue to strengthen the AML and CTF regime. The FATF on‑site visit concluded that Guyana has a legal and institutional framework in place that addresses the strategic deficiencies of its AML and CTF regime. As a result, the FATF has removed Guyana from its document Improving global AML/CTF compliance: ongoing process.

The Commission’s analysis has similarly concluded that Guyana should no longer be considered to be a third country with strategic AML and CTF deficiencies. As a result, it is removing Guyana from the list of high-risk third countries under MLD4.

The Commission adopted the Delegated Regulation on November 24, 2016. The new Delegated Regulation states that it will enter into force the day after it is published in the Official Journal of the EU (OJ).

European Parliament Adopts Resolution on Finalization of Basel III

 

On November 23, 2016, the European Parliament published a provisional version of the text of the resolution it has adopted on finalization of Basel III.

Among other things, in the resolution, the Parliament:

  • Underlines the importance of sound global standards and principles for the prudential regulation of banks and welcomes the post-crisis work of the Basel Committee on Banking Supervision (“BCBS“) in this area. The Parliament notes the BCBS’ ongoing work to finalize the Basel III framework and underlines the need for greater transparency and accountability to enhance the legitimacy and ownership of the BCBS’ deliberations.
  • Stresses that the current revision should respect the principle of not significantly increasing overall capital requirements, while at the same time strengthening the overall financial position of EU banks. The Parliament also underlines the equally important principle to be respected of promoting the level playing field at the global level, by mitigating rather than exacerbating the differences between jurisdictions and banking models, and by not unduly penalizing the EU banking model.
  • Is concerned that early analysis of recent BCBS drafts indicates that the reform package at its current stage might not comply with the principles mentioned above. As a result, the Parliament calls on the BCBS to revise its proposals accordingly, and calls on the European Central Bank (“ECB“) and the Single Supervisory Mechanism (SSM) to ensure respect of the principles in finalizing and monitoring the new standard. The Parliament underlines that this approach would be instrumental in ensuring consistent implementation of the new standard by the Parliament as co-legislator.
  • Calls for dialogue and an exchange of best practices among regulators concerning the application of the principle of proportionality to be established at EU and international levels.
  • Calls on the European Commission to prioritize work on a “small banking box” for the least risky banking models. The Parliament also calls on the Commission to extend this work to an assessment of the feasibility of a future regulatory framework consisting of less complex and more appropriate and proportional prudential rules specifically adapted to different types of banking models.
  • Stresses the importance of the role of the Commission, the ECB and the EBA in engaging in the BCBS’ work, and in providing transparent and comprehensive updates on developments in the BCBS’ discussions. The Parliament calls for this role to be given stronger visibility during meetings of the European Economic and Financial Affairs Council (ECOFIN), and for enhanced accountability to its Economic and Monetary Affairs Committee (ECON).

The Parliament has instructed its President to forward the resolution to the Commission.

European Court of Auditors Special Report on Single Supervisory Mechanism

 

On November 18, 2016, the European Court of Auditors published a report on the Single Supervisory Mechanism (“SSM“) (No 29/2016). The SSM was set up by the European Central Bank (“ECB“) to ensure the consistent application of prudential rules across the euro-zone countries. The report examines the setup and workings of the SSM and concludes that the complexity of the new system is a challenge, especially because it relies too heavily on the resources of national supervisors. This means that despite the ECB’s overall responsibility, the ECB has insufficient control over some important aspects of banking supervision.

The full report can be found here, but, in brief, specific concerns identified in the report relate to:

  • Under resourcing of internal audit for its work on the SSM, which is given less attention than other audit tasks.
  • Efforts to ensure transparency and accountability for the SSM towards the European Parliament and the general public are potentially weakened by the lack of a proper process for assessing and then reporting on supervisory effectiveness.
  • The independence of the ECB’s work relating to monetary policy and supervision functions.
  • Insufficient staffing levels and overdependence on staff appointed by national authorities leading to the ECB having insufficient control over the composition and skills of supervision and inspection teams.
  • Insufficient allocation of resources to joint off-site supervisory teams.
  • Inspection teams for on-site supervision include insufficient ECB staff. There are also concerns over missing guidance on prioritization for inspection requests, IT shortcomings and the qualifications of national competent authority on-site inspectors.

The report sets out a number of recommendations on how the SSM could be improved in relation to issues outlined above and explains that the ECB was not willing to share a number of documents needed for the audit to be completed. As a result, the report only reflects a partial assessment of whether the ECB is managing the SSM efficiently in the areas of governance, off-site supervision and on‑site inspections.

Council of the EU Announces Political Agreement on MMF Regulation

 

On November 16, 2016, the Council of the EU published a press release announcing that its presidency has reached a provisional agreement with representatives of the European Parliament on the proposed Regulation on Money Market Funds (“MMF Regulation“). The press release can be read in full here.

The agreement reached at the final meeting of political negotiators covers the core issues concerning the regulation of MMFs, such as liquidity and diversification requirements, assets in which MMFs can invest (including the role of government debt) and transparency. It also provides for the European Commission to produce a report on the functioning of the MMF Regulation.

Although an overall agreement has been reached at the political level, a number of technical issues relating to the MMF Regulation are yet to be finalized. Once these are resolved, the agreement will then be submitted to the Council’s Permanent Representatives Committee (COREPER) for endorsement on behalf of the Council. The Parliament and the Council will then be called on to adopt the MMF Regulation at first reading.

The MMF Regulation is designed to ensure the smooth operation of the short-term funding market. It follows efforts by the G20 and the Financial Stability Board (FSB) to strengthen the oversight and regulation of the shadow banking system.

Implementing Regulation on Information for Calculation of Technical Provisions and Basic Own Funds for Q4 2016 Reporting Under Solvency II Adopted by European Parliament

 

On November 11, 2016, the European Commission adopted an Implementing Regulation laying down information for the calculation of technical provisions and basic own funds for reporting with reference dates from September 30 until December 30, 2016, in accordance with the Solvency II Directive (2009/138/EC).

EIOPA provided the Commission with the technical information related to end of September 2016 market data on October 11, 2016, which was published in accordance with Article 77E(1) of Solvency II.

The aim is that by setting out technical information on relevant risk-free interest rate term structures, fundamental spreads for the calculation of the matching adjustment and volatility adjustments for every reference date, conditions for the calculation of technical provisions and basic own funds will be uniform across all insurance and reinsurance undertakings for the purposes of Solvency II.

The annexes to the Implementing Regulation set out the technical information to be used by reinsurance and insurance undertakings for the reference dates from September 30 to December 30, 2016, are as follows:

  • Annex I: the relevant risk-free rate term structures.
  • Annex II: the fundamental spreads for the calculation of the matching adjustment.
  • Annex III: the volatility adjustments for each relevant national market.

European Parliament Writes to EBA About the Development of Regulatory Technical Standards (RTS) on Strong Customer Authentication and Secure Communication

 

On November 11, 2016, the EBA published a letter (dated October 24, 2016) from the European Parliament in relation to the development of regulatory technical standards (“RTS“) on strong customer authentication (“SCA“) and secure communications under the Revised Directive on Payment Services (“PSD2“) in the internal market ((EU) 2015/2366).

The European Parliament’s negotiating team is of the view that payment initiation service providers and account information service providers should have direct access to the payer’s account without being required by an account servicing payment service provider to use a particular business model. In its letter, the European Parliament therefore raised its concerns surrounding the EBA’s proposal for a dedicated interface that could give rise to account servicing payment service providers excluding or limiting direct access to a payer’s account via existing online banking facilities. Article 98(2) of PSD2 mandates that the EBA develop RTS in order to secure and maintain fair competition among all payment service providers and to ensure technology and business model neutrality, and the introduction of the dedicated interface will go against this principle.

The European Parliament also stated in its letter that it is of the view that the RTS are unclear in relation to the exemptions from the SCA (notably, whether the exemptions are optional or mandatory).