December 2023 Regulatory Roundup

INVESTMENT SERVICES & CAPITAL MARKETS

MIFID and MIFIR

ESMA Analysis on the evolution of EEA share market structure since the application of MiFID II

On 30 October 2023, ESMA published an article on the evolution of the European share market structure from 2019 to 2022, following the implementation of MIFID II.

Specific focus is given to the impact of the UK’s withdrawal from the EU, given its pivotal role in equity markets.  

The European market structure has changed in an important manner during the observed period. The important decrease in trading volumes observed after 2021 linked to the impact of the UK withdrawal was accompanied by four main changes:

• a decrease in the number of trading infrastructures, even though their number remains elevated
• a shift in share trading distribution, both in terms of market types and countries
• a concentration of trading in a few EU countries and trading venues
• a relocation of domestic trading activities; and a rise in the specialisation of trading venues.

This topic is of relevance to ESMA in terms of both its financial stability and orderly markets mandate, since competition among trading venues can lead to more innovative services and lower fees, but a fragmented trading landscape can also impact market liquidity. In this sense, assessing the evolution of the European market structure in the recent transformative years is key to “improve the level-playing field between execution venues”, which is one of the three priority areas for the Review of the Regulation governing rules about the structure of the markets in financial instruments.

Markets in Crypto-assets

Verena Ross’ speech at Malta FSA Forum on MiCA

On 16 November 2023, the European Securities and Markets Authority (ESMA) published a speech by its chair, Ms. Verena Ross, entitled ‘Innovation with protection: the next steps on the MiCA journey’.

In the speech Ms. Verena Ross covers some of the key features of ESMA’s October consultation paper on the second package of level 2 measures for the Regulation on Markets in crypto assets (MiCA). She also discusses how ESMA is preparing for the transition to the new MiCA regime, in close cooperation with colleagues from Member State competent authorities. ESMA is working hard with such competent authorities to harmonise practices when it comes to authorisation, supervision, and enforcement, starting with authorisation procedures as the most urgent necessity.

As regards authorisation Ms. Verena Ross mentions that aligning authorisation procedures is one of several ways ESMA is aiming to prevent regulatory arbitrage before MiCA and its level 2 measures apply. On this point Verena Ross states that the example of the MFSA’s risk-based licensing framework for virtual financial asset service providers may serve as one model to look at as Member State competent authorities design their own authorisation procedures for crypto asset service providers.

Central Securities Depositories Regulation

Council adopts proposed CSDR Refit Regulation

On 27 November 2023, the Council of the EU announced that it has adopted the proposed Regulation amending the CSDR (CSDR Refit).

The CSDR Refit aims to reduce the financial and regulatory burden on CSDs and improve their ability to operate across borders, while also strengthening financial stability. Among other changes, the Council highlights that it shall:

• clarify and simplify the passporting rules, reducing the barriers to cross-border settlement and easing the administrative and financial burden;
• make supervision of CSDs more effective by improving cooperation between supervisors;
• improve settlement efficiency by amending certain elements of the settlement discipline regime, including the preconditions for applying so-called mandatory buy-ins. Such buy-ins will only be introduced as a measure of last resort, where the rate of settlement fails in the EU is not improving and is presenting a threat to financial stability;
• provide conditions under which CSDs can access banking-type services, including through other CSDs.

The CSDR Refit will be published in the Official Journal and will enter into force 20 days after its publication.

Digital Operational Resilience Act (DORA)

ESMA to put cyber risk as a new Union Strategic Supervisory Priority

On 09 November 2023, ESMA, the EU’s financial markets regulator and supervisor, is changing its Union Strategic Supervisory Priorities (USSPs) to focus on cyber risk and digital resilience alongside ESG disclosures.

With this new priority, EU supervisors will put greater emphasis on reinforcing firms’ ICT risk management through close monitoring and supervisory actions, building new supervisory capacity and expertise. The aim is to keep pace with market and technological developments, and closely monitor potential contagion effects of attacks and disruptions across markets and firms.

The new USSP will come into force in 2025, at the same time as the Digital Operational Resilience Act – DORA. This timeline is intended to provide supervisors and firms in Member States with sufficient time to prepare for compliance with the new regulatory requirements. Meanwhile, ESMA and national competent authorities (NCAs) will carry out preparatory work planning and shaping the supervisory activities to undertake under this priority.

In addition, ESMA and NCAs will continue their work on the second priority – ESG disclosures. The aim is to tackle greenwashing, increase investors understanding and embed sustainability requirements when firms advise investors. ESG disclosures will remain the focus in 2024 across key segments of the sustainable finance value chain such as issuers, investment managers and investment firms.

The new USSP on cyber risk and digital resilience will replace the USSP on market data quality. ESMA and NCAs have carried out intensive and concerted supervisory efforts to make structural, long-lasting improvements in this area. Notably, we have:

built common data quality methodologies and data sharing frameworks; and

worked on the detection of supervisory issues, carried out investigations and developed supervisory tools to extract further intelligence from the data reported.

Ensuring data quality remains a primary duty of supervised entities.  Firms, and in particular their top management, should take ownership of the data they report and increase its use also for internal purposes. EU supervisors will continue to undertake important supervisory work on data quality, leveraging on the new methodologies and tools developed through the USSP. Paying close attention to this topic remains fundamental in building a data-driven supervisory approach, a key strategic objective under the ESMA Strategy.

The USSPs are an important tool through which ESMA coordinates and focuses supervisory action with NCAs across the EU on specific topics.

EBA speech on DORA and operational resilience

On 15 November 2023, the EBA published a speech given by José Manuel Campa, EBA Chair, on operational resilience in the EU financial services sector.

Mr Campa shared some observations on digitalisation trends across the EU. These include that digitalisation is deepening interconnections and dependencies within the EU financial sector and with third-party infrastructure and information and communication technologies (ICT) providers. Further, the growing reliance on ICT providers can potentially create risks to financial stability.

In relation to the ESAs’ preparatory work for DORA, they have conducted a high-level exercise to trace the landscape of ICT providers in the EU financial sector. Findings included that: (i) there are around 15,000 ICT providers directly serving EU financial entities; (ii) it is a highly concentrated market, despite the high number of ICT TPPs identified and the number of ICT services provided; and (iii) frequently, the suppliers that provide services for the operation of most critical functions are not replaceable or the contingency of alternative suppliers is not foreseen by the financial institution. The ESAs are using the information obtained to develop the new supervisory framework under DORA (for example, in determining the criteria to determine a supplier as critical or essential).

European Commission consults on two draft Delegated Regulations under DORA

On 16 November 2023, the European Commission began consulting on two draft Delegated Regulations supplementing DORA by:

1. specifying the criteria for the designation of information and communication technologies (ICT) third-party service providers as critical for financial entities (CTPPs) – to address potential systemic and concentration risks posed by the financial sectors’ reliance on a small number of ICT third-party service providers, DORA establishes an EU oversight framework for CTPPs. As Lead Overseers, each of the ESAs will have the power to monitor on pan-European scale the activity of CTPPs in the context of their ICT services to the financial sector; and
2. determining the amount of the oversight fees to be charged by the Lead Overseer to CTPPs and the way in which those fees are to be paid – to ensure that Lead Overseers have the necessary resources to effectively carry on the oversight tasks under DORA.

The deadline for comments is 14 December 2023. The European Commission intends to adopt the Delegated Regulations in Q2 2024. It is mandated to adopt the delegated acts by 17 July 2024.[/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 AIFs

Final compromise text on proposed Directive amending UCITS Directive and AIFMD

On 10 November 2023, the Council of the EU published the final compromise text of the proposed Directive amending the AIFMD and the UCITS Directive as regards delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services and loan origination by AIFs.

Many of the changes made to the final text from the political agreement version are minor. The more substantive changes concern three main areas: (1) the distinction between directly and indirectly originating loans, (2) supervisory reporting, and (3) delegation arrangements.

There remains a process of translation and Member States will have 24 months from the date AIFMD II comes into force to transpose the Directive into local rules. ESMA and the European Commission are empowered to produce various Level 2 rules and reports. [/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]Independence of supervisory authorities

European Supervisory Authorities publish joint criteria on the independence of supervisory authorities

On 25 October 2023, the three European Supervisory Authorities – the European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA) and European Securities and Markets Authority (ESMA) (EBA, EIOPA and ESMA the ESAs) – published their joint criteria on the independence of supervisory authorities.

Supervisory independence is key to ensure that fair, effective and transparent decisions are taken by appropriately resourced supervisory authorities. These authorities can in turn provide effective and adequate protection for customers and consumers of financial services ensuring confidence in the financial system. The independence criteria are organised around four key principles:

• Operational independence: so supervisory authorities operate without any form of undue influence from the supervised sector and the government, have adequate legal powers and operational resources.
• Personal independence: with transparent rules for the appointment, selection and removal of members of the supervisory authority’s governing body, and high ethical standards for members of the supervisory authority’s staff and governing body.
• Financial independence: with sufficient financial resources for supervisory authorities to fulfil their mandates.
• Accountability and transparency: so supervisory authorities conduct their tasks in a transparent and accountable manner.

The criteria can be used by supervisory authorities as a tool to enhance their independence and, at a later stage, by the ESAs to assess supervisory independence in 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]

SUSTAINABLE FINANCE

[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]Sustainable Finance Disclosure Regulation (SFDR)

ESAs put forward amendments to sustainability disclosures for the financial sector

On 4 December 2023, the three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) published their Final Report amending the draft Regulatory Technical Standards (RTS) to the Delegated Regulation supplementing the Sustainable Finance Disclosure Regulation (SFDR).

The ESAs propose adding new social indicators and streamlining the framework for the disclosure of principal adverse impacts of investment decisions on the environment and society.

The ESAs also suggest new product disclosures regarding “greenhouse gas emissions reduction” targets.

Additionally, the ESAs propose further technical revisions to the SFDR Delegated Regulation:

• Improvements to the disclosures on how sustainable investments “Do No Significant Harm” (DNSH) to the environment and society;
• Simplification of the pre-contractual and periodic disclosure templates for financial products; and
• Other technical adjustments concerning, among others, the treatment of derivatives, the calculation of sustainable investments, and provisions for financial products with underlying investment options.

The European Commission will study the draft RTS and decide whether to endorse them within three months. These draft RTS would be applied independently of the comprehensive assessment of SFDR announced by the European Commission in September 2023 and before changes resulting from that assessment would be introduced.

European Green Deal

ESMA Chair speech at COP 28 – Making finance work for a sustainable future

On 5 December 2023, Verena Ross, ESMA Chair, attended COP28 and spoke about ESMA’s sustainable finance work. In her role as co-Chair of the International Organization of Securities Commission’s (IOSCO) Sustainable Finance Carbon Markets Workstream, she also promoted ESMA’s and IOSCO’s contribution to the global sustainability agenda.

International cooperation is key to ensuring that consistent measures are taken to protect investors and support financial stability, as the demand for sustainability-related financial products continues to grow. Building an internationally comparable set of rules and principles that are applicable across the entire sustainable investment value chain will help to address the global challenges facing us.

ESMA’s mandate and determination to integrate environmental, social, and governance (ESG) factors across all its activities is reflected in ESMA’s Strategy and the Sustainable Finance Roadmap. Given ESMA’s core investor protection role, ESMA focuses on building and maintaining a trusted environment for sustainable investing. The ultimate objective is to support channelling the necessary capital flows to meet the EU’s decarbonization targets as well as its wider environmental and social objectives.

ESMA has been engaging extensively with stakeholders to provide guidance around the sustainable finance regulatory framework. Working with the national supervisors to ensure consistent implementation and effective and convergent supervision and enforcement of the ESG framework at is equally important. In this context, ESG disclosures became one of our two Union-wide strategic supervisory priorities.

Role of asset management for sustainability

ESMA speech on asset management in relation to financial stability and sustainability

On 24 November  2023, ESMA published a speech by Verena Ross, ESMA Chair, where she discusses financial stability and sustainability in the asset management sector.

Ms. Ross provides a summary of regulatory initiatives to preserve financial stability in the non-bank financial intermediation (NBFI) sector, focusing on the asset management sector. She states that asset managers need to adapt to the current reality, after operating for years in a low yield and low inflation environment. ESMA and supervisors are monitoring the situation closely. Points of interest in relation to sustainability include:

• ESMA will shortly publish its review of the SFDR Delegated Regulation. It has tried within the existing regime to improve the current templates by introducing language simplification and a ‘dashboard’, taking into account the results of consumer testing. Ms. Ross notes that this is only a first step towards the simplification of disclosures;
• ESMA is revising existing guidelines to reflect ESG considerations, ensuring that investors receive accurate information and advice about products that properly reflect the product’s sustainability features. In collaboration with the other ESAs, it will shortly publish a Financial Education factsheet;
• ESMA is working with NCAs to take stock of the supervisory response to greenwashing and together with the other ESAs, will publish final reports on greenwashing in May 2024; and
• ESMA is closely monitoring the progress of the ESG rating file and is hopeful that an agreement can be reached before the end of the European Parliament’s term.

EU Sustainable Finance framework

ESMA explanatory notes on key topics of the sustainable finance framework

On 22 November 2023, ESMA published three explanatory notes covering key topics of the sustainable finance framework:

• concepts of sustainable investments and environmentally sustainable activities in the EU sustainable finance framework. This explanatory note explains how the concept of sustainability is inscribed in the EU sustainable finance framework. The concept of sustainability is reflected in the definition of “sustainable investments” in the SFDR and the definition of “environmentally sustainable economic activities” introduced under the Taxonomy Regulation;
• ‘Do no significant harm” definitions and criteria across the sustainable finance framework. This explanatory note explains the “do no significant harm” (DNSH) principle that is embedded in several pieces of EU sustainable finance legislation. The DNSH principle is a key element in the Taxonomy Regulation, SFDR and the Benchmarks Regulation (BMR); and
• the concept of estimates across the EU sustainable finance framework. This explanatory note explains how key sustainable finance legislation deals with the use of “estimates” and “equivalent information”, and the conditions under which these are allowed as sources of data to prepare mandatory ESG metrics for the compliance of regulated entities with their obligations. Different pieces of the sustainable finance framework impose requirements for the calculation and disclosure of various ESG metrics or sustainability indicators by financial market participants. These disclosures and calculations play a key role in the Taxonomy Regulation, the SFDR and the BMR.

The explanatory notes aim to set out factual information regarding the three concepts and help stakeholders to navigate and better understand the sustainable finance legislative framework. These documents are purely descriptive and are not intended to replace relevant legal texts nor to provide guidance on the application of relevant provisions.

ESAs

The ESAs provide clarity and tips to consumers on sustainable finance

On 30 November 2023, the three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) published an interactive factsheet that answers consumers’ most frequently asked questions about sustainable finance. The factsheet provides tips to consumers considering buying financial products with sustainability features, including loans, investments, insurances and pensions.

The factsheet provides answers to frequently asked questions and steps consumers can take to understand how their financial choices could contribute to a more sustainable future.

In addition, the factsheet provides four tips consumers should take into account before choosing financial products with sustainability features. Consumers are encouraged to:

1. decide how important sustainability is for them and what financial goals they want to achieve before they choose a product;
2. pay attention to the conditions and the sustainability features, to avoid being misled by ‘greenwashing’;
3. keep in mind that financial products with sustainability features are not risk-free;
4. for investments and life insurance policies, take their time before deciding and, if need be, seek further clarification from the firm or person that can advise them on and sell them such products.

Financial jargon can at times be intimidating and prevent consumers from understanding crucial financial concepts such ‘ESG’ or ‘EU taxonomy’. To overcome this barrier, the factsheet has helpful pop-up boxes that explain specific terms in a simple and easy-to-understand way.

The factsheet has been translated in all EU languages, and the ESAs are working with national supervisory authorities to help promote it across the EU.

Taxonomy

Taxonomy Environmental Delegated Act and Amending Taxonomy Climate Delegated Act published in the Official Journal

On 21 November 2023, the Taxonomy Environmental Delegated Act and Amending Taxonomy Climate Delegated Act were published in the Official Journal.

The Taxonomy Environmental Delegated Act ((EU) 2023/2486) sets out the technical screening criteria for economic activities that contribute substantially to the sustainable use and protection of water and marine resources, to the transition to a circular economy, to pollution prevention and control, and to the protection and restoration of biodiversity and ecosystems. The Delegated Act will apply from 1 January 2024.

The Amending Taxonomy Climate Delegated Act ((EU) 2023/2485) sets out additional technical screening criteria for economic activities that may contribute substantially to climate change mitigation or climate change adaptation without significantly harming other environmental objectives, but which are currently not covered by the Taxonomy Climate Delegated Act. These includes the manufacturing activities associated with components for low carbon vehicles and electrical equipment. The amending Delegated Act predominantly applies from 1 January 2024, although some provisions apply from 1 January 2025.

Fit-for-55

EBA final templates to collect climate-related data from EU banks

On 17 November 2023, the EBA published final templates that will be used to collect climate-related data from EU banks in the context of the one-off Fit-for-55 climate risk scenario analysis.

The templates are accompanied by guidance, which includes definitions and rules for compiling the templates. The templates are designed to collect data from 110 EU banks and gather climate-related and financial information on credit risk, market and real estate risks.

The data collection will start on 1 December and will be completed on 12 March 2024. Banks are asked to report aggregated and counterparty level data as of December 2022. Collecting counterparty level data will allow the EBA to assess concentration risk of large climate exposures, as well as to capture amplification mechanisms and assess second round effects. Aggregated data will inform climate-related risks of the banking sector more broadly.[/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 C605: European Banking Authority (‘EBA’) public Consultation Paper on new Guidelines on preventing the abuse of funds and certain crypto-assets transfers, for money laundering and terrorist financing purposes.

On 28 November 2023, the CySEC issued Circular C605 (‘the Circular’), informing regulated entities that the EBA launched a public consultation on new Guidelines on preventing the abuse of funds and certain crypto-assets transfers for money laundering and terrorist financing purposes under Regulation (EU) 2023/1113 (the ‘Guidelines’). The said Guidelines relate to the so-called ‘travel rule’ obligation.

The Guidelines provide specific steps for Payment Service Providers (PSPs), Intermediary PSPs (IPSPs), crypto-asset service providers (CASPs), and Intermediary CASPs (ICASPs) to identify and address missing or incomplete information in fund or crypto-asset transfers and aim to establish a common understanding for the consistent application of EU law, enhancing anti-money laundering and counter-terrorism financing measures.

The main goal of the said Guidelines is to prevent the misuse of funds and crypto-assets for terrorist financing and other financial crimes, ensuring authorities can trace such transfers when necessary. The EBA advocates for a shared understanding among relevant entities and authorities on effective procedures for detecting and managing transfers lacking the required information on the payer/originator and payee/beneficiary.

Regulated entities may respond to the abovementioned public consultation by submitting their comments through the EBA’s consultation page. The deadline for the submission of comments is 26 February 2024.

Further to the above, it is noted that the EBA will hold a virtual public hearing on the consultation paper on 17 January 2024, from 14:00 to 16:00 Paris time, and interested stakeholders may register using this link by 3 January 2024 at 16:00 CEST.

The CySEC encourages the regulated entities to respond to the said consultation paper.

Amendments to Directive for the prevention and suppression of money laundering and terrorist financing (register of CASPs)

On the 29^th November 2023, the Directive for the Prevention and Suppression of Money Laundering and Terrorist Financing (Register of Crypto Asset Service Providers) (Amending) of 2023 – R.A.D. 343/2023 was passed, amending the Directive for the Prevention and Suppression of Money Laundering and Terrorist Financing (Register of Crypto Asset Service Providers) of 2021.

The following amendments were made:

• The definition of the term “Relevant offence” was amended;
• Article 6(1)(b)(i) of the main Directive has been amended, in relation to what is considered as ‘good reputation’ of persons holding a management position in the applicant company.

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