Posts by: Kevin Wong

ECB Publishes Opinion on Proposed Regulation Amending EBA Regulation


The European Central Bank (“ECB“) published an opinion (CON/2018/19) (dated April 11, 2018) on a proposed Regulation amending (among other things) the EBA Regulation (Regulation 1093/2010) on April 12, 2018.

The proposed Regulation forms part of the European Commission’s legislative proposals for reforms to the European System of Financial Supervision (“ESFS“), which were published in September 2017. In November 2017, the Council of the EU requested an opinion from the ECB on the proposed Regulation.

In the opinion, the ECB welcomes the proposed Regulation’s objective of fostering effective and consistent prudential supervision and regulation across the EU. It supports further integration of the supervisory framework at EU level for the banking sector and strengthening supervision by re-examining the current set-up of the European supervisory authorities (“ESAs“) (that is, ESMA, EIOPA and the EBA).

The opinion sets out the ECB’s general observation that the banking union and the capital markets union (“CMU“) are at different stages of progress. The review of the ESAs should not necessarily produce three identical outcomes for the three ESAs, but should address their respective mandates and functions.

The ECB considers that certain of the proposed amendments to the EBA Regulation do not adequately distinguish between the scope of the ECB’s microprudential supervisory tasks and the EBA’s competence to set regulatory standards to promote supervisory convergence. It states the importance of avoiding duplication or inappropriate allocation of tasks, as this could blur the responsibilities of the two authorities and render the system less effective overall.

The ECB also makes some specific observations in the opinion concerning the revised EBA governance framework, strategic supervisory plans, stress testing and independent reviews of national competent or supervisory authorities.

A technical working document accompanied by an explanatory text is appended to the opinion, setting out the ECB’s proposed amendments to the text of the proposed Regulation.

The ECB has decided to adopt separate opinions on the Commission’s legislative proposals for reforms to the ESFS, so it advises that the opinion should be read in conjunction with an opinion it published in March 2018 on a proposed Regulation amending the European Systemic Risk Board (ESRB) Regulation (Regulation 1092/2010).

ESMA Speech on Measured Approach to FinTech

The European Securities and Markets Authority (“ESMA“) published a speech by ESMA Chair Steven Maijoor on taking a measured approach to Financial Technology (“FinTech“) on February 27, 2018.

Mr. Maijoor explained that there are two strands to ESMA’s measured approach to FinTech. The first strand involves monitoring innovations diligently and intelligently. The second strand is to take action in a measured way (that is, to carefully consider how best to act, weighing risks and benefits in an objective fashion). He goes on to address the following three key areas of FinTech:

Monitoring FinTech by looking at economic function. As ESMA monitors and assesses FinTech developments, it finds it helpful to keep in mind radical changes brought by FinTech and other information technology. ESMA recognises the potential for FinTech to reshape the financial sector. It has already devised a financial innovation scoreboard, with which it performs an initial assessment of financial innovations according to the risks and benefits arising from the functions they perform.

Structural features of FinTech. Understanding how the process of innovation works and taking into account its structural features enables regulators to take a coherent view of FinTech. Mr. Maijoor states that one of the overarching features across different FinTech innovations is the reliance on information technology, and that one innovation often leads to another. In some cases, successful technologies, products or services may emerge from failed innovations. This process of development is known as the “innovation spiral”. Distributed ledger technology is an example of the innovation spiral. Mr. Maijoor also refers to the notion of a “regulatory dialectic”. This is where market participants take into account existing rules and regulations when they innovate. In response, authorities may seek to amend the regulatory framework, which may then prompt further innovation and so on.

Challenges and opportunities for regulators. FinTech is a priority for financial market regulators. Mr. Maijoor refers to the European Commission’s work in this area. Following the Commission’s consultation on FinTech, it published a summary of responses in September 2017. Under the Commission’s proposals, specific new tasks for the European Supervisory Authorities (“ESAs“) (that is the EBA, EIOPA and ESMA) relating to FinTech would include four areas. These relate to pursuing convergence on licensing requirements for FinTech companies, clarifying and updating the supervisory outsourcing frameworks, co-ordinating national technological innovation hubs and work relating to cybersecurity. Mr. Maijoor states that if the Commission’s proposals are adopted, it will provide the ESAs with a clear roadmap to meet the challenges and opportunities arising from FinTech.

EC Speech Outlines Goals of FinTech Action Plan


The European Commission (“EC“) published a speech on February 27, 2018 given by Vice President Valdis Dombrovskis, European Commissioner for Financial Stability, Financial Services and Capital Markets Union (“CMU“), which includes an outline of the goals of its Financial Technology (“FinTech“) action plan.

Mr. Dombrovskis explained that the action plan will propose over 20 new measures intended to create a more innovative and competitive EU financial sector. He outlines some of these measures in his speech, which fall under the following three main goals:

Supporting innovative business models. The Commission will propose an EU label for the crowdfunding sector, to allow platforms to operate across the EU under a single authorization. The Commission will also invite the European Supervisory Authorities (“ESAs“) (that is, the EBA, ESMA and EIOPA) to identify best practices for innovation hubs and sandboxes by the end of 2018. Based on their work, it will present a plan with recommendations for regulatory sandboxes.

Increasing cybersecurity and the integrity of the financial system. The Commission supports the work of the European Central Bank (“ECB“) and supervisors to develop an EU-wide cyber-resilience testing framework, to consolidate the testing obligations for companies that operate in different countries. Later in 2018, the Commission will organise a public-private workshop to identify and address obstacles to information-sharing among market participants relating to cybersecurity threats.

Encouraging the uptake of new technologies. Informed and skilled supervision of FinTech activities will be a core theme of the action plan. The Commission will invite the ESAs to consider issuing guidelines to facilitate the use of cloud services. Mr. Dombrovskis explains that the EU blockchain observatory and forum, which it launched on February 1, 2018, will help monitor developments and inform its policy thinking on blockchain and other applications of distributed ledger technology (“DLT“). The Commission will also establish an EU FinTech Lab for supervisors to engage with technology solution providers, to increase the knowledge and understanding of new technologies.

Mr. Dombrovskis explains that the content of the action plan has been informed by the responses received to the Commission’s March 2017 consultation paper on developing a policy approach to FinTech.

ECB Consults on Draft Guides on ICAAP and ILAAP

The European Central Bank (“ECB“) published two consultation papers on March 2, 2018 on the draft principles underlying its expectations for banks’ internal capital adequacy assessment processes (“ICAAPs“) and internal liquidity adequacy assessment processes (“ILAAPs“).

A set of FAQs accompany the draft ECB guide to ICAAP and the draft ECB guide to ILAAP. The FAQs explain what the ICAAP and ILAAP are, and the purpose and legal nature of the guides.

The consultation closes on May 4, 2018 and the ECB will hold a public hearing on April 24, 2018 by telephone conference. It will publish the comments it receives, together with a feedback statement.

The ECB wrote to a number of significant institutions under the Single Supervisory Mechanism (“SSM“) about the development of the guides in February 2017.

IBOR Global Benchmark Transition Roadmap Launched

The International Swaps and Derivatives Association (“ISDA“) published an interbank offered rate (“IBOR“) global benchmark transition roadmap, which it has produced alongside a number of other trade associations on March 2, 2018.

The roadmap aggregates and summarises existing information issued by regulators and various risk-free rate (“RFR“) working groups on work carried out to date on transitioning financial products and practices from certain IBORs to selected RFRs.

The roadmap covers the London Interbank Offered Rate (LIBOR) and certain other IBORs denominated in euro, sterling, Swiss franc, US dollar and yen.

In the accompanying press release, ISDA stated that the roadmap is the first part of a comprehensive analysis of the issues and possible solutions relating to transitioning from IBORs for a wide range of financial instruments. The trade associations (which also include the Association for Financial Markets in Europe (“AFME“), the Securities Industry and Financial Markets Association (“SIFMA“) and the International Capital Market Association (“ICMA“)) will also be conducting a global survey of buy- and sell-side firms and infrastructure providers that will feed into a report aiming to support interest rate benchmark transition planning efforts.

ISDA announced its intention to develop a global benchmark transition roadmap in November 2017.

Delegated Regulations Under MiFID II Directive and BMR Published in OJ

The following Delegated Regulations were published on January 17, 2018 in the Official Journal of the EU (OJ):

Commission Delegated Regulation (EU) 2018/63, which amends Delegated Regulation (EU) 2017/571 supplementing the MiFID II Directive (2014/65/EU) with regard to regulatory technical standards on the authorization, organizational requirements and the publication of transactions for data-reporting services providers. The Commission adopted this Delegated Regulation on September 26, 2017.

Commission Delegated Regulation (EU) 2018/64, which supplements Regulation (EU) 2016/1011 (BMR) on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds with regard to specifying how the criteria of Article 20(1)(c)(iii) of the BMR are to be applied for assessing whether certain events would result in significant and adverse impacts on market integrity, financial stability, consumers, the real economy or the financing of households and businesses in one or more member states.

Commission Delegated Regulation (EU) 2018/65, which specifies technical elements of the definitions laid down in Article 3(1) of the BMR.

Commission Delegated Regulation (EU) 2018/66, which supplements the BMR specifying how the nominal amount of financial instruments other than derivatives, the notional amount of derivatives and the net asset value (NAV) of investment funds are to be assessed. The Commission adopted Delegated Regulations (EU) 2018/64, (EU) 2018/65 and (EU) 2018/66 on September 29, 2017.

Commission Delegated Regulation (EU) 2018/67, which supplements the BMR with regard to the establishment of the conditions to assess the resulting impact from the cessation of or change to existing benchmarks. The Commission adopted this Delegated Regulation on October 3, 2017.

All the Delegated Regulations will enter into force twenty days after their publication in the OJ on February 6, 2018.

European Parliament to Expedite Process for Adopting Proposal to Delay Application Date for IDD and IDD Delegated Regulations

European Parliament’s Committee on Economic and Monetary Affairs (“ECON”) published a letter (dated January 9, 2018) on January 16, 2018. The letter was sent by the ECON Chair to the Chair of the Council of the EU’s Permanent Representatives on the legislative proposal to postpone the application date of the Insurance Distribution Directive ((EU) 2016/97) (“IDD“) to October 1, 2018.

The proposal was adopted by the European Commission on December 20, 2017. ECON had urged the Commission to adopt a legislative proposal “swiftly” in November, to enhance legal certainty on the applicable provisions and to allow for the necessary organizational and technical changes needed to comply with the provisions introduced by the Delegated Regulations Legal update. ECON urged the Commission to take into account European Parliament’s recommendation to postpone the IDD application date to October 1, 2018.

In its latest letter, ECON confirms its support for a “postponement of the date of transposition of [the IDD] by a few months, such as 1 July 2018”. ECON goes on to confirm its intention to “steer the adoption of [the proposed amending Directive] in an expedited manner while respecting [Parliament] Rules of Procedure, and in order to avoid trialogue procedures”. ECON explains that it does not intend to object to the adoption of the proposed Directive to speed up its entry into force, and states that it trusts the Council will do the same.

EBA Final Report on Implementation of Guidelines on Methods for Calculating Contributions to Deposit Guarantee Schemes

The European Banking Authority (“EBA“) published its final report on the implementation of its guidelines on methods for calculating contributions to deposit guarantee schemes (DGSs) on January 17, 2018.

This follows the publication of a consultation paper on a draft report by the EBA in July 2017 (EBA/CP/2017/10).

The final report assesses authorities’ compliance with the principles outlined in the guidelines. The report concludes that:

  • the guidelines have broadly met the aim of introducing different contribution levels for institutions according to their risk levels. However, the method outlined in the guidelines, and currently in use, allows too much flexibility and may need to be reviewed to ensure a more consistent approach while still catering for national specificities;
  • the approach taken by member states seems to ensure a good level of transparency to stakeholders and does not cause excessive additional reporting requirements. Therefore, the guidelines do not appear to require amendment. However, changes to the way information is disclosed to the contributing institutions may be considered in the future; and
  • further analysis and greater experience of the risk-based systems currently in use is needed before proposing any changes to the guidelines, as the available data covers only one year of risk-based contributions.

The EBA states that it intends to consider a number of suggested improvements to the guidelines as part of a wider review of the Deposit Guarantee Schemes Directive (2014/49/EU) (“DGSD”) in 2019.

The assessment on the implementation of the methods for calculating contributions to DGSD has been carried out in accordance with Article 13(3) of the DGSD.

ESMA Call for Evidence on Potential Product Intervention Measures on CFDs and Binary Options to Protect Retail Clients

On January 18, 2018, European Securities and Markets Authority (“ESMA”) published a call for evidence (“CfE”) on potential product intervention measures on contracts for differences (“CFDs”) and binary options in order to protect retail clients (ESMA35-43-904).

In December 2017, ESMA published a statement explaining it was considering the possible use of its product intervention powers under Article 40 of the Markets in Financial Instruments Regulation (Regulation 600/2014) (MiFIR) to address investor protection concerns arising out of the marketing, distribution and sale of CFDs and binary options to retail investors. It is now seeking feedback from stakeholders on the impact of certain potential measures.

In relation to CFDs, ESMA is considering implementing the following:

  • A standardized risk warning by CFD providers in any communication to, or published information accessible by, a retail client relating to the marketing, distribution or sale of a CFD. At present, ESMA’s preferred option is that this standardized warning would indicate the percentage range of retail investor accounts having losses.
  • Leverage limits on the opening of a position by a retail client that would apply to any payment made to a product provider for the purpose of entering into a CFD, excluding any commission and transaction fees owed to the provider. They would range from 30:1 to 5:1 depending on the different classes of underlying assets.
  • A margin closeout rule on a position-by-position basis. This would standardize the percentage of margin at which providers are required to close out a retail client’s open CFD. The aim is that clients are routinely protected from losing more than they have invested in a consistent manner across providers.
  • Negative balance protection on a per-account basis, to provide an overall guaranteed limit on retail client losses.
  • A restriction on incentivization of trading provided directly or indirectly by a CFD provider, such as providing retail clients with a payment (other than a realized profit on any CFD provided) or a non-monetary benefit in relation to the marketing, sale or distribution of a CFD.

ESMA is currently considering how CFDs on cryptocurrencies fit within the MiFID II regulatory framework as financial instruments. It is seeking views on this and asks whether it should introduce specific restrictions concerning CFDs in cryptocurrencies.

ESMA is also considering a prohibition on the marketing, distribution and sale to retail clients of binary options. This is on the basis that the risks relating to binary options are due to inherent product features that are unlikely to be sufficiently addressed through product restrictions.

The CfE closes to responses on February 5, 2018.

European Commission Report on SEPA Migration Regulation


The European Commission published a report on November 23, 2017 (COM(2017) 683 final) to the Council of the EU and the European Parliament on the application of the Single Euro Payments Area (“SEPA“) Regulation (Regulation 260/2012) (SEPA Migration Regulation).

The SEPA Migration Regulation set the end-date for migration from national credit transfer and direct debit payment instruments to SEPA credit transfers (“SCT“) and direct debits (“SDD“). For member states that belonged to the euro area, this date was February 1, 2014 (although this was postponed for six months). Member states that do not belong to the euro area had until October 31,  2016 to migrate.

Article 15 of the SEPA Migration Regulation requires the Commission to report on the application of the Regulation by February 1,  2017.

The Commission sent a questionnaire to member states on December 15, 2016 about a number of issues such as the migration from legacy credit transfers and direct debits to SCT and SDD, the use of options by member states, the authorities designated for ensuring compliance with the Regulation and their powers, and issues that may still be encountered across the EU relating to the implementation of the Regulation. The member states’ responses form the basis for the Commission’s report.

The Commission concluded that, overall, the SEPA Migration Regulation is correctly applied across the EU, and there is currently no need for a follow-up legislative proposal. The very few issues (such as international bank account number (“IBAN“) discrimination and competent authorities’ competences) that persist have been addressed by member states and their resolution should be closely monitored. The main issue to be closely observed is IBAN discrimination by payees (that is, imposing an obligation on payers to pay from an account located in a specific country, which is contrary to Article 9 of the Regulation). Although the number of cases have decreased, the Commission believes that new cases could still arise.