Irish Quarterly Legal and Regulatory Report - Asset Management and Investment Funds- January 2022 to March 2022

Asset Management & Investment Funds January 2022 to March 2022 Global Legal and Professional Services www.walkersglobal.com 2 1. AIFMD DEVELOPMENTS .................................................................................................... 4 1.1 AIFs' exposures to commercial real estate................................................................ 4 1.2 Fourth Annual Statistical Report on AIFs................................................................... 4 2. UCITS DEVELOPMENTS..................................................................................................... 4 2.1 Amendments to the UCITS Regulations.................................................................... 4 3. CENTRAL BANK UPDATES................................................................................................ 5 3.1 Central Bank's Consumer Protection Outlook Report ................................................ 5 3.2 Central Bank's letter – Financial Regulation priorities for 2022 .................................. 7 3.3 Central Bank Demographic Analysis Report.............................................................. 8 3.4 Central Bank letter – Managing risks due to Russian invasion of Ukraine.................. 8 3.5 Securities Markets Risk Outlook Report 2022 ........................................................... 9 3.6 Central Bank enforcement actions ............................................................................ 9 (a) Breaches relating to outsourcing .................................................................. 9 (b) Insure4Less Teoranta t/a Kerry Insurance Group - Breaches of F&P preapproval requirements ............................................................................... 10 3.7 Central Bank's markets updates ............................................................................. 10 3.8 Research Technical Paper...................................................................................... 10 3.9 Behind the Data publications .................................................................................. 10 3.10 Central Bank's quarterly bulletin.............................................................................. 11 3.11 Central Bank's prudential regulatory flexibility measures ......................................... 11 3.12 Central Bank's Research Bulletin 2021 ................................................................... 11 3.13 Central Bank statistical release............................................................................... 11 3.14 Central Bank speeches/interviews .......................................................................... 11 4. OTHER LEGAL AND REGULATORY DEVELOPMENTS................................................... 13 4.1 AML updates .......................................................................................................... 13 4.2 Benchmarks Regulation.......................................................................................... 14 (a) Supervisor of benchmark administrators..................................................... 14 (b) Updates to ESMA's Q&As.......................................................................... 14 (c) Updates to transposing legislation.............................................................. 14 4.3 Central Counterparties............................................................................................ 14 (a) Extension of recognition decisions for three UK central counterparties........ 14 (b) Updates to recognition of third country central counterparties ..................... 14 (c) Guidelines on common procedures and methodologies on supervisory review and evaluation process .............................................................................. 14 (d) Report on central counterparty financial resources for recovery and resolution .................................................................................................................. 15 (e) Decision to extend equivalence for UK central counterparties..................... 15 4.4 Central Securities Depositories Regulation ............................................................. 15 4.5 Companies Registration Office update.................................................................... 15 4.6 Crypto assets ......................................................................................................... 16 (a) Warning from the Central Bank .................................................................. 16 (b) Warning from ESAs.................................................................................... 16 4.7 Cyber Security update ............................................................................................ 16 4.8 EMIR – Clearing obligation for Pension Scheme Arrangements .............................. 17 4.9 ESMA..................................................................................................................... 17 (a) ESMA statement on supervisory exercise on liquidity risk in corporate debt and real estate funds ........................................................................................ 17 (b) Common supervisory action on valuation of UCITS and open-ended AIFs.. 17 (c) Letter relating to the use of reverse solicitation........................................... 18 (d) Coordination of regulatory response to the war in Ukraine and its impact on EU financial markets........................................................................................ 18 (e) Study outcome relating to actively managed equity UCITS and benchmark indices ....................................................................................................... 18 (f) Working paper – Flash crashes on sovereign bond markets – EU evidence 18 3 (g) First Trends, Risks and Vulnerabilities Report of 2022................................ 19 (h) Trends, Risks and Vulnerabilities risk analysis............................................ 19 (i) Trade Repository fined for breaches of EMIR............................................. 19 (j) Response to consultation on the Listing Act ............................................... 19 (k) Common supervisory action – MiFID II costs and charges.......................... 19 (l) ESAs' response to call for advice on digital finance .................................... 19 (m) Supervisory briefing on the use of tied agents under MiFID II ..................... 20 (n) Cross-Border Distribution – National rules governing marketing requirements .................................................................................................................. 20 (o) Consultation paper relating to the Credit Rating Agencies Regulation......... 20 (p) EMIR consultation...................................................................................... 20 (q) Report on accepted market practices under the Market Abuse Regulation.. 20 (r) Final report on amendments to the Market Abuse Regulation guidelines .... 21 (s) Final report relating to guidelines on disclosure requirements for initial reviews and preliminary ratings............................................................................... 21 (t) Final reports on the central counterparties recovery regime........................ 21 (u) ESMA speeches ........................................................................................ 22 4.10 IOSCO ................................................................................................................... 23 (a) Consultation on development of regulatory toolkit relating to retail market conduct issues ........................................................................................... 23 (b) 2022 Sustainable Finance work plan .......................................................... 23 (c) Consultation on retail distribution and digitalisation..................................... 23 (d) Consultation on operational resilience of trading venues and market intermediaries ............................................................................................ 24 (e) Investment Funds Statistics Report ............................................................ 24 4.11 Ireland for Finance - Action Plan 2022 .................................................................... 24 4.12 Money Market Funds.............................................................................................. 24 (a) Opinion on proposed reforms to the Money Market Funds Regulation ........ 24 (b) ESMA's guidelines updated........................................................................ 25 (c) ESRB policy recommendation.................................................................... 25 4.13 PRIIPs.................................................................................................................... 25 4.14 Securitisation Regulation ........................................................................................ 25 4.15 SFTR – Updated Q&As .......................................................................................... 25 4.16 Short Selling – Amendment to threshold for the notification of significant net short positions................................................................................................................. 25 4.17 2022 Spring Legislation Programme published ....................................................... 26 4.18 Sustainable Finance ............................................................................................... 26 (a) International Sustainability Standards Board draft standards ...................... 26 (b) Platform on Sustainable Finance Reports................................................... 26 (c) ESAs update joint supervisory statement on the application of the SFDR ... 26 (d) Proposal for a Directive on Corporate Sustainability Due Diligence............. 26 (e) Climate risk stress testing for CCPs ........................................................... 27 (f) Sustainable Finance implementation timeline ............................................. 27 (g) Sustainable Finance Roadmap................................................................... 27 (h) Report on EU carbon market...................................................................... 27 (i) Trends, Risks and Vulnerabilities risk analysis............................................ 27 (j) Call for evidence – ESG ratings.................................................................. 28 (k) Taxonomy Complementary Delegated Act – Climate Change Mitigation and Adaptation ................................................................................................. 28 This is a condensed version of our Asset Management and Investment Funds Legal and Regulatory Report setting out key developments during the quarter. 4 1. AIFMD DEVELOPMENTS 1.1 AIFs' exposures to commercial real estate On 18 February 2022, ESMA published its latest update relating to AIFs' exposures to commercial real estate. This update contains data as of 31 December 2020. 1.2 Fourth Annual Statistical Report on AIFs On 3 February 2022, ESMA published its fourth annual statistical report on AIFs which states that the main risk faced by the sector relates to a mismatch between the potential liquidity of the assets and the redemption timeframe offered to investors. The main findings relating to the size of the market and various asset classes – fund of funds, real estate and private equity are detailed in the press release accompanying the report. 2. UCITS DEVELOPMENTS 2.1 Amendments to the UCITS Regulations The Covered Bonds Directive is being transposed into Irish law by way of the European Union (Covered Bonds) Regulations 2021 which comes into effect on 8 July 2022. These regulations principally amend the Asset Covered Securities Act 2001 but also amend Regulation 70(3) of the UCITS Regulations which from 8 July 2022 will state that a UCITS may invest up to 25 per cent of its assets in bonds (i) that were issued before 8 July 2022 and met the requirements set out in this subparagraph as it applied on the date of their issue; or (ii) which come within the definition of "covered bond" in point (1) of Article 3 of the Covered Bond Directive. In addition, from 8 July 2022 Regulation 70(3)(c) will be deleted. Article 3(1) of the Covered Bond Directive states that a covered bond means a debt obligation that is issued by a credit institution in accordance with the provisions of national law transposing the mandatory requirements of the Directive and that is secured by cover assets to which covered bond investors have direct recourse as preferred creditors. Regulation 70(3) of the UCITS Regulations currently states: "(a) Notwithstanding paragraphs (1) (a) and (2), a UCITS may invest up to 25% of its assets in bonds that are issued by a credit institution which has its registered office in a Member State and is subject by law to special public supervision designed to protect bond-holders. In particular, sums deriving from the issue of those bonds shall be invested, in accordance with the law, in assets which, during the whole period of validity of the bonds, are capable of covering claims attaching to the bonds and which, in the event of failure of the issuer, will be used on a priority basis for the reimbursement of the principal and payment of the accrued interest. (b) When a UCITS invests more than 5% of its assets in the bonds referred to in subparagraph (a) and issued by one issuer, the total value of those investments shall not exceed 80% of the value of the assets of the UCITS. (c) The Bank shall send to ESMA and to the Commission a list of categories of issuers authorised, in accordance with the laws and supervisory arrangements referred to in subparagraph (a) that are in force in the State, to issue bonds complying with the requirements of that subparagraph. A notice specifying the status of the guarantees offered shall be attached to those lists." 5 3. CENTRAL BANK UPDATES 3.1 Central Bank's Consumer Protection Outlook Report On 14 March 2022, the Central Bank published its latest Consumer Protection Outlook Report. The report highlights five risk areas financial firms should take action on to avoid consumer harm: • poor business practices and weak business processes; • ineffective disclosures to consumers; • the changing operational landscape; • technology-driven risks to consumer protection; and • the impact of shifting business models. The report also sets out the Central Bank's expectations for regulated financial service providers in terms of each of these risks. Poor business practices and weak business processes • Put in place robust product governance and oversight arrangements covering the design, sale and delivery of the product; • Design and bring products to market in a responsible way with features, charges and risks that meet the needs of the individual consumers identified for the product; • Comply with the legislative requirements to assess the suitability of their products and services to each individual consumer; • Be clear on the reasons why a product or service is being offered to a consumer and why it is suitable for that consumer; • Monitor products over time to ensure the product is performing as intended and remains suitable for the target market; • When errors or operational incidents occur, ensure that consumers are treated fairly and put back in the position they would have been in had the error or incident not occurred; • Ensure proper resources are deployed to deliver a high quality service; and • Place the best interests of consumers at the heart of their commercial decisions and how they provide services to consumers. Ineffective disclosures to consumers • Provide clear information in a timely manner to consumers, disclosing the key information upfront (i.e. risks and benefits, fees and costs); • Support consumers in making fully informed decisions by ensuring that information is provided in a way that it can be easily understood; • Ensure that statements of suitability and other disclosures provided to consumers are fully compliant with legislative requirements; 6 • Disclose exclusions to financial products in an effective manner at the outset to support consumers in making good decisions; • Ensure disclosure is as clear on digital media as with more traditional communications channels; and • Avoid greenwashing by producing disclosure documents that are clear, not misleading and fully compliant with the most recent legislative disclosure requirements. The changing operational landscape • Actively identify and address risks to consumers that may potentially emerge from changes in the landscape within which the firm and/or its consumers are operating; • Have sufficient operational resilience to manage change without creating risks to consumers; • Engage with financial innovation from the perspective of consumers’ needs and best interests; and • Clearly delineate for the consumer between regulated and unregulated products, especially where they are offered within the same digital environment. This is especially important in the case of unregulated products carrying special risks such as virtual assets. Technology-driven risks to consumer protection • Have well-defined and comprehensive information technology and cybersecurity risk management frameworks, supported by sufficient resources to achieve resilience and protect the interests of consumers; • When designing and providing financial products digitally, ensure consumers’ needs and interests are central to the firm’s considerations and that the product will only be provided to consumers for whom it is suitable; • Have effective measures to mitigate the risk of fraud and scams, and be proactive in identifying and dealing with cases of fraud or scams including engaging effectively with consumers affected; and • Demonstrate that they have appropriate oversight of any delegated or outsourced arrangements and can provide evidence that the risks associated with outsourcing and delegation have been appropriately considered and are being managed effectively. The impact of shifting business models • Proactively assess the risks and consumer impact a commercial decision may pose to new and existing customers, and develop comprehensive action plans to mitigate these risks whilst ensuring that customers understand what changes mean for them; • Have the customer service capacity and structures in place to meet expected service levels to provide a timely and customer focused service through all channels; • Consider the impact of their decisions on vulnerable customers and provide the assistance necessary. This should include specific and effective processes and communication plans to support vulnerable customers; and 7 • Only design and bring to market products with features, charges, and risks that meet the needs of consumers identified for the product. 3.2 Central Bank's letter – Financial Regulation priorities for 2022 On 11 March 2022, the Central Bank published a letter that its governor sent to the Minister for Finance on 22 February 2022 setting out the Central Bank's financial regulation priorities for 2022. Ensuring the resilience of the financial sector, the rapid change being seen in the financial system involving greater digitalisation, innovative services and the need to manage climate change as well as the growth of market-based finance are all mentioned in the introductory paragraphs. In terms of areas where the Central Bank and the Department of Finance have strong common interest, the governor specifically highlights: • the banking and capital markets union and the lack of progress; • AML/CFT and the risks of fragmentation across the EU and the risks that this poses to the EU's financial system. He also mentions preparing for the new EU AML/CFT infrastructure; • the IMF's financial sector assessment programme, which is a comprehensive and in-depth assessment of a country's financial sector, noting that Ireland is one of 29 financial services centres for which a programme must be undertaken every five years; • the individual accountability framework, which is noted as being an important objective this year. Following the passage of the legislation relating to the framework the Central Bank will issue a consultation paper setting out proposed supporting regulation and guidance; • the strengthening of the Central Bank's crisis management capabilities, including liaising with the Department of Finance in relation to the remaining gaps in the legislative framework; • work relating to cyber/digital, noting that the Central Bank continues to support the Department of Finance in finalising the negotiations on MiCA and DORA and that the Central Bank will be preparing for their implementation in Ireland; • specific priorities for 2022 are (the two priorities that are of particular relevance are highlighted in bold below): o completing the framework review of the macroprudential mortgage measures; o contributing to the European review of capital buffers for banks, including ensuring their usability in times of crisis, and concluding the Central Bank's review of the bank capital framework; o starting a comprehensive review of the Consumer Protection Code by publishing a discussion paper and engaging widely with stakeholders on it. The paper will examine the role of consumer protection in supporting a well-functioning financial system and the balance of key aspects such as trust, innovation, and predictability; o introducing new Differential Pricing Regulation for non-life insurance with effect from July this year; o introducing new measures to address risks in Irish property funds (while continuing to play a lead role globally in developing a macroprudential framework for investment funds); 8 o putting in place a structured framework for engagement which will include an Industry Stakeholder Forum, a Financial System Conference (to be held later in the year) and a Climate Risk and Sustainable Finance Forum (to bring together key industry and other stakeholders to share knowledge and understanding of the implications of climate change for the Irish financial system). 3.3 Central Bank Demographic Analysis Report On 8 March 2022, the Central Bank published the latest edition of its demographic analysis report which looks at applications for PCF roles during 2021. In the press release accompanying the report, Derville Rowland states that the Central Bank remains "of the view that that a lack of diversity at senior management and board level is a leading indicator of heightened behaviour and culture risks". The press release also states that "gender diversity at senior levels in the regulated financial services sector is increasing but remains insufficient". The report highlights that female representation accounted for 31% of PCF applications in 2021 and this is the highest percentage since the report was first published in 2017 although it is noted that there is a pronounced gender imbalance in revenue generating and risk management roles. It is interesting to note that the most material change in the applications' composition was in the asset management and credit union sectors, where 37% of applications in both were for female appointments, compared to 30% and 29% respectively in 2020. It is also interesting to note that existing regulated firms continue to show higher levels of gender diversity than new firms seeking authorisation while applications associated with new firm authorisations continue to show a material imbalance, with a ratio of more than three to one in terms of male versus female applicants. 3.4 Central Bank letter – Managing risks due to Russian invasion of Ukraine On 7 March 2022, the Central Bank published a letter it sent to fund service providers – fund management companies, administrators and depositaries relating to the Russian invasion into Ukraine and covering financial sanctions, valuation of funds, liquidity management and decisions regarding dealing arrangements. This letter sets out the Central Bank's expectations in terms of financial sanctions and states that in the event a fund service provider identifies a relevant transaction or a proposed transaction including subscription or redemption activity with a target of the sanctions, the fund service provider, in line with their obligations, must immediately freeze the account(s) and/or stop the transaction(s) and immediately report this to Central Bank along with other relevant information. The letter also sets out the Central Bank's expectations in relation to valuations, liquidity and fund suspensions, noting that it is the fund management company's responsibility to take all necessary steps to ensure that the valuation of fund assets are fair and proper and in accordance with the relevant fund valuation policies and rules. With depositaries also reminded of their fiduciary duties in relation to the funds in respect of which they are appointed. The letter is to be brought to the attention of the board of the fund service provider, the fund(s), relevant PCFs and other relevant responsible persons. In addition, the Council of the EU has published decisions concerning: (i) restrictive measures in view of Russia’s actions destabilising the situation in Ukraine; and (ii) restrictive measures in view of the situation in Belarus and the involvement of Belarus in the Russian aggression against Ukraine which result in additional restrictions applying from 12 April 2022 in relation to transferable securities and money market instruments, services provided by trading venues and central securities depositaries. 9 3.5 Securities Markets Risk Outlook Report 2022 On 8 February 2022, the Central Bank published its latest securities markets risk outlook report. This report highlights key conduct risks that the Central Bank has identified, being misconduct risk; sustainable finance; governance; conflicts of interest; financial innovation; data; cyber security and market dynamics. It details the actions that firms should take to identify, mitigate and manage those risks. The report outlines the Central Bank’s supervisory priorities for securities markets in 2022 including: • completing the Common Supervisory Action ("CSA") on valuations in the funds sector; • following up on the fund management company guidance review and the CSA on UCITS costs and fees; • continuing to engage strongly with depositaries and fund administrators, including conducting targeted risk assessments focussing particularly on governance, operational and capital risk; • undertaking a number of full conduct risk assessments on firms; and • continuing to develop and enhance our supervisory approach to market abuse risks. Our advisory provides an overview of the sections of this report of most relevance to funds and their service providers. 3.6 Central Bank enforcement actions (a) Breaches relating to outsourcing On 24 March 2022, the Central Bank published a public statement in relation to an enforcement against a fund administrator. The fund administrator was fined €10,780,000 in respect of 16 regulatory breaches relating to the outsourcing of fund administration activities. The 16 breaches arose because of the fund administrator's failure: • to have in place an adequate outsourcing governance framework; • to comply with its regulatory obligations in respect of outsourcing; and • to engage openly and transparently with the Central Bank once breaches of its regulatory obligations were identified. The duration of the breaches ranged from 26 days to 6 years, spanning the period from July 2013 to December 2019. The breaches relate to requirements contained in the Prudential Handbook for Investment Firms; Annex II of Chapter 5 of the AIF Rulebook; and Central Bank (Supervision and Enforcement) Act 2013 (Section 48 (1)) (Investment Firms) Regulations 2017. A timeline of the Central Bank's engagement in relation to this matter and further details on the breaches are set out in the statement. 10 (b) Insure4Less Teoranta t/a Kerry Insurance Group - Breaches of F&P pre-approval requirements On 2 March 2022, the Central Bank published a public statement relating to an enforcement action against Insure4Less Teoranta t/a Kerry Insurance Group where the company was reprimanded and fined €8,400 for breaches of the Central Bank's fitness and probity pre-approval requirements. The fine and reprimand result from the conclusion of a Central Bank investigation which found that the company failed to obtain the Central Bank’s prior approval before appointing three individuals as directors of the company, these directors were appointed in January 2018 but Central Bank approval was not sought until February 2019. This entity is authorised by the Central Bank as a retail intermediary that operates in the commercial and retail insurance market. In its press release, the Central Bank highlights that it issued "a ‘Dear CEO Letter’ to industry in April 2019, as a reminder of firms’ obligations under the F&P regime. This letter made clear that the Central Bank would hold firms responsible for non-compliance in circumstances where a person is appointed to a PCF role without the prior approval of the Central Bank. Firms were again reminded of their F&P obligations in a second ‘Dear CEO’ letter issued in November 2020." 3.7 Central Bank's markets updates On 4 March 2022, the Central Bank published its second markets update of 2022. In addition to the updates covered in sections 3.7 and 3.9 of this report, the Central Bank provided updates on: • revising its "Publication of national provisions governing marketing requirements for AIFs" webpage; • a BaFin consultation on prohibiting the marketing, distribution and sale of futures with additional payments obligations to retail clients in Germany; and • the publication of the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Investment Firms) (Amendment) Regulations 2022. On 31 January 2022, the Central Bank published its first markets update of 2022. In addition to the update from the Central Bank covered separately in the report covering the fourth quarter of 2021, there were four updates of relevance to investment firms and an update relating to the new crowdfunding regulatory regime. 3.8 Research Technical Paper On 1 February 2022, the Central Bank published a research technical paper entitled "Do redemptions increase as money market funds approach regulatory liquidity thresholds?" which states that regulations that link breaches of liquidity thresholds with considerations around the imposition of fees, gates or suspensions can exacerbate outflows. The paper states that its findings could be considered favourable to the implementation of countercyclical liquidity regulation with the objective of making liquidity buffer requirements for MMFs more usable in times of stress, to guard against potential first-mover advantage dynamics. 3.9 Behind the Data publications On 20 January 2022, the Central Bank published the following three Behind the Data papers together with a press release providing an overview of each of the three papers: • Beyond Big: Measuring Ireland’s Non-Bank Financial Intermediation Sector. This paper examines the Irish data for the Financial Stability Board’s categorisation of the global non-bank financial intermediaries sector; 11 • Through the looking glass: understanding the interconnectedness of the Irish insurance sector and investment funds. This paper looks at the underlying asset class of funds to gain a more accurate picture of the geographic exposures of insurers; and • Understanding the surge in resident banks’ cross-border financial assets since 2018. 3.10 Central Bank's quarterly bulletin On 26 January 2022, the Central Bank published its first quarterly bulletin of 2022. While the bulletin provides updates on the Irish economy including recent developments and information on domestic demand; exports, imports and balance of payments, the labour market; prices and costs; and the public finances, there is nothing specifically relating to funds in this bulletin. 3.11 Central Bank's prudential regulatory flexibility measures On 1 March 2022, the Central Bank updated the information on their website relating to the prudential regulatory flexibility measures it introduced in 2020. The main changes to the version published on the website from 2 February 2021 to 1 March 2022 are to remove the information in the headings "Updates to Central Bank Regulatory Policy Frameworks", "ESMA Announcements", "EBA Announcements" and to update the references in the "Further updates" section to include 2022 dates in relation to the Transparency Directive and the European Single Electronic Format requirements. 3.12 Central Bank's Research Bulletin 2021 On 31 March 2022, the Central Bank published its research bulletin for 2021. This contains (i) summaries of Research Technical Papers published in 2021; (ii) links to the economic letters published in 2021; (iii) links to the financial stability notes published in 2021; and (iv) Behind the Data reports published in 2021. 3.13 Central Bank statistical release On 4 March 2022, the Central Bank published a statistical release outlining the direct financial links of Irish economic sectors to Russian entities. Two sectors to highlight are: • Special Purpose Entities ("SPEs") have the largest link to Russia across economic sectors with holdings of €37.1bn of Russian issued assets. There were 33 Russian sponsored SPEs identified with total assets of €35.5bn. This accounts for 8% of the non-securitisation SPE sector. • Investment funds held €11.5bn Russian issued assets at the end of 2021, accounting for 0.3% of total assets held by investment funds. 3.14 Central Bank speeches/interviews 11 March 2022 On 11 March 2022, Derville Rowland, Director General, Financial Conduct, spoke at a Financial Services Ireland Executive Board engagement and discussed the role of financial regulation in building resilience, anticipating risk and protecting citizens – in steady times and through shocks. She mentioned the invasion of Ukraine and that it is likely to have broader macro-financial implications at a global level, noting that the Central Bank has been closely monitoring developments in Ukraine and assessing potential impacts on the economy and financial system. 12 Turning to the Central Bank's strategy she emphasised the importance of resilience and in this context refers to the need to develop and operationalise a complete macroprudential framework for investment funds and that the Central Bank will continue to work on this with its international counterparts and see its development as a priority. She also mentioned that IT and cybersecurity risks are a key concern for the Central Bank given their potential impact on firms and their customers, and the risks for financial stability. Noting that for firms to prepare for these risks, "effective cybersecurity and IT governance and risk management is essential. Boards of firms should have an excellent picture of the risks their organisations are facing and how they are actively working to mitigate them". She notes that in the Consumer Protection Outlook Report which the Central Bank published after this speech five key cross-sectoral risks are highlighted: • poor business practices and weak business processes; • ineffective disclosures to consumers; • the changing operational landscape; • technology-driven risks to consumer protection; and • the impact of shifting business models. In terms of the AIFMD review she notes that "A number of elements of the Commission’s proposal are aligned with the existing Irish regulatory framework and supervisory undertakings – including CP86 obligations and requirements for fund managers which originate loans. In certain areas, the proposals will require careful consideration to ensure the right balance is struck between mitigating potential risks while ensuring the framework can operate efficiently, and in the best interests for underlying investors. For example, there are significant changes proposed in relation to reporting requirements around delegation arrangements. Striking the right balance will be important to ensure those proposals have the desired effect." Other issues referenced in this speech include authorisations, the innovation hub, banking sector changes, distressed debt, differential pricing, review of the consumer protection code, the individual accountability framework, AML/CFT and crypto-assets. 9 March 2022 On 9 March 2022, Derville Rowland, Director General, Financial Conduct, spoke at the UCD Sutherland School of Law & Eversheds Sutherland book launch. The book launched is entitled "New Accountability in Financial Services: Changing Individual Behaviour and Culture" and in this context the Central Bank's proposal for an enhanced individual accountability framework was discussed. By way of introduction to the various aspects of the proposed framework it is noted that "Firms need to be effectively managed and organised, individuals need to be clear what they are responsible for, and both need to be accountable if they fall short of expected standards. It is essential to be clear on roles and responsibilities in firms, particularly large and complex institutions where things can and do go wrong through systems, error and individual conduct. In an increasingly technological and rapidly changing world, the need for effective governance underpinned by strong ethical culture and robust systems of delivery, which incorporate trust components, is essential." In this speech the scope of the proposed conduct standards is reiterated, with the standards applying "to all sectors, across the thousands of firms and entities we currently regulate. The standards comprise common conduct standards for individuals carrying out controlled functions (CFs), additional conduct standards for senior executives, and the important standards for businesses themselves." as well as the initial scope of SEAR being limited to credit institutions, certain insurance undertakings and investment firms which the Central Bank states amounts to approximately 150 firms. 13 In terms of the enhancements to the fitness and probity regime, the introduction of a positive duty on firms to certify each controlled function is highlighted with it being noted that this will strengthen the focus on the responsibility of firms for the conduct of their staff and their corporate culture. In the section entitled "What firms should do now", firms are encouraged to "use this time to prepare to implement the IAF by understanding their obligations, assessing their current governance structures in order to identify who is responsible for what, and implement any necessary changes to their existing business model in order to ensure the requirements are properly embedded." 22 February 2022 On 22 February 2022, the Central Bank published a speech given by Gerry Cross, Director of Financial Regulation – Policy Risk, at the Compliance Institute. The speech covers a number of topics, the updates relating to the individual accountability framework are of particular relevance. The speech notes that "Subject to the legislative process, it can be expected that the bill will be enacted into law during the course of the months ahead. At the Central Bank we have been working in parallel on the regulations and guidance which will complete the new framework. It is our intention to publish the proposed Central Bank regulations for consultation very shortly after the finalisation of the legislation." In terms of outsourcing and the individual accountability framework the speech states that "In the context of SEAR, to ensure transparency and accountability, the Bank expects that where outsourcing arrangements are in place then there will be a Senior Executive Function in the regulated firm with responsibility for outsourcing arrangements. Moreover, the outsourced role-holder will fall under the oversight of a PCF role holder within the entity. This will need to be reflected in the relevant Statement of Responsibilities and Responsibility Maps. This will ensure that the overall responsibility and related individual accountability is retained within the regulated firm." 17 February 2022 On 17 February 2022, the Central Bank published remarks made by the Central Bank's governor at the European Financial Forum, the key theme of the remarks is resilience and the governor makes reference to economic resilience through transitions, the economics of regulation, the green transition, the digital transition and under the heading "The changing financial system" makes reference to the rapid growth in market based finance, noting that this is a source of risk. 4. OTHER LEGAL AND REGULATORY DEVELOPMENTS 4.1 AML updates On 21 February 2022, Commission Delegated Regulation (EU) 2022/229 setting out additions to the European Commission's list of high risk third countries for AML purposes, was published in the Official Journal and entered into force on 13 March 2022. Along with the Cayman Islands, the following countries were added to the list of high risk third countries – Burkina Faso, Haiti, Jordan, Mali, Morocco, the Philippines, Senegal and South Sudan. On 7 January 2022, the European Commission published a draft delegated act which proposes including additional countries including the Cayman Islands to the European Commission's list of high risk third countries. This list sets out the countries which present strategic deficiencies in their AML/CFT regimes that are considered to pose significant threats to the financial system of the EU. The consequences of a specific country being included on this list is that enhanced customer due diligence will apply in respect of entities domiciled in a jurisdiction included on the list. The source of this requirement is Article 18a of Directive (EU) 2015/849 which obliges member states to require obliged entities to apply enhanced customer due diligence measures when establishing business relationships or carrying out transactions involving high-risk third countries identified by the European Commission. 14 4.2 Benchmarks Regulation (a) Supervisor of benchmark administrators On 31 January 2022, ESMA published a press release noting that ESMA has assumed the chair of the EURIBOR college and also since 1 January 2022, ESMA is the supervisor of EU critical benchmarks administrators and EU recognised third country administrators under the Benchmarks Regulation. (b) Updates to ESMA's Q&As On 28 January 2022, ESMA published an updated version of its Q&As on the Benchmarks Regulation. A new Q&A 8.6 was added which provides that temporary disruptions to the provision of a benchmark do not require supervised entities to initiate their written plans established for the event of cessation of a benchmark pursuant to Article 28(2) of the Benchmarks Regulation. (c) Updates to transposing legislation On 28 January 2022, the European Union (Indices used as Benchmarks in Financial Instruments and Financial Contracts or to Measure the Performance of Investment Funds) (Amendment) Regulations 2022 were published in Iris Oifigiuil. These regulations amend the European Union (Indices Used as Benchmarks in Financial Instruments and Financial Contracts or to Measure the Performance of Investment Funds) Regulations 2017. The amendments relate to excluding certain spot foreign exchange benchmarks from the scope of the regulations, in accordance with Article 2(2)(i) of the Benchmarks Regulation. They also provide a mechanism by which the Central Bank, having consulted with the Minister for Finance, may designate a replacement for a benchmark, where the majority of contributors to the benchmark are located within Ireland in accordance with Article 23c of the Benchmarks Regulation. 4.3 Central Counterparties (a) Extension of recognition decisions for three UK central counterparties On 25 March 2022, ESMA announced its decision to extend the application of the recognition decisions under Article 25 of EMIR for the three central counterparties ("CCPs") established in the UK, being ICE Clear Europe Ltd, LCH Ltd and LME Clear Ltd. The extension is until 30 June 2025. (b) Updates to recognition of third country central counterparties On 25 March 2022, ESMA announced a series of updates in relation to the recognition of CCPs established in third countries under EMIR. The updates include the review of recognitions of third country CCPs that were already previously recognised, the conclusion of revised Memoranda of Understanding ("MoUs") with relevant third country authorities, as well as the first-time recognition of the National Securities Clearing Corporation. On 30 March 2022, ESMA published MoUs relating to CCPs established in the following jurisdictions: (i) US – SEC and CFTC; (ii) Switzerland; (iii) Singapore; (iv) Korea; (v) New Zealand; (vi) Mexico; (vii) Japan – MAFF/METI and JFSA; (viii) Hong Kong; (ix) Dubai; (x) Canada – Alberta and Ontario/Quebec; (xi) Brazil; and (xii) Australia. (c) Guidelines on common procedures and methodologies on supervisory review and evaluation process On 10 March 2022, ESMA published the translations of the guidelines on common procedures and methodologies on supervisory review and evaluation process of CCPs under Article 21 of EMIR. The objective of these guidelines is to ensure consistency in format, frequency and depth of CCP supervisory reviews and evaluation processes. The publication of the translations triggers a two-month 15 period during which national competent authorities ("NCAs") must notify ESMA whether they comply or intend to comply with the guidelines. (d) Report on central counterparty financial resources for recovery and resolution On 10 March 2022, the Financial Stability Board ("FSB"), the Committee on Payments and Market Infrastructures of the Bank for International Settlements and the IOSCO published a report analysing existing financial resources and tools for CCP recovery and resolution, which confirmed the need for further work on CCP financial resources. The FSB welcomes stakeholder views as input in the further work on the sufficiency of the existing toolkit for CCP resolution, in particular on non-default loss scenarios, and the need for, and costs and benefits (including effectiveness and impact on incentives) of potential alternative financial resources and tools for CCP resolution. Comments should be sent to the FSB by 29 April 2022. (e) Decision to extend equivalence for UK central counterparties On 8 February 2022, the European Commission advised that it has adopted a decision to extend equivalence for UK CCPs until 30 June 2025. This implementing decision was published in the Official Journal of the EU on 9 February 2022, applying from 1 July 2022. In addition, the European Commission launched a public consultation on ways to expand central clearing activities in the EU and improve the attractiveness of EU CCPs in order to reduce the EU's overreliance on systemic third-country CCPs and a call for evidence relating to a targeted review of EMIR, the feedback period for this closed on 8 March 2022. 4.4 Central Securities Depositories Regulation On 17 March 2022, the European Commission sought feedback relating to its review of the Central Securities Depositories Regulation. This review will assess how the EU rules on central securities depositories ("CSDs") are working, especially how CSDs are able to operate in different countries across the EU how requests to use their services are handled whether there are other substantive barriers to competition in this sector that need to be addressed. The proposals are to be made by way of amendment to the regulation and the feedback period is open until 16 May 2022. 4.5 Companies Registration Office update On 1 February 2022, the Companies Registration Office advised that from 1 March 2022 the following forms are no longer accepted by post but need to be submitted online: • G1: Special Resolution • G2: Ordinary Resolution • E2: Notice of Appointment of Liquidator(s) • E2A: Notice of Resignation of Liquidator • E2B: Notice of Removal of a Liquidator • E2C: Notice of Appointment of Liquidator(s) following Removal of previous Liquidator • E3: Liquidator’s Accounts of Acts & Dealings • E4: Liquidator’s Statement of Proceedings and Position of Winding Up 16 • E5: Liquidator’s Final Statement of Accounts • E6: Return of final winding up meeting • E7: Final Wind-up Meeting - Members & Creditors • E8: Notice of Appointment of Receiver • E9: Receiver’s Abstract • E11: Notice of cessation by receiver • Form C6 - Declaration of satisfaction of a charge • Form C7 - Partial Satisfaction of a Charge/Judgement Mortgage • Form H1: Restoration of a Company • Form H15: Application for Voluntary strike-off. 4.6 Crypto assets (a) Warning from the Central Bank On 22 March 2022, following on from the warning issued by the European Supervisory Authorities (the "ESAs") on 17 March 2022, the Central Bank issued a warning on the risks associated with investing in crypto-assets. This warning is aimed at retail investors and highlights that crypto assets are highly risky and speculative, and that people need to be alert to the risks of misleading advertisements, particularly on social media, where influencers are being paid to advertise crypto assets. (b) Warning from ESAs On 17 March 2022, ESMA published a warning released by the ESAs relating to crypto-assets, it states that many crypto-assets are highly risky and speculative. In the warning, the ESAs set out key steps consumers can take to ensure they make informed decisions. The warning sets out the key risks as relating to (i) extreme price movements; (ii) misleading information; (iii) absence of protection; (iv) product complexity; (v) fraud and malicious activities; (vi) market manipulation, lack of price transparency and low liquidity; and (viii) hacks, operational risks and security issues. 4.7 Cyber Security update On 27 January 2022, the European Systemic Risk Board ("ESRB") published a recommendation for the establishment of a pan-European systemic cyber incident coordination framework together with a report entitled "Mitigating systemic cyber risk" explaining how the framework would facilitate an effective response to a major cyber security incident. The recommendation states that its key objective is to build on one of the envisaged roles of the ESAs under the proposal for a Regulation of the European Parliament and of the Council on digital operational resilience for the financial sector ("DORA") of gradually enabling an effective EU level coordinated response in the event of a major cross-border information and communication technologies related incident or related threat having a systemic impact on the EU's financial sector as a whole. The establishment of a framework should form part of this response. 17 The press release accompanying the recommendation notes that major cyber incidents have the potential to corrupt information and destroy confidence in the financial system, and they may therefore pose a systemic risk. This calls for a high level of preparedness and coordination among financial authorities in order to respond effectively to such major cyber incidents. The framework would aim to strengthen this coordination among financial authorities in the EU, as well as with other authorities in the EU and key actors at international level. The ESAs have published a statement welcoming the recommendation which states that the ESAs fully recognise the need for authorities to coordinate and communicate swiftly in the event of a major cyber incident, to rapidly assess its impact and to support confidence in the financial sector. The ESAs also note that the recommendation sets out some concrete steps for them in terms of mapping out and analysing the current impediments, legal and other operational barriers for the effective development of such a framework. 4.8 EMIR – Clearing obligation for Pension Scheme Arrangements On 1 February 2022, ESMA published a letter it sent to the European Commission providing its views on the clearing obligation for Pension Scheme Arrangements ("PSAs"). In this letter ESMA recommends the end of the current exemption from the clearing obligation for PSAs with a one year implementation period. This would mean that the clearing obligation would apply to PSAs from 19 June 2023. 4.9 ESMA (a) ESMA statement on supervisory exercise on liquidity risk in corporate debt and real estate funds On 30 March 2022, ESMA issued a statement noting that it has carried out a supervisory engagement with investment funds together with NCAs. The exercise focused on liquidity risk in corporate debt and real estate funds, with the results showing that the funds included in the scope of the analysis do not pose any substantial risk for financial stability. The statement notes that "while the overall degree of compliance is satisfactory, it also highlights some room for improvement and continued monitoring, especially on the liquidity stress testing and valuation of less liquid assets. Many NCAs reported that management companies were able to manage episodes of valuation uncertainty in March 2020 and that they have not identified any strong valuation issue for the funds in the scope of the exercise." In terms of next steps ESMA states that in 2022 it will facilitate discussions on this topic among NCAs on the application of the Liquidity Stress Testing guidelines in UCITS and AIFs. The statement also makes reference to the fact that a 2022 CSA is being conducted on the valuation of less liquid assets in UCITS and open-ended AIFs. By way of background, in May 2020, the ESRB recommended that ESMA coordinate with NCAs on a focused supervisory engagement with investment funds that have significant exposures to corporate debt and real estate, in order to assess their preparedness to potential future redemptions and valuation shocks and as a result ESMA published a final report in November 2020. ESMA notes that it has followed up on the steps undertaken by NCAs with regard to the priority areas highlighted in the report. (b) Common supervisory action on valuation of UCITS and open-ended AIFs On 20 January 2022, ESMA issued a press release announcing a common supervisory action ("CSA") on valuation which will focus on UCITS and open-ended AIFs. The press release states "The CSA aims to assess compliance of supervised entities with the relevant valuation-related provisions in the UCITS and AIFMD frameworks, in particular the valuation of less 18 liquid assets, and will be conducted throughout 2022. The CSA will focus on authorised managers of UCITS and open-ended AIFs investing in less liquid assets i.e.: unlisted equities, unrated bonds, corporate debt, real estate, high yield bonds, emerging markets, listed equities that are not actively traded, bank loans." It is likely that the Central Bank will issue a questionnaire on the issues raised in the CSA to in-scope UCITS management companies and AIFMs and we would expect this to follow the format of the detailed questionnaire issued to fund management companies on costs and fees during the course of 2021. (c) Letter relating to the use of reverse solicitation On 3 January 2022, ESMA published a letter sent to the European Commission on 17 December 2021 which responded to a request for input from ESMA relating to the use of reverse solicitation by asset managers. As a result of a request by the European Commission for information on this topic, ESMA conducted a survey on the use of reverse solicitation and its impact on passporting activities. ESMA's letter states that the results of the survey show that almost all NCAs have no readily available information on the use of reverse solicitation but the regulators in Italy and Cyprus did provide some information on the extent to which reverse solicitation is used in those jurisdictions. (d) Coordination of regulatory response to the war in Ukraine and its impact on EU financial markets On 14 March 2022, ESMA published a statement noting that together with the NCAs it is closely monitoring the impact of the Ukraine crisis on financial markets and it is prepared to use its relevant tools to ensure the orderly functioning of markets, financial stability and investor protection. In the statement, ESMA outlined its specific supervisory and coordinating activities in relation to CCPs, credit rating agencies, benchmarks, investment management, secondary markets, CSDs, cyber security and risk assessment. It also sets out market recommendations relating to sanctions compliance, market disclosure and financial reporting. (e) Study outcome relating to actively managed equity UCITS and benchmark indices On 28 March 2022, ESMA published the outcome of a study analysing the performance of actively managed equity UCITS relative to their prospectus and market benchmark indices between 19 February 2020 and the end of June 2020. The report is entitled "Fund performance during market stress – The Corona experience" and its main findings show that for the sample of funds considered active funds, net of ongoing costs, did not on average outperform their related benchmarks in the period considered. More than half of the active UCITS analysed underperformed their benchmarks during the stressed period (between 19 February and 31 March) and more than 40% during the post-stress period (between 1 April and 30 June). Moreover, results show a partial ability of active funds to generate abnormal positive net returns, especially during the period analysed and in the case of larger funds. (f) Working paper – Flash crashes on sovereign bond markets – EU evidence On 18 March 2022, ESMA published its first working paper of 2022 entitled "Flash crashes on sovereign bond markets – EU evidence". The paper focuses on two flash events in the German and Italian bond markets show how liquidity vanished ahead of the crashes, resulting in trades having a large price impact on prices. The report states that the findings call for increased monitoring of electronic trading markets, taking into account the pace of financial innovation, and for pursuing more integrated approaches in the presence of highly interlinked markets. 19 (g) First Trends, Risks and Vulnerabilities Report of 2022 On 15 February 2022, ESMA published its first Trends, Risks and Vulnerabilities ("TRV") report of 2022. This report sets out ESMA's outlook for 2022 which notes that it continues to see high risks to institutional and retail investors of further, possibly significant, market corrections. The main findings of the report relate to market environment, securities markets, asset management, sustainable finance and financial innovation and are summarised in the press release accompanying the report. It is also interesting to note that for the first time ESMA included environmental risk as a category in the risk dashboard. A statistical annex was also published with the report as was the TRV Structural Market Indicators, a collection of statistics that provide structural indicators on securities, markets, market participants and infrastructures for the EEA and EU, and by member state. (h) Trends, Risks and Vulnerabilities risk analysis On 1 March 2022, ESMA published its latest risk analysis report entitled "The 2020 short selling bans – market impact". The report considers the effects of these short selling bans on market liquidity and volatility and concludes that the bans appear to have had mixed effects "since they entailed a deterioration of market liquidity but also diminished the volatility of the shares concerned". (i) Trade Repository fined for breaches of EMIR On 24 March 2022, ESMA advised that it has fined trade repository REGIS-TR €186,000 for eight breaches of EMIR. The breaches relate to failures in ensuring the integrity of data and providing direct and immediate access to regulators. (j) Response to consultation on the Listing Act On 15 February 2022, ESMA published its response to the European Commission’s targeted consultation on the Listing Act. The response reflects ESMA’s views on the functioning of the existing regulatory framework for companies’ listing on public markets, particularly in relation to prospectus, corporate governance, transparency and market abuse rules. An annex to the response contains feedback on the specific questions posed by the European Commission in its consultation. (k) Common supervisory action – MiFID II costs and charges On 8 February 2022, ESMA announced the launch of a common supervisory action on the application of MiFID II costs and charges disclosures. This action will be conducted during the course of 2022 and ESMA and the NCAs will focus on information provided to retail clients. (l) ESAs' response to call for advice on digital finance On 7 February 2022, ESMA published the ESAs' joint report responding to the European Commission’s call for advice on digital finance from February 2021. The ESAs recommend rapid action to ensure that the EU’s financial services regulatory and supervisory framework remains fit-for-purpose in the digital age with proposals aimed at maintaining a high level of consumer protection and addressing risks arising from the transformation of value chains, platformisation and the emergence of new "mixedactivity groups" (groups combining financial and non-financial activities). In addition to the report ESMA also published: (i) a report setting out the outcome of a survey provided to NCAs; and (ii) a report relating to the public call for evidence relating to digital finance. 20 (m) Supervisory briefing on the use of tied agents under MiFID II On 2 February 2022, ESMA published a supervisory briefing on the use of tied agents under MiFID II. The briefing sets out ESMA and NCAs' common understanding on the supervision of firms using tied agents to provide investment services and/or activities and covers the supervisory expectations when firms appoint tied agents; and the supervisory expectations on firms using tied agents in their on-going activities. (n) Cross-Border Distribution – National rules governing marketing requirements On 2 February 2022, ESMA published a document setting out the hyperlinks to the websites of competent authorities where they publish complete and up-to-date information on the applicable national laws, regulations and administrative provisions governing marketing requirements for AIFs and UCITS, as well as the summaries thereof, and the hyperlinks to the websites of competent authorities where they publish and maintain complete and up-to-date list of the fees and charges they levy for carrying out their duties in relation to the cross-border activities of fund managers. (o) Consultation paper relating to the Credit Rating Agencies Regulation On 28 January 2022, ESMA published a consultation paper relating to a targeted revision to its guidelines and recommendations on the scope of the Credit Rating Agencies Regulation. The proposed revision is intended to provide greater clarity on the exemptions for private ratings under the Credit Rating Agencies. The closing date for responses is 11 March 2022 following which ESMA will consider all responses to this consultation and expects to publish a final report by end of the second quarter of 2022. (p) EMIR consultation On 27 January 2022, ESMA published a consultation paper relating to potential amendments to the regulatory technical standards ("RTS") prepared under EMIR relating to anti-procyclicality ("APC") margin measures for CCPs. The aim of the proposals is to harmonise the existing APC margin measures for CCPs as well as specific APC tools. By way of background, Article 28(1) of the RTS requires that a CCP employs at least one of the three anti-procyclicality margin measures and to clarify the application of the RTS ESMA developed guidelines on EMIR APC margin measures for CCPs. The paper states that while EMIR APC measures have helped mitigate procyclical margin increases overall, ESMA believes there is some room for improvement considering the lessons learnt from the COVID-19 driven market events. In particular, ESMA has identified divergent implementations of the APC tools which seem to be due to the nonbinding character of the guidelines, and show the need for higher granularity of the relevant provisions. Feedback is sought not only from CCPs and clearing members but also counterparties accessing CCP services. The deadline for responses to the consultation paper is 31 March 2022 and a public hearing is being organised by ESMA on 17 March 2022 to discuss the proposals. (q) Report on accepted market practices under the Market Abuse Regulation On 18 January 2022, ESMA published its 2021 annual report on the application of accepted market practices ("AMPs") under the Market Abuse Regulation ("MAR"). The report identifies that the number of liquidity contracts and the volumes traded under the AMPs decreases for the four NCAs that have them in place (CNMV, CMVM, CONSOB and AMF) since June 2020. 21 (r) Final report on amendments to the Market Abuse Regulation guidelines On 5 January 2022, ESMA published its final report on the amendments to the MAR guidelines on delayed disclosure in relation to prudential supervision. These guidelines also add certain cases to the list of legitimate interests of issuers for delaying public disclosure of inside information. The guidelines aim to assist issuers in conducting their assessment as to whether they meet the conditions to delay inside information in accordance with MAR. The guidelines will be applicable 2 months after the publication of translations on ESMA's website. (s) Final report relating to guidelines on disclosure requirements for initial reviews and preliminary ratings On 31 January 2022, ESMA published the final report relating to guidelines on disclosure requirements for initial reviews and preliminary ratings. By way of background, the Credit Rating Agencies Regulation includes a number of requirements that are designed to provide clarity to the market around whether entities or debt instruments have been subject to initial review or preliminary rating by credit rating agencies, before receiving a credit rating. The objective of these requirements is to mitigate against the effects of rating shopping. The guidelines set out in this final report provide guidance that will address inconsistencies in the application of these requirements by credit rating agencies, and by extension reduce the risks that are posed by rating shopping to the extent it is possible under the existing provisions of the Credit Rating Agencies Regulation. ESMA will consider these guidelines for the purposes of its supervision from 1 July 2022. (t) Final reports on the central counterparties recovery regime On 31 January 2022, ESMA published the following seven final reports relating to draft regulatory technical standards ("RTS") and guidelines: • Guidelines on the consistent application of the triggers for the use of Early Intervention Measures; • Guidelines on CCP recovery plan scenarios; • Guidelines on CCP recovery plan indicators; • Guidelines further specifying the circumstances for temporary restrictions in the case of a significant non-default event in accordance with Article 45a of EMIR; • RTS further specifying the factors that shall be considered by the competent authority and the supervisory college when assessing the CCP recovery plan; • RTS specifying the conditions for recompense; and • RTS on the methodology for calculation and maintenance of the additional amount of prefunded dedicated own resources. The draft RTS have been submitted to the European Commission for consideration and the guidelines will apply two months after being translated and those translations published by ESMA. 22 (u) ESMA speeches 29 March 2022 On 29 March 2022, ESMA published a speech given by its Executive Director, Natasha Cazenave, at the ICI Investment Management Conference. Two themes are focused on: (i) developing a framework for the asset management industry to positively contribute to the climate transition; and (ii) strengthening the resilience of investment funds to market, credit and liquidity shocks. The speech refers to the work being undertaken to comply with the implementing measures under SFDR as well as the work that the ESAs are doing in relation to preparing the review of the indicators for principal adverse impacts, a key part of the SFDR disclosures. The speech also discussed the taxonomy and also the challenges in this area, specifically calling out lack of data as a key challenge and noting that the legislative proposal on corporate sustainability reporting will, once adopted, help to reduce some of the biggest data gaps that fund managers grapple with. On the topic of financial stability, money market funds are mentioned in terms of the crucial role they play in terms of short-term financing and the vulnerabilities highlighted by the 2020 market turmoil. She spends some time discussing the review of the MMF Regulation which is due to be launched by the European Commission later this year and refers to three key proposals in this area that ESMA has already highlighted in its opinion on the review. 18 March 2022 On 18 March 2022, ESMA published a speech given by its chair, Verena Ross, focused on corporate reporting and in particular improving corporate sustainability disclosure and digitalisation. She highlights two ongoing legislative initiatives, the green bond standard and the corporate sustainability reporting directive. The final topic discussed is the supervision of credit rating agencies. 24 February 2022 On 24 February 2022, ESMA published a speech given by its chair, Verena Ross, at the Eurofi conference entitled "The major challenges facing securities regulators" which states that the resilience of some parts of the financial system needs to be further enhanced and that it is necessary to adapt to challenges. Digitalisation and sustainability are called out as two of these challenges as these are rapidly transforming the way in which the financial sector operates. In terms of digital innovation she notes that regulators should play a key role in reigning in bad behaviour and improper practices and that combined efforts are needed to raise wider societal awareness on the risks in modern financial markets. She further notes the need to uphold strong standards of investor protection, while encouraging learning and participation. The need to safeguard financial stability is the last topic touched on in this speech. 9 February 2022 On 9 February 2022, ESMA published the keynote address that Verena Ross, Chair of ESMA, delivered at the Afore 6th Annual FinTech and Regulation conference entitled "Keeping on track in an evolving digital world". The opportunities associated with digitalisation (cost reduction, potentially wider customer base, streamlining processes and use of data) were discussed together with the risks (reliance on third parties, easy access to complex and highly risky products, such as crypto-assets and contracts for differences or even CFDs on cryptos and social media information overload and gamification of financial decisions may prevent consumers from making well-informed decisions). ESMA's response to these opportunities and risks was highlighted by way of two examples relating to (i) digital finance; and (ii) crypto-assets. 23 4.10 IOSCO (a) Consultation on development of regulatory toolkit relating to retail market conduct issues On 21 March 2022, IOSCO published a consultation seeking feedback on the development of a regulatory toolkit for jurisdictions to consider when addressing emerging retail market conduct issues. The consultation report sets out the findings from a survey exercise IOSCO carried out in the third quarter of 2021 and public information issued by IOSCO members. In the consultation IOSCO seeks feedback to 14 questions and notes that the purpose of the regulatory toolkit proposed in the consultation would be to place in front of regulators key issues that they may consider as part of their regulatory strategies. In this case, the regulatory toolkit could be designed for regulators to consider as they continue to evaluate and address the risks arising from the changing retail investor behaviour and trends outlined in the report. Feedback is sought on or before 23 May 2022. (b) 2022 Sustainable Finance work plan On 14 March 2022, IOSCO advised that it has adopted its 2022 work plan to develop sustainable finance with the importance of mitigating greenwashing and doing what is necessary to create reliable information on sustainability impacts for investors emphasised. According to the press release, IOSCO has identified independent assurance of the quality of corporate reporting of sustainability information as a key element of building trust in sustainability reporting. (c) Consultation on retail distribution and digitalisation On 17 January 2022, IOSCO published a consultation paper which sets out a toolkit of proposed policy and enforcement measures to assist IOSCO members with mitigating potential risks of retail investor harm posed by online and cross-border marketing and distribution and digital offerings. The proposed policy toolkit measures relate to: • firm level rules for online marketing and distribution; • firm level rules for online onboarding; • responsibility for online marketing; • capacity for surveillance and supervision of online marketing and distribution; • staff qualification and/or licensing requirements for online marketing; • ensuring compliance with third country regulations; and • clarity about legal entities using internet domains. The proposed enforcement toolkit measures relate to: • proactive technology-based detection and investigatory techniques; • powers to promptly take action where websites are used to conduct illegal securities and derivatives activity and other powers effective in curbing online misconduct; 24 • increasing efficient international cooperation and liaising with criminal authorities and other local and foreign partners; • promoting enhanced understanding by and collaboration with providers of electronic intermediary services with regard to digital illegal activities; and • additional efforts to address regulatory and supervisory arbitrage. Feedback is sought prior to 17 March 2022. (d) Consultation on operational resilience of trading venues and market intermediaries On 13 January 2022, IOSCO published a consultation report on the operational resilience of trading venues and market intermediaries during the COVID-19 pandemic. The report sets out a summary of the key lessons learnt in relation to operational resilience during the pandemic including (i) operational resilience means more than just technological solutions; (ii) consider dependencies and interconnectivity; (iii) review, update and test business continuity plans; (iv) effective governance frameworks; (v) compliance and supervisory processes; and (vi) information security risk. Feedback is requested by 14 March 2022. (e) Investment Funds Statistics Report On 4 January 2022, IOSCO published a report entitled "Investment Funds Statistics Report" which provides new insights into the global investment funds industry and the potential systemic risks this industry may pose to the international financial system. This report goes beyond hedge funds (typically covered by IOSCO hedge funds survey) and includes analysis for the open-ended and closed-ended funds industries. This report will be produced on an annual basis. 4.11 Ireland for Finance - Action Plan 2022 On 3 February 2022, the Irish Department of Finance published its 2022 action plan under the Ireland for Finance strategy. The priority areas of focus are: (i) sustainable finance; and (ii) FinTech with three other priorities being diversity and talent; regionalisation and promotion; and operating environment. The priority measure under the Sustainable Finance theme is the implementation of Ireland’s Sustainable Finance Roadmap. There are five priority action measures set for 2022 under the FinTech and Digital Finance theme (i) implementing the second phase of the Department of Finance’s FinTech Steering Group; (ii) developing educational resources to support consumers to engage with FinTech; (iii) developing the instech.ie InsurTech hub; (iv) delivering a programme of activities to support Irishowned FinTech companies’ growth in international markets; and (v) developing a coordinated programme of activities to raise Ireland’s global visibility as a hub for FinTech. 4.12 Money Market Funds (a) Opinion on proposed reforms to the Money Market Funds Regulation On 16 February 2022, ESMA published an opinion containing proposed reforms to the regulatory framework for EU money market funds ("MMFs") under the Money Market Funds Regulation which seek to improve the resilience of MMFs by addressing liquidity issues and the threshold effects for constant NAV ("CNAV") MMFs. 25 (b) ESMA's guidelines updated On 14 February 2022, ESMA published its final report on the guidelines on stress test scenarios under the Money Market Funds Regulation. The 2021 amendments to the guidelines are set out in red in the report. (c) ESRB policy recommendation On 25 January 2022, the ESRB published a policy recommendation aimed at increasing the resilience of money market funds. The ESRB’s recommendation builds on its issues note of July 2021 on money market funds, which sets out its analysis of systemic vulnerabilities. The press release accompanying the recommendation states that in view of the forthcoming revision of the Money Market Fund Regulation, the ESRB recommends that the European Commission: • reduce threshold effects that increase first-mover advantages, including by amending the features that make money market funds similar to deposit-taking institutions; • reduce liquidity transformation by diversifying asset portfolios and improving their liquidity through requirements to hold public debt assets and by making sure that such liquidity can be used when needed; • facilitate the use of liquidity management tools that impose trading costs on redeeming investors; • enhance monitoring and stress-testing frameworks. The ESRB has published a detailed report explaining the economic rationale for its recommendation and providing an impact assessment for its main proposals. 4.13 PRIIPs On 10 February 2022, a Corrigendum to Commission Delegated Regulation (EU) 2021/2268 was published in the Official Journal of the EU setting out some minor amendments to this regulation. 4.14 Securitisation Regulation On 3 February 2022, ESMA advised that it has launched its simple, transparent and standardised ("STS") register for the notification of securitisations under the Securitisation Regulation. 4.15 SFTR – Updated Q&As On 28 January 2022, ESMA published an updated version of its Q&As on SFTR data reporting. Q&A 2 relating to settlement fails has been amended. 4.16 Short Selling – Amendment to threshold for the notification of significant net short positions On 11 January 2022, Commission Delegated Regulation (EU) 2022/27 of 27 September 2021 amending Regulation (EU) No 236/2012 of the European Parliament and of the Council as regards the adjustment of the relevant threshold for the notification of significant net short positions in shares was published in the Official Journal of the EU. The notification threshold under the Short Selling Regulation is being amended to "a percentage that equals 0.1 % of the issued share capital of the company concerned and each 0.1 % above that". This change applies 20 days from the date of publication, being 31 January 2022. 26 On 26 January 2022, ESMA published a statement to clarify how to report net short positions between 28 and 31 January 2022 when the reporting threshold changes from 0.2% to 0.1%. 4.17 2022 Spring Legislation Programme published On 23 January 2022, the Irish government published its spring legislative programme. The Central Bank (Individual Accountability Framework) Bill has been included in the priority legislation list with prelegislative scrutiny ongoing. 4.18 Sustainable Finance (a) International Sustainability Standards Board draft standards On 31 March 2022, the International Sustainability Standards Board ("ISSB") launched a consultation on exposure drafts of the IFRS Sustainability Disclosure Standards. The proposed build upon the recommendations of the Task Force on Climate-Related Financial Disclosures and incorporate industry-based disclosure requirements derived from SASB Standards. The ISSB is seeking feedback on the drafts and the consultation period closed on 29 July 2022. (b) Platform on Sustainable Finance Reports On 29 March 2022, the Platform on Sustainable Finance published a final report on Taxonomy extension options supporting a sustainable transition which has been provided to the European Commission for its consideration. By way of summary only certain economic activities are currently covered by the Taxonomy and this report considers whether the Taxonomy should be extended to capture additional activities by including new classifications and prioritising activities supporting urgent environmental transition. On 30 March 2022, the Platform on Sustainable Finance published a report with recommendations on the technical screening criteria for the four remaining environmental objectives under the Taxonomy Regulation. An annex to the report contains the technical screening criteria for economic activities contributing to all six environmental objectives of the Taxonomy Regulation and also sets out the rationale for those criteria. (c) ESAs update joint supervisory statement on the application of the SFDR On 25 March ESMA advised that the ESAs have updated their joint supervisory statement on the application of the SFDR. This includes a new timeline, expectations about the explicit quantification of the product disclosures under Article 5 and 6 of the Taxonomy Regulation, and the use of estimates. The statement provides that "The supervisory expectation during the interim period before the application of the RTS is that in order to comply with the provision under point (b) 6 of the first subparagraph of Article 5 of the TR, an explicit quantification should be provided through the numerical disclosure as a percentage of the extent to which investments underlying the financial product are taxonomy-aligned. The supervisory expectation is also that information on taxonomy-eligible activities should not be provided for the disclosure of the extent to which investments underlying the financial product are in taxonomy-aligned economic activities. Moreover, while estimates should not be used, where information is not readily available from public disclosures by investee companies, financial market participants may rely on equivalent information on taxonomy alignment obtained directly from investee companies or from third party providers." (d) Proposal for a Directive on Corporate Sustainability Due Diligence On 23 February 2022, the European Commission announced that it has adopted a proposal for a Directive on Corporate Sustainability Due Diligence together with an annex. 27 According to the European Commission's webpage, the aim of this proposed Directive is to foster sustainable and responsible corporate behaviour and to anchor human rights and environmental considerations in companies’ operations and corporate governance. It also states that the new rules will ensure that businesses address adverse impacts of their actions, including in their value chains inside and outside Europe. In the explanatory memorandum to the proposal it is noted that this proposed Directive will complement the Non-Financial Reporting Directive and its proposed amendments (by way of the proposed Corporate Sustainability Reporting Directive) by adding a substantive corporate duty for some companies to perform due diligence to identify, prevent, mitigate and account for external harm resulting from adverse human rights and environmental impacts in the company’s own operations, its subsidiaries and in the value chain. A short factsheet provides a high level overview of the proposals while a more detailed Q&A webpage provides more detail on these proposals. (e) Climate risk stress testing for CCPs On 23 February 2022, ESMA launched a call for evidence on climate risk stress testing for CCPs. ESMA is seeking feedback on the methodology to assess climate risk with a new stress testing framework for CCPs. Feedback is sought by 21 April 2022. (f) Sustainable Finance implementation timeline On 21 February 2022, ESMA published an implementation timeline covering the following sustainable finance related initiatives – SFDR, Taxonomy Regulation, CSRD, MiFID, IDD, UCITS and AIFMD. (g) Sustainable Finance Roadmap On 11 February 2022, ESMA published its Sustainable Finance Roadmap 2022-2024. ESMA identifies three priorities for its sustainable finance work: • tackling greenwashing and promoting transparency; • building NCAs' and ESMA’s capacities in the sustainable finance field; and • monitoring, assessing and analysing ESG markets and risks. An annex to the roadmap sets out a comprehensive list of actions across the following sectors: investment management, investment services, issuers’ disclosure and governance, benchmarks, credit and ESG ratings, trading and post-trading and financial innovation. (h) Report on EU carbon market On 28 March 2022, ESMA published its final report on the EU carbon market. While the report’s analysis did not find any current major deficiencies in the functioning of the EU carbon market based on the data available, ESMA’s analysis of the market has led it to put forward a number of policy recommendations to improve market transparency and monitoring. (i) Trends, Risks and Vulnerabilities risk analysis On 11 February 2022, ESMA published an article assessing the implementation of ESMA’s guidelines on the disclosure of environmental, social, and governance factors in credit rating agency press releases. 28 (j) Call for evidence – ESG ratings On 3 February 2022, ESMA published a call for evidence relating to ESG ratings which is aimed at gathering information on the market characteristics for ESG rating providers in the EU. Feedback is sought prior to 11 March 2022. (k) Taxonomy Complementary Delegated Act – Climate Change Mitigation and Adaptation On 2 February 2022, the European Commission published a draft of the Taxonomy Complementary Delegated Act relating to the two environmental objectives of climate change mitigation and climate change adaptation and technical screening criteria for certain gas and nuclear power activities together with Annexes 1, 2 and 3. The press release accompanying the Complementary Delegated Act states that this act introduces additional economic activities from the energy sector into the Taxonomy and contains clear and strict conditions, under Article 10(2) of the Taxonomy Regulation, subject to which certain nuclear and gas activities can be added as transitional activities to those already covered by the first Delegated Act on climate mitigation and adaptation, which have applied since 1 January 2022. In summary, these stringent conditions are for: (i) both gas and nuclear, that they contribute to the transition to climate neutrality; (ii) nuclear, that it fulfils nuclear and environmental safety requirements; and (iii) gas, that it contributes to the transition from coal to renewables. The draft act also introduces specific disclosure requirements for businesses relating to their activities in the gas and nuclear sector (i.e. those entities to which Article 8 of the Taxonomy Regulation applies) and the European Commission has published a draft notice relating to these proposed disclosures, see below. Once translated this act will be transmitted to the European Parliament and Council for scrutiny. The scrutiny period is four months with the ability to request two extra months available. If there are no objections, the Complementary Delegated Act will apply from 1 January 2023. The European Commission also published a number of resources in addition to the draft act as follows: • Questions and Answers on the EU Taxonomy Complementary Climate Delegated Act covering certain nuclear and gas activities; • Factsheet on this draft act; and • Draft Commission notice on the interpretation of certain legal provisions of the Disclosures Delegated Act under Article 8 of EU Taxonomy Regulation on the reporting of eligible economic activities and assets. On 1 January 2022, the European Commission published a press release noting that consultations have commenced with the Member States Expert Group on Sustainable Finance and the Platform on Sustainable Finance on a draft text of a Taxonomy Complementary Delegated Act covering certain gas and nuclear activities. Both groups were initially given a deadline of 12 January 2022 to provide comments on the draft which was extended to 21 January 2022. The Platform on Sustainable Finance published its response to the consultation on 24 January 2022 with the overall assessment being that the activities detailed in the Complementary Delegated Act are not in line with the Taxonomy Regulation. Nicholas Blake-Knox Partner, Head of Asset Management & Investment Funds T: +353 1 470 6669 E: [email protected] Sarah Maguire Partner, Asset Management & Investment Funds T: +353 1 470 6691 E: [email protected] Jennifer Fox Partner, Asset Management & Investment Funds T: +353 1 863 8531 E: [email protected] Damien Barnaville Of Counsel, Asset Management & Investment Funds T: +353 1 863 8529 E: [email protected] Key Contacts Eimear Keane Partner, Asset Management & Investment Funds T: +353 1 470 6622 E: [email protected] Jill Shaw Senior Knowledge Lawyer, Asset Management & Investment Funds T: +353 1 863 8546 E: [email protected] BERMUDA | BRITISH VIRGIN ISLANDS | CAYMAN ISLANDS | DUBAI | GUERNSEY | HONG KONG | IRELAND | JERSEY | LONDON | SINGAPORE Walkers Ireland LLP The Exchange George’s Dock, IFSC Dublin 1, D01 W3P9 Ireland T: +353 (0)1 470 6600 Global Legal and Professional Services Disclaimer © 2022 The information contained in this advisory is necessarily brief and general in nature and does not constitute legal or taxation advice. 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