June 2024 Regulatory Roundup

INVESTMENT SERVICES & CAPITAL MARKETS

MIFID and MIFIR

ESMA publishes data on markets and securities in the EEA

On 16 May 2024, ESMA published the Statistics on Securities and Markets (ESSM) Report, with the objective of increasing access to data of public interest. 

The report provides details about how securities markets in the European Economic Area (EEA30) were organised in 2022, including structural indicators on securities, markets, market participants and infrastructures.

It covers the distribution of legal entities by member states, either based on their supervisory role or their location. It also contains information on third country entities when their activities are recognised (e.g., CCPs or benchmark administrators) or when their securities are traded in EEA30 (e.g., information on issuers and securities available for trading). 

The ESSM focus exclusively on data available to ESMA through regulatory frameworks, as this is precisely the data that it is not currently available to the public. The information provides an overview using the reporting set up by MIFID, MIFIR, the Prospectus Regulation, EMIR, the Money Market Fund Regulation, AIFMD, and other regulations establishing the creation of public registers by ESMA. 

Prioritising transparency through the access to data in a user-friendly format and accessible way is part of the implementation of the recently launched ESMA Data Strategy 2023-2028.   ESMA will continue publishing this report on annual basis.

Basel Committee publishes report on the digitalisation of finance

On 16 May 2024, the Basel Committee on Banking Supervision published a report that considers the implications of the ongoing digitalisation of finance on banks and supervision.

The report reviews the use of key innovative technologies across various aspects of the banking value chain, including application programming interfaces, artificial intelligence and machine learning, distributed ledger technology and cloud computing. It also considers the role of new technologically enabled suppliers (e.g. big techs, fintech and third-party service providers) and business models.

While digitalisation can benefit both banks and their customers, it can also create new vulnerabilities and amplify existing risks. These can include greater strategic and reputational risks, a larger scope of factors that could test banks’ operational risk and resilience, and potential system-wide risks due to increased interconnections. Banks are implementing various strategies and practices to mitigate these risks, but effective governance and risk management processes remain fundamental.

Digitalisation raises regulatory and supervisory implications for both banks and supervisors. These include:

• monitoring evolving risks and adopting a responsible approach to innovation;
• safeguarding data and implementing robust risk management processes; and
• securing the necessary resources, staff and capabilities to assess and mitigate risks from new technologies and business models.

The Committee will continue to monitor developments related to the digitalisation of finance. Where necessary, it will consider whether additional standards or guidance are needed to mitigate risks and vulnerabilities.

MIFIR review: ESMA consults on three new technical standards

On 21 May 2024, ESMA launched a public consultation on non-equity trade transparency, reasonable commercial basis (RCB) and reference data under the Markets in Financial Instruments Regulation (MIFIR) review.

ESMA’s proposals aim at enhancing the information available to stakeholders by improving, simplifying and further harmonising transparency in capital markets.

In the consultation ESMA is seeking input on three topics:

• Pre- and post-trade transparency requirements for non-equity instruments (bonds, structured finance products and emissions and allowances), which aims at ensuring trade information is available to stakeholders by improving, simplifying, and harmonizing transparency requirements, and combining the right balance between real-time transparency and the ability to defer publication.
• Obligation to make pre-and post-trade data available on an RCB intended to guarantee that market data is available to data users in an accessible, fair, and non-discriminatory manner. Furthermore, the consultation elaborates on the cost-based nature of fees and the applicable reasonable margin; and 
• Obligation to provide instrument reference data that is fit for both transaction reporting and transparency purposes. It also proposes amendments to align this data with other relevant reporting frameworks and international standards.

ESMA will consider all comments received by 28 August 2024.

After reviewing the feedback, ESMA will publish a final report and submit the draft technical standards to the European Commission by the end of Q4 2024.

Further information on the MIFID II /MIFIR review and the upcoming consultation process can be found on the dedicated webpage.

ESMA makes recommendations for more effective and attractive capital markets in the EU

On 22 May 2024, ESMA published its Position Paper on “Building more effective and attractive capital markets in the EU”.

The Paper includes 20 recommendations to strengthen EU capital markets and address the needs of European citizens and businesses.

ESMA’s recommendations for a well-functioning capital market focus on three dimensions: citizens, companies and the EU regulatory and supervisory framework. The actions proposed in this paper go beyond changes to financial regulation and are thus directed not only to capital market supervisors but also to EU Member States, the European Commission and EU Co-legislators as well as to the financial industry.

The key proposals are:

• EU citizens: Simple, cost-efficient investment options are crucial for empowering citizens to invest their savings in capital markets that serve their long-term needs. Key recommendations in this area include the development of basic long-term investment products and pension systems that are suitably incentivised and contribute to the development of capital markets. This should be complemented by efforts to improve financial education.
• EU companies: Diverse and sustainable financing options are critical for fueling growth and innovation in the EU, especially for SMEs. Key recommendations in this area include developing a conducive ecosystem for public companies and fostering pan-European markets while addressing barriers to integration, particularly for market infrastructures.
• EU regulation and supervision: EU capital markets must be agile to respond to evolving needs. Key recommendations to address this include modernisation of the EU’s regulatory framework, to account for new tools such as effective forbearance powers. At the same time, supervisory consistency amongst EU supervisors should be prioritised, while further centralisation of supervision at EU level should be evaluated. 

ESMA will continue to engage and collaborate with all stakeholders regarding implementation of the recommendations outlined in this paper and contribute through its work to building more effective and attractive capital markets in the EU.

FSB examines vulnerabilities in short-term funding markets

On 22 May 2024, the Financial Stability Board (FSB) published a report analysing the functioning of, and considering potential ways to address vulnerabilities in, CP and negotiable CD markets.

The main findings are:

• FSB analysis finds that commercial paper (CP) and negotiable certificates of deposit (CD) markets generally function well in normal times but are susceptible to illiquidity in times of stress.
• Potential reforms to enhance the functioning and resilience of CP and CD markets include improving market microstructure; enhancing reporting and transparency; and expanding private repo markets for CP and CD collateral.
• The idiosyncratic nature of CP and CD markets means that not all potential reforms may be appropriate or relevant for all jurisdictions.

The report identifies a number of vulnerabilities in CP and CD markets, including limited secondary market activity due to the buy-and-hold nature of these instruments, investor and dealer concentration, and opacity. The high interconnectedness of CP and CD markets with other funding markets means that stress can be transmitted within the financial system and across borders, as experienced during the March 2020 market turmoil.

Authorities are encouraged to explore the usefulness of these reforms for their own markets and to consider how these could complement other policies, such as addressing vulnerabilities in money market funds (MMFs).

MIFIR Review Consultation Package (Consolidated Tape Providers and Data Reporting Service Providers)

On 23 May 2024, ESMA published a consultation on draft technical standards related to consolidated tape providers (CTPs) and data reporting service providers (DRSPs), and assessment criteria for the CTP selection procedure following the MIFIR review.

The consultation considers: (i) the input and output data requirements of CTPs; (ii) the revenue redistribution scheme for the equity CTP; (iii) the synchronisation of business clocks; (iv) the authorisation and organisational requirements for DRSPs; and (v) ESMA’s initial reflections on the specification of the assessment criteria for the CTP selection procedure.

The deadline for responses is 28 August 2024.

ESMA intends to submit the final draft technical standards to the European Commission by the legislative deadline of 29 December 2024. It will also publish a feedback statement on the specification of the assessment criteria for the CTP selection procedure by the end of 2024.

ESMA reports on the application of MIFID II marketing requirements

On 27 May 2024, ESMA published a combined report on its 2023 Common Supervisory Action (CSA) and the accompanying Mystery Shopping Exercise (MSE) on marketing disclosure rules under MIFID II.

ESMA, together with the National Competent Authorities (NCAs), finds that globally, marketing communications (including advertisements) comply with MIFID II requirements, and investment firms generally have procedures in place to ensure compliance with MIFID II of marketing materials, including during their development. Some concerns were raised by NCAs regarding sustainability claims in marketing communications, including advertisements.

In the report, ESMA identifies several areas of improvements, such as the need for marketing communications to be clearly identifiable as such, and to contain a clear and balanced presentation of risks and benefits. In cases where products and services are marketed as having ‘zero cost’, they should also include references to any additional fees. 

Other areas for improvement include: 

1. The need for adequate approval and review processes for marketing communications, including advertisements, whether these are prepared by the firm or by third parties;
2. Ensuring compliance with legal requirements on the part of distributors for all marketing communications;
3. Implementation of adequate record-keeping measures for all marketing material including social media posts;
4. Involvement of control functions and senior management in internal processes and procedures related to development, design, and oversight of marketing materials

NCAs are encouraged to consider the use of sanctions in case of breaches. 

ESMA and the NCAs will continue working on the topic given the substantial role that marketing communications and advertisements can play in determining consumer behaviour and influencing investment decisions.

ESMA updates its Q&As on MIFIR

On 28 May 2024, ESMA updated its Q&As on MIFIR, with one new Q&A on Reporting of accumulator contracts.

ESMA provides guidance to firms using artificial intelligence in investment services

On 30 May 2024, the European Securities and Markets Authority (ESMA), issued a Statement providing initial guidance to firms using Artificial Intelligence technologies (AI) when they provide investment services to retail clients.

When using AI, ESMA expects firms to comply with relevant MiFID II requirements, particularly when it comes to organisational aspects, conduct of business, and their regulatory obligation to act in the best interest of the client.

Although AI technologies offer potential benefits to firms and clients, they also pose inherent risks, such as:

• Algorithmic biases and data quality issues;
• Opaque decision-making by a firm’s staff members;
• Overreliance on AI by both firms and clients for decision-making; and #
• Privacy and security concerns linked to the collection, storage, and processing of the large amount of data needed by AI systems.

Potential uses of AI by investment firm which would be covered by requirements under MiFID II include customer support, fraud detection, risk management, compliance, and support to firms in the provision of investment advice and portfolio management.

ESMA and the National Competent Authorities (NCAs) will keep monitoring the use of AI in investment services and the relevant EU legal framework to determine if further action is needed in this area.

Market Abuse Regulation

ESMA reminds on rules for sharing information during pre-close calls

On 29 May 2024, ESMA issued a statement reminding issuers about the applicable legislative framework to “pre-close calls” and encouraging them to follow good practices when engaging in such calls, with the goal of contributing to maintain fair, orderly, and effective markets.

Pre-close calls are communication sessions between an issuer and analysts who generate research, forecasts and recommendations related to the issuer’s financial instruments. These sessions occur just before the periods preceding an interim or year-end financial report, during which issuers avoid providing additional information or updates. The outcomes of pre-close calls can influence market expectations and instrument prices.

Following some recent news in the media suggesting a connection between episodes of high volatility in share prices and “pre-close calls”, ESMA reminds issuers that any disclosure of inside information should only take place in accordance with the Market Abuse Regulation (MAR). Consequently, issuers should only share non-inside information during these “pre-close calls”.

To address potential concerns related to pre-close calls, ESMA recommends following several good practices, including:

• Prior to a “pre-close call”, carrying out an assessment of the information intended to disclose, making sure that it is not inside information;
• Informing the public about the upcoming “pre-close calls” on the issuer’s website, highlighting the relevant details (date, place, topics and participants);
• Making the material and documents used simultaneously available on the issuer’s website.

ESMA also notes that the analysis of specific episodes and identification of potential breaches of MAR is for national competent authorities.

EMIR

ESMA updates its Q&As on EMIR

On 28 May 2024, ESMA updated its Q&As, adding tow Q&As: Reporting of accumulator contracts (2202) and Reporting of price field at position level (2203)[/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

Council of EU publishes texts of AML Regulation, AMLA Regulation and MLD6

On 20 May 2024, the Council of the EU published the texts of:

• the Regulation on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (AML Regulation);
• the Regulation establishing the Anti-Money Laundering Authority (AMLA Regulation); and
• The Sixth Money laundering Directive

The Council will now formally adopt the legislation, after which it will be published in the Official Journal.

Council publishes directive on cross-border law enforcement access to bank account registries

On 22 May 2024, the Council of the EU published the text of the Directive amending Directive 2019/1153 as regards access by competent authorities to centralised bank account registries through the interconnection system and technical measures to facilitate the use of transaction records.

The proposed Directive aims to ensure more effective investigations into illicit finance by making it easier to retrieve data across borders from centralised bank registries. It mandates EU Member States to ensure that the information from centralised registries is available through an access point to be developed and operated by the European Commission.

The next step is for the Council to formally adopt the legislation, which will enter into force 20 days after its publication in the Official Journal. Member states are expected to apply measures implementing the Directive three years following its entry into force, with the exception of certain provisions relating to the bank account registers interconnection system that will apply five years following its entry 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

ESMA updates its Q&As on UCITS

On 28 May 2024, ESMA updated its Q&As on Undertakings for Collective Investment in Transferable Securities Directive (UCITS).  There are two new Q&As on performance fees.

ESMA asks for input on assets eligible for UCITS

On 7 May 2024, ESMA published a Call for Evidence on the review of the UCITS Eligible Assets Directive (EAD).

The objective of this call is to gather information from stakeholders to assess possible risk and benefits of UCITS gaining exposure to various asset classes.

Investors and consumer groups interested in retail investment products, management companies of UCITS, self-managed UCITS investment companies, depositaries of UCITS and trade associations are invited to provide their feedback on market practices and interpretation or practical application issues with respect to the eligibility criteria and other provisions set out in the UCITS EAD.  

ESMA is additionally interested in gathering insights on some key notions and definitions used in the UCITS EAD and their transversal consistency with other pieces of legislation in the EU Single Rulebook.  

UCITS are the key retail investment product in the EU, accounting for around 75% of all collective investments by retail investors. The acclaimed success of UCITS as a global brand is based on their established reputation of being well-regulated and supervised investment products. Most notably, UCITS shall be invested in assets subject to stringent eligibility criteria with a view to ensuring adherence to the investor protection principles underlying the UCITS Directive. 

Since the adoption of the UCITS EAD almost two decades ago, the number and variety of financial instruments traded on financial markets has increased considerably, leading to uncertainty in determining whether some categories of assets are eligible for investment, in turn giving rise to divergent interpretations and market practices in terms of the application of the UCITS Directive.  

ESMA’s technical advice on the review of the UCITS EAD therefore aims to preserve and strengthen the well-functioning of the UCITS framework and the operation of UCITS in the best interest of investors, as well as the quality of investment products offered to retail investors.  

ESMA will consider all feedback received by 7 August 2024 using the form available on the related webpage. Taking into account the evidence and views collected, ESMA will develop its technical advice to the European Commission. 

AIFMD

ESMA updates it Q&As on AIFMD

On 28 May 2024, ESMA updated its Q&As on the Alternative Investment Fund Managers Directive (AIFMD). There are two new Q&As on performance fees.[/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]UCITS and AIFs

ESMA Guidelines on the criteria for use of ESG and sustainability terms in fund names

On 14 May 2024, ESMA published its final report containing Guidelines on funds’ names using ESG or sustainability-related terms. 

The objective of the Guidelines is to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims in fund names, and to provide asset managers with clear and measurable criteria to assess their ability to use ESG or sustainability-related terms in fund names.

The Guidelines establish that to be able to use these terms, a minimum threshold of 80% of investments should be used to meet environmental, social characteristics or sustainable investment objectives. The Guidelines also apply exclusion criteria for different terms used in fund names: 

• “Environmental”, “Impact” and “sustainability”-related terms: exclusions according to the rules applicable to Paris-aligned Benchmarks (PAB); and
• “Transition, “Social” and “Governance”-related terms: exclusions according to the rules applicable to Climate Transition Benchmarks (CTB).

In cases of a combination of terms, use of transition, sustainability- and impact-related terms, and for funds designating an index as a reference benchmark, further criteria are specified in the Guidelines. 

The Guidelines will be translated into all EU languages and will subsequently be published on ESMA’s website. They will start applying three months after that publication.

Within two months of the date of publication of the Guidelines on ESMA’s website in all EU official languages, competent authorities to which these guidelines apply must notify ESMA whether they (i) comply, (ii) do not comply, but intend to comply, or (iii) do not comply and do not intend to comply with the guidelines.

The transitional period for funds existing before the application date will be six months after that date. Any new funds created after the application date should apply these Guidelines immediately in respect of those funds.[/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]CySEC’s announcement regarding the publication of the 3^rd Enhanced Follow-up Report by Moneyval

On the 3 May 2024, CySEC issued an announcement regarding Moneyval’s 3^rd Enhanced Follow-up Report for the assessment of Cyprus’ technical compliance to counter Money Laundering and the Financing of Terrorism (AML/CFT).

This is the third Follow-up Report on the Republic of Cyprus, during which MONEYVAL experts assessed the level of technical compliance established by the Republic to counter money laundering (ML) and terrorism financing (TF), in relation to Recommendations 8 and 15 of the Financial Action Task Force (the FATF). The Report assessed the level of technical compliance of all the involved Cyprus Authorities, including the CySEC.

MONEYVAL states that Cyprus has made clear progress towards improving the key deficiencies in Recommendation 15, particularly by undertaking and adopting a National Action Plan (based on the National Risk Assessment with respect to Virtual Assets and Virtual Asset Service Providers – the ‘NRA’) to address the risks of ML and TF, in relation to Crypto-Assets and Crypto-Asset Service Providers as well as the issuance by the CySEC of a Guidance document on matters relating to the prevention and suppression of terrorist financing in the context of crypto-asset activities. As a result of the upgrade, Cyprus has now achieved ‘Compliance’ or ‘Large Compliance’ on 37 out of the 40 FATF Recommendations. Cyprus has reached the general expectation of having remedied most of the technical compliance deficiencies at the end of its 3rd year of follow-up. Cyprus is expected to report back by May 2025.

CySEC’s announcement regarding the Call for Evidence on the review of the UCITS Eligible Assets Directive

On the 14 May 2024, the CySEC issued an announcement through which informed interested parties that  on 7 May 2024, ESMA published the Call for Evidence on the review of the Commission Directive 2007/16/EC on UCITS eligible assets (‘UCITS EAD’).

The Commission has mandated ESMA to carry out an assessment of the implementation of the UCITS EAD in the Member States and to analyse whether any divergences have arisen in this area and to provide a set of recommendations on how the EAD should be revised to keep it in line with market developments.

The Call for Evidence is of particular interest for investors and consumer groups interested in retail investment products, management companies of Undertakings for Collective Investment in Transferable Securities (UCITS), self-managed UCITS investment companies, depositaries of UCITS and trade associations.

ESMA shall accept the feedback provided by Wednesday 7 August 2024.[/vc_column_text][/vc_column][/vc_row][/vc_section]