ESMA

ESMA Updates Q&A on Application of UCITS Directive

The European Securities and Markets Authority (ESMA) has published an updated version of its Q&A paper on the application of the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive (2009/65/EC) as most recently revised by UCITS V (2014/91/EU).  The purpose of the Q&A is to promote common supervisory approaches and practices in the application of the UCITS and its implementing measures.  The most recent updates reflect a Q&A relating to the valuation of OTC derivatives and are highlighted in yellow in the paper.

The latest version of the Q&A is available here.

ESMA Consultation on Validation and Review of Credit Rating Agencies’ Methodologies

On July 13, 2016 the European Securities and Markets Authority published a new consultation paper relating to Credit Rating Agency methodologies. This follows on from a discussion paper published on November 17, 2015 and an open hearing on January 25, 2016.

The consultation and review is based around CRA’s application of Articles 8(3) and 8(5) of the CRA regulation and articles 7 and 8 of the Regulatory Technical Standards. ESMA believes that publication of official guidelines will help to ensure the consistent application of validation and review measures for demonstrating the discriminatory power, predictive power and historical robustness of methodologies.

The consultation will be open for 5 weeks, and ESMA aims to finalize the proposed guidelines and publish a final report in Q1 2017.

ESMA Publishes Responses to its Discussion Paper on UCITS Share Classes

The European Securities and Markets Authority (“ESMA“) has published the responses received to the Discussion Paper on UCITS share classes.

The UCITS Directive recognizes the possibility for UCITS to offer different share classes to investors but it does not prescribe whether, and to what extent, share classes of a given UCITS can differ from one another. ESMA has identified diverging national practices as to the types of share class that are permitted, ranging from very simple share classes (e.g. with different levels of fees) to much more sophisticated share classes (e.g. which may potentially have different investment strategies).

ESMA published the discussion paper on April 6, 2016. Respondents included the: Alternative Investment Management Association, European Fund and Asset Management Association and The Investment Association.

European Commission Adopts a Delegated Regulation on RTS Relating to Clearing Access in Respect of Trading Venues and Central Counterparties under MiFIR

The European Commission has adopted a Delegated Regulation and annex supplementing the Markets in Financial Instruments Regulation (Regulation 600/2014) (“MiFIR“) with regard to regulatory technical standards (“RTS“) relating to clearing access in respect of trading venues and central counterparties (C(2016) 3807 final). The European Securities and Markets Authority (“ESMA“) submitted the draft RTS to the Commission in September 2015. The RTS cover transparency, micro-structural issues, data publication and access, requirements applying on and to trading venues, commodity derivatives, market data reporting, post-trading issues and best execution. The Delegated Regulation will now be considered by the Council of the EU and the European Parliament. If neither of them objects, it will enter into force 20 days after its publication in the Official Journal of the EU. The Delegated Regulation will apply from the application date of MiFIR (that is, January 3, 2018) with the exception of Articles 15, 16, 17, 19 and 20, which will apply from the date the Regulation enters into force.

ESMA Updates Document on Waivers from MiFID Pre-Trade Transparency Requirements

On June 20, 2016, the European Securities and Markets Authority (“ESMA“) published an updated version of the waiver document (ESMA/2011/241h) that sets out its assessment of applications for waivers from pre-trade transparency requirements under the Markets in Financial Instruments Directive (2004/39/EC) (“MiFID“).

The waiver document is aimed at competent authorities under MiFID to ensure that, in their supervisory activities, their actions converge with the opinions provided by ESMA. The examples are also intended to provide clarity for firms on the MiFID requirements for pre-trade transparency.

In the updated waiver document there is a new ESMA opinion relating to large-in-scale waivers. The new opinion, which is written in red, provides an example of functionalities that satisfy the MiFID criteria.

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.