The European Market Infrastructure Regulation (“EMIR”), providing for the regulation of derivatives in the EU, has been in force since 2012, and rules requiring reporting of derivative transactions to trade repositories started to be phased in from early 2014. In April 2015, the European Securities and Markets Authority (“ESMA”) announced its plans for a single access point for trade repository data under EMIR. The facility will be called the Trade Repositories Project and will provide ESMA and national competent authorities with immediate access to 300 million weekly reports on derivatives contracts received from 5,000 different counterparties across the EU trade repositories, all through a single platform. It is assumed that data submitted will not be accessible to market participants other than ESMA and the 27 national competent authorities, although questions remain around what the regulators will do with the data once received. The project is expected to go live in 2016, with the aim of bringing transparency and clarity to the EMIR trade reporting mandate. Furthermore, in November 2015, ESMA published an update of the existing technical standards on EMIR reporting. The updated technical standards aim to address the shortcomings and limitations in EMIR reporting that have come to light since its implementation by instituting a more consistent and harmonised approach to population of data fields and reporting of complex derivatives. The final draft technical standards have been sent to the Commission, which has three months within which to endorse them, and then, if approved by the European Parliament and the Council of the EU, these may take effect in 2016.
From June 2016, mandatory central clearing for OTC interest rate swaps denominated in euros, pounds sterling, Japanese yen and US dollars will apply, following publication of the final draft regulatory standards (“RTS”) relating to these currencies in the Official Journal of the EU (the “OJ”) on 1 December 2015. The classes of derivatives covered by this obligation will be plain vanilla interest rate basis swap derivatives, fixed-to-float swaps, forward rate agreements and overnight index swaps. The clearing obligations will be applied to four different categories of counterparties, each with different phase-in periods in order to give smaller market participants additional time to begin complying. The clearing obligation for Category 1 counterparties (clearing members) will take effect on 21 June 2016 and for Category 2 counterparties (other financial counterparties or alternative investment funds (AIFs) with outstanding trades with a gross notional amount exceeding EUR8bn) on 21 December 2016. The obligations for Category 3 (other financial counterparties or AIFs) and Category 4 (all other non-financial counterparties) counterparties will take effect in 2017 and 2018 respectively. In addition to this, in November 2015, ESMA published a final report setting out additional draft regulatory technical standards which propose mandatory clearing for interest rate derivatives denominated in Norwegian krone, Polish zloty and Swedish krona. This draft has been sent to the Commission, who have three months within which to endorse it, after which there will be a period of scrutiny by the European Parliament and the Council of the EU before it can then be published in the OJ. We may, therefore, see mandatory clearing introduced for these currencies in 2016.
In respect of any OTC derivatives transactions which are not subject to central clearing, EMIR requires certain counterparties to exchange collateral as a way of reducing counterparty risk exposure. In its June 2015 consultation paper, the European Supervisory Authorities’ draft RTS prescribed the amount of initial and variation margin to be posted and collected as collateral and provided for the phase-in of these margin requirements by applying the initial margin requirements only to the largest counterparties from the outset in September 2016, with a deadline of September 2020 for all counterparties with a notional amount of non-centrally cleared derivatives in excess of EUR 8 billion. Variation margin requirements for the largest institutions, i.e., those with an aggregate average notional amount of non-centrally cleared derivatives above EUR 3 trillion, is expected to apply from 1 September 2016 and to all other counterparties from 1 March 2017. The draft RTS are expected to be finalised in January 2016.
The regulation on key information documents (“KIDs”) for packaged retail and insurance-based investment products (“PRIIPs”) will become effective in December 2016. When a person is advising on or selling a PRIIP to retail investors, a pre-contract KID must be provided to the investor. The regulation contains detailed requirements as to the form and content of the KID. In November 2015, the ESAs released a joint consultation paper setting out draft regulatory technical standards focusing on the presentation and content of the KID (including methodologies for calculating and presenting risks, rewards and costs), the review, revision and republication of KIDs, and the conditions for fulfilling the requirement to provide the KID in good time. Input in respect of the consultation is invited by the end of January 2016.
The use of benchmarks in financial transactions has been in focus in recent years following alleged misconduct in relation to the setting of LIBOR and other financial indebtedness. In July 2013, the International Organisation of Securities Commissions (“IOSCO”) published principles for financial benchmarks, and later that year the European Commission published a draft regulation in relation to indices used as benchmarks in financial contracts, with the aim of reducing the risk of manipulation by ensuring that benchmark providers in the EU have prior authorisation and are subject to prior supervision. On 24 November 2015, the Council of the EU, the European Parliament and the Commission reached a preliminary political agreement on the proposed benchmark regulation. It includes a classification of benchmarks based on three categories with obligations (governance, transparency of methodologies and administrators’ obligations) applied proportionately to these categories, as well as an equivalence regime for the purpose of recognition of non-European benchmarks within the EU. Subject to endorsement by the Council of the EU and the European Parliament by the end of 2015, the final, agreed text of the regulation will be adopted and subjected to legal review. Publication in the OJ is expected in March or April 2016, although the regulation will not apply for a further 12 months thereafter.
Prospectus Directive (PD3)
As part of its Capital Markets Union action plan, on 30 November 2015, the European Commission proposed a number of adjustments to the rules governing fundraising on public markets or through offers to the public, in the form of a regulation that will replace the current Prospectus Directive. In particular, focus has fallen on the somewhat burdensome requirements of mandatory disclosure under the Prospectus Directive (such amendments forming the basis of a second significant overhaul of the legislation, therefore coining the term “PD3”). Proposed amendments are varied but concentrate on reducing requirements for small-and medium-sized companies. They include (amongst others) broader exemptions for small capital raisings (it is currently proposed that no prospectus will be required for capital raisings which are, in total, below €500,000 (up from €100,000 at present)), creation of a lighter-touch disclosure regime for SMEs, reduction in the length of prospectus summaries (and welcome harmonisation of such summaries with the KID required under the PRIIPs Regulation), fast-tracking and simplification for frequent issuers via use of a “Universal Registration Document” (similar to a shelf registration concept) and creation of a single access point for all EU prospectuses, making them more available and accessible for investors. Most of the other exemptions from publishing a prospectus for an offer of securities to the public in the EU remain unchanged, such as the professional investor exemption, the 150 offerees per EU-member state exemption and offers addressed to investors who acquire securities for a total consideration of at least €100,000 per investor (though the minimum denomination exemption of €100,000 is proposed to be removed). It is not yet known when the new regulation is proposed to take effect.
MiFID II is the overhaul of the Markets in Financial Instruments Directive and comprises a Regulation (“MiFIR”) and a recast Directive. It came into force in August 2014 but was not slated to become effective until 1 January 2017. Following confirmation by ESMA in October that MiFID’s technical standards (including provisions relating to investor protection, market infrastructure, compulsory exchange trading of derivatives and pre-and post-trade transparency for derivatives and debt securities) would not be finalised until March 2016 at the earliest, the European Parliament (on 27 November 2015) confirmed that it was ready to accept a one year delay of the package of proposals, subject to the swift finalisation of the implementing legislation and a clear roadmap for setting up implementation work. In the meantime, 2016 will see work continue in relation to finalising the secondary legislation, consulting on a range of outstanding issues, including systems and controls, enforcement and client assets, as well as transposition (in respect of the Directive) into the domestic laws of Member States.