February 2024 Regulatory Roundup #2

INVESTMENT SERVICES & CAPITAL MARKETS

MIFID and MIFIR

ESMA and NCAs to coordinate supervisory activities on MIFID II pre-trade controls

On 11 January 2024, ESMA launched a Common Supervisory Action (CSA) with National Competent Authorities (NCAs), with the objective of assessing the implementation of pre-trade controls (PTCs) by EU investment firms using algorithmic trading techniques.

PTCs are used by investment firms to carry out checks at order entry to limit and prevent sending erroneous orders for execution to trading venues. Following the May 2022 flash crash, ESMA and NCAs have focused their attention on the implementation of PTCs in the EU, gathering evidence through questionnaires submitted to a sample of EU investment firms. As a follow up, ESMA and NCAs have decided to launch a CSA with the goal of gathering further and more detailed insights on how firms are using PTCs across the EU. 

The CSA will cover the following aspects:

• Implementation of PTCs, including their calibration methodology and the use of hard and soft blocks in the design of PTCs; 
• Establishment of credit and risk limits and their interaction with PTCs;
• Monitoring and governance framework related to PTCs; 
• Implementation and monitoring of PTCs in case of outsourcing of trading activity to third countries. 

This initiative and the related sharing of practices across NCAs aim at ensuring consistent application of EU rules, helping to promote stable and orderly markets in line with ESMA’s objectives. The rules governing the use of PTCs are set out in MIFID II and more specifically in CDR 2017/589 (RTS 6) which specifies the organisational requirements of investment firms engaged in algorithmic trading.

ESMA and NCAs will carry out the CSA in the course of 2024.

European Parliament adopts proposals to enhance MIFID II financial market data transparency

On 16 January 2024, the European Parliament announced that it had adopted amendments to MIFID II and MIFIR at the first reading.

The amendments enhance financial market data transparency, optimise orderly trading and prohibit payments for forwarding client orders. The new provisions aim to reduce information asymmetries between market participants and improve orderly trading in commodity derivatives concerning energy and food. To protect investors from sub-optimal trading decisions, the practice of receiving payments for forwarding client orders for execution (‘payment for order flows’) will be banned across the EU.

The next step is for the Council of the EU to formally adopt the proposed amending legislation, after which the amendments will enter into force on the twentieth day following their publication in the Official Journal.

ESMA publishes new Q&A on MIFIR reporting

On 26 January 2024, ESMA published a new Q&A on MIFIR reporting relating to transaction reporting. 

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

On 1 February 2024, ESMA published the new quarterly liquidity assessment of bonds, the data for the quarterly systematic internaliser calculations for equity, equity-like instruments, bonds and for other non-equity instruments and the consolidated tape provider (CTP) under MIFID II and MIFIR.

The full list of assessed bonds is now available through the Financial Instruments Transparency System (FITRS) in the XML files with publication date from 1 February 2024 (see here) and through the Register web interface (see here).  

The data for the systematic internaliser quarterly calculations is also available through FITRS in the XML files with publication date 1 February 2024.

Markets in Crypto Assets Regulation (MiCA)

ESMA consults on reverse solicitation and classification of crypto assets as financial instruments under MICA

On 29 January 2024, ESMA published two Consultations Papers on guidelines under Markets in Crypto Assets Regulation (MiCA), one on reverse solicitation and one on the classification of crypto-assets as financial instruments.

Consultation paper on guidelines on reverse solicitation

In this consultation, ESMA is seeking input on proposed guidance relating to the conditions of application of the reverse solicitation exemption and the supervision practices that National Competent Authorities (NCAs) may take to prevent its circumvention. 

The proposed guidance confirms that the provision of crypto-asset services by a third-country firm is limited under MiCA to cases where the client is the exclusive initiator of the service. This exemption should be understood as very narrowly framed and must be regarded as the exception. A firm cannot use it to bypass MiCA.

Consultation paper on guidelines on conditions and criteria for the classification of crypto-assets as financial instruments

In this consultation paper, ESMA is seeking input on establishing clear conditions and criteria for the qualification of crypto-assets as financial instruments. This initiative is aimed at bridging the MiCA regulation and the Markets in Financial Instruments Directive II (MiFID II) and ensuring consistency across the EU. 

The proposed guidelines aim at providing NCAs and market participants with structured but flexible conditions and criteria to determine whether a crypto-asset can be classified as a financial instrument. 

To do so, the draft strikes a balance between providing guidance and avoiding establishing a one-size-fits-all approach. Once finalised, these guidelines will provide much-needed clarity and contribute to the global standards in crypto-asset regulation. 

The consultation closes on 29 of April 2024. ESMA will consider the feedback it receives to the consultation in Q2 2024 and expects to publish a final report in Q4 2024.

EMIR

ESMA publishes new Q&As

ESMA has published the following new Q&As in relation to EMIR Reporting:

• On 26 January 2024, ESMA published a new Q&A on EMIR REFIT reporting under Settle-to-Market model (STM) / Collateralise -to-Market model (CTM)
• On 26 January 2024, ESMA published a new Q&A on EMIR REFIT reporting in relation to whether the reporting counterparties and entities responsible for reporting are expected to update during the transition period any client codes not compliant with the requirements set out under EMIR REFIT.
• On 26 January 2024, ESMA published a new Q&A in relation to EMIR Reporting covering portability of schedules.
• On 26 January 2024, ESMA published a new Q&A in relation to EMIR Reporting covering Subsidiaries.
• On 02 February 2024, ESMA published a new Q&A on EMIR Reporting covering Reporting of a Counterparty falling within scope of Article 1(4)(a) and (b) of EMIR.

Central Securities Depositories Regulation

ESMA report on the provision of cross-border services by CSDs and handling of applications under Article 23 of CSDR from 2020 to 2022

On 31 January 2024, ESMA published a report on the provision of cross-border services by CSDs and handling of passporting requests from 2020 to 2022.

The report’s main conclusions on cross-border services are:

• there is overall stability in the landscape of EEA CSDs, with a clear dichotomy between ICSDs and other EEA CSDs, and diversity in approaches to cross-border integration;
• certain identified regulatory factors and market factors, including connection to TARGET2-Securities (T2S, a securities settlement platform where exchange can happen simultaneously) are main drivers of development of cross-border services.

The report also concluded that compared to the previous three years, fewer applications have been submitted in the period between 2020 and 2022. Areas to be explored in future reports include (a) the rationale for specific approaches to cross-border integration; (b) the importance of relayed links; (c) the role of global custodians; and (d) the benefits of connection to T2S.

ESMA Work

ESMA planned consultations 2024

On 19 January 2024, ESMA provided an overview of the consultations it plans to launch in 2024. These relate to topics including: MiCAR, the MIFID/MIFIR review, UCITS, DORA, EMIR and AIFMD.

In Q1, ESMA plans to consult on:

• guidelines on the due diligence requirements under the Securitisation Regulation
• MiCAR guidelines and technical standards
• MIFID review – RTS on position management controls and ITS 4 on position reporting
• RTS under the EU Green Bond Regulation
• guidelines on internal controls for ESMA supervised entities
• call for evidence on the review of the UCITS Eligible Assets Directive.

Digital Operational Resilience Act (DORA)

Technical standards for ICT and third-party risk management and incident classification under DORA

On 17 January 2024, the ESAs published the first set of final draft technical standards under DORA aimed at enhancing the digital operational resilience of the EU financial sector by strengthening financial entities’ Information and Communication Technology (ICT) and third-party risk management and incident reporting frameworks.

The joint final draft technical standards include:

• Regulatory Technical Standards (RTS) on ICT risk management framework and on simplified ICT risk management framework;
• RTS on criteria for the classification of ICT-related incidents;
• RTS to specify the policy on ICT services supporting critical or important functions provided by ICT TPPs.
• Implementing Technical Standards (ITS) to establish the templates for the register of information.

The final draft technical standards have been submitted to the European Commission, who will now review them with the objective of adopting the standards in the coming months.[/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]

FINANCIAL CRIME

[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_single_image image=”10028″ img_size=”full”][vc_column_text]Anti-money laundering

EBA issues guidance to crypto-asset service providers (CASPs) to effectively manage their exposure to ML/TF risks

On 16 January 2024, the EBA published a final report on guidelines amending the EBA guidelines on customer due diligence and the factors credit and financial institutions should consider when assessing the ML/TF risk associated with individual business relationships and occasional transactions under Articles 17 and 18(4) of the Fourth Money Laundering Directive (MLD4).

The amendments extend the scope of the guidelines to include CASPs, with the aim of helping CASPs identify ML/TF risks by providing a non-exhaustive list of different factors, which may indicate the CASP’s exposure to higher or lower levels of the ML/TF risk due to its customers, products, delivery channels and geographical locations.

The EBA explains that based on these risk factors, CASPs can develop an understanding of their customer base and identify which part of their business or activity is most vulnerable to ML/TF. The guidelines also explain how CASPs should adjust their mitigating measures, including the use of blockchain analytics tools.

Given the interdependence of the financial sector, the guidelines also include guidance addressed to other credit and financial institutions that have CASPs as their customers or which are exposed to crypto assets.

The guidelines will be translated into the official EU languages and published on the EBA’s website. The deadline for competent authorities to report whether they comply with the guidelines will be two (2) months after the publication of the translations. The guidelines will apply from 30 December 2024.

Council and European Parliament provisional agreement on the proposed AML Regulation and MLD6

On 18 January 2024, the Council of the EU and the European Parliament announced that they had reached a provisional agreement on the proposed Anti-money Laundering (AML) Regulation and Sixth Money Laundering Directive (MLD6).

Key proposals from the AML Regulation include:

• a Union-wide limit on large cash payments of 10,000 euro, that will also be extended to payment service and electronic money providers;
• enhanced transparency rules for football clubs and ultra-rich individuals. Crypto asset service providers (CASPs) will also be required to comply with enhanced dure diligence on their customers;
• access for national Financial Intelligence Units (FIUs) and other competent authorities to information on beneficial ownership.

Key proposals from MLD6 include:

• the harmonisation EU AML supervision;
• increased powers for the FIU, so that they can analyse and detect ML/TF cases as well as to suspend suspicious transactions, accounts or business relationships;
• harmonisation of content and functioning of the beneficial owners’ registers; and
• unfiltered, direct and free access to beneficial ownership information held in national registers for competent authorities, supervisory bodies, tax authorities, AMLA, the European Public Prosecutor’s Office, the European Anti-Fraud Office, Europol and Eurojust.

The texts will now be finalised and presented to member states’ representatives in the Committee of permanent representatives and European Parliament for approval. If approved, the Council and the European Parliament will then have to formally adopt the texts before they are published in the Official Journal and enter into force.[/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

ESMA steps up its monitoring of EU alternative investment funds and sees potential risks in funds exposed to leverage and liquidity mismatches

On 30 January 2024, ESMA published a report on the EU alternative investment funds (AIFs)’ market and an article on the risks posed by leveraged AIFs in the EU.

ESMA confirms the risks posed by real estate (RE) funds, in a context of declining volumes of transactions and falling prices in several jurisdictions.

Existing liquidity mismatches in AIFs are particularly heightened by the high share of open-ended RE funds, some of which offer daily liquidity. This vulnerability could be systemically relevant in jurisdictions where RE funds own a large share of the RE market. 

Looking at the full sector and specifically at the risks posed by leveraged AIFs, ESMA finds that:

• the size of the sector declined slightly (-3%) to EUR 6.8tn in 2022 and AIFs account for 36% of the EU fund industry,
• the fall in value was mainly driven by valuation losses for funds exposed to bonds and equities amid adverse market developments in 2022,
• RE funds face multiple risks related to leverage, market footprint, valuation discrepancies and liquidity mismatches,
• leverage for hedge funds remains very high, and this may pose a risk of market impact. However, most of them also dispose of large levels of cash to address potential margin calls, which limits the risk of fire sales,
• National Competent Authorities (NCAs) have reported risks posed by the Liability-Driven Investment (LDI) funds, which gain leveraged exposures to the UK government bond market. Risks have remained elevated, and the limits set after the severe stress experienced in September 2022 remain appropriate.

In light of these findings, ESMA reports on the measure taken by authorities to address the risks identified and will continue to work with the NCAs to meet ESMA’s financial stability objective. 

ESMA Webinar on ESMA’s Annual cost and past performance report

ESMA organised together with the European Insurance and Occupational Pensions Authority (EIOPA) a joint webinar “ESMA’s and EIOPA’s Annual Cost and Past Performance Report” to share the findings of:

• ESMA’s Market Report on Costs and Performance of EU Retail Investment Products
• EIOPA’s Report on Costs and Past Performances

The webinar was held online on 10 January 2024, 10:30 – 11:30 CET.[/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 update Q&As on SFDR

On 12 January 2024, the Joint Committee of the ESAs published an updated version of its consolidated Q&As on the SFDR and the SFDR Delegated Regulation.

The consolidated Q&As, first published in May 2023, combine responses given by the European Commission to questions requiring the interpretation of EU Law, which are colour coded in blue, and responses generated by the ESAs relating to the practical application or implementation of SFDR, which are not colour coded.[/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 C614: European Banking Authority’s (‘EBA’) public Consultation Paper on two sets of Guidelines on internal policies, procedures and controls to ensure the implementation of Union and national restrictive measures

On 9 January 2024, CySEC issued Circular C614 (the ‘Circular’) to inform its Regulated Entities about a Public Consultation Paper launched by the European Banking Authority (hereinafter “the EBA”) regarding two sets of Guidelines on internal policies, procedures and controls to ensure the implementation of Union and national restrictive measures (the “Consultation Paper“).

Restrictive measures are binding on any person or entity under the jurisdiction of Member States. They comprise individual measures, i.e. targeted financial sanctions, and sectoral measures, i.e. financial and economic measures or embargoes.

One set of draft Guidelines is addressed to financial institutions and prudential supervisors and sets common, regulatory expectations regarding the role of senior management, internal governance and risk management in the restrictive measures context.

A second set of draft Guidelines, addressed to PSPs and CASPs, sets out what PSPs and CASPs should do to be able to comply with restrictive measures when performing transfers of funds and crypto-assets and focus, in particular, on know your customer (KYC), screening and due diligence. Regulated Entities may respond to the public consultation by submitting their comments through the EBA’s consultation page until the 24 of March 2024.

Please note that the EBA will hold a virtual public hearing on the Consultation Paper on the 8th of February 2024 from 10:00 to 12:00 CET, and interested stakeholders may register using this link by the 31 of January 2024 at 18:00 CET. The CySEC encourages the Regulated Entities to respond to the said Consultation Paper.

Circular C615: Cross Border Data Collection Exercise, Freedom to Provide Investment Services and Activities (Cross Border Activity)

On 15 January 2024, CySEC issued Circular C615 (the ‘Circular’). With the said Circular and following CySEC’s Circular C612, CySEC informs all CIFs that the European Securities and Markets Authorities (‘ESMA’) has launched the exercise for the collection of data regarding cross border activity of investment firms for the year 2023.

The present Circular provides detailed information regarding the completion of the online questionnaire via the EU’s online platform. The information entailed in the Circular is addressed to CIFs that fulfil the conditions set out in point 1.1 of Circular C612 i.e. CIFs that were authorised by 31 of December, 2023, and which have at least 50 retail clients, (including clients treated as professionals on request according to Section II of Annex II of MiFID II), in at least one host Member State (excluding Cyprus).

Further to the above, an email with the link and password to access the online questionnaire will be sent out to all CIFs that fulfil the conditions set out in point 1.1 of Circular C612. Participating CIFs must complete and submit the online questionnaire by 31 of January 2024, at the latest. More information on the completion and submission of the questionnaire can be found in the Circular.

Circular C616: ESMA Guidelines for reporting under EMIR (ESMA74-362-2281)

On 23 January 2024, CySEC issued Circular C616 (the “Circular”) to remind the regulated entities that the European Securities and Markets Authority (ESMA) has published the Guidelines for reporting under EMIR (the ‘Guidelines’) on the 23 of October 2023, translated in all official languages of the EU.

The Guidelines will apply from the 29 of April 2024 to financial and non-financial counterparties to derivatives as defined in Articles 2(8) and 2(9) of EMIR, to trade repositories (TRs) as defined in Article 2(2) of EMIR and to competent authorities. The Guidelines will apply in relation to the derivatives reporting obligation as stated in Article 9 of EMIR and the TRs’ obligations under Articles 78 and 81 of EMIR.

The Guidelines are based on Article 16(1) of ESMA’s Regulation. They fulfil several purposes with regards to the harmonisation and standardisation of reporting under EMIR. This is key to ensure high quality of data necessary for the effective monitoring of the systemic risk. Furthermore, increased harmonisation and standardisation of reporting allows to contain the costs along the complete reporting chain – the counterparties that report the data, the TRs which put in place the procedures to verify the completeness and correctness of data, and the authorities, defined in Article 81(3) of EMIR which use data for supervisory and regulatory purposes.

The Guidelines provide clarifications on the following aspects:

1. transition to reporting under the new rules,
2. the number of reportable derivatives,
3. intragroup derivatives exemption from reporting,
4. delegation of reporting and allocation of responsibility for reporting,
5. reporting logic and the population of reporting fields,
6. reporting of different types of derivatives,
7. ensuring data quality by the counterparties and the TRs,
8. construction of the Trade State Report and reconciliation of derivatives by the TRs,
9. data access.

CySEC has adopted the Guidelines by incorporating them into its supervisory practices and regulatory approach.

Circular C617: Recommendation 2022/9 of the European Systemic Risk Board (ESRB) on the vulnerabilities in the commercial real estate sector in the European Economic Area

On 24 January 2024, CySEC issued Circular C617 (the “Circular”) to inform the Regulated Entities that the European Systemic Risk Board (the “ESRB”) issued on 1 December 2022 the Recommendation ESRB/2022/9 on the vulnerabilities in the commercial real estate (“CRE”) sector in the European Economic Area (the “Recommendation”). The Recommendation aims in monitoring the vulnerabilities related to the CRE sector in order to identify potential risks to financial stability and to assess possible responses to address such risks.

CySEC, after taking into consideration the points raised in the Recommendation, mentioned in detail in Part A of the present Circular, decided to adopt the Recommendation.

Following the above, CySEC requests all Regulated Entities to complete and submit Form CRE-IF (the “Form”) to CySEC for each authorised/registered with CySEC sub-fund (in the case of an umbrella fund) or fund (for single scheme funds) under their management which has been authorised/registered until 30 June 2023. It is important to note that Regulated Entities must complete a separate Form for different sub-funds/funds.

Details on the information to be collected, reporting reference dates/ periods and general instructions can be found in Part B.2 of the Circular. The Form must be successfully submitted electronically, via the CySEC’s Transaction Reporting System (‘TRS’) by Friday, 23 February 2024, the latest.

Circular C618: Technical clarifications concerning Reporting obligation under articles 4(3)(d) and 31(1), (2) and (4) of the Alternative Investment Fund Managers Law (the ‘AIFM Law’) as further specified with articles 5(3) and 110 of the Commission Delegated Regulation (EU) No 231/2013 with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision (‘the Regulation’)

On 31 January and following circular C592, CySEC issued Circular C618 (the “Circular”), to draw the attention of the AIFMs to the updated AIFMD reporting technical guidance (2013/1358) (revision 6) and AIFMD Application, which are now available in CySEC’s website.

The new IT technical guidance revision 6 (2013-1358 AIFMD Reporting IT Technical Guidance – revision 6) introduced new validation rules making more fields mandatory or with stricter rules to improve data quality.

The new changes are specified in the tab ‘change history’ of the excel document. Reporting entities should use the version revision 6 to submit reports required under Articles 4(3)(d) and 31(1), (2) and (4) of the AIFM Law for year 2023. The reference period for the first reporting is Y1, H2, Q4 or X2 2023.[/vc_column_text][/vc_column][/vc_row][/vc_section]