Euroshore EU Regulatory Update – May 2022

ECB Chair provides update on desks mapping review

On 19 May 2022, the European Central Bank (ECB) published a blog by Andrea Enria, ECB Supervisory Board Chair, on the ECB's desks mapping review. The desks-mapping review - i.e. the review of booking and risk management practices across trading desks active in market-making activities, treasury and derivative valuation adjustments - is part of the ECB's supervisory work aimed at ensuring that third-country subsidiaries have adequate governance and risk management capabilities and do not operate as empty shells.

The blog discusses the results of the first phase of the review, which was launched in spring 2020. This focused on 264 trading desks across seven institutions and affiliated investment firms, and found that the incoming banks do not yet retain full control of their balance sheets, as prescribed in the ECB's 2018 expectations.

For the desks identified as material, the ECB will issue individual binding decisions to the incoming banks. These decisions may require the bank to:

• appoint a head of desk within the euro area legal entity with clearly defined reporting lines and a compensation structure linked to the performance of that entity

• ensure the desk has the adequate infrastructure and number and seniority of traders to manage risk locally

• establish a solid governance and internal control framework of remote booking practices with parent affiliates; and

• ensure limited reliance on intragroup hedging.

EBA consults on standardised information requirements to support sales of NPLs

On 16 May 2022, the EBA published a consultation paper on draft implementing technical standards (ITS) specifying the templates to be used by credit institutions for the provision of information referred to in Article 15(1) of Directive (EU) 2021/2167 on credit servicers and credit purchasers (also known as the Non-Performing Loans (NPL) Directive).

The objective of the draft ITS is to provide a common standard for NPL transactions across the EU enabling cross-country comparison and therefore reducing information asymmetries between the sellers and buyers of NPL.

Comments can be made on the consultation until 31 August 2022. The EBA will hold an online public hearing on the draft ITS on 15 June 2022. The draft ITS will be finalised and submitted to the European Commission by the end of 2022.

European Commission consults on third country benchmarks

On 20 May 2022, the European Commission published a consultation paper to gather views on possible enhancement of the rules for using third-country benchmarks in the EU.

The targeted consultation aims to gather views of stakeholders on a possible enhancement of the rules for the use in the EU of third country benchmarks. The Commission is particularly interested in the views of administrators of benchmarks, both those located in the EU and outside the EU, of supervised entities in the EU using benchmarks and of businesses and investors who are end-users of benchmarks for investment, hedging or other purposes. However other stakeholders are also welcome to participate.

Stakeholders are invited to reply by 12 August 2022 at the latest to the online questionnaire available on this webpage.

On 11 May 2022 ESMA published its overview of planned consultation papers for 2022, which, amongst others, includes planned publication dates for the following:

• MiFID - Sustainability MiFID Product Governance Guidelines - July 2022.

• UCITS - RTS and ITS under the UCITS Directive and the AIFMD on the notification of cross-border marketing and cross-border management of UCITS and AIFs -  Q2 2022

• Benchmarks - RTS on the Clearing Obligation and the Derivative Trading Obligations (DTO) regarding the benchmark transition - Q3 2022

• SFDR - Review of Principal Adverse Impact (PAI)  indicators (SFDR) - Q2/3 2022

• EuVECA/EuSEF - RTS and ITS (under EuVECA/EuSEF Regulation) - Q2/Q3 2022

• MMF - Update of MMF Stress Test methodology - Q3 2022

• Derivates  - Amendment to Guidelines on calculation of positions in derivatives - Q3/4 2022

• DLT - Guidelines on standard forms, formats and templates (under Distributed Ledger Technology (DLT) Pilot Regime) - Q3/4 2022

• Acting in Concert - Review of whitelist - To be confirmed.

On 28 April, the ECB published the attached Opinion (dated 27 April) on, amongst other things, the scope of art 21c of draft revised Capital Requirements Directive (CRD 6) .

Draft CRD 6, along with draft revised Capital Requirements Regulation (CRR 3), forms part of the European Commission's proposals to revise the capital requirements legislative framework. Included within draft CRD 6 is a new Art 21c, the broad intention of which is to provide a common set of rules for branches of third-country banking groups operating in Member States, to replace currently unharmonised national approaches.

Specifically, draft Art 21 imposes requirements on third country firms doing "banking" business in the EU - including:

• to require non-EU firms (i.e. third country firms) to establish a branch or subsidiary in the EU before starting to provide "banking services", except in the case of reverse solicitation

• to prevent the ability of these activities to be carried out by third country branches on a cross-border from one member state into another

There has been push-back from the industry on these proposals and their exact scope to date - including, amongst others, on the scope activities caught as "banking" business, the lack of any reciprocity regimes, the lack of broader exemptions and a lack of transititional periods.

Broadly (page 9 onwards of the opinion) the ECB welcomes the Art 21 proposals. The ECB also proposes amendments to some aspects, including on in-scope booking arrangements, branch asset calculations, information on EU footprints of third country groups, and in-scope services.

The ECB's opinion is an advisory function, issued in response to a request from the European legislative bodies upon publication of its draft CRD6 / CRR3 proposals. The draft CRD6 / CRR3 proposals are currently being considered by the European Parliament and Council of EU to determine their negotiating positions. Thereafter trialogue negotiations will take place to reach political agreement. This process is expected to take up much of 2022.

ESMA updates Q&As on crowdfunding

On 22 May 2022, ESMA published an updated version of its Q&As relating to the Regulation on European crowdfunding service providers for business (ECSPR or Crowdfunding Regulation). The Q&As have been updated in relation to general and investor provisions in the Crowdfunding Regulation.

ESMA publishes final report on possible extension of transitional period under Crowdfunding Regulation

On 19 May 2022, ESMA published a final report providing technical advice to the European Commission on the possible extension of the transitional period under Article 48(3) of the Regulation on European crowdfunding service providers for business (ECSPR or Crowdfunding Regulation).

Under Article 48(1) crowdfunding service providers are allowed to continue, in accordance with the applicable national law, to provide crowdfunding services until 10 November 2022 or until they are authorised under Article 12 of the ECSPR, whichever is sooner. Article 48(3) requires the Commission, after consulting ESMA, to assess whether the transitional period should be extended.

ESMA states that:

• It supports granting an extension of the transitional period.

• It accepts that this would delay the application of harmonised investor protection rules, however, it believes that there are significant risks for the EU crowdfunding market as a whole if no extension is implemented.

• It appears likely that a number of crowdfunding providers will not be authorised pursuant to the ECSPR before 10 November 2022, which means that these providers will need to put their business activities on hold while continuing to bear their fixed operating costs.

• The interruption of existing crowdfunding services may affect investors, including non-sophisticated investors, who invested in crowdfunding projects offered on platforms of crowdfunding service providers benefiting from the transitional period.

• It appears that, as of 22 March 2022, no crowdfunding service provider had been authorised pursuant to the ECSPR, and that only 15 crowdfunding platforms had applied for authorisation out of an estimated 271 platforms currently benefiting from the transitional period.

• The Commission should consider extending the transitional period only for the benefit of crowdfunding service providers currently operating under national law and that have applied for authorisation under the ECSPR before the end of the current transitional period.

• The extension should apply to crowdfunding providers that have applied for authorisation by 1 October 2022.

Due to time constraints, ESMA only conducted targeted non-public consultations with national competent authorities, key stakeholders and key EU consumer associations. The final report will be submitted to the European Commission on 27 May 2022 for consideration.

EBA final report on draft RTS on requirements for crowdfunding service providers under Crowdfunding Regulation

On 13 May 2022, the EBA published its final report (dated 29 April 2022) on draft regulatory technical standards (RTS) under Article 19(7) of the Regulation on European crowdfunding service providers for business ((EU) 2020/1503) (ECSPR or Crowdfunding Regulation) relating to credit scoring and loan pricing disclosure, credit risk assessment, and risk management requirements.

The EBA is mandated under the Crowdfunding Regulation to develop, in co-operation with ESMA, draft RTS on subjects relating primarily to the disclosure of information to investors and to the existence of prudential requirements for crowdfunding service providers (CSPs). 

The draft RTS will be submitted by the EBA to the European Commission for endorsement, after which they will be subject to scrutiny by the European Parliament and the Council of the EU before being published in the Official Journal of the European Union.

The Crowdfunding Regulation contains two mandates for the EBA to produce RTS. The EBA published the final draft RTS required under its other mandate in November 2021.

Open Finance / Data Sharing

On 10 May 2022 European Commission published a targeted consultation paper on an open finance framework and data sharing in the financial sector.

The objective of the targeted consultation is to gather evidence and stakeholder views on various aspects related to the state of play and further development of open finance in the EU and effective customer protection.

The deadline for comments on the consultation is 5 July 2022.

European Parliament approve draft Data Governance Act

On 6 April 2022, the European Parliament approved the draft Data Governance Act. The Data Governance Act (DGA) aims to set the foundation for a data economy in Europe and provide a single data marketplace where data can be shared in a trusted and regulated way.

Read our briefing for more detail.

EU Data Act proposals - recap

On 23 February 2022, the European Commission (EC) published its proposals for a regulation to harmonise rules across the EU regarding fair access to and use of data, referred to as the 'Data Act'. This proposal is part of a growing landscape of legislation that is supposed to implement the concepts highlighted by the EC in its "European data strategy" of 2020. Amongst other things, the draft Data Act sits alongside the Data Governance Act (discussed above).

Read our briefing for a recap of the key points.

Crypto View

For the latest on all things Crypto, see our latest Crypto View.

Digital Download

For insights about the latest, need-to-know Digital Business updates, see our Digital Download.

Agreement reached on proposed Regulation on digital operational resilience (DORA)

On 10 May 2022, the Council of the EU and the European Parliament reached a provisional political agreement on the proposed Regulation on digital operational resilience for the financial sector (DORA) (2020/0266(COD)).

The Council published a press release that highlights key aspects of the agreement. The European Parliament also published its own press release about the agreement.

The next step will be for the Council and European Parliament to approve the provisional agreement before going through the formal adoption procedure. The agreed revised text of the legislative proposal has not yet been published.

On 11 May 2022 the European Commission published a legislative proposal that it has adopted for a Directive concerning financial services contracts concluded at a distance.

The proposed Directive will repeal the Distance Marketing Directive (2002/65/EC) (DMD) and transfer the framework for consumer protections relating to financial services distance contracts to the Consumer Rights Directive (2011/83/EU) (CRD).

The proposed Directive makes a number of targeted modernising amendments to the existing DMD framework, including requiring traders to:

• Provide an email address in pre-contractual information and supply pre-contractual information at least a day before the consumer is bound by any distance contract.

• Allow consumers the possibility to use a withdrawal button where a distance contract is concluded by electronic means.

• Provide adequate explanations to consumers on proposed financial services contracts to enable them to assess whether the contracts are adapted to their needs and financial situation. If a trader uses online tools for this purpose (such as roboadvice or chat boxes), the consumer will have a right to request and obtain human intervention.

The proposed Directive will also extend the application of certain rules in the CRD to financial services distance contracts, including rules on additional payments and on enforcement and penalties.

ESAs ask the Commission for clarity on aspects of the SFDR

On 13 May 2022, the European Supervisory Authorities (ESAs) published a series of ten questions on various aspects of SFDR and the Taxonomy Regulation, which  they have referred to the European Commission (Commission) for interpretation.

Although the SFDR will be fully in effect from 1 January 2023 (when the Level 2 measures come into force) there have been many areas where firms are unsure how to interpret what they are supposed to do (or not do). Some of these issues are covered in these ten questions.

The questions are divided into five groupings:

• principal adverse impact (PAI) disclosures

• financial advisers

• transparency of the integration of sustainability risks and rules for products no longer made available

• good governance practices

• the scope of Article 5-6 of the Taxonomy Regulation

However there are still a number of important questions as to interpretation of the SFDR, which the ESAs have not raised.

Read our briefing for more detail.

SFDR RTS - the Commission asks the ESAs to prepare amendments

On 8 and 11 April 2022, the Commission sent two letters to the ESAs, inviting them to develop amendments to the RTS which supplement the SFDR, before the RTS themselves have yet been finalised - they are currently in the process of being scrutinised by the European Parliament (EP) and by the Council of the EU (the Council). The letters were published by ESMA on 6 May 2022.

In the letters, the ESAs have been asked to amend the RTS around (a) PAI indicators and disclosures, (b) decarbonisation targets and (c) exposure to gas and nuclear activities.

Read our briefing for more detail.

Commission publishes call for evidence on retail investment in capital markets

The European Commission has published a Call for Evidence (CfE) on "Retail investment - a new package of measures to increase consumer participation in capital markets", running from 3 to 31 May 2022.

This is part of an initiative first mooted in the Commission's September 2020 Capital Markets Union Action Plan and designed, among other things, to "increase consumer participation in capital markets." The CfE notes that the level of retail investor participation in EU capital markets remains very low despite high individual savings rates in Europe.

The CfE response period ends on 31 May 2022.

Responses will help inform an impact assessment on the proposed package of measures - this is scheduled to be submitted to the Commission's Regulatory Scrutiny Board in September 2022 and the Commission provisionally plans to adopt legislative or non-legislative initiatives in Q4 2022.

Read our briefing for more detail.

EBA report on convergence of supervisory practices in 2021

On 11 May 2022, the EBA published a report on the convergence of supervisory practices across the EU in 2021.

The report finds that national competent authorities' (NCAs) successfully incorporated the four key topics in the EBA's 2021 convergence plan into their supervisory priorities in 2021 and, overall, implemented them well into their supervisory practices throughout the year.

NCAs most thoroughly implemented the capital and liability management key topic in supervisory practices and the asset quality and credit risk management topic was also a priority for them. The topics of ICT and security risk and operational resilience, as well as profitability and business model, received less supervisory attention.

The EBA identified some areas where further action is needed to achieve further convergence across the EU. Loan origination practices, cyber risk (including in the context of outsourced services) and digital transformation and its impact on the business model, remain points of attention in 2022.

ESMA publishes updated Q&As

On 20 May 2022, ESMA published updated Q&As on the following:

• Application of AIFMD Q&As to add a new Q&A relating to ESMA's guidelines on performance fees in UCITS and certain types of alternative investment funds (AIFs).

• Application of UCITS Directive Q&As to update the Q&A on the performance reference period for the benchmark model and add a new Q&A on the performance reference period for the hurdle rate model.

ECON's rapporteur publishes draft report on proposed Directive amending AIFMD and UCITSD

On 18 May 2022 the rapporteur of the Committee on Economic and Monetary Affairs (ECON) (a committee of the European Parliament) published a draft report containing proposed text amendments to the European Commission's November 2021 proposed Directive amending the AIFMD and UCITS Directive relating to delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services, and loan origination by alternative investment funds.

The report proposes a number of areas of improvement to the proposed Directive on delegation, liquidity management tools, loan origination, depository services and transparency. This represents only the amendments to the Commission's proposal that the ECON committee's rapporteur, Isabel Benjumea Benjumea, would wish to see. Whilst these carry some force, they are by not guaranteed to voted through.

Other members of the Committee have until 27 June to submit their own proposed amendments.

These will be collated and published at the end of August. The ECON committee will subsequently vote on which amendments to adopt, after which those agreed amendments will be submitted to the European Parliament for consideration. Trilogue negotiations with the Council of the EU will then be held.

ESMA consults on cross-border marketing and cross-border management

On 17 May 2022, ESMA issued a consultation paper, "Draft technical standards on the notifications for cross-border marketing and cross-border management of AIFs and UCITS". The aim is to develop harmonised information requirements and common templates to be used by firms when informing NCAs of their cross-border marketing and management activities under the UCITS Directive and the AIFMD.

The consultation closes on 9 September 2022.

ESMA will then finalise draft RTS and ITS and submit these to the European Commission.

Debt funds - regulatory updates

The number of debt funds has increased over the past years. Currently, there is no harmonised regime for debt funds within the EU. The proposed text of AIFMD 2 is about to change this. Watch on demand as our experts from various jurisdictions in the EU and the UK discuss current and proposed regulatory changes.

Hedge fund vista

Our Hedge Fund Vista series of webinars cover key legal, regulatory and industry issues and trends.

Markets View

This month in Markets View, we look at how responses to the Russian invasion of Ukraine have impacted financial markets infrastructure and market participants, ESMA's call for evidence on climate stress testing for central counterparties, and the report on central counterparty financial resources from FSB, CPMI and IOSCO.

ESMA publishes updated CSDR Q&As

On 20 May 2022, ESMA updated its Implementation of CSDR Q&As to add a question relating to the review and evaluation of central securities depositories.

ESMA publishes consultation papers on guidelines under the CCPRRR

On 12 and 19 May 2022, ESMA published 4 Consultation Papers on guidelines under the CCP Recovery and Resolution Regulation (CCPRRR) on:

• The assessment of resolvability

• The types and content of the provisions of co-operation arrangements

• The summary of resolution plans

• Written arrangements and procedures for the functioning of resolution colleges

In respect of each consultation, ESMA will consider the feedback it receives in Q3 2022 and expects to publish the guidelines and final reports by Q4 2022. The deadline for responses to all four consultations is 1 August 2022.

ESMA publishes final report on highly liquid financial instruments

On 19 May 2022,ESMA published a final report on highly liquid financial instruments for the investment policy of central counterparties. This was published under ESMA's mandate to provide a report to the European Commission on whether the list of financial instruments that are considered highly liquid with minimal market and credit risk could be extended and whether that list could include one or more money market funds (MMFs) authorised under the Regulation on money market funds ((EU) 2017/1131) (MMF Regulation). The list is contained in Article 47 of EMIR.

ESMA concludes that further research is needed to determine whether to extend the list of eligible financial instruments to certain public entities and potentially to covered bonds.

It also concludes that it would be premature to allow CCP investments in MMFs, as no category of MMFs currently meets all the conditions that define highly liquid financial instruments. However, it notes that the forthcoming review of the MMF Regulation is expected to assess possible changes to the regulatory framework that might make EU MMF adequate for CCP investments.

ESMA has submitted the report to the Commission and reserves the right to propose potential changes to the relevant regulatory technical standards (RTS) or additional implementing guidance such as Q&As or opinions, if and when necessary.

ESMA publishes reports on CCP Resolution Regime

On 16 May 2022, ESMA published 6 Final Reports on the CCPs resolution regime under the CCP Recovery and Resolution Regulation.

The Final Reports set out proposals for Regulatory Technical Standards (RTSs) on the content of CCP resolution plans; resolution colleges; valuation of CCPs' assets and liabilities in resolution; and safeguards for clients and indirect clients. The Final Reports also cover Guidelines on the circumstances under which a CCP is deemed to be failing or likely to fail as well as on the methodology to value each contract prior to termination.

ESMA submitted the Final Reports on RTSs to the European Commission which now has three months to decide whether to endorse the proposed standards under a Delegated Regulation.

MIFID3 View

Read our MiFID3 View for highlights of the latest developments in relation to MiFID2 reforms

ESMA publishes updated Q&As

On 20 May 2022, ESMA published updated MiFID2/MiFIR Transparency Q&As to deal with the following:

• How should Field 24 in Table 2 of Annex IV of RTS 2, the "Reference rate", be populated when the reference rate is not included in the {INDEX} list?

• Which characteristics should prevail in the classification of a bond: its "structure" or its "issuer"? The Q&A's sets out a decision tree hierarchy to be followed for the classification of bonds.

European Commission consults on PSD2 and open finance

On 10 May 2022 the European Commission published a public consultation paper to gather evidence for the review of the revised Payment Services Directive ((EU) 2015/2366) (PSD2) and to inform its work on open finance.

Responses will provide important guidance to the Commission in its report on the application and impact of PSD2 and may feed into an impact assessment accompanying a legislative proposal for further revising the PSD2, if considered appropriate. The responses will also help guide the Commission's parallel work on the open finance framework, which is part of the data strategy for Europe.

The deadline for comments to the paper is 2 August 2022.  

European Commission publishes targets consultation on PSD2

On 10 May 2022 the European Commission published a targeted consultation paper on the review of the revised Payment Services Directive ((EU) 2015/2366).

The consultation will inform the Commission on the application and impact of PSD2 taking into consideration, among others, developments in the payment market, payment user needs and the need for possible amendments. In particular, the Commission is seeking responses from more professional stakeholders including payment service providers (PSPs) and payment service uses (PSUs), as well as national and EU legislative and regulatory authorities.

The deadline for comments to the paper is 5 July 2022.

ESAs publish expectations on 'What is this product' section of PRIIPs KID

On 9 May 2022, the European Supervisory Authorities (ESAs) jointly published a Supervisory Statement, in which they set out their expectations regarding the 'What is this product?' section of the PRIIPs KID.

Read our briefing for more detail.

ESAs recommend a range of changes to the PRIIPs KID

On 29 April 2022, the Joint Committee of the European Supervisory Authorities (ESAs) submitted technical advice to the European Commission setting out recommended changes to the PRIIPs Regulation.

The advice was given in response to the Commission's Call for Advice on the PRIIPs Regulation. Consideration of adjustments to the PRIIPs regime is one element of the Commission's work in developing its retail investments strategy under the Capital Markets Union Action Plan.

Read our briefing for more detail.

EU Commission launches public consultation on withholding tax claims

The EU Commission has published a Public Consultation on its initiative to introduce a common EU-wide system for withholding tax claims on dividend and interest payments within the EU. The Public Consultation will run until 26 June 2022.

Read our briefing for more detail.

Regulator commentary on expectations on financial services firms during crisis

As the Ukraine / Russia war continues, we look at the key commentary and themes from EU and UK regulators regarding the expectation on financial services firms during this crisis.

ESMA guidance on use of side pockets

On 16 May 2022, ESMA published guidance on the use of side pockets by AIFs and UCITS as a means of dealing with liquidity and valuation issues where the fund has assets with an exposure to Russia, Belarus and/or Ukraine.

The statement is aimed at managers of AIFs, EuVECAs and EuSEFs (though of less immediate relevance to these as their funds tend to be closed ended) and UCITS.

Read our briefing for more details on ESMA's statement.

Ireland publishes approval process for UCITS side pockets

On 16 May 2022 the Central Bank of Ireland set out details of its approval process for UCITS seeking to make use of side pockets in light of the Ukraine/Russia crisis.

This follows from the UK FCA's publication of a consultation paper on 28 April 2022 to consult on the use of side pockets by AFMs of UK UITS and NURS in light of the Ukraine/Russia crisis. The response window closed on 15 May 2022, and the FCA aims to publish a final policy statement and final Handbook rules and guidance as soon as possible.

ESMA publishes statement on implications of Ukraine events on half-yearly reporting

On 13 May 2022, ESMA issued a public statement addressing the preparation of interim financial statements according to IFRS Accounting Standards and the interim management reports for the 2022 half-yearly reporting periods.

It highlights the need for issuers to provide information that is useful to users and adequately reflects the current and, to the extent possible, expected impact of Russia's invasion of Ukraine on the financial position, performance and cash-flows of issuers. ESMA also highlights the importance of providing information on the identification of the principal risks and uncertainties to which issuers are exposed.

Impact on financial market infrastructure

In this month's Market View, amongst other things, we look at how responses to the Russian invasion of Ukraine have impacted financial market infrastructure and market participants 

EU sanctions and Euro-denominated securities

In April 2022 an EU Regulation was published which prohibits the sale of euro denominated transferable securities issued after 12 April 2022 or units in collective investment undertakings which provide exposure to such securities, to any Russian national or natural person residing in Russia, or any legal person, entity or body established in Russia. Nationals and residents of EU Member States are excluded from the scope of the prohibitions.

A separate Regulation imposes the same provisions in respect of Belarus. And in a further Regulation issued on 8 April the restrictions were extended to all official currencies of the Member States, including those issued by Bulgaria, Croatia, the Czech Republic, Denmark, Hungary, Poland, Romania and Sweden.

Read our briefing for further analysis,