Posts by: Heidi Wardle

ESMA Renews Restriction of CFDs for Further Three Months


On December 19, European Securities and Markets Authority (“ESMA”) published a press release announcing it is renewing the restriction on the marketing, distribution or sale of contracts for differences (“CFDs”) to retail clients. The restriction has been in effect since August 1, 2018 and the extension is for 3 months from February 1, 2019. The extension is because ESMA considers that a significant investor protection concern related to the offer of CFDs to retail clients continues to exist. The renewal is on the same terms as the previous renewal on November 1, 2018 and include:

  • Leverage limits on the opening of a position by a retail client from 30:1 to 2:1, which vary according to the volatility of the underlying.
  • A margin close out rule on a per account basis.
  • Negative balance protection on a per account basis.
  • A restriction on the incentives offered to trade CFDs.
  • A standardized risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.

ESMA Final Report and Guidelines on NSBs under BMR


On December 20, ESMA published a final report containing guidelines on non-significant benchmarks (“NSBs”) under the Benchmarks Regulation ((EU) 2016/1011) (“BMR”). The guidelines apply to competent authorities designated under Article 40 of the BMR, benchmark administrators and supervised contributors, and apply in relation to the provision of, and contribution to, NSBs.

The purpose of the guidelines is to ensure common, uniform and consistent application, for NSBs, of:

  • The oversight function requirements in Article 5 of the BMR.
  • The input data provision in Article 11 of the BMR.
  • The transparency of the methodology provision in Article 13 of the BMR.
  • The governance and control requirements for supervised contributors provision in Article 16 of the BMR.

The guidelines will apply two months after they have been translated into the official EU languages and published on ESMA’s website. During the two months national competent authorities must notify ESMA whether they comply or intend to comply with the guidelines and those that do not intend to comply must notify ESMA of their reasons for not complying.

The final report can be found here and the guidelines, which were published on ESMA’s website, can be found here.

Working Group on Sterling Risk-Free Reference Rates Publishes Paper on Loans Referencing LIBOR


On December 21, the Working Group on Sterling Risk-Free Reference Rates published a paper aiming to help market participants prepare in advance of 2021, when LIBOR may not be available. The paper considers new and legacy loan transactions that reference LIBOR and highlights possible issues should it be replaced, and also the impacts a LIBOR replacement could have on the regulatory obligations of market participants. The paper also considers the possibility that LIBOR might continue to be published but based on a different methodology. READ MORE

ESMA Adopts Decision to Renew Ban on Marketing, Distribution or Sale of Binary Options


On December 21, European Securities and Markets Authority (“ESMA”) published a notice of its decision to renew the prohibition on the marketing, distribution or sale of binary options to retail clients as it considers that a significant investor protection concern related to the offer of binary options to retail clients continues to exist. The decision renews on the same terms as the previous renewal decision of September 21, 2018. The decision was made under Article 40 of the Markets in Financial Instruments Regulation (600/2014) and applies from January 2, 2019 for three months.

ISDA Publishes Statement on Benchmark Fallbacks

On November 27,the International Swaps and Derivatives Association (“ISDA“) published a statement of the preliminary results of its consultation on new benchmark fallbacks for derivatives contracts that reference certain interbank offered rates (“IBORs“).

The consultation suggests four options for calculating the applicable adjusted risk-free rates (“RFRs“), if fallbacks are triggered, and three options for calculating spread adjustments, as well as setting out which of the options the ISDA expects to proceed with and include in its standard definitions.

The information in the statement is subject to the final decision of the ISDA Benchmark Committee and only reflects its preliminary findings at this stage.

The full statement can be found here.

ECB Speech on Climate Change and Central Banking

On November 27, the European Central Bank (“ECB“) published a speech by Yves Mersch, ECB executive board member, on climate change and central banking. Key points included:

  • Three principal sources of risk have been identified by the Financial Stability Board’s (“FSB“) taskforce on climate related financial disclosures, the European Systemic Risk Board and other bodies: (i) physical risk from exposure to climatic events; (ii) transition risk; and (iii) the undervaluation risk in new “green” financial products leading to price bubbles.
  • The physical risk falls mainly on insurers who need to ensure capital adequacy (the ECB is excluded from supervising insurance firms under the Treaty of the Functioning of the EU) but the banking sector may also be affected to the extent that climatic events affect the physical collateral underpinning lending, such risk is increased if banks have loan portfolios concentrated in particular geographic areas.
  • The ECB is not a regulator for financial markets or banks, so cannot vary the capital requirements of supervised banks to take into account their climate risks, or to encourage climate finance.
  • Climate risks have been identified in the ECB Banking Supervision’s risk assessment for 2019 and will be among the topics covered in the qualitative discussions held with banks on an individual basis.


Third European Commission Progress Report on Reducing NPLs in EU

On November 28, the European Commission published a communication setting out its third progress report (COM(2018) 766 final) in reducing non-performing loans (“NPLs“) and further risk reduction in the banking union.

There is an overall trend of improvement, with NPLs declining to an average of 3.4% which is approaching pre-crisis levels, due to action taken by member states and market players. However, there are high NPL ratios still in some member states.

The Commission has delivered all elements of the Council’s July 2017 NPLs action plan. However, it needs to be fully implemented by all actors in order to address the challenge of high NPLs, both in terms of reducing existing stocks to sustainable levels and preventing future accumulation. In particular, the Commission calls on the European Parliament and the Council of the EU to swiftly agree on the banking risk reduction package and all the elements of the legislative proposals to tackle NPLs.

A staff working document (SWD(2018) 472 final) was produced at the Council’s request and following collaboration with the European Central Bank (“ECB“) and the European Banking Association (“EBA“). The document, which is stated to not represent the views of the Commission, the ECB or the EBA, consider the set-up of an EU NPL electronic marketplace platform where banks and investors could trade NPLs to help stimulate development of the secondary market.

European Commission Calls on European Parliament and the Council of the EU to Accelerate Work on Completing CMU


On November 28, the European Commission published a communication (COM(2018) 767 final) on the capital markets union (“CMU“). The Commission outlined that the CMU is a key priority for a number of reasons:

  • completing the CMU is essential to make member state economies more resilient and to safeguard financial stability;
  • the CMU will offer more choice to consumers allowing them to buy cheaper and better investment products;
  • the CMU will enable financial service providers to scale-up by offering their services in other member states.

Since 2015, only three of the Commission’s original proposals contributing to the CMU have been adopted and 10 of 13 proposals are under discussion by EU legislators, including proposals on the pan-EU personal pension product and an EU covered bonds framework. The Commission calls on the European Parliament and Council of the EU to accelerate the remaining proposals before the May 2019 Parliament elections.

The full communication can be found here. The annex was published separately alongside an FAQs document.

IIF Publishes Report on Key Findings from Survey on Use of Machine Learning in AML


On October 19, the Institute of International Finance (“IIF“) published a report on machine learning in anti-money laundering (“AML“). The report, which isn’t publicly available, sets out a summary of the IIF’s key findings from a survey of 59 institutions (54 banks and 5 insurers).

The IIF explains that as the level of undetected illicit funds in the financial services sector remains too high, firms are increasingly turning to new technologies, including machine learning, to address the issue. The IIF found that 69% of firms surveyed already use or experiment with machine learning techniques. Another 29% indicated that they are planning to apply new analytical techniques in the foreseeable future however, none of the firms surveyed were pursuing machine learning as a means to reduce staff.

The most prominent benefit was increased speed or automation of analysis which allows the AML process to respond to the latest developments in money laundering methods. Challenges were also identified, including uncertainty about regulators’ support for it as part of a firms’ adequate risk-mitigation framework. Overall, the IIF found that the application of machine learning techniques in AML is spreading quickly across the industry, and expects this trend to continue.

AFME Calls on Authorities to Urgently Address Brexit Cliff Edge Risks for Financial Services Sector


On October 22, the Association for Financial Markets in Europe (“AFME“) published a press release on avoiding a Brexit cliff edge in financial services, these concerns were reiterated in a letter to the European Commission, urging the Commission along with member states and regulators to provide steps that will be taken to address these risks. In particular, it outlined three risks that need addressing urgently:

  1. Continued access to central counterparties (“CCPs“) – It has been suggested that EU27 banks could move positions to EU CCPs, however this seems unrealistic in the time frame and it is questionable whether the market alone could supply sufficient liquidity for such significant shifts of positions between CCPs. Also, there is currently no available alternative for clearing some products in the EU27. In the absence of clarity, there is a risk that UK CCPs may have to start delivering termination notices to their EU27 clearing participants as early as December 2018.
  2. Continued servicing of existing contracts – firms should be able to continue to perform contractual obligations under existing OTC derivatives contracts in most member states, however it might not be possible to perform essential “life cycle” events (such as exercising options or transferring collateral) and transferring legacy clients onto new contracts ahead of Brexit would be hugely challenging, especially in a no-deal scenario.
  3. Cross border data transfers – the ability to transfer data is vital to support cross-border business and essential for maintaining day to day operations.