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.
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.
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.
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.
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.
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.
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.
On February 23, 2017, the European Banking Authority (“EBA“) published a report setting out its final draft regulatory technical standards (“RTS“) on strong customer authentication and common and secure communication under Article 98 of the Directive on payment services in the internal market (“PSD2“).
The RTS were developed in close cooperation with the European Central Bank (“ECB“) and consulted on by the EBA in August 2016. The key points raised in the consultation related to the scope and technologically neutral requirements of the draft RTS, the exemptions, including scope, thresholds and the request of many respondents for an exemption for transactions identified as low risk, access to payment accounts by third-party providers and the requirements around the information communicated.
The EBA states that it had to make difficult trade-offs between the various objectives of PSD2, including enhancing security, encouraging competition, allowing for technology and business‑model neutrality, contributing to the integration of payments in the EU, protecting consumers, facilitating innovation and enhancing customer convenience.
There was extensive input to the consultation paper. The EBA summarizes responses in section 4 of the report and provides its assessment as to whether changes have been made to the RTS as a result of the response.
The final draft RTS are set out in section 3 of the report. The draft will be submitted to the European Commission (EC), after which it will be subject to scrutiny by the European Parliament and the Council of the EU before being published in the Official Journal of the European Union. The RTS will apply 18 months after their adoption by the Commission as a delegated act. The EBA states that this suggests an application date of the RTS in November 2018 at the earliest.
On January 31, 2017, the European Commission published a speech by Valdis Dombrovskis, Commission Vice President, on finance for growth in manufacturing.
The speech included the Commission’s recent review of EMIR, the outcome of which the European Commission reported on in November 2016.
Mr. Dombrovskis commented that, during the review process, the European Commission received substantial feedback on the rules governing derivatives. Several respondents, including regulators and industry participants, argued that there is scope to make the rules and reporting obligations in this area more proportionate, particularly for non-financial counterparties.
The European Commission agrees with this feedback and intends to address some of the issues by revising existing technical standards to make reporting standards simpler and clearer. It will publish its legislative proposal to revise EMIR in spring 2017.
On January 20, 2017, the European Commission published a consultation paper requesting targeted input on revisions on the capital markets union (“CMU“) action plan, together with frequently asked questions on the consultation.
The Commission intends to publish its mid-term review of the CMU action plan in June 2017. The aim of the review is to take stock of the progress towards implementing the action plan, to reframe actions in light of new developments and to add new measures to the action plan. The CMU action plan was published in September 2015, and it set out the Commission’s proposed initiatives for the establishment of the CMU.
In the consultation, the Commission seeks views from stakeholders on potential revisions to the action plan on any additional actions that could:
The consultation sets out the current position of the CMU initiatives already underway and the expected timings for their next steps, where applicable.
The deadline for responses is March 17, 2017. The Commission will evaluate the responses and produce a summary feedback statement. It will also hold more focused roundtable discussions on small and medium enterprises, access to finance, retail investigator engagement and institutional investment.
