Investment Firms Quarterly Legal and Regulatory
Period covered: 1 October 2016 31 December 2016
Table of Contents
Markets in Financial Instruments Directive ("MiFID")....................................................................... 2 Markets in Financial Instruments Directive II ("MiFID II") and Markets in Financial Instruments Regulation ("MiFIR")......................................................................................................................... 2 Capital Requirements Directive ("CRD IV") ..................................................................................... 9 European Markets Infrastructure Regulation ("EMIR") .................................................................. 13 Securities Financing Transactions Regulation ("SFTR") ............................................................... 18 Packaged Retail Insurance-based Investment Products ("PRIIPs") .............................................. 19 Benchmark Regulation................................................................................................................... 21 Market Abuse Regulation............................................................................................................... 23 Payment Services Directive ........................................................................................................... 24 European Securities and Markets Authority ("ESMA") .................................................................. 25 International Organisation of Securities Commissions .................................................................. 26 Alternative Investment Management Association ("AIMA") ........................................................... 28 The Joint Committee (ESMA, EIOPA and EBA) ............................................................................ 28 European Commission................................................................................................................... 32 Central Bank of Ireland .................................................................................................................. 35 Anti-Money Laundering ("AML")/Counter-Terrorist Financing ("CTF") .......................................... 39 Data Protection .............................................................................................................................. 47 Contact Us ..................................................................................................................................... 49
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INVESTMENT FIRMS QUARTERLY LEGAL AND REGULATORY UPDATE
Markets in Financial Instruments Directive ("MiFID")
(i) ESMA updates Q&As on CFDs and other speculative products
On 11 October 2016, ESMA published an updated version of its Q&As (ESMA/2016/1165) on the application of the Markets in Financial Instruments Directive (2004/39/EC) (MiFID) to the marketing and sale of financial contracts for difference ("CFDs") and other speculative products (such as binary options and rolling spot forex) to retail clients.
The Q&As include five new questions and answers in sections 6 to 9, which relate to the following topics:
The use of trading benefits when offering CFDs or other speculative products;
The withdrawal of funds from trading accounts when investing in CFDs or other speculative products;
The use of leverage when offering CFDs or other leveraged products to retail clients, and
Best execution obligations for firms offering CFDs or other speculative products to retail clients.
A copy of the updated Q&As are available via the following link:
Markets in Financial Instruments Directive II ("MiFID II") and Markets in Financial Instruments Regulation ("MiFIR")
(i) ESMA published updated version of Q&A on transparency under MIFID II and MiFIR
On 3 October 2016, ESMA published a new questions and answers on MiFID II and MiFIR transparency topics (ESMA/2016/1424) (the "Q&A Document"), which contains four questions on the double cap volume mechanism under MiFIR which restricts trading under the "Reference Price Waiver" and "Negotiated Transaction Waiver," which are waivers from the obligation on market operators and investment firms operating a trading venue to make pre-trade information public.
On 4 November 2016, ESMA published an updated version of the Q&A Document.
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In an accompanying press release, ESMA explains that the updated Q&A Document clarifies when ESMA will publish the first set of data needed to implement the systematic internaliser ("SI") regime and the date by which firms must assess whether they should be considered as SIs for the first time.
ESMA provides the following key dates:
ESMA will publish information on the total number and volume of transactions executed in the EU for the first time by 1 August 2018. The data will cover the period from 3 January 2018 to 30 June 2018.
Investment firms must undertake their first assessment and, where appropriate, comply with the SI obligations by 1 September 2018.
For subsequent assessments, ESMA will publish data by the first calendar day of February, May, August and November. Investment firms are expected to perform the calculations and comply with the SI regime by the 15th day of February, May, August and November.
The earliest mandatory deadline for firms to comply with the SI regime is 1 September 2018. However, ESMA stresses that investment firms can opt-in to the SI regime for all financial instruments from 3 January 2018 as a means of complying, for example, with the trading obligation for shares.
On 19 December 2016, ESMA updated two further questions in the Q&A Document. MiFID II requires trading venues to make public bid and offer prices and depth of trading interest unless granted a waiver by 3 January 2018. Therefore the Q&A sets out information on the waiver application for 2017 in order for competent authorities and ESMA to handle applications in time for 3 January 2018. The waivers will be processed in two tranches:
Equity and Equity-like instruments: Trading venues submit waivers to NCAs by 1 February 2017 NCAs submit waivers to ESMA by 28 February 2017 ESMA review completed by 31 May 2017
Bonds and Derivatives: Trading venues submit waivers to NCAs by 1 June 2017 NCAs submit waivers to ESMA by 31 July 2017 ESMA review completed by 30 November 2017
Waivers submitted by trading venues after the above dates will be processed on a best effort basis. The updated Q&A document also clarifies the conditions when existing waivers for shares require a new waiver application.
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A copy of the most up to date version of the Q&A Document is available via the following link:
(ii) ESMA issues final Guidelines on implementation of MiFID II transaction reporting regime
On 10 October 2016, ESMA published its final guidelines (the "Guidelines") on transaction reporting, order record keeping and clock synchronisation under MiFID II and MiFIR.
The Guidelines, which apply from 3 January 2018, are applicable to investment firms, trading venues, approved reporting mechanisms ("ARMs") and competent authorities.
In particular, the Guidelines are focused on the construction of transaction reports and of the order data records field by field for various scenarios that can occur. Given the wide range of potential scenarios, the Guidelines do not provide an exhaustive list of all scenarios. However, those subject to the Guidelines are required to apply the elements of the most relevant scenario to construct their records and reports.
Competent Authorities to which the guidelines apply must notify ESMA whether they comply or intend to comply with them, with reasons for non-compliance, within two months of the date of publication by ESMA. In the absence of a response by this deadline, they will be considered as non-compliant.
A copy of the Guidelines are available via the following link:
(iii) New ESMA Q&As on MiFID II and MiFIR investor protection topics
On 10 October 2016, ESMA published a new set of questions and answers aimed at Competent Authorities and firms on investor protection topics under MiFID II and MiFIR (the "Q&A Document").
The Q&A Document relates to the following areas:
Best execution; Recording telephone conversations and electronic communications; Record keeping; Investment advice on an independent basis; Underwriting and placement of a financial instrument, and Inducements.
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On 16 December 2016, ESMA updated the Q&A Document to provide clarification on the following topics:
Suitability; Post sale reporting; Inducements (research); Information on charges and costs, and Underwriting and placement of a financial instrument
A copy of the Q&A is available via the following link:
(iv) EBA published consultation on Joint ESMA and EBA Guidelines on suitability of management body
On 28 October 2016, the European Banking Authority ("EBA") and ESMA launched a consultation on Guidelines on the Assessment of the Suitability of the Members of Management Body and Key Function Holders (the "Draft Guidelines"). The Draft Guidelines aim at further improving and harmonising suitability assessments within the EU financial sectors and are designed to ensure sound governance arrangements in financial institutions.
The Draft Guidelines:
Provide common criteria to assess the individual and collective knowledge, skills and experience of members of the management body as well as the good repute, honesty and integrity, and independence of mind of members of the management body;
Require members of the management body to commit sufficient time to perform their duties and specify how the number of directorships held by members of the management body should be counted, for significant institutions;
Set out how different aspects of diversity, educational and professional background, age, gender and geographical provenance should be taken into account in the recruitment process, and
Highlight the importance of induction and training to ensure the initial and ongoing suitability of members of the management body, and call for institutions to establish training policies and to allocate appropriate financial and human resources to induction and training.
The consultation will close on 28 January 2017.
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The Draft Guidelines will apply to EU Competent Authorities, as well as to credit institutions and investment firms. EU Competent Authorities will be expected to implement the Draft Guidelines by mid-2017. Once the revised guidelines are enforced, the previous EBA guidelines on the assessment of the suitability of the management body and key function holders, which were published in 2012, will be repealed.
A copy of the consultation paper is available via the following link:
(v) ESMA consults on draft RTS on package orders under MiFID II
ESMA opened a public consultation on 10 November 2016 on draft RTS regarding the treatment of package orders under MiFID II and MiFIR.
ESMA's draft RTS establish a methodology for determining those package orders for which there is a liquid market in the European Union as a whole, and which consequently may not be waived from MiFIR's pre-trade transparency requirements, which requires the disclosure of trading interests in all non-equity instruments.
The consultation closed on 3 January 2017 and ESMA will use the feedback received to finalise the standards by February 2017.
A copy of the consultation paper is available via the attached link:
(vi) MiFIR Delegated Regulations Published in the Official Journal of the EU
On 21 November 2016, three Delegated Regulations under the Markets in Financial Instruments Regulation (Regulation 600/2014) ("MiFIR") were published in the Official Journal of the EU:
Delegated Regulation (EU) 2016/2020 supplementing MiFIR with regard to regulatory technical standards ("RTS") on criteria for determining whether derivatives subject to the clearing obligation should be subject to the trading obligation.
The Delegated Regulation entered into force on 11 December 2016 and is applicable from 3 January 2018.
A copy of the Delegated Regulation is available via the following link:
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Delegated Regulation (EU) 2016/2021 supplementing MiFIR with regard to RTS on access in respect of benchmarks.
The Delegated Regulation entered into force on 11 December 2016 and is applicable from 3 January 2020.
A copy of the Delegated Regulation is available via the following link:
Delegated Regulation (EU) 2016/2022 supplementing MiFIR with regard to RTS concerning the information for registration of third-country firms and the format of information to be provided to clients.
The Delegated Regulation entered into force on 11 December 2016 and is applicable from 3 January 2018.
A copy of the Delegated Regulation is available via the following link:
(vii) New ESMA Q&As on MiFID II and MiFIR market structure topics
On 18 November 2016, ESMA published a new Q&A document on market structure topics which provides clarifications on data disaggregation and the mandatory tick size regime.
On 19 December 2016, ESMA updated this document and published clarifications on the two following topics:-
data disaggregation; and, the mandatory tick size regime.
A copy of the Q&A document is available via the following link:
(viii) European Commission adopts Delegated Regulation on RTS for application of position limits to commodity derivatives
On 1 December 2016, the European Commission adopted a Delegated Regulation supplementing MiFID II with regard to RTS for the application of position limits to commodity derivatives (C(2016) 4362 final).
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MiFID II requires that competent authorities, in line with ESMA's methodology, establish and apply position limits on the size of a net position a person can hold in certain commodity derivatives and economically equivalent OTC contracts.
The RTS differ slightly from the draft initially submitted to the European Commission in September 2015, in that they create a more stringent regime for liquid contracts whose underlying product is food for human consumption. It also caps the upper position limits for new and illiquid contracts to 40%, but specifies that upper position limits of up to 50% can be imposed on a temporary basis. Finally, the proposed methodology specifies how competent authorities are to consider volatility when setting position limits.
The next step will be for the Council of the EU and the European Parliament to consider the Delegated Regulation. If neither of them objects, the Delegated Regulation will enter into force 20 days after its publication in the Official Journal of the EU.
A copy of the Delegated Regulation is available via the following link:
(ix) European Commission adopts Delegated Regulation on RTS on criteria for establishing when an activity is considered to be ancillary to main business
On 1 December 2016, the European Commission adopted a Delegated Regulation supplementing MiFID II with regard to RTS on the criteria for establishing when an activity is considered to be ancillary to a firm's main business (C(2016) 7643 final).
MiFID II exempts persons dealing on own account, or providing investment services to clients, in commodity derivatives and emission allowances, provided that activity is ancillary to their main business, and their main business is not the provision of investment services or banking activities.
The next step will be for the Council of the EU and the European Parliament to consider the Delegated Regulation. If neither of them objects, the Delegated Regulation will enter into force 20 days after its publication in the Official Journal of the EU and will apply from 3 January 2018.
A copy of the Delegated Regulation is available via the following link:
(x) New ESMA Q&As on data reporting under MiFIR and MiFID II
On 20 December 2016, ESMA published a new Q&A document on MiFID II and MiFIR in relation to regulatory data reporting topics, regarding the practical application of MiFID II and MiFIR on:
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Legal Entity Identifiers (LEI) of the issuer; and Date and time of the request of admission and admission
A copy of the Q&A document is available via the following link:
(xi) New ESMA Q&As on commodity derivatives under MiFID II
On 19 December 2016, ESMA published a new Q&A document on commodity derivatives topics under MiFID II in relation to the position limits, position reporting and ancillary activity provisions and other aspects of the commodity derivatives regime. The Q&A clarifies a number of points relating to position limits and ancillary activity.
A copy of the Q&A document is available via the following link:
Capital Requirements Directive ("CRD IV")
(i) EBA recommends only investment firms identified as G-SIIs and O-SIIs be subject to full CRD IV regime
Following the European Commission's call for technical advice from the European Banking Authority ("EBA") on the prudential regime for investment firms under CRD IV, the EBA published an opinion on 20 October 2016 (the "Opinion").
The call for technical advice came about following the publication of the EBA Report on Investment Firms (the "Report"), published on 15 December 2015. Further background information on this call for technical advice can be obtained in our previous legislative update, which is available via the following link:
http://www.dilloneustace.com/download/1/Publications/Financial%20Services/Investment% 20Firms%20Quarterly%20Legal%20and%20Regulatory%20Update%201%20July%20to% 2030%20September%202016.PDF
The Opinion, which is dated 19 October 2016, provides technical advice on the first recommendation contained in the Report, which states that only firms that are identified as global systemically important institutions ("G-SIIs") or other systemically important institutions ("O-SIIs") be subject in full to the prudential regime in the CRD IV Directive.
The EBA forwarded the following recommendations in the Opinion:
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that systemic importance, interconnectedness with the financial system, complexity and bank-like activities should be the criteria used to identify investment firms that should continue to be subject to CRD IV;
that the investment firms that should be subject to the full CRD IV should be those identified as G-SII or O-SII in accordance with the current regulatory framework;
that the suitability of the OSII guidelines for the purpose of identifying the investment firms that should be subject to the full CRD IV is revised after the new prudential framework for investment firms is completed;
assuming that the only investment firms subject to the full CRD IV are those identified by the EBA in its recommendation, it is recommended postponing any specific regulatory change related to investment firms at this stage and starting the review of specific provisions once the CRR review has reached a more advanced stage, and
the suitability of the O-SII guidelines, for the purpose of identifying the investment firms that should be subject to the full CRD IV regime, is revised after the new prudential framework for investment firms is completed.
A copy of the Opinion is available at the following link:
In preparation for an additional opinion to provide technical advice on the second recommendation contained in the Report, which is due to be published by 30 June 2017, the EBA launched a discussion paper on 4 November 2016.
The second recommendation of the Report addresses the specific prudential regime that should be designed for those investment firms for which CRD IV is not applicable.
The discussion paper deals with appropriate design and calibration of all aspects of this new prudential regime, including the EBA recommendation that this framework is focused on the risks that investment firms pose to customers and to market integrity.
The EBA is proposing that the ongoing capital requirements shall be calculated based on capital factors (K-factors) that are attributed to one of these two broad types of risks. As a result, firms that pose more risk to customers and markets should get higher capital requirements than those which pose less risk, and firms that pose similar risk to customers and markets but with more own exposure risk should hold more capital than those with less own exposure risk.
The discussion paper also covers the most important aspects related to the new prudential requirements for investment firms, including three possible alternatives to set minimum
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liquidity requirements. All three alternatives aim at addressing the liquidity profile of investment firms in a more appropriate way than the liquidity coverage ratio ("LCR") and the net stable funding ratio ("NSFR") set out under the CRD IV regime.
The consultation runs until 2 February 2017 and is addressed to all investment firms that are not systemic and bank-like.
The discussion paper and details on responding to the consultation are available via the following link:
(ii) EBA reviews its guidelines on internal governance
On 28 October 2016, the EBA published a consultation paper (EBA/CP/2016/16) which invites comments on all proposals put forward in the Draft Guidelines on Internal Governance (the "Draft Guidelines").
The aim of the Draft Guidelines is to update the existing set of Guidelines on internal governance, by further harmonising institutions' internal governance arrangements, processes and mechanisms across the EU, in line with the new requirements introduced by CRD IV and also taking into account the proportionality principle.
The Draft Guidelines introduce aspects that aim to foster the implementation of a sound risk culture by the management body; to strengthen its oversight over the institutions' activities and their risk management framework. Additional guidelines have been provided to further increase the transparency of institutions' offshore activities and the consideration of risks within institutions' change processes.
It is intended that the EBA will finalise the Draft Guidelines following the public consultation, which closes on 28 January 2017. The existing Guidelines on internal governance, published on 27 September 2011, will be repealed when the revised Guidelines enter into force.
A copy of the Consultation Paper is available at the following link:
(iii) EBA report responding to Commission request for additional information on application of proportionality principle to CRD IV remuneration provisions
On 21 November 2016, the EBA published a report (EBA-Op-2016-20) which outlines the EBA's response to a letter from the European Commission, dated 21 April 2016, requesting
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further information with regard to the application of the principle of proportionality to the remuneration provisions in CRD IV (the "Report").
Section 1 of the Report provides an overview by Member States on the applicable framework regarding the principle of proportionality with regard to waivers. Based on this overview, the EBA concluded that most Member States allow for the application of waivers, either using thresholds based on the balance sheet total and/or the amount of variable remuneration, or by making case-by-case assessments, having regard to the size, the internal organisation and the nature, scope and complexity of institutions' activities
Section 2 of the Report analyses the number of institutions and staff in each Member State currently benefiting from waivers regarding the application of deferral arrangements, pay out instruments and discretionary pension benefits. From this analysis, the EBA has identified significant differences between the figures of the different Member States, which are mainly as a result of different thresholds being applied; the levels of variable remuneration being paid, and the structural differences in Member States' banking sectors.
Section 3 of the Report provides information, by Member State, about the institutions and staff who could benefit from proportionality waivers from the application of the remuneration requirements if the amendment proposed by the 's Opinion were to be adopted.
Section 4 of the Report describes the current national implementation of CRD IV regarding the ability of listed institutions to use share-linked instruments. In its Opinion, the EBA recommended that listed institutions be able to use share-linked instruments since, in terms of incentives for prudent risk-taking, they have the same effect as shares when they reflect exactly the value of shares at all times. This approach is already taken in many Member States.
A copy of the report is available via the following link:
http://www.eba.europa.eu/documents/10180/1667706/EBA+Opinion+on+the+application+o f+the+principle+of+proportionality+to+the+remuneration+provisions+in+Dir+2013+36+EU+ %28EBA-2016-Op-20%29.pdf
(iv) European Commission legislative proposals for revisions to CRR and CRD IV Directive
On 23 November 2016 the European Commission published proposed amendments to CRD IV.
The aim of these amendments is to adopt measures that will strengthen the resilience of the banking sector by introducing more risk-sensitive capital requirements. The new measures will simultaneously make CRD IV rules more proportionate and less burdensome for smaller financial institutions and will improve banks' lending capacity to support EU economy.
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The text of the amending directive and regulation are available via the respective links:
(v) EBA launches data collection for commodity derivatives firms to review prudential framework for investment firms under CRD IV
On 20 December 2016, the EBA published instructions for a data collection exercise on the revision of prudential framework for investment firms templates for commodity derivatives firms.
The European Commission issued a call for advice from the EBA relating to the prudential requirements applicable to investment firms under CRD IV in June 2016
Among other things, the European Commission asked the EBA to consider the extent to which the new regime would also be suitable for specialised commodity derivatives firms.
The data collection consists of five parts, that focus on general and financial information and prudential requirements, which aim to gather information on regulatory capital, liquidity and large exposures.
Firms should submit the completed templates to their respective competent authority by 20 February 2017, who will then perform quality checks and forward them onto the EBA by 27 February 2017.
The data collection instructions are available via the following link: http://www.eba.europa.eu/documents/10180/1699387/EBA+Data+Instructions+for+Commo dity+Derivatives+Firms.pdf
European Markets Infrastructure Regulation ("EMIR")
(i) Central Bank publishes letter on EMIR reporting requirements
On 30 September 2016, the Central Bank published a letter to industry to provide feedback on the EMIR Regulatory Return ("ERR"), by outlining on the main issues identified from this review to facilitate appropriate amendments to ensure complete, accurate and timely reporting of derivate trades.
The letter contains recommendations for how firms' compliance with EMIR reporting requirements could be improved.
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The letter can be found at the following link:
(ii) European Commission adopts and publishes text of Implementing Regulation on ITS on format and frequency of trade reports to trade repositories
On 26 October 2016, the European Commission adopted an Implementing Regulation (the "Implementing Regulation") amending Implementing Regulation (EU) No 1247/2012 laying down implementing technical standards ("ITS") with regards to the format and frequency of trade reports to trade repositories under EMIR.
On 27 October 2016, the European Commission published the text (plus Annex) of the Implementing Regulation. The Implementing Regulation will enter into force 20 days following its publication in the Official Journal of the EU and will apply from the first day of the ninth month from the date of entry into force.
The Implementing Regulation can be found in full at the following link:
(iii) European Commission reports on outcome of EMIR review
On 23 November 2016, the European Commission published a report on the review of EMIR. Article 85(1) of EMIR, required the European Commission to review and prepare a general report on EMIR to be submitted to the European Parliament and the Council, together with any appropriate proposals.
The European Commission considered that no fundamental change should be made to the nature of the core requirements of EMIR, which are integral to ensuring transparency and mitigating systemic risks in the derivatives markets. Nonetheless, a number of areas were highlighted where the EMIR requirements could be adjusted without compromising on its overall objectives in order to:
(i) Simplify and increase the efficiency of the requirements; and
(ii) Reduce disproportionate costs and burdens.
Some of the identified issues and considered actions are:
Review of the categorisation of non-financial counterparties;
Adjustment of trade reporting requirements to reduce operational burden;
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A possible mandate for supervisory approval of initial margin models;
Review of extent of frontloading requirements;
Potential clearing solutions for small financial counterparties; and
A possible longer-term exemption from clearing for pension schemes.
In the report the European Commission also stated that it will propose a legislative review of EMIR in 2017. This review will also assess the technical standards made under EMIR.
The European Commission's full review can be found at the following link:
(iv) ESMA publishes final report on delaying EMIR clearing obligations for financial counterparties with a limited activity volume
On 14 November 2016, ESMA published its final report (ESMA/2016/1565) on the amended application of the clearing obligations for financial counterparties with a limited volume of activity under EMIR.
The aim of the report is to present amended regulatory technical standards ("RTS") as a result of the difficulties facing some financial counterparties with a limited volume of activity in preparing for the clearing obligation.
The following changes to the timeframe for application of the clearing oblgiation proposed by ESMA, along with the reasoning for the changes, are outlined in the final report:
An extension of the phase in period of the clearing obligations by two years, for financial counterparties with a limited volume of activity; and
Modification of the compliance dates in the Delegated Regulation on interest rate swaps and credit default swaps. This compliance date is now 21 June 2019.
The European Commission must now make a decision whether to endorse the RTS within three months from the date of submission of the final report.
The final report, along with the draft RTS, can be found at the following link:
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(v) ESMA opinion defines supervisory approach for CCPs' product and service extensions and significant changes to risk models under EMIR
On 15 November 2016, ESMA published an opinion (ESMA/2016/1574) on common indicators for new products and services under Article 15 and for significant changes under Article 49 of EMIR.
ESMA provides this opinion to NCAs for the purpose of building a common supervisory culture and consistent supervisory practices, as well as ensuring uniform procedures and consistent approaches throughout the EU.
The opinion states that national competent authorities ("NCAs") supervising authorised CCPs should follow some commonly agreed indicators to identify when a change is significant (as required by Article 15) and seek the NCAs and ESMA's opinion on the project of extension of the services and activities and on the significant change of the risk models and parameters (as required by Article 49).
The opinion is available via the following link:
(vi) Delegated Regulation on RTS on risk mitigation techniques for uncleared OTC derivative contracts under EMIR published in OJ
On 15 December 2016, Commission Delegated Regulation ((EU) 2016/2251) supplementing EMIR with RTS on risk mitigation techniques for uncleared OTC derivative contracts under Article 11(15) of EMIR was published in the Official Journal of the EU.
The European Commission adopted the Delegated Regulation on 4 October 2016, and it came into force 20 days following its publication in the Official Journal of the EU on 4 January 2017.
The Delegated Regulation can be found in full at the following link:
(vii) ESMA consults on draft RTS on data to be made publicly available by trade repositories under EMIR
On 15 December 2016, ESMA published a consultation paper on draft RTS on data to be made publicly available by trade repositories ("TRs") under article 81 of EMIR (ESMA/2016/1661).
Article 81(5) of EMIR requires ESMA to develop RTS specifying the frequency and the details of the information to be made available to the relevant authorities and the
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information to be published by TRs. Annex III to the consultation sets out the proposed RTS in the form of a draft Commission Delegated Regulation, including discussions and analysis on exchange-traded derivatives ("ETDs"), data aggregation and aggregation on commodity derivatives.
The consultation closes on 15 February 2017 at which point ESMA will analyse the responses received and submit the draft RTS for inclusion in a final report to the European Commission.
The consultation paper can be found at the following link:
(viii) ESMA publishes peer review report on CCP compliance with margin and collateral requirements under EMIR
On 22 December 2016, ESMA published a report (ESMA/2016/1683), for information purposes only; outlining the results of a peer review it conducted on how NCAs assess compliance by CCPs with the margin and collateral requirements under EMIR.
The report identifies a number of areas where there is a lack of consistency in the supervisory approaches of NCAs, including differences in the frequency and depth of the supervision of CCPs that are similar in terms of size, systemic importance, nature and complexity. The report makes a series of recommendations to improve consistency in supervisory practices.
ESMA also identified differing supervisory approaches regarding the frequency and proactivity of NCAs' assessments and reviews of margin requirements. This includes areas of CCPs' back testing and sensitivity analysis reports, the adequacy of CCPs' confidence levels and the liquidation period and the efficiency of countercyclical tools used by CCPs.
The report is available via the following link:
(ix) European Commission adopts Delegated Regulation further extending temporary clearing exception for Pension Scheme Arrangements under EMIR
On 20 December 2016, the European Commission adopted a Delegated Regulation amending EMIR as regards the extension of the transitional periods related to pension scheme arrangements ("PSAs") (C (2016) 8542 final).
The reasoning for this extension was outlined in European Commission press release, where it was noted, that in the absence of such as extension, PSAs would have to source
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cash for central clearing. Since PSAs hold neither significant amounts of cash nor highly liquid assets, imposing central clearing requirements on them would require very farreaching and costly changes to their business model which could ultimately affect pensioners' income. Therefore the European Commission concluded that CCPs need this additional time to find solutions for pension funds.
The next step will be for the Council of the EU and the European Parliament to consider the Delegated Regulation. If neither of them objects, it will enter into force the day after it is published in the Official Journal of the EU.
The text of the Delegated regulation is available via the following link:
Securities Financing Transactions Regulation ("SFTR")
(i) Securities Transactions Regulation Reporting: Upcoming Deadline
Entities engaging in securities financing transactions and total return swaps, including UCITS management companies, UCITS investment companies and AIFMs will be aware of the EU Regulation on reporting and transparency of securities financing transactions (the "SFT Regulation") that entered into force on 12 January, 2016.
The SFT Regulation provides for reporting and disclosure requirements (subject to certain transitional implementation dates) with the aim of improving the transparency of securities financing transactions ("SFTs") in the shadow banking sector. SFTs are specifically defined in the SFT Regulation as follows:
A repurchase transaction (to include reverse repos);
Securities or commodities lending/borrowing;
A buy-sell back or sell-buy back transaction; and
A margin lending transaction.
Article 13 of the SFT Regulation, which applies from 13 January 2017, requires UCITS management companies, UCITS investment companies, and AIFMs to provide information to investors on the use made of SFTs and total return swaps in the annual report of each UCITS/AIF under management, as well as in each half-yearly report for UCITS.
In October 2016, ESMA confirmed that the information should be included in the next annual or half-yearly report to be published after 13 January 2017. This now clarifies that the requirements apply to financial statements covering a reporting period before 13 January 2017 (e.g. investment funds with a year end as of 30 September or annual/half
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yearly reports with a reporting period ending 31 December, 2016) and which are published after 13 January 2017.
The SFT Regulation does not prescribe whether disclosure needs to be included in any specific section of the financial statements; however the disclosure in the annual report will be subject to audit.
Dillon Eustace has prepared an article setting out what needs to be included in the disclosure and the next steps to be taken. A copy of the article is available at the following link:
Packaged Retail Insurance-based Investment Products ("PRIIPs")
(i) PRIIPs Commission Delegated Regulation (EU) 2016/1904 on product intervention published in the Official Journal of the EU
On 29 October 2016, Commission Delegated Regulation (EU) 2016/1904 of 14 July 2016 supplementing Regulation (EU) No 1286/2014 on key information documents for packaged retail and insurance-based investment products (the "PRIIPs KID Regulation") with regard to product intervention (the "Commission Delegated Regulation") was published in the Official Journal of the EU.
The Commission Delegated Regulation is based on the empowerments set out in Articles 16 and 17 of the PRIIPs KID Regulation, which give National Competent Authorities ("NCAs") and EIOPA the power to monitor financial products under their supervision and, subject to certain conditions, to prohibit or restrict temporarily the marketing, distribution or sale of insurance-based investment products, financial activities or practices.
The powers of the NCAs and EIOPA to prohibit or restrict the marketing, distribution and sale of insurance-based investment products laid down in PRIIPs KID Regulation are subject to a number of specific conditions including the requirement to determine the relevant significant investor protection concern or threat to the orderly functioning and integrity of financial markets or to the stability of the whole or part of the financial system of at least one Member State of the EU. Another condition for the exercise of these powers is that existing regulatory requirements under EU law applicable to the insurance-based investment products, or activity or practice are not sufficient to address those concerns and risks.
The Commission Delegated Regulation sets out the criteria and factors to be taken into account by both the NCAs (Article 2 of the Commission Delegated Regulation) and EIOPA (Article 1 of the Commission Delegated Regulation) when determining the existence of a significant investor protection concern or threat to the orderly functioning and integrity of
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financial markets or to the stability of the whole or part of the financial system of at least one Member State of the EU.
The Commission Delegated Regulation entered into force on 18 November 2016 and applies from 31 December 2016. It can be accessed via the following link:
(ii) Update on status of PRIIPs KID Regulatory Technical Standards
The draft PRIIPs KID Regulatory Technical Standards (the "RTS"), adopted by the European Commission on 30 June 2016, were rejected by the European Parliament on 14 September 2016. The European Parliament called for modifications to the RTS which relate to multi-option PRIIPs, the inclusion of a fourth performance scenario (the `stress scenario') and the use of the comprehension alert.
On 10 November 2016, the European Commission wrote to the European Supervisory Authorities ("ESAs") informing them of its intention to amend the draft RTS to address the concerns expressed by the European Parliament. In the letter, the European Commission set out its proposed amendments relating to multi-option PRIIPs, the fourth performance scenario and the comprehension alert and invited the ESAs to amend the draft RTS within six weeks on the basis of the proposed amendments. The European Commission also invited the ESAs to develop guidance in line with the relevant provisions of the RTS and without altering their substance on the practical application of credit risk mitigation factors under the RTS for insurers.
The European Commission's letter to the ESAs can be found at the following link:
On 22 December 2016, the ESAs issued their response to the intention of the European Commission to amend the draft RTS. Following a discussion of the proposed amendments, the ESAs presented an Opinion to the three Boards of Supervisors covering all areas addressed by the European Commission's letter and the amendments in the RTS. The EBA and ESMA Boards adopted the Opinion on the basis of a qualified majority. However, the Opinion did not receive the support of a qualified majority of the EIOPA Board as there were different views in particular concerning the treatment of multi-option products, the criteria to determine whether a comprehension alert should be included in a KID and the provision in the RTS on the credit risk mitigation factors for insurers. Consequently, the three ESAs are not in a position to provide an agreed opinion on the amended draft RTS. The ESAs did however convey in the letter the main concerns raised during the discussions that the amendments to the performance scenarios proposed by the Commission raised comprehension issues and may be misleading.
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The ESAs response to the European Commission can be found at the following link:
(iii) Regulation amending application date of PRIIPs KID Regulation published in the Official Journal of the EU
On 23 December 2016, Regulation (EU) 2016/2340 of the European Parliament and of the Council of 14 December 2016 amending Regulation (EU) No 1286/2014 on key information documents for packaged retail and insurance-based investment products as regards the date of its application (the "Amending Regulation") was published in the Official Journal of the EU.
The publication of the Amending Regulation follows the European Parliament's rejection of the European Commission's Regulatory Technical Standards (adopted 30 June 2016) in September 2016 along with its call, together with a large majority of Member States, for a deferral of the date of application of the PRIIPs KID Regulation.
The Amending Regulation provides that the PRIIPs KID Regulation will now apply from 1 January 2018. This deferral of twelve months will give additional time for those concerned to adhere to the new requirements.
The Amending Regulation entered into force on 24 December 2016 and can be accessed via the following link:
(i) ESMA publishes list of designated NCAs under the Benchmark Regulation
On 7 November 2016, ESMA published a new webpage containing a list of the national competent authorities ("NCAs") that have been designated under Article 40 of the Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds ((EU) 2016/1011) ("Benchmark Regulation").
The countries/NCAs listed are as follows:
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UK FCA; and
ESMA's new webpage can be located at the following link:
(ii) ESMA publishes technical advice on future rules for financial benchmarks
On 10 November 2016, ESMA published its final report to the European Commission setting out technical advice on the Benchmark Regulation.
Key areas addressed in ESMA's final report are:
How benchmarks' reference values can be calculated by using data reporting structures under existing EU rules, such as MiFID II and EMIR;
The criteria for deciding whether third country benchmarks can be endorsed for use in the EU; and
The definition of the criteria of what constitutes making a benchmark figure available to the public.
The European Commission will now prepare the final rules for benchmarks which should enter into force by 1 January 2018.
The final report can be found at the following link:
(iii) ESMA publishes responses to consultation on technical standards under the Benchmark Regulation
On 8 December 2016, ESMA published the responses it received to its consultation launched in September 2016 on draft regulatory technical standards and implementing technical standards required under the Benchmark Regulation. Respondents included;
The Investment Association ("IA");
European Fund and Asset Management Association ("EFAMA"); and
Federation of European Securities Exchanges ("FESE").
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ESMA expects to issue its final report on these draft technical standards in April 2017.
The responses can be found at the following link: https://www.esma.europa.eu/press-news/consultations/consultation-draft-technicalstandards-under-benchmarks-regulation
Market Abuse Regulation
(i) ESMA final guidelines on market soundings and delayed disclosure of inside information under MAR
On 20 October 2016, ESMA published a press release announcing that the following guidelines relating to the Market Abuse Regulation ("MAR") ("MAR Guidelines") had been published in the official languages of the EU:
Delay in the disclosure of inside information (ESMA/2016/1478); and
Persons receiving market soundings (ESMA/2016/1477).
ESMA had previously published the English version of these guidelines in July 2016.
The guidelines relating to the "Delay in the disclosure of inside information" came into effect on 20 December 2016.
On 10 November 2016, ESMA published a revised version of its guidelines on "Persons receiving market soundings" under MAR and these revised guidelines come into effect on 10 January 2017.
The MAR Guidelines can be found in full at the following link:
(ii) ESMA updates Q&A on MAR
On 20 December 2016, ESMA published an updated version of its Q&A on MAR. The updated Q&A includes:
Three new Q&A (questions 3 to 5) in section 2: managers' transactions; and
Four new Q&A (questions 5 to 8) in section 3: investment recommendations and information recommending or suggesting an investment strategy.
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The updated Q&A is available at the following link:
Payment Services Directive
(i) EBA publishes final draft technical standards on cooperation and exchange of information for passporting under PSD2
On 14 December 2016, the EBA published its final draft Regulatory Technical Standards ("RTS") specifying the framework for cooperation and exchange of information between Competent Authorities ("CAs") for passport notifications under the revised Payment Services Directive ("PSD2"). The aim of the RTS is to ensure that information about payment institutions and e-money institutions that carry out business in one or more EU Member States is exchanged consistently between the national authorities of the home and host Member States.
The final draft RTS set out a harmonised framework for cooperation and exchange of information between CAs to facilitate cross-border provision of payment services in the EU internal market. They also address some of the concerns that had been raised by the industry during the consultation period.
A copy of the RTS is available at the following link:
(ii) EBA launches consultation on Guidelines on the reporting of major operational or security incidents under the PSD2
On 7 December 2016, the EBA launched a consultation on its draft Guidelines developed in close cooperation with the European Central Bank ("ECB") under PSD2. The draft Guidelines specify:
the criteria, timeframe, thresholds and methodology to be used by payment service providers in order to classify operational or security incidents; the template to be used by payment service providers when notifying major operational or security incidents to CAs, and the indicators CAs need to use when assessing the relevance of such incidents to other domestic authorities, including the minimum information that must be shared.
The draft Guidelines support the objectives of PSD2, to strengthen the integrated payments market across the EU, to ensure a consistent application of the legislative framework, to promote equal conditions for competition and to provide a secure framework on the
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payments environment and protecting consumers. The consultation runs until 7 March 2017 following which the the final Guidelines will be published.
A copy of the consultation paper is available at the following link:
(iii) EBA consults on Guidelines on authorisation and registration under PSD2
On 3 November 2016, the EBA launched a consultation on its draft Guidelines, which specify the information to be provided by applicants intending to obtain authorisation as payment and electronic money institutions, as well as to register as account information service providers under PSD2.
The draft Guidelines specify the detailed information and documentation that applicants need to submit to national authorities in the authorisation or registration process, so as to comply with PSD2.
The deadline for the submission of comments on the draft Guidelines is 3 February 2017.
A copy of draft Guidelines are available via the following link:
European Securities and Markets Authority ("ESMA")
(i) ESMA 2017 work programme
On 30 September 2016, ESMA published its work programme for 2017 (ESMA/2016/1419), which sets out its priorities and areas of focus for 2017 in support of its mission to enhance investor protection and promote stable and orderly financial markets.
The programme reflects the shift in focus of ESMA's work, from building the single rulebook, towards ensuring its consistent application across the European Union
The key areas of focus under ESMA's activities of supervisory convergence, assessing risks, single rulebook and direct supervision will be:
Converging supervisory practices on the implementation of MiFID II; Focusing on data quality; Level 2 work on the Benchmarks Regulation and on various initiatives under the umbrella of the Capital Markets Union; and
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Directly supervising credit rating agencies and trade repositories, with a particular focus on their ancillary activities given the trend of combining ancillary and core services.
A copy of the work programme is available via the following link:
International Organisation of Securities Commissions
(i) IOSCO publishes consultation paper on other CRA Products
On 8 November 2016, the International Organization of Securities Commissions ("IOSCO") published a consultation report (CR06/16) on `Other CRA Products' ("OCPs"), which considers how market participants use non-traditional, credit-related products or services offered by credit rating agencies ("CRAs").
IOSCO explains in the report that OCPs may be used by market participants in making investment and other credit-related decisions and may be used by issuers and obligors to make decisions about whether to obtain a credit rating from a particular CRA. Examples of OCPs include private ratings, confidential ratings, expected ratings and indicative ratings.
The report provides feedback on the information provided by respondents to two surveys on OCPs published by IOSCO in 2015, and seeks to clarify that information. IOSCO's main observations on the responses to the questionnaires are summarised in the report as follows:
Some OCPs share some common processes and features with traditional credit ratings. For example, CRAs develop a number of OCPs using the same credit rating analysts that determine traditional credit ratings;
CRAs tend to create separate structures or business line organisations to offer OCPs, and
OCPs can be categorised in six primary groups (these are described and analysed in chapter five of the consultation report).
The Report also seeks comments on IOSCO's current understanding of OCPs and how they differ from the traditional issuer-paid or subscriber-paid credit ratings.
The consultation closed on 5 December 2016.
A copy of the consultation is available via the following link:
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(ii) IOSCO Guidance to improve quality of reporting on compliance with financial benchmarks principles
On 16 December 2016, IOSCO published a report setting out guidance to improve the consistency and quality of reporting on compliance with its principles for financial benchmarks, which were published in July 2013.
Given the variety of benchmarks operating in the market place, IOSCO determined that guidance on statements of compliance should be flexible and take the form of reasonable expectations for reporting.
IOSCO has decided, for now, not to provide further guidance on proportionality, but instead seek greater disclosure from administrators on where and how they had applied a proportional approach.
A copy of the guidance is available at the following link:
(iii) IOSCO Final Report on Retail OTC Leveraged Products
On 21 December 2016, IOSCO published a final report on retail OTC leveraged products, which analyses offers of rolling-spot forex contracts, contracts for differences and binary options to retail investors (the "Final Report").
The Final Report identifies various risks related to the marketing and sale of complex OTC leveraged products to retail investors, and describes how some regulators are responding to the challenges these products present. Examples of concerns raised include:
Retail investors may not be able to assess the risks associated with these products or withstand the losses they may incur;
There can be difficulties relating to the withdrawal of client funds and aggressive or misleading marketing and sales practices; and
Many firms use on-line advertising, social media, expert blogs and other cross-border marketing techniques to attract investors, some of which can be aggressive and/or misleading in some jurisdictions.
The Final Report describes a variety of possible regulatory approaches and standards for mitigating the risks that OTC leveraged products pose to retail investors.
A copy of the Final Report is available at the following link:
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Alternative Investment Management Association ("AIMA")
(i) AIMA publishes guide to managed accounts
On 7 December 2016, the Alternative Investment Management Association ("AIMA") published a guide for fund managers wishing to establish a managed account, a popular form of investing in hedge funds that offer greater transparency and control to investors with regard to account management, investment strategy and choice of service provider.
The Guide aims to provide fund managers with a better understanding of what to expect when offering managed accounts and what some of the operational and regulatory challenges are.
The Joint Committee (ESMA, EIOPA and EBA)
(iv) Joint Committee of ESAs 2017 work programme
On 12 October 2016, the Joint Committee of the ESAs (the "Joint Committee") published its 2017 work programme, dated 30 September 2016.
In the work programme, the Joint Committee states that, during 2017, it aims to assess more closely cross-sectoral opportunities and threats created by the increasing digitalisation of finance and financial technology. The ESAs will also continue to explore synergies in their activities (by launching joint procurements) and cooperate on financial reporting issues relevant to the banking, insurance and securities sectors. They will also continue to provide operational and secretarial support to the ESAs' Board of Appeal.
The Joint Committee states that its aims for 2017 are to:
Provide further guidance (via Q&As) on the implementation of the Regulation on key information documents ("KIDs") for packaged retail and insurance-based investment products ("PRIIPs") (Regulation 1286/2014) ("PRIIPs Regulation");
Conclude its work on the automation in financial advice and continue to monitor the market during 2017;
Continue to assess the opportunities and challenges relating to the use of "big data" and personal data by financial institutions to profile consumers, identify patterns of consumption and make targeted offers;
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Aim to prepare a general mapping of the rules for different firms operating in the banking, securities and insurance sectors and analyse issues experienced by supervisors;
Continue to analyse the key trends and vulnerabilities to financial stability and continue to include appropriate cross-referencing in the sectoral risk reports with possible further analysis gathered on the digitalisation of finance and on financial technology from this perspective;
Publish, in 2017, guidelines under Article 25 of the revised Wire Transfer Regulation ((EU) 2015/847) ("WTR"), draft regulatory technical standards ("RTS") on central contact points under Article 45(10) of the Fourth Money Laundering Directive ((EU) 2015/849) ("MLD4");
Publish draft RTS under Article 45(6) of MLD4 on measures firms should take to handle the risk of money laundering or terrorist financing where a third country's laws prohibit the application of equivalent anti-money laundering ("AML") and counterterrorist financing ("CTF") standards;
Continue their work to fulfil their mandates under MLD4 and carry on their work on fostering the cooperation of competent authorities in relation to the AML/CTF supervision of credit and financial institutions that operate on a cross-border basis; and
Take action to respond to AML/CTF issues as they arise, including in response to emerging findings from the "Panama papers", amending existing guidelines to take account of new legal and regulatory developments and new guidelines on virtual currency exchange platforms.
A copy of the ESAs full 2017 work programme can be located at the following link:
(v) EBA publishes Consultation Paper on draft guidelines on internal governance released
On 28 October 2016, the EBA published a Consultation Paper on the draft guidelines on internal governance. The purpose of the draft guidelines is to:
Complete the various governance provisions in the Capital Requirements Directive ("CRD") by taking into account the principle of proportionality, specifying the tasks, responsibilities and organisation of the management body, the organisation of
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institutions and groups, including the need to create transparent structures that allow for a supervision of all their activities and specifies requirements for the three lines of defence and, in particular, the risk management, compliance and audit function; and.
Update and replace the existing set of Guidelines on internal governance (GL 44 published in 27 September 2011) and introduce additional aspects that aim to foster a sound risk culture to be implemented by the management body, to strengthen its oversight over the institutions' activities and their risk management framework. Additional guidelines have been provided to further increase the transparency of institutions' offshore activities and the consideration of risks within institutions' change processes.
The consultation runs until 28 January 2017 and can be located at the following link:
(vi) Consultation Paper - Joint ESMA and EBA Guidelines on the assessment of the suitability of members of the management body and key function holders under the Capital Requirements Directive and the MiFID II Directive
On 28 October 2016, the EBA and ESMA published a joint Consultation Paper on draft guidelines on the assessment of the suitability of members of the management body and key function holders under the CRD and the MiFID II Directive.
These draft guidelines specify the requirements regarding the suitability of members of the management body of credit institutions, investment firms, financial holding companies and mixed financial holding companies. The draft guidelines:
Provide common criteria to assess the individual and collective knowledge, skills and experience of members of the management body as well as the good repute, honesty and integrity, and independence of mind of members of the management body;
Require members of the management body to commit sufficient time to perform their duties and specify how the number of directorships held by members of the management body should be counted, for significant institutions;
Set out how different aspects of diversity, educational and professional background, age, gender and geographical provenance should be taken into account in the recruitment process; and
Highlight the importance of induction and training to ensure the initial and ongoing suitability of members of the management body, and call for institutions to establish
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training policies and to allocate appropriate financial and human resources to induction and training.
The consultation is open until 28 January 2017, and can be located at the following link:
(vii) EBA publishes discussion paper on new prudential regime for investment firms
On 4 November 2016, the EBA published a discussion paper on designing a new prudential regime for investment firms (the "Discussion Paper"). The Discussion Paper was produced in response to a call for advice by the European Commission in June 2016. The Discussion Paper requests views on proposals for a new prudential regime for investment firms that are not "systemic and bank-like".
The proposed framework focuses on the risks that investment firms pose to customers and to market integrity and liquidity and proposes a system whereby ongoing capital requirements are calculated based on capital factors that are attributed to one of these types of risk and increased by a measure of the risk to which the investment firm itself is exposed whereby an investment firm that poses more risk to customers and markets will have higher capital requirements that an investment firm that poses less risk.
The Discussion Paper considers the possibility of keeping the existing prudential treatment for investment firms set out in the Capital Requirements Regulation ("CRR"), as well as other issues such as corporate governance and remuneration requirements. The deadline for responses is 2 February 2017, as the EBA intends to submit an opinion and report on the new prudential regime to the European Commission by 30 June 2017.
A copy of the Discussion Paper is available at the following link:
(viii) Joint Committee of ESAs' publishes final report and revised joint guidelines on prudential assessment of acquisitions
On 20 December 2016, the Joint Committee of ESAs published a final report containing revised joint guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector.
The revised guidelines, replacing the 2008 version, aim to:
Clarify key concepts, such as indirect holdings, persons acting in concert and decision to acquire as well as matters relevant to the assessment of an acquisition, such as the
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financial soundness of the proposed acquirer and suspicions of money laundering or terrorist financing;
Clarify when the competent authority should provide an acknowledgement of receipt of the notification of an acquiring transaction thereby ensuring a consistent interpretation of time limits; and
For indirect acquisitions of qualifying holdings apply a two-step test consisting of a "control" test supplemented by a "multiplication" test.
The Joint Committee consulted on a draft version of the revised guidelines between July and October 2015. Feedback on the consultation is set out in section 6 of the report.
The guidelines will now be translated into all the official languages of the EU and apply from 1 October 2017.
The link to the final report containing the guidelines can be found here:
https://esas-jointcommittee.europa.eu/Publications/Guidelines/JC%20GL%202016%2001%20(Joint%20Gui delines%20on%20prudential%20assessment%20of%20acquisitions%20and%20increases %20of%20qualifying%20holdings%20-%20Final).pdf
(i) Irish Funds response to European Commission's public consultation on the main barriers to the cross-border distribution of investment funds
On 7 October 2016, Irish Funds submitted its response to the public consultation on the main barriers to the cross-border distribution of investment funds across the EU, which was launched in June 2016.
In its response, Irish Funds outlined the barriers it found to cross border distribution. These included marketing costs, regulatory costs and tax issues. Responses to the consultation were mainly led by the industry European Distribution and CMU Working Groups.
A link to the European Commission's public consultation can be found at the following link:
http://ec.europa.eu/finance/consultations/2016/cross-borders-investmentfunds/index_en.htm?&lang=en&newsletter_id=166&utm_campaign=Finance%20&utm_cont ent=Main%20barriers%20to%20the%20cross%20borders%20distribution%20of%20invest ment%20funds%20across%20the%20EU%20&utm_medium=email&utm_source=fisma_ne wsletter
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The Irish Fund's response to the consultation can be found at the following link:
(ii) European Commission publishes G7 principles on cyber security for the financial sector
On 11 October 2016, the European Commission published the text of the G7 fundamental elements of cyber security in the financial sector with an accompanying statement. In the statement, the European Commission welcomes the work done by the G7 Cyber Expert Group to address the increase in sophistication, frequency and persistence of cyber threats in the financial sector in order to promote the consistency of cybersecurity approaches among G7 Partners and the potential risk to financial stability.
In order to achieve this, multiple non-binding, high-level fundamental elements were designed for private and public entities in the financial sector, which are described as `building blocks' upon which an entity can design and implement its cybersecurity strategy and operating framework, informed by its approach to risk management and culture. Public authorities can use the principles to guide public policy, regulation and supervision.
The G7 fundamental elements of cyber security are as follows:
Element 1: Cybersecurity Strategy and Framework Establish and maintain a cybersecurity strategy and framework tailored to specific cyber risks;
Element 2: Governance Define and facilitate performance of roles and responsibilities for personnel implementing, managing and overseeing the effectiveness of the cybersecurity strategy and framework;
Element 3: Risk and Control Assessment Identify functions, activities, products, and services and identify and implement controls to protect against and manage those risks within the tolerance set by the governing authority;
Element 4: Monitoring Establish a systematic monitoring process to rapidly detect cyber incidents and evaluate the effectiveness of identified controls;
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Element 5: Response to Cyber Incidents Including the timely assessment of the nature, scope, and impact of a cyber incident and notification of internal and external stakeholders;
Element 6: Recovery Resume operations responsibly, while allowing for continued remediation;
Element 7: Information Sharing Engage in the timely sharing of reliable, actionable cybersecurity information with internal and external stakeholders on threats, vulnerabilities, incidents, and responses, etc.; and
Element 8: Continuous Learning Review the cybersecurity strategy and framework regularly and when events warrant.
A copy of the full G7 principles on cyber security for the financial sector can be found at the following link:
(iii) European Commission's communication on Work Programme 2017
On 25 October 2016, the European Commission published a communication to the European Parliament, the Council of the EU, the European Economic and Social Committee and the Committee of the Regions (the "Communication").
The Communication outlined the Commission's work programme for 2017, including;
21 key initiatives across the Commission's ten political priorities;
19 intended withdrawals or modifications of pending proposals; and
18 actions to review the quality of existing EU legislation.
The latest work programme is intended to provide an insight into the Commission's aims for 2017, following on from the publication of the Commission's 2016 work programme in October 2015.
The Communication can be found in full at the following link:
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Central Bank of Ireland
(i) Central Bank publishes 2016 Industry Funding Levies
On 10 October 2016, the Central Bank published its 2016 Guide to the Industry Funding Levies (the "Guide") along with an accompanying statement.
Under the current funding arrangements, which are approved annually by the Minister for Finance, regulated entities are levied 50 per cent of the costs incurred on financial regulation, with some exceptions. The balance is funded by the Exchequer by means of subvention from the Central Bank. In general, costs are levied on industry sectors on a proportionate basis, depending on the level of regulatory input and oversight required.
The budget for financial regulation for 2016 reflects:
The growth of the financial sector and number of firms and funds regulated in Ireland;
The additional mandates, number and complexity of the financial regulations that the Central Bank is tasked with supervising and enforcing, most notably Alternative Investment Fund Managers Regulations and the Solvency II, which introduced a harmonised EU-wide insurance regulatory regime and came into force on 1 January 2016; and
The phased roll-out of the measures detailed in the Central Bank's 2016-2018 Strategic Plan, including addressing the IMF recommendations such as bringing lowimpact supervision up to an acceptable standard of intensity, improving the Central Bank's IT infrastructure and the increased cost of contested enforcement actions, such as inquiries, refusals, appeals and litigation.
The Guide is intended to be a user-friendly means of understanding the levy calculation process and is divided into five sections:
1. A background to the 2016 Industry Funding Regulations;
2. Significant changes to the levy in 2016;
3. How the levy is calculated for each industry sector;
4. Calculation of the levy rates for individual financial service providers and how the net Annual Funding Requirement is determined; and
5. Appendices including a comparison of 2016 and 2015 net Annual Funding Requirements, the population of each Industry Sector, an introduction and background to Impact Scores and a glossary.
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The Central Bank's Statement on the Industry Funding Levies 2016 can be found at the following link:
The Guide to the 2016 Industry Funding Regulations can be found at the following:
(ii) Central Bank plan to implement enhancement to ORION system for submitting QIAIF applications
On 17 November 2016, the Central Bank held a briefing on enhancements to the QIAIF ORION system and published guidance on enhancements to the ORION QIAIF system.
The principle enhancements to ORION include the following:
ORION has been updated to incorporate QIAIF ICAV applications. The applicant will be able to select ICAV as the legal structure of the QIAIF and upload the Instrument of Incorporation;
Clause based validations have been removed from ORION. The applicant will instead be required to upload checklist documents in relation to the relevant clause based documents;
Legal Entity searches for the proposed parties to the QIAIF have been replaced by a simpler `Add Details' functionality; and
Questions relating to Loan Originating Funds have been added to the QIAIF Fund application and QIAIF Sub-Fund application.
From 5 December 2016, all QIAIF applications (including those structured as ICAVs) must be submitted electronically via ORION.
The Central Bank guidance on enhancements to the ORION QIAIF System is available at the following link:
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(iii) Feedback Statement on Consultation on Central Bank Investment Firms Regulations
On 25 November 2016 the Central Bank published its Feedback Statement on Consultation on Central Bank Investment Firms Regulations 2015 (CP 97) (the "Feedback Statement"). CP 97 relates to the publication of an Investment Firms Rulebook ("the Rulebook") which consolidates into one document all of the conditions and requirements which the Central Bank imposes on investment firms.
The Feedback Statement summarises the responses received to CP 97 and outlines the Central Bank's comments and decisions, including the following:
In response to queries on the proposal in CP 97 that existing capital requirements in the AIF Rulebook, as applicable to fund administrators, be amended and moved to the Investment Firm Regulations, the Central Bank has confirmed that prior written permission will be required from the Central Bank before any Common Equity Tier 1, Additional Tier 1 and Tier 2 instruments or capital contributions may be included in a fund administrator's own funds. The Central Bank further confirmed that there has been no change in the criteria required for capital contributions to be included in own funds and that pre-existing capital instruments/capital contributions do not require approval by the Central Bank.
In relation to the criteria outlined in Regulations 39 and 40, which deal with the release of final NAV by an Outsourcing Service Provider ("OSP"), the Central Bank confirmed that outsourcing by fund administrators, and by investment firms in general, is subject to ongoing review within the Central Bank and a review of outsourcing across all financial sectors is also being initiated. In light of this work and taking into account the large number of comments received in relation to the release of the final NAV by an OSP, the Central Bank has decided to:
Retain the prohibition on outsourcing the check and release of the final NAV except in circumstances determined by the Central Bank;
Set out those exceptional circumstances in guidance which will accompany the Central Bank Investment Firm Regulations. The type of guidance the Central Bank intends to provide in relation to the exceptional circumstance when the check and release of final NAV may be outsourced is set out in Annex 1 to the Feedback Statement;
Clarify that previously approved outsourcing arrangements that do not comply with the guidance will not be required to change; and
Retain the obligation on fund administrators to check the final NAV the day following its release by the OSP.
The Feedback Statement also includes a general overview of other matters raised in CP 97.
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The Central Bank intends to publish Investment Firms Regulations together with guidance in early 2017.
The Feedback Statement is available via the following link:
(iv) Central Bank publishes findings of Thematic Review on operation of risk function
On 5 December 2016, the Central Bank published the outcome of a thematic review to assess the operation of the risk function by reviewing risk frameworks and risk culture across Investment Firms, Fund Service Providers and Stockbrokers.
The main findings of the review are:
There is a divergence in the quality and effectiveness of risk frameworks;
There were notable inconsistencies and deficiencies in how firms' approach identification of risks, documenting risks, quantifying risks, mitigating risks and communicating these risks within the firm; and
Good practices identified in the firms' documentation are not always evident in the operations of the business.
The Central Bank encourages all boards to consider how it is addressing these aspects of the risk management framework. The Central Bank has attached an Appendix for use by firms when carrying out a self-assessment of their own risk framework and culture. The Central Bank states that where issues have been identified with individual firms, the Central Bank will follow up directly with firms concerned to address these issues.
The Central Bank's letter regarding its thematic review of risk function can be found at:
(v) Central Bank publishes Thematic Review on oversight of outsourcing arrangements
On 19 December 2016, the Central Bank published its findings from its thematic review of oversight of outsourcing arrangements and has set out a number of questions that relevant entities such as Fund Managers, Fund Service Providers and Investment Firms should consider where such firms have outsourcing arrangements in place. The questions to be considered are as follows:
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Monitoring: Does the firm have appropriate key performance indicators and monitoring tools that are properly aligned to the outsourced activity and embedded in the risk framework?
Reporting: Is the reporting on the performance of the outsourcing provider, including Board reporting, sufficiently detailed and does the frequency of reporting correspond to the criticality of the outsourced activity?
Appraisal: Is the board satisfied that the initial due diligence analysis on the outsourcing provider was suitably rigorous and that on-going appraisals are equally thorough?
Business Continuity: Does the firm have documented succession or remedial action plans in the case of disruption or termination of service and are these subject to robust testing on an ongoing basis?
Outsourcing Policy: Does the firm's outsourcing policy take into account the entire life cycle of outsourcing?
In the event that a firm cannot answer yes to any of the questions above, it may want to take steps to rectify this to ensure its oversight of outsourcing arrangements is in line with Central Bank expectations.
We would recommend that firms present the results of the relevant assessment to the board along with any actions points arising from the assessment. This should be noted and recorded in the board minutes.
A copy of the thematic review is available at the following link:
Anti-Money Laundering ("AML")/Counter-Terrorist Financing ("CTF")
(i) Department of Finance publishes National Risk Assessment for Ireland
On 7 October 2016, the Department of Finance published the first National Risk Assessment for Ireland (Money Laundering and Terrorist Financing) (the "Risk Assessment"), which was carried out in conjunction with the Department of Justice and Equality.
The aim of this process was to identify, understand and assess the money laundering and terrorist financing risks faced by Ireland and to develop strategies to address those risks and allocate sufficient resources to implement those strategies.
While this is Ireland's first Risk Assessment, Ireland as a FATF member and under its
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future legal obligations once the Fourth Money Laundering Directive ("MLD4") comes into force will be required to update the Risk Assessment on an ongoing basis to reflect changes to existing and future threats and vulnerabilities as they emerge.
The Risk Assessment found Ireland's money laundering and terrorist financing risk profile to be broadly in line with the risk profile of other Member States of a similar size. At a macro-economic level a number of risk enhancing and risk reducing factors were identified.
Risk enhancing factors included:
Ireland's open, free market principled economy with a service-exporting financial services that is generally regarded as highly interconnected;
Ireland's membership of the EU which means the already open economy was further opened from 1973 to move goods, workers, services and capital across the internal borders of the EU; and
Ireland's close economic ties with the United Kingdom, with a shared border increasing risk of certain cross-border activities.
Risk reducing factors found by the Risk Assessment included, amongst other factors:
Ireland's single, centralised police force, An Garda Sochna, which allows it to effectively manage all types of crime;
Ireland's comprehensive legislative framework criminalising both money laundering and terrorist financing; and
Ireland's single, centralised and well-resourced financial services regulator, the Central Bank of Ireland that reflects adequately the scale and complexity of the financial sector.
The Risk Assessment also sets out the understanding of the nature and scale of criminal conduct in Ireland which generates illicit proceeds, particularly as informed by law enforcement authorities. This includes risks such as:
Drug offences According to the Risk Assessment, drug offences pose the most significant threat of money laundering to Ireland. While there has been a decrease in the numbers of drug offences recorded in recent years, drug offences still accounted for over 7% of all recorded offences in 2015.
Financial crime Such as social welfare fraud, inheritance scams and payment card scams.
Tax evasion Ireland is rated the easiest country in the EU to pay business taxes, and also the Member State with the second lowest burden of customs procedures in the
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EU. Academic research describes Ireland as a small, open economy which displays none of the characteristics of a tax haven. Ireland is also a strong supporter of the European Commission's work in the area of tax transparency and administrative cooperation.
Cybercrime Such as malware; denial of service attacks, hacking and intellectual property theft impact up to 44% of Irish businesses, which is almost double the rate in 2012. 36% of Irish businesses now also view cybercrime as the greatest future risk.
Other illicit trade Such as counterfeiting and intellectual property theft are emerging threats of money laundering in Ireland. Due to intelligence gaps, it is difficult to estimate the scale of the proceeds generated by these criminal activities, but intelligence suggests that the emergence and growth of online advertising and purchasing has increased the availability of illicit products in Ireland.
The Risk Assessment includes a table which sets out a brief overview of each sector and its final risk rating for potential money laundering and terrorist financing risk. It is important to note that these are residual risk ratings after taking mitigants and other relevant factors into account, however a higher rating does not necessarily indicate that there is low compliance in the sector. Some sectors will by their nature or scale remain higher risk even with robust AML/CTF compliance. The following ratings are of note:
Funds/ Fund Administrators
A copy of the full Risk Assessment can be found on the Department of Justice and Equality's website at the following link:
http://www.justice.ie/en/JELR/National_Risk_Assessment_Money_Laundering_and_Terrori st_Financing_Oct16.pdf/Files/National_Risk_Assessment_Money_Laundering_and_Terrori st_Financing_Oct16.pdf
(ii) Register of Beneficial Ownership Requirements
On 15 November 2016, the Department of Finance published the European Union (AntiMoney Laundering: Beneficial Ownership of Corporate Entities) Regulations 2016 (the "AML Regulations"), which came into effect on the same day. These AML Regulations transpose Article 30(1) of MLD4 into Irish law in advance of the 26 June 2017 transposition deadline. In accordance with Article 30(1), Member States, such as Ireland, are required to
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oblige corporates and other legal entities to obtain and hold adequate, accurate and current information on their beneficial ownership, including details of the beneficial interests held.
Further to the publication of the AML Regulations, most Irish companies are now obliged to hold adequate, accurate and current information on their beneficial ownership on an internal register (the "Register"). The AML Regulations affect companies incorporated under the Companies Act 2014 (the "Act") as well as existing companies within the meaning of that Act and other legal entities incorporated in Ireland ("Relevant Entities"). Therefore this will include unregulated companies as well as regulated companies such as UCITS investment companies, AIF investment companies, ICAVs and fund administrators.
Meaning of Beneficial Owner
The term "beneficial owner" is defined in the AML Regulations as meaning the natural person(s) who ultimately owns or controls a Relevant Entity through either a direct or indirect ownership of a sufficient percentage of shares or voting rights or ownership interest in that entity. Where a natural person holds more than 25% of the shares of the Relevant Entity or has an ownership interest of more than 25%, then that shall be an indication of direct ownership by that person. Where a corporate or multiple corporates hold more than 25% of the shares or other ownership interest exceeding 25% in the Relevant Entity and those holdings are controlled by a natural person, that shall be an indication of indirect ownership.
If the Relevant Entity is not able to identify (or if there is any doubt that the person(s) identified are the beneficial owner(s)), the natural person(s) who holds the position of "senior managing official(s)" shall be listed in the Register. The Relevant Entity must also document and keep records of all actions taken in order to identify the beneficial owners of the Relevant Entity as such term is defined in the AML Regulations.
As outlined above, the AML Regulations apply to Relevant Entities which essentially refers to every company or other legal entity incorporated in Ireland. However, there is an exemption for those companies that are:
(i) Listed on a regulated market that is subject to disclosure requirements consistent with EU Law; or
(ii) Subject to equivalent international standards which ensure adequate transparency of ownership information.
The AML Regulations do not affect trust structures governed by Irish law. A separate provision of MLD4 deals with the beneficial ownership of trusts, however this provision has not as yet been transposed into Irish law.
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The AML Regulations require every Relevant Entity to take all "reasonable steps" to obtain adequate, accurate and current information in respect of its beneficial owners. In this regard the AML Regulations require the Relevant Entity to take certain steps to identify any beneficial owners. Further to this obligation if the Relevant Entity has reasonable cause to believe that an individual is a beneficial owner it must give a notice to that individual asking that person to confirm whether he/she is a beneficial owner. If the relevant individual is a beneficial owner he/she must confirm and correct any particulars of the notice within one month of the receipt of such notice.
Separately, if the Relevant Entity believes that someone else has information about any beneficial owner it must serve a notice on that person looking for the relevant information.
A duty is also imposed upon a natural person who is a beneficial owner, or who ought to know that they are one, to notify the Relevant Entity that they are a beneficial owner if they have not received a notice from the Relevant Entity requesting this information. There is also a duty on natural persons in certain circumstances to notify relevant changes in beneficial ownership.
The information in the Register must contain the following particulars in respect of each beneficial owner:
Name, date of birth, nationality and residential address;
A statement of the nature and extent of the interest held by each such beneficial owner;
The date on which each natural person was entered into the Register; and
The date on which each natural person who ceased to be a beneficial owner ceased to be such an owner.
Relevant Entities are required to keep and maintain this information since 15 November 2016 and they must also seek to ensure that this information is up to date and take measures where there are any changes to the beneficial owners.
Failure by the Relevant Entity to comply with the obligations contained in the AML Regulations is an offence and the Relevant Entity can be liable on summary conviction to a fine not exceeding 5,000. It is also an offence for an individual to fail to comply with his/her obligations under the AML Regulations, including failing to comply with the terms of the notice received from the Relevant Entity. Such an individual can be liable on summary conviction to a fine not exceeding 5,000.
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Companies should consider the impact of the AML Regulations and the steps they will need to comply with the obligations set out in the AML Regulations. In particular, they will need to consider how they will maintain the Register and prepare the various notices to be served on shareholders as required by the AML Regulations.
A copy of the AML Regulations is available at the following link:
(iii) Joint Committee of ESAs final version of guidelines on risk-based supervision under MLD4
On 16 November 2016, the Joint Committee of the ESAs published the final version of its guidelines on risk-based supervision under MLD4 (the "Guidelines").
The Guidelines, addressed to National Competent Authorities ("NCAs") responsible for supervising the compliance of credit and financial institutions with AML obligations, are based on a mandate set out in Article 48(10) of MLD4. They firstly set out the characteristics of a risk-based approach to AML and CTF supervision, and identify the role of NCAs in identifying and assessing the money laundering risk to which their sector is exposed, and consequently adjusting the focus, intensity and frequency of supervisory actions in line with the risk-based approach.
The Guidelines emphasise the need for, amongst other things:
Suitably qualified staff to carry out risk-based AML and CTF supervision in an informed and consistent manner; and
A policy that ensures that the size or systemic importance of a credit or financial institution is not the sole indicator of the extent to which it is exposed to money laundering and terrorist financing risk, particularly in the cases of smaller firms;
The Guidelines state that they apply a year from the date they are issued. Under MLD4, the final version of the Guidelines is to be issued by 26 June 2017. The Joint Committee intends to keep the Guidelines under review, once they have been adopted, and to update them as appropriate.
A link to the Guidelines in full can be found here:
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(iv) European Commission adopts Delegated Regulation amending list of high-risk third countries under MLD4
On 25 November 2016, a Commission Delegated Regulation was published which amended Commission Delegated Regulation (EU) 2016/1675 supplementing MLD4 by identifying high-risk third countries with strategic deficiencies.
The explanatory memorandum to the new Delegated Regulation explains that, as stressed in recital 28 to MLD4, the European Commission will adapt its assessment to changes made to information sources from international organisations and standard setters, such as those issued by the FATF. As a consequence, the European Commission aims to update the list to reflect the progress, or the lack of progress, made by high-risk third countries in removing the strategic deficiencies.
The European Commission has adopted the new Delegated Regulation in the light of FATF's recent on-site visit to Guyana where it was found that Guyana has made significant progress on AML and CTF matters. Consequently, the European Commission has concluded that Guyana should no longer be considered to be a third-country with strategic AML and CTF deficiencies and Guyana has been removed from the list of high-risk third countries under MLD4. The European Commission adopted the Delegated Regulation on 24 November 2016.
The new Delegated Regulation, which is binding in all Member States, entered into force on the 26 November 2016. A copy is available at the following link:
(v) Central Bank publishes Bulletin on Anti-Money Laundering and Third Party Reliance
On 6 December 2016, the Central Bank published the first publication of the Anti-Money Laundering bulletin, which focuses on third party reliance and sets out the Central Bank's expectations in this area (the "Bulletin"). The Bulletin seeks to provide guidance and feedback for credit and financial institutions in relation to anti money laundering and counter-terrorist financing.
In relation to third party reliance, the Central Bank expects that:
There is a signed agreement in place between the firm and the third party;
Firms only rely on third parties to perform Customer Due Diligence; and
Firms should conduct regular assurance testing to ensure documentation can be retrieved quickly and without undue delay, and that the quality of the underlying documents obtained is sufficient.
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The Bulletin can be found via the following link:
(vi) European Commission publishes a proposal for a Directive on criminalisation of money laundering
On 21 December 2016, the European Commission published a Proposal for a Directive on criminalisation of money laundering (the "Proposal"). On 2 February 2016, the European Commission presented an Action Plan against terrorism financing, with a key action being to consider a possible proposal for a Directive to introduce minimum rules regarding the definition of the criminal offence of money laundering and to approximate sanctions. This complements other initiatives such as the proposed Directive on combating terrorism and the amendments to MLD4 published in July 2016.
The Proposal acknowledges that all Member States criminalise money laundering but there are some differences that require change:
There are significant differences in the respective definitions of what constitutes money laundering, on the predicate offences, for example the underlying criminal activity which generated the property laundered, and the level of sanctions;
The current legislative framework is neither comprehensive nor sufficiently coherent to be fully effective and can be exploited by criminals and terrorists who can choose to carry out their financial transactions where they perceive anti-money laundering measures to be weakest; and
At the operational level, the differences in the definitions, scope and sanctions of money laundering offences affect cross-border police and judicial cooperation between national authorities and the exchange of information. For example, differences in the scope of predicate offences make it difficult for Financial Intelligence Units and law enforcement authorities in one Member State to coordinate with other EU jurisdictions to tackle cross-border money laundering.
The Proposal can be found at the following link:
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(vii) Council of the EU compromise proposal on MLD5
The European Commission published the proposed Directive amending the Fourth Money Laundering Directive ("MLD4") in July 2016, which is known as the Fifth Money Laundering Directive ("MLD5").
The Council has proposed a number of amendments to the European Commission's MLD5 proposal including to the transposition date for MLD4 and MLD5, provision on group supervision and provisions on implementing acts relating to interconnectivity of EU Member States' beneficial ownership registers.
The Council has advised that Member States will have 12 months to transpose MLD5 into national laws and regulations following its publication in the Official Journal of the EU, although there will be longer periods (24 or 36 months) in which to implement the various provisions on beneficial ownership registers.
The Council's negotiating mandate on MLD5 was agreed on 20 December 2016, with a view to enabling negotiations with the Parliament to start in early 2017. A vote is scheduled for 25 January 2017.
The latest text from the Council is set out below:
(i) European Commission proposes amendments to adequacy decisions on "whitelisted" countries and decisions on standard contractual clauses
Following the presentation of two draft Commission Implementing Decisions (the "Decisions") proposing amendments to the existing adequacy decisions on "white-listed" countries and the decisions on standard contractual clauses ("SCCs") permitting the transfer of personal data outside of the European Economic Area at the Article 31 Committee meeting on 3 October 2016, the European Commission published Commission Implementing Decision (EU) 2016/2295 and Commission Implementing Decision (EU) 2016/2297 on 16 December 2016.
The purpose the Decisions is to comply with ruling in Max Schrems, the ruling of the European Court of Justice, which invalidated Article 3 of the Safe Harbor adequacy decision.
As recorded in the Max Schrems ruling, national data protection authorities' ("NDPA's") powers to suspend and prohibit data flows were limited. The Decisions attempt to remove comparable provisions and restrictions in the existing adequacy and SCCs decisions, thereby ensuring that the NDPAs can use all the powers provided under EU and national law.
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Following the introduction of the Decisions, whenever NDPAs exercise their powers leading to the suspension or definitive ban of data flows to third countries, for the protection of individuals personal data, the Member State concerned shall without delay inform the European Commission, which will then forward the information to the other member states. The Decisions are available via the following links: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32016D2295&from=EN http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32016D2297&from=EN Dillon Eustace January 2017
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This Investment Firms Quarterly Legal and Regulatory Update is for information purposes only and does not constitute, or purport to represent, legal advice. It has been prepared in respect of the current quarter ending 31 December 2016, and, accordingly, may not reflect changes that have occurred subsequently. If you have any queries or would like further information regarding any of the above matters, please refer to your usual contact in Dillon Eustace
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