October 2023 Regulatory Roundup

INVESTMENT SERVICES & CAPITAL MARKETS

MIFID

ESMA to launch Common Supervisory Action on MiFID II sustainability requirements

On 3 October 2023, ESMA announced it will launch a Common Supervisory Action (CSA) with National Competent Authorities (NCAs) on the integration of sustainability in firms’ suitability assessment and product governance processes and procedures in 2024.

The goal of the CSA will be to assess the progress made by intermediaries in the application of the key sustainability requirements, which entered into application in 2022 following the amendments to the MIFID II Delegated Acts.

The CSA will cover the following aspects:

• How firms collect information on their clients’ “sustainability preferences”
• Which arrangements firms have put in place to understand and correctly categorise investment products with sustainability factors for the purpose of the suitability assessment
• How firms ensure the suitability of an investment with respect to sustainability (including the use of a “portfolio approach”)
• How firms specify any sustainability-related objectives a product is compatible with as part of the target market assessment of the investment product.

ESMA believes this initiative, and the related sharing of practices across NCAs, will help ensure consistent application of EU rules and enhance the protection of investors in line with ESMA’s objectives.

The CSA follows ESMA’s recent update of two sets of guidelines on suitability and product governance, both of which entered into application on 3 October 2023.

ESMA and the NCAs will carry out the CSA during 2024.

MiFIR

Public Register for the Trading Obligation for derivatives under MiFIR

On 4 September 2023, ESMA published its Public Register for the trading obligation of derivatives under MiFIR. In accordance with Article 34 of Regulation (EU) No 600/20141 (MiFIR), ESMA shall maintain a Public Register to inform market participants on the trading obligation for derivatives.

Pursuant to Commission Delegated Regulation (EU) 2017/2417 (“the Delegated Regulation no.1 on the trading obligation”), several classes of interest rate derivatives denominated in EUR as well as several classes of credit derivatives denominated in EUR are required to be traded on regulated markets (“RMs”), multilateral trading facilities (“MTFs”), organised trading facilities (“OTFs”) or third-country venues established in third-country in respect of which the European Commission has adopted an equivalence decision.

Commission Delegated Regulation (EU) 2022/7493 entered into force on 18 May 2022 and amended Delegated Regulation no.1 on the trading obligation in the context of the transition to risk-free rate benchmarks. Consequently, the classes of interest rate derivatives denominated in GBP and USD previously included in the trading obligation are no longer in scope.

Central Securities Depositary Regulation (CSDR)

ESMA consults on the potential impact of shortening the standard settlement cycle

On 5 October 2023, ESMA launched a Call for Evidence on the shortening of the settlement cycle.

The Call for Evidence will help ESMA to assess the costs and benefits of a possible reduction of the settlement cycle in the European Union (EU); and identify whether any regulatory action is needed to smoothen the impact for EU market participants of the planned shortening of the settlement cycle to T+1 in other jurisdictions, such as the US.

ESMA seeks input, including quantitative evidence, from all stakeholders involved in financial markets, and not only those in financial market infrastructures.

In particular, ESMA invites market infrastructures (CSDs, CCPs, trading venues), their members and participants, other investment firms, issuers, fund managers, retail and wholesale investors, and their representatives to provide detailed feedback on the questions put forward.

Stakeholders are invited to provide their input by 15 December 2023.  ESMA will consider the feedback it receives from this consultation in Q1 2024 and intends to submit to the European Commission and publish a final report in Q4 2024 at the latest.  ESMA may provide an earlier report to the European Commission identifying possible regulatory actions to address the impact for EU market participants of the US move to T+1.[/vc_column_text][/vc_column][/vc_row][/vc_section][vc_section css=”.vc_custom_1609007282200{margin-bottom: 20px !important;}”][vc_row css=”.vc_custom_1609007241176{padding-right: 15px !important;padding-left: 15px !important;}”][vc_column css=”.vc_custom_1612794217189{margin-bottom: 20px !important;padding-top: 3px !important;padding-right: 20px !important;padding-bottom: 3px !important;padding-left: 20px !important;background-color: #283a66 !important;}”][vc_column_text]

FUNDS

[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_single_image image=”9400″ img_size=”full”][vc_column_text]UCITS and AIFMD

European Parliament announces date it plans to consider the proposed AIFMD II

On 27 September 2023, the European Parliament updated its procedure file on the proposed Directive amending AIFMD and the UCITS Directive, also known as AIFMD II.

The update shows that the European Parliament plans to consider AIFMD II during its plenary session, which will be held on 5 February 2024.

PRIIPS

European Parliament publishes draft reports on proposed Directive on retail investment protection and Regulation amending PRIIPs

On 5 October 2023, Economic and Monetary Affairs Committee of the European Parliament (ECON) published draft reports on:

• the proposed Directive on retail investment protection; and
• the proposed Regulation amending the PRIIPs Regulation, as regards the modernisation of the key information document (KID).

The draft reports include the European Commission’s proposed texts with the Rapporteur’s proposed amendments.

As regards the Directive on retail investment protection, the Rapporteur highlights amendments including in relation to:

(a) inducements – the Rapporteur expresses strong views against a full ban on inducements. She remains concerned about the introduction of a partial ban on execution-only services which is not justified and does not seem to address issues of conflict of interest;

(b) best interest test – the Rapporteur clarifies and strengthens the European Commission’s proposal on the “best interest” test under MIFID and the IDD. In MIFID, she proposes to clarify the notion of “cost-efficiency”;

(c) value for money benchmarks – further discussions are needed to find the right and balanced approach. The Rapporteur deletes the benchmarks in the draft report, with a view to continuing discussions on this topic;

(d) supervision and cross-border practices – the Rapporteur introduces an obligation for companies to register in the same Member State where their head office is located, in order to avoid forum-shopping; and

(e) finfluencers – the Rapporteur proposes additional elements, including to impose firms to sign a contract with finfluencers in order to ensure transparency and determine responsibility.

In relation to PRIIPs, the Rapporteur sees the need to introduce further adjustments to market practices and certain adaptations to the insurance sector. The Rapporteur suggests deleting a new section in the KID titled “Product at a glance” and will continue to further assess the alignment of the new sustainability section with the relevant existing legislation.[/vc_column_text][/vc_column][/vc_row][/vc_section][vc_section css=”.vc_custom_1609007282200{margin-bottom: 20px !important;}”][vc_row css=”.vc_custom_1609007241176{padding-right: 15px !important;padding-left: 15px !important;}”][vc_column css=”.vc_custom_1612794217189{margin-bottom: 20px !important;padding-top: 3px !important;padding-right: 20px !important;padding-bottom: 3px !important;padding-left: 20px !important;background-color: #283a66 !important;}”][vc_column_text]

SUSTAINABLE FINANCE

[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Sustainable Finance Disclosure Directive

European Commission consults on sustainable finance disclosures

On 14 September 2023, the European Commission launched a targeted consultation and a public consultation to seek feedback on SFDR.

The SFDR, which has been in application since March 2021, sets out how financial intermediaries, such as asset managers, have to communicate sustainability information to investors. It is designed to bring more transparency to the market and enable investors to make informed choices.

The consultation will be accompanied by a series of workshops, kicking off on 10 October with an online event to be opened by Commissioner McGuinness.

The consultation will run until 15 December 2023.

Joint ESAs report on the extent of voluntary disclosure of principal adverse impacts under SFDR

On 28 September 2023, the Joint Committee of the three European Supervisory Authorities (EBA, EIOPA and ESMA – the ESAs) published their second annual Report on the extent of voluntary disclosure of principal adverse impacts under the Article 18 of the Sustainable Finance Disclosure Regulation (SFDR).

Similar to the approach adopted for 2022 Report, the ESAs launched a survey of National Competent Authorities to assess the current state of entity-level and product-level voluntary principal adverse impact (PAI) disclosures under the SFDR, and have developed a preliminary, indicative and non-exhaustive overview of good practices and areas that need improvement.

Highlights include:

• The results show an overall improvement compared to the previous year, although there is still significant variation in the extent of compliance with the requirements and in the quality of the disclosures both across financial market participants and jurisdictions.
• Disclosures appear easier to find on websites compared to the previous year.
• When financial market participants do not consider principal adverse impacts, they should better explain the reasons for not doing so.
• Even though they are encouraged to do so under the SFDR, financial market participants are generally not disclosing to what extent their investments align with the Paris Agreement.
• Voluntary disclosures of PAI consideration by financial products will be further analysed in future reports.

The 2023 Report also includes a set of recommendations for the European Commission to consider ahead of the next comprehensive assessment of the SFDR.

Greenwashing

ESMA finds increase in use of ESG-related language in the EU fund industry

On 2 October 2023, ESMA published an analysis exploring the use of language related to environmental, social and governance (ESG) factors in EU investment fund names and documentation.

Tackling greenwashing is one of the key priorities in ESMA’s Strategy on Sustainable Finance, and in this respect its assessment of how investment funds signal themselves (via their name or via their documents) is an important first step in the detection and monitoring of potential greenwashing.

In this study, ESMA shows that the share of EU UCITS investment funds with ESG words in their name has increased from less than 3% in 2013 to 14% in 2023. The analysis further highlights that fund managers tend to prefer using generic language (‘ESG’, ‘Sustainable’) rather than more specific words. This can make it more difficult for investors to verify that the fund portfolio is in line with the name.

To carry out this study ESMA has also used natural language processing techniques to examine the use of ESG-related language in more than 100,000 fund documents. As expected, funds with ESG words in their names, and as well as funds disclosing under Article 9 of the Sustainable Finance Disclosure Regulation (SFDR), tend to use relatively more ESG words in their documentation. However, the results also point to differences between the document types (regulatory document vs. marketing material), suggesting that fund managers adapt their communication based on the expected types of readers. 

This analysis contributes to ESMA’s on-going monitoring efforts in the area of greenwashing risks, in particular in the investment management sector, and supports on-going regulatory efforts regarding ESG disclosure requirements for investment funds.

ESMA is organising a public webinar on the analysis and its findings. During the webinar, authors of the analysis will have a presentation which will be followed by a Q&A session.  The webinar will be held online on Wednesday, 18 October 2023 from 10:30 to 11:30.  Registration is open till Monday, 16 October 2023 at 12:00 via the following link.

ESMA provides analysis on issuers’ potential benefits from an ESG pricing effect

On 6 October 2023, ESMA published an article on the European sustainable debt market, analysing the existence of an ESG pricing effect (‘the Greenium’) across different types of sustainable-labelled debt instruments.  

In the article, ESMA notes that it cannot confirm a systematic pricing benefit for any ESG-labelled debt type as of March 2023. However, issuers of ESG bonds did benefit from a statistically significant pricing in the past driven by their issuer-level ESG credentials.

The sustainable-labelled debt market

Issuance of sustainable-labelled debt has rapidly increased over the last years (+28% in one year in 1H23 and +663% since 1H18), and the variety of debt instruments with a sustainability aspect introduced to the market has increased.

Existing research suggests that sustainable-labelled debt issuers may benefit from a pricing advantage, often dubbed ‘the Greenium’, meaning that investors would accept lower yields in exchange for the sustainability profile of the bond or the issuer. The evidence is however not conclusive and largely focuses on green bonds only.

This article therefore analyses the existence of an ESG pricing effect for various types of ESG-debt instruments, beyond only green bonds, and further investigates if issuer-level ESG credentials can serve as an explanatory variable to explain the phenomenon. ESMA’s analysis also includes an overview of the current state of play of the European sustainable debt market and provides details about how ESG characteristics have in the past and present impacted bond pricing differences. The assessment was conducted for a total dataset of 8,696 bonds from issuers domiciled in the EEA, with a combined outstanding face value of EUR 3.7tn.

As the sustainable debt market continues to evolve steadily and considering that this analysis looks at a specific sample of outstanding bonds, these results should not be interpreted as a general rejection regarding the possibility of pricing advantages related to sustainable debt instruments. ESMA will continue to monitor these and related market developments in the future.

This topic is of relevance to ESMA in terms of both its financial stability and investor protection mandate, since significant price distortions can trigger increased levels of volatility and rapid reductions in asset prices. Additionally, if issuers benefit from a pricing advantage based on a sustainability character, which proves to be inaccurate, investors may feel mislead, which can subsequently hamper investor trust.

This analysis focuses on the financial stability angle and informs ESMA’s regulatory and supervisory work by assessing potential pricing distortions in the ESG debt market and thus investigating if the greenium phenomenon can trigger financial stability concerns. By doing this, ESMA aim to identify the potential for financial stability concerns at an early stage and to contribute to the ESMA strategic priority of monitoring key market developments in the area of sustainable finance.

ESMA is organising a public webinar on the article and its findings. During the webinar, authors of the article will have a presentation which will be followed by a Q&A session. The webinar will also include the presentation on the TRV Article: ESG names and claims in the EU fund industry – please see above.

The webinar will be held online on Wednesday, 18 October 2023 from 10:30 to 11:30  Registration is open till Monday, 16 October 2023 at 12:00 via this link.[/vc_column_text][/vc_column][/vc_row][/vc_section][vc_section css=”.vc_custom_1609007282200{margin-bottom: 20px !important;}”][vc_row css=”.vc_custom_1609007241176{padding-right: 15px !important;padding-left: 15px !important;}”][vc_column css=”.vc_custom_1612794217189{margin-bottom: 20px !important;padding-top: 3px !important;padding-right: 20px !important;padding-bottom: 3px !important;padding-left: 20px !important;background-color: #283a66 !important;}”][vc_column_text]

ESMA

[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]ESMA

ESMA Work Programme 2024: focus on digital change and the green transition

On 28 September 2023, ESMA published its work programme for 2024.

In 2024, ESMA will:

• develop rules for sustainable finance as part of the new European Green Bond Regulation
• deliver its final report on greenwashing, proposing actions to combat this practice
• finalise technical standards for the European Single Access Point (ESAP)
• in the digital finance area, conclude the work on technical standards and guidelines in relation to the MiCA regulation and the Digital Operational Resilience Act (DORA).
• work to enhance financial stability and investor protection also through tasks mandated in the asset management area under the recently concluded reviews of the Alternative Investment Fund Managers (AIFMD), Undertakings for Collective Investment in Transferable Securities (UCITS) Directives, and the Central Securities Depositories Regulation (CSDR); the ongoing reviews of the European Market Infrastructure Regulation (EMIR) as well as the new Listing Act may also lead to new mandates for ESMA in 2024.
• assist in the finalisation (and possibly start of implementation) of the new Retail Investment Strategy,
• assess whether the NCAs have sufficiently improved their supervision of investment firms’ cross-border activities.
• to enhance investor understanding, engage with retail investors through coordinated communication with National Competent Authorities (NCAs), complementing and amplifying their actions and messages.
• continue to adapt its supervisory efforts to be ready for the entry into application of DORA in 2025
• begin the process of selecting and authorising Consolidated Tape Providers (CTPs) in the EU

As effective use of data and Information and Communication Technologies is a key part of ESMA’s strategy for 2023-2028, ESMA will work on further improving data quality outputs for all supervisory data and enhance the ability to share and analyse this data, in close cooperation with NCAs and other EU authorities.[/vc_column_text][/vc_column][/vc_row][/vc_section][vc_section css=”.vc_custom_1609007282200{margin-bottom: 20px !important;}”][vc_row css=”.vc_custom_1609007241176{padding-right: 15px !important;padding-left: 15px !important;}”][vc_column css=”.vc_custom_1612794217189{margin-bottom: 20px !important;padding-top: 3px !important;padding-right: 20px !important;padding-bottom: 3px !important;padding-left: 20px !important;background-color: #283a66 !important;}”][vc_column_text]

EUROPEAN BANKING AUTHORITY

[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]EUROPEAN BANKING AUTHORITY

EBA publishes its work programme for 2024

On 3 October 2023, the European Banking Authority (EBA) published its annual work programme for 2024, setting out the key strategic areas for the Authority to work on in the coming year, as well as related activities and tasks.

In 2024, the EBA will need to address a large number of mandates in a wide range of areas, building on the priorities defined in its programming document for the period 2024-2026. The focus will be on:

1. implementing the EU banking package (Capital Requirements Regulation – CRR III / Capital Requirements Directive – CRD VI),
2. monitoring financial stability and sustainability against a backdrop of increased interest rates and uncertainty,
3. providing a data infrastructure at the service of stakeholders,
4. developing oversight and supervisory capacity for the Digital Operational Resilience Act (DORA) and the Markets in Crypto Assets Regulation (MICAR), and
5. increasing attention on innovation and consumers (including access to financial services) while preparing the transition to the new anti-money laundering and countering the financing of terrorism (AML/CFT) framework.

[/vc_column_text][/vc_column][/vc_row][/vc_section][vc_section css=”.vc_custom_1609007282200{margin-bottom: 20px !important;}”][vc_row css=”.vc_custom_1609007241176{padding-right: 15px !important;padding-left: 15px !important;}”][vc_column css=”.vc_custom_1612794217189{margin-bottom: 20px !important;padding-top: 3px !important;padding-right: 20px !important;padding-bottom: 3px !important;padding-left: 20px !important;background-color: #283a66 !important;}”][vc_column_text]

Digital Operational Resilience Act (DORA)

[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]ESAs specify criticality criteria and oversight fees for critical ICT third-party providers under DORA

On 29 September 2023, the European Supervisory Authorities (EBA, EIOPA and ESMA – the ESAs) published their joint response to the European Commission’s Call for Advice on two EC delegated acts under the Digital Operational Resilience Act (DORA) specifying further criteria for critical ICT third-party service providers (CTPPs) and determining oversight fees levied on such providers.

In relation to the criticality criteria, the ESAs propose 11 quantitative and qualitative indicators along with the necessary information to build up and interpret such indicators following a two-step approach. The ESAs also put forward minimum relevance thresholds for quantitative indicators, where possible and applicable, to be used as starting points in the assessment process to designate critical third-party providers. This joint response does not include any details of the designation procedure nor of the related methodology as these are out of the scope of this Call for Advice. However, the ESAs plan to define these details no later than six months after the adoption of the delegated act by the Commission.

Regarding the oversight fees, the ESAs make proposals for determining the amount of the fees to be levied on CTPPs and the way in which they are to be paid. The ESAs’ proposals cover the types of estimated expenditures (for both the ESAs and the competent authorities) that shall be covered by oversight fees as well as the basis for the expenditures’ calculation and the available information for determining the applicable turnover of the CTPPs (the basis of fee calculation) and the method of fee calculation together with other practical issues regarding the collection of fees. In addition, the advice proposes a financial contribution for voluntary opt-in requests. The ESAs will specify other practical aspects on the estimation of oversight expenditures and operational aspects in the context of the implementation of the oversight framework.

Legal basis

Regulation (EU) 2022/2554 of the European Parliament and of the Council of 14 December 2022 on digital operational resilience for the financial sector and amending Regulations (EC) No 1060/2009, (EU) No 648/2012, (EU) No 600/2014, (EU) No 909/2014 and (EU) 2016/1011 form the legal basis for the ESAs’ response.

Background

In December 2022, the Commission issued to the ESAs a Call for Advice (CfA) in relation to two delegated acts under DORA to 1) specify further criteria for critical ICT third-party service providers and 2) determine the fees levied on such providers.

To inform the responses, the ESAs held a public consultation (May-June 2023). In light of the 41 responses received from various stakeholders, the ESAs have amended the draft advice on the criticality criteria to increase the role of critical or important functions in the assessment and further streamlined the proposed set of indicators. Regarding the oversight fees, the ESAs have, among others, adapted their advice by proposing to define the scope of the applicable turnover on a narrower basis. Overall, market participants expressed support to the proposals related to the other aspects of the advice, while requesting clarifications on some other points.[/vc_column_text][/vc_column][/vc_row][/vc_section][vc_section css=”.vc_custom_1609007282200{margin-bottom: 20px !important;}”][vc_row css=”.vc_custom_1609007241176{padding-right: 15px !important;padding-left: 15px !important;}”][vc_column css=”.vc_custom_1612794217189{margin-bottom: 20px !important;padding-top: 3px !important;padding-right: 20px !important;padding-bottom: 3px !important;padding-left: 20px !important;background-color: #283a66 !important;}”][vc_column_text]

CySEC DEVELOPMENTS

[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_single_image image=”8217″ img_size=”full” alignment=”center”][vc_column_text]Circular C596: Russian Federation Federal Laws No. 319-FZ and No. 519-FZ regarding the transfer of Russian securities to Russia (‘Forced Transfers’)

On 11 of September 2023, CySEC issued Circular C596 (the ‘Circular’) to inform the Regulated Entities on the matter of ‘Forced Transfers’ as described below.

According to the Russian Federation Federal Law No. 319-FZ (the ‘Law 319-FZ’), owners of Russian issuers’ securities, or persons for whose benefit the securities are held, including local shares, bonds and Eurobonds, which were blocked for transfers by non-Russian custodians due to European Union Council’s Decisions and Regulations (EU Restrictive Measures) and/or other international sanctions, could transfer their rights in such securities from an account held with a non-Russian custodian opened with the Russian National Settlement Depository (the ‘NSD’) to an account opened with a Russian custodian (the ‘Forced Transfers’). Furthermore, Federal Law No. 519-FZ was published which introduced changes to Law 319- FZ, by including additional eligible cases for transfers of Russian securities out of foreign custody services providers.

Following the enactment of the Law 319-FZ, under these ‘Forced Transfers’ requests and according to CySEC’s understanding, the owners of Russian issuers’ securities were able to submit a set of identification and security-holding confirmation documents to the NSD or to Russian investment firms which maintained an account for the Russian issuers’ securities with the non-Russian custodian (e.g. Euroclear, Clearstream or any CIF). Upon successful application, the holders of Russian issuers’ securities could effectively transfer the custody of such securities to Russia.

In light of the above, CySEC requests the Regulated Entities with customers that proceeded with ‘Forced Transfers’ to fill-in the requested information included in the Excel file attached to the Circular and inform CySEC by Monday, 25 September 2023, at the latest, using the email address eu.sanctions@cysec.gov.cy.

Circular C600: Joint EBA and ESMA Guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) under Directive (EU) 2019/2034 (EBA/GL/2022/09, ESMA35-36- 2621)

On 27 of September 2023, CySEC issued Circular C600 (the ‘Circular), which wishes to bring the attention of the Cyprus Investment Firms (the ‘CIFs’) the Joint EBA and ESMA Guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) under Directive (EU) 2019/2034 (the ‘Guidelines’) published on 20 July 2022. 

CySEC has adopted the Guidelines, under Section 29 of the Prudential Supervision of Investment Firms Law of 2021, which transposes Article 36 of the Directive (EU) 2019/2034 (the “IFD”).

The Guidelines specify the common procedures and methodologies for the functioning of the supervisory review and evaluation process (SREP) referred to in Articles 36 and 45 of IFD and processes and actions taken with reference to Articles 39, 40, 41 and 42 of IFD.

The Guidelines apply in relation to the supervisory review and evaluation process (SREP) of the investment firms as defined in Articles 36 to 45 of the IFD.

The Guidelines apply from 19 June 2023 and are applicable to the SREP exercises initiated in 2023.[/vc_column_text][/vc_column][/vc_row][/vc_section]