Brexit - EiOPA guidance on authorisation and supervision principles in light of Brexit
On 25 May, an article was published on Reuters reporting that EIPOA is to publish guidance for national regulators on sound principles for authorisation and supervision in the light of Brexit. The fear is that financial institutions may undercut one another in their attempts to attract firms moving from London due to Brexit. EIOPA's head of policy, Manuela Zweimuller, has announced at a conference that EIOPA is monitoring developments in this area and will publish guidance in due course. According to the article, ESMA is also to publish guidelines on this issue before the summer. It reports that ESMA's chairman has said it has discussed the potential risks of new "letter box" companies being set up in the EU, which would delegate key operations to group companies in London. ESMA warns that these arrangements could undermine stability.
Brexit – Council of EU authorises EC to start negotiations on behalf of EU
On 22 May, the General Affairs Council, meeting in an EU-27 format, adopted a Council Decision authorising the opening of negotiations with the UK for an agreement setting out the arrangements for its withdrawal from the EU. The Council Decision formally nominates the EC as the EU's negotiator, and authorises the opening of the negotiations. It provides that the negotiations will be carried out in accordance with the negotiating directives set out in the Annex. The EC can now agree the dates for the negotiating sessions with the UK. The first formal meeting between the EU and the UK is expected to take place on 19 June. A European Council summit on Article 50 is scheduled for 22-23 June.
CAPITAL MARKETS AND MARKET INFRASTRUCTURE
LBMA launches new global precious metals code
On 25 May, the LBMA launched a new global precious metals code. Alongside the code, the LBMA has published an explanatory note that provides guidance on how the code may be used and implemented. Although the explanatory note does not replace or supplement the code, it is intended to provide an overview of the code, particularly for market participants that are not subject to financial regulation. The LBMA will review and update the explanatory note periodically to reflect frequently asked questions. The code sets out the standards and best practice expected from participants in the global OTC wholesale market for precious metals. It is intended to define a robust, fair, effective and transparent market where all participants are able to transact following best practice guidelines. In addition to market conventions, the code contains a common set of principles to promote the integrity and effective functioning of the global market, covering ethics, governance, compliance and risk management, information sharing and business conduct. In a related press release, the LBMA explains it is intended that, as far as practically possible, the code is aligned with the new FX global code, which was also published on 25 May and contains a set of global principles of good practice in the FX market. This is the first time a stand-alone global precious metals code has been issued and the LBMA believes that it represents an important step in market development.
Press Release: Click here
FX market – GFXC requests feedback on last look practices in FX market
On 25 May, the Global Foreign Exchange Committee (GFXC) issued a request for feedback on last look practices in the FX market This is the GFXC's first request for feedback on the FX global code, which was launched on 25 May The request explains that, as the structure of the FX market evolves in the future and market practices adapt, the GFXC is committed to evolving the code to maintain its relevance. In this respect, the GFXC intends to periodically request feedback from market participants and others on specific topics. The GFXC's first feedback request focuses on a practice within electronic trading known as last look, specifically trading activity during the last look window related to a last look trade request. The FX global code defines last look as "a practice utilised in electronic trading activities whereby a market participant receiving a trade request has a final opportunity to accept or reject the request against its quoted price”. Principle 17 of the FX global code provides guidance on four related topics, which reflect the dominant themes related to last look identified by private and public sector representatives involved in the drafting of the FX global code: the purpose(s) of last look; governance and controls designed to limit the use of last look beyond its intended purpose(s); the use of information obtained from a client trade request, including through trading activity in the last look window; and client transparency regarding the functioning of last look, including minimum disclosures. The Principle 17 guidance is aimed at encouraging improved transparency and controls surrounding the use of last look. The GFXC raises two specific questions in the request, which closes to responses on 21 September. The GFXC hopes that respondents will use this and future feedback requests opportunity to exchange views on trends and developments in global FX markets.
FX global code - FCA and BoE respond to launch of complete FX global code
On 25 May, the BoE published a press release and the FCA issued a statement, responding to the launch of the complete FX global code. The complete FX global code comprises a set of global principles of good practice in the FX market. It was published by the new Global FX Committee (GFXC) on 25 May. In its press release, the BoE confirms that the FX global code supersedes and substantively updates existing guidance for participants in FX markets provided by the BoE's non-investment products (NIPs) code. Guidance on other markets covered by the NIPS code will be superseded by the BoE's new UK money markets code and the new precious metals code published by the London Bullion Market Association (LBMA) on 25 May. In its statement, the FCA welcomes the FX global code. It believes that, as explained in its Mission 2017, standards can be a useful way for the industry to police itself in support of our regulatory work and can help firms to communicate expectations of individuals when linked to the SM&CR. The FCA expects firms, senior managers, certified individuals and other relevant persons to take responsibility for and be able to demonstrate their own adherence with standards of market conduct. The FCA's supervision of the SM&CR rules supports this. The statement goes on to say that firms have already begun work to ensure their FX businesses satisfy the principles of the FX global code. The FCA states that firms can help to promote the wide adoption of the FX global code by expecting that their FX counterparties also take steps to adhere to it as it applies to them.
BoE Press Release: Click here
FCA Statement: Click here
FX global code - GFXC launches complete FX global code
On 25 May, the Global Foreign Exchange Committee (GFXC) launched a new FX global code. The FX global code is a set of global principles of good practice in the FX market, developed to provide a common set of guidelines to promote the integrity and effective functioning of the wholesale FX market. The FX working group (FXWG), established by the BIS to develop the FX global code in collaboration with market participants, has published a separate report that sets out a blueprint for achieving widespread adoption of, and adherence to, the FX global code.
FX Market - New Global Foreign Exchange Committee established
On 25 May, the new Global Foreign Exchange Committee (GXFC) published a press release announcing its establishment. The press release reports that public and private sector representatives from the foreign exchange (FX or forex) committees of 16 international FX trading centres met in London on 24 May and agreed to formally launch the GFXC. The GXFC, which will meet regularly, replaces a more informal commitment from eight FX committees (that is, in Australia, Canada, the Euro Area, Hong Kong, Japan, Singapore, the UK and the US). The GFXC includes additional representatives from existing, or soon to be established, FX committees or similar structures in Brazil, China, India, South Korea, Mexico, South Africa, Sweden (representing the Scandinavian market) and Switzerland. The GXFC's objectives are to: (i) promote collaboration and communication amongst the local foreign exchange committees (FXCs) and non-GFXC jurisdictions with significant FX markets; (ii) provide a forum to exchange views on trends and developments in global FX markets, including on the structure and functioning of those markets, drawing on information gathered at the various FXCs; and (iii) promote, maintain and update on a regular basis the FX global code (which was also launched on 25 May), and consider good practices concerning effective mechanisms to support adherence.
Governance frameworks – FSB stocktake on work to strengthen governance frameworks to mitigate misconduct risks
On 23 May, the FSB published a stocktake report on work being done by international bodies, national authorities, industry associations and firms to strengthen governance frameworks in order to mitigate misconduct risk. The report draws on responses to a questionnaire that the FSB's Working Group on Governance Frameworks (WGGF) sent out in October 2016. Alongside the stocktake, the WGGF also conducted a review of root causes of misconduct in the financial and non-financial sectors. Drawing on the findings of the stocktake and review, ten themes emerged, which the WGGF discussed with a view to identifying possible areas of focus for a potential phase 2 of its work. At its February plenary meeting, FSB members agreed on three topics for phase 2 work, with a view to preparing a toolkit for supervisors and firms: (i) rolling bad apples. This problem arises when employees are dismissed due to misconduct at one firm (or leave under suspicion of misconduct) and then re-surface at another firm. This work will try to define and assess the size of the problem and explore the current and potential uses of governance frameworks to make employee screening and due diligence more effective; (ii) responsibility mapping. This work will examine the ways in which responsibility mapping and related tools could be used to mitigate misconduct risk, including through supervisory examination or enforcement practices focused on the legal and regulatory requirements applicable to those individuals; and (iii) culture. This work will explore how governance mechanisms, such as escalation processes, training and non-financial incentives may mitigate misconduct posed by the culture of a firm. As the phase 2 work progresses, the WGGF will determine whether any further steps (such as guidance) would be beneficial and, if so, such recommendations will be presented to the FSB plenary at that time. The WGGF will finalise its work by March 2018.
EC publishes results of Consumer Rights Directive review
On 25 May, the EC published a report on the results of its evaluation of the Consumer Rights Directive (2011/83/EU). While the evaluation indicated that the Directive had positively contributed to the functioning of the business-to-consumer internal market and had ensured a high common level of consumer protection across member states, it also highlighted areas where action can be taken to improve application of the Directive. The Commission will now take steps to address certain of the evaluation's findings, including further examining possible targeted amendments to the Directive.
AML – Wolfsberg Group guidance on PEPs
On 23 May, the Wolfsberg Group published guidance on politically exposed persons (PEPs). The aim of the guidance is to assist financial institutions (FIs) in handling the money laundering risks posed by PEPs. The guidance covers: the definition of a PEP; the definitions of "close family members" and "close associates" of a PEP; the identification of a PEP and their close family members or close associates; control by PEPs of organisations, state-owned entities and public sector bodies; key components of the PEP risk management framework; declassification of PEPs (that is, guidance on the time period that an individual should be regarded as a PEP after they have left the public function that gave rise to their initial categorisation); and PEP screening (that is the screening of customer names and associated details against PEP information during the customer relationship). The guidance replaces the Wolfsberg Group FAQs on PEPs published in May 2008.
FinTech – FSB and CGFS joint report on FinTech credit
On 22 May, the FSB and the Committee on the Global Financial System (CGFS) published a report on FinTech credit. The report has been produced by a working group established by the FSB and CGFS. It aims to help policymakers understand the functioning of FinTech credit markets. The report covers: the factors influencing the development of FinTech credit activity (section 2); the size and structure of FinTech credit markets across jurisdictions (section 3); the nature of FinTech credit activity, including platform business models and the characteristics of borrowers and investors (section 4); the efficiency and vulnerabilities of FinTech platforms and markets (section 5); the potential financial stability implications of FinTech credit, considering its possible impact on credit provision in the economy and the banking sector (section 6); and current regulatory and other policy frameworks for FinTech credit, focusing in particular on how FinTech credit is treated within existing frameworks and whether there have been specific policy initiatives for FinTech credit (section 7).
FinTech – BoE FAQs on FinTech Accelerator
On 19 May, the BoE published a set of FAQs on its FinTech Accelerator. The BoE explains that the Accelerator works in partnership with firms developing new technology to make use of FinTech innovations for central banking. The BoE carries out proofs of concept (PoC) on use cases that relate to its role as a central bank that could enable it to function more efficiently and effectively. The Accelerator helps the BoE understand emerging technologies at first hand, to help it to better recognise and monitor the incidence and integration of the new developments in the market.
ESMA updates Q&A on application of AIFMD and UCITS Directive
On 25 May, ESMA published a press release announcing it has updated two sets of Q&A: (i) Q&A on application of the application of the AIFMD (ESMA34-32-352); and (ii) Q&A on application of the UCITS Directive (ESMA34-43-392). The UCITS Directive has most recently been revised by UCITS V (2014/91/EU). The press release explains that the AIFMD Q&A include three new questions and answers on: (i) how AIFMs should report information on the breakdown between retail and professional investors to NCAs when this information is not available; (ii) notification by an AIFM of the AIFs domiciled in another member state that it intends to manage by way of the AIF management passport; and (iii) use by an AIF of the exemption for intragroup transactions under Article 4(2) of EMIR if subject to the clearing obligation in Article 4(1) of EMIR. The UCITS Q&A include the question and answer set out above relating to the EMIR intragroup exemption in respect of how it applies to UCITS. ESMA last updated both sets of Q&A in April.
MMF Regulation – ESMA consultation on draft technical advice, ITS and guidelines
On 24 May, ESMA published a consultation paper (ESMA34-49-82) on draft technical advice, ITS and guidelines under the MMF Regulation. In the consultation paper, ESMA seeks views on its proposals for technical advice for the EC relating to: the liquidity and credit quality requirements applicable to assets received as part of a reverse repurchase agreement; and internal credit quality assessments. ESMA also seeks views on: draft ITS on a reporting template containing all the information managers of MMFs are required to send to the competent authority of the MMF; and draft guidelines on common reference parameters for the scenarios to be included in the stress tests that managers of MMFs are required to conduct. The deadline for comments is 7 August.
AIFMD – CLLS letter to FCA about ESMA's approach to delegation in its Q&A on AIFMD application
On 19 May, the CLLS published a letter (dated 16 May) from its Regulatory Law Committee to the FCA relating to ESMA's Q&A paper on the application of the AIFMD. The CLLS refers to an update to the Q&A ESMA published in November 2016, and specifically ESMA's response to question 2 in Section VIII on delegation. The question was whether an AIFM that does not itself perform the functions set out in Annex I of the AIFMD is released from responsibility to ensure compliance with the relevant functions within the AIFMD. ESMA's response was that the AIFM was not released from this responsibility and where a third party performs a function stated in Annex I, this function should be considered as delegated by the AIFM, and the AIFM retains responsibility for ensuring compliance with the AIFMD requirements on delegation. The CLLS argues that ESMA has incorrectly interpreted the relevant provisions of the AIFMD. It believes that ESMA's answer cuts directly across the approach taken by UK fund managers and practitioners and is not supported by the approach taken by the FCA in its Investment Funds sourcebook (FUND) or in its Perimeter Guidance Manual (PERG). The CLLS asks the FCA to update its rules or guidance, or otherwise take steps to give effect to ESMA's Q&A on delegation.
Solvency II – EIOPA's final report on methodology to derive ultimate forward rate
On 23 May, EIOPA published its final report (EIOPA-BoS-17/122) (dated 17 May) on the methodology to derive the ultimate forward rate (UFR) under Solvency II. EIOPA consulted on the methodology in April 2016 and its final report includes (at section 2) a summary of the main comments received and EIOPA's resolution of those comments. As a result of the consultation, EIOPA states that it has made the following changes to the consultation proposal: the limit to annual changes of the UFR is lowered from 20 to 15 basis points, so that the UFR will change more gradually; to significantly reduce the frequency of UFR changes, the UFR will only be changed when the difference between the calculated UFR and the currently applicable UFR exceeds 15 basis points; the average for calculating the real rate component of the UFR will be a simple average instead of a weighted average that puts more weight on recent observations. Also, this change will make the UFR move more gradually; the first application of the UFR methodology is set to the beginning of 2018 instead of mid-2017 so as to give insurance and reinsurance undertakings more time for their preparations; and the start of the time series for the derivation of the expected real rate is put to 1961 instead of 1960. This change allows the use of consistent data for the derivation. Section 3 of the report contains the final methodology to derive the UFR and how it will be implemented. Section 4 sets out the results of an information request to undertakings on the UFR and the Annex contains a resolution table with all stakeholder comments. Alongside its final report, EIOPA has also published an example calculation of the expected real rate.
Example Calculation: Click here
MiFID II – ESMA opinion on meaning of traded on a trading venue for OTC derivatives
On 22 May, ESMA published an opinion (ESMA70-156-117) to clarify the concept of traded on a trading venue (TOTV) in respect of OTC derivatives under the MiFID II and MiFIR. In ESMA's view, only OTC derivatives sharing the same reference data details as the derivatives traded on a trading venue should be considered to be TOTV and, therefore, subject to the MiFIR transparency and transaction reporting requirements. It states that, in this context, "sharing the same reference data details" should mean that the OTC derivatives should share the same values as the ones reported in accordance with the fields of Regulation (EU) 2017/585 for derivatives admitted to trading or traded on a trading venue, except fields 5 to 12 (the trading venue and issuer-related fields). Since the trading venue and issuer-related fields are only applicable to trading venues when submitting reference data for derivatives but are not applicable for trading those contracts bilaterally outside of trading venues, ESMA considers it appropriate not to take into account those fields when determining whether an OTC derivative traded outside of a trading venue is to be considered TOTV. ESMA believes that this approach will ensure the consistent interpretation of the concept of TOTV across the different provisions of MiFIR, will contribute to supervisory convergence in the EU and will be the most efficient way to get the MiFID II transparency and transaction reporting regime up and running. Despite this, ESMA states that it is aware that it may need to revisit what is to be considered the "same" reference data details taking into account the evolution of markets after 3 January 2018. ESMA intends to ensure that such evolution does not undermine market transparency and efficiency, does not result in information asymmetries between market participants and does not create incentives to move trading to the OTC space as this would run counter to the legislative goals expressed in MiFID II and MiFIR. ESMA, therefore, plans to monitor the application of the concept of TOTV as described in its opinion, and, in particular, the ratio of derivatives that are considered TOTV compared to overall OTC derivatives trading.
MiFID II – CLLS responds to FCA's fourth consultation on implementation
On 19 May, the CLLS published the response (dated 20 February) of its Regulatory Law Committee to the FCA's fourth consultation on implementation of the MiFID II. The CLLS expresses concern over the FCA's proposals relating to specialist regimes and tied agents. Its concerns in respect of specialist regimes centre on the new recording requirements and the FCA's proposal to extend the requirements to non-MiFID business related to commodity or exotic derivatives. In particular, it questions the FCA's cost-benefit analysis and urges the FCA to reconsider whether the proposals are necessary and proportionate. The CLLS' main concern relating to tied agents is the potential mismatch in the timing of implementation of MiFID II in different member states. In particular, it will raise issues for a UK firm wishing to appoint a tied agent in another EU member state that is late in implementing a tied agent regime. The FCA's proposed changes to Chapter 12 of its Supervision manual would mean that the firm would not be able to appoint a new tied agent in that jurisdiction and its existing appointments might also be affected. The CLLS suggests transitional provisions to allow a tied agent established in another member state to be registered with the FCA until that member state has fully implemented the relevant MiFID II provisions.
EBA to launch 2017 transparency exercise in September
On 25 May, the EBA published a press release announcing details of its 2017 transparency exercise. The EBA will launch the annual exercise in September, when it will populate the templates and send to banks for data verification. The data will be frozen at the end of October and the EBA expects to publish it in early December, together with the EBA 2017 risk assessment report (RAR). The EBA says that it has aligned the sample of banks with the one used in the 2017 RAR and the exercise will be based exclusively on supervisory reporting data. It believes that not requiring banks to report any additional data will significantly reduce their burden. The data will refer to December 2016 and June 2017, showing financial information on capital, leverage ratio, risk exposure amounts, profit and losses, market risk, securitisation, credit risk, exposures to sovereign, non-performing exposures and forborne exposures. Leverage ratio has been included as a new item since it is now available in supervisory reporting.
CRR - EBA second consultation on connected client guidelines under CRR
On 25 May, the EBA published a second consultation paper (EBA/CP/2016/07) on its draft guidelines on the treatment of connected clients, defined under Article 4(1)(39) of the CRR, for large exposures. The EBA published its first consultation on the guidelines in July 2016. The EBA's second consultation focuses on the scope of the draft guidelines. It proposes to extend the guidelines to the remaining aspects of the CRR, the EBA technical standards, and the EBA guidelines where the concept of "group of connected clients" is relevant. The EBA believes that this extension of scope would ensure that the concept was applied consistently throughout the CRR and would harmonise institutions’ practices. In the draft guidelines the EBA provides guidance on two types of interconnection: control relationships and economic dependencies, which lead to the formation of groups of connected clients. In its July 2016 consultation, the EBA proposed that the guidelines should apply only in the context of the large exposures regime. However, the EBA explains that the concept of group of connected clients is also used in other areas of the CRR, for example the categorisation of clients in the retail exposure class for the purposes of credit risk, the development and application of rating systems, the specification of items requiring stable funding for the purposes of reporting, and the application of the small and SME supporting factor. The concept is also used in other EBA technical standards and guidelines. The consultation closes on 26 June.
Basel IV - BCBS speech on progress on "Basel IV" reforms and future priorities
On 25 May, the BIS published a speech by William Coen, Secretary General of the BCBS that sets out the progress of the revisions to the Basel III framework sometimes referred to as "Basel IV". Mr Coen is hopeful that the BCBS will finalise the reforms "in the near future". He states that the BCBS has now largely completed the technical work needed to revise the Basel framework and that the only unfinished business is the calibration of the output floor design. He acknowledges that concerns have been raised on the impact of the output floor and comments that, in the past, the BCBS has allowed time for banks and supervisors to meet the implementation timelines to reflect the differences in the readiness of banks across jurisdictions to meet new rules. He expects that, like the Basel III reforms adopted in 2010, transitional arrangements will apply to the output floor. The BCBS is also considering a "reasonable phase-in" for some elements of the revised standards, although Mr Coen notes that national supervisors have the discretion to adopt the rules early. Mr Coen also outlines the BCBS' future priorities and work programme. The BCBS intends to: (i) monitor and analyse the impact of the reforms and the effectiveness of the new standards; (ii) focus on helping to ensure more effective supervision and improving supervisory co-operation and communication. The BCBS intends to provide insight into developments in FinTech and to explore the implications for banks' business models and supervisors; and (iii) focus its policy-related work on a small number of initiatives (such as `provisioning), responses to FAQs and gauging the impact of the new standards on bank business models and behaviour. As part of this work, the BCBS will pay particular attention to identifying regulatory arbitrage.
CRR – EBA report on monitoring of CET1 instruments issued by EU institutions
On 23 May, the EBA published a report on the monitoring of CET1 instruments issued by EU institutions. The report provides: (i) guidance on the content and objectives of the published CET1 list; (ii) clarity on the consequences of the inclusion (or exclusion) of an instrument in (or from) the list; and (iii) feedback on the outcome of the EBA monitoring work on CET1 issuances across the EU. The EBA intends to update the report regularly, where necessary, to explain how it takes into consideration new developments in CET1 issuances and market practices. Depending on those developments and the materiality of changes to the list, it may produce updated versions of the report. Any updated reports will be published at the same time as the relevant update(s) to the CET1 list. It has published this first report alongside the fifth update of the CET1 list.
CRR II and CRD IV – EBA opinion on CRR II and CRD V proposals on own funds
On 23 May, the EBA published an opinion on own funds in the context of the CRR review. In the opinion, the EBA sets out its views on aspects of the proposals for the CRR II and the CRD V relating to: the role of the EBA in relation to CET1 instruments; restrictions on distributions and definition of the maximum distributable amount (MDA); reduction, redemption, repurchase of capital instruments; anti-circumvention principle; and point of non-viability (PONV).
RECOVERY and RESOLUTION
BRRD - Council of EU Presidency compromise proposal on proposed Directive amending BRRD relating to ranking of unsecured debt instruments in insolvency hierarchy
On 25 May, the Council of the EU published a Presidency compromise proposal (7880/17) on the proposed Directive amending the BRRD as regards the ranking of unsecured debt instruments in insolvency hierarchy (dated 30 March). The proposed Directive is part of the reforms (often referred to as BRRD II) that were proposed by the EC in November 2016. The reforms relate to the EU implementation of the FSB’s TLAC standard and other amendments to the text of the BRRD. The proposal states that additions to the last Presidency compromise are marked in underlined bold text, additions to the Commission's legislative proposal from earlier compromises are in underlined font, and deletions from the last Presidency compromise are indicated in strikethrough.
BRRD – EBA final draft RTS on valuation
On 24 May, the EBA published a document containing its final draft on valuation under the BRRD. Articles 36(15) and 74 of the BRRD give the EBA the discretion to produce draft RTS relating to the following valuations: valuations prior to resolution to inform the determination whether the conditions for resolution or the write-down or conversion of capital instruments are met (valuation 1); valuations prior to resolution to inform the choice of resolution action to be adopted, the extent of any eventual write-down or conversion of capital instruments, and other decisions on the implementation of resolution tools (valuation 2); and post-resolution valuations to determine whether an entity's shareholders or creditors would have received better treatment if the entity had entered into normal insolvency proceedings (valuation 3). Section three of the document contains draft RTS relating to valuations 1 and 2 (EBA/RTS/2017/05) and section four contains draft RTS relating to valuation 3 (EBA/RTS/2017/06). The aims of the RTS are to specify the principles on the basis of which independent valuers must apply their own information and expertise in particular cases. The EBA consulted on the RTS in November 2014. It sets out feedback on the consultation and the opinion of its Banking Stakeholder Group (BSG) in section five of the document.
BRRD – Delegated Regulation on classes of arrangements protected in partial property transfers published in OJ
On 20 May, EC Delegated Regulation ((EU) 2017/867) on classes of arrangements to be protected in a partial property transfer under Article 76 of the BRRD was published in the OJ. The Delegated Regulation will enter into force twenty days after its publication in the OJ (that is, on 9 June).