Europe: EU/UK Regulatory Roundup

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Publication January 2018

A roundup of recent regulatory developments in the EU and UK. To receive daily updates on regulatory developments subscribe to our blog, Regulationtomorrow.com

Title Date Comment
ESMA consults on potential CFD and binary options measures to protect retail investors 18.01.2018 The European Securities and Markets Authority (ESMA) publishes a call for evidence on potential product intervention measures relating to the provision of contracts for difference (CFDs), including rolling spot forex and binary options to retail investors. In relation to CFDs, ESMA is considering restricting the marketing, distribution or sale to retail clients of CFDs, including rolling spot forex. ESMA states that the option of applying the restrictions to professional clients is not under consideration due to the lack of evidence of harm to this type of client. The deadline for comments on the call for evidence was 5 February 2018.
Commission Delegated Regulations supplementing the Benchmarks Regulation published in OJ 17.01.2018 The following Commission Delegated Acts are published in the Official Journal of the EU (OJ):
  • Commission Delegated Regulation (EU) 2018/64 of 29 September 2017 supplementing Regulation (EU) 2016/1011 of the European Parliament and of the Council with regard to specifying how the criteria of Article 20(1)(c)(iii) are to be applied for assessing whether certain events would result in significant and adverse impacts on market integrity, financial stability, consumers, the real economy or the financing of households and businesses in one or more Member States;
  • Commission Delegated Regulation (EU) 2018/65 of 29 September 2017 supplementing Regulation (EU) 2016/1011 of the European Parliament and of the Council specifying technical elements of the definitions laid down in paragraph 1 of Article 3 of the Regulation;
  • Commission Delegated Regulation (EU) 2018/66 of 29 September 2017 supplementing Regulation (EU) 2016/1011 of the European Parliament and of the Council specifying how the nominal amount of financial instruments other than derivatives, the notional amount of derivatives and the net asset value of investment funds are to be assessed; and
  • Commission Delegated Regulation (EU) 2018/67 of 3 October 2017 supplementing Regulation (EU) 2016/1011 of the European Parliament and of the Council with regard to the establishment of the conditions to assess the impact resulting from the cessation of or change to existing benchmarks.
The Commission Delegated Regulations entered into force on 6 February 2018.
Commission Roadmap – Delegated Act on MMF Regulation 16.01.2018 The European Commission (Commission) publishes a Roadmap on the Delegated Act on the Money Market Funds (MMF) Regulation, specifying quantitative and qualitative liquidity requirements applicable to assets received as part of a reverse repurchase agreement and on credit quality assessment. The deadline for feedback on the Roadmap was 12 February 2018.
ISDA updates Brexit FAQs 10.01.2018

The International Swaps and Derivatives Association (ISDA) updates its publicly available FAQs on Brexit which covers the following key areas:

  • contractual points under ISDA documentation;
  • choice of law, jurisdiction and recognition of judgements;
  • insolvency;
  • access to EU financial markets;
  • European Market Infrastructure Regulation (EMIR);
  • collateral;
  • Settlement Finality Directive;
  • Bank Recovery and Resolution Directive; and
  • amendments to the ISDA Master Agreement and transfers of existing contracts.
FCA Dear CEO letter to providers and distributers of CFDs 09.01.2018 The FCA publishes a Dear CEO letter to providers and distributers of CFD products. The Dear CEO letter summarises the findings of an FCA review of 19 firms that provide CFDs to intermediaries which in turn distribute this product to retail consumers on either an advisory or discretionary basis. Overall, the FCA observed that CFD providers and distributors may be failing to conduct their activities in accordance with the Principles for Businesses, the client’s best interests rule (COBS 2.1.1R) and the Senior Management Arrangements, Systems and Controls sourcebook.
AFME due diligence questionnaire to further standardise process for global custodians 08.01.2018 The Association for Financial Markets in Europe publishes a revised version of its Due Diligence Questionnaire (DDQ) which harmonises and simplifies the process of completing questionnaires for global custodians.
IOSCO statement on the use of financial benchmarks 05.01.2018 The International Organization of Securities Commissions (IOSCO) publishes a statement setting out matters for users of financial benchmarks to consider in selecting an appropriate benchmark and in contingency planning, particularly for scenarios in which a benchmark is no longer available.
FMLC paper on Brexit and impact of WTO rules on financial services 22.12.2017 The Financial Markets Law Committee publishes a paper on the potential impact of Brexit and World Trade Organisation (WTO) rules on financial services. The paper examines the future of the UK’s cross-border trade with the EU and the potential impact of the WTO rules.
Revised versions of JMLSG AML and CFT guidance 21.12.2017 The Joint Money Laundering Steering Group (JMLSG) publishes revised versions of its anti-money laundering (AML) and counter-terrorist financing (CTF) guidance.
FCA updates documents on reporting transparency information under AIFMD 20.12.2017

The FCA publishes an updated version of its Q&A document on reporting transparency information to the FCA. The document provides information to alternative investment fund managers about:

  • who is required to report transparency information;
  • what transparency information must be reported;
  • how the FCA will collect transparency information; and
  • how to register and how to use Gabriel to report transparency information.

Commission adopts legislative proposals for revised EU prudential framework for investment firms

20.12.2017 The Commission publishes legislative proposals that revise the EU prudential regime for investment firms. Under the legislative proposals EU investment firms would be classified into one of three categories for prudential purposes:
  • Class 1 investment firms are those with total assets above €30bn and which provide underwriting services and dealing on own account. These investment firms would remain under the CRD IV/ CRR;
  • Class 2 investment firms would be those above any of the following size thresholds: (i) assets under management under both discretionary portfolio management and non-discretionary arrangements higher than €1.2 billion; (ii) client orders handled of at least €100 million / day for cash trades and/or at least €1 billion / day for derivatives; (iii) balance sheet total higher than €100 million; (iv) total gross revenues higher than €30 million; (iv) exposure to risks from trading financial instruments higher than zero; (v) client assets safeguarded and administered higher than zero; and (vi) client money held higher than zero; and
  • Class 3 investment firms would be those below all of the above thresholds.
The minimum capital for class 3 investment firms would be either the level of initial capital required for their authorisation or a quarter of their fixed costs for the previous year, whichever is higher.

The minimum capital requirement for class 2 investment firms would be set either as for class 3 investment firms, or according to a new ‘K-factor’ approach for measuring their risks, whichever is higher. The K-factors specifically target the services and business practices that are most likely to generate risks to the firm, to its customers and to counterparties. They set capital requirements according to the volume of each activity.

Revised governance and remuneration requirements will also apply to class 2 and 3 investment firms.

The provisions in MiFIR on assessing the equivalence of a third country’s regulatory framework are adjusted in light of the proposals.

The legislative proposals are being discussed by the European Parliament and the Council of the EU. Once adopted, an implementation period of 18 months is envisaged before the new regime starts to apply.
FCA feedback statement on distributed ledger technology 15.12.2017 The FCA publishes Distributed ledger technology: Feedback statement on DP17/03. The FC14 states that nearly all respondents to its earlier Discussion Paper feel that these is generally no substancial barriers to adopting distributed ledger technology under existing FCA rules.
PFOF – priority area of FCA supervisory focus 13.12.2017 The FCA publishes a Dear CEO letter on payment for order flow (PFOF). In the Dear CEO letter, the FCA reiterates that firms that continue to charge PFOF will breach the new standards implemented in MiFID II, reminding firms that they must take action to ensure compliance and warn against any attempted models that seek to avoid these rules.
The Duty of Responsibility for FCA solo-regulated firms 13.12.2017 The FCA publishes Consultation Paper 17/42: The duty of responsibility for insurers and FCA solo-regulated firms (CP17/42). In CP17/42 the FCA consults on extending the duty of responsibility (that already applies to firms currently subject to the Senior Managers & Certification Regime (SM&CR)) to FCA solo-regulated firms and insurance and reinsurance firms. The deadline for comments on CP17/42 is 21 February 2018.
FCA consultation paper on transitioning FCA firms and individuals to the SM&CR 13.12.2017 The FCA publishes Consultation Paper 17/40: Individual Accountability: Transitioning FCA firms and individuals to the SM&CR (CP17/40). In CP17/40, the FCA consults on the operational aspects of extending the SM&CR to FCA solo-regulated firms, including how firms would transition from the approved persons regime to the SM&CR.

The deadline for comments on CP17/40 is 21 February 2018.
FCA consultations on approach to consumers, competition and authorisation 11.12.2017 The FCA publishes the following documents that are linked to its Mission 2017:
  • the FCA’s future approach to consumers. The document explores the FCA’s approach to regulating for retail consumers;
  • the FCA’s approach to competition. The FCA looks at how it delivers its competition objective; and
  • the FCA’s approach to authorisation. The FCA explains the purpose of, and its approach to authorisation, the public value it delivers and the changes it is making to improve its approach.
Commission and UK Government report on phase 1 of the Brexit negotiations 08.12.2017 The Commission and the UK Government jointly publish a report on the progress of phase 1 of the Brexit negotiations. The Commission is satisfied that sufficient progress had been made to allow the negotiations to move onto phase 2 dealing with the EU/UK future trading relationship.
The UK’s Investment Management Strategy II 06.12.2017 The HM Treasury publishes the UK’s Investment Management Strategy II. The report sets out the Government’s long-term strategy, to be delivered in collaboration with the industry, to ensure that the UK remains a globally competitive location for asset management.
Commission adopts Delegated Regulation supplementing ELTIF Regulation 04.12.2017 The Commission adopts a Delegated Regulation supplementing the Regulation on European long-term investment funds. The Council of the EU and the European Parliament will now consider the Delegated Regulation. If neither objects, the Delegated Regulation enters into force on the twentieth day following that of its publication in the OJ.
GLEIF published Entity Legal Forms Code List 30.11.2017 The Global Legal Entity Identifier Foundation (GLEIF) publishes the ‘Entity Legal Forms Code List’. The list covers more than 1,600 entity legal forms across more than 50 jurisdictions. The GLEIF will publish updated versions of the list periodically.
IOSCO reports on fourth hedge fund survey 23.11.2017 IOSCO publishes its latest biannual Hedge Fund Survey report. Among other things, the report makes the following observations:
  • according to the data of the survey, equity long/short was the most widely used investment strategy, followed by global macro and fixed income arbitrage; and
  • as of the measurement date, 3.8% of hedge fund assets had constrained redemptions through the use of liquidity management tools, such as gates, suspensions or side pockets.
IOSCO final report on good practices for termination of investment funds 23.11.2017 IOSCO publishes a report setting out good practices on the voluntary termination of collective investment schemes and other fund structures such as commodity, real estate and hedge funds.
ESMA updates Q&As on MAR 21.11.2017

ESMA publishes an updated version of its Q&As on the Market Abuse Regulation (MAR). ESMA added answers on the following questions:

  • how should permission to trade in a closed period, which may be granted in certain circumstances to persons discharging managerial responsibilities (PDMR) in accordance with Article 19(12) of the MAR, be considered in the context of Article 14 of MAR?

  • are the types of “transaction” by a PDMR prohibited during a closed period under Article 19(11) of MAR the same as those types of transaction subject to the notification requirements set out under Article 19(1) of MAR?

ESMA final report on MMF Regulation 17.11.2017 ESMA publishes a final report containing its technical advice, draft implementing technical standards (ITS) and guidelines under the MMF Regulation. With respect to the ITS on the establishment of a reporting template and the timing of implementation of the corresponding data base, ESMA confirms that managers would need to send their first quarterly reports mentioned in Article 37 to national competent authorities (NCAs) in October / November 2019.
FCA speech on effective compliance with MAR 14.11.2017 The FCA publishes a speech given by Julia Hoggett (Director of Market Oversight, FCA). The speech is entitled ‘Effective compliance with MAR – a state of mind’. Among other things, the FCA notes that it expects firms to ensure that their systems are in constant evolution to meet the changing nature and needs of the businesses within which they operate.
Public consultation on institutional investors and asset managers’ duties regarding sustainability 13.11.2017 The Commission issues a consultation document seeking information on how asset managers and institutional investors could include environmental, social and governance factors when taking decisions. The deadline for comments on the consultation document was 22 January 2018. The Commission will adopt an Action Plan on sustainable finance in Q1 2018.
ESMA highlights ICO risks for investors and firms 13.11.2017 ESMA issues two statements on initial coin offerings (ICOs), one on the risks of ICOs for investors and one on the rules applicable to firms involved in ICOs.

Official Journal: Regulation amending EuVECA Regulation and EuSEF Regulation

10.11.2017 There is published in OJ, Regulation (EU) 2017/1991 of the European Parliament and of the Council of 25 October 2017 amending Regulation (EU) No 345/2013 on European venture capital funds and Regulation (EU) No 346/2013 on European social entrepreneurship funds. The Regulation applies from 1 March 2018.

FCA Market Watch issue 54

07.11.2017 The FCA publishes Market Watch 54. In this issue of Market Watch, the FCA focusses on the MiFID II LEI.

FCA publishes Future Approach to Consumers

06.11.2017 The FCA publishes its ‘Approach to Consumers’ paper which explores its approach to regulating retail consumers. The paper sets out the FCA’s initial views on what good looks like for all retail consumers, and aims to clearly explain how the regulator will work to diagnose and remedy actual and potential harm, giving more certainty about its framework.

FSB considers financial stability implications of artificial intelligence and machine learning

01.11.2017 The Financial Stability Board (FSB) publishes a report that considers the financial stability implications of the growing use of artificial intelligence (AI) and machine learning in financial services. Overall, the FSB finds that AI and machine learning applications show substantial promise if their specific risks are properly managed.
MiFID II: EU issues guidance on obtaining brokerage and research services from non-EU brokers 26.10.2017

The Commission issues FAQs in order to clarify how EU investment firms should interact when they seek out brokerage and research services from broker-dealers in non-EU countries.

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