European Supervisory Authorities (ESAs)

European Commission Publishes Communication on Equivalence Policy With Non-EU Countries

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On July 29, the European Commission published a communication (and annex) on equivalence in the area of financial services. The Commission highlights recent improvements to the design of EU equivalence regimes and notes that significant changes have been introduced to the equivalence regimes in a number of legislative amendments relating to the proposed:

  • Omnibus Regulation relating to the powers, governance and funding of the European Supervisory Authorities (ESAs) – where the role of each ESA in monitoring equivalent third countries is strengthened;
  • Regulation amending the European Market Infrastructure Regulation (EMIR) supervisory regime for EU and third-country central counterparties (CCPs) (EMIR 2.2) – where a more risk-sensitive and proportionate approach for third-country regimes is being introduced; and
  • Investment Firms Directive (IFD) – where new assessment criteria, safeguards and reporting obligations for third-country firms are being created.

In relation to making equivalence assessments, the Commission emphasizes that decisions are not taken in isolation and proportionality is very important, and it notes that the Commission is concerned about identifying risks to the EU financial system.

The communication also summarizes equivalence decisions adopted since January 2018 and sets out its priorities for 2019 and 2020, including:

  • continuing work on equivalence assessments, especially relating to the Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds;
  • repealing existing decisions where the third-country framework no longer delivers the necessary outcomes (for example, under the CRA Regulation);
  • focusing on high-impact areas and third countries (EMIR (Regulation 64/2012) is specifically mentioned);
  • areas where there is an impending review or expiration of an equivalence deadline (the Capital Requirements Regulation (575/2013) is specifically mentioned); and
  • examining market segments that are undergoing dynamic or structural changes (the Markets in Financial Instruments Regulation (Regulation 600/2014) (MiFIR) is specifically mentioned).
  • The communication included the communication itself, an annex and a press release.

Joint Committee of the ESAs Propose Draft RTS to Clarify Application of the KID to Investment Funds

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On March 8, the Joint Committee of the European Supervisory Authorities (ESAs) published a letter that had been sent to the European Commission proposing draft regulatory technical standards (RTS) amending Commission Delegated Regulation (EU) 2017/653 to clarify the application of the key information document (KID) to multi-option products (MOPs).

MOPs are Undertakings for Collective Investments in Transferable Securities (UCITS) and certain non-UCITS funds offered as underlying investment options to a packaged retail and insurance-based investment product (PRIIP). In February 2019, the ESAs identified the draft RTS are required following a decision during the trialogue on the cross-border distribution of investment funds that will extend the time period for which MOPs are excused from preparing a PRIIPs KID from December 31, 2019 until December 31, 2021.

The draft RTS seek to align the date of the exemption in Article 18 of the PRIIPS Delegated Regulation with the revised date in the PRIIPS Regulation ((EU) 1286/2014). The objective is to provide legal certainty to market partakers before the expiry of the current provision in the PRIIPs Delegated Regulation at the end of 2019.

The letter from the Joint Committee of the ESAs to the European Commission can be found here.

European Commission Request to ESAS to Issue Recurrent Reports on Cost and Performance of the Main Categories of Pension, Insurance and Pension Products

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On October 17, 2017, the European Commission published a request to the European Supervisory Authorities (“ESAs“) to issue recurrent reports on the past performance and cost of the main categories of insurance, pension and retail investment products.

In its request, the Commission states that the reporting should be based on information originating from disclosures and reporting required under the MiFID Directive, the Insurance Distribution Directive, the Regulation on key information documents for packaged retail and insurance-based investment products and other EU and national legislation.

The Commission outlines a tentative timetable for the reports, indicating that the first report on data availability, costs and performances should be available in the third and fourth quarter of 2018.

ESAs and IOSCO Publish Statements on Variation of Margin Exchange under EMIR

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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.

The Financial Services Aspects of the Brexit White Paper

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On February 2, 2017, the Department for Exiting the European Union, the department of the UK government tasked with extricating the UK from the EU, published a white paper on the UK’s exit from and new partnership with the EU. The white paper contains further detail on the UK government’s approach to financial services in sections 8.22 to 8.26.

The white paper states that the UK government will target the following aims in its negotiations with the EU in respect of the financial services sector:

  • Achieving the “freest possible trade” in financial services between the UK and EU member states.
  • Establishing strong co-operation and oversight arrangements with the EU, reflecting the interconnectedness of financial markets. The paper suggest that the UK will continue to support and implement international financial standards.
  • Negotiating on the UK’s future status and arrangements with regard to EU agencies, including the European Supervisory Authorities (ESAs) (that is, ESMA, EIOPA and the EBA).
  • Agreeing on a “phased process of implementation” to allow for the UK and the EU to prepare for the new arrangements that will apply following the UK’s departure from the EU. It is suggested that the phased process might relate to the future legal and regulatory framework for business. In any event, the UK government will take steps to mitigate the impact on economic and other functions, including passing legislation if necessary.

The UK government argues that factors such as the UK’s legal system, language and infrastructure will help to ensure that it remains a preeminent global financial center after the implementation of Brexit.

Further to the publishing of the white paper, the Financial Markets Law Committee published a letter on February 3, 2017, addressed to Andrew Tyrie, Treasury Select Committee chair, commenting on the UK’s financial services industry in the context of the UK’s withdrawal from the EU. The letter has been written in response to the Committee’s inquiry on the UK’s future economic relationship with the EU. The letter notes that post-Brexit, the UK will lose access to the European single market in financial services and will become a third country from the perspective of EU law. The letter notes that there are serious uncertainties as to the conditions that the UK and regulators will have to satisfy as a third country. As such, staged transitional arrangements negotiated well in advance of the UK’s withdrawal from the EU will be valuable in promoting legal certainty and minimizing disruption.

European Supervisory Authorities Launch Second Consultation on Draft Regulatory Technical Standards

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The European Supervisory Authorities (ESAs) have launched a second consultation on draft Regulation Technical Standards (RTS) outlining the framework of the European Market Infrastructure Regulation (EMIR). The document is the result of engagement with other authorities and industry stakeholders and focuses only on a narrow set of topics in order to clarify and finalize all the operation issues that may arise from the implementation of the EMIR framework. These draft RTSs prescribe the regulatory amount of initial and variation margin that counterparties should exchange, as well as the methodologies for their calculations, for over-the-counter derivative transactions not subject to central clearing. The RTSs also outline the criteria for eligible collateral, and establish the criteria to ensure that such collateral is sufficiently diversified and not subject to wrong-way risk. The consultation closes on July 10, 2015.  Release.

Joint Committee Report on Securitization

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On May 12, 2015, the Joint Committee of the three European Supervisory Authorities (ESAs) published a report detailing its findings and recommendations regarding the disclosure requirements and obligations relating to due diligence, supervisory reporting and retention rules in existing EU law on Structured Finance Instruments (SFIs). The ESAs comprise the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority.

The report states that its recommendations constitute the Joint Committee’s response to the European Commission’s recent consultation on securitization and should be considered in the light of further work on the transparency requirements for SFIs.

The report focuses on the interplay between investor due diligence requirements and the disclosure requirements that apply to issuers, originators and sponsors. It aims to establish whether investors are effectively protected and whether the supervision framework is appropriate to support the redevelopment of the EU securitization markets. It includes recommendations to:

  • harmonize due diligence requirements across the EU.
  • standardize investor reports and have them stored in a centralized, public space.
  • ensure investors receive loan-by-loan level data.
  • review the use of different definitions and key terms across EU legislative texts.
  • complement a harmonized due diligence and disclosure framework with a comprehensive regime for supervision and enforcement.