Issue No. 23 Regulatory Insights - State Street Corporation · 2021. 2. 11. · to dominate our lives and it appears that the pandemic’s grip on economies and societies is tightening

Our quarterly overview of key legislative and regulatory developments in the European Union

Issue No. 23

Regulatory Insights

i REGULATORY INSIGHTS NO. 23

3 Foreword

6 Europe

7 Alternative Investment Fund Managers Directive (AIFMD)

9 Anti-Money Laundering (AML)

10 Benchmarks

11 Capital Markets

15 Digital Finance

17 Financial Stability

21 Market Abuse Regulation

22 Market Infrastructure

24 Markets in Financial Instruments Directive (MiFID) and Markets

in Financial Instruments Regulation (MiFIR)

28 Payments

29 Prudential

30 Sustainable Finance

31 Tax

32 Germany

33 Electronic Securities

34 Suitability of Members of Management and

Supervisory Bodies

35 Ireland

36 Diversity and Inclusion

37 Liquidity Stress Testing

38 Money Market Funds

Contents

1 REGULATORY INSIGHTS NO. 23

39 Italy

40 Pensions

41 Tax

42 United Kingdom

43 Financial Stability

45 Prudential

46 Supervision

47 Sustainable Finance

48 Product

49 Money Market Fund Regulation

50 Packaged Retail and Insurance- Based Investment Products

51 Abbreviations

Contents


Welcome to State Street’s latest

edition of Regulatory Insights,

our quarterly overview of

relevant legislative and regulatory

developments in financial services

across the European Union (EU).

Much like the majority of 2020, over

the last quarter, COVID-19 has continued

to dominate our lives and it appears

that the pandemic’s grip on economies

and societies is tightening again.

Policymakers will once again be

confronted with difficult choices again,

which will undoubtedly influence the

future policy and regulatory agenda.

As the period of extreme volatility

observed earlier in the year

has abated and global markets have

largely stabilised, regulators around

the globe are taking the opportunity

to better understand the experience

of various sectors, with a view to

identifying weaknesses in the system

and determining relevant policy

responses. In particular, this has

reinvigorated the interest in the non-

bank sector, specifically regarding

liquidity management tools, exchange-

traded funds and, above all, money

market funds. While this debate is not

new, the events in March and April

have breathed new life into the ongoing

discussions at global and regional

levels. Regulators, both prudential and

for securities markets, are undertaking

their assessments in fora such as the

FSB and International Organisation

of Securities Commissions (IOSCO),

and we are likely to see further policy

developments in the coming months.

European policymakers are deeply

involved in these discussions at the

international level. While that is underway,

policy initiatives in our region have

not only been delayed and compliance

deadlines postponed, but the economic

recovery has understandably become

the primary focus. Important initiatives

such as the implementation of the

final elements of the Basel prudential

framework for banks and the review

of Solvency II have been pushed out.

Similarly, compliance deadlines for the

settlement discipline measures

under the Central Securities Depositories

Regulation (CSDR), Level 2 measures

under the Sustainable Finance

Disclosure Regulation (SFDR) and

the remaining phases of the bilateral

margin requirements have been delayed;

although, these decisions were not

solely driven by COVID-19 but also

due to concerns around the industry’s

preparedness, given the overall

challenging circumstances.

Foreword


At the same time, the European

Commission is moving ahead with its

efforts to facilitate the EU’s recovery

and, in this context, published a package

of proposals targeted at securities

markets legislation, in July 2020.

The so-called Capital Markets Recovery

Package (CMRP) includes targeted

amendments to MiFID, the Prospectus

Regulation and the Securitisation

Regulation. The co-legislators have

set an ambitious target of reaching

a political agreement by the end

of the year and the pace at which

negotiations are developing

suggests this remains feasible.

In addition to these reactive measures,

the European Commission is progressing

its broader policy agenda, including the

drive to transform the economy and place

it on a greener, more sustainable path;

the fallout from the pandemic has added

renewed impetus to these efforts. A key

cornerstone of that forward-looking work

is the Capital Markets Union, for which

the European Commission published

an updated Action Plan in September.

Aimed at supporting the green economic

recovery, helping individuals to save and

invest long-term, and further integrating

national capital markets, the Plan

identifies 16 actions that the Commission,

under the new Irish Commissioner in

charge of financial services, Mairéad

McGuinness, will launch over the coming

years. The actions cover a range of policy

areas including inducement rules, financial

literacy, consolidated tape, pensions and

the European supervisory architecture.

A further key building block of the

forward-looking agenda is the recently

published Digital Finance Package,

consisting of several legislative and

non-legislative initiatives. This includes

a proposal for a Financial Services Digital

Operational Resilience Act (DORA), a

Pilot Regime for market infrastructures

using Did you mean distributed ledger

technology (DLT), and a proposal for

markets in crypto-assets (MiCA).

These broader initiatives are

underpinned by the ongoing work in

areas such as sustainable finance and

technical preparatory work for upcoming

reviews of existing legislation such as

the Market Abuse Regulation, MiFID II/

MiFIR and the AIFM Directive. Regarding

the latter, while initially expected to be a

targeted legislative review, the perceived

performance of the asset management

sector earlier this year, as well as the

UK’s departure from the EU, has resulted

in the scope being expanded significantly.

In that context, the letter from the Chair

of the European Securities and Markets

Authority (ESMA), Steven Maijoor, over the

summer is particularly relevant, in which

ESMA highlighted a number of suggested

priority topics for consideration under the

review. In particular, delegation is flagged

as a specific area of concern, with ESMA


suggesting a more stringent approach,

either through more explicit quantitative

criteria or establishing a list of functions

that cannot be delegated. Some of these

elements are reflected in the European

Commission’s recently launched

public consultation.

Finally, turning to the UK’s departure

from the EU, which itself may warrant

an entirely separate and dedicated

publication. In spite of the recent political

theatre, and approximately two months

before the end of the transition period,

the seemingly interminable discussions

have yielded little progress, with trust

between the two sides perhaps at its

nadir. Notwithstanding this, discussions

are ongoing and there is a feeling in

certain quarters that a deal can still be

achieved. While such a deal is unlikely

to have any immediate material effect

on financial services, it will be important

for the overall nature of the future

relationship in areas such as supervisory

cooperation and equivalence decisions.

On the issue of equivalence, despite both

sides having committed to completing

their equivalence assessments by

the end of June, the majority of

equivalence decisions remain outstanding.

Importantly, the EU has granted

temporary equivalence for UK Central

Counterparties (CCPs) and the expectation

is that UK Central Securities Depositories

(CSDs) servicing the Irish market will

benefit from similar arrangements.

This will partially address some of the

potential cliff-edge risks in the event of a

no-deal, which at the time of writing, is

still possible. Regulators on both sides

have again emphasised the need for

firms to be prepared for all outcomes. In

this context, it is positive that securities

markets regulators on both sides have

reconfirmed the existence of the relevant

memorandums of understanding

(MoUs), which will allow existing

delegation arrangements to continue.

In summary, the environment remains

a complex one to navigate in light of the

COVID-19 pandemic and the uncertainties

it creates, whilst the regulatory agenda

is further expanding. We hope that this

publication continues to be helpful in

navigating this challenging environment

and in keeping abreast of the most recent

relevant developments.


EUROPE


Alternative Investment Fund Managers Directive

The Chair of ESMA submitted a letter to the European Commission on recommended priority topics for the upcoming review of AIFMD on 18 August 2020.

ESMA notes that whilst the AIFMD

has established a solid and credible

regulatory framework for alternative

investment funds in Europe, the

supervisory experience of the Authority,

as well as national competent authorities

(NCAs), has highlighted many areas

which could be improved. Some of

these elements were placed under the

spotlight during the extreme market

volatility observed in March, as a result

of COVID-19. The letter was accompanied

by annexes, which further specified

the recommendations and separately

proposed solutions to a number of them.

The most notable recommendation, which

has garnered significant attention from

the industry, is in relation to delegation

arrangements. ESMA indicates that the

current framework governing delegation

and substance requirements would

benefit from additional legislative

clarifications. Regarding the extent

of delegation, particularly in relation

to portfolio management, ESMA notes

that in some cases this is largely or even

entirely delegated to a third party, which

may be located in a third country, which

could create operational and supervisory

risks – this is likely to increase following

the UK’s withdrawal from the EU. As such,

ESMA suggests the European Commission

consider augmenting current requirements

with either more explicit quantitative

criteria or establishing a list of functions

that cannot be delegated. In the context of

delegation, ESMA is also calling for further

guidance and clarity on the use of seconded

staff, supporting tasks and white-label

service providers.

Away from delegation, the letter

also includes recommendations to

further harmonise the AIFMD and the

Undertakings for Collective Investments in

Transferable Securities (UCITS) regimes.

ESMA notes that in some cases, the AIFMD

is more granular than UCITS on related

provisions where there is little objective

justification for such differences.

Furthermore, ESMA has recommended

that the European Commission consider

facilitating the availability of liquidity

management tools (LMT) across EU

Member States, particularly in light of the

challenges faced by the industry during

the pandemic, as well as studying the

benefits and risks of a depositary passport.

In total, there are 19 recommendations.


EUROPE

Indeed, some of the elements covered

in the ESMA letter have been reflected

in the European Commission’s public

consultation, which was published on

22 October 2020. The consultation

consists of more than 100 questions and

touches upon depositary rules, delegation,

reporting obligations and financial

stability, amongst others. While it may be

that not all of these issues are included

in the legislative proposal, expected

in early 2021, it may be indicative of a

more broad-based review of the AIFMD.


EUROPE

Anti-Money Laundering (AML)

The European Banking Authority (EBA) published its response to the European Commission’s public consultation on the Action Plan regarding anti-money laundering and countering the financing of terrorism (AML/CTF) on 19 August 2020.

The European Commission published

its Action Plan in May 2020, in which

it outlined its approach to developing

a robust EU framework to tackle AML/

CTF and promoting the integrity of

the EU financial system.

In its response, the EBA makes

a number of recommendations,

including harmonisation of the current

legal framework across the EU. One

of the key elements of the European

Commission’s Action Plan was with

regards to supervision and the possible

establishment of a dedicated EU-level

AML/CTF supervisor. While the EBA

remains neutral on its preference, it

makes a number of detailed suggestions

in relation to a single EU supervisor.

This includes recommending a “hub

and spoke approach”, whereby an

EU-level supervisor is responsible

for coordination and oversight but is

also able to benefit from the extensive

expertise developed by NCAs.

The EBA is of the view that this approach

would provide sufficient flexibility needed

for the supervision of such a wide

population of obliged entities as well as

be more efficient. In addition, the EBA

encourages the European Commission to

adopt a pragmatic approach if it decides

to establish a single EU-supervisor, which

is likely to take time. The European

Commission should also pay due regard

to the costs and benefits of setting up

a new agency, particularly in light of

the economic fallout from COVID-19.


EUROPE

Benchmarks

The European Commission launched a consultation on targeted amendments to the Benchmark Regulation (BMR), regarding the designation of a replacement benchmark for critical benchmarks and an exemption for third country currency benchmarks on 11 August 2020.

The European Commission published

a legislative proposal to amend the

BMR on 24 July 2020, two years after

its entry into force. The focus of the

targeted amendments is to ensure an

orderly transition away from critical

benchmarks that may cease to exist,

as is expected with the London Interbank

Offer Rate (LIBOR) at the end

of 2021. The proposal would give the

Commission additional powers to

designate a replacement benchmark

for financial contracts that reference

the benchmark.

In addition, the Commission has proposed

to exempt certain non-EU currency

benchmarks from the scope of the BMR,

which will allow EU supervised entities

to continue using foreign exchange

benchmarks. Responses to the consultation,

which closed on 6 October 2020, will

inform the final legislative text. It will

then be subject to a three-month scrutiny

period by the European Parliament and

Council, with a view to agreeing a final

text before the end of the year. While the

Council has already agreed its negotiating

position, progress in the European

Parliament is moving at a slower pace.

Separately, ESMA launched

a consultation on fees for administrators,

on 25 September 2020. The fees will be

required as part of ESMA’s expanded

remit to supervise both administrators

of EU designated critical benchmarks,

as recognised under Article 32 of the

BMR, and third country benchmarks.

A final report is expected to be submitted

to the EU Commission by the end of

the year.

Furthermore, on 29 September 2020,

ESMA published a final report containing

five draft regulatory technical standards

(RTS) with regards to benchmark

administrators’ governance arrangements,

methodologies, reporting of infringements,

mandatory administration (of critical

benchmarks) and the compliance

statement in relation to non-significant

benchmarks. ESMA submitted the RTS to

the Commission on 1 October, after

which it will have three months to

decide whether to adopt them.


EUROPE

Capital Markets

Capital Markets Recovery Package

The European Commission published a package of proposals targeted at securities markets legislation, in order to facilitate the EU’s recovery efforts, on 24 July 2020.

The package of reforms, formally

referred to as the Capital Markets

Recovery Package (CMRP), includes

targeted amendments to MiFID,

the Prospectus Regulation and

the Securitisation Regulation.

The proposed amendments to MiFID

relate primarily to investor protection

topics. In particular, the package seeks

to alleviate some of the pressures

faced by investment firms and market

participants as a result of disclosure

and reporting obligations. Amongst

other things, it is proposed that eligible

counterparties and professional clients

are exempt from receiving costs and

charges disclosures for services

other than portfolio management and

investment advice. In addition, the

obligation for trading venues, systematic

internalisers (SIs) and other execution

venues to publish periodic best execution

reports is to be suspended until 2022.

The European Commission notes that

it does not foresee this proposal having

a detrimental impact on investor

protection as investors currently

make very little use of such reports.

There are also amendments relating to

commodity derivatives, including limiting

the scope of the position limit regime and

introducing a targeted hedging exemption.

Regarding the Prospectus Regulation,

the CMRP proposes the creation of

a simplified prospectus, referred to as

the EU Recovery prospectus, which would

be available for the secondary issuance

of shares, subject to further conditions.

This would also face a streamlined

approval process by NCAs of five

working days, enabling “issuers to swiftly

seize opportunities to raise capital”.

In terms of amendments related to the EU

Securitisation Regulation, the European

Commission has suggested the simple,

transparent and standardised (STS)

framework be extended to on-balance

sheet synthetic securitisations. This

follows the previously published report

on the creation of a specific STS

framework for synthetic securitisations,

which found no evidence that such

a structure would inherently result in

losses that are higher than traditional

securitisations. In addition, the CMRP

proposes a new definition of a non-

performing exposure (NPE) securitisation,

which may facilitate the capacity of

markets to absorb non-performing

assets from bank balance sheets.


EUROPE

Negotiations on the proposals have

already started in the Council, with

the German Presidency emphasising

its intention to reach an agreement

amongst Member States as quickly as

possible, so that a political agreement

is possible before the end of its

mandate. This will of course be

dependent on how fast the European

Parliament is able to progress the file,

given it was delayed in appointing key

negotiators and has decided to separate

the various elements of the CMRP.

European Parliament Own Initiative Report on the Capital Markets Union

The European Parliament’s Economic and Monetary Affairs (ECON) Committee set out its priorities to further develop the Capital Markets Union (CMU) in its own initiative report, which was adopted on 10 September 2020.

While own initiative reports do not

have legal standing and there is no

obligation for the European Commission

to issue related legislative proposals,

they have become an increasingly

important instrument for the European

Parliament in setting out its priorities.

They also provide an insight into how

the co-legislator may approach future

negotiations on legislative proposals.

Amongst other things, the report

stresses the need to simplify access

to diversified funding sources for

small-and medium-sized enterprises

(SMEs), including with regards to listing

requirements. The report also calls

for greater alignment with consideration

of the EU’s sustainable/green finance

agenda. In addition, the European

Parliament highlights its support

for further supervisory convergence,

including governance reforms to the

European Supervisory Authorities

(ESAs) in order to make them more

independent of national regulators

and also what lessons can be

learned from the Wirecard affair.

Furthermore, the report references

various elements that are being

considered in ongoing negotiations

under the CMRP, including in regards

to synthetic securitisations and whether

the associated prudential requirements

could be adjusted to further increase

financing capacity. Interestingly, the

Parliament is also proposing that the

European Commission assess whether

there is a need to review the trading

obligation of shares (STO), in order to

eliminate frictions that may inhibit

EU companies access to capital.

This has been a long-standing issue

for the industry, particularly in the

context of the potential market liquidity

fragmentation which may result from


EUROPE

the UK’s withdrawal from the EU.

As such, this proposal is likely to be

welcomed by market participants.

The report was adopted by the ECON

Committee, with 37 MEPs voting in

favour, whilst there were 10 MEPs

that voted against and 10 MEPs that

abstained respectively. The report

went before the European Parliament

Plenary on 8 October and is expected

to be published imminently.

Capital Markets Union (CMU) Action Plan

The European Commission published its highly-anticipated new Action Plan on the CMU on 24 September 2020.

The action plan sets out key measures

the European Commission will undertake

in order to deliver on the commitment

made by Commission President Ursula

von der Leyen to complete the CMU,

noting the strong political support

expressed by both the Council and the

European Parliament. The European

Commission emphasises that in order

to deliver a fully fledged CMU, it will need

to be a joint effort by EU institutions

and market participants. As such, in

developing the measures presented in

the action plan, it has paid due regard

to the recommendations put forward

by the CMU High-Level Forum in their

final report, published in June 2020.

The action plan highlights that the CMU

has taken on added importance as

a result of the economic fallout of

the COVID-19 pandemic. In this regard,

the European Commission notes that

market financing will be critical to

delivering and sustaining the recovery

and future growth, with deep and liquid

markets being essential for the financing

needs of both public authorities and

European companies. Furthermore,

the European Commission links

development of the CMU with wider,

equally-important EU policy priorities,

including sustainability, establishing

a more inclusive and resilient economy,

and promoting the global competitiveness

of the EU, thereby enhancing the

international role of the EU.

The new action plan identifies

three key objectives:

1. To support a green, digital, inclusive

and resilient economic recovery by

making financing more accessible

to European companies

2. To make the EU an even safer place

for individuals to save and invest

long-term

3. Integrate national capital markets

into a genuine single market


EUROPE

In order to deliver on these objectives,

the action plan sets 16 actions, which

the European Commission has

committed to undertake. Amongst

other things, this includes:

• Establishing an EU-wide platform to

provide investors with simplified

access to a company’s financial and

sustainability-related information

• Removing regulatory obstacles for

insurers to invest long-term, paying

due regard to financial stability and

protection of policyholders

• An assessment of the current

framework for inducements,

disclosure and, where necessary,

the advice received by retail investors

• Launching a study analyse auto-

enrolment practices, with a view to

developing best practices across

the EU

• Developing an EU-wide system for

withholding tax relief at source

• Develop an EU definition of

“shareholder” to promote cross-

border investor engagement

• Propose the creation of an effective

and comprehensive post-trade

consolidated tape for equity and

equity-like financial instruments

The actions reflect the ambition of

the European Commission, given that

they seek to address long-standing and

potentially sensitive topics, particularly

with regards to tax and insolvency laws.

In addition, the European Commission

has demonstrated that it has taken on

board input from market participants.

For example, in the context of the

review of the MiFID II framework,

many industry stakeholders have been

advocating for the establishment of

an EU consolidated tape. Interestingly,

the European Commission states that it

will consider proposing measures

to promote supervisory convergence

or possibly direct supervision by the

ESAs. In doing so, it shall also consider

the implications of the Wirecard case

and whether this has identified

any shortcomings in the current

supervisory framework.

In conclusion, the European Commission

calls on the support and political

commitment at the “highest level”

from the European Parliament and

Member States.


EUROPE

Digital Finance

The European Commission unveiled its new Digital Finance Strategy, outlining a number of legislative and non-legislative initiatives to support the digital transformation in the EU, on 24 September 2020.

The document initially sets out recent

key trends in digital innovation, noting

how this has facilitated the growth of

firms, including through the provision

of tailored services at lower cost.

Similarly, data has itself developed into

a key asset for financial services and

the increased use of cloud infrastructure

has enabled firms to adopt a greater

level of operational flexibility. On the

other hand, such developments have

inherently changed the nature of risks

to a wide-range of stakeholders and may

have implications for financial stability.

Taking this into account, the European

Commission states its strategic objective

is to “embrace digital finance for the good

of consumers and businesses”. In order

to achieve this objective, the document

sets out four key priorities that will inform

the EU’s actions up to 2024 – these are:

1. Tackle market fragmentation, so that

consumers have access to cross-border

services and European firms can take

advantage of opportunities to scale up

digital operations

2. Ensure the regulatory framework

allows for sufficient innovation in

line with EU values

3. Create a European financial data

space to promote data-driven

innovation, including enhanced

access to data and data sharing

4. Address new challenges and risks

associated with the digital

transformation, paying particular

consideration to the principle of

“same activity, same risk, same rules”

Specific actions within the four priority

areas include the introduction of

harmonised licensing and passporting

regimes. In addition, the European

Commission is proposing the

establishment of dedicated legislative

framework for crypto-assets in the EU,

which would encompass ‘stablecoins’

and utility tokens. This would seek to


EUROPE

provide further clarity on the application

of existing rules, as well as dedicated

provisions that consider implications

for financial stability and “monetary

sovereignty”. Separately, the European

Commission has stated it will consider

updating prudential rules regarding

financial firms’ holding of crypto-assets

in light of ongoing international work.

Furthermore, a proposal will be published

regarding an EU framework designed to

enhance digital operational resilience.

The Strategy concludes with the

European Commission bringing

together a wide-range of stakeholders

to actively engage with the proposals

set out, in order to support the

economic recovery and enable the EU

to embrace available opportunities.


EUROPE

Financial Stability

ESMA Trends, Risk and Vulnerabilities Report

ESMA published its second Trends, Risks and Vulnerabilities (TRV) Report of 2020, analysing the impact of COVID-19 on financial markets, on 2 September 2020.

ESMA notes that the pandemic

created an unprecedented external

shock to financial markets, resulting

in one of the steepest market

contractions in recent history. Since

the peak of the market volatility, markets

have recovered, largely owing to “massive

policy responses” by public authorities.

Notwithstanding this, markets remain

fragile and may be susceptible to further

pressures, should there be an increase

in credit-risk or from the very high levels

of corporate and public indebtedness.

The Report highlights that both equity

and debt markets experienced significant

volatility; with regards to the latter, this

was not contained to the corporate sector

alone, as government-issued debt

instruments also experienced a sharp-

widening of spreads. While securities

markets have since stabilised, ESMA

cautions over the potential “de-coupling”

of financial market performance from

underlying economic activity, which

casts doubt on the sustainability of the

apparent recovery. On asset management

sector, the Report notes that some parts

of the sector faced a rapid deterioration

of market liquidity and significant

outflows. In particular, the Report refers

to the challenges faced by fixed-income

funds, exchange-traded funds and money

market funds, although these funds

have since seen substantive inflows.

On the other hand, ESMA finds that

market infrastructures proved to

be largely resilient. Trading venues

were effectively able to cope with the

significant surge in activity, with the

Report highlighting that there was

a modest increase in the volume of

‘lit’ trading, which stood at 48 percent

in March. CCPs were also able to cope

with the upsurge in activity, despite the

increased market volatility resulting in

widespread intra-day margin calls.

From a risk perspective, amongst

other things, the Report considers

the interconnect of markets and potential

spillover effects, particularly

in light of the increasing importance

of the asset management sector.


EUROPE

The TRV conducts empirical analysis,

focused on fixed-income UCITS funds,

which finds that there are “high spillover

effects”, with alternative UCITS acting

as transmitters of shocks. Separately,

the Report analyses closet index funds,

finding that investors in potential

closet indexers are worse off than

genuinely active funds, when taking

account of expected returns and fees.

European Systemic Risk Board Annual Report

On 23 July 2020, the European Systemic Risk Board (ESRB) published its annual report, outlining its key activities over the 12 months up to March 2020.

The relevant period for the report

covers the initial, and perhaps most

volatile, stages of COVID-19 pandemic.

The ESRB notes that in response to

the onset of the crisis, it undertook

a review of its systemic risk assessment,

including classifying the risk of significant

defaults in the real economy as a severe

systemic risk to financial stability, amongst

other things.

The ESRB also highlights the role

it played in both the bank and non-bank

sectors. With regards to the former,

the ESRB notes that it contributed to

the EU-wide stress test conducted by

the EBA. On the non-bank sector, the

ESRB published its considerations on

policy options that could help mitigate

the procyclicality of margins and haircuts

in derivatives markets. In addition, the

ESRB issued a letter to the European

Commission on potential improvements

to the AIFMD.

European Central Bank Recommendation on Dividends

The European Central Bank (ECB) issued a number of publications relevant for banks in navigating the ongoing COVID-19 crisis, including in relation to the distribution of dividends, on 28 July 2020.

Amongst the items published, the ECB

has issued a recommendation that credit

institutions refrain from paying dividends

or undertaking share buy-backs that are

aimed at “remunerating shareholders”

until 1 January 2021. The recommendation

goes on to state that where an EU bank

is of the view that it has a legal

commitment to pay dividends, it

should explain the reasons to its

relevant joint supervisory team

immediately. The recommendation

is targeted at significant supervised

entities, as well as to the NCAs of

less significant supervised entities.


EUROPE

In addition, the ECB issued two letters

to bank CEOs. The first letter relates

to remuneration, whereby the ECB sets

out its expectation that banks should

exercise “extreme moderation” with

regards to variable remuneration until

1 January 2021. In the event that this

is not possible, banks should consider

whether longer deferral periods are

possible. The second letter relates to

the ECB’s expectations in regarding to

banks’ operational capacity when dealing

with distressed debtors. This includes

the expectation that banks engage

with potentially distressed borrowers

to avoid possible large negative

impacts on bank balance sheets as a

consequence of payments moratoria.

With regards to the recommendation

and the letter on remuneration policies,

the ECB states that it shall continue

to evaluate economic conditions and

consider whether an extension of both

is appropriate beyond 1 January 2021.

ESAs’ Joint Report on Risks and Vulnerabilities

The ESAs published a joint report on risks and vulnerabilities to the EU financial system on 4 September 2020.

The report is the first assessment by

the Joint Committee of ESAs, consisting

of the EBA, the European Insurance and

Occupational Pensions Authority (EIOPA)

and ESMA, following the onset of the

COVID-19 pandemic. The ESAs note that

the pandemic has created unprecedented

economic challenges, particularly with

regards to liquidity, valuation and credit

risks. Over the medium-term, there

remains significant uncertainty, with

markets continuing to be fragile, and

additional challenges being presented

by the reliance on information and

communication technology (ICT).

In light of these elements, the ESAs

have identified a set of policy

actions, targeted at NCAs and market

participants – this includes:

• Remain vigilant against possible

further market correction and the

deterioration of market liquidity,

including through performing stress

testing, to analyse potential shocks

• Due to continued pressures on asset

quality, banks should properly assess

the quality of loan portfolios

• Ensure the financial sector remains

well capitalised, whilst also making

use of flexibilities in the current

framework so that the sector may

continue to support the real economy

In addition, in the context of the UK’s

withdrawal from the EU, the ESAs

encourage market participants to

ensure preparations are in place

for potential disruption from the

end of the transition period.


EUROPE

The report also considers the risks

observed across various sectors.

Regarding investment funds, the

ESAs note that the sector experienced

significant liquidity challenges, which

were particularly challenging in some

segments (e.g. fixed-income and

money market funds [MMFs]). This

initially resulted in substantive outflows

although the sector did stabilise during

the latter stages of the crisis. For the

banking sector, the ESAs note that

banks generally had strong capital and

liquidity positions going into the crisis.

However, the ongoing uncertainty has

put further pressure on profitability, with

the ESAs stating this will be subject to a

“significantly adverse impact”. In relation

to insurance and the pensions sector,

the report highlights significant challenges

going forward; for insurers, this is

due to the ongoing low-interest rate

environment and the interconnectedness

with other sectors. Occupational pensions

schemes may also be susceptible to

broader “macro variables”, including

unemployment and disposable income.

The report concludes by considering

new technological developments, given

the increased usage and dependency

on technology. In this context, the ESAs

highlight the increased relevance of

cyber risks and their continued efforts

to protect EU citizens.


EUROPE

Market Abuse Regulation

The European Securities and Markets Authority published its Final Report on its review of the Market Abuse Regulation (MAR), on 23 September 2020.

The report follows the request issued

by the European Commission to ESMA

for technical advice. The MAR mandates

the European Commission to publish

a report to the European Parliament

and Council on the functioning of

certain provisions of the Regulation.

The report takes into consideration

the feedback received for the ESMA

consultation and broadly concludes

that the current framework introduced

by the MAR has functioned well and

remains fit for purpose. However, ESMA

has identified a number of targeted

amendments that the European

Commission may wish to consider.

Amongst other things, this includes:

• Clarifications with regards to market

soundings

• Ensuring that collective investment

undertakings continue to be under the

scope of MAR, as there is no

compelling reason for them to be

excluded

• Modifying the scope of reporting

obligations in relation buy-back

programmes

The previous ESMA consultation also

considered whether the spot foreign

exchange (FX) market should be

brought within scope of MAR. Based

on its analysis, ESMA concludes that

there may be a “regulatory gap” with

regards to spot FX contracts. As such,

ESMA is of the view that there is merit

in analysing the potential establishment

of an EU regulatory regime regarding

potential market abuse for spot FX.

ESMA recommends that this takes into

account the FX Global Code, as well

ensuring the involvement of Central

Banks and global coordination.

ESMA expects the findings and

recommendations in its report to

be taken into account in any future

legislative review of the MAR.


EUROPE

Market Infrastructure

Central Securities Depositories Regulation

The European Securities and Markets Authority issued a report recommending a further one year delay of the settlement discipline regime under the Central Securities Depositaries Regulation (CSDR) on 26 August 2020.

The CSDR seeks to harmonise and

promote greater efficiency in securities

settlement, and on the organisation

and operations of central securities

depositories (CSDs) in the EU.

The settlement discipline measures

are considered the most impactful

provisions in the CSDR, including

provisions relating to mandatory

settlement instruction fields, cash

penalties for failing settlement, and

mandatory buy-in requirements.

Having been delayed twice already,

ESMA cites the impact of the COVID-19

pandemic on industry preparedness as

legitimate grounds for further deferral.

In addition, it is likely that the EU was

also influenced by the UK Government’s

announcement, earlier this year in July,

that it would not implement the CSDR

settlement discipline measures. As such,

the European Commission has asked

ESMA to provide additional advice

on the impact of these measures,

and a consultation has already

been undertaken with stakeholders

via industry associations.

More broadly, the European

Commission is expected to launch

a public consultation in November,

as part of the legislative review of

the CSDR. This process is already

underway, and was initiated through

a survey of NCAs earlier in the

year. In the context of the review,

the industry is generally calling

for the mandatory nature of the

buy-in provisions to be revised.

ESMA CCP Supervisory Committee

The European Parliament approved ESMA’s nominees for the newly established CCP Supervisory Committee on 15 September 2020.

Under the revised European Market

Infrastructure Regulation (EMIR 2.2),

ESMA is required to establish a CCP

Supervisory Committee that will be

tasked with the recognition process

and direct supervision of third-

country CCPs operating in the EU,

as well as promoting supervisory

convergence in the authorisation

and supervision of EU CCPs.


EUROPE

In August, ESMA proposed candidates

for the role of Chair and the two

Independent Members of the Committee.

For the role of Chair, ESMA put forward

Klaus Löber, who is currently Head of the

Oversight Division at the ECB. Regarding

the Independent Members, ESMA had put

forward Nicoletta Giusto, who is currently

Senior Director and Head of International

Relations at Commissione Nazionale per

le Società e la Borsa (CONSOB), and

Froukelien Wendt, who is currently

a Senior Financial Sector Expert at

the International Monetary Fund.

All three nominees were endorsed

by the European Parliament’s ECON

Committee on 10 September and

subsequently by the Plenary.

Equivalence of UK CCPs

The European Commission adopted an Implementing Decision granting time-limited equivalence decisions for UK CCPs on 21 September 2020.

The Implementing Decision grants

equivalence for 18 months from

1 January 2021 up until 30 June 2022,

within which financial market participants

are encouraged to reduce their exposure

to and reliance upon UK CCPs.

The European Commission also hopes

this will provide sufficient time for EU

CCPs to build up capacity to support this

transition. The European Commission’s

Executive Vice President, Valdis

Dombrovskis, highlighted that

it was a “matter of financial stability”,

noting the heavy reliance of the European

financial system on CCPs located in the UK.

Subsequently, on 28 September 2020,

ESMA announced its intention to recognise

three UK CCPs as third-country CCPs,

ensuring that they can continue to provide

clearing services in the EU following

the end of the transition period. In its

announcement, ESMA states that it

has agreed to a new memorandum of

understating with the Bank of England,

establishing the necessary cooperation

arrangements, as required under EMIR.


EUROPE

Markets in Financial Instruments Directive and Markets in Financial Instruments Regulation

ESMA Call for Evidence on the Transparency Regime

The European Securities and Markets Authority published a call for evidence on aspects of the Markets in Financial Instruments Directive (MiFID) II and Markets in Financial Instruments Regulation (MiFIR) transparency regime for equity and non-equity instruments on 1 September 2020.

The call for evidence (CfE) specifically

requests stakeholder input on practical

challenges regarding the application

of the provisions set out in ‘RTS 1’

and ‘RTS’, which specify the main

implementing measures of the MiFID II/

MiFIR transparency regime. Furthermore,

ESMA has welcomed views on other

technical issues and potential policy

gaps in the current regime, as well as

the identification of provisions for which

further clarity may be welcomed.

ESMA notes that the CfE represents

a separate exercise from the broader

review of the transparency regime, which

is expected to constitute a key element

of the more comprehensive review of

MiFID II/MiFIR. As part of the latter, ESMA

published its final reports reviewing key

provisions of the transparency regimes

for equity and non-equity instruments

respectively, on 16 July 2020, following

consultations from earlier in 2020.

The deadline for contributing to the CfE

was 31 October 2020. ESMA states that

the feedback received will inform its

consultation paper on the review of RTS 1

and RTS 2, which is expected to be

issued in 2021.

ESMA Consultation on Transaction Reporting

ESMA published a consultation paper on the MiFIR transaction reporting and reference data obligations on 24 September 2020.

The consultation paper relates to

the legislative review that the European

Commission is mandated to undertake

by the Level 1 text of MiFIR. More

specifically, Article 26 of MiFIR requires

the Commission to submit a report to

the co-legislators regarding the

functioning of the transaction reporting

regime. In turn, the European Commission

has mandated ESMA to conduct a review

to inform its report.


EUROPE

ESMA states that the objective of its

review is to consider the experience

of the transaction reporting and

reference data regimes and identify

possible amendments, with a view

to simplifying and improving the

consistency of current requirements.

The consultation paper touches upon

a number of specific topics, including

a possible revision of the ‘traded on

a trading venue’ (ToTV) concept, possible

revision of the scope of indices subject

to the reporting obligation, in light of

the more recent EU Benchmark

Regulation, and possible further

alignment between EMIR and MiFIR

reporting regimes, following the EMIR

‘Refit’ Review. With regards the latter,

ESMA notes that while the alignment

of reporting requirements is a desired

outcome, it is important to recognise

that certain fundamental differences

exist owing to the different purposes

of reporting under the two regulations.

As such, ESMA states that it has

focused its harmonising efforts to

the extent it was feasible and without

compromising the financial stability

and market integrity objectives of the

two respective reporting obligations.

The consultation consists of 33 questions,

with stakeholders invited to provide

feedback by 20 November 2020. ESMA

states that it will consider the feedback

received when developing its final report,

which it intends to submit to the

European Commission in Q1 2021.

ESMA Consultation on Functioning of Organised Trading Facilities

ESMA published a consultation paper reviewing the functioning of the Organised Trading Facility (OTF) regime under MiFID II on 25 September 2020.

An OTF is a trading venue for specific

financial instruments, including bonds,

structured financial instruments and

derivatives. The key differences between

an OTF and a multilateral trading facility

(MTF) or regulated market, which are the

other types of trading venues defined

under MiFID II, is that the operator of

an OTF has a degree of discretion in

deciding whether or not to match client

orders and that OTFs are prohibited

from executing transactions in shares.

Under Article 90 of MiFID II, the European

Commission is required to submit

a report to the Council and European

Parliament on the functioning of the

OTF regime after consulting the ESMA.

The consultation paper touches upon a

number of important issues of relevance

to trading venues more broadly. ESMA

notes that it has recently received

concerns from many market participants

with regards to firms that have

operating systems, which function in a

substantively similar way to multilateral

systems but which have not been

authorised as a trading venue. As such,

ESMA states it may be helpful to further

clarify when authorisation is required.


EUROPE

In addition, in relation to the discretion

that OTF operators may exercise, ESMA

concludes that it does not create any

supervisory concern and no further

clarification is necessary. Furthermore,

ESMA states it will need to consider

further internal crossing systems

operated by fund managers before

offering a conclusive view on whether

such activity falls within the scope of

MiFID II or the AIFMD/UCITS Directive.

The consultation consists of 21 questions

and ESMA has requested that market

participants submit comments by

25 November 2020. Based on the feedback

received, ESMA will submit a final report

to the European Commission in Q1 2020.

Transparency Regime for Non-Equity Instruments

The European Securities and Markets Authority published its Final Report on the review of the MiFID II/MiFIR transparency regime for non-equity instruments and the trading obligation for derivatives (DTO) on 25 September 2020.

The report follows the ESMA consultation

on this topic, which was published in

March this year. ESMA notes that it

has received more than 50 responses

to its consultation, in which almost all

respondents shared the view that the

current legislative framework had failed

to achieve the objective of introducing

“meaningful transparency” in non-equity

markets. However, respondents were

divided in the action that policymakers

should undertake to address this. ESMA

states that there appear to be broadly

two camps, with one side arguing for

the need to ensure that there is

a balance between transparency and

liquidity, and that in light of Brexit ESMA

should refrain from making wholesale

changes at this stage; on the other

hand, a larger group of respondents

were calling for an enhanced regime.

Taking into account the feedback

received and on the basis of its own

assessment, ESMA puts forward

a number of recommendations to

improve the current regime – amongst

other things, this includes:

• Removal of the size-specific to

the instrument (SSTI) waiver and

simultaneously reducing the large-

in-scale (LIS) threshold to compensate

for any adverse consequences

• Support for changes to the current

methodology for determining liquid

bonds – under the current framework,

it is estimated that 99.5 percent of

bonds are not deemed liquid and

therefore not subject to pre-trade

transparency


EUROPE

• A more streamlined deferral regime,

which would delete the SSTI deferral

and simplify the deferral regime

for illiquid instruments and LIS

transactions, based on volume-

masking

• Full alignment between the clearing

obligation and the DTO and a more

streamlined process for the stand-

alone suspension of the DTO

The recommendations include both

changes to Level 1 and Level 2.

ESMA states that it expects the

report to inform any future review

of the MiFIR transparency regime

by the European Commission.

ESMA Report on Provision of Services and Activities by Third-Country Firms

The European Securities and Markets Authority published its Final Report, outlining draft technical standards on the provision of investment services and activities in the EU by third-country firms, on 28 September 2020.

The recently implemented ‘Investment

Firms Review’, which introduced

a dedicated prudential framework

for investment firms, included provisions

on enhanced reporting obligations for

third-country firms providing investment

services and activities in the EU under

the MiFID II and MiFIR frameworks.

Third-country firms would be required to

submit additional granular data to ESMA

on an annual basis, as well as be required

to comply with ad-hoc data requests by

ESMA. Where a third-country firm does

not comply with the reporting obligations

or a request for additional information,

ESMA will have the power to temporarily

restrict the firm from the provision

of the relevant service or activity.

The ESMA report contains final draft RTS

and implementing technical standards

(ITS). The RTS specifies the information

that is to be provided to ESMA for the

purposes of registration of a third-

country firm and the information that

is to be provided to ESMA on an annual

basis, while the ITS specifies the format

in which this information should be

provided. The report also summarises

the responses to the relevant consultation

which was conducted by ESMA in Q1

2020 and how the stakeholder feedback

has been taken into account in the

development of the technical standards.

It is now up to the European Commission

to decide whether to adopt the technical

standards. Once adopted, they will be

subject to scrutiny by the Council and

European Parliament, after which they

shall be published in the Official Journal.


EUROPE

Payments

The European Commission published a communication outlining its EU Retail Payments Strategy on 24 September 2020.

The communication notes that payments

have become strategically significant,

effectively transforming into the

“lifeblood” of the European economy.

Payments are also at the centre of digital

innovation and transformation in the

provision of financial services and, as

such, warrant dedicated policy measures.

The European Commission recognises

that there have been a number of

encouraging developments regarding

the establishment of an integrated

cross-border payments market in the

EU. In spite of this, the payments market

in Europe remains to a “significant degree”

fragmented along national lines.

The communication outlines the

European Commission’s vision for retail

payments in the EU, whereby a diverse

and competitive payments market

benefit of citizens and companies,

and which also supports the financial

and economic sovereignty of the

EU. In addition, this will promote the

international role of the EU. In order to

deliver on this vision, the communication

highlights four key inter-linked pillars:

1. Increasingly digital and instant

pan-European payment solutions

2. Innovative and competitive retail

payments markets

3. Efficient and interoperable retail

payment systems and other support

infrastructures

4. Efficient international payments

The communication goes onto highlight

key actions under each of the pillars to

be undertaken over the next four years,

encompassing both legislative and

non-legislative initiatives, including the

potential revision of existing legislation.

In this regard, the European Commission

states that under its review of the

Payment Services Directive (PSD2),

amongst other things, it shall assess

whether current consumer protection

measures provide appropriate protection

to consumers making instant payments.

The review of the PSD2 is expected

by the end of 2021. Separately, the

Commission will consider whether the

scope of the Settlement Finality Directive

(SFD) can be extended to e-money and

payment institutions, when it launches

its review of the legislation in Q4 2020.

The communication concludes by

encouraging all stakeholders to actively

engage in the implementation

of the strategy.


EUROPE

Prudential

Brexit Preparedness

The EBA released a statement targeted at financial institutions in relation to the end of the Brexit transition period, on 29 July 2020.

In the statement, the EBA reiterates

that financial institutions seeking to

operate in the EU and offer services

to their EU customers should ensure

they have obtained the necessary

authorisations and effectively establish

themselves before the end of the year.

In particular, financial institutions should

ensure that they have put in place

adequate management capabilities,

commensurate with the nature of their

business activities, and avoid outsourcing

activities to such an extent that they

operate as ‘empty shell’ companies.

Financial institutions affected by

the transition are also advised to

provide information to their EU

customers regarding the availability

of services post the end of transition

period. The EBA’s statement echoed

an earlier ESMA notice, on 17 July, in

which it urged market participants to

finalise implementation preparations,

including business contingency measures.

Separately, on 8 July, the European

Commission published several sector-

specific notices, including notices for

banking and payments, which is of a

similar sentiment to that of the EBA.

Minimum Requirements for Own Funds and Eligible Instruments

The EBA published implementing standards on the disclosure and reporting for the G-SII requirement for total loss absorbing capacity (TLAC) and the minimum requirements for own funds and eligible liabilities (MREL) under CRR2 and BRRD2 on 3 August 2020.

Both MREL and TLAC are presented in

an integrated manner in the reporting

and disclosure templates, the

requirements of which are enshrined

in one set of ITS. TLAC-related disclosure

will apply immediately after adoption by

the Commission, whereas MREL-related

disclosures will apply from the end

of the relevant transition periods

(i.e. from 1 January 2024 or in

accordance with the resolution

authority’s compliance deadline).

The EBA will also develop a data point

model, an XBRL taxonomy and validation

rules based on the final draft ITS,

which will be published later in 2020.


EUROPE

Sustainable Finance

Low Carbon Benchmarks

The European Commission published its long-awaited Level 2 measures, supplementing the ‘low carbon benchmarks’ framework, on 17 July 2020

The delegated acts provide technical

advice on benchmark administrators’

enhanced sustainability-related

disclosures, which had been due to

apply from April this year, but for which

ESMA granted relief, given the absence

of final delegated acts. These will now

be subject to a three-month scrutiny

period by the European Parliament and

Council. The final delegated acts will

then be published in the Official Journal

and enter into force 20 days thereafter.

Sustainable Finance Disclosures Regulation

The ESAs published a consultative survey, regarding the presentational aspects of the product disclosures required under the EU Sustainable Finance Disclosures Regulation (SFDR), on 21 September 2020.

The SFDR is due to apply from 10

March 2021. The ESA’s survey follows

their previous consultation on the draft

technical standards relating to the

entity-level sustainability disclosures and

principal adverse impact reporting, which

had been published prior to the summer.

With this recent survey, the ESAs

also propose to present the disclosed

information in a standardised manner

via mandatory reporting templates in

order to improve the comparability of

financial products across Member States.

The consultation closed on 16 October.

EU Taxonomy

The European Commission formally requested technical advice from the ESAs on the enhanced disclosure requirements stemming from the EU Taxonomy Regulation on 15 September 2020.

The Commission specifically asked

ESMA to advise on key performance

indicators that companies subject to

the Non-Financial Reporting Directive

(NFRD) will have to disclose, as well as

the methodology they use to determine

whether economic activities qualify as

environmentally sustainable. The advice

will further inform the Commission’s

legislative review of the NFRD, which

is expected to be adopted in Q1 2021.

.


EUROPE

Tax

The EU Commission announced a package of measures related to “fair and simple taxation in the EU,” including an Action Plan on taxation measures to support the economic recovery post COVID-19, on 15 July 2020.

The Action Plan for fair and simple

taxation measures sets out 25 initiatives

to be implemented between now and

2024, which notably proposes

a simplification of Value Added Tax (VAT)

rules and to standardise withholding

taxes across Member States.

On tax good governance, the Commission

also published a communication outlining

its intention to reform the Code of Conduct

Group, which oversees the third country

tax “blacklist” to ensure cases of very

low taxation are examined – inside and

outside the EU – as well as expanding

the criteria on which third countries

are assessed. The Commission will

also consider the process by which

taxation policy is agreed in the EU to

explore whether the ordinary legislative

procedure could instead be employed.

In addition, the package contained

proposed revisions to the EU Directive

on administrative cooperation in the

field of taxation (DAC VI). The Commission

issued a legislative proposal that seeks

to extend the EU tax transparency

rules to digital platforms. Finally, the

Commission announced that it would

conduct a review on the topic of

‘Business Taxation for the 21st Century”

in November.


EUROPE

GERMANY


Electronic Securities

The German Federal Ministry of Justice and Consumer Protection and the Federal Ministry of Finance published a draft act on the introduction of electronic securities on 11 August 2020.

The German law will be opened up to

electronic securities. However, the current

draft will initially only be applicable to

bonds. It will now also be possible to issue

these in electronic form and they will

have the same legal effect as securities

issued by means of a certificate.

To ensure technological neutrality,

the draft is not limited to cryptographic

securities but also integrates all other

technical processes and does not favour

any of the possible variations. The draft

presents, amongst others, the

following rules:

• An electronic security is issued by

making an entry in an electronic

securities register - in this case,

a certificate is no longer required

• A crypto security is an electronic

security that is listed in a crypto

securities register

• A crypto securities register must

have a forgery-proof recording

system in which data is recorded in

chronological order and protected

against unauthorized deletion as well

as against subsequent modification-

due to these specific technical security

measures, a crypto securities register

can be operated decentrally and even

by the issuer himself

• All other electronic securities must

be listed in a centralized register, which

must be maintained by an authorized

central securities depository

• Existing securities may be replaced

by electronic securities of identical

content

• The operation of a crypto securities

register is incorporated into the

German Banking Act

(Kreditwesengesetz - KWG) as

a financial service and will therefore

require a license

• The BaFin will supervise the issuance

and operation of decentralized

registers as a new financial service

under the act on the introduction of

electronic securities, the KWG and

the Central Securities Depository

Regulation


GERMANY

Suitability of Members of Management and Supervisory Bodies

The BaFin published drafts of the revised “Guidance notice on management board members pursuant to the German Banking Act (Kreditwesengesetz – KWG), the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG) and the German Investment Code (Kapitalanlagegesetzbuch – KAGB)” and “Guidance notice on members of administrative or supervisory bodies pursuant to the KWG and KAGB” as well as various forms of the German Notification Ordinance in anticipation of subsequent amendments for consultation on 3 June 2020.

The purpose of the revision to the guidance

notices is to incorporate the EBA and

ESMA “Guidelines on the assessment

of the suitability of members of the

management board and key function

holders” (EBA/GL/2017/12) and the EBA

“Guidelines on internal governance”

(EBA/GL/2017/11) into the administrative

practice of the BaFin.

In particular, the following proposals

are made:

• Strengthening the requirements

for the supervisory review process

(so-called “fit and proper” review)

• Adjustments of the material

requirements for members of the

management board and members

of supervisory bodies, in particular

with regard to the counting of

mandates and the inclusion of the

new criterion “impartiality” in the

context of the reliability assessment

• Inclusion of requirements for internal

guidelines and processes of the

institutions (suitability, diversity,

introduction and training sessions,

dealing with conflicts of interest)

• Information on the duties of the

institutions (conducting internal

assessments of the individual

and collective suitability of board

members, suitability assessments

of key function holders, dealing

with conflicts of interest)


GERMANY

IRELAND


Diversity and Inclusion

The Central Bank of Ireland (CBI) published its Thematic Assessment of Diversity & Inclusion in Insurance Firms (the Assessment) on 29 July 2020.

The CBI’s Assessment highlights evidence

of a lack of diversity and inclusion (D&I)

in the sector, based on a sample of

11 insurance firms, including some of

the largest insurers operating in Ireland.

The Assessment took into consideration

firms’ policies, procedures and practices,

as well as their approaches to monitoring

progress on D&I. Remuneration of men

and women was also examined and an

analysis was conducted into pre-approved

control function (PCF) applications

received by the CBI between 2012-2018.

While the scope of the assessment did

not include Fund Service Providers,

the findings are nonetheless noteworthy.

Some of the key findings and observations

arising out of the Assessment include:

• Most entities do not have a D&I strategy

• Where there is a D&I strategy, it is not

clear how this strategy is aligned to

the overall company strategic objectives

• Most firms are not sufficiently

prioritising D&I and considerations

of diversity

• The overall effectiveness of boards

and senior executive teams is not

sufficiently evident in senior

recruitment and succession planning

• There is clear evidence of significant

gender pay gaps in most firms – while

women accounted for 51 percent of the

total workforce, they represented only

24 percent of top 10 earners across

the sample and accounted for

34 percent of the upper pay quartile

• The CBI has issued a Risk Mitigation

Programme to each of the 11 firms

included in the Assessment, requiring

them to submit a detailed action plan

to address firm-specific issues

identified and to ensure these issues

are appropriately addressed


IRELAND

Liquidity Stress Testing

The CBI published a notice of intention in relation to the ESMA Liquidity Stress Testing (LST) Guidelines on 13 July 2020.

The notice sets out that the CBI will

consult on the incorporation of

a requirement in their UCITS Regulations

and AIF Rulebook that UCITS Management

Companies, AIFMs and depositaries

adhere to the ESMA Guidelines. In the

interim, the CBI expects full compliance

with the Guidelines from 30 September

2020 (the respective date of application).

In addition, the CBI issued updated AIFMD

and UCITS Q&A, which include new Q&As

in relation to LST in AIFs and UCITS and

set out the following:

• The LST policy may be documented

within the UCITS Risk Management

Policy

• LST should generally be performed

at least quarterly

• LST should be employed at all stages

in a UCITS and AIF’s lifecycle, including

at the design phase


IRELAND

Money Market Funds

The CBI published a Guidance Note on Money Market Fund Regulation (MMFR) Reporting on 31 August 2020.

The purpose of this Guidance Note is to

provide information and direction on the

completion of MMFR Reporting by UCITS

Management Companies and Alternative

Investment Fund Managers regarding:

• The “Money Market Fund Returns”

for authorised MMFs under Article 37

of the MMFR including related

provisions as per the “ESMA Guidelines

on the reporting to competent

authorities under Article 37 of the

Money Market Fund Regulation”

• Ad-hoc stress test reporting under

Article 28 of the MMFR

• Other ad-hoc reporting under MMFR

outside of points (i) and (ii)

• Additional reporting required by

the CBI

All MMFR reporting is made through

the CBI’s Online Reporting portal, unless

stated otherwise in the Guidance.

The reported data will be used for

supervisory purposes by the CBI and,

where specified in this Guidance, for

onward transmission to ESMA for

their use, as specified in the MMFR.


IRELAND

ITALY


Pensions

The Italian Pension Funds Supervisory Commission (COVIP) issued a resolution regarding the EU Institutions for Occupational Retirement Provisions (IORP) II Directive on 29 July 2020.

The resolution contains a number of

directives relating to complementary

pension schemes and is intended to

provide instructions and make the

necessary changes to implement the

European legislation. This is the last

step in the domestic implementation

process, following the Italian transposing

legislative decree no. 147/2018.

The key changes concern an effective

system of governance, which shall

be proportionate to the size, nature,

scale and complexity of the activities

of the pension fund. The governance

framework must include an adequate

and transparent organisational structure

with a clear allocation and appropriate

segregation of responsibilities.

Furthermore, the directives also pay

particular attention to sustainability

profiles with the inclusion of ESG

factors in investment policies and

risks’ assessment.


ITALY

Tax

The Legislative Decree 30 July 2020 No. 100 was published in the Official Gazzette, completing the implementation process of DAC VI in Italy.

The DAC VI, which is officially referred

to as Directive (EU) 2018/822 of 25

May 2018, introduced the obligation

for intermediaries and taxpayers to

communicate information to financial

authorities relating to cross-border

arrangements that can be used for

aggressive tax planning purposes,

with the aim of contributing to the

creation of a fair taxation environment

in the EU internal market.

As with most EU Directives, which are

not directly applicable and are subject

to local transposition, there is an element

of subjectivity and discretion permitted

to Member States. The provisions

introduced under the Legislative Decree

No. 100 covers critical issues, including

defining the concept of tax advantage.

However, it is also subject to a specific

decree of the Minister of Economy and

Finance, which is yet to be issued, which

will specify the precise identification

of ‘hallmarks’, certain technical rules

regarding the application of Legislative

Decree and the development of the

criteria on the basis of which it is

possible to verify whether a cross-

border arrangement can effectively be

considered as being aimed “at obtaining

a tax advantage”. In the absence of these

specific implementing provisions, it may

be difficult to identify the cases in which

a cross-border arrangement must be

communicated to relevant authorities.

The DAC VI became effective from

1 July 2020. However, the terms for

fulfilling the obligations regarding

the communication and exchange

of information have recently been

postponed, following a decision in

the Council of the EU to allow Member

States an optional extension of up to

six months in light of the challenges

posed by COVID-19. Italy has decided

to implement this deferral; as such,

the revised applicable deadlines

for reporting are:

• January 1 2021, for the communication

of the new mechanisms implemented

from 1 July 2020 to 31 December 2020

• 28 February 2021, for sending

reports on the mechanisms

implemented in the period from

25 June 2018 (the date on which

the DAC VI entered into force)

to 30 June 2020


ITALY

UNITED KINGDOM


Financial Stability

The Bank of England published its bi-annual Financial Stability Report, analysing the performance of the UK financial sector during the COVID-19 pandemic, on 6 August 2020.

The Financial Stability Report (FSR)

is prepared by the Financial Policy

Committee (FPC), a committee of the

Bank of England (BoE) responsible for

driving its financial stability objective.

The report sets out the FPC’s outlook

for UK financial stability, including an

assessment of the resilience of the

financial system and the key financial

stability risks, as well as the action

being taken to mitigate those risks.

The report notes that the financial

system suffered an unprecedented

shock as a result of the pandemic.

However, the system has been supported

by the banking sector, which entered

the crisis in a much stronger position

relative to the global financial crisis in

2008, as well through the exceptional

action taken by public authorities.

Critical market infrastructure including

retail payment systems and UK CCPs

have also proved to be resilient.

While markets have since stabilised,

there remains significant underlying

vulnerabilities that could resurface.

Regarding the banking sector, the FSR

finds that banks’ capital and liquidity

positions have remained resilient, aided

by the significant buffers held by banks

coming into the crisis. While further

economic deterioration may result

in increased credit-related losses, it

appears that current capital buffers are

sufficient to absorb these losses. The

report notes, based on reverse stress

testing undertaken by the FPC to deplete

regulatory capital buffers in line with the

central assumption of the 2019 stress

test exercise, banks would need to incur

credit impairments of approximately

£120 billion – this would need the

cumulative loss of economic output

associated with COVID-19 to be double

the current central projection of the

Monetary Policy Committee, accompanied

by an almost unprecedented rise in

unemployment. Looking ahead, the FPC

states that it is in the collective interest

for banks to continue providing support

to businesses and households and that

adopting an overly defensive position,

for example through the restriction of

lending, may be counterproductive.


UNITED KINGDOM

Looking to market-based finance,

the report notes the sector was severely

disrupted which necessitated central

bank intervention. This reliance on

action from policymakers may suggest

a need to revisit the resilience of

market functioning during periods of

heightened market stress. In particular,

the report highlights a number of

specific vulnerabilities that may

require further assessment, including

the potential procyclicality of margin

calls, gaining a better understanding

of factors which may have limited

dealer capacity and the role played

by leveraged non-bank investors.

Focusing specifically on investment

funds, the FSR refers to the significant

challenges faced by MMFs. Despite being

subject to comprehensive regulatory

reforms, the experience in March has

highlighted that some vulnerabilities

remain, including provisions that may

have propagated concerns regarding

first-mover advantage. The FPC states

that it will support international efforts

to consider reforms to MMFs. On the

other hand, the report acknowledged

that exchange-traded funds (ETFs)

became a key mechanism for price

discovery. During the height of the market

turmoil, there were large differences

between ETF share prices and their

net asset values (NAVs), suggesting ETF

prices were reflecting more accurately

price and liquidity information of the

underlying assets. This phenomenon

has since disappeared, largely due to

the indirect effect of market interventions

by the US Federal Reserve.

The report concludes by assessing

the financial stability implications

of Brexit. While the majority of risks

associated with a potential disruption

to cross-border financial services have

been mitigated, the FPC states that

more could be done in some areas.


UNITED KINGDOM

Prudential

The PRA published a consultation (CP 12/20), setting out proposed changes to its regulatory toolkit in order to implement elements of the revised EU Capital Requirements Directive (CRD V), on 10 July 2020.

The revised CRD came into force in

April 2019 and, although HM Treasury

announced that it would not implement

aspects that were due to take effect

after the Brexit transition period, there

are a number of areas that the UK has

sought to implement.

These include updated provisions

relating to pillar 2 requirements,

remuneration policies, the intermediate

parent undertaking requirement,

governance and reporting. The CRD V

must be transposed by 28 December

2020, with most requirements becoming

applicable on the next day. The deadline

for comments to the consultation was

30 September.


UNITED KINGDOM

Supervision

The FCA published a consultation (CP20/20) regarding its approach to the authorisation and supervision of international firms operating in the UK on 23 September 2020.

Anticipating an increase in firms applying

for temporary permission or permanent

authorisation to continue operating in

the UK at the end of the transition period,

the FCA’s consultation sets out guidance

on its expectations for international

firms seeking full UK authorisation under

Part 4A of the Financial Services and

Markets Act (FSMA) 2000. The FCA is

not proposing any changes to existing

rules. Instead, views are sought on the

specific challenges for international firms

in meeting the threshold conditions set

out in FSMA, including during the FCA’s

authorisation and ongoing assessments

and in mitigating risks of harm relevant

for international firms. The consultation

closes on 27 November 2020, after

which the FCA intends to publish its

final approach.


UNITED KINGDOM

Sustainable Finance

The UK Department for Work and Pensions (DWP) issued a consultation on pension schemes’ governance arrangements and reporting in relation to climate change on 26 August 2020.

Initially, the proposed changes would

be targeted at larger schemes – with

£5 billion or more in total assets,

authorised master trusts and authorised

collective money purchase schemes –

before being extended to smaller

schemes – with more than £1 billion

of assets – the following year. The DWP

propose to then consider whether to

expand the regime to smaller schemes

in 2024.

In addition to scope and timing, the

DWP’s proposals would codify existing

voluntary requirements, for which the

DWP has issued previous guidance,

covering climate-related governance and

strategy, as well as reporting, in line with

the international framework established

by the Taskforce on Climate-related

Financial Disclosures (TCFD) framework.

In addition, the consultation

acknowledges challenges that trustees

face when considering material

sustainability factors – for example,

the absence of quality data on investee

companies. Nevertheless, the DWP has

proposed a set of penalties that could

be imposed, at the discretion of The

Pensions Regulator, upon trustees

where they fail to produce TCFD reports

in line with statutory requirements.

The consultation closed on 7 October.

The proposals are based on amendments

made to the Pension Schemes Bill during

its passage through the House of Lords.

The timeline for the legislation being

passed is unclear, and the amendments

(tabled by the DWP) would have to survive

the remaining Parliamentary stages.

The Government seems confident that will

be the case, and currently plans to consult

on regulations in late 2020 or early 2021.


UNITED KINGDOM

PRODUCT


Money Market Fund Regulation

The quarterly reporting obligations to NCAs under the MMFR have become applicable.

The MMFR requires managers of MMFs to

maintain records and file periodic reports

with the relevant NCA , in accordance with

the technical requirements specified by

ESMA. The first quarterly reporting cycle

covering Q1 2020 was originally due at

the end of April 2020. However, as part of

a package of relief provided by regulatory

bodies in light of the challenges posed by

the COVID-19 pandemic, ESMA advised

that both Q1 and Q2 reporting should be

submitted to NCAs by September 2020.

Additionally, at the end of August, ESMA

issued a statement advising of future

changes to risk parameters in the

MMFR stress testing scenarios, due

to be issued in Q4 2020. The updated

guidelines will then be translated and

the changes will apply from two months

after the publication of the translations.


PRODUCT

Packaged Retail and Insurance- Based Investment Products

The UK announced its intention to amend certain provisions of the Packaged Retail and Insurance- based Investment Products (PRIIPs) Regulation that have been ‘onshored’ into UK legislation.

The PRIIPs Regulation came into

force on 1 January 2018 and includes

requirements for a standardised investor

disclosure document, the Key Information

Document (KID). Firms distributing

packaged investment products to

retail investors need to include certain

information in the KID, such as product

objectives, potential risks and returns,

performance scenarios, and costs and

charges (including transaction costs).

In July 2020, the UK government issued

a document outlining the approach

to amending the PRIIPs Regulation

that has been “onshored” into UK

legislation, using powers under the

UK’s European Union (Withdrawal) Act

2018. The UK government is proposing

to make the following changes:

• Enabling the FCA to clarify the

scope of the PRIIPs Regulation to

address ambiguities in certain

types of investment products

(e.g. corporate bonds)

• In light of concerns regarding

potentially misleading information,

replacing ‘performance scenario’

with ‘appropriate information on

performance’, with the FCA proposing

revised technical standards to clarify

what information on performance

should be included in the KID

• Further extending the exemption

for UCITS funds beyond the current

date of 31 December 2021, up to

a maximum of five years to enable

consideration of the timing for

transition to UCITS products

If the above changes are implemented,

this will result in a divergent methodology

for UK PRIIPs compared to EU countries,

which will require close consideration by

firms to implement into their KID

production processes.


PRODUCT

Abbreviations

AIF Alternative Investment Fund

AIFM Alternative Investment Fund Manager

AIFMD Alternative Investment Fund Managers Directive

AML Anti-Money Laundering

BaFin Bundesanstalt für Finanzdienstleistungsaufsicht -

German Federal Financial Supervisory Authority

BCBS Basel Committee on Banking Standards

BMR EU Benchmarks Regulation

BoE Bank of England

BRRD Bank Recovery and Resolution Directive

CBI Central Bank of Ireland

CCP Central Counterparty

CET 1 Common Equity Tier 1

CfE Call for Evidence

CMU Capital Markets Union

CMRP Capital Markets Recovery Package

CONSOB Commissione Nazionale per le Società e la

Borsa - Italian Securities Markets Regulator

COVIP Commissione di Vigilanza sui Fondi Pensione -

talian Pension Funds Supervisory Commission

CRD Capital Requirements Directive

CRR Capital Requirements Regulation


ABBREVIATIONS

CSD Central Securities Depository

CSDR EU Central Securties Depositories Regulation

CSP Cloud Service Provider

CTF Countering the Financing of Terrorism

DAC VI EU Directive on Administrative Cooperation in the field of Taxation

D&I Diversity and Inclusion

DTO EU Derivatives Trading Obligation

DWP UK Department for Work and Pensions

EBA European Banking Authority

ECB European Central Bank

ECON European Parliament’s Economic and Monetary Affairs Committee

EIOPA European Insurance and Occupational Pensions Authority

EMIR European Market Infrastructure Regulation

ESAs European Supervisory Authorities

ESG Environment, Social and Governance

ESMA European Securities and Markets Authority

ESRB European Systemic Risk Board

ETFs Exchange Traded Funds

FATF Financial Action Task Force

FCA UK Financial Conduct Authority

FPC UK Financial Policy Committee

FSMA UK Financial Services and Markets Act 2000


ABBREVIATIONS

FSR Financial Stability Review

FX Foreign Exchange

HLF High-Level Forum on Capital Markets Union

ICT Information and Communication Technology

IM Initial Margin

IOSCO International Organisation of Securities Commissions

ITS Implementing Technical Standards

KID Key Information Document

KWG Kreditwesengesetz - German Banking Act

LIS Large in Scale

LMT Liquidity Management Tools

LST Liquidity Stress Testing

MAR EU Market Abuse Regulation

MiFID Markets in Financial Instruments Directive

MiFIR Markets in Financial Instruments Regulation

MMFs Money Market Funds

MMFR EU Money Market Funds Regulation

MTF Multilateral Trading Facility

MREL Minimum Requirements for Own Funds and Eligible Liabilities

NAV Net Asset Value

NCAs National Competent Authorities

NFC Non-Financial Counterparty


ABBREVIATIONS

NFRD Non-Financial Reporting Directive

NPEs Non-Performing Exposures

OTC Over-the-Counter

OTF Organised Trading Facility

PCF Pre-Approval Control Functions

PIR Italian Individual Saving Plans

PRA UK Prudential Regulation Authority

PRIIPs EU Packaged Retail and Insurance- based

Investment Products Regulation

PSAs Pension Scheme Arrangements

PSD2 EU Payment Services Directive 2

Q&A Question and Answer

RTS Regulatory Technical Standards

SASB Sustainability Accounting Standards Board

SFD EU Settlement Finality Directive

SFDR EU Regulation on Sustainability-Related

Disclosures in the Financial Services Sector

SFTs Securities Financing Transactions

SIs Systematic Internalisers

SME Small-Medium Enterprise

SSTI Size Specific to The Instrument

STO EU Share Trading Obligation

STS Simple, Transparent and Standardised securitisations


ABBREVIATIONS

TCFD Taskforce on Climate-related Financial Disclosures

TLAC Total Loss-Absorbing Capacity

ToTV Traded on a Trading Venue

TRV ESMA Report on Trends, Risks and Vulnerabilities

TTP Temporary Transitional Powers

UCITS Undertakings for Collective Investment in Transferable Securities

VAT Value Added Tax

VM Variation Margin


ABBREVIATIONS

Important Information

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Issue No. 23 Regulatory Insights - State Street Corporation · 2021. 2. 11. · to dominate our lives and it appears that the pandemic’s grip on economies and societies is tightening