August 2024 Regulatory Roundup

INVESTMENT SERVICES & CAPITAL MARKETS

MIFID and MIFIR

MIFIR review: ESMA launches new consultations

On 10 July 2024, ESMA  published a new package of public consultations with the objective of increasing transparency and system resilience in financial markets, reducing reporting burden and promoting convergence in the supervisory approach. 

This package includes: 

1. Amendments to rules on the liquidity assessment for equity instruments, on equity transparency and on the volume cap. 
2. A draft of the new Implementing Technical Standard (ITS) on systematic internalisers (SIs).  
3. A section on the equity Consolidated Tape Provider (CTP) in relation to the input/output data, to ensure full alignment between the transparency requirements and the CTP specifications.  
4. A section on flags to be used in the post-trade transparency reports for non-equity instruments which was missing in the previous consultation.  
5. New rules specifying organisational requirements of trading venues, adding new provisions on circuit breakers and with targeted amendments to adapt to the DORA framework. 

Once these standards are approved, they will facilitate the implementation of the Consolidated Tape Provider (CTP) in the European Union as well as contribute to a more informative pre-trade and post-trade transparency regime. The new rules also aim to foster efficiency and competitiveness in European financial markets, thanks to streamlined reporting requirements.  

ESMA will consider all comments received by:   

• 30 September 2024 for the technical advice (Section 3), RTS 1 (Section 4), the RTS on input/output data for shares and ETFs CTP (Section 8) and the flags under RTS 2.
• 15 October 2024 for the SI ITS (Section 5), RTS 3 (Section 6) and RTS 7 (Section 7).

ESMA will prepare a final report and intends to submit to the European Commission the technical advice and the draft technical standards for RTS 1, the whole input/output data RTS and RTS 2 (including the flags) in December 2024, and the remaining mandates in March 2025. Further information on the MIFID II /MIFIR review and the upcoming consultation process can be found on the dedicated webpage.

ESMA Public hearing on shortening the settlement cycle

On 10 July 2024, Verena Ross Chair of ESMA made introductory remarks at the Public Hearing on shortening the settlement cycle to T+1.

Verena Ross’ remarks include:

• shortening the settlement cycle represents a significant change to the way in which markets operate today and this applies at all levels of the value chain: from CSDs, to investors going through CCPs, trading venues and intermediaries. All actors along the trading and post-trading chain will have to adapt in order to meet tighter deadlines not only in relation to trading but also for other more complex activities, such as securities lending, repos and FX trading
• shorter settlement cycles mean less time available to carry out all the necessary post-trade processes. The compression of the settlement cycle will imply a reduction of the risk in the system, which should translate into lower margin requirements
• some jurisdictions have already moved to T+1 and our strong interconnections with some of them, in particular the US, means that many EU stakeholders now have to deal with misaligned settlement cycles. This brings complexity, costs, and risks. We have seen some of these consequences for the asset management industry, in particular for ETFs invested in securities in jurisdictions with a different settlement cycle and also for issuers who look for funding in the EU and in the US and face the complexities of misaligned settlement cycles for their corporate events.
• increased efficiency in the way we operate, with lower risks, lower margin requirements as well as international realignment should overall contribute to the competitiveness of EU markets.
• the process to get to T+1 in the EU will be complex. It will likely require changes in CSDR, in existing Level 2 regulations and potentially further regulatory guidance. It will also require the industry to work together to find solutions to some of the identified challenges and put them into practice through market standards. Such a project, in an environment such as the EU financial markets, with multiple market infrastructures, currencies, and a broad range of market participants, calls for a robust governance allowing us to make progress together towards the common goal of more efficient markets.
• as from when we move towards shorter settlement cycles we will have to look at our neighbours in continental Europe. Our markets are strongly interlinked and a misalignment in the settlement cycle between the UK, the EU and Switzerland could be damaging ((the UK have announced that they will move by the end of 2027)

ESMA will submit its report on T+1 to the European Parliament and the Council at the latest by mid-January 2025, as required by CSDR Refit.

ESMA publishes 2023 data on cross-border investment activity of firms

On 15 July 2024, ESMA together with the National Competent Authorities (NCAs), completed an analysis of the cross-border provision of investment services during 2023.

The data sets were collected from investment firms across 30 jurisdictions in the EU/EEA. 

The main findings include:

• A total of around 386 firms provided services to retail clients on a cross-border basis in 2023;
• Approximately 8 million clients in the EU/EEA received investment services from firms located in other EU/EEA Member States in 2023;
• Compared to 2022, the cross-border market for investment services grew by 1.6% in terms of firm numbers, and by 5% in terms of retail clients, while the number of complaints increased by 31%;
• Cyprus is the primary location for firms providing cross-border investment services in the EU/EEA, accounting for 20% of the total firms passporting investment services. Luxembourg and Germany follow with 15% and 14% of all firms, respectively; and
• Germany, France, Spain, and Italy are the most significant destinations (in terms of number of retail clients) for investment firms providing cross-border services in other Member States.

The insights gained from the analysis will allow ESMA and the NCAs to better understand and monitor cross-border investment services provided by firms in the EU/EEA.

ESMA will perform the next data collection in 2025.

ESMA consults on firms’ order execution policies under MIFID II

On 16 July 2024, ESMA launched a consultation on draft technical standards specifying the criteria for how investment firms establish and assess the effectiveness of their order execution policies.

The objective of the proposed technical standards is to foster investor protection by enhancing investment firms’ order execution. 

ESMA is seeking stakeholder input on:  

• the establishment of an investment firm’s order execution policy. This includes the classification of financial instruments in which firms execute client orders and the initial selection of venues for the order execution policy;
• the investment firm’s procedures to monitor and regularly assess the effectiveness of its order execution arrangements and order execution policy;
• the investment firm’s execution of client orders through own account dealing; and
• on how an investment firm should deal with client instructions.

ESMA will consider all comments received by 16 October 2024.  Based on the input received, ESMA will prepare the final report for subsequent submission of the final draft technical standards to the European Commission.

ESMA statement on the transition to the new regime for post-trade transparency of OTC-transactions

On 22 July 2024, ESMA issued a public statement  in relation to the transition to the new regime for publication of OTC-transactions for post-trade transparency purposes (hereafter “DPE regime”) as introduced by the MIFIR review.

The MIFIR review introduced provisions empowering National Competent Authorities (NCAs) to grant the status of Designated Publishing Entity (DPE) to investment firms. According to Article 21a of MIFIR, DPEs, when they are party to a transaction, shall be responsible for making the transaction public through an approved publication arrangement (APA). The Regulation requires ESMA to establish by 29 September 2024 a public register of all DPEs, specifying their identity and the classes of financial instruments for which they act as DPEs.

The MIFIR review does not provide for a transitional provision for the application of the DPE regime for post-trade transparency. Considering the need to ensure an orderly transition to the DPE regime, ESMA and NCAs have agreed on a two-steps approach:

1. first, DPE register go-live: ESMA starts publishing the DPE register on 29 September 2024; and
2. second, DPE regime start: the new DPE regime for post-trade transparency becomes fully operational on 3 February 2025.

Therefore, ESMA expects that as of 3 February 2025, registered DPEs, which are party to a transaction, will make the transaction public through an APA. At the same time, ESMA expects that the current approach relying on Systematic Internalisers (SIs) to make transactions public through an APA should stop applying as of this date.

Investment firms intending to become DPEs are encouraged to register with their NCA, indicating the classes of financial instruments for which they wish to take up this function. NCAs will transmit the information regarding the DPEs for specific classes of financial instruments to ESMA so that the information is included in the future DPE public register. The granting of the DPE status can start anytime from now on.

As per the MIFIR legal requirements, ESMA will publish at the end of September 2024 the list of DPEs based on the information received by that time from NCAs. The register will be updated regularly.

ESMA publishes data for quarterly bond liquidity assessment and the systematic internaliser calculations

On 1 August 2024, ESMA published the new quarterly liquidity assessment of bonds and the data for the quarterly systematic internaliser calculations for equity, equity-like instruments, bonds and for other non-equity instruments under MIFID II and MIFIR.

Bonds quarterly liquidity assessment 

ESMA published the latest quarterly liquidity assessment for bonds available for trading on EU trading venues. For this period, there are currently 1,355 liquid bonds subject to MiFID II transparency requirements. 

Data for the systematic internaliser quarterly calculations

The data covers the total number of trades and total volume over the period 1 January 2024 to 30 June 2024 and includes:

• 25,177 equity and equity-like instruments;
• 144,441 bonds; and
• 6,270 sub-classes of derivatives (including equity derivatives, interest rate derivatives, commodity derivatives, emission allowance).

Investment firms are required to perform the SI test by 15 August 2024. 

Market Abuse

ESMA report on Suspicious Transaction and Order Reports

On 17 July 2024, ESMA published a report on the use of Suspicious Transactions and Order Reports (STORs) under Market Abuse Regulation.

Suspicious Transactions and Order Reports (STOR) are a key information tool in market abuse investigations. This report, similar to the one published in July 2023, aims at providing the market with a clear overview over the use of STORs in different jurisdictions across the EU and how this has evolved over time.

The report focuses mainly on 2023. In this context, ESMA notes that the figures are rather consistent, and no major changes can be detected when compared with the previous years. The number of notifications received from NCAs has only slightly increased and other indicators such as the type of reporting entities, the type of instrument as well as the types of violation despite some minor discrepancies, point towards very similar results.

As highlighted also in the context of the last report, it is worth noting that when comparing figures from the last few years with those of years before 2019, the Brexit effect cannot be disregarded given the magnitude of STORs received by the UK FCA until 2018. To that effect, ESMA included, where possible, also statistics both with and without the UK in order to provide a comprehensive view.

Central Securities Depositories Regulation (CSDR)

CSDR Refit: ESMA consults on rules to recalibrate and further clarify the framework

On 9 July 2024, ESMA launched new consultations on different aspects of the Central Securities Depositories Regulation (CSDR) Refit.

The proposed rules relate to the information to be provided by European CSDs to their national competent authorities (NCAs) for the review and evaluation, the information to be notified to ESMA by third-country CSDs, and the scope of settlement discipline.

The draft rules are set out in three separate consultation papers, covering:

• The review and evaluation process of EU CSDs, suggesting a harmonisation of the information to be shared by CSDs on their cross-border activities and the risks to be considered by the relevant authorities for the purpose of feeding the overall assessment of the competent authorities;  
• Third country CSDs, where ESMA is proposing to streamline the information to be notified, aiming for an accurate understanding of the provision of notary, central maintenance and settlement services in the Union, limiting the reporting burden; and
• The scope of settlement discipline, covering ESMA’s proposals on the underlying cause of settlement fails that are considered as not attributable to the participants in the transaction, and the circumstances in which operations are not considered as trading.

The CSDR Refit aims to fine-tune and further clarify the CSDR framework. All the policy mandates under consultation today will contribute towards the effective recalibration of the CSDR regime.

ESMA invites EU CSDs, third-country CSDs, CSD participants, as well as any stakeholders that may be impacted by the CSDR settlement discipline to respond to these three consultation papers by 9 September 2024.

Following the consultation, the responses will be assessed to finalise the respective proposals, before submission to the European Commission in Q1 2025. Other consultations about other aspects of CSRD will follow in the coming months.

Artificial Intelligence

FSB speech on how AI may shape the economy and the financial system

On 11 July 2024, Financial Stability Board’s (FSB) chair Klaas Knot gave a speech (published on 16 July) on how Artificial Intelligence (AI) may shape the economy and the financial system.

Mr Knot stated that regulators and policymakers should maintain a healthy balance between harnessing the benefits of innovation while mitigating the risks. When it comes to innovation, the Americans have traditionally been focused on the opportunities, with a regulatory environment that’s more flexible and conducive to business innovation. Europeans tend to focus on the risks and call for regulation. But falling behind in adopting new innovations is a significant risk too, as all parts of the world should benefit from the productivity potential of AI.  So, Mr Knot calls for a slightly more American attitude to things and warn against stifling AI-driven innovation.

This year, the FSB are updating an FSB paper on the financial stability implications of artificial intelligence, originally published in 2017. While it’s too early to say with certainty what our conclusions will be, the emerging consensus is that the risks identified in the earlier report are still there. The most important ones are concentration risk, third-party risks, possible increases in herding behaviour, and model risk, including challenges with regard to explainability. Many of the potential risks of AI may seem new, but when you look beneath the surface, they are strikingly similar to traditional financial risks. Risks that we are familiar with. However, he warns of potential new forms of interconnectedness in the financial system that may emerge.[/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]

MARKETS IN CRYPTO-ASSETS REGULATION (MiCA)

[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]ESAs consult on Guidelines under the Markets in Crypto-Assets Regulation

On 12 July 2024, the three European Supervisory Authorities (EBA, EIOPA and ESMA – the ESAs) published a consultation paper on Guidelines under Markets in Crypto-assets Regulation (MiCA), establishing templates for explanations and legal opinions regarding the classification of crypto-assets along with a standardised test to foster a common approach to classification.

To support market participants and supervisors in adopting a convergent approach to the classification of crypto-assets, the Guidelines propose a standardised test, as well as templates for explanations and legal opinions that provide descriptions of the regulatory classification of crypto-assets in the following cases:

• Asset-referenced tokens (ARTs): The white paper for the issuance of ARTs, which contains comprehensive information about the crypto asset, must be accompanied by a legal opinion that explains the classification of the crypto asset – in particular, the fact it is not an EMT nor a crypto-asset that could be considered excluded from the scope of MiCA.
• Crypto-assets that are not ARTs or EMTs under MiCA: The white paper for the crypto-asset must be accompanied by an explanation of the classification of the crypto asset – in particular, the fact it is not an EMT, ART or crypto-asset excluded from the scope of MiCA.

Comments to the consultation paper can be sent by clicking on the “send your comments” button on the consultation page. The deadline for the submission of comments is 12 October 2024.

The ESAs will hold a virtual public hearing on the consultation paper on Monday, 23 September 2024 from 10:00 to 12:00 CEST and invite interested stakeholders to register using this link by 19 September 2024 at 16:00 CEST. The dial-in details will be communicated in due course to those who have registered for the meeting.

All contributions received will be published following the end of the consultation, unless requested otherwise.

MiCA establishes regimes for regulating the issuance, offering to the public, and admission to trading of electronic money tokens (EMTs), asset-referenced tokens (ARTs), and other crypto-assets. The Regulation also establishes a framework for crypto-asset service provision and a joint mandate for the ESAs to develop the guidelines for application. These draft Guidelines are the only joint-ESA policy mandate under MiCA.

ESMA delivers opinion on global crypto firms using their non-EU execution venues

On 31 July 2024, the European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor authority, issued an Opinion to address the risks presented by global crypto firms seeking authorisation under the Markets in Crypto Assets (MiCA) Regulation for part of their activities (crypto brokerage) while keeping a substantial part of their group activities (intra-group execution venues) outside the European Union (EU) regulatory scope.

ESMA recognises risks associated with global crypto firms’ complex structures where execution venues fall outside of the scope of MiCA. Such structures may include the involvement of an EU-authorised broker effectively routing orders to an intra-group execution venue based outside the EU, potentially leading to diminished consumer protection and to an unlevel playing field with EU-authorised execution venues.

Considering these risks ESMA recommends National Competent Authorities (NCAs) to be vigilant during the authorisation process and to assess business structures of global firms to ensure that they do not bypass obligations established in MiCA, to protect consumers and ensure transparent and orderly functioning of crypto markets.

The Opinion calls for a case-by-case assessment, outlining the specific requirements that should be met regarding best execution, conflicts of interest, the obligation to act honestly, fairly and professionally in the best interests of clients and the obligation relating to the custody and administration of crypto-assets on behalf of clients.

Crypto-asset execution venues play an important role in the functioning of the crypto-asset ecosystem and MiCA sets out comprehensive rules regarding the functioning of trading platforms for crypto-assets. This Opinion is part of broader efforts by ESMA and NCAs to ensure effective application of MiCA and convergent supervisory practices throughout the EU.[/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]

OPERATIONAL RESILIENCE

[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]DORA

ESAs finalise second set of technical standards and guidelines under DORA

On 17 July 2024, the three European Supervisory Authorities (EBA, EIOPA and ESMA – the ESAs) published the second batch of policy products under the Digital Operational Resilience Act (DORA).

This batch consists of four final draft regulatory technical standards (RTS), one set of Implementing Technical Standards (ITS) and 2 guidelines, all of which aim at enhancing the digital operational resilience of the EU’s financial sector.

The package focuses on the reporting framework for ICT-related incidents (reporting clarity, templates) and threat-led penetration testing while also introducing some requirements on the design of the oversight framework, which enhance the digital operational resilience of the EU financial sector, thus also ensuring continuous and uninterrupted provision of financial services to customers and safety of their data.

The ESAs are publishing the following final draft technical standards:

• RTS and ITS on the content, format, templates and timelines for reporting major ICT-related incidents and significant cyber threats;  
• RTS on the harmonisation of conditions enabling the conduct of the oversight activities;
• RTS specifying the criteria for determining the composition of the joint examination team (JET); and
• RTS on threat-led penetration testing (TLPT).

The set of guidelines include:

• Guidelines on the estimation of aggregated costs/losses caused by major ICT-related incidents; and
• Guidelines on oversight cooperation.

The guidelines have already been adopted by the Boards of Supervisors of the three ESAs. The final draft technical standards have been submitted to the European Commission, which will now start working on their review with the objective to adopt these policy products in the coming months. The remaining RTS on Subcontracting will be published in due course (please see item below 25 July 2024).

ESAs establish framework to strengthen coordination in case of systemic cyber incidents

On 17 July 2024, the three European Supervisory Authorities (EBA, EIOPA and ESMA – the ESAs) established the EU systemic cyber incident coordination framework (EU-SCICF – one page explainer), in the context of the Digital Operational Resilience Act (DORA), that will facilitate an effective financial sector response to a cyber incident that poses a risk to financial stability, by strengthening the coordination among financial authorities and other relevant bodies in the European Union, as well as with key actors at international level.

The background is that after identifying a shortfall in crisis management frameworks that could lead to a lack of financial sector coordination in the event of a significant cross-border information and communication technologies (ICT) incident, the European Systemic Risk Board (ESRB) recommended the ESAs to build on the role foreseen in the Digital Operational Resilience Act (DORA), and to gradually develop a pan-European systemic cyber incident coordination framework.

Over the coming months, the ESAs will kickstart the implementation of the framework by setting up:

• the EU-SCICF Secretariat, supporting the functioning of the framework;
• the EU-SCICF Forum, working on testing and maturing the functioning;
• the EU-SCICF Crisis Coordination, facilitating during a crisis the coordination of actions by the participating authorities.

The ESAs will identify legal and other operational hurdles encountered during the initial set up and report these to the European Commission. The further development of the framework will be subject to the availability of resources and other measures taken by the European Commission.

ESAs final report on draft RTS on subcontracting ICT services supporting critical or important functions under DORA

On 26 July 2024, the ESAs published a final report on draft RTS to specify the elements that a financial entity needs to determine and assess when subcontracting information and communication technology (ICT) services supporting critical or important functions as mandated by Article 30(5) of DORA.

The draft RTS set out requirements when the use of subcontracted ICT services supporting critical or important functions or material parts thereof by ICT third-party service providers is permitted by financial entities and set out the conditions applying to such subcontracting. In particular, the draft RTS require financial entities to assess the risks associated with subcontracting during the precontractual phase, which includes the due diligence process.

The draft RTS also set out requirements regarding the implementation, monitoring, and management of contractual arrangements regarding the subcontracting conditions for the use of ICT services supporting critical or important functions or material parts thereof ensuring that financial entities are able to monitor the entire ICT subcontracting chain of ICT services supporting critical or important functions.

The ESAs will now submit the draft RTS to the European Commission for adoption.[/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]AIFMD and UCITS

ESMA consults on Liquidity Management Tools for funds

On 8 July 2024, ESMA launched two consultations seeking input on i) draft guidelines and ii) on technical standards under the revised Alternative Investment Fund Managers Directive (AIFMD) and the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive.

Both Directives aim to mitigate potential financial stability risks and promote harmonisation of liquidity risk management in the investment funds sector. 

In the draft Regulatory Technical Standards (RTS) on the characteristics of Liquidity Management Tools (LMTs) ESMA defines the constituting elements of each LMT, such as calculation methodologies and activation mechanisms. ESMA also publishes draft Guidelines on LMTs of UCITS and open-ended AIFs, providing guidance on how managers should select and calibrate LMTs, in light of their investment strategy, their liquidity profile and the redemption policy of the fund.

These draft RTS and guidelines are designed to promote convergent application of the Directives for both UCITS and open-ended AIFs and make EU fund managers better equipped to manage the liquidity of their funds, in preparation for market stress situations. Additionally, they intend to clarify the functioning of specific LMTs, such as the use of side pockets, a practice that currently varies significantly across the EU.

The publication of the two consultations is a key step in the implementation of the new AIFMD and UCITS Directive.

ESMA welcomes responses to the consultations by 8 October 2024. Following this, ESMA will deliver the final RTS and guidelines by 16 April 2025. 

ESMA publishes new Q&As for AIFMD and UCITS

On 12 July 2024, ESMA published updated Q&As:

• On Alternative Investment Fund Managers Directive (AIFMD)
  • Initial capital and additional own funds(2227)
  • Notification upon establishment of a branch(711)

• Undertakings for Collective Investment in Transferable Securities Directive (UCITS)
  • Derogation for newly authorized UCITS(601)

PRIIPS

Table of Member State language and ex ante notification requirements for the PRIIPs KID

On 23 July 2024, the Joint Committee of the European Supervisory Authorities (the ESAs) published a document, summarising the language and ex-ante notification requirements for the Key Information Document (KID) for Packaged Retail and Insurance-based Investment Products (PRIIPs) in different Member States and EEA countries in a table.[/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

Network for Greening the Financial System (NGFS) publishes two complementary reports on nature-related risks

On 2 July 2024, the Network for Greening the Financial System (NGFS) has published today two complementary reports on nature-related risks.

The first report is the final version of the Conceptual Framework for nature-related financial risks, which aims to guide policies and action by central banks and financial supervisors. The report includes two illustrative cases, which demonstrate how this framework can be applied in practice.

The second report outlines the key emerging trends related to nature-related litigation, including cases concerning biodiversity loss, deforestation, ocean degradation, carbon sinks and plastic pollution, and explores the potential relevance for central banks, supervisors and the financial system.

The two reports are complementary: the Conceptual Framework outlines the broad framework for nature-related risks, the second report aims to raise awareness more specifically about nature-related litigation risk.  

Conceptual Framework for nature-related financial risks

The NGFS published the beta version of the Conceptual Framework on nature-related financial risks in September 2023. The overall design and structure of the final Conceptual Framework remain unchanged compared to the beta version. Minor revisions mainly focus on factual updates and alignments with other similar frameworks that have come to the fore since the publication of the beta version.  The report is further supplemented with two illustrative cases about forest and freshwater ecosystems. These cases show how the framework can be operationalised and utilised by central banks and financial supervisors.Nature-related litigation: emerging trends and lessons learned from climate-related litigation

In September 2023, the NGFS published two reports on climate-related litigation, noting that governments and civil society may increasingly turn their attention beyond greenhouse gas (GHG) emissions to the importance of nature. 

In view of these developments, the NGFS has prepared the following report, to highlight emerging trends in the field of nature-related litigation. The report argues that nature-related legal actions will likely evolve and grow, taking inspiration from successful climate-related litigation cases, and benefiting from an increasing awareness of the nature crisis.

The NGFS encourages central banks, supervisors and financial institutions to closely monitor developments in nature-related litigation. Climate- and nature-related litigation might increase pressure on the financial system through compounding legal ‘points of entry’.

NGFS publishes an information note on “Improving Greenhouse Gas Emissions Data”

On 16 July 2024,  the Network for Greening the Financial System (NGFS) published an information note on improving greenhouse gas emissions data. 

Financial institutions need high-quality climate data if they are to integrate climate considerations into their operations and risk management practices. Data is also an essential enabler of the transition to a low-carbon and sustainable economy. Previous NGFS work (Final report on bridging data gaps) identified significant gaps in the availability, quality, and comparability of climate-related data. The NGFS Expert Network on Data (EN Data) aims to address those gaps.

Measurement, estimation and collection of GHG emissions data is challenging, however. The information note reviews some of the difficulties. Drawing on the diverse experiences of NGFS members, it then proposes several measures that could enhance the granularity and comparability of emissions data. These include:

• Harmonizing the metrics in reporting standards. This would support disclosure by making it easier to compare emissions and monitor them over time.
• Encouraging coordination between supervisors and government agenciesin the collection and dissemination of emissions data. This would reduce operational costs and risks.
• Intensifying collaboration across public bodies, financial institutions, and businesses to address the challenges of emissions data.  

ESMA sets out its long-term vision on the functioning of the Sustainable Finance Framework Sustainable finance

On 24 July 2024, ESMA published an Opinion on the Sustainable Finance Regulatory Framework, setting out possible long-term improvements.

ESMA acknowledges that the EU Sustainable Finance Framework is already well developed and includes safeguards against greenwashing. At the same time, ESMA considers that, in the longer-term, the Framework could further evolve to facilitate investors’ access to sustainable investments and support the effective functioning of the Sustainable Investment Value Chain. 

The main recommendations for the European Commission’s consideration include:

• The EU Taxonomy should become the sole, common reference point for the assessment of sustainability and should be embedded in all Sustainable Finance legislation;
• The EU Taxonomy should be completed for all activities that can substantially contribute to environmental sustainability and a social taxonomy developed;
• A definition of transition investments should be incorporated into the Framework to provide legal clarity and support the creation of transition-related products;
• All financial products should disclose some minimum basic sustainability information, covering environmental and social characteristics;
• A product categorisation systemshould be introduced catering to sustainability and transition, based on a set of clear eligibility criteria and binding transparency obligations; 
• ESG data productsshould be brought into the regulatory perimeter, the consistency of ESG metrics continue to be improved, reliability of estimates ensured; and
• Consumer and industry testingshould be carried out before implementing policy solutions to ensure their feasibility and appropriateness for retail investors.

This Opinion builds on the findings of the ESMA Progress Report on Greenwashing and the Joint ESAs Opinion on the review of the SFDR. The Opinion also represents the last component of ESMA’s reply to the EC Request for input related to greenwashing, next to the Final Report on Greenwashing. 

Sustainable Finance Disclosure Regulation (SFDR)

ESAs update consolidated Q&As on SFDR

On 25 July 2024, the ESAs published an updated version of its consolidated Q&As on the SFDR and the SFDR Delegated Regulation.

The consolidated Q&As were first published in May 2023. The new answers added relate to, among others:

• establishing a website to comply with Article 10 of the SFDR;
• the calculation of principal adverse impact (PAI) indicators being performed on a pass/fail basis;
• how to calculate the share of sustainable investment that qualifies as environmentally sustainable and its disclosure;
• a table showing how the calculations of sustainable investment can be done either at the economic activity or the investment level for financial products; and
• whether sustainable investment can be made by investing in another financial product, such as a UCITS fund.

Corporate Sustainability Due Diligence Directive

Corporate Sustainability Due Diligence Directive published in the Official Journal

On 5 July 2024, the Corporate Sustainability Due Diligence Directive (Directive (EU) 2024/1760) (CSDDD) was published in the Official Journal.

The Directive aims to ensure that companies operating in the EU internal market contribute to sustainable development and the sustainability transition by identifying, preventing and mitigating actual or potential adverse human rights and environmental impacts connected with companies’ operations, the operations of their subsidiaries and of their business partners in their chain of activities.

CSDDD imposes obligations upon large EU and non-EU companies which meet certain conditions on turnover and employee thresholds. The CSDDD will enter into force on 25 July 2024, the twentieth day following its publication in the Official Journal. Once the CSDDD is in force, member states have until 26 July 2026 to transpose it into national law. Application will then be on a staggered basis, starting from 26 July 2027 for the largest companies.

ESMA puts forward measures to support corporate sustainability reporting

On 5 July 2024, ESMA published a Final Report on the Guidelines on Enforcement of Sustainability Information (GLESI) and a Public Statement on the first application of the European Sustainability Reporting Standards (ESRS). These documents will support the consistent application and supervision of sustainability reporting requirements.

The purpose of the GLESI is to provide guidance to build convergence on supervisory practices on sustainability reporting. Through the Public Statement on the first-time application of the ESRS, ESMA intends to support large issuers in going through the learning curve associated with the implementation of these new reporting requirements.

The guidelines and statement published are in line with recommendations proposed in the recently published ESMA Position Paper “Building more effective and attractive capital markets in the EU” namely:  

• promoting EU capital markets as a hub for green finance– this should include efforts to clarify the disclosure of sustainability information to aid comprehension by investors, also through the use of sustainability labels/categories as necessary; reducing complexity and enhancing clarity for the industry can also serve to ease compliance burdens; and 
• improving supervisory consistency amongst EU National Authorities– fostering harmonised enforcement outcomes through enhanced cooperation and convergence.

ESMA will continue to monitor the sustainability reporting practices in 2025 as well as the application of the GLESI. ESMA will translate the GLESI in all EU languages and make these translations available on its website. 

In addition, ESMA will release in Q4 recommendations in relation to the sustainability statements of listed companies in its Public Statement on the 2024 European Common Enforcement Priorities.[/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 SUPERVISORY AUTHORITIES

[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]11th Joint ESAs Consumer Protection Day

The registration for the 11th Joint Consumer Protection Day organised by the three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) on 3 October 2024 in Budapest, Hungary is open.  Interested stakeholders can register until 2 September 2024.

The event aims to unite thought leaders from consumer organisations, regulatory authorities, EU institutions, academia, and key market participants from across the European Union to discuss significant issues in consumer protection within financial services. 

Discussions will focus on following themes: Artificial intelligence in financial services, access to consumer centric products and services and sustainable finance (SFDR).

Interested stakeholders can register via this link no later than 2 September 2024.  For more information about the event, please visit the event’s page.[/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 C651: Thematic Review on the Handling of CIF Clients’ Uninvested Funds

On 09 July 2024, CySEC issued Circular C651, informing CIFs about the launch of the Thematic Review regarding the handling of uninvested funds held by CIFs on behalf of their (potential) clients, including the payment of interest or returns on these uninvested funds (the “Exercise”).

CySEC shall conduct this Exercise via desk-based review method on a sample of CIFs, who shall in the coming days received the relevant questionnaire to complete and return within a specified timeframe, accompanied by the relevant supporting documents.

Upon completion of the Exercise, CySEC will issue a relevant circular detailing its findings.

Circular C653: Annual Report of the Unit for Combating Money Laundering (MOKAS) for 2023

On 16 July 2024, CySEC issued Circular C653 through which it informs the Regulated Entities that the Unit for Combating Money Laundering (‘MOKAS’) has published its Annual Report for 2023 (‘Annual Report’).

The Annual Report includes an analysis of the Suspicious Activity Reports and Suspicious Transaction Reports, as well as the Additional Information File, and constitutes an important tool in relation to the evaluation of risks and the detection of suspicious behaviours or transactions.

CySEC encourages the Regulated Entities to study the Annual Report and make use of the information provided within it.

Circular C654: Notification of crypto asset services under article 60 of MiCA

On 30 July 2024, CySEC issued Circular C654, to inform that Regulated Entities intending to provide crypto-asset services in the EU under MiCA, must also submit their intention at authorisations@cysec.gov.cy.

The information must be submitted to the above email address by the 9^th of August 2024.[/vc_column_text][/vc_column][/vc_row][/vc_section]