Posts by: Max Iles

ESMA Publishes Responses to June 2017 Consultation on RTS Trading Obligations for Derivatives under MiFIR


On August 10, 2017, the European Securities and Markets Authority (“ESMA“), published responses to its June 2017 consultation on trading obligations for derivatives under the Markets in Financial Instruments Regulation (Regulation 600/2014) (“MiFIR“), viewable here.

Under Article 32(1) of MiFIR, ESMA is required to develop regulatory technical standards (RTS) specifying the derivatives that should be subject to the trading obligation. ESMA intends to use the feedback to finalize the draft RTS and submit them to the European Commission for endorsement.

Respondents include:

  • Investment Association (IA).
  • Alternative Investment Management Association (AIMA).
  • Building Societies’ Association (BSA).
  • European Savings and Retail Banking Group (ESRBG).
  • European Banking Federation (EBF).
  • Managed Funds Association (MFA).
  • Wholesale Markets Brokers’ Association (WMBA).
  • International Swaps and Derivatives Association (ISDA).

European Commission Requests Feedback on a Roadmap for Widening Access to Centralized Bank and Payment Account Registries


On August 9, 2017, the European Commission published an inception impact assessment (Ares (2017)3971182) (also called a roadmap) on access to centralized bank account registries.

In the roadmap, the Commission explains that the proposed Fifth Money Laundering Directive (“MLD5“) includes provisions that would require member states to establish automated centralized mechanisms, such as central registries or central electronic data retrieval systems, of bank and payment accounts. Member states would be required to grant access to these registries to financial intelligence units (FIUs) and national competent authorities (NCAs) to prevent money laundering and terrorist financing. The registries are intelligence tools, not data warehouses. They do not contain any information on the balance of the account or transaction details. The minimum data that would be contained in the registries would include information on the identification of the account holder, of any person acting on their behalf, of the beneficial owners, the IBAN account number (which would also identify the bank), the account opening date and, where applicable, the closing date.

The Commission advises that the inter-institutional negotiations on MLD5 are well advanced. The Council of the EU adopted its general approach in December 2016, in which no substantial changes were made to Article 32a of MLD5, which establishes the registries. The European Parliament has not presented substantive amendments on Article 32a either. As a result, the Commission believes that the provisions establishing centralized registers are likely to be included in the final text of MLD5, to be adopted by the co-legislators later in 2017.

However, the Commission explains that the scope of MLD5 is limited to the prevention of money laundering and terrorist financing. As a result, under MLD5, access to the registries can only be granted to FIUs and NCAs, but not to other law enforcement agencies. In some member states, a broader range of law enforcement agencies will be able to consult the registries. This means there will be differences among member states, which could be exploited by criminals and organized crime groups.

Under the Commission’s February 2016 terrorist financing action plan, it announced that it would explore the possibility of a self-standing legislative instrument to allow for broader access to the registries for other law enforcement investigations and by other authorities (such as tax authorities, asset recovery offices (AROs) and anti-corruption authorities (ACAs)). The Commission believes that this would contribute to the prevention of organized crime, and other serious offenses, by enabling public authorities to get timely access to information on the identity of holders of bank and payment accounts in their member state. This would facilitate criminal investigations, as well as the confiscation and recovery of criminal assets. The Commission also considers that banks are likely to benefit from the initiative, as they should experience a reduction in the administrative costs of regularly having to reply to authorities’ requests for information.

In June 2016, the Commission carried out a targeted consultation that involved sending a questionnaire on the issue of access to the registries to AROs and ACAs. 90% of all authorities who replied (representing 26 member states) consider that access would facilitate their tasks substantially. It is planning to launch a twelve-week public consultation in the third quarter of 2017 and, simultaneously, to carry out targeted consultations of key stakeholders (including banks) in the third and fourth quarter of 2017.

A related Commission webpage explains that comments can be made on the roadmap until September 6, 2017. The roadmap refers to an indicative planning date of the first quarter of 2018.

European Parliament Committee Publishes Study on the Legal Implications of Brexit


On August 9, 2017, a policy department of the European Parliament (“EP“) published a Study requested by the EP’s Committee on Internal Market and Consumer Protection (“IMCP“) on the “Legal Implications of Brexit: Customs Union, Internal Market Acquis for Goods and Services, Consumer Protection Law, Public Procurement“.

The Study categorizes the EU legal framework for the different stages of the withdrawal of a member state from the EU, namely:

  • Substantive legal obligations arising from Article 50 of the Treaty on the European Union concerning withdrawal from the EU resulting in a withdrawal agreement.
  • The legal nature and scope of the UK’s future relationship with the EU.
  • Possible transitional arrangements.
  • Implications of that future relationship for EU Internal Market law, particularly those policy areas covered by the IMCO Committee.

The Study emphasizes that there are significant limitations to its analysis owing to the fact there are still many major policy choices left to be made by the EU and the UK even before they start being negotiated. The main purpose of the study, therefore, is to provide an analytical framework for assessing the legal impact of different Brexit scenarios.

Scenarios for the Future EU-UK Relationship: The Study analyzes different scenarios of the UK withdrawing from the EU in relation to the EU Customs Union, the Internal Market law for Goods and Services, and on Consumer Protection law.

It takes fully-fledged EU membership as the baseline scenario and compares it to three other scenarios and assesses the legal implications of each scenario:

  • UK membership of European Economic Area (“EEA“).
  • A tailor-made free trade arrangement between the UK and EU.
  • WTO law governing relations between the UK and EU (the fall-back scenario).

Impact of a Scenario on EU Policy Areas: The Study also develops an analytical framework for identifying the legal impact of different Brexit scenarios on IMCO Committee policy fields, including proposing a two-step test.

Finally, it applies that test to the various Brexit scenarios on key EU laws in IMCO Committee policy areas and reaches some tentative conclusions on the likely impact, particularly for:

  • Consumer protection: relatively limited impact.
  • Policy areas involving standards, such as product safety: significant impact.
  • Goods: significant impact.

The Study is available here.

European Union (Withdrawal) Bill Received First Reading in Parliament


The European Union (Withdrawal) Bill (the “Repeal Bill”), which will end the supremacy of EU law in the UK by repealing the European Communities Act 1972 and will prepare the UK’s legislative framework after its withdrawal, has received its first reading in Parliament on July 13, 2017.

The Repeal Bill will have four key functions:

  1. The repeal of the ECA 1972 and the end of the supremacy of EU law after exit day.
  2. Conversion of EU law into UK law so that the UK’s legislation retains a functioning statutory framework after Brexit.
  3. Creating powers that, where the government considers it necessary, correct existing legislative provisions and afford the devolved administrations the power to make corrective amendments.
  4. Maintaining the current scope of devolved decision making powers in areas currently governed by EU law.

The Bill was published with Explanatory Notes.

It is anticipated that the Repeal Bill will not receive its second reading until after September 5, 2017, after which parliamentary debate will follow. The UK is scheduled to leave the EU on March 29, 2019.

European Commission Expert Group on Sustainable Finance Issues Interim Report


On July 13, 2017, the European Commission published the interim report of its high-level expert group (“HLEG“) on sustainable finance. The HLEG was established in October 2016 as one of the initiatives relating to the Commission’s capital markets union (CMU). The HLEG’s aim is to provide recommendations on how to entrench sustainability into the EU’s regulatory and financial policy framework and to utilize more capital flows towards sustainable investment and lending.

The HLEG report sets out initial recommendations on areas where EU policymakers could further align financial practices with sustainable policy objectives. Its recommendations include:

  • Establishing an EU classification of financial products that captures all acceptable definitions of “sustainable.” The HLEG suggests that this could be finalized before the end of 2018 ahead of the review of the Regulation on key information documents for packaged retail and insurance-based products (PRIIPS Regulation) (Regulation 1286/2014).
  • Establishing a single set of principles for financial intermediaries’ fiduciary duties that incorporates environmental, social and governance (ESG) factors. The HLEG suggests that the Commission should use its forthcoming reviews of financial services sectoral legislation to address this issue.
  • Improving the disclosures made by firms and financial institutions on sustainability issues.
  • Developing a sustainability test to ensure that sustainability is embedded across all future EU financial regulations and policies.
  • Using the ongoing review of the European Supervisory Authorities (“ESAs“) (being ESMA, EIOPA and the EBA) to clarify and enhance the ESAs’ roles on ESG issues.

The HLEG also sets out policy areas relating to sustainable finance that it considers require further discussion. These include potential reforms relating to firms’ governance, credit rating agencies’ (CRAs) methodologies, financial reporting, benchmarks and the prudential requirements for banks and insurers.

The HLEG intends to undertake public consultations on its recommendations with “key participants in the investment and lending chain.” It will use feedback received on the initial report in its work in developing further recommendations for inclusion in its final report, which it intends to publish in December 2017.

FIA Reports on MiFID II/MiFIR Compliance for US FCMs


On July 7, 2017, the Futures Industry Association (“FIA“) published a compliance brief on the impact of the revised European Markets in Financial Instruments Directive (“MiFID II“) and Markets in Financial Instruments Regulation (“MiFIR“) on U.S. Futures Commission Merchants (“FCMs“). Both regulations are scheduled to take effect on January 3, 2018.

MiFID II and MiFIR form a framework of EU legislation that provides for the regulation of investment firms and the trading of financial instruments in the EU markets. MiFID II/MiFIR revise the EU’s original Markets in Financial Instruments Directive (MiFID).

The FIA brief addresses the compliance obligations of U.S. FCMs and their non-EU clients (third-country firms) once MiFID II/MiFIR take effect. The brief covers:

  • Direct impact of MiFID II/MiFIR rules that require FCMs to either be authorized as an investment firm under MiFID II/MiFIR or to discontinue the activity that is triggering the authorization requirement.
  • Direct impact of MiFID II/MiFIR rules that require ongoing compliance from U.S. FCMs without necessitating authorization as investment firms.
  • Indirect impacts of MiFID II/MiFIR rules that may require certain compliance measures under certain circumstances.

MiFID II and MiFIR apply generally to certain financial entities, primarily those defined under the regulations as “investment firms.” Third-country firms, or firms that would be an investment firm or credit institution under MiFID II/MiFIR if its head or registered office was located within the EU, are not within the territorial scope of MiFID II/MiFIR. Third-country firms cannot be authorized as investment firms under MiFID II/MiFIR unless they retain a registered or head office in an EU member state. Similar restrictions prevent third-country firms from being authorized as:

  • Financial counterparties.
  • Non-financial counterparties above the EMIR clearing threshold (NFC+).
  • Credit institutions under MiFID II/MiFIR.

MiFIR does provide for a “third-country passport” for certain third-country firms in the event that an equivalence determination is made regarding the prudential and business conduct rules between the EU and the relevant third-country jurisdiction. Currently, no such equivalence determinations have been made.

Though third-country firms are not within the territorial scope of MiFID II/MiFIR, they still may be directly or indirectly impacted by the regulations and may incur resulting compliance obligations. The FIA brief also includes sample due diligence questions that FCMs might consider when determining potential compliance obligations under MiFID II/MiFIR.

Indirect Impact

The brief further outlines that MiFID II/MiFIR may also have an indirect impact on U.S. FCMs in the following ways:

  • General clearing-member obligations. A third-country firm is not directly subject to general clearing-member obligations under MiFID II/MiFIR, but it may be affected by these obligations if it accesses an EU CCP through an investment firm that is a clearing member.
  • Algorithmic trading. A third-country firm is not directly subject to the new rules on algorithmic trading, but it may be required to comply with the rules in the following situations:
    • when an FCM is a member of an EU trading venue, that FCM will be required to comply with the EU trading venue’s rules relating to algorithmic trading; and
    • when a third-country firm engages in algorithmic trading through an investment firm that is subject to MiFID II/MiFIR, the third-country firm may be expected to cooperate with the investment firm in meeting the investment firm’s MiFID II/MiFIR compliance obligations.
  • Transaction reporting. Third-country firms are generally not directly subject to the expanded transaction reporting regime established under MiFIR, but they may be required to provide an increased amount of information to investment firms and credit institutions that are subject to the new MiFID II/MiFIR regime. Importantly, EU branches of third-country firms will be directly subject to these new rules, and full compliance under MiFID II/MiFIR will be required.
  • Clock synchronization. An FCM that is a member of or participant in an EU trading venue may be required to utilize Coordinated Universal Time (UTC) for the recording of reportable events in accordance with new MiFID II data reporting rules.

EMMI Consults on New Reference Index for Euro Repo Market


The European Money Markets Institute (“EMMI“) published a consultation paper on June 15, 2017, concerning a new reference index for the euro repo money market.

EMMI has been working to find suitable risk-free (or nearly risk-free) rates based on robust and liquid underlying markets to complement the Euro Interbank Offered Rate (EURIBOR) and the Euro Overnight Index Average (EONIA), in line with regulatory recommendations put forward by the Financial Stability Board (FSB), among others. It aims to provide the market with a credible and robust index that is aligned with regulatory requirements and fills the gap left by the discontinuation, in January 2015, of Eurepo.

As money market patterns moved towards a greater reliance on secured funding, EMMI established a task force to explore the feasibility of a transaction-based benchmark for the secured segment of the euro money markets.

Transaction data from the three most active automatic trading systems in Europe covering the period 2006 to 2015 were analyzed to assess whether it is sufficient to support the determination of a new pan-European index, and the design considerations to be taken into account.

EMMI’s analysis identified that activity for the electronically traded repo market in euro is concentrated on the short term of the curve, which allows for the development of a purely transaction-based benchmark for the one-day tenor.

The consultation paper sets out, and seeks views on, its proposal for a pan-European transaction-based repo benchmark. It addresses the new repo index’s calculation methodology and its definition. Matters such as governance, publication, or potential or future licensing of the new repo index are not part of the consultation. The consultation closes to responses on July 14, 2017. EMMI expects to obtain a reliable indication of the market’s interest in, and need for, the proposed new repo index. In developing its proposal, EMMI focused on four design principles:

  • The new repo index should measure pan-European secured funding rates based on security-financed euro repo transactions.
  • The new index must be an accurate representation of the underlying interest it seeks to measure.
  • The source data for the new index should be sufficient to reliably measure this underlying interest.
  • The benchmark design should capture the majority of all eligible euro repo transactions.

The consultation paper summarizes EMMI’s work toward the development of a new repo index that satisfies these four principles, which are in line with regulatory best practices, such as the IOSCO principles for financial benchmarks and the Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (Regulation (EU) 2016/1011).

Council of EU Agrees on Approach to Legislative Proposals for Insolvency Hierarchy Directive and IFRS 9 Regulation


The Council of the EU has agreed on a general approach to the legislative proposals for a directive (which will relate to the ranking of unsecured debt instruments in insolvency) amending the Bank Recovery and Resolution Directive (2014/59/EU) (“BRRD“) and a Regulation amending the Capital Requirements Regulation (Regulation 575/2013) (“CRR“) (which concerns transitional periods under the International Financial Reporting Standard 9 (“IFRS 9“)).

A press release published on June 16, 2017, by the Council of the EU (in its configuration as the Economic and Financial Affairs Council (ECOFIN)) outlined the following general approach on the legislative proposals:

  • In relation to BRRD, the Council agreed on the text set out in the Council’s final compromise proposal dated May 31, 2017 (9479/17).
  • In relation to CRR, the Council agreed on the text set out in the Council’s final compromise proposal dated May 31, 2017 (9480/17).
  • On June 12, 2017, the Council’s Permanent Representatives Committee recommended that the Council agree on these texts as their general approach.

The press release states that EU ministers have asked the Council Presidency to start talks with the European Parliament on these proposals as soon as the Parliament has approved its own negotiating stance. It quotes the finance minister of Malta (which currently holds the Council Presidency), stating that the Council hopes that “the Parliament will be able to start negotiating by the end of this year.”

The draft Insolvency Hierarchy Directive and the IFRS 9 Regulation form part of the package of banking reforms that were adopted by the European Commission in November 2016. The EU authorities have decided to fast-track these relatively discrete measures ahead of their consideration of the remainder of the reforms.

ESAs Publish 2016 Annual Reports


On June 15, 2017, ESMA, EIOPA and the EBA (the European Supervisory Authorities (“ESAs“)) each published their annual reports outlining the relevant ESA’s objectives, activities and key achievements in 2016.

ESMA’s annual report summarizes the work carried out by ESMA in 2016 under each of the following activities:

  • Assessing risks to investors, markets and financial stability.
  • Creating a single rule book.
  • Promoting supervisory convergence.
  • Supervising credit rating agencies and trade repositories.

The EBA’s annual report outlines the EBA’s work in 2016, which included:

  • Completing the single rule book applicable to the EU banking sector.
  • Supporting the finalization of the Basel III package of measures and its implementation in the EU.
  • Enhancing its monitoring of different aspects of the single rule book, including on own funds, remuneration practices and significant risk transfers in securitizations.
  • Improving its role in monitoring and assessing key risks in the banking sector across the EU.
  • Monitoring financial innovation and contributing to secure and efficient retail payments in the EU.

EIOPA’s annual report outlines the EIOPA’s work associated with the implementation of the Solvency II Directive (2009/138/EC) on January 1, 2016, such as the secure collection and storage of data. Other areas of work included:

  • The calculation and publication of risk-free rates on a monthly basis.
  • An EU-wide insurance stress test.
  • The development of a macro-prudential approach to the low interest rate environment in Solvency II.

Advice to the European Commission on a number of issues, including the development of a pan-European personal pension product and, within the context of the Joint Committee of the ESAs, on the key information documents for packaged retail and insurance-based investment products.