CAPITAL MARKETS AND MARKET INFRASTRUCTURE
Please see the Prudential Regulation Section for an update on CCP supervisory stress testing framework
BoE working group issues white paper on potential approaches to adoption of SONIA as preferred near risk-free reference rate
On 29 July, the BoE working group on sterling risk-free reference rates (RFRs) published a white paper on potential approaches to broader adoption in sterling markets of the SONIA interest rate benchmark. The white paper sets out the group’s early thinking on adoption of SONIA as an alternative to the LIBOR, and invites engagement from current and potential users of SONIA in the adoption process. In particular, the working group is seeking feedback on: The development and promotion of interest rate derivative products that reference the RFR, including the design of a futures contract; The appropriate scope of adoption of the RFR across broader financial markets beyond derivatives (such as loan or bond markets), including whether a term RFR might be necessary; The potential scope for voluntary conversion of legacy portfolios that currently reference LIBOR to reference the RFR. The white paper closes to on 29 September. The working group will then discuss the responses received and publish an anonymised summary.
European Commission adopts amending Delegated Regulation on access to data and aggregation and comparison of data under EMIR
On 29 June, the EC adopted a Delegated Regulation amending Commission Delegated Regulation (EU)151/2013 with regard to RTS specifying the data to be published and made available by trade repositories and operational standards for aggregating, comparing and accessing data under EMIR (C(2017) 4408 final). The amendments set out Common provisions for the operational standards for aggregation and comparison of data, including common output formats; and for the operational standards for access to data, including data exchange procedures between trade repositories and the competent authorities listed in Article 81(3) of EMIR. The next step will be for the Council of the EU and the EP to consider the amending Delegated Regulation. If neither object to, it will be published in the OJ. It will enter into force on the date following its publication. It will apply from 1 November.
European Commission Implementing Regulation establishing a list of critical benchmarks used in financial markets under Benchmarks Regulation published in OJ: June 2017
On 29 June, EC Implementing Regulation (EU) 2017/1147, which amends Implementing Regulation (EU) 2016/1368 establishing a list of critical benchmarks used in financial markets pursuant to the Benchmarks Regulation, was published in the OJ. The Implementing Regulation, which specifies the EIONA as a critical benchmark, enters into force on the day following its publication in the OJ (that is, 30 June).
FCA publishes policy statement on prohibition of restrictive contractual clauses
On 27 June, the FCA published a policy statement (PS17/13) setting out its rules to ban the use of clauses that restrict a client's choice of future providers of primary market services (debt capital market services, equity capital market services and merger and acquisition services). This follows the FCA's final report on its market study on the UK investment and corporate banking market, published in October 2016, which found that some practices of primary market providers could hinder competition. The ban applies to unspecified and uncertain future services only, and excludes future service restrictions in bridging loans. It will also apply to written agreements only, but the FCA stresses that this does not mean that firms should replace written clauses with unwritten oral agreements. It also applies irrespective of the size of the client. The text of the new rules is appended to the policy statement, and firms affected by the changes have until 3 January 2018 to ensure compliance.
CPMI and IOSCO consult on third batch of key OTC derivatives data elements
On 27 June, the CPMI and the IOSCO issued a consultative report on the harmonisation of the third batch of key OTC derivatives data elements, other than the unique transaction identifier (UTI) and the unique product identifier (UPI). The report is part of the CPMI-IOSCO Harmonisation Group's response to its mandate from the FSB to address the harmonisation of data elements reported to trade repositories. The purpose of the consultative report is to gather feedback on the definition, format and allowable values of critical data elements to develop guidance for relevant authorities that require these data elements to be reported to trade repositories in their own jurisdiction. The third batch of critical data elements includes data elements focused on collateral, prices, quantities, non-regular payments, packages and other links, and custom baskets. Comments can be made until 30 August.
Council of EU invites Coreper II to approve final texts of Securitisation Regulation and CRR Amendment Regulation
On 27 June, the Council of the EU invited the Coreper II to approve the final texts of: (i) the proposed regulation laying down common rules on securitisation and creating a European framework for simple, transparent and standardised securitisation and amending Directives 2009/65/EC, 2009/138/EC, 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012 (Securitisation Regulation); and (ii) the proposed regulation amending the CRR on prudential requirements for credit institutions and investment firms (CRR Amendment Regulation).
ECB recommends that it should have power to regulate CCPs and other clearing systems
On 23 June, the ECB published a recommendation (ECB/2017/18) adopted by its Governing Council to amend Article 22 of the Statute of the ESCB and of the ECB, together with a press release. The ECB recommends that Article 22 should be amended to give the ECB the power to make regulations relating to clearing systems for financial instruments. This would give it the power to regulate CCPs. In particular, the Eurosystem (that is, the ECB and the national central banks of member states in the eurozone) would have the power to monitor and assess risks posed by CCPs clearing significant amounts of euro-denominated transactions and the ECB would be able to adopt additional requirements for those CCPs. The recommendation takes the form of a proposed decision of the European Parliament and the Council of the EU. The ECB has sent the recommendation to the Parliament and the Council for their consideration. The Commission will issue an opinion on the recommendation.
Please see the Markets section for an update on CFD policy work.
FCA speech on conduct regulation in retail banking
On 29 June, the FCA published a speech by Andrew Bailey, FCA Chief Executive on conduct regulation in the UK retail banking market. In the speech Mr Bailey identifies four broad issues for retail banks that he refers to as being highly relevant for conduct regulation: (i) offering multiple products. Banks are more complex as firms because they provide customers with many products. The risk is that the number of products creates more scope for less transparency in pricing and the assessment of costs; (ii) longevity of products. Products can be very long-lived, because they are meeting the long-term needs of customers (for example, mortgages). This complicates financial services relative to many other products because the consequences of the terms, for banks and their customers, will often only emerge over a long period of time. This lends itself to a problem of transparency in explaining the terms of products and in judging their appropriateness for customers once events take over; (iii) cross-subsidies. There is naturally scope for cross-subsidies between products and therefore between customers. This can create issues in allocating costs; and (iv) public policy. There is a public interest in the supply of financial services and some basic challenges follow on from the public interest element of retail banking. For example, there are important social policy issues around access to basic bank accounts, access to bank branches, access to ATM's and access to credit.
Creditworthiness Assessment Bill 2017-19: publication and first reading
On 28 June, the Creditworthiness Assessment Bill 2017-19 had its first reading in the House of Lords. The Bill amends section 64A of the FSMA. The amendment imposes a requirement on the FCA to make rules to ensure that firms carrying on credit-related regulated activities and connected activities, and firms entering into or varying a regulated mortgage contract or home purchase plan, take into account rental payment history and council tax payment history when assessing a borrower's creditworthiness. The second reading of the Bill has yet to be scheduled.
EBA report on innovative uses of consumer data by financial institutions
On 28 June, the EBA published a report on innovative uses of consumer data by financial institutions. The report outlines both the risks and potential benefits of this innovation. It also identifies a number of EU legal requirements applying to financial institutions that mitigate most of the identified risks. The EBA has observed that a growing number of financial institutions use consumer data in innovative ways, often combining data that they hold internally with data obtained from external data vendors, social media or other external sources. Given the application of EU law currently in force, the EBA finds no sufficient grounds for further industry-specific legislative interventions on this matter at this point in time, but will continue to monitor closely the evolution of this innovation. The EBA will also look to carry out further work in 2017, jointly with ESMA and EIOPA, on the topics of Big Data, as the risks arising specifically from Big Data are cross-sectoral.
Financial Guidance and Claims Bill 2017-19 published
On 28 June, the UK parliament published the text of the Bill, together with explanatory notes. The BilI aims to ensure that members of the public are able to access free and impartial money guidance, pensions guidance and debt advice. It also ensures that they are able to access high-quality claims handling services by strengthening the regulation of claims management companies (CMCs). To achieve this, the Bill provides for the: (i) creation of a single financial guidance body (SFGB). This body will replace the Money Advice Service (MAS), the Pensions Advisory Service (TPAS), and Pension Wise. Its functions will include the provision of pensions guidance, money guidance and debt advice, and it will also have a strategic function to develop a national strategy to improve financial capability and debt management; and (ii) transfer of claims management regulation from the Claims Management Regulation Unit of the MoJ to the FCA. The Bill will make amendments to the FSMA to enable the FCA to regulate CMC activity as a regulated activity under FSMA. It also provides for the transfer of complaints-handling responsibility from the Legal Ombudsman to the FOS, which will allow the FOS to take over jurisdiction to investigate and determine consumer complaints about the service provided by CMCs. The FCA will be given the power to impose a cap on the fees that CMCs can charge for their services and the MoJ will be empowered to put in place a transfer scheme for assets and liabilities of the Claims Management Regulation Unit to the FCA, and a scheme providing for the transfer of staff. The Bill is due to receive its second reading on 5 July.
FATF consults on draft guidance on information sharing between financial institutions
On 29 June, the FATF published for consultation draft guidance for private sector information sharing. The guidance sets out the obstacles to information sharing, including legal constraints and operational challenges. It contains examples of how countries address these obstacles, including how national data protection and AML authorities work together to meet their respective objectives. It sets out practices adopted by countries to promote group-wide information sharing, and information sharing between financial institutions that are not part of the same group. Before finalising the guidance, the FATF has decided to consult with private sector stakeholders. Comments can be made on the draft guidance until 31 July. As the FATF has not yet approved the draft guidance at this stage, it advises that the guidance will be subject to further revisions and amendments.
New FCA webpage on notification requirements in Money Laundering Regulations 2017 for FSMA authorised firms
On 27 June, the FCA published a new webpage on the notification requirements in Money Laundering Regulations 2017 for persons authorised under the FSMA. The Money Laundering Regulations 2017 came into force on 26 June and update the UK's AML regime. Regulation 23 requires FSMA-authorised persons to inform the FCA if they are undertaking Money Service Business (MSB), or trust or company service (TCSP) activities. An authorised person will need to notify the FCA, by email, if they fall within one of the following three categories: (i) if an authorised person conducted MSB or TCSP activity before 26 June, they must notify the FCA by 26 July; (ii) if an authorised person begins to conduct MSB or TCSP activity after 26 June, they must notify the FCA within 28 days of doing so; and (iii) If an authorised person ceases to provide either of these services, they must notify the FCA within 28 days. Details of how to notify the FCA are set out on the webpage, which also provides information on what constitutes MSB and TCSP activities.
Joint Committee of ESAs final report on MLD4 AML and CTF risk factor guidelines
On 26 June, the Joint Committee of ESAs published its final report (JC/2017/37) containing risk factor guidelines on AML and CTF under Articles 17 and 18(4) of the MLD4. The guidelines set out factors that firms should consider when assessing the ML and TF risk associated with a business relationship or occasional transaction. They also set out how firms can adjust the extent of their customer due diligence (CDD) measures in a way that is commensurate to the level of risk they have identified. The factors and measures described in the guidelines are not exhaustive and firms should consider other factors and measures as appropriate. The guidelines are divided into two parts: (i) title II is general and applies to all firms. It is designed to equip firms with the tools they need to make informed, risk-based decisions when identifying, assessing and managing the ML/TF risk associated with individual business relationships or occasional transactions; and (ii) title III is sector-specific and complements the general guidance in Title II. It sets out risk factors that are of particular importance in certain sectors and provides guidance on the risk-sensitive application of CDD measures by firms in those sectors. The guidelines will apply from 26 June 2018. The ESAs will keep the guidelines under review and update them as appropriate. The first update is likely to occur once amendments to MLD4 have been agreed. The ESAs will consult on any changes made to the substance of these guidelines.
Joint Committee of ESAs final report on draft RTS on MLD4 central contact point
On 26 June, the Joint Committee of ESAs published its final report (JC/2017/08) containing draft RTS on the criteria for determining the circumstances in which the appointment of a central contact point (CCP), under Article 45(9) of the MLD4, is appropriate and the functions of the CCP. The draft RTS creates legal certainty about the criteria that member states will use to determine whether or not a CCP must be appointed and set out the functions a CCP must have to fulfil its duties. In line with the mandate of Article 45(10), the draft RTS do not specify the form a CCP must take or determine when PSPs or EMIs provide services in another member state through establishments. The ESAs consulted on the draft RTS in February 2017. Only minor changes were made in the light of feedback received. The feedback, together with the Joint Committee’s response, is set out in section 4 of the report. The ESAs will submit the draft RTS to the EC for approval.
MLD4: Information about People with Significant Control (Amendment) Regulations 2017
On 23 June, the Information about People with Significant Control (Amendment) Regulations 2017 were published. They were made on 22 June, laid before Parliament on 23 June and came into force on 26 June. The regulations reflect the government's proposals set out in its consultation published in November 2016. The Regulations include, amongst others: (i) part 2 (amendments in relation to companies) which amends the Companies Act 2006 and the Register of People with Significant Control Regulations 2016; (ii) part 3 (amendments in relation to LLPs) which amends the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009 and Schedule 2 to the Limited Liability Partnerships (Register of People with Significant Control) Regulations 2016 to apply and modify the amendments in Part 2 to LLPs; (iii) part 4 (amendments in relation to unregistered companies) applies the existing measures, as amended, to unregistered companies, by amending Schedule 1 to the Unregistered Companies Regulations 2009; and (iv) part 5 which makes consequential amendments and introduces the transitional arrangements set out in the Schedule. The transitional arrangements: include provisions under which a company which is newly subject to Part 21A is not required to comply with Chapter 3 or 4 of Part 21A of the Companies Act (register of people with significant control and alternative method of record-keeping) until 24 July; and provides that, in relation to the new 14 day deadlines in sections 790E and 790M, where a company subject to an obligation to take action under those sections has not complied before 26 June, it must comply before the end of the period of 14 days beginning with 26 June.
JMLSG publishes final revised AML and CTF guidance
On 23 June, the JMLSG published the following: (i) a revised version of Part I of its AML and CTF guidance, together with a version marked-up from the final text; (ii) a revised version of Part II of its AML and CTF guidance, together with a version marked-up from the final text; and (iii) a revised version of Part III of its AML and CTF guidance, together with a version marked-up from the final text. The revised guidance reflects the provisions of the MLTF Regulations, which were published on 22 June. It also takes account of the draft risk factor guidelines published by the ESAs in October 2015. These have not yet been published in final form.
BEIS publishes amended draft statutory guidance on the meaning of significant influence or control and amended non-statutory guidance for companies, SEs, LLPs and for people with significant control
On 23 June, BEIS published revised: (i) draft statutory guidance on the meaning of significant influence or control over companies; and (ii) versions of its non-statutory guidance for companies, Societates Europaeae and Limited Liability Partnerships and for people with significant control (PSC). In particular, the amendments include: changes to the statutory guidance to clarify the extension of the PSC register regime to companies admitted to trading on prescribed markets, such as AIM and NEX Exchange, but that the regime continues not to apply to companies which are listed on the UK main market; changes to the guidance to reflect the fact that the PSC regime applies to unregistered companies, Scottish limited partnerships and Scottish qualifying general partnerships (together, Eligible Scottish Partnerships); changes to the non-statutory guidance for people with significant control to reflect the application of the PSC regime to these new legal entities which were previously not in scope (including a new Annex 4 for guidance on PSCs of Eligible Scottish Partnerships), as well as the requirement that from 26 June onwards all companies and LLPs that fall within the PSC regime will have to update their PSC register within 14 days of becoming aware that a person meets the PSC conditions, must be registered and the central public register must be updated within a further 14 days.
FATF publishes outcomes of plenary meeting
On 23 June, the FATF published its outcomes of its plenary meeting in Valencia on 21-23 June 2017. The main issues dealt with by this Plenary were: (i) work on combating terrorist financing; (ii) work on improving transparency and beneficial ownership; (iii) discussion of the mutual evaluation reports of Denmark and Ireland; (vi) statement on Brazil’s progress in addressing the deficiencies identified in its mutual evaluation reports since the FATF’s statement of February 2017; (v) two public documents identifying jurisdictions that may pose a risk to the international financial system; (vi) jurisdictions with strategic AML/CFT deficiencies for which a call for action applies, including an update on Iran’s engagement with FATF; and jurisdictions with strategic AML/CFT deficiencies for which they have developed an action plan with the FATF, including an update on AML/CFT improvements in Afghanistan and Lao PDR; and (vii) adoption of a revision to the interpretative note to Recommendation 7 (Targeted Financial Sanctions Related to Proliferation).
FSB publishes report on FinTech financial stability implications
On 27 June, the FSB published a report on the financial stability implications from FinTech. The FSB has analysed the potential financial stability implications from FinTech with a view to identifying supervisory and regulatory issues that merit authorities' attention. Ten areas have been identified, of which the first three listed below are seen as priorities for international collaboration: (i) the need to manage operational risk from third-party service providers. In particular, authorities should determine if current oversight frameworks for important third-party service providers to financial institutions are appropriate; (ii) mitigating cyber risks; (iii) monitoring macro-financial risks that could emerge as FinTech activities increase; (iv) cross-border legal issues and regulatory arrangements; (v) governance and disclosure frameworks for big data analytics; (vi) assessing the regulatory perimeter and updating it on a timely basis; (vii) shared learning with a diverse set of private sector parties; (viii) further developing open lines of communication across relevant authorities; (ix) building staff capacity in new areas of required expertise; and (x) studying alternative configurations of digital currencies. The report also includes case studies relating to a sample of specific FinTech activities in which their potential benefits and risks to financial stability are assessed. In the report, the FSB advises international bodies and national authorities to take FinTech into account in their risk assessments and regulatory frameworks. The FSB will continue to monitor and discuss the evolution of the potential financial stability implications of FinTech developments.
FCA publishes consultation paper on implementing asset management market study remedies and changes to Handbook to provide protection for investors
On 28 June, the FCA published a consultation paper setting out proposals to implement some of the remedies identified in its asset management market study (AMMS) (CP17/18). It proposes changes to the way the FCA regulates AFMs, including: strengthening the FCA's rules requiring AFMs to act in the best interests of their investors and implementing governance reforms that, in conjunction with the forthcoming SM&CR, will hold asset managers to greater account (Chapter 3); clarifying the FCA's existing guidance on the approach AFMs should take to move retail investors in pre-Retail Distribution Review (RDR) share classes into better value classes. In response to feedback, it is also seeking views on whether the FCA should consider introducing an end to the payment of trail commission (Chapter 4); changes to rules on box management in COLL to require AFMs to pass box profits that have been generated without taking any market risk back to the fund (Chapter 5). The FCA also considers (in Chapter 6) whether some of the proposals discussed in CP17/18 should be extended to include other retail investment products, including unit linked and with-profits insurance products, and funds set up as closed-ended investment companies (including investment trusts). Although it is not consulting on rule changes for these sectors at this stage, it sets out some early thoughts on the issues and invites stakeholders, particularly life insurance companies, investment companies and consumer groups, to comment on the discussion. Proposed Handbook text is set out in the draft Collective Investment Schemes Sourcebook (Miscellaneous Amendments) Instrument 2017 (in Appendix 1) and proposed non-Handbook guidance is set out in a draft guidance consultation on changing clients to post-RDR unit classes (in Appendix 2). The deadline for responses to the consultation is 28 September. The FCA also states that it wants to do some more work in other areas following the AMMS. It has set out its current thinking on issues including fund objectives, use of benchmarks, performance reporting and the transparency of fees and charges in its AMMS final report. It plans to consult on these further issues, where relevant, later in 2017.
FCA publishes final report on asset management market study
On 28 June, the FCA published its final report on the asset management market study (MS15/2.3). The final report confirms the FCA's interim findings, published in November 2016. In particular, the FCA has found that: price competition is weak in a number of areas of the industry; there is substantial variation in performance, both across asset classes and within them; asset managers’ objectives and charges need greater clarity; there are differences in both the behaviour and outcomes of different institutional investors. The FCA is proposing a significant package of remedies that seek to make competition work better in this market. Implementation of the remedies will take place in a number of stages; with some requiring consultation, others not. The FCA has proposed remedies designed to meet three objectives in particular: (i) remedies to provide protections for investors who are not well placed to find better value for money. The FCA has published a consultation paper (CP17/18) on its proposals to strengthen the duty on fund managers to act in the best interests of investors; (ii) remedies which will drive competitive pressure on asset managers. Detailed consultations on costs and charges disclosure to retail investors and benchmarks and performance will follow later in 2017. Any possible rule changes that flow from the working group on objectives will also be consulted upon at a later stage; and (iii) proposals to improve the effectiveness of intermediaries. Within its interim report, the FCA consulted on whether to make a market investigation reference to the CMA on the investment consultancy market. The FCA considered that competition was being adversely affected in the institutional advice market by a weak demand side, persistent levels of concentration, high barriers to entry and vertically integrated business models. It has now provisionally decided to reject undertakings in lieu of a market investigation reference offered by the three largest investment consultants. It invites comments on that decision by 26 July, and will announce its decision in September 2017.
COREPER invited to approve final compromise text of proposed Regulation amending EuVECA and EuSEF Regulations
On 27 June 2017, the Council of the EU published an "I" item note (10573/17) from its General Secretariat to its COREPER on the approval of the final compromise text of the proposed Regulation amending the EuVECA Regulation and the EuSEF Regulation. COREPER is invited to: approve the final compromise text of the proposed Regulation, which is set out in the addendum to the note (10573/17 ADD1); and confirm that the Presidency can indicate to the European Parliament that, should the Parliament adopt its position at first reading as regards the proposed Regulation set out in the addendum, the Council would approve the Parliament's position and will adopt the Regulation in the wording that corresponds to the Parliament's position. The Council has also published a corrigendum to the addendum (10573/17 ADD1 COR1), which amends Articles 21 and 22 of the final compromise text.
EIOPA publishes first set of Solvency II statistics on EU insurance sector
On 28 June 2017, EIOPA published its first set of Solvency II statistics on the EU insurance sector based on Solvency II regulatory reporting, together with a related FAQs document. This is EIOPA's first set of comprehensive statistical information on the EU insurance sector, and relates to the third quarter of 2016. The statistics are based on the regulatory reporting (under the Solvency II Directive) of around 3,000 insurance undertakings and groups operating in the EU and the EEA. EIOPA explains that the statistics provide the most up-to-date and high-quality data, including country breakdowns and distributions of key variables. They give a comprehensive picture of the EU insurance sector. In particular, the statistics include aggregated country-level information about the balance sheet, own funds, capital requirements, premiums, claims and expenses. EIOPA plans to publish the statistics on a quarterly basis.
FCA findings from review of appropriateness assessments for sales of CFD products
On 29 June, the FCA published the findings of its review of appropriateness assessments for sales of contracts for difference (CFD) products. The review found that, despite the letter, the following key areas of concern remain: (i) inadequate assessments of prospective clients' knowledge. The FCA found a reliance on irrelevant or unsupported information in assessments; (ii) insufficient account of clients' previous transactional experience. Firms generally failed to take adequate account of the nature, volume and/or frequency of prospective clients' previous transactional experience, or the time period over which such transactions had been carried out; (iii) inadequate risk warnings to prospective clients who fail appropriateness assessments; (iv) failure to evaluate whether failed applicants should be allowed to make CFD transactions. In most cases, firms did not give meaningful consideration to whether the applicant should still be permitted to proceed; and (v) poor oversight, weak controls and inadequate management information. Firms tended to lack evidence of meaningful board level discussions relating to appropriateness assessments or of appropriate challenge, such as board minutes or contemporaneous notes of senior management discussions.
FCA update on CFD policy work
On 29 June, the FCA published a statement providing an update on its policy work relating to contract for difference (CFD) products and its consultation paper (CP16/40) on conduct of business rules for firms providing CFD products to retail clients. The statement follows the announcement by ESMA, on 29 June 2017, on its consideration of product intervention measures under Article 40 of the MiFIR. The FCA states that the announcement means ESMA's product intervention powers can only come into effect from 3 January 2018 at the earliest. Consequently, the FCA has decided to delay making final conduct rules for UK firms providing CFD products to retail clients, pending the outcome of ESMA's discussions. In the event of a significant delay to possible ESMA measures, the FCA will reconsider making final rules at a domestic level in the first half of 2018.
ESMA publishes update on implementation of its MiFID II IT projects
On 28 June, ESMA published a letter (dated 19 June) that it has sent to the EC the EP and the Council of the EU to update them on the implementation of its IT projects relating to the MiFID II and the MiFIR. ESMA reports that, six months ahead of the MiFID II and MiFIR coming into force, the related ESMA IT projects are developing according to the planned time schedules and in line with the 3 January 2018 start date. It refers in particular to its work on setting up IT infrastructures to allow: the reception and publication of reference data; the computation and publication of the various liquidity assessments and thresholds to be used for the new transparency and tick size regimes; the implementation of the double volume cap mechanism (DVCM); the co-ordination of suspensions through the suspensions and restoration information system (SARIS); and changes to the transactions reporting exchange mechanism (TREM). A related press release states that ESMA will also publish "in the coming days", market size calculations for MiFID II's ancillary test as well as transitional transparency calculations.
ESMA publishes the official translations of guidelines on calibration of circuit breakers and publication of trading halts under MiFID II
On 27 June, ESMA published the official EU language versions of its guidelines on the calibration of circuit breakers and publication of trading halts, under the MiFID II. The guidelines (ESMA70-872942901-63), which apply from 3 January 2018, apply to trading venues that allow or enable algorithmic trading on their systems and to NCAs. They provide detail on the parameters that trading venues should consider for the calibration of their circuit breakers. They also establish that trading venues should immediately make public the activation of a trading halt, the type of trading halt, the trading phase in which it was triggered, the eventual extension and the end of the halt. An accompanying press release states that NCAs to which the guidelines apply must, within two months, notify ESMA whether they comply or intend to comply with them.
Implementing Regulation on ITS on standard forms, templates and procedures for authorisation of DRSPs under MiFID II published in OJ
On 23 June, Commission Implementing Regulation (EU) 2017/1110 laying down ITS with regard to the standard forms, templates and procedures for the authorisation of DRSPs and related notifications, under the MiFID II, was published in the OJ. The Commission adopted the Implementing Regulation on 22 June. It enters into force on 13 July (that is, 20 days after its publication in the OJ). It applies from 3 January 2018.
EBA publishes Consultation Paper on central contact points under the PSD2
On 29 June, the EBA published a consultation paper (EBA/CP/2017/09) on draft RTS that specify the criteria for determining the circumstances in which the appointment of a central contact point pursuant to Article 29(4) of PSD2 is appropriate and the functions of those central contact points. The RTS aim to ensure that, where host Member States choose to require the appointment of a central contact point, this request is proportionate to the aims pursued by the PSD2. In addition, these RTS provide legal certainty as to the circumstances under which the appointment of such contact points is considered appropriate, as well as to the functions they should provide. The deadline for comments is 29 September.
EBA publishes Opinion on the EC’s intention to partially endorse and amend the EBA’s final draft RTS on strong customer authentication and common and secure communication under PSD2
On 29 June, the EBA published an Opinion responding to the EC’s intention to amend the EBA's draft RTS on strong customer authentication and common and secure communication. In its Opinion, while agreeing with the aims sought in the EC's amendments, the EBA voices its disagreement with three of the four concrete amendments the Commission proposes on the basis that it would negatively impact the fine trade-off and balances previously found in the RTS.
Please see our eAlert: New money laundering compliance duties for pension trustees
Law Commission report on pension funds and social investment: financial services aspects
On 23 June, the Law Commission published a report on pension funds and social investment (Law Com No 374). It has also published a summary of the report and a background paper on the legal forms taken by social enterprises. In the report, the Commission analyses whether there are any legal or regulatory barriers to using pension funds for social impact, including investment in social enterprises. For the purposes of the report, the Commission considers that social investment involves incorporating some non-financial element into decision making (such as a desire to have particular positive social impact), alongside a desire for good risk-adjusted returns. The report covers the law and regulation applying to trust-based schemes, set by the DWP, and for contract-based schemes, which are regulated by the FCA. In particular, the Commission's recommendations relating to contract-based schemes include, amongst other things, that the FCA should: (i) amend COBS 19.5, relating to independent governance committees (IGCs); (ii) issue guidance for contract-based pension providers on financial and non-financial factors that should follow the guidance given by The Pensions Regulator in its July 2016 guide on investment governance; and (iii) consider providing guidance on its permitted links rules, in COBS 21, to address concerns that they are sometimes perceived as blocking certain investments. Such guidance should cover how pension schemes can manage some element of illiquid investment in their funds and how they can produce unit prices for illiquid assets.
European Commission adopts proposal for Regulation on pan-EU personal pension product
On 20 June 2017, the EC adopted a proposal (provisional version) for a Regulation on a pan European personal pension product (PEPP) (COM(2017) 343 final) together with an impact assessment (SWD(2017)243/F1). Alongside the proposal, the Commission published a set of FAQs and factsheet on the PEPP, as well as a final Ernst & Young report that provides a study on the feasibility of an EU personal pension framework (FISMA/2015/146(02)/D). The main conclusion of the study is that tax regimes across the EU are very diverse, and this requires sufficient flexibility in an EU framework on the PEPP to adapt to national criteria. The proposal lays down the foundation of a PEPP market and provides for standardisation of the core product features, including transparency requirements, investment rules, switching and portability, but will allow sufficient flexibility to cater for national differences.
Please see the Capital Markets and Market Infrastructure section for an update on CRR Amendment Regulation.
BCBS consults on simplified alternative to standardised approach to market risk capital requirements
On 29 June, the BCBS published a consultative document (BCBS408) on a simplified alternative to the standardised approach to market risk capital requirements. The proposed reduced sensitivities-based method represents a simplified version of the sensitivities-based method (SbM), which is the primary component of the standardised approach. Significant simplifications relative to the SbM include: (i) removal of capital requirements for vega and curvature risks; (ii) simplification of the basis risk calculation; and (iii) reduction in risk factor granularity and the correlation scenarios to be applied in the associated calculations. Comments can be made until 27 September. Once the BCBS has reviewed responses, it will publish the final revised standard. Implementation arrangements will take into account the target implementation of any finalised standard in tandem with the Pillar 1 implementation date for the broader revised market risk framework.
CPMI and IOSCO publishes report on CCP supervisory stress testing framework
On 28 June, the CPMI and the IOSCO published a consultative report on a framework for supervisory stress testing of CCPs. The framework is intentionally broad and flexible to allow each authority implementing an SST exercise to develop its own tailored approach given applicable legal and regulatory frameworks as well as other relevant factors. Authorities are, therefore, encouraged, but not required, to use the framework as they consider appropriate.
The framework sets out six components that describe the steps authorities would be likely to follow when designing and running a multi-CCP SST. These are: (i) setting the purpose and exercise specifications (Component 1); (ii) establishing governance arrangements (Component 2); (iii) developing stress scenarios (Component 3); (iv) data collection and protection (Component 4); (v) aggregating results and developing analytical metrics (Component 5); and (vi) determining the use of results and disclosure (Component 6). There is a set of elements under each component that contain more granular information on the specific issues that authorities may need to consider when deciding how to implement that component. These elements provide authorities with guidance on the substantive aspects of SSTs by describing the associated challenges and trade-offs as well as potential approaches to addressing them. The framework includes examples and alternative methodological approaches that are provided for illustrative purposes. The CPMI and IOSCO have identified a number of targeted areas in which feedback from stakeholders, including public authorities, CCPs, clearing participants and buy-side firms could be particularly valuable. These are set out in a related cover note. However, comments on all aspects of the framework are invited by 22 September.
BoE publishes financial stability report no 41
On 27 June, the BoE published issue number 41 of its financial stability report (dated June 2017). Related materials, including slides, are available on the BoE's financial stability report June 2017 webpage. The report sets out the FPC’s view of the outlook for UK financial stability, including its assessment of the resilience of the UK financial system, the current main risks to financial stability, and the action it is taking to remove or reduce these risks. The report also outlines the FPC's activities over the reporting period, and the extent to which its previous policy actions have succeeded in meeting its objectives.
FPC and PRA publishes consultation on changes to UK leverage ratio framework relating to treatment of claims on central banks
On 27 June, the BoE published consultations by the FPC and the PRA (CP11/17), in the same document, on changes to the UK leverage ratio framework relating to the treatment of claims on central banks. The consultations cover the following: (i) FPC consultation. Section 2 sets out the FPC's proposed recommendation to the PRA to exclude claims on central banks from the leverage exposure measure in the UK leverage ratio framework, and compensate for the resulting reduction in capital required by the leverage ratio framework, by increasing the minimum requirement from 3% to 3.25%; and (ii) PRA consultation (CP11/17). Section 3 sets out the PRA's proposals for implementing the FPC's proposed recommendation, should it be adopted by the FPC. The proposed rules are set out in the draft Leverage Ratio and Reporting Leverage Ratio (Amendment) Instrument 2017, which is in the appendix to CP11/17. CP11/17 also sets out the proposed amendments to its supervisory statement "UK leverage ratio: instructions for completing data items FSA083 and FSA084" (SS46/15), together with the draft amendments to reporting template FSA083 and its accompanying instructions. The proposals aim to ensure that the leverage ratio does not act as a barrier to the effective implementation of any monetary policy action that leads to an increase in central bank reserves. They could also increase the financial sector's ability to cushion shocks to the financial system and the provision of credit to the real economy by drawing on central bank liquidity facilities as necessary. The deadline for comments is 12 September. Separate to its proposals, the FPC intends to carry out an in-depth review of its leverage ratio framework pending progress on an international leverage ratio standard. This will include considering expanding the scope to other PRA-regulated banks, building societies and investment firms, and when and how to apply requirements at individual entity level.
PRA updates supervisory statement on guidelines for completing regulatory reports: June 2017
On 23 June, the PRA published an updated version of its supervisory statement on guidelines for completing regulatory reports (SS34/15). SS34/15 is relevant to all firms that are required to submit supervisory reports under the Regulatory Reporting, Close Links and Change in Control Parts of the PRA Rulebook. Its purpose is to set out the PRA's expectations for how firms should complete the data items and returns required by those Parts. The statement has been updated to include updated notes for completing the Mortgage Lenders and Administrators Return (MLAR) (set out in Appendix 2 to SS34/15). The notes take effect on 1 July.
RECOVERY AND RESOLUTION
ECON draft report on proposed BRRD insolvency hierarchy Directive
On 27 June, the ECON published a draft report (PE606.264v01.00) (dated 22 June) on the proposed Directive amending the BRRD as regards the ranking of unsecured debt instruments in insolvency hierarchy. The draft report contains a Parliament legislative resolution on the proposed Directive, the text of which sets out suggested amendments to the EC’s original legislative proposal. It also contains an explanatory statement by the rapporteur, Gunnar Hokmark. Amongst other things, the rapporteur explains that amendments relating to the insolvency ranking are necessary to integrate the TLAC standard requirements into the BRRD. This is because the TLAC standard stipulates the eligibility of liabilities only where they are subordinated to other liabilities; and stresses that it is important for investors and issuers to quickly get clarity and certainty about the applicable subordination requirements. In the same vein, it is however important to clarify the eligibility criteria laid down in Article 72b of the CRR. Consistency and coherence between both pieces of legislation must be ensured. The next step for the Parliament is for ECON to vote to finalise the draft report, before it is considered by the Parliament in plenary.
FCA Handbook Notice 45
On 23 June, the FCA published Handbook Notice 45, which sets out the changes made to the FCA Handbook under following instruments made by the FCA Board on 22 June: (i) Periodic Fees (2017/2018) and Other Fees Instrument 2017 (FCA 2017/32). This instrument comes into force on 3 July; (ii) Future Service Restrictions Instrument 2017 (FCA 2017/33). This instrument comes into force on 3 January 2018; (iii) Market Conduct Sourcebook (Commodity Derivatives Inside Information) Instrument 2017 (FCA 2017/34). The FCA consulted on the proposals in CP17/6. Feedback to CP17/6 is set out in Chapter 3 of the Handbook Notice. This instrument came into force on 23 June; and (iv) Supervision Manual (Reporting No 5) Instrument 2017 (FCA 2017/35). The FCA consulted on the proposals in CP16/39, CP16/41 and CP17/6. Feedback to the consultation papers is set out in Chapter 3 of the Handbook Notice. Part 1 of this instrument comes into force on 1 July 2017 and Part 2 on 31 October 2017.
FCA publishes Enterprise Act Annual Report 2017
On 23 June, the FCA published its Enterprise Act Annual Report 2017. Under section 24A of the Small Business, Enterprise and Employment Act 2015 (SBEEA), relevant regulators are required to publish specified information on their regulatory provisions (that is, requirements, standards or advice produced by the regulators). The SBEEA divides regulatory provisions into qualifying regulatory provisions (QRPs) and non-qualifying regulatory provisions (NQRPs). Regulators are required to produce an impact assessment for each QRP, which should be verified by the Independent Regulatory Policy Committee (RPC). All requirements introduced by regulators are treated as QRPs unless they fall within one of the exclusion categories listed in a written ministerial statement made in March 2016. The FCA was designated as a relevant regulator by the Business Impact Target (Relevant Regulators) Regulations 2017 (SI 2017/344). The report summarises the QRPs and NQRPs produced by the FCA between 8 May 2015 (the date on which the Enterprise Act retrospectively applied) and 8 June 2017. The FCA states that the majority of its work within the scope of the SBEEA is non-qualifying and so excluded from the requirement to complete an impact assessment. Annex 1 provides a full list of the QRPs and Annex 2 provides a list of all impact assessments that have been verified by the RPC.