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Commission Adopts Proposal to Incorporate ESAs into EEA Agreement

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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.

Commission Summary of Contributions on EU Regulatory Framework

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The European Commission has published a summary of contributions received to the ‘Call for Evidence’ on an EU regulatory framework for financial services. The consultation closed on January 31, 2016.

The summary reports who responded and gives an overview of the responses. Overall, the Commission claims that stakeholders did not dispute the reforms of recent years and many responses expressed support of the new rules. Many replies also related to unnecessary regulatory constraints on financing, proportionality, excessive compliance costs and complexity, reporting and disclosure obligations, and overlaps, duplications, and inconsistencies.

EBA Releases Key Information on EU G-SIIs

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On July 28, the European Banking Authority (EBA) published a chart setting out the key metrics used to identify global systemically important institutions (G-SIIs) in the EU. The chart contains information on the size, interconnectedness, substitutability, complexity and cross-jurisdictional activity of the 37 EU institutions whose leverage ratio exposure measure exceeded EUR 200 billion in 2014. Under the CRD IV Directive, additional capital buffers apply to firms that are systemically important. Identification of G-SIIs is the responsibility of national competent authorities and took place for the first time in January 2015.

ESRB Reports on EMIR

The European Systemic Risk Board (ESRB) has published two reports relating to EMIR (the Regulation on OTC derivative transactions, central counterparties and trade repositories) to assist the European Commission in fulfilling its obligation under Article 85 of EMIR to review and provide a report on the Regulation.

1.  Margining Requirements

The ESRB explains in its report that although Article 85 of EMIR refers specifically to margining requirements, given the significant economic features in common between margins and the determination of haircuts, the report also considers haircut requirements and focuses on margins and haircut settings for central counterparties (CCPs), as the regulatory technical standards on bilateral margin requirements have not yet been endorsed. The ESRB proposes a further review of EMIR in 2018, specifically on the use of margining and haircuts to address and prevent systemic risks.

2.  Issues to be considered other than efficiency of margining requirements

In its second report, the ESRB recommends that the Commission considers the following additional topics when preparing its report to the European Parliament and Council of the EU:

  • A swift process for the removal or suspension of mandatory clearing obligations.
  • The evaluation of systemic risks for mandatory clearing purposes.
  • Replenishment of default funds and the skin-in-the-game design.
  • Transparency requirements consistent with guidance developed at the international level.
  • Publication of a list of approved interoperability arrangements by the European Securities and Markets Authority (ESMA).
  • Access to trade repository data.

ESMA Consults on Draft RTS under ELTIF Regulation

On July 31, the European Securities and Markets Authority (ESMA) published a consultation paper on draft regulatory technical standards (RTS) under the Regulation on European Long-Term Investment Funds (ELTIF Regulation).

In accordance with the ELTIF Regulation, ESMA is consulting on draft RTS to determine the criteria for establishing the following:

  • Circumstances in which the use of financial derivative instruments solely serves hedging purposes.
  • Circumstances in which the life of an ELTIF is considered sufficient in length.
  • Criteria to be used for certain elements of the itemised schedule for the orderly disposal of the ELTIF assets.
  • Costs disclosure.
  • Facilities available to retail investors.

The deadline for responses to the consultation is October 14, 2015.

Council of EU Agrees General Approach on Proposed Regulation on Securities Financing Transactions

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On November 20, the Council of the EU published a press release reporting that its Permanent Representatives Committee (COREPER) has agreed its approach on a draft regulation on reporting and transparency of securities financing transactions (SFTs) (the SFT Regulation).

SFTs are often carried out by the shadow banking sector and rely on assets belonging to the counterparty to generate financing.  They mostly involve lending or borrowing of securities and commodities, repurchase or reverse repurchase transactions, or buyback/sell-back transactions.

The SFT Regulation is intended to enhance financial stability by ensuring that information on SFTs is efficiently reported to trade repositories and investors in collective investment undertakings.

The Commission published its legislative proposal for the SFT Regulation in January 2014 and the Council published its first compromise proposal in October 2014. The Council’s agreement enables negotiations to commence as soon as the negotiating team of the European Parliament is entrusted with a mandate. The aim is to adopt the SFT Regulation at first reading. Press Release.

ECON Publishes Draft Report on MMF Regulation

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On November 17, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) published a draft report on the proposed Regulation on Money Market Funds (the MMF Regulation).

Money market funds are a type of investment fund that invests in short-term debt such as money market instruments issued by banks, governments and companies (MMFs).  If adopted, the MMF Regulation will introduce a general framework of requirements to enhance the liquidity and stability of MMF funds.

The draft report sets out suggested amendments to the European Commission’s original proposal and an explanatory statement. The statement comments that:

  • there is still significant scope for improvement relating to liquidity and maturity transformation and in making MMFs more stable;
  • a new category of EU government constant net assets value money market fund (CNAV MMF) should be established, which would invest a majority of assets into EU government debt; and
  • the net asset value of CNAVs should be subject to daily disclosure requirements, stress tests should take place on a quarterly basis and there should be stronger investor warnings.

The Parliament is scheduled to consider the MMF Regulation at its plenary session on March 25, 2015. Draft report.

ESMA Call for Evidence on AIFMD Passport and Third Country AIFMs

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On November 7, the European Securities and Markets Authority (ESMA) published a call for evidence on the EU passport under the Alternative Investment Fund Managers Directive (AIFMD) and third country Alternative Investment Fund Managers (AIFMs).

Under the AIFMD, non-EU AIFMs and non-EU Alternative Investment Funds (AIFs) managed by EU AIFMs are subject to the national private placement regime of each of the member states where the AIFs are marketed or managed. However, the AIFMD makes provision for the passport to be potentially extended in the future.

Responses to the call for evidence from the EU and the non-EU stakeholders (as well as ongoing input ESMA is receiving from national competent authorities) will help ESMA develop the opinion and advice it is required to deliver to the European Commission.

The deadline for responses to the call for evidence is January 8, 2015.  ESMA will consider the feedback it receives to the call for evidence in the first quarter of 2015.  It is required to deliver the opinion and the advice to the Commission by July 22, 2015.  Call for Evidence.

UCITS 5 Political Agreement Reached

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On February 25, the European Parliament published a press release announcing that political agreement has been reached with the Council of the EU on the proposed UCITS V Directive.

The press release notes the following areas of agreement:

  • Payment of fund managers.
  • The appointment of a depository by UCITS or UCITS management companies.
  • Provision of penalties by EU member states for funds failing to comply with national UCITS authorization and reporting rules.   Press Release.

Council of EU Publishes UK Issues Paper on MLD4

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On November 24, the Council of the European Union published a note (dated November 8, 2013) from the Council Presidency to Council Delegations which includes a UK issues paper on the fourth Money Laundering Directive (MLD4).  The issues paper states that the UK welcomes MLD4, but notes certain points for discussion.  In particular, the UK highlights the issue of beneficial ownerships of companies and misuse of trusts.

The UK suggests that central registries of company beneficial ownership would help to break through corporate secrecy and reveal who truly owns companies.  To further this aim, the UK has pledged to make the UK’s central registry of company beneficial ownership publically accessible.  The UK is also taking part in an automatic information exchange pilot with France, Italy, Spain and Germany in order to tackle tax evasion and the use of trusts for illegal purposes.

According to an EU press release, these issues were discussed at the November 2013 ECOFIN conference.  Note.  Press Release. 

SEC and EU Supervisory Cooperation for Asset Management Industry

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On July 19, the SEC announced that it signed various memoranda of understanding with the financial regulators of 25 member states of the EU and 3 regulators of the European Economic Area as part of a long-term strategy to improve oversight of certain entities in the asset management industry that operate across national borders.  SEC Release.  Cooperative Arrangements Fact Sheet.

FSA Approach to Implementation of Aspects of the EU Short Selling Regulation

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On August 15, the FSA published a short selling edition of its Market Watch newsletter. Newsletter No. 42, August 2012. 

Although the EU Short Selling Regulation (the ‘Regulation’) will have direct effect in the UK from November 1, certain aspects of it afford discretion to, or impose obligations on, member states to introduce operational procedures to ensure compliance by market participants.

The newsletter, which does not constitute formal FSA guidance, sets out the FSA’s proposed approach to how it will exercise that discretion in six areas of the Regulation including:

  • removing the existing UK rules on short selling by November 1, through amendments to the FSA Handbook;
  • whether it is appropriate to apply the FSA’s existing penalties policy to breaches of the short selling regime;
  • a framework for determining whether or not the FSA will exercise its powers to suspend, prohibit or limit trading in financial instruments following a significant fall in price; and
  • developing web-based solutions for the public disclosure of significant short positions.

The FSA will issue a formal consultation on proposed changes to the FSA Handbook shortly.