February Regulatory Update

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ESMA ISSUES OPINIONS ON POSITION LIMITS UNDER MIFID II

The European Securities and Markets Authority (ESMA) published on 7th of February, seven opinions on position limits, regarding commodity derivatives under MiFID II/MiFIR.The opinions agree with the proposed position limits regarding:

  • ICE Endex Dutch TTF Gas contracts;
  • EEX Phelix DE Base Power contracts;
  • EEX Capesize TC5 Freight contracts;
  • EEX Spanish Power Base contracts; and
  • MEFFPOWER Baseload contracts.

In addition, ESMA published two more opinions on the proposed position limits regarding the OMIP SPEL Base contracts. The first opinion relates to the position limits initially notified by Comissão do Mercado de Valores Mobiliários (CMVM ) which ESMA did not find consistent with the objectives established in MiFID II.

 

EBA calls for measures to ensure a more balanced composition of management bodies in institutions

The European Banking Authority (EBA) issued a new benchmarking report on diversity practices in credit institutions and investment firms, analysing the development since its 2015 diversity benchmarking exercise. Based on data as of September 2018, still many institutions, 41.61% out of 834, have not adopted a diversity policy. The representation of women in management bodies is still relatively low and many institutions do not have a gender diverse board. The EBA calls on institutions and Member States to consider additional measures for promoting a more balanced representation of both genders and on competent authorities to ensure institutions’ compliance with the requirement to adopt diversity policies.

The European Banking Authority calls on institutions and Member States to consider additional measures for promoting a more balanced representation of both genders and on competent authorities to ensure institutions’ compliance with the requirement to adopt diversity policies.

 

Dear CEO Letter: approach to customers who have been in persistent debt for 36 months (PD36)

On the 3 February 2020 the FCA published a Dear CEO Letter on their approach to customers who have been in persistent debt for over 36 months (PD36).

The FCA have conducted a review with which they came to areas of concern. This milestone is addressed to credit card borrowers and tells them to check their approach to ensure it is reducing persistent debt while treating their customers fairly.

  • Where a firm is required to contact a customer in persistent debt to set out options for the customer to reduce the debt, those options must be reasonable. The aim of the repayment options is that the debt is repaid in a reasonable period. This is usually between 3 and 4 years. The FCA are also concerned that customers may not respond to the communication, and firms are advised to ask the customer to establish a contact to confirm their situation.
  • Where the repayment options proposed by a firm are not sustainable for the customer, they will be in a better position if they contact the firm as they are entitled to receive forbearance (potentially including the reduction, waiving or cancellation of interest and charges).
  • Firms are reminded by the regulator that they have to provide not-for-profit debt advice bodies contact details and encourage customers to approach them.
  • The FCA reminds that a suspension of a credit card could be a possible consequence only if the client has not responded to the PD36 communication in the specified time frame or if they say the proposed options are affordable but that they will not make increased payments. When a credit card company decides to suspend a credit card, they must inform the concerned party about the same with notice giving justified reason/s.

It is important that firms are operationally ready to deliver their PD36 interventions in line with the regulatory requirements. Operational readiness should include consideration of the people, processes (including all communications) and systems impacts and requirements to deliver competent customer engagements.

 

MiFID II/ MiFIR review report on the transparency regime for equity and equity-like instruments, the double volume cap mechanism and the trading obligations for shares

This consultation paper is primarily of interest to competent authorities and firms that are subject to MiFID II and MiFIR – in particular, investment firms and credit institutions performing investment services and activities.

The CP introduces new requirements for trading venues as well as for Systematic Internalisers (SIs) and investment firms trading OTC. MiFID II/MiFIR will expand their reach to include equity-like and non-equity instruments.

National competent authorities (NCAs) may waive some of the pre-trade transparency obligations for trading venues, the European Commission reserves the right to review and adjust these requirements two years after they have come into force.

Syllabus of this consultation paper are:

  • Pre-trade transparency requirements for equity and equity-like instruments
    Regulated Markets(RMs) and Multilateral Trading Facilities (MTFs) are obliged to continuously publish current bid and offer prices for shares, depositary receipts, ETFs, certificates and other similar financial instruments (“equity and equity-like instruments”). There is a volume cap mechanism introduced on the waivers which aims at reducing the dark trading.
  • Post-trade transparency requirements for equity and equity-like instruments
    Trading venues are obliged to publish the price, volume and time of the transactions executed in respect of equity and equity-like instruments traded on that trading venue as close to real-time as is technically possible.
  • MiFIR introduced the Double Volume Cap (DVC) regime in order to incentivise lit trading, decrease market fragmentation, reduce the cost of trading and avoid negative impact on the price formation process.
  • ESMA proposes an increase of minimum quoting obligations subject to pre-trade transparency, a revised methodology for determining quoting sizes and also to extend the SI (Systemic Internalisers) obligations to illiquid instruments. This suggestion would significantly increase the number of instruments in scope of pre-trade transparency obligations under the SI regime.
  • A question was raised In regards the third-country shares and the trade reporting obligations. There is a concern regarding the possible overlap with the regime applicable in other third countries. This issue became particularly apparent in the context of the decision from the UK to leave the EU. ESMA’s interpretation is that branches of EU investment firms remain subject to the EU trading obligation even for operations and transactions executed outside the EU.

ESMA is therefore asking firms if the share trading obligation in Article 23 of MiFIR should be reduced to exclude third-country shares and if so, what is the best way to identify such shares.

The deadline for comments on the consultation paper is 17 March 2020. ESMA intends to submit its final report of the transparency regime applicable to equity instruments to the European Commission by July 2020.

 

ESMA issued a report on postponing of the entry into force of the Central Securities Depositories Regulation (CSDR) settlement discipline

The European Securities and Markets Authority (ESMA) has published on 4 Feb 2020 a Final Report on draft regulatory technical standards (RTS) on postponing the date of entry into force of the Commission Delegated Regulation (EU) 2018/1229 (RTS on settlement discipline) to 1 February 2021.

The current date for the new regime to enter into force is 13 September 2020. The new regime under the Central Securities Depositories Regulation will introduce new changes that will require significant IT system infrastructure, market testing and adjustments to legal arrangements between the parties concerned. The new regime affects a wide range of market participants and authorities,

ESMA is proposing to delay the entry into force of the RTS on settlement discipline, having taken into account the additional time needed for the establishment of essential features for the functioning of the settlement discipline regime, such as the necessary ISO messages, the joint penalty mechanism of CSDs that use a common settlement infrastructure, and the need for proper testing of the new functionalities. Annex IV to the final report contains the draft Commission Delegated Regulation, which has been submitted for endorsement by the European Commission.

The CSD Regulation (CSDR) settlement discipline regime consists of three main features:

  • rules for the trade allocation and confirmation process,
  • cash penalties on failed transactions, and
  • mandatory buy-ins.

https://www.esma.europa.eu/press-news/esma-news/esma-proposes-amend-technical-standards-in-view-postponing-entry-force-csdr

 

 

ESMA advises the European Commission on Product Intervention

The European Commission asked ESMA to report on its progress with the product intervention, including the practical effects of the product intervention measures in relation to Contracts for Difference (CFDs) and binary options.

ESMA published its first product intervention measures back in March 2018 and justified that these measures have protected retail investors by limiting distribution of speculative products to retail clients. Nearly all NCAs have taken national product intervention measures in relation to the marketing, distribution or sale of binary options and CFDs to retail clients.

As part of its review, and process of renewal, of the temporary measures in relation to binary options and CFDs, ESMA has collected significant information on the impact of its product intervention measures. ESMA also invited market participants, investors and their associations to share any further information on the effects of the measures.

The most important points of the technical advice include:

  • A recommendation to the EC to address the risk of arbitrage between MiFID firms and fund management companies
  • Advice on how to improve convergence and the level playing field across the EU single market, through facilitating the transformation of temporary measures into permanent ones, and alternatively extend ESMA’s powers to allow the introduction of temporary bans for 18 months
  • A request for further clarification of the application of product intervention measures to firms acting on a cross-border basis
  • Measures to facilitate the adoption by an NCA of a measure already adopted by ESMA
  • A request for further clarification of the wording of Article 40(3) of MiFIR

 

 

JMLSG published proposed amendments to its Guidance

The Joint Money Laundering Steering Group (JMLSG) published on the 4 February 2020, proposed amendments to its Guidance. The proposed revisions take account of The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 which came into force on 10th January 2020, and reflect some refinement of the Guidance to improve clarity of other minor issues.

A new section is being introduced in Part II in order to provide sector specific guidance for cryptoasset exchanges and custodian wallet providers. JMLSG will publish the aforementioned shortly.

 

 

EBA updated AML and CTF risk factor guidelines

On 9 July 2018, Directive (EU) 2018/843 entered into force and amended the Directive (EU) 2015/849. This directive introduces a number of changes that warrant a review of the Risk Factor Guidelines to ensure their ongoing accuracy and relevance: this is the case in particular in relation to the provisions on enhanced customer due diligence (EDD) related to high-risk third countries.

To support firms’ AML/CTF compliance efforts and enhance the ability of the EU’s financial sector effectively to deter and detect ML/TF, these guidelines have been updated regarding:

  • business-wide and individual ML/TF risk assessments;
  • customer due diligence measures including on the beneficial owner;
  • terrorist financing risk factors and
  • new guidance on emerging risks, such as the use of innovative solutions for CDD purposes.

The guidelines are divided into two parts:

  • Title I is generic and applies to all firms. It is designed to equip firms with the tools they need to make informed, risk-based decisions when identifying, assessing and managing ML/TF risk associated with individual business relationships or occasional transactions.
  • Title II is sector specific and complements the generic guidelines in Title I. It sets out risk factors that are of particular importance in certain of those sectors and provides guidance on the risk-sensitive application of Customer Due Diligence measures by firms in those sectors. So as to foster greater convergence of supervisory expectations of the measures, firms should take to tackle emerging risks, additional sectoral guidelines have been added to the original Risk Factors Guidelines on crowdfunding platforms, providers of currency exchange services, corporate finance, and payment initiation services providers (PISPs) and account information service providers (AISPs). This is why, Title II now contains thirteen sectoral guidelines about very different key financial sectors such as for instance correspondents banking, retail banking, electronic money, money remittance, life insurance and investments firms.

Together, Title I and Title II promote the development of a common understanding, by firms and competent authorities across the EU, of what the risk-based approach to AML/CTF entails and how it should be applied.

 

 

EBA published Guidelines on the appropriate subsets of exposures in the application of the systemic risk buffer

The European Banking Authority (EBA) published a consultation on 12 February 2020 on draft Guidelines on the appropriate subsets of sectoral exposures to which competent or designated authorities may apply a systemic risk buffer (SyRB) in accordance with the Capital Requirements Directive (CRD). These Guidelines aim at setting a common framework to harmonise the design of the appropriate subsets of sectoral exposures to which a systemic risk buffer may be applied, thus facilitating a common approach throughout the EU. The consultation will run until 12 May 2020.

This consultation paper (CP) is setting pre-defined frame, which competent authorities should use when defining a subset of sectoral exposures in the application of a systemic risk buffer. A pre-condition when defining a subset of sectoral exposures is its systemic relevance according to a qualitative and quantitative assessment conducted by the relevant authority. The CP recommends three criteria to be used in such assessments: size, riskiness and interconnection.

This consultation paper sets out general principles to ensure the right balance between addressing the systemic risk, stemming from the identified subset of sectoral exposures and the unintended consequences when applying a sectoral SyRB to this subset. In particular, relevant authorities should avoid unwarranted interactions with other macroprudential measures and consider reciprocity challenges that could arise when identifying an appropriate subset of sectoral exposures.

Comments to this consultation can be sent to the EBA, the deadline is 12 May 2020. All contributions received will be published following the close of the consultation, unless requested otherwise.

 

 

IOSCO publishes key considerations for regulating crypto-asset trading platforms

On 12 February 2020, the International Organization of Securities Commissions (IOSCO) published a final report on issues, risks and regulatory considerations relating to crypto-asset trading platforms (CTPs).

The key considerations relate to:

  • Access to CTPs
  • Safekeeping of participant assets, including custody arrangements
  • Identification and management of conflicts of interest
  • Transparency of operations
  • Market integrity, including the rules governing trading on the CTP, and how those rules are monitored and enforced
  • Price discovery mechanisms
  • Technology, including resiliency and cyber security

IOSCO states that many of the issues related to the regulation of CTPs are common to traditional securities trading venues but may be heightened by the business models used by CTPs. Additionally, where a regulatory authority has determined a crypto-asset is a security and falls within its remit, the basic principles or objectives of securities regulation should apply.

IOSCO will continue to monitor the evolution of the markets for crypto-assets to ensure the issues, risks and key considerations identified in this report remain relevant and appropriate.

 

 

FCA published a letter on the key risks credit brokers should consider and act on

On 13 February 2020, the FCA published a letter  with which they laid out the key risks credit brokers could pose to their consumers or markets. Credit brokers are now asked to consider the extent of these risks in their business and assess if their strategies reduce the risks.

The FCA explains that it has examined a range of information and data, including firms’ regulatory histories and the type and number of complaints, to assess how credit brokers could cause harm. The FCA set out what it found:

  • many firms did not understand their regulatory requirements;
  • firms have poor oversight of staff and/or appointed representatives’ activities;
  • the increased risk of harm to customers by domestic premises suppliers where the sale of goods or services is made in the home, especially when such customers are vulnerable;
  • misleading or inaccurate financial promotions;
  • firms not explaining the level of service provided, or other factors likely to influence a customer’s decision;
  • where the firm is responsible for providing product information, not providing adequate or relevant information to allow consumers to make informed choices about financial products or taking reasonable steps to ensure recommended products are not unsuitable; and
  • not considering or managing the risks to their business from technology, cyber-attacks and inadequate IT resilience.

The FCA advised it prioritised the supervisory work in the area of accurate regulatory data. It reminds firms that are subject to the rules in SUP 16.10 that they must review and confirm their details annually, within 60 business days of their accounting reference date. Even if a firm’s details have not changed from the previous year, it will still need to log on to Connect and confirm that they are up to date. Firms are recommended to register for the ‘Regulation Round Up’, which is the FCA’s monthly newsletter to all regulated firms. Firms are also advised to understand the customer journey and staff/AR (appointed representatives) oversight, in order to prevent the risk of mis-selling.

The UK left the EU with a Withdrawal Agreement on 31 January 2020 and entered a transition period. The regulator expects companies to take notice of the areas of concerns, they are advised to take steps and prepare for after the transition period, which ends on 31 December 2020. Should firms have questions or are unsure, they could reach out to the regulator for assistance.

 

 

FCA Sector Views

On 18 February 2020 the Financial Conduct Authority published its Sector Views. It gives an overview of how each financial sector is performing. The View also provides annual analysis of the way the financial environment is changing and the impact of these changes on consumers and market effectiveness. This analysis will contribute to the Business Plan 2020/21 and the decisions that have been made, affecting consumers, market integrity and competition.

The sector views on general insurance and protection identifies the following risks:

  • Of particular note are two key insights on Open Banking and fintech, and fintech firms should take steps to ease concerns shared by the FCA.

The country’s watchdog is known for its fintech-friendly and innovative approach, which is reflected in this report.

  • Open Banking and PSD2 regulations are strengthening consumer data security. Many banks and banking institutions are working closely with emerging fintechs to implement Open Banking and PSD2 regulations, which aim to improve consumer data rights and online security as well as boost competition in the industry. Fintech should invest in the Open Banking infrastructure and double the security efforts when connecting with a wealth of consumer data via Open Banking APIs that could increase the cyberattack threats.
  • New rules for Strong Customer Authentication came into effect in September 2019. This is changing change how banks or payment providers authenticate the person requesting access to their account or making a payment, and should reduce fraud. Online banking firms have been given until 14 March 2020, and e-commerce firms until 14 March 2021, to comply with them.
  • The High-Cost Credit Review and subsequent rule changes will deliver benefits to many consumers, particularly through changes to overdraft and buy now pay later pricing and the price cap in the rent-to-own market. These will lead to lower prices for these often vulnerable consumers.
  • A well-functioning insurance sector is vital for the health of the financial services industry. The importance of this sector is demonstrated by high consumer demand. Fair pricing continues to be a major problem in personal lines insurance. FCA are constantly working to improve access for consumers with specific insurance needs, such as travel insurance for customers with pre-existing medical conditions. Other issues detected in the insurance business are: pricing practices in personal lines still penalise loyal customers; add-on prices continue to cause harm to consumers; complex distribution chains and products are contributing to poor value. Culture within insurance firms in the London Market will be under scrutiny, as this is another major point of the report.

 

ICMA published guide to reporting under the SFTR

ICMA’s European Repo and Collateral Council published its guide on 24 February 2020 to reporting repo transactions, under the EU Securities Financing Transactions Regulation (SFTR). The purpose of this guide is to support ICMA members in their SFTR implementation efforts. It offers help to interpret the SFTR regulatory reporting framework, specified by the European Securities and Markets Authority and sets out best practice recommendations to provide additional clarity to the official guidance. It is supplemented by a set of sample reports and an overview of repo life-cycle event reporting, which have been published alongside the guide.

 

 

HM Treasury Advisory Notice: Money Laundering and Terrorist Financing controls in higher risk jurisdictions

The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (MLRs 2019) require the UK regulated sector to apply enhanced customer due diligence in relation to high-risk countries.

The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (MLRs 2019) require the UK regulated sector to apply enhanced customer due diligence in relation to high-risk countries in order to prevent activities related to money laundering and terrorist financing.

On 21 February 2020 FATF published two statements identifying jurisdictions with strategic deficiencies in their AML/CTF regimes.

Annex A of the updated HMT advisory notice identified the following as high risk jurisdictions with significant strategic deficiencies in their AML/CTF regimes: Democratic People’s Republic of Korea and Iran.

Annex B of the HMT advisory notice identified the following jurisdictions that are under increased monitoring which are actively working with the FATF to address strategic deficiencies in their AML/CTF regimes: Albania, Bahamas, Barbados, Botswana, Cambodia, Ghana, Iceland, Jamaica, Mauritius, Mongolia, Myanmar, Nicaragua, Pakistan, Panama, Syria, Uganda, Yemen, Zimbabwe.

 

Jurisdictions No Longer Subject to Increased Monitoring by the FATF

Trinidad and Tobago has made significant progress in improving its AML/CTF regime it is no longer subject to increased monitoring by the FATF.

 

ISDA published EMIR reporting best practices

ISDA published, on 26 February 2020, an EMIR reporting industry best practices, which cover 87 data points across 61 reporting fields, including both over-the-counter and exchange-traded derivatives, and were developed to improve the accuracy and efficiency of trade reporting and to reduce compliance costs.