European Commission (EC)

European Commission Guidelines on Application of PRIIPS Regulation

 

On July 4, 2017, the European Commission adopted a communication containing guidelines on the application of the Regulation on key information documents (“KIDs“) for packaged retail and insurance-based products (“PRIIPS“) (Regulation 1286/2014) (PRIIPS Regulation).

The PRIIPS Regulation lays down rules on the content and format of the KID to be drawn up by PRIIP manufacturers and on the provision of the KID to retail investors and those selling or advising on the products. By smoothing out potential interpretative divergences throughout the EU, the guidelines hope to help providers and distributors of investment products, funds and investment insurance policies design their KIDS. Along with several others, the guidelines address the following issues:

  1. products covered by the PRIIPS Regulation;
  2. products made available to retail investors against no consideration;
  3. multi-option PRIIPS;
  4. insurance-based investment products with PRIIPS and non-PRIIPS as underlying investment options;
  5. territorial application;
  6. use of KIDs by UCITS;
  7. PRIIPS only sold by intermediaries;
  8. distribution of a PRIIP without a KID; and
  9. a non-PRIIP product offered alongside a PRIIP.

The communication was published in the Official Journal of the EU (OJ) on July 7, 2017, as 2017/C 218/02. Firms must comply with the Regulation from January 1, 2018.

European Commission Mid-Term Review of CMU Action Plan: Financial Services Aspects

 

On June 8, 2017, the European Commission published a communication on the mid-term review of the capital markets union (“CMU“) action plan (COM(2017) 292). This follows the action plan published by the Commission in September 2015, which set out its proposed initiatives relating to the establishment of the CMU, and the consultation paper published by the Commission in January 2017, which sought targeted input on revisions to the CMU action plan that would feed in to its mid-term review of the action plan.

The purpose of the mid-term review is to set out an additional set of actions that complement the initiatives laid down in the action plan that have not yet been completed. It consists of:

  • Initiatives that follow on from completed work announced in the action plan:
    • The Commission has confirmed that it intends to proceed with legislative proposals on (i) the Pan-European Personal Pension Product (PEPP); (ii) conflict of laws rules for third-party effects of transaction and securities and claims; and (iii) an EU framework for covered bonds.
    • The Commission also intends to proceed with further work on initiatives relating to commitments announced in the action plan, including (i) amendments to the Solvency II Delegated Regulation ((EU) 2015/35); (ii) recommendations on private placements; (iii) communication on a roadmap for removing barriers to post-trade market infrastructure; and (iv) communication on corporate bond markets.
  • New priority initiatives intended to strengthen the CMU action plan:
    • The initiatives relate to issues including (i) the functioning of the European Supervisory Authorities (ESAs); (ii) prudential treatment of investment firms; (iii) Fin Tech; (iv) non-performing loans (NPLs); and (v) cross-border investment funds.

The Annex to the mid-term review contains a consolidated list of the CMU initiatives and the proposed timings for those initiatives.

European Commission Adopts Delegated Regulation Amending Solvency II Delegated Regulation On Infrastructure Corporates

 

On June 8, 2017, the European Commission adopted a Delegated Regulation amending the Solvency II Delegated Regulation ((EU) 2015/35) concerning the calculation of regulatory capital requirements for certain categories of assets held by insurance and reinsurance undertakings (infrastructure corporates) (C(2017)3673 final). An impact assessment and executive summary were published alongside the Delegated Regulation.

The Solvency II Delegated Regulation was amended, with effect from April 2016, to provide for appropriate risk calibrations for qualifying infrastructure projects, but not infrastructure corporates. EIOPA submitted a report to the Commission in June 2016, which set out technical advice on infrastructure corporates and recommended several changes to the previous treatment of infrastructure projects. This included amendments to the definition and qualifying criteria for infrastructure projects to avoid inadvertent exclusion of investments in those projects with a better risk profile.

The amendments to the Delegated Regulation will reduce the capital charges attached to investments by insurance companies in infrastructure companies. The aim is to remove regulatory barriers to investment opportunities in infrastructure that fulfill a number of criteria and are considered to have a better risk profile. The amending Delegated Regulation forms part of the Commission’s wider efforts on capital markets unions (CMUs) to support insurers in their role as long-term investors in the EU economy.

It is now for the Council of the EU and the European Parliament to consider the amending Delegated Regulation. Should neither the Council nor the Parliament object to the amending Delegated Regulation, it will be published in the Official Journal of the EU (OJ). It will enter into force on the date following its publication in the OJ and will apply from that date.

European Commission Publishes Speech on Reducing Uncertainty in the Financial Services

 

On April 6, 2017, the European Commission published a speech that considered a number of areas in the financial services sector where action can be taken to reduce uncertainty and strengthen recovery. The speech, given by Vice President Valdis Dombrovskis, touched on a number of interesting points, including nonperforming loans, the Capital Markets Union and the effect of Brexit on the central clearing of derivatives. The full speech is available here.

European Commission Publishes Draft Seventh Implementing Regulation Extending Transitional Periods Related to Own Fund Requirements for CCPS Exposures

 

On March 31, 2017, the European Commission published a draft version of an Implementing Regulation on the extension of the transitional periods related to own funds requirements for exposures to Central Counterparties (“CCPs“), set out in the Capital Requirements Regulation (Regulation 575/2013) (“CRR“) and EMIR.

The Commission adopted an initial Implementing Regulation (Regulation 591/2014) in June 2014, extending the 15-month periods referred to in Article 497(1) and (2) of the CRR and in the first and second subparagraphs of Article 89(5)(a) of EMIR by six months, to December 15, 2014. The most recent Implementing Regulation, adopted by the European Commission on December 9, 2016, extended the transitional periods to December 15, 2016.

To avoid market disruption and to prevent penalizing institutions by subjecting them to higher own funds requirements during the process of authorization and recognition of existing CCPs, the latest Implementing Regulation extends the transitional periods by an additional six months, to June 15, 2017.

European Commission Republishes CMU Report on Addressing National Barriers to Capital Flows

 

The European Commission has republished a report as part of its Capital Markets Union (CMU) initiative on addressing national barriers to capital flows.

The European Commission originally published the report in February 2017, but later removed it from its website. The European Commission stated that it was made aware of certain inaccuracies, mainly due to incomplete or conflicting information, and so decided to adopt an amended version. The majority of the changes relate to the removal of references to specific member states.

In the report, the European Commission sets out the initial findings of its expert group of representatives of member states on national barriers to cross-border capital flows and the steps that the Commission expects member states to take to address them. The issues highlighted include barriers to the cross-border distribution of investment funds, national approaches to crowdfunding and residence requirements on managers of financial institutions.

European Commission Publishes Inception Impact Assessment on New Prudential Framework for Investment Firms

 

The European Commission has published an inception impact assessment on its review of the appropriate treatment for investment firms.

The impact assessment relates to the Commission’s review of the prudential framework for investment firms, as required by Articles 293(2), 498(2), 508(2) and 508(3) of the Capital Requirements Regulation (“CRR“) (Regulation 575/2013). In November 2016, the European Banking Authority (“EBA“) published a discussion paper on a new prudential framework, with the aim of submitting an opinion and report to the European Commission by June 30, 2017.

The impact assessment provides an overview of the background to the initiative and the European Commission’s ongoing work. The European Commission states that, in light of the EBA’s consultation on the prudential framework, it does not intend to launch its own public consultation. It is, however, carrying out a consultation with industry stakeholders on the proposal. In particular, it intends to liaise with the industry on aspects of the proposal, such as the calibration and impact of any changes to the regime and foreseeable potential costs.

The European Commission states that the bulk of any new rules will take the form of a Regulation. This will be accompanied by a Directive covering elements that need to take the form of a directive for legal reasons, such as organizational and authorization requirements and corporate governance.

The impact assessment indicates that the European Commission will adopt a legislative proposal in the fourth quarter of 2017.

The European Commission is seeking feedback on the impact assessment. The European Commission’s website on impact assessments states that the deadline for comments is April 19, 2017.

European Parliament Will Consider Money Market Fund Regulation in April 2017 Plenary Session

 

The European Parliament has announced that it will consider the MMF regulation during its upcoming plenary session, currently scheduled to be held April 3-6, 2017.

The MMF regulation is intended to introduce new framework requirements to more effectively regulate money market funds, as well as increase their stability and general liquidity. In particular, the regulation (introduced by the European Commission) is intended to more tightly regulate the shadow banking sector.

The plenary session will allow debate and potential amendment to the scope of the MMF regulation.

European Commission Publishes Speech on FinTech

 

On March 8, 2017, the European Commission (EC) published a speech that considered the challenges currently faced by the financial services sector in the EU, with a particular emphasis on FinTech.

Financial technology, commonly referred to as FinTech, has been a hot topic in recent times, with the European Commission maintaining a task force specifically dealing with it.

The speech, given by Oliver Guersent, commented on a number of points, including the need to ensure that all human interaction was not excluded and the possible investor protection risks surrounding “robo-advice.” The speech can be found in its entirety here.

ESAs and IOSCO Publish Statements on Variation of Margin Exchange under EMIR

 

On February 23, 2017, the Joint Committee of European Supervisory Authorities (“ESAs“) published a statement on variation margin exchange under the EMIR regulatory technical standards (“RTS“) on risk mitigation techniques for uncleared over-the-counter derivative contracts under Article 11(15) of the European Market Infrastructure Regulation (“EMIR“). The International Organization of Securities and Commissions (“IOSCO“) has also published a related statement.

The statement responds to industry requests relating to operational challenges in meeting the deadline of March 1, 2017, for exchanging variation margin, the effect of which will be experienced particularly by smaller counterparties.

Neither the ESAs nor competent authorities (“CAs“) have the power to disapply directly applicable EU legalization. As a result, any further delays of the application of the EU rules would formally need to be implemented through EU legislation, which the ESAs state is not possible due to the lengthy process for adopting EU legislation.

The ESAs outline their expectations of smaller counterparties as follows:

“The ESAs expect CAs to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation. This approach entails that CAs can take into account the size of the exposure to the counterparty plus its default risk, and that participants must document the steps taken toward full compliance and put in place alternative arrangements to ensure that the risk of non-compliance is contained, such as using existing Credit Support Annexes to exchange variation margins. This approach does not entail a general forbearance, but a case‑by‑case assessment from the CAs on the degree of compliance and progress. In any case, the ESAs and CAs expect that the difficulties will be solved in the coming few months and that transactions concluded on or after March 1, 2017, remain subject to the obligation to exchange variation margin.”

The statement points out that in 2015, the IOSCO had already granted a nine-month delay based on similar arguments from the industry. The ESAs comment that it is unfortunate that the financial industry has not prepared for the implementation. The ESAs had previously expressed concern about the delayed adoption of the then draft RTS.

In its statement, IOSCO explains that some market participants have faced difficulty in completing the necessary credit support documentation and operational processes to settle variation margin in accordance with the requirements. However, IOSCO expects all affected parties to make every effort to fulfill the necessary variation margin requirements by the deadlines. IOSCO adds that it believes that relevant IOSCO members should consider taking appropriate measures available to them to ensure fair and orderly markets during the introduction and application of such variation margin requirements.

The European Commission (EC) adopted Delegated Regulation 648/2012 supplementing EMIR with the RTS in October 2016. The Joint Committee of ESAs submitted the final draft RTS to the Commission in March 2016.