Regulatory Insights No. 16 - State Street Corporation

Issue No. 16

Regulatory Insights

Our quarterly overview of important legislative and

regulatory developments in the European Union

FOREWORD 2

A PATH TO MULTI-MARKET GROWTH 6

EUROPE 10

CSDR 11

Sovereign Bond Backed Securities 12

Short Selling Regulation 13

AIFMD/UCITS Directive 14

MiFID II 15

Risk Reduction Measures Package 17

Sustainable Finance Package 18

ESMA Q&A on the Benchmark Regulation 20

Public Corporate Reporting 21

EMIR 22

Draft Implementing Measures under the Shareholder Rights Directive 23

Cross-Border Distribution of Funds 24

PEPP 25

GERMANY 26

Minimum Requirements for the Compliance Function and Additional Requirements Governing Rules

of Conduct, Organisation and Transparency 27

EUROPEAN REGULATORY TIMELINE 28

GERMANY (CONTINUED) 30

Minimum Requirements for Complaints Management 30

IRELAND 32

Consultation on Amendments of the Central Bank of Ireland’s UCITS Regulations – CP119 33

Anti-Money Laundering Directive IV – Transposition into Irish Law 34

Michael Hodson Comments on Brexit Preparedness 35

Martin Moloney Comments on Transforming Culture in Regulated Financial Services 37

ITALY 38

Consultation on Customer Due Diligence and Regulation on Internal Procedures 39

LUXEMBOURG 42

Law of 17 April on Benchmarks 43

Law of 19 April on PRIIPs 44

UNITED KINGDOM 46

FCA Policy Statement on the Asset Management Market Study 47

PRA Policy Statement on Model Risk Management Principles for Stress Testing 48

PRA Policy Statement on Pillar 2 Reporting Requirements 49

MiFID II 49

Insurance Distribution Directive 50

Regulatory Priorities for UK Supervisors 2018/9 51

MREL 52

PRA Policy Statement on Algorithmic Trading 53

ABBREVIATIONS 54

Contents

1

Foreword

Welcome to State Street’s Regulatory Insights’ newsletter, our quarterly overview of important legislative and regulatory developments in the European Union (EU).

Since our last issue, a few more regulatory milestones have been achieved, as further additional elements of the Markets in Financial Instruments Directive (MiFID) II, such as the double volume cap, are incorporated into

“business as usual”. In addition, the General Data Protection Regulation (GDPR) has become applicable. Although it wasn’t a “big bang” go-live, given the risk-based nature of the regulation’s requirements, it was nonetheless a key milestone in the transition to the new privacy framework. The journey with GDPR, and the challenges it presents, looks set to continue.

As Austria assumed the rotating six-month Presidency of the European Council from Bulgaria for the second half of 2018, what should we expect? It is clear that the spotlight will be on the ongoing discussions on the EU’s response to migration. Negotiations on the EU’s Multi-Annual Financial Framework (MFF) for 2021-2027 and the future of the EU’s institutional framework will also feature strongly in the work programme.

In the area of financial services, the Austrians have identified the Risk Reduction Measures (RRM) package as a priority and hope to achieve significant progress, if not full agreement during their Presidency. Priority is also being given to the European Market Infrastructure Regulation (EMIR) Regulatory Fitness and Performance programme (REFIT) and EMIR II, as well as rules on the non-performing loans package.

Additionally, there will be continued efforts to advance the review of the European Supervisory Authorities (ESAs). However, given the limited progress on the proposal to date, this has not been identified as a priority and it is unlikely that agreement will be reached among Member States before the end of the year.

2 REGULATORY INSIGHTS NO. 16

Other live files such as the Pan-European Personal Pension Product (PEPP) and the proposal on the removal of cross-border barriers to the distribution of funds, will remain on the agenda and will be pursued through the EU’s legislative process.

At the same time, the European Commission has issued a number of new legislative proposals. These include proposals emanating from its Action Plan on Sustainable Investment, as well as asset segregation under the Alternative Investment Fund Managers Directive (AIFMD) and Undertakings for Collective Investment in Transferable Securities (UCITS) Directive, which incorporate the July 2017 European Securities and Market Authority (ESMA) Opinion on asset segregation.

There have also been important developments in regulatory implementing measures, such as the Central Securities Depositories Regulation (CSDR), the Shareholder Rights Directive (SRD) and the Securities Financing Transactions Regulation (SFTR). These provide important detail and additional information for firms working to ensure compliance with the range of new requirements.

Overall, the legislative pipeline is a busy and active one. As we approach the 2019 European elections, we can expect increasing pressure on the co-legislators to finalise the various pending files before the term of this European Parliament and Commission ends.

3

Brexit Last but not least is Brexit! It would be impossible to cover Brexit’s various turns and developments over the last few months in this short introduction. The adoption of the EU Withdrawal Bill – achieved despite the political fighting – is an important milestone. However, negotiations are now at a critical stage and the UK political situation is a constant rollercoaster.

At the time of writing, we have seen the British Prime Minister convening her cabinet at Chequers to set out the Government’s position on the future relationship with the EU. This was followed by a number of high-profile cabinet Brexiteer resignations, in protest as they considered the position to represent a renunciation of the Government’s initial red lines. The position, as then further detailed in the White Paper published on 12 July, suggests that the future UK-EU relationship would be based on an Association Agreement, including a free-trade area for goods, a security partnership and continued membership of several EU agencies.

For financial services, the UK Government will look to agree arrangements based on enhanced/expanded equivalence as opposed to mutual regulatory recognition, which the industry was advocating. This follows the June 2018 European Council, which did not yield the progress or clarity the industry had hoped for.

Focus now moves to the October Council and hopes that a successful Withdrawal Agreement can be achieved. This would include agreement on the question of the Irish border. Until we reach that point, however, it is generally understood that “nothing is agreed until everything is agreed”.

There is no doubt that we are facing an interesting and challenging time. We hope that you continue to find this publication helpful in navigating the regulatory environment and staying on top of the various developments and initiatives.

DR. SVEN KASPER

Senior Vice President Head of Regulatory, Industry and Government Affairs, EMEA State Street


FOREWORD

5

Feature Article

A Path to Multi-Market

Growth


23%

of respondents list regulations as the biggest challenge in launching new

products

64%

of respondents said their appetite to launch cross-border funds is

increasing

Asset managers are expanding geographically to bring new products to market and tap new growth opportunities.

According to the State Street 2017 “A New Climate for Growth” study, 34 percent of asset managers globally cited entering new country markets as a top growth priority.1

Cross-border strategies are rapidly gaining traction, according to the most recent State Street study of asset managers globally.2 Nearly two-thirds of respondents (64 percent) stated that their appetite to launch cross-border funds is increasing over the next five years (of which 28 percent see this increase as significant).

Over the next five years, Luxembourg is expected to further grow its status as the leading domicile for cross-border strategies, according to 62 percent of survey respondents (versus 46 percent who use it today).

Ireland and the Cayman Islands are also expected to gain ground, cited by 55 percent and 31 percent, respectively. All three are among the top five most sought-after locations, with Ireland expected to overtake the United States and United Kingdom – jurisdictions more commonly associated with domiciling funds for domestic distribution.

1 A New Climate for Growth, State Street, 2017. 2 State Street 2018 Fund Strategy Survey. State Street commissioned Oxford Economics to conduct

a global survey of 250 asset managers, during May and June of 2018. Respondents represented organizations that are distributing products outside their home markets or considering doing so. The survey explores how asset managers are approaching the selection of fund vehicles and domiciles to advance their distribution strategies.

7

We see this trend in our day-to-day interactions with clients who are seeking scale and efficiency by choosing domiciles from where they can distribute into multiple markets, much as an International Driving Permit allows operation of a vehicle outside one’s home market country.

The primary challenges faced by asset managers in entering new markets and launching new products, according to our research, are the understanding of local regulations (cited by 23 percent) and building brand awareness (21 percent), resulting in a delayed time to market for fund launch (according to 18 percent of the respondents).

Consequently the established regulatory environment and the distribution reach of a cross-border domicile, cited by 27 percent and 20 percent of managers respectively, explained the accelerated preference for the cross-border domicile.

More than half (54 percent) of respondents2 are currently reshaping their distribution strategy in response to Brexit, and another 19 percent expect to do so over the next five years. About one in five (21 percent) are in the process of hiring staff in a new location.

The research shows that asset managers must stay nimble to thrive in the new market environment. Moreover, as part of a longstanding trend of industry disintermediation, 44 percent of our respondents say their firm’s percentage of direct sales is set to increase.

The pace of change is only accelerating, according to the 57 percent of managers in our study who believe that technology-driven challengers will threaten incumbents’ distribution models.

DAVID SUETENS

Executive Vice President Country Head of State Street in Luxembourg


FEATURE ARTICLE

54%

of respondents are in the process of reshaping their

distribution strategy in response to Brexit

23%

of respondents cite understanding of local

regulations as a challenge to entering

new markets

9

Europe


The European Commission published the long-awaited Regulatory Technical Standards (RTS) on settlement discipline under the CSDR on 25 May. The RTS clarify the buy-in execution for uncleared transactions (the “buy-in” process). This is an issue that has attracted significant attention. The final RTS are broadly aligned with the draft version, which was submitted by ESMA to the European Commission in February 2016.

Key highlights of the RTS include provisions on:

• Monitoring of settlement fails

• Cash penalties

• Systematic delivery failure.

The European Commission has again broadly followed the recommendation made by ESMA on the buy-in process. The RTS confirm that the execution of the buy-in for uncleared transactions is to remain at the trading level. In addition, the RTS clarify that where a buy-in is unsuccessful or fails, the counterparty can choose to receive cash compensation.

The European Council had one month from the publication date to raise any objections. The RTS will enter into force 24 months after publication in the Official Journal.

In addition, ESMA published its updated Q&A on the implementation of CSDR on 30 May.

The revised Q&A document contains one updated question on prudential requirements. ESMA specifically addresses the question of whether the requirement set out in the relevant RTS – for a Central Securities Depository (CSD) to have “access to financial instruments on the same business day when the decision to liquidate the financial instruments is taken” – means that these financial instruments should be liquidated on the same business day. ESMA clarifies that while a CSD should be legally and operationally ready to liquidate financial instruments on the day that such a decision is made, it does not necessarily mean that the CSD should liquidate on the same business day.

CSDR

11

The European Commission published a proposal for a regulation on Sovereign Bond Backed Securities (SBBS) on 24 May in order to support further integration and diversification within Europe’s financial sector and bring more stability and resilience to the markets.

The aim of the European Commission’s proposal is to establish a framework that would enable the private sector to create the SBBS, through the pooling of sovereign bonds and tranching. The senior tranche could then act as a form of “safe asset” (i.e. assets that carry low-risk and ensure sufficient liquidity during adverse market conditions). One objective of the regulation is to reduce the link between euro-area national governments and their domestic banks, through the purchase of sovereign debt – the so-called

“doom loop”. The proposal is expected to promote market resil-ience and contribute to the reduction of risk in the European financial system, complementing other measures in the Banking Union and Capital Markets Union (CMU).

The European Commission has emphasised that the newly-established SBBS would not rely on any public risk sharing or fiscal mutualisation, as the risk – and any subsequent losses – will only be shared among private investors. As such, they are different from Eurobonds.

The proposal builds on the recommendations and the preparatory work undertaken by the European Systemic Risk Board (ESRB) and the high-level task force, established in 2016, to assess the feasibility and merits of an SBBS framework. A key finding of the ESRB task-force was the relatively unfavourable treatment of SBBS vis-à-vis sovereign bonds (i.e. higher capital requirements), which could act as a barrier to creating a SBBS framework.

Sovereign Bond Backed Securities


EUROPE

The European Commission’s proposal will seek to address such barriers. It will include amendments to other pieces of EU legislation, such as the UCITS, Solvency II and Institutions for Occupational Retirement Provisions (IORPs) Directives. These changes will make it easier for entities captured under these pieces of legislation to engage in the SBBS market.

The initial reaction to the European Commission’s proposal has been generally negative, particularly among Member States in the European Council. The concerns raised so far include the potential negative impact on national markets and possible counterproductive effects. More broadly, there is a concern that this could be the first step towards wider fiscal mutualisation.

ESMA published its updated Q&A on the Short Selling Regulation (SSR) on 29 May, specifically for uncovered short sales.

ESMA has provided further clarity on how to meet the requirement to have a locate arrangement, as specified in Article 12(1c) of the regulation and whether referring to an existing

“easy-to-borrow or purchase list” would be sufficient in this regard.

The so-called “locate rule” is set out in the SSR as a pre-condition to entering into a short sale of a share that is admitted to trading on a trading venue and requires the person entering into the trade to establish an arrangement with a third-party.

This third-party must confirm that the share has been “located”, giving reasonable expectation that settlement can take place on the relevant date in the transaction. A similar provision applies in relation to the short sale of EU sovereign debt.

Short Selling Regulation

13

The European Commission published two draft delegated regulations on 29 May, which propose amendments to the current delegated regulations under the AIFMD and UCITS Directive. The purpose of these is to clarify the rules on the safekeeping of client assets by depositaries.

The proposals made by the draft regulations include the following:

• Record-keeping of accounts

• The minimum details that should feature in the contract between a depositary and a third-party on the delegation of custody of assets of the depositary’s UCITS clients

• Asset segregation requirements for the third-parties (custodians) to which the custody of UCITS assets has been entrusted.

It seems clear that the European Commission is trying to ensure alignment with the ESMA Opinion on asset segregation as published in July 2017.

The draft regulations specify that a custodian is permitted to hold the assets of UCITS and Alternative Investment Fund (AIF) clients and other clients of one depositary in the same omnibus account, provided that its own assets, the proprietary assets of the depositary and assets belonging to other clients of the third-party are held in segregated financial instruments accounts.

Stakeholders had the opportunity to provide feedback to the European Commission until the 26 June deadline.

AIFMD/UCITS Directive


EUROPE

ESMA published its Final Report on 29 May, with guidelines on specific elements of the suitability requirements under MiFID II.

The report builds upon the existing ESMA guidelines on suitability under MiFID I, and also considers the feedback received on the ESMA consultation in 2017. ESMA notes that the assessment of suitability is one of the key elements of investor protection under the MiFID framework. The scope of the guidelines is wide and they cover the provision of any type of investment advice – independent or not – and also portfolio management.

The existing guidelines have been strengthened and broadened, as necessary, in order to:

• Consider technological developments in the advisory market, particularly “robo-advice”

• Build on National Competent Authorities’ (NCAs) supervisory experience on the application of current suitability requirements

• Consider behavioural finance, where appropriate

• Provide additional details on the existing guidelines, where required.

ESMA refers explicitly to the recent initiatives undertaken by the European Commission on sustainable finance, particularly the European Commission’s Action Plan. ESMA notes that they will continue to monitor developments in this area and will consider amending the guidelines in light of any further legislative changes.

ESMA has also updated its MiFID II/Markets in Financial Instruments Regulation (MiFIR) Q&As on the topics of transparency and market structures. The Q&A was published on 29 May.

MiFID II

15

The updated questions on trans-parency deal with the following:

• Clarification on when the operator of a Request for Qualification (RFQ) system should provide pre-trade transparency

• Further details on how trading venues, Approved Publication Arrangements (APAs) and Consolidated Tape Providers (CTPs) should make data available free of charge 15 minutes after publication and ensure non-discriminatory access to the information

• Information on how the “publication date and time” field should be populated

• Clarification on how voice trading systems should apply the MiFIR pre-trade transparency requirements.

The Q&A document contains one update on the topic of market structures. This deals with the question of whether an Organise Trading Facility (OTF) can arrange or trade strategies which include an equity leg (i.e. a component of a broader trading strategy that is exposed to equities). ESMA states that an OTF operator is permitted to arrange such a strategy as long as the equity leg is not executed on the OTF (as MiFID II states that only non-equity instruments can be traded on an OTF).


EUROPE

The European Parliament and Council established their negotiating positions on all elements of the RRM package.

The European Commission published a package of reforms on 23 November 2016 to revise existing legislative framework regarding capital, liquidity and resolvability rules for financial institutions.

The aim is to address outstanding issues in the European banking sector and to ensure alignment with relevant international rules. Specifically, the RRM package revises the Capital Requirements Directive (CRD) IV, the Bank Recovery and Resolution Directive (BRRD), and the Single Resolution Mechanism Regulation.

Progress had been slow since the European institutions adopted new legislation on the “fast-tracked” elements of the RRM package – namely, the introduction of the Bank Creditor Hierarchy as well as the phasing-in of International Financial Reporting Standards (IFRS 9) and the associated amendments to the Large Exposures regime. This is because of the politically sensitive nature of some of the remaining proposals.

At a meeting of EU Finance Ministers – Economic and Financial Affairs Council (ECOFIN) – on 25 May, agreement Council to secure its position.

However, a majority of Member States said that it was essentially a

“bottom line” position, meaning they would be resistant to further dilution of the original 2016 RRM package during trialogue negotiations with the Parliament and Commission.

Momentum in the Council gave impetus for adoption of the European Parliament’s position at its Economic and Monetary Affairs’ (ECON) committee on 19 June. The Parliament’s decision to split the RRM package across capital (CRR/D) and resolution (BRRD) files led to a delay in establishing an overall position.

Nevertheless, trialogue negotiations will continue on that basis, with the first kick-off session on the capital elements having taken place on 5 July and the resolution elements on 11 July. EU policymakers have retained their aim to wrap up trialogue negotiations by the end of 2018. Political issues whereby the Council and Parliament positions significantly diverge include amendments to the Minimum Requirements for own funds and Eligible Liabilities (MREL) and moratorium tools, which could threaten the ambitious year-end deadline to agree upon final legislative texts.

Risk Reduction Measures Package

17

The European Commission published the first set of legislative initiatives to re-orient capital towards sustainable investments on 24 May, to support the transition to a “low-carbon, more resource efficient, sustainable economy”.

Following the commitments of governments across the globe to the 2015 Paris climate change and United Nations (UN) sustainable development agreements, the EU regulatory focus has shifted towards sustainability. Policymakers view the financial sector, especially institutional investors and asset managers, as having a crucial role to play in helping to achieve those commitments.

The European Commission established a High-Level Expert Group (HLEG) on sustainable finance in 2016 to identify ways in which the financial sector could support the transition to a sustainable economy and also consulted industry on specific issues. The HLEG produced eight recommendations in January 2018, which the European Commission then developed into a 10-pronged Action Plan, published in March. The European Commission will seek to set up another Technical Expert Group (TEG) to assist with the development of certain actions.

The European Commission released the first set of legislative proposals on actions relating to EU sustainability taxonomy, incorporating Environmental, Social and Governance (ESG) considerations into investor duties, and introducing sustainability benchmarks. The overall objective of this package of proposals is to make it easier and less costly for investors to identify which investments are sustainable, while placing material ESG risks at the heart of the overall investment process.

The proposal on a framework to facilitate a unified classification system, or taxonomy, aims to est-ablish a common language around what constitutes environmentally sustainable economic activity. This is thought to be a first and essential step to re-orient invest-ments towards sustainable activities. Initially, the taxonomy will cover climate change, before being extended to the other “social” and “governance” elements. The TEG will be tasked with developing such taxonomy and will report on their efforts by the end of 2018, with a view to EU adoption of climate change taxonomy by Q3 2019.

Sustainable Finance Package


EUROPE

The second proposal concerns transparency measures relating to sustainable investments and associated risks, which builds upon the EU’s stated intention to integrate ESG into the concept of fiduciary duty. It envisages additional disclosure and reporting obligations around how institutional investors and asset managers consider material ESG risks.

The third proposal seeks to intro-duce sustainability benchmarks, by creating a new category of benchmarks comprising of

“low-carbon” and “positive carbon impact benchmarks” in the existing regulation governing financial benchmarks. This should provide investors with better information on the carbon footprint of their investments. Accordingly, the new categories will be incorporated into the EU Benchmarks Regulation, which has been applicable since 1 January 2018.

These legislative proposals on sustainability taxonomy, dis-closures/investor duties, and low-carbon benchmarks are open for industry feedback until 27 July 2018. In addition, the European Commission has published two sets of pro-posed amendments to existing EU rules governing financial advice, namely the suitability requirement contained in MiFID II and the Insurance Distribution Directive. The consultation on these amendments was open until 21 June 2018, and they are expected to apply from Q3 2018.

19

ESMA published it’s Q&A document clarifying the application of the EU Regulation for Financial Benchmarks to fund prospectuses on 8 June.

The regulation was first introduced in the EU in 2016 as a response to foreign exchange and interest rate benchmark manipulation. It introduces specific rules for administrators, contributors and users of benchmarks in the EU. While there is a two-year transitional period for existing benchmark administrators and contributors, provisions governing benchmark users came into force on 1 January 2018.

Supervised entities using benchmarks must ensure they use benchmarks that have been authorised by ESMA. Fund prospectuses that reference a benchmark must be updated accordingly by the 1 January 2019 compliance deadline.

Authorised benchmarks will be publicly available on an ESMA register. However, the register will not be exhaustive until all administrators have been registered.

A new section has been added to ESMA’s Q&A document. It clarifies that a fund prospectus should explicitly reference the EU benchmark register. ESMA is of the view that prospectuses must be updated ahead of the compliance deadline, although where an administrator has not been registered, a statement to that effect should be included. In addition, once a relevant administrator has been listed on ESMA’s register, fund prospectuses should be updated at the first opportunity.

ESMA Q&A on the Benchmark Regulation


EUROPE

The European Commission launched a review of existing legislation on public corporate reporting on 21 March.

The aim of this review is to assess whether the current EU public reporting framework continues to satisfy intended objectives, or whether amendments are required, particularly in light of new challenges (such as sustainability and digital-isation). Public reporting by companies is currently factored into several pieces of EU legislation and stipulates rules applying to listed and non-listed companies, sector-specific requirements (banks and insurers), as well as additional disclosure requirements for listed companies.

This consultative review builds upon the European Commission’s Action Plan, published in March on financing sustainable growth. It called for a fitness check on the EU framework for public reporting by companies. Responses to this consultation should also be considered in that context.

The consultation poses broad questions on the adequacy of the EU public reporting framework overall. It addresses: disclosures by companies relating to individual and consolidated financial statements, in accordance with national Generally Accepted Accounting Principles (GAAP); the IFRS and other

“sectoral layouts and principles”.

Targeted questions are asked on the EU financial reporting framework applicable to:

• All companies, especially cross-border companies who have to apply different accounting standards (GAAP or IFRS), as these can “weaken comparability of financial statements”

• Listed companies, taking into account the impact of the “voluntary” nature of the third-country adoption of IFRS and the International Accounting Standards, as well as the impact of amendments to the Transparency Directive, which require issuers of securities traded on regulated markets within the EU to maintain a transparent flow of information to the market (e.g. disclosure of major holdings of voting rights held through derivatives)

• Banks and insurers, such as the Bank Accounting Directive or the Insurance Account Directive to improve harmonisation of financial statements.

Public Corporate Reporting

21

The consultation questions the implementation and effectiveness of the country-by-country reporting requirements for the extractive and logging industries, including a possible extension of such reporting requirements to other sectors.

Non-financial disclosure is also a key component of the public reporting framework. The consultation reviews the implementation of the Non-Financial Reporting Directive – which is applicable to large listed undertakings – across EU Member States. It focuses on the appropriateness of its scope and queries if there is sufficient guidance to support companies to disclose non-financial information in a standardised and consistent manner.

The deadline for feedback to the European Commission was 21 July 2018. Following the consultation the European Commission will produce a number of reports on each of these aspects once it has completed its review. Industry feedback will inform a final report that is expected to be published in early 2019. This may also be accompanied by proposed legislative amendments.

ESMA published its updated Q&A on EMIR on 30 May.

The revised Q&A document contains a number of additional and updated questions on Trade Repositories and the EMIR reporting requirements, including:

• The reporting of maturity dates

• The reporting of post-trade events at the position-level

• The population of the relevant table when identifying the underlying for a derivative contract.

EMIR


EUROPE

The European Commission published draft Implementing Technical Standards (ITS) on minimum requirements for the transmission of shareholder information under the SRD on 11 April.

The EU SRD makes it clear that companies have a right to know who their shareholders are and seeks to encourage longer-term shareholder engagement following shortcomings identified in the financial crisis. In particular, it introduces requirements around shareholder identification, the transmission of such information to companies in which they invest, and the facilitation of shareholder voting rights. These requirements apply to “intermediaries”, defined in the SRD as MiFID II investment firms; firms that provide services of safekeeping shares, administration of shares or maintenance of securities accounts; and firms that are designated on behalf of shareholders.

Standardised formats and structures for the transmission of shareholder information were proposed in the draft ITS for use by intermediaries to fulfill their obligations under the SRD. The purpose of these ITS is to promote efficiency and interoperability between intermediaries, as well as to avoid national divergences.

Eight tables, set out in the annex to the draft ITS, specify the minimum information that must be transmitted to companies on: shareholder identity; notification of and participation at general meetings; confirmation of voting receipt (which also includes recording and counting of votes); and corporate action events. In addition, the ITS set out the minimum security requirements applicable to the issuer and intermediaries when transmitting relevant information.

The draft ITS were open for public feedback until 9 May 2018, and have been submitted to the European Parliament and Council for scrutiny. Provided there are no objections, the final ITS are expected to be published by September 2018.

Draft Implementing Measures under the Shareholder Rights Directive

23

The European Council adopted a general agreement on the proposal on the cross-border distribution of funds on 20 June. The legislative proposal, which is part of the CMU, aims to facilitate cross-border distribution and remove existing barriers.

The Bulgarian Presidency had submitted a compromise proposal to Member States in early June under the so-called “silence procedure”, in which no Member State raised objections (or “broke silence”). The compromise text included softer provisions on the definition of pre-marketing. This was one of the few highly contentious issues for industry in the proposal. Following its successful passage through the silence procedure, the agreement was ratified by EU Ambassadors in the Permanent Representatives Committee (Coreper) without discussion.

This agreement will be the starting point for the Austrian presidency in trilogue negotiations with the European Parliament and the European Commission. It is not clear yet when these negotiations will start, given that discussions in the European Parliament have progressed relatively more slowly and the Rapporteur has not yet finalised his report.

Cross-Border Distribution of Funds


EUROPE

The European Council adopted a general agreement on the legislative proposal for a PEPP on 19 June. This agreement gives the Austrian Presidency its mandate to start trilogue negotiations with the European Parliament.

The PEPP proposal, which is another component of the CMU agenda, was introduced to bolster the personal pensions market and, more broadly, to address concerns over the pensions-savings gap in Europe.

The proposal was first put forward by the European Commission in June 2017. The initial reception from industry participants was fairly negative. However, it appears that the European Council has largely addressed the key concerns of industry, particularly around the issue of compartments and portability, the “default option” and disclosure requirements.

In addition, the Council has signif-icantly reduced the role that was initially envisaged for the European Insurance and Occupational Pensions Authority (EIOPA), opting to give more responsibility to national competent authorities.

The focus will now be on the European Parliament, where the Rapporteur, Sophie In’t Veld, is close to presenting her final report, ahead of trilogue negotiations. These negotiations could start in Q3 2018.

PEPP

25

Germany


The Federal Financial Supervisory Authority, “Bundesanstalt für Finanzdienstleistungsaufsicht” (BaFin), published the final version of the amended Minimum Requirements for the Compliance Function and Additional Requirements Governing Rules of Conduct, Organisation and Transparency pursuant to Section 63 et seq. of the German Securities Trading Act “Wertpapierhandelsgesetz” (WpHG) for investment services enterprises, “Mindestanforderungen an die Compliance – Funktion und die weiteren Verhaltens –, Organisations – und Transparenzpflichten nach §§ 63 ff. WpHG für Wertpapierdienstleistungsunternehmen” (MaComp), as Circular 05/2018 (WA) on 19 April.

The amendments result from revisions in MiFID II, which were implemented in the new WpHG, the revised regulation detailing the Rules of Conduct and Organisational Requirements for Investment Services Enterprises (Wertpapierdienstleistungs-Prüfungsverordnung – WpDPV) and the Delegated Regulation (EU) 2017/565 on Organizational Requirements under MiFID II, as well as requirements from ESMA.

Furthermore, new modules are based on ESMA guidelines. These include requirements on:

• Product governance

• Employee skills

• Handling of complaints and respective reporting

• Handling of complex financial instruments and

• Cross-selling.

In addition, the existing modules for the execution of client orders, the monitoring of employee transactions and inducements have been revised.

Minimum Requirements for the Compliance Function and Additional Requirements Governing Rules of Conduct, Organisation and Transparency

27

European Regulatory Timeline

2016 2017 2018 2019

2016 2017 2018 2019

Q2Q1 Q1 Q1 Q1Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4


Publication in Official Journal


Text published in Official Journal

Application date for settlementinternalisation reporting

Level 2 rules on settlement internalisation and CSD requirements

Level 2 rules on prudential requirements for CSDs

Level 2 rules on settlement discipline

Application date (extended)


Level 2 rules on facilitatingvoting rights

Application date Date by which fund prospectuseswill need to be updated

Political agreementon Level 1 text


Application date

Application date

Application dateDelegated Acts and RTS published

Member Statetransposition date

Application date for new funds

Application date for existing funds

Final Level 2 rules on the Key Information Document

Political agreement onLevel 1 text reached

Estimated application date for phase-inof reporting requirements

Application date for rules on reuse

Application date for transparency requirements

Discussion paper on draft Level 2 rules

Application date

Application date (TLAC)


ESMA Final ReportLevel 2 measures published

IORP II

MiFID II/MiFIR

MMFs

PRIIPs

SFTR

Risk Reduction Package(“Fast-Track Elements”)

ShareholdersRights Directive

GDPR

CSDR

Benchmarks

IORP II

MiFID II/MiFIR

MMFs

PRIIPs

SFTR



GDPR

CSDR

Benchmarks

Completed milestones Future milestones Application date

European Regulatory Timeline


2016 2017 2018 2019

2016 2017 2018 2019





Text published in Official Journal

Application date for settlementinternalisation reporting

Level 2 rules on settlement internalisation and CSD requirements

Level 2 rules on prudential requirements for CSDs

Level 2 rules on settlement discipline

Application date (extended)


Level 2 rules on facilitatingvoting rights

Application date Date by which fund prospectuseswill need to be updated



Application date

Application date

Application dateDelegated Acts and RTS published

Member Statetransposition date

Application date for new funds

Application date for existing funds

Final Level 2 rules on the Key Information Document

Political agreement onLevel 1 text reached

Estimated application date for phase-inof reporting requirements

Application date for rules on reuse

Application date for transparency requirements

Discussion paper on draft Level 2 rules

Application date

Application date (TLAC)


ESMA Final ReportLevel 2 measures published

IORP II

MiFID II/MiFIR

MMFs

PRIIPs

SFTR



GDPR

CSDR

Benchmarks

IORP II

MiFID II/MiFIR

MMFs

PRIIPs

SFTR



GDPR

CSDR

Benchmarks

Completed milestones Future milestones Application date

29

BaFin published the final version of the Minimum Requirements for Complaints Management, “Mindestanforderungen an das Beschwerdemanagement”, as Circular 06/2018 (BA and WA) on 4 May.

The circular refers to the “guidelines for complaints-handling for the securities (ESMA) and banking EBA sectors” (JC 2014 43), which were issued by the Joint Committee of the European Supervisory Authorities in 2014. The part of the requirements applicable to investment services enterprises has already been implemented in the new Minimum Requirements for the Compliance Function and Additional Requirements Governing Rules of Conduct, Organisation and Transparency pursuant to Sections 31 et seq. of the Securities Trading Act (Wertpapierhandelsgesetz – WpHG) for Investment Services Enterprises) (MaComp). The new circular applies to Capital Requirements Regulation (CRR) credit institutions, third country branches, payment institutions and investment management companies.

Under the terms of the circular, the following applies:

• Complaints mean every expression of dissatisfaction

• Complaints must be reliably recorded and analysed

• Institutions have to develop principles and procedures for appropriate complaints handling and provide for a complaints’ management function

• An internal complaints register must be kept

• Data on complaints’ handling must be analysed continuously

• Customers shall be informed on complaints procedure; if the answer to a complaint does not fully satisfy the demands of the complainant, the answer must be reasoned and must indicate that there are further possibilities for dispute settlement.

Germany (continued)

Minimum Requirements for Complaints Management


GERMANY

31

Ireland


The Central Bank of Ireland (CBI) published Consultation Paper 119 (CP119) on 29 March, addressing amendments to (and consolidation of) the CBI UCITS Regulations.

CP119 focuses on amendments arising from a general review of the CBI UCITS Regulations and amendments related to other regulatory provisions and guidance. These include:

• Incorporation of provisions from ESMA’s Opinion on Share Classes of UCITS

• Removal of certain provisions being included in the Money Market Fund Regulation (MMFR)

• Performance fees with obligations relating to UCITS which charge performance fees previously con-tained in guidance and inclusion of a restriction on paying a performance fee more frequently than annually

• Existing UCITS that pay perfor-mance fees more frequently than annually will have a transition period to adjust their frequency

• Requirements for management companies to establish, maintain and monitor an email address, on a daily basis for correspondence with the CBI and to keep all its records in a way that makes them immediately retrievable in or from Ireland

• Requirements for a full 12-month set of financial accounts for management companies and depositaries to be submitted within one month of the relevant period end, which replaces the requirement for a set of six-monthly accounts for the second six months of the financial year to be submitted (there is no change to the requirement to submit accounts for the first six months or audited annual financial statements for the full year)

• Amendments to depositary obli-gations and depositary agreement requirements in light of UCITS V

• A requirement to update the CBI within 21 working days of applying a temporary suspension; and to notify the CBI immediately when any temporary suspension is lifted.

It is also proposed to consolidate the previous amendments to the CBI’s UCITS Regulations. The closing date for responses was 29 June.

Consultation on Amendments of the Central Bank of Ireland’s UCITS Regulations – CP119

33

The Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Bill 2018 was published in Ireland on 30 April, together with an explanatory memorandum.

The primary purpose of the Bill is to amend the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 (the Act of 2010) in order to transpose, in part, the Fourth EU Money Laundering Directive (2015/849) into national law, and to give effect to the recommendations of the Financial Action Task Force (FATF). It increases the obligations on a range of entities, such as credit and financial institutions, lawyers, accountants and high-value goods dealers, in relation to money laundering and terrorist financing.

In particular, it imposes requirements on those entities to assess the risks of money laundering and terrorist financing involved in carrying out their businesses, to put policies in place to mitigate that risk and to carry out cus-tomer due diligence measures. It also sets out the functions and powers of the Financial Intelligence Unit of the Garda Síochána (Irish police force).

The Bill is a mixture of amendments to sections of the current Criminal Justice Act 2010 and some new sections. The expected timeframe for transposition is Q4 2018.

Anti-Money Laundering Directive IV – Transposition into Irish Law


IRELAND

Mr. Michael Hodson, Director, Asset Management Supervision at the CBI, spoke at a conference in Dublin on 3 May where he addressed the issue of Brexit, among other things. Below is a summary of the key comments he made on that topic.

The CBI expects firms to adopt a prudent approach and to continue to prepare for all plausible Brexit scenarios, including the possibility that there will be no transition period. Firms also need to be mindful of the “cliff effects” that may occur in the event of a hard Brexit.

From a review of the responses received to the November 2017 CBI letter, the main risks identified include:

• Loss of Market Access, including the potential loss of revenue from UK clients and the loss of access to UK-based outsourcing providers

• Macroeconomic effects such as the impact on exchange rates and market volatility

• GDPR and the potential for the UK to become a non-equivalent third country, making it more difficult for Irish firms to transfer or store data in that location

• Staffing issues relating to staff retention and wage pressure following the authorisation of new firms in the Irish market and the expansion of the operations of existing ones

• Passporting – specifically, the possibility of restriction or prohibition of the marketing and distributing of UK funds into the EU, and vice versa.

The CBI will follow up with firms on an individual basis to get a better understanding of how the risks identified will affect them and to discuss the steps taken by the firms to manage these risks. Mr. Hodson stressed that firms should not rely on solutions coming from the authorities, as these are not known.

Michael Hodson Comments on Brexit Preparedness

35

Mr. Hodson referenced the letter issued in November 2017 by the Securities and Markets Supervision Directorate within the CBI to all fund management companies and self-managed investment funds, drawing their attention to their responsibilities for adequate planning for Brexit. In December 2017, follow up communication was undertaken with a sample of fifty investment funds.

The CBI was disappointed to find that the majority of respondents did not have any firm measures in preparation for Brexit.

Finally, Mr. Hodson acknowledged that there is a need for supervisors to continue to engage with fund management companies and self-managed investment funds in terms of Brexit preparedness.


IRELAND

At an event in Dublin on 19 May, Martin Moloney, Special Advisor, CBI, gave a speech addressing culture in financial services firms. During the speech he also referred to the responses of regulators.

Regulatory focus is increasingly on ensuring the right “culture” within financial services. This has been driven by persistent conduct issues, which have forced regulators to consider whether intrusive regulation, fines and compliance measures are sufficient to compel regulated firms to act in the best interests of consumers.

In Ireland, the CBI is asking firms to focus on culture. As part of its efforts, the CBI has already introduced a framework for the assessment of culture in financial services firms which seeks to determine how those firms identify and manage consumer risk. The CBI remains committed to influencing and shaping international regulatory developments in this area.

Mr. Moloney’s speech also addressed the distinction to be drawn between what is legally permissible and what is good culture, emphasising how an effective, good cultural environment can avoid the need for a heavily regulated environment.

He went on to point out that the CBI is currently conducting a review of the culture in the five main retail banks in Ireland. It is working with

the Dutch Central Bank, which has significant expertise in evidence-based assessment of organisational culture and which is participating in the CBI’s onsite inspections at lending institutions. A report on the findings from this work is expected in July.

Mr. Moloney noted there are a number of steps the CBI can take to influence firms’ culture, including:

• Establishing board-level governance requirements to promote the board’s awareness of ethical and cultural issues

• Providing feedback on inspections

• Requiring an increase in the formality of accountability by leadership.

However, Mr. Moloney stressed that each individual firm is ultimately responsible for its culture. He concluded by saying that,

“The best test for cultural choices is whether you would be proud of your choice if it was widely known”.

Martin Moloney Comments on Transforming Culture in Regulated Financial Services

37

Italy


The Bank of Italy issued a consultation on two secondary measures on 13 April, implementing Directive (EU) 2015/849 (AMLD IV) in Italy.

The two documents are related to Customer Due Diligence (CDD) and Internal Organisation, Procedures and Controls.

Draft CDD RegulationThe main comments set out under the Draft CDD Regulation relate to simplifying and enhancing CDD, as well as non-face-to-face CDD and beneficial owners.

The simplified CDD measures as set out in Legislative Decree 90/2017, with an automatic exemption from CDD, no longer apply. The new measures require the application of all phases of CDD, even if they are applied on a less frequent and less intensive basis. Also, Annex 1 to the Draft CDD Regulation previews a list of low risk money laundering or terrorist financing factors.

Enhanced CDD specific measures are to be applied where there is a high risk of money laundering or terrorist financing, including where Politically Exposed Persons (PEPs) are involved. Annex 2 sets out a list of risk factors to be taken into consideration.

Non-face-to-face CDD measures may be applied for some types of transactions/business relationships, for example through the use of biometric technologies and video-identification procedures.

The criteria set out in the Legislative Decree n. 90/2017 also apply to the identification of beneficial owners of private and public entities or partnerships, which do not have their own legal personality. In such cases, the identity of at least one beneficial owner is required.

Draft Regulation on Internal ProceduresThe main provisions of the Draft Regulation on Internal Procedures cover central contact points internal procedures, risk assessment procedures and the implementation of ESA guidelines.

The Draft Regulation on Internal Procedures confirms the obligation to appoint a central contact point for EU banks and payment service providers established in Italy.

Consultation on Customer Due Diligence and Regulation on Internal Procedures

39

Internal procedures, with specific requirements and obligations will be introduced to cover the duties of the internal bodies; the monitoring of the relevant distribution channels; the identification of the person in charge of suspicious transaction reporting (who would, among other things, also be required to carry out random checks on the assessment made by the first line of defense); and the Anti-Money Laundering (AML) office and other group structures.

Specific procedures must be followed for the assessment of the risk exposure of the intermediary to money laundering and terrorist financing.

The Draft Regulation on Internal Procedures sets out the specific criteria for this assessment.

The ESAs Joint Guidelines and procedures under Article 25 of Regulation (EU) 2015/847 should be applied in the management of a transfer of funds where providers detect missing or incomplete information on the payer or the payee.

Both consultations ended on 12 June.


ITALY

41

Luxembourg


The Law of 17 April 2018 on Benchmarks entered into force on 23 April, while specific provisions of the insurance law came into effect on 1 July.

The Benchmark Law implements the European Benchmark Regulation (BMR) in Luxembourg, which already applies fully since 1 January 2018.

The BMR imposes new requirements for firms, as modified in the Consumer Code. It requires institutions selling loan arrange ments and mortgages to provide the consumer with a separate information sheet disclosing the name of the index used to determine the borrowing rate; the identity of the administrator; and the contingency plans, in case the benchmark refer-enced in the contract is discontinued or its use is restricted in the EU.

The Luxembourg Benchmark Law defines a few measures specific to Luxembourg, appointing the Luxembourg regulator,

“Commission de Surveillance du Secteur Financier” (CSSF) and the Luxembourg Assurance Authority “Commissariat aux Assurances” (CAA) as NCAs to authorise benchmark administrators and supervised entities under their respective sectors of supervision, and ensuring that the different stakeholders respect the requirement set by the BMR.

Law of 17 April on Benchmarks

43

The Law on Key Information Documents (KID) for Packaged Retail and Insurance-Based Investment Products (PRIIPs) came into effect on 19 April.

The Law (formerly draft Law 7199), published in the Official Journal of Luxembourg, implements provisions of Regulation (EU) No. 1286/2014 and amends the law of December 17 2010 on UCITS.

Under this law, the CSSF and the CAA are designated as the competent authorities for the supervision of com-pliance with the PRIIPs Regulation at a national level. As such, they are the controlling and investigating powers.

The law also outlines the adminis-trative sanctions and measures at the disposal of the CSSF and the CAA in case of breaches. This ranges from the suspension of the marketing of PRIIPs to deterrent fines (up to €5,000,000 or 3 percent of revenue for a moral person and up to €700,000 euros for a physical person).

The law also allows the CSSF and the CAA to request that the manufacturer gives prior notification of the KID to its Competent Authority.

Moreover, the law includes an express article allowing venture capital investment companies, “société d’investissement en capital à risque” (SICARs) and undertakings for collective investment that are not UCITS to draw up a KID in compliance with Directive 2009/65/CE. This would exempt them from the provisions of the regulation until 31 December 2019.

Law of 19 April on PRIIPs


LUXEMBOURG

45

United Kingdom


The UK Financial Conduct Authority (FCA) published its policy statement (PS18/8), introducing the first set of remedies to address some of the shortfalls identified in their asset management market study.

The FCA published its first policy statement outlining additional rules and guidance in response to the findings of their asset management market study on 5 April, which, among other things, found evidence of weak price competition in the industry. The proposed remedies will be part of a wider package of reforms to address the shortcomings identified by the FCA. In addition, the policy statement provides the FCA’s response to the feedback from the relevant consultation on their market study.

The aim of the remedies proposed by the FCA is to ensure that firms have a greater focus on acting in the best interests of their customers and to encourage competition in the value they deliver. One of the specific remedies being proposed is that authorised fund managers will be required to make an annual assessment of “value”, as part of their duty to act in the best interests of investors.

Furthermore, to increase individual accountability, there will be a new prescribed responsibility under the Senior Managers and Certification Regime (SM&CR). There is an implementation period of between 12 to 18 months for the majority of final rules.

The FCA’s policy statement was accompanied by a second consultation on further remedies, focused on improving the information that is available to investors. The deadline for the consultation was 5 July 2018.

The FCA launched its asset man-agement market study in 2016 to assess how asset managers delivered value to their investors. The final report, which outlined the FCA’s findings, was published in July 2017.

FCA Policy Statement on the Asset Management Market Study

47

The Prudential Regulation Authority (PRA) published its policy statement containing the final supervisory statement on model risk management principles for stress testing on 30 April.

The policy statement, which is relevant to PRA-authorized banks, building societies and PRA-designated investment firms, includes the PRA’s feedback to the responses that it received to its consultation paper (CP 26/17) on the same topic. The consultation proposed four principles to support effective practices in model risk management for stress testing. These include:

• Establishing the definition of a model and maintaining a model inventory

• Implementing an effective governance framework, with policies, procedures and controls to manage model risk

• Implementing a robust model development and implementation process, and ensuring the appropriate use of models

• Undertaking appropriate model validation and independent review activities to ensure sound model performance and greater understanding of model uncertainties.

Having considered the feedback, the supervisory statement sets out the practises the PRA expects firms to adopt when using stress test models. Firms that will be applying the principles are expected to undertake a self-assessment of their own models against the principles as part of the Internal Capital Adequacy Assessment Process (ICAAP) and to start reporting these from 1 January 2019 onwards, depending on the frequency of the Supervisory Review and Evaluation Process (SREP). The PRA expects the supervisory statement to take effect from 1 June 2018.

PRA Policy Statement on Model Risk Management Principles for Stress Testing


UNITED KINGDOM

The PRA published its policy statement containing updates on Pillar 2 reporting requirements on 30 April.

The policy statement and the final policy, which is relevant to banks, building societies and PRA-designated investment firms, follow on from a public consultation on this topic.

In addition, the policy statement includes an updated supervisory statement, which outlines instructions for completing data items in relation to ICAAP documents. The final rules will take effect from 1 October 2018.

The FCA confirmed its decision to retire two separate pieces of its own guidance on 11 May, following the publication of MiFID II.

The decision to retire the following pieces of guidance with immediate effect involves:

• FG12/15: Retail Distribution Review: independent and restricted advice

• FG14/1: Supervising Retail Investment Advice: inducements and conflicts of interest.

The policy statement (PS18/10) takes into account the feedback received by the FCA to its consultation, while stating that the respective pieces of guidance had largely been

“superseded” by recent policy changes, including the implementation of MiFID II. The FCA notes that firms should already be complying with the new rules for inducements and the description of advice services which came into effect from 3 January 2018.

PRA Policy Statement on Pillar 2 Reporting Requirements

MiFID II

49

The Insurance Distribution (Regulation Activities and Miscellaneous Amendments) Order 2018 (SI 2018/546) was laid before the UK Parliament on 1 May.

The Order implements parts of the amended EU Insurance Distribution Directive (IDD) through proposed amendments to the relevant provisions of the Financial Services and Markets Act 2000 (FSMA) and related regulations. The Order proposes a number of changes, including:

• Changes to the definition of “insurance distribution”

• Amendments to FSMA allowing the FCA to make financial promotion rules

• A requirement for the publication of information in relation to sanctions imposed under the IDD

• A number of amendments on the governance of the passporting rights of UK and European Economic Area (EEA) firms.

The parts of the Order on financial promotion rules (Section 137R of FSMA) came into force on 23 May 2018, while the remaining changes will take effect from 1 October 2018. Other elements of the IDD will be implemented by the FCA through changes to its rules.

Insurance Distribution Directive


UNITED KINGDOM

The FCA and the PRA published their Business Plans for 2018/19 on 9 April, outlining key regulatory priorities.

The priorities set out in these Business Plans seek to reflect significant changes affecting both financial services and the wider economy. According to the UK regulators, firms are being challenged by rapidly evolving consumer needs, in addition to heightened economic and political uncertainty in the future. The plans aim to detail how these challenges will be addressed, although UK supervisory activities will continue to focus on preparing for and implementing changes resulting from the UK’s departure from the European Union.

The FCA has identified a number of cross-sector priority issues. These focus on the areas that pose the greatest vulnerability to financial stability and include: the culture and governance of firms; high-cost credit, building on the significant impact already made in the market; tackling financial crime to deter criminals from operating within the UK financial centre and financial innovations (for example,

“big data”). More broadly, it has identified data security, resilience and outsourcing, since technology plays a core role in delivering financial products and services; the improvement of consumer

protection, particularly in relation to mitigating any unfair treatment of existing customers over new customers; and retirement outcomes, in order to reflect the changing UK population and its financial needs.

The PRA’s priorities outline a set of strategic goals:

• Ensuring robust prudential standards to embed the remainder of the post-crisis regulatory reform

• Ensuring that firms are adequately capitalised and have sufficient liquidity

• The supervision of firms’ operational resilience to prevent market disruption in the provision of designated critical economic functions

• Continued work with firms to put in place plans that allow for resolvability; while also facilitating effective competition by considering proportionality.

Regulatory Priorities for UK Supervisors 2018/9

51

The Bank of England (BoE) issued an updated approach to setting internal Minimum Requirements for own funds and Eligible Liabilities (MREL) for non-resolution entities, with a particular focus on

“internal MREL” on 13 June. This follows a consultation on setting internal MREL for non-resolution entities in October 2017.

The updated policy statement describes the general framework that the BoE will use when setting MREL. This is to ensure that firms are resolved in an orderly manner, in line with resolution objectives, and as specified under a preferred resolution strategy.

While the BoE explains that it intends to retain the approach proposed in the October 2017 consultation, it now proposes withholding requirements around the location and the form of surplus MREL. These will be considered in consultation with other authorities in crisis management groups (CMGs). The statement also provides clarity on what instruments – in terms of the holder of the instrument and the contractual triggers – are eligible to make up internal MREL. The bank will now communicate with institutions on what internal MREL targets they must meet in the second half of 2018.

The PRA’s final expectations on MREL reporting – to competent authorities regarding an institution’s ability to meet MREL targets, including any breaches – follows a consultation in January. These expectations are laid out in the PRA’s supervisory statement, which applies to PRA-authorised UK banks. The PRA has made minor amendments to the proposed statement, simply to take a more proportionate approach in respect of the frequency of reporting and further clarifies supporting templates and guidance. These expectations will prescribe the way in which the PRA supervises firms from 1 January 2019.

A number of elements – such as the Total Loss Absorbing Capacity (TLAC) holdings, MREL disclosure and reporting – are still under negotiation as part of broader revisions to the BRRD which may not be concluded until Q1 next year. The BoE aims to clarify its full expectations by the end of 2018.

MREL


UNITED KINGDOM

The PRA published its policy statement outlining the responses to its consultation on algorithmic trading along with its final supervisory statement on 15 June.

The supervisory statement sets out the PRA’s expectations of a firm’s risk management and governance of algorithmic trading activities. It is relevant for firms engaged in algorithmic trading and subject to relevant PRA and EU rules. It is also relevant for firms with algorithmic trading activities related to unregulated financial instruments, including spot foreign exchange. The supervisory statement came into effect on 30 June 2018.

There were five responses to the PRA consultation on this issue. The PRA noted that the feedback was generally supportive of the approach proposed, with some requests for minor clarifications in a number of areas.

PRA Policy Statement on Algorithmic Trading

53

w

Abbreviations

AIFMD Alternative Investment Fund Managers Directive AIFs Alternative Investment Funds AML/CTF Anti-Money Laundering and Counter Terrorism Financing APA Approved Publication ArrangementBaFin German Financial Supervisory Authority BMR Benchmark RegulationBoE Bank of EnglandBRRD Bank Recovery and Resolution Directive CAA Luxembourg Assurance AuthorityCBI Central Bank of Ireland CDD Customer Due DiligenceCMG Crisis Management Groups CMU Capital Markets Union CP Consultation PaperCRD IV Capital Requirements Directive IVCRR Capital Requirements RegulationCSDR Central Securities Depository Regulation CSDs Central Securities Depositories CSSF Commission de Surveillance du Secteur FinancierCTP Consolidated Tape ProvidersEBA European Banking Authority ECOFIN Economic and Financial Affairs Council EEA European Economic AreaEIOPA European Insurance and Occupational Pensions AuthorityEMIR European Market Infrastructure Regulation EMIR REFIT Regulatory Fitness and Performance ProgrammeESAs European Supervisory Authorities

(comprised of EBA, ESMA and EIOPA)ESG Environmental, Social and GovernanceESMA European Securities and Markets AuthorityESRB European Systemic Risk BoardEU European Union FATF Financial Action Task Force FCA Financial Conduct Authority FSMA Financial Services and Markets ActGAAP Generally Accepted Accounting PrinciplesGDPR General Data Protection RegulationHLEG High-Level Expert GroupICAAP Internal Capital Adequacy Assessment ProcessIDD Insurance Distribution Directive


w

IFRS 9 International Financial Reporting Standard 9 IORPS Institutions for Occupational Retirement Provisions ITS Implementing Technical Standards KID Key Information Document MaComp Minimum Requirements for the Compliance Function and

Additional Requirements Governing Rules of Conduct, Organisation and Transparency pursuant to Sections 31 et seq. of the Securities Trading Act (Wertpapierhandelsgesetz – WpHG) for Investment Services Enterprises) (MaComp)

MFF Multi-Annual Financial FrameworkMiFID Markets in Financial Instruments Directive MiFIR Markets in Financial Instruments Regulation MMFR Money Market Funds RegulationMREL Minimum Requirements for Own Funds and Eligibility LiabilitiesNCAs National Competent Authorities OTF Organise Trading FacilityPEPP Pan-European Personal Pension Product PEPs Politically Exposed PersonsPRA UK Prudential Regulation Authority PRIIPs Packaged Retail and Insurance-based Investment Products RFQ Request for QualificationRRM Risk Reduction Measures RTS Regulatory Technical Standards SBBS Sovereign Bond Backed SecuritiesSFTR Securities Financing Transactions RegulationSICARs Risk Capital Investment Company

(Société d’Investissement en Capital à Risque)SM&CR Senior Managers and Certification RegimeSRD Shareholder Rights DirectiveSREP Supervisory Review and Evaluation Process SSR Short Selling RegulationTEG Technical Expert GroupTLAC Total Loss Absorbing Capacity UCITS Undertakings for Collective Investment in Transferable SecuritiesUN United NationsUK United Kingdom

55


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Europe and the United KingdomSven Kasper +44 20 3395 3723 [email protected]

Rayhan Oddud +44 20 3395 3395 [email protected]

Ciara Horigan +44 20 3395 3457 [email protected]

Channel IslandsRussell Turner +44 1534 609508 [email protected]

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