ECB updates FAQs on procedure for relocation of banks to euro area
On 11 January, the ECB updated its FAQs on the procedure for the relocation of banks to the euro area in the context of Brexit. Under the heading "Internal governance and risk management", the ECB has added: (i) a new FAQ: "Can I continue to provide services to customers in the EU from a branch in London post Brexit?"; (ii) an updated answer to the existing FAQ: "Will the use of a back-to-back booking model be accepted? What arrangements do you expect to be in place when it comes to booking models generally?"; and (iii) a new FAQ: "How will booking models be assessed? What are the supervisory expectations vis-à-vis back-to-back booking?". Under the heading "Issues related to ongoing supervision", the ECB has added: (i) a new FAQ: "The EBA has recently published an opinion on Brexit issues with a view to ensuring the consistent application of EU legislation to businesses seeking to establish or enhance their EU27 presence. Will there be any changes as a consequence of that EBA opinion?".
ISDA updates Brexit FAQs: financial services regulatory aspects
On 10 January, ISDA updated its FAQs on Brexit which were originally published in October 2017. The FAQs address the possible UK position post-Brexit. They include a section on access to the EU financial markets (see the FAQs in section 16). Points of interest in that section include: (i) the UK may request an equivalence decision under MiFID II, which would allow UK firms to register with ESMA to provide investment services to eligible counterparties and professional clients in the EU - the UK regime should, objectively, be equivalent, but in practice there is no guarantee that an equivalence decision will be granted. There is also still a potential gap risk due to the lengthy time period involved in making an equivalence decision and in firms then becoming registered with ESMA. In addition, not all of MiFID II is covered by the equivalence regime. For example, dealings with retail clients and elective professional clients are not covered; and (ii) CRD IV contains no provisions for third-country equivalence - in the absence of an agreement between the UK and the EU to extend the CRD IV passport for banking services to the UK, a UK credit institution would have to either provide banking services on a wholly unsolicited basis, or on the basis of narrowly defined local law exemptions, or would need to establish a subsidiary and obtain authorisation in an EU member state to provide those services. Among other things, the FAQs also consider whether UK OTC derivatives counterparties will be required to comply with the EMIR clearing, reporting and risk-mitigation requirements (see FAQ sections 17 to 22), collateral (see FAQ 23), SFD (see FAQ 24), BRRD (2014/59/EU) (see FAQ sections 25 to 27) and banking business transfer schemes under Part 7 of the FSMA (see FAQ 29). ISDA has also updated the more in-depth Brexit FAQs for its membership.
UK Government article on importance of "deep and special" partnership with EU
On 10 January, the UK government published an article issued jointly by Philip Hammond, Chancellor of the Exchequer, and David Davis, Secretary of State for Exiting the EU, on a "deep and special" partnership between the UK and the EU. Points of interest in the article for financial services practitioners include: (i) the collective efforts of the UK and the EU must be re-doubled to ensure that that hard-earned financial stability is not put at risk, by getting a deal that supports collaboration within the EU banking sector, rather than forcing it to fragment; (ii) for a close trading partnership in services to succeed, the UK and the EU will need to maintain their common principles, including their shared belief in high standards, and continue the intelligent co-operation of the UK and EU regulators; and (iii) the UK government proposes to provide as much certainty as possible to businesses throughout the EU through a time-limited implementation period after the UK leaves the EU. During this period, the UK government proposes that access to one another's markets will continue in its current form, using the EU's existing rules, regulations and agencies. In this way, UK and EU businesses will have time to prepare for a single set of changes, once it is clear what the future trading partnership will look like.
EC speech on future relationship between EU27 and UK
On 9 January, the EC published a speech given by Michel Barnier, the EU's chief Brexit negotiator, on the future relationship of the EU27 with the UK. Among other things, Mr Barnier considers what kind of future relationship the UK wants with the EU27. He notes that there is not yet an answer to this question, but believes it is possible to proceed by deduction, based on the EU's legal system and the UK’s "red lines". Mr Barnier comments that, as a result of the UK red lines, the only model possible is a FTA. This would, of course, be adapted to the specificities of the relationship between the EU27 and the UK, in the same way that the EU agreement with Canada is not identical to its agreements with Korea or Japan. Mr Barnier stresses that, however ambitious, an FTA cannot include all the benefits of the single market or the customs union. With regards to financial services, he states that a FTA may include provisions on regulatory co-operation, as is the case with Japan. This regulatory co-operation may take the form of a regular dialogue, like the one the EU has with the US. However, the EU has never given up its regulatory autonomy. The EU has developed a single rulebook and more integrated EU supervision, which guarantee financial stability, investor protection, market integrity and a level playing field. A member state leaving this very precise framework and the accompanying supervision, gains the ability to diverge from it. However, by the same token, that member state loses the benefits of the internal market. Its financial services providers cannot enjoy the benefits of a passport to the single market, or those of a system of a generalised equivalence of standards.
CAPITAL MARKETS AND MARKET INFRASTRUCTURE
ESMA thematic report on fees charged by CRAs and TRs
On 11 January, ESMA published a thematic report following the conclusion of its supervisory review of the current fee structures of CRAs and TRs (ESMA80-196-954). It has also published the following factsheets that accompany the report, which outline areas of supervisory focus and key observations in the report: (i) Fact Sheet on the thematic report: Credit Rating Agencies (ESMA71-99-924); (ii) Fact Sheet on the thematic report: Trade Repositories (ESMA71-99-923). The report sets out ESMA's views on the application of requirements that fees charged by CRAs should be non-discriminatory and cost-based (under the CRA regulation), and that TRs provide non-discriminatory access and charge publicly disclosed and cost-related fees (under EMIR). The report outlines three main areas that give rise to supervisory concerns: (i) transparency and disclosure; (ii) fee-setting process; and (iii) interaction with entities related to CRAs and TRs. ESMA explains that, going forward, these areas will form the core of its supervisory focus. ESMA will continue to engage with both supervised entities and their clients to ensure effective application of the fee provisions (for example, on costs, price deviations and controls in place). It may also decide to provide further supervisory guidance to ensure compliance with the relevant requirements.
EP non-objection to Delegated Regulations under BMR
On 10 January, the EP updated its procedure files for the following Delegated Regulations supplementing the Regulation on BMR to reflect its non-objection to them: (i) Commission Delegated Regulation supplementing the BMR with regard to specifying technical elements of the definitions laid down in Article 3(1) of the BMR (2017/2883(DEA)); (ii) Commission Delegated Regulation supplementing the BMR with regard to 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 (2017/2884(DEA)); and (iii) Commission Delegated Regulation supplementing the BMR with regard to specifying how the criteria of Article 20(1)(c)(iii) of the BMR 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 (2017/2885(DEA)). These Delegated Regulations were all adopted by the Commission in September 2017 and will enter into force 20 days after publication in the EU.
EMIR – ESMA consultation on guidelines on anti-procyclicality margin measures
On 8 January, ESMA published a consultation paper on draft guidelines on anti-procyclicality margin measures for CCPs (ESMA70-151-1013). The aim of the draft guidelines is to clarify the application of EMIR in the context of the procyclicality of margins with the aim of ensuring common, uniform and consistent application of Article 41 of EMIR and Article 28 of the RTS. They cover the monitoring of margin procyclicality, the implementation of APC margin measures and disclosures intended to facilitate margin predictability. The deadline for comments is 28 February. ESMA expects to publish the final guidelines by the first half of 2018.
Global custodians – AFME updates post-trade due diligence questionnaire
On 8 January, AFME published a revised version of its post-trade due diligence questionnaire (DDQ) which harmonises and simplifies the process of completing questionnaires for global custodians. A related press release explains that AFME's DDQ taskforce reviewed the 2016 version of the DDQ and additional questions proposed by market participants. The revised DDQ incorporates approximately 20 additional questions. The revised document should further standardise the process by allowing firms to use the AFME DDQ without sending a sizeable addendum of additional questions. An additional section has also been added for when the recipient is providing Global Custody services, following a request from AFME members.
Financial benchmarks – IOSCO statement on use of financial benchmarks
On 5 January, IOSCO published a statement that sets out matters for users of financial benchmarks to consider when selecting an appropriate benchmark and in contingency planning. The matters for users to consider fall into two categories, namely those related to: (i) assessing the appropriateness of a benchmark, in both its initial selection and ongoing use; and (ii) contingency planning, such as if the selected benchmark becomes unavailable. In both cases, the statement recognises users' reliance on benchmarks, aims to increase awareness of the risks involved and encourages their mitigation, where appropriate. Users of benchmarks are encouraged to consider the matters covered in the statement, as appropriate.
FCA publishes "Dear CEO" letter to CFD providers and distributors on the FCA's review of CFD market
On 10 January, the FCA published a "Dear CEO" letter that it sent to providers and distributors of CFD products. It has also updated its webpage on CFDs to refer to that letter. The letter reminds firms that CFDs are high-risk, complex financial products and refers to its recent review of the CFD market, under which it assessed the conduct of 19 firms providing the CFD service and 15 firms that distribute the product (on either an advisory or discretionary basis) and deal with the end consumer. The review uncovered "areas of serious concern", which the FCA is now seeking to highlight to firms across the industry, regarding: (i) target market identification and aligning this group to the characteristics of the product; (ii) communication, oversight and challenge on the part of providers; (iii) providers' process for taking on new distributors and distributors' management of conflicts of interest; and (iv) client categorisation by distributors and remuneration arrangements within distributors. Given the "significant weaknesses" across the sample of firms assessed for the review, the FCA believes that there is a high risk that firms across the sector are not meeting its rules and expectations when providing and distributing CFDs. As a result, consumers may be at serious risk of harm from poor practices. The FCA notes that Firms must consider the issues raised and whether they comply with the FCA's requirements when providing or distributing CFDs to retail customers on an advisory or discretionary basis. The FCA intends to carry out further work on these topics and may ask firms to take part in a follow-up review to assess the response to the feedback provided. The FCA advises firms to pay specific attention to the FCA's new Product Intervention and Product Governance sourcebook (PROD), which implements MiFID II's product governance requirements. When the FCA follows up on CFD provision and distribution in the future, it will assess firms' arrangements against the PROD requirements.
Please see the Conduct section for an update to CFD providers and distributors on the FCA's review of CFD market.
FCA publishes Insight article on driving consumer credit growth
On 8 January, the FCA published an Insight article that considers who is driving consumer credit growth. The article explains that, for many years, regulators have relied on aggregated data from large lenders to monitor which lenders and products are driving credit growth. This data is useful, but has important gaps. For example, it does not include less-mainstream products that people with low incomes often rely on. Also, it does not show who is borrowing, or people's overall debt across different lenders and products. Although consumer surveys can offer some insights in this area, they often have limited product coverage, are only available with a lag, and may suffer from misreporting. In the light of concerns about the growth of consumer credit, the FCA asked CRAs to provide it with data for one in ten consumers. The article summaries the following particular insights that have emerged from this work: (i) credit growth has not been driven by sub-prime borrowers; (ii) people without mortgages have mainly driven credit growth - it is noted that a key question going forward is how much of the growth is coming from renters and how much from outright owners; and (iii) consumers remain indebted for longer than product-level data implies.
PRA consults on insurance reporting requirements changes
On 11 January, the PRA published a consultation paper (CP2/18) proposing a number of changes to its insurance reporting requirements. The proposals in CP2/18 are intended to reduce the reporting burden on firms and mutuals that fall within the scope of Solvency II. The PRA proposes to: (i) update the scope, content and format of eight of the thirteen National Specific Templates (NSTs), found in rule 2.6 and Chapter 8 of the Reporting Part of the PRA Rulebook, with effect for the financial year-end 2018 submissions - the proposed changes are set out in the draft PRA Rulebook: Solvency II: Reporting Amendments Instrument (No 1) 2018, in Appendix 1 to CP2/18; (ii) amend the content of the corresponding NST LOG files and introduce a new supervisory statement: Solvency II: National Specific Templates LOG Files, which contains the LOG files - the draft supervisory statement, which is set out in Appendix 3 of CP2/18, formally clarifies the PRA's expectations on how the templates should be completed. In Appendix 2, the PRA provides additional clarification on how to complete the NSTs in order to improve data quality and consistency; (iii) update its supervisory statement: Solvency II: Regulatory Reporting and Exemptions (SS11/15), with respect to the process for applying for quarterly reporting waivers and clarification on the timing when a firm resumes reporting when a waiver expires or has been revoked; and (iv) amend rule 5.2 of the Change in Control Part of the PRA Rulebook to exempt mutuals from submitting annual controller reports if they do not have a controller. Links to the draft NST requirements and LOG files being consulted on can be found on the PRA's dedicated webpage for CP2/18. The proposals are relevant to all UK Solvency II firms, the Society of Lloyd's and its managing agents and mutuals. The deadline for responses to the proposals is 13 April.
MiFIR - New FCA transaction reporting instrument reference data errors and omissions form
On 11 January, the FCA updated its webpage on instrument reference data to make available a new instrument reference data errors and omissions form. The FCA advises that trading venues and SIs may use the new form when complying with the duty to notify the FCA of any errors or omissions in the trading venues and SIs instrument reference data. Firms should provide as much information as possible when completing the form and completed forms should be submitted to the FCA's markets reporting team (MRT) at email@example.com as soon as possible. Use of the form should help ensure that the FCA is provided with the necessary information for the purposes of handling errors or omissions in instrument reference data.
MiFID II – ESMA delays publication of data on double volume cap mechanism
On 9 January, ESMA announced that it has decided to delay the publication of the data on the double volume cap (DVC) mechanism for January. This is because the current quality and completeness of the data does not allow for a sufficiently meaningful and comprehensive publication of double volume cap calculations, as required under MiFID II/MiFIR. Publication would result in a biased picture covering only a very limited number of instruments and markets, which could create an unlevel playing field. ESMA explains that it is engaging with NCAs and trading venues, to close the gaps in reporting as soon as possible. Having analysed the data received, ESMA is aware of which venues have so far not succeeded in submitting an adequately complete set of data and will address them first to improve the completeness of the available dataset. ESMA believes that the initial technical and reporting problems leading to the delay can be overcome within the next few weeks, assuming there is good co-operation from trading venues. In March 2018, ESMA intends to publish the data on the DVC, in March.
MiFID II/MiFIR – Recent ESMA publications
On 9 December, ESMA published the following publications under MiFID II/MiFIR: (i) a register for the trading obligation for derivatives under MiFIR; (ii) a register of derivatives to be traded on-venue under MiFIR - the register provides clarity to market participants on the application of the trading obligation under MiFIR and in particular on: (a) the classes of derivatives subject to the trading obligation; (b) the trading venues on which those derivatives can be traded; and (c) the dates on which the obligation takes effect per category of counterparties - the public register will be updated in case of changes, such as when new trading venues offer trading in the derivatives subject to the trading obligation. ESMA notes that it will consult market participants before including more derivatives in the scope of MiFIR's trading obligation; (iii) a list of trading venues benefiting from a transitional exemption from the access provisions under MiFIR; (iv) a list of trading venues temporarily exempted from open access under MiFIR; and (v) a list of supplementary deferral regimes under MiFID II.
MiFID II - ESMA publishes overview of the position management controls for commodity derivatives
On 8 January, ESMA published an overview of the position management controls for commodity derivatives under MiFID II. The first badge of position management controls for commodity derivatives were published by ESMA on 9 January.
PAD technical standards published in OJ
On 11 January, the following technical standards required under the PAD were published in the OJ: (i) Commission Delegated Regulation (EU) 2018/32, which contains RTS for standardised terminology for the most representative services linked to a payment account - the RTS relate to mandates under Article 3(4) of the PAD. The standard terms and definitions for the services linked to a payment account that are common to at least a majority of member states are set out in the Annex to the Delegated Regulation; (ii) Commission Implementing Regulation (EU) 2018/33, which contains ITS on the standardised presentation format of the statement of fees and its common symbol - the ITS relate to a requirement under the PAD that member states ensure that PSPs provide the consumer, at least annually and free of charge, with a statement of all fees incurred, as well as, where applicable, information regarding the interest rates for services linked to a payment account; (iii) Commission Implementing Regulation (EU) 2018/34, which contains ITS with regard to the standardised presentation format of the fee information document and its common symbol – the ITS relate to a requirement under the PAD that member states ensure that PSPs provide the consumer with a fee information document on paper or another durable medium containing the standardised terms in the final list of the most representative services linked to a payment account and, where such services are offered by a PSP, the corresponding fees for each service. The Regulations were adopted by the Commission on 28 September 2017 and will enter into force on 31 January (that is, 20 days after their publication in the OJ).
ECB article: insights into the digital transformation of the retail payments ecosystem
On 10 January, the ECB published an article on the digital transformation of the retail payments ecosystem. In the article, the ECB discusses: (i) innovation; (ii) how the digital evolution is affecting the retail payments ecosystem; (iii) the role of central banks in retail payments innovation; (iv) how incumbent banks can embrace innovation; (v) instant payments – adoption and interoperability; (vi) virtual currencies; (vii) customer choice and behaviour; and (viii) cyber security.
IFRS 9 - PRA Dear CFO letter sets out expectations on minimum disclosures about expected credit loss on transition to IFRS 9
On 11 January, the PRA published a Dear CFO letter (dated 8 January) on transition disclosures for IFRS 9 financial instruments. The purpose of the letter is to set out the PRA's expectations following discussions with the larger UK-headquartered credit institutions in August 2017 regarding good disclosures about expected credit loss (ECL). The expectations are set out in an annex to the letter. They cover a number of different areas, including: (i) the objective and content of transition disclosures; (ii) general comments about transition disclosures; and (iii) quantitative measurement uncertainty and sensitivity disclosures. The PRA considers that these expectations are likely to be of some relevance to other credit institutions, particularly those that actively manage their investor base. However, the PRA has not discussed transition disclosure with those firms, so it is not addressing its expectations to them. The letter explains that, the ECL accounting requirements in IFRS 9 are fundamental to the financial statements of credit institutions with large (relative to balance sheet) credit portfolios. It is therefore important for the PRA's statutory objectives that market participants understand the implications for credit institutions of the move to ECL from the incurred loss provisioning model under IAS 39.
MREL – PRA consultation on MREL reporting
On 8 January, the PRA published a consultation paper relating to reporting on MREL (CP1/18). In CP1/18, the PRA proposes amendments to its supervisory statement on resolution planning (SS19/13) intended to set out its expectations for firms'' reporting on MREL. In particular, the PRA intends to add a new part A4 to chapter 2 of SS19/13 directed at firms that have been notified by the BoE that they are or are likely to be subject to external or internal MREL in excess of regulatory capital requirements. The PRA expects firms to submit information on MREL resources using the following new templates, which have been published separately from CP1/18 together with draft guidance notes: (i) MREL Resources (MRL01.00) - this template is intended to collect information on the amount and maturity profile of MREL eligible liabilities, cross-holdings of MREL and regulatory capital that does not qualify as MREL resources; (ii) MREL Resources Forecast (MRL02.00) - this template is intended to collect information on projected MREL eligible resources; and (iii) MREL Debt (MRL03.00) - this template is intended to collect data on individual characteristics of internal and external MREL resources to monitor compliance with the eligibility criteria. The deadline for comments is 9 April.
FCA/PSR appointments – HMT announces new chair of FCA and PSR
On 5 January, HMT announced that Charles Randell CBE has been appointed as the new Chair of the FCA and Chair of the PSR, with effect from 1 April. The appointments are each for a five year term. Mr Randell replaces John Griffith-Jones in both roles, whose departure on 31 March was announced in July 2017.