2015 Annual Reports

The following bodies have released their 2015 annual reports in the past week:

  • EIOPA (European Insurance and Occupational Pensions Authority)
  • ESMA (European Securities and Markets Authority)
  • EBA (European Banking Authority)

Each report contains a review of achievements from 2015 as well as looking forward to the objectives and challenges which will be relevant in the coming year.

European Parliament Votes to Postpone MiFID II Implementation until January 2018

On June 7, 2016, the European Parliament published a press release announcing that it has voted to postpone the implementation of MiFID II (the MiFID II Directive (2014/65/EU)) and the Markets in Financial Instruments Regulation (Regulation 600/2014) (MiFIR)) until January 3, 2018. This grants member states a year’s extension on the original July 3, 2016 deadline to transpose the legislation. The extension was triggered by the European Commission and the European Securities and Markets Authority’s (ESMA) delay in producing the necessary technical standards.

MiFID II intends to close the gaps left by MiFID I. Following the financial crisis, it was introduced to create a single market for investment services and activities, with the aim of improving the competitiveness of EU financial markets. The Parliament, through MiFID II, seemingly aims to introduce: (i) a dedicated regime for the treatment of package transactions with regards to pre-trade transparency obligations; (ii) clarification for the own-account exemption for corporate end-users and securities financing transactions, which are excluded from MiFID transparency obligations; and (iii) a technical cross-referencing issue between the Prospective Directive (2003/71/EC) and MiFID II.

On June 8, the Parliament proceeded to publish the provisional edition of: (i) the text of the legislative proposal for a Directive amending the MiFID II Directive as regards certain dates; and (ii) the text of the legislative proposal amending the MiFIR, the Market Abuse Regulation (Regulation 596/2014) (MAR) and the Regulation on improving securities settlement and regulating central securities depositories (CSDs) (Regulation 909/2014) (CSDR) as regards certain dates.

It now remains for the proposals to be formally adopted by the Council, following which they will be published in the Official Journal of the EU (OJ) and enter into force in line with the timing stipulated in the legislation.

ESMA Reminds Firms of their Responsibilities when Selling Bail-In Securities

On June 2, 2016, ESMA issued a statement (ESMA/2016/902) reminding banks and investment firms of their responsibility to act in their clients’ best interests when selling bail-in-able financial instruments.  The statement clarifies how credit institutions and investment firms should apply the requirements under the Markets in Financial Instruments Directive (2004/39/EC) (MiFID) governing the distribution to clients of financial instruments subject to the BRRD resolution regime under the Bank Recovery and Resolution Directive (2014/59/EU).

The statement stresses that firms must comply with their obligations under MiFID and the importance of:

  • Providing investors with up-to-date, complete information drafted under the supervision of the compliance function.
  • Managing potential conflicts of interest, in particular, when a firm sells its own bail-in financial instruments directly to its customers (self-placement).
  • Ensuring the product is suitable and appropriate for the investor, which may entail collecting more in-depth information about the client than usual to reflect the fact a client could lose money without the firm entering into insolvency.

In an accompanying press release, ESMA explained that under the BRRD rules, which came into force in January 2016, firms are likely to issue a significant amount of potentially loss-bearing instruments to fulfil their obligations and raised its concern that investors (in particular retail investors) are unaware of the risks they may face when buying these instruments.

Commission Adopts Proposal to Incorporate ESAs into EEA Agreement

On June 2, 2016, the European Commission published a press release announcing that it had adopted a proposal for a Council decision on the position to be taken by the EU on the incorporation of the Regulations on the European Supervisory Authorities (ESAs), and some of the related Regulations and Directives, into the Agreement on the European Economic Area (EEA).

The acts to be incorporated into the EEA Agreement include the ESAs Regulations (EBA, EIOPA and ESMA Regulations), the European Systemic Risk Board Regulation, the Alternative Investment Fund Managers Directive and related Delegated Acts, the Short Selling Regulation and related delegated acts, the European Markets Infrastructure Regulation (‘EMIR’) and the Credit Ratings Agency Regulations.

This is an important step towards the extension of the European System of Financial Supervision (ESFS) to the EEA EFTA countries: Norway, Iceland and Liechtenstein. The Commission explained that incorporating these acts into the EEA Agreement would ensure strong and co-ordinated financial supervision throughout the EEA.

ESMA Publishes Opinion on MiFIR II RTS on Ancillary Activities

ESMA has published an opinion proposing amendments to its draft technical standards (“RTS“) under the MiFID II Directive (2014/65/EU) and the Markets in Financial Instruments Regulation (Regulation 600/2014) (MiFIR) relating to criteria to establish when a non-financial firm’s commodity derivatives trading activity is considered to be ancillary to its main business. The revised draft RTS are set out in an annex to the opinion.

In response to the draft text submitted by ESMA to the European Commission in September 2015, the Commission requested that ESMA include in its RTS a capital-based test for groups that have undertaken significant capital investments in creating infrastructure, transportation or production facilities or groups that undertake activities or investments that cannot be hedged in financial markets.

ESMA maintains that its business activity test was in line with the objectives set out in MiFID II, and a capital based test has significant drawbacks. However, it has identified some metrics for a numerator and denominator that the Commission could use to construct a capital test as an alternative to ESMA’s main business test. In cases where a capital test is introduced, ESMA proposes to allow entities choose between performing the original main business test based on trading activity or a capital test to avoid putting small and medium-sized entities at a disadvantage. Opinion.

ESMA Consults on Draft Implementing Measures under the Benchmark Regulation

ESMA published a consultation paper (ESMA/2016/723) on the technical implementation of the proposed Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No 596/2014 (“Benchmark Regulation“).

The proposals in the paper are based on the provisional text of the Benchmark Regulation published by the European Parliament in April 2016. The paper covers the five areas on which the Commission has requested advice, setting out the relevant provisions and their objectives, an explanation of the related policy issues and references to the relevant responses received to the discussion paper: some elements of the definitions, measurement of the use of critical and significant benchmarks, criteria for the identification of critical benchmarks, endorsement of a benchmark or family of benchmarks provided in a third country and transitional provisions. Consultation paper.

ESMA Publishes Final Report on Amendment of Draft RTS on Reporting Obligations under Article 26 of MiFIR

On May 4, 2016, The European Securities and Markets Authority (ESMA) published its final report requesting an amendment of ESMA draft regulatory technical standards (RTS) on transaction reporting under the Markets in Financial Instruments Regulation (MiFIR).

The draft RTS were submitted to the European Commission in September 2015. However, ESMA has since identified a need to amend Article 2 of RTS 22 as a result of an unintentional omission in the final stage of drafting.

The amendment relates to the list of instances that are not considered to be reportable transactions for the purposes of Article 26 of MiFIR. It resolves an unintended omission by adding acquisitions or disposals that are solely a result of a transfer of collateral to the list of exclusions from transaction reporting specified in Article 2(5) of RTS 22. It thus ensures that investment firms are not required to submit transaction reports for transfers of collateral, which ESMA concluded would be costly and bring no supervisory benefit. ESMA anticipates that the amendment will be taken into account in the context of the Commission’s endorsement of RTS 22.

ESMA Publishes Principles on Stakeholder Engagement in Peer Reviews

On April 15, the European Securities and Markets Authority (“ESMA”) published a paper on stakeholder engagement in peer reviews.

The paper sets out six high-level principles guiding the interaction with stakeholders with the objective of obtaining background information relevant for the peer review:

  • What entities are considered as stakeholders in the context of a peer review?
  • Who decides if interaction with stakeholders is needed?
  • When does this decision need to be taken? Must national competent authorities (“NCAs“) accept the fact of stakeholder engagement?
  • If an NCA may decline such a possibility, does an NCA need to explain why it would not want to have stakeholder engagement for a particular peer review?
  • How is the interaction organized and how are the stakeholders chosen?
  • What use is made of the outcome of the stakeholder interaction?

The principles contribute to ESMA’s commitment to focus on supervisory convergence in 2016. ESMA may in the future, in light of its experience, prepare a set of procedures for stakeholder engagement in peer reviews, which could be annexed to the Methodology for peer reviews (ESMA/20131709). Paper.

ESMA Publishes New Q&A on CFDs and Other Speculative Products

The European Securities and Markets Authority (ESMA) has published a new question and answer document (ESMA/2016/590) on the application of MiFID to the marketing and sale of financial contracts for difference (CFDs) and other speculative products to retail clients.

ESMA explains that, although CFDs and other speculative products (such as binary options and rolling spot forex) are complex products, they are widely advertised to the retail mass market by a number of firms, often through online platforms. The Q&A document is designed to promote common supervisory approaches and practices in the application of MiFID and its implementing measures to key aspects that are relevant when CFDs and other speculative products are sold to retail clients. Although they are targeted at competent authorities, the answers are also intended to help firms by providing clarity on MiFID requirements.

ESMA has also added that, while the Q&A refer to MiFID, the principles and requirements underpinning the content of the document will remain unchanged once MiFID II enters into application.

European Commission Adopts Delegated Directive Supplementing MiFID II

On April 7, 2016, the European Commission adopted a Delegated Directive supplementing MiFID II regarding the safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision of reception of fees, commissions or any monetary or non-monetary benefits (i.e. inducements).

The aim of the draft Delegated Directive is to specify further the following MiFID II rules and details for their implementation:

  • The safeguarding of clients’ financial instruments and funds;
  • Product governance obligations for investment firms manufacturing or distributing financial instruments (or both);
  • The provision or reception of inducements.

The draft Delegated Directive is based on the final technical advice on MiFID II and MiFIR provided to the Commission by ESMA in December 2014. The Council of the EU and the European Parliament will now consider the Delegated Directive. If neither of them object, it will enter into force twenty days after publication in the Official Journal.