The following posts provide a snapshot of the principal U.S., European and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructures, asset managers and corporates.
EU Legislation Published to Update Supervisory Reporting Requirements
A Commission Implementing Regulation supplementing the Capital Requirements Regulation has been published in the Official Journal of the European Union. The Implementing Regulation amends the existing Implementing Regulation ((EU) No 680/2014) to reflect the gradual supplementation and amendment of elements of the CRR reporting requirements by the adoption of further Regulatory Technical Standards. The Amending Regulation was adopted by the European Commission on October 9, 2018. It amends the existing Implementing Regulation to set out:
- additional requirements relating to prudent valuation adjustments of fair-valued positions;
- additional requirements to accommodate the reporting on securitization positions subject to the revised securitization framework; and
- minor changes to the reporting requirements on the geographical distribution of exposures.
The Amending Regulation will enter into force on November 29, 2018 and will apply directly across the EU from December 1, 2018.
View Commission Implementing Regulation (EU) 2018/1627.
Technical Standards Under the EU Benchmarks Regulation to Apply From January 2019
A series of ten Commission Delegated Regulations, comprising all of the Regulatory Technical Standards to supplement the EU Benchmarks Regulation, has been published in the Official Journal of the European Union.
The Benchmarks Regulation, which took effect directly across the EU in January 2018, sets out the authorization and registration requirements for benchmark administrators, including third-country entities, and the requirements for governance and control of administrators. It provides for different categories of benchmarks depending on the risks involved, imposes additional requirements on benchmarks considered to be "critical" and gives powers to national regulators to mandate, under certain conditions, contributions to or the administration of critical benchmarks. The RTS outline the behaviors and standards expected of administrators of and contributors to benchmarks. Draft Commission Delegated Regulations setting out the RTS were adopted by the European Commission in July 2018.
All of the Commission Delegated Regulations will enter into force on November 25, 2018 and they will apply directly across the EU from January 25, 2019.
UK Conduct Regulator Evaluates Impact of UK Benchmark Reform Since 2015
The U.K. Financial Conduct Authority has published an evaluation paper on the impact of bringing seven additional benchmarks within the U.K.'s regulatory and supervisory perimeter in April 2015, in response to the recommendations of the Fair and Effective Markets Review. The necessary changes to the FCA's Handbook and guidance were effected by the Benchmarks (Amendment) Instrument 2015, a legal instrument made by the FCA. In the evaluation paper, the FCA clarifies that this benchmarks-related evaluation does not cover changes due to other policies that affect benchmarks, such as the EU Benchmarks Regulation or principles set by EU or international bodies.
The evaluation has been conducted in line with the FCA's approach to ex-post evaluation of the impact of its work, which it outlined in a discussion paper in April 2018. The FCA has conducted the benchmarks-related evaluation to understand: (i) the impact of the Benchmarks (Amendment) Instrument 2015 on markets and firms' costs; and (ii) whether the FCA's regulatory intervention met its objective of increasing the robustness of benchmarks and restoring market confidence.
Draft UK Post-Brexit Legislation Published to Onshore the EU Central Securities Depositories Regulation
HM Treasury has published a draft of the Central Securities Depositories (Amendment) (EU Exit) Regulations 2018, along with explanatory information.
EU Supervisory Authority Reports on ICO and Crypto-Asset Risks and Potential Regulation
The European Securities and Markets Authority has published an own-initiative report prepared by its Securities and Markets Stakeholder Group. The purpose of the report is to provide advice to ESMA on steps it might take to contain the risks of Initial Coin Offerings and crypto-assets, on top of existing regulation.
In the report, the term “crypto-assets” is used to refer to coins, tokens, virtual and cryptocurrencies or other digital or virtual assets collectively. The acronym "ICO" is used to refer to an initial offering of any crypto-asset. The report sets out a taxonomy of crypto-assets, based on the distinction between payment tokens, utility tokens, asset tokens and hybrids used by the Swiss Financial Market Supervisory Authority (FINMA).
UK Regulator Considers Potential Regulatory Refinements for Climate Change
The U.K. Financial Conduct Authority has published a Discussion Paper on climate change and green finance in which it calls for comment on potential changes to its regulatory approach in these areas. The Discussion Paper sets out specific action that the FCA intends to take in the short term in four focus areas - capital markets disclosures, public reporting requirements, green finance and pensions.
First, the FCA is considering whether the regulatory approach to disclosures by issuers in the capital markets should be amended. In particular, the FCA is asking for comments on: (i) the difficulties that issuers may have in determining materiality of climate-related issues such that a specific disclosure would be warranted; (ii) whether investors would benefit from greater comparability of disclosures; (iii) whether further prescribed requirements on climate-related disclosures should be introduced to facilitate more consistent disclosures by issuers. This final point includes whether the introduction of a "comply or explain" approach to the Task Force on Climate-related Disclosures would facilitate more effective markets.
UK Conduct Regulator Consults on Enforcement Powers under the Securitization Regulation
The U.K. Financial Conduct Authority has published a further consultation on implementation of the EU Securitization Regulation. The Securitization Regulation (also known as the STS Regulation) and a related amendment to the Capital Requirements Regulation came into effect on January 17, 2018. The majority of the provisions of the Securitization Regulation and the related amendment to the CRR will apply directly across the EU from January 1, 2019. While the Securitization Regulation is directly applicable, HM Treasury must make certain legislative amendments to align provisions of U.K. law with the Regulation. The FCA must also align its Handbook and launched a first consultation in August 2018 on its proposals for Handbook amendments.
In this further consultation, the FCA is consulting on proposed amendments to its Decision Procedure and Penalties manual (DEPP) and to its Enforcement Guide, to reflect the expected provisions of a Statutory Instrument which is expected to be laid before Parliament by HM Treasury in December 2018.
Financial Stability Board Recommends Vigilant Ongoing Monitoring of Crypto-Assets
The Financial Stability Board has published a report entitled "Crypto-asset markets: Potential Channels for future financial stability," in which it outlines its findings following its assessment of the crypto-asset markets in 2018.
The FSB has considered the primary risks present in crypto-assets markets as low liquidity, volatility, leverage risks, as well as technological and operational risks (including cyber security risks). The FSB considers that crypto-assets lack the key attributes of sovereign currencies and do not serve as a common means of payment, a stable store of value or a mainstream unit of account. Based on the available information, the FSB considers that crypto-assets do not pose a material risk to global financial stability at this time. However, the FSB's report highlights that there could be financial stability implications from these primary risks through a variety of transmission channels including: (i) confidence effects; (ii) financial institutions' exposures to crypto-assets, related financial products and entities that are financially impacted by crypto-assets; (iii) the level of market capitalisation of crypto-assets; and (iv) the extent of their use for payments and settlements.
UK Conduct Regulator Consults on Brexit-Related Changes to Its Rulebook and Binding Technical Standards
The U.K. Financial Conduct Authority has published its first consultation on proposed changes to the FCA Handbook to ensure a functioning legal and regulatory framework for financial services in the event of a "no-deal" scenario whereby the U.K. exits the EU on March 29, 2019 without a ratified Withdrawal Agreement in place and there is consequently no transitional period for firms. The proposed amendments will not take effect if the U.K. enters into a transitional period after exit day.
The consultation includes the FCA's proposals in relation to the Binding Technical Standards it has been empowered by HM Treasury to amend prior to Brexit and to maintain afterward. These are the retained EU "Level 2" delegated and implementing regulations that set out regulatory technical standards and implementing technical standards. The consultation also sets out the FCA's proposed approach to non-legislative "Level 3" materials such as guidelines, recommendations and opinions that will also be onshored.
The FCA states in the consultation that the majority of the proposed changes are consequential in nature and follow the amendments to retained EU law that HM Treasury is proposing, as set out in the series of financial services-related statutory instruments being made under the European Union (Withdrawal) Act 2018.
European Supervisors Announce 2019 Work Priorities
The Joint Committee of the European Supervisory Authorities (that is, the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority) has published its 2019 Work Programme. EIOPA will Chair the Joint Committee in 2019. The Work Programme provides details of the Joint Committee's key workstreams for 2019.
Global Foreign Exchange Committee Update and Survey on Adoption of the FX Global Code
The Global Foreign Exchange Committee has published an update on the ongoing work of its four priority working groups: (i) the cover and deal working group; (ii) the disclosures working group; (iii) the buy-side outreach working group; and (iv) the working group on embedding the FX Global Code. The GFXC was established in 2017 as a forum for participants in the wholesale foreign exchange markets and its terms of reference include addressing misconduct in FX markets by facilitating adoption of the global principles of good practice enshrined in the FX Global Code.
The update refers to the recent launch (on September 28, 2018) of a survey by the working group on embedding the FX Global Code. Completed surveys are requested by October 19, 2018. The aims of the survey are to measure awareness and adoption of the FX Global Code among market participants and to inform the GFXC's further work on embedding and integrating the code into the global FX markets. The survey results will be considered at the GFXC's next meeting, which will be held in November.
View the survey.
View the press release.
European Securities and Markets Authority Publishes Its 2019 Priorities
The European Securities and Markets Authority has published its Annual Work Programme for 2019, dated September 26, 2018. ESMA sets out its focus areas for 2019 and provides details of expected outputs within each of the areas. ESMA also indicates that a number of pieces of EU legislation may be reviewed. These include the Market Abuse Regulation and the clearing obligation under the European Market Infrastructure Regulation, in addition to the reviews that have already been announced.
UK Parliamentary Committee Calls For Urgent Regulation of Crypto-Assets
The U.K. House of Commons Treasury Committee has published a report calling for crypto-assets to be regulated in the U.K. as a matter of urgency. The Treasury Committee considers that the current "ambiguity of the UK Government and regulators' position is clearly not sustainable" and is recommending that an amendment be made to the Regulated Activities Order to bring crypto-assets within the U.K. regulatory perimeter, supervised by the Financial Conduct Authority. The Committee does not specify in the report the activity related to crypto-assets that should go into the RAO, but recommends that it should at least include the issuance of crypto-assets through Initial Coin Offerings and the provision of crypto-exchange services. This will, according to the Committee's report, address anti-money laundering risks and consumer protection, aligning investor protections with those adopted in the U.S.
The Committee is also seeking various actions by the Government and the U.K. regulators.
International Standards Body Encourages Regulatory Clampdown on OTC Leveraged Products
The International Organization of Securities Commissions has published a report on retail OTC leveraged products, alongside a statement warning retail investors of the risks of investing in illegal or fraudulent binary options. This step at international level follows the temporary prohibition of the marketing, distribution or sale of binary options and the restrictions on the marketing, distribution or sale of CFDs to retail clients introduced in the EU earlier this year, which the U.K. Financial Conduct Authority fully supported.
The report covers rolling spot forex contracts, CFDs and binary options offered and sold on a domestic and cross-border basis by intermediaries to retail investors. The report includes three toolkits providing guidance to IOSCO member jurisdictions on methods for mitigating the harm to retail investors investing in these products.
UK Regulators Ask Large Banks and Insurers for LIBOR Transition Plans
The Prudential Regulation Authority and the Financial Conduct Authority have published letters addressed to the CEOs of the largest banks and insurers supervised in the U.K. asking for confirmation of each firm's preparations for transition from LIBOR to risk-free rates. The regulators are requesting these firms to provide the following by December 14, 2018:
- A summary of the firm's assessment of key risks relating to LIBOR discontinuation and details of actions the firm intends to take to mitigate those risks, approved by the board; and
- The names of the Senior Manager(s) responsible for the provision of the firm's response to the letter and for implementing its transition plans.
The letter relates to the ongoing global benchmark reform effort instigated by the Financial Stability Board, in particular, the transition from LIBOR to alternative rates by the end of 2021. Firms that have not received the letter are not subject to the information request, but the regulators ask those firms to nevertheless consider their LIBOR transition plans, where relevant.
View the letters.
New International Guidance Addresses Conflicts of Interest and Conduct Risks in Equity Capital Raisings
The International Organization of Securities Commissions has published a final report setting out Guidance to its members to address the significant potential conflicts of interest arising from the role of intermediaries during key stages of an equity raising. IOSCO consulted on a draft version of the guidance between February and April 2018.
IOSCO has identified a number of key risks. In the early, pre-offering, phase of an equity raising, conflicts of interest can arise if analysts employed by firms managing the securities offering are at risk of being under pressure to present a positive view of the issuer. During the investor education and price-formation phase, there is a risk that these "connected" analysts may produce conflicted research and conflicts can also be present during the allocation of securities. IOSCO considers that there can be both conflicts of interest and risks of misconduct where staff employed within firms that are managing an equity raising enter into personal transactions related to the capital raising. These issues can damage investor confidence and the effectiveness of the capital markets as route for issuers to raise finance.
Bank of England Launches Public Register for the UK Money Markets Code
The Bank of England has announced that its Money Markets Committee has launched a public register to display the statements of commitment from market participants that have agreed to abide by the UK Money Markets Code and would like their statements to be included on the register. The public register is accessible via a dedicated BoE webpage.
The Code is a voluntary industry code launched in April 2017, written by market participants. It sets out best practice expected from participants in the deposit, repo and securities lending markets and incorporates revised relevant sections of the Non-Investment Products Code, and also a revision and update of the Gilt Repo Code and Securities Borrowing and Lending Code.
View the public register.
View the Money Markets Code.
Working Group Recommends Replacement of EONIA With New Euro Short-Term Rate
The European Central Bank has announced its recommendation of the Euro short-term rate - ESTER - as a euro risk-free rate by a private sector working group. The group also recommends that ESTER replaces the Euro overnight index average, EONIA, because EONIA no longer complies with the EU Benchmark Regulation and will be restricted from January 1, 2020. The recommendations of the working group are not legally binding.
According to the ECB, ESTER will also provide a basis for developing fallbacks for contracts referencing the EURIBOR because the reformed ESTER methodology will be assessed for compliance with the Benchmark Regulation in 2019. ESTER reflects wholesale Euro unsecured overnight borrowing costs of Euro area banks and will be produced by ECB by October 2019, at the latest.
EU Delegated Regulation on Settlement Discipline Published
A Commission Delegated Regulation on settlement discipline has been published in the Official Journal of the European Union. The Delegated Regulation sets out Regulatory Technical Standards on settlement discipline as required under the Central Securities Depository Regulation. The RTS cover measures for preventing settlement fails through automated matching, a hold and release mechanism and partial settlement. The RTS also provide measures for monitoring and addressing settlement fails, such as a mechanism for cash penalties and a buy-in process. The RTS will apply directly across the EU from September 14, 2020.
View the RTS.
EU Disagreement on EU Technical Standards for Reporting of Securities Financing Transactions
The European Securities and Markets Authority has published an Opinion on the European Commission's proposed amendments to the final draft Implementing and Regulatory Technical Standards on reporting under the Securities Financing Transactions Regulation. Various parts of the SFTR came into effect on January 12, 2016. However, the new reporting obligation for SFTs is not yet in force. Securities financing transactions involve the use of securities to borrow cash or other higher investment-grade securities, or vice versa. Such transactions can include repurchase transactions, securities lending and sell/buy backs. The SFTR requires, amongst other things, all securities financing transactions to be reported to EU recognized trade repositories, including details on the composition of collateral, whether collateral is available for reuse or has been reused, the substitution of collateral and any haircuts applied. The reporting obligation will apply to financial and non-financial counterparties, subject to exceptions for central banks and similar bodies.
European Banking Authority Proposes Revised Implementing Technical Standards for Reporting of Securitization Information
The European Banking Authority has published a consultation paper setting out proposed amendments to existing Implementing Technical Standards on supervisory reporting, to align the reporting of securitizations with the new EU securitization framework. The new securitization framework took effect in January 2018 and comprises: (i) the Securitization Regulation (also known as the STS Regulation), which lays down common due diligence for institutional investors, risk retention and transparency measures and establishes a category of simple, transparent and standardized securitization in the EU; and (ii) a Regulation making targeted amendments to the Capital Requirements Regulation to provide for the capital treatment of STS securitizations and certain SME synthetic securitizations, including measures to reduce reliance on external credit ratings.
EU Final Draft Technical Standards on Reporting and Disclosure Requirements for Securitizations
The European Securities and Markets Authority has published a final report and technical standards on the disclosure and reporting requirements under the EU Securitization Regulation (or STS Regulation). The Securitization Regulation requires originators and sponsors to notify ESMA of any securitization that meets the "Simple, Transparent and Standardized" criteria. ESMA will maintain a list of all such securitizations on its website. Securitization special purpose entities, originators and sponsors of a securitization will be required to make certain information available via a securitization repository to holders of a securitization position, to the national regulators and, upon request, to potential investors. The Securitization Regulation will apply directly across the EU from January 1, 2019 to securities issued under securitizations on or after January 1, 2019. Securitizations issued before that date may be referred to as STS securitizations provided that they meet certain conditions.
EU Implementing Regulations for Benchmark Regulation Published
Two Commission Implementing Regulations supplementing the Benchmark Regulation have been published in the Official Journal of the European Union. The Benchmark Regulation, which took effect across the EU in January 2018, sets out the authorization and registration requirements for benchmark administrators, including third-country entities, and the requirements for governance and control of administrators. It provides for different categories of benchmarks depending on the risks involved, imposes additional requirements on benchmarks considered to be "critical" and gives powers to national regulators to mandate, under certain conditions, contributions to or the administration of critical benchmarks.
Upcoming Priorities for the Global FX Code
The Global Foreign Exchange Committee has published a paper entitled: "The FX Global Code at One Year: a Look Back and a Look Ahead." The FX Global Code was published by the GFXC in May 2017. It superseded and substantively updated existing guidance for participants in FX markets previously provided by the Non-investment Products (NIPs) Code. The Code comprises a set of global principles of good practice for the FX market, covering a broad range of areas, including ethics, governance, execution, information-sharing, risk management, compliance, trade confirmation and settlement.
The paper discusses the achievements of the GFXC and the way in which the Code has been received by market participants over the past year. These include increased awareness of and commitment to the Code, further integration of the Code into the business practices of FX market participants and evolution of the Code with changes in the FX market, in particular for transparency and disclosure.
The GFXC's upcoming priorities are outlined in the paper. These include:
- continuing the existing GFXC working groups - the disclosures working group and the cover and deal working group; and
- establishing two new GFXC working groups - one on buy-side outreach and the other to further integration of the Code.
View the paper.
UK Conduct Regulator Consults on Rule Alignments for EU Securitization Framework
The U.K. Financial Conduct Authority has launched a consultation on proposed changes to its rules to ensure consistency with the provisions of the directly applicable EU Securitization Regulation (also known as the STS Regulation) and related amendments to the Capital Requirements Regulation, which take effect across the EU on January 1, 2019. This forthcoming EU legislation will introduce a new framework for simple, transparent and standardized securitizations, intended to make the EU securitization market function more effectively.
Global Recommendations for Trading Venues to Manage Extreme Volatility
The International Organization of Securities Commissions has published a report on mechanisms used by trading venues to manage extreme volatility and preserve orderly trading. Following its consultation earlier this year, IOSCO is making eight recommendations for trading venues and their regulators to consider when implementing, operating and monitoring volatility control mechanisms to preserve orderly trading.
Final Draft EU Technical Standards on Securitization Risk Retention Requirements
The European Banking Authority has published a final report and final draft Regulatory Technical Standards under the EU Securitization Regulation (or STS Regulation) on the risk retention requirements for originators, sponsors and original lenders. The Securitization Regulation requires, among other things, originators, sponsors or original lenders of a securitization to retain on an ongoing basis a material net economic interest in the securitization of at least 5 %. The final draft RTS specify in greater detail the risk retention requirement, including the modalities of retaining risk, the measurement of the level of retention, the prohibition of hedging or selling the retained interest and the conditions for retention on a consolidated basis.
The final draft RTS have been submitted to the European Commission for endorsement. The final RTS will apply directly across the EU twenty days after publication in the Official Journal of the European Union.
The Securitization Regulation, which will apply from January 1, 2019, has replaced the risk retention requirements in the Capital Requirements Regulation. Once the final RTS enter into force, the existing Commission Delegated Regulation ((EU) No 625/2014) on risk retention requirements, made under the Capital Requirements Regulation, will be repealed.
View the final draft RTS.
View the existing Delegated Regulation on risk retention requirements.
View details of the EBA's consultation on the draft RTS.
European Banking Authority Makes Policy Recommendations for Proposed Introduction of European Secured Notes
The European Banking Authority has published a final report in response to a call for advice from the European Commission, in the context of the Commission's Capital Markets Union project, to help the Commission assess the case for introducing European Secured Notes, an additional instrument which would be available for institutions to gain funding on the capital markets, particularly infrastructure loans and loans to Small and Medium Sized Enterprises. ESNs are defined in the call for advice as "dual recourse financial instruments on an issuer's balance sheet applying the basic structural characteristics of covered bonds to two non-traditional cover pool assets - SME bank loans and infrastructure bank loans."
The Commission asked the EBA to assess whether a dual recourse instrument, similar to covered bonds, may provide a useful funding option to banks engaged in lending to SMEs and infrastructure projects and to determine an appropriate EU framework and regulatory treatment for this new product.
In the final report, the EBA: (i) assesses the business case for ESNs; (ii) analyzes the potential implications of issuances of ESNs on asset encumbrance; and (iii) considers the risk profile of SME loans and project finance. The EBA makes suggestions on the pool eligibility criteria and the structure and features of ESNs and on their potential regulatory treatment. The EBA makes five main policy recommendations on crucial aspects for the Commission to consider when possibly designing the legislative framework for ESNs. These relate to the structure, cover assets and regulatory treatment of SME ESNs, the EBA's reservations about introducing Infrastructure ESNs and the impact of ESNs on asset encumbrance.
View the final report.
UK Working Group Outlines Risk Mitigation Considerations for Bond Market Participants During Transition From LIBOR
The U.K. Working Group on Sterling Risk-Free Reference Rates has published a paper to raise awareness among market participants of some of the current market uncertainties surrounding issuance of long-dated bonds referencing LIBOR. The Working Group is tasked with helping to bring about broad-based transition to the Sterling Overnight Index Average rate by end-2021 across Sterling bond, loan and derivative markets. SONIA has been selected as the preferred alternative risk-free rate for Sterling and, among other work, the Working Group is in the process of developing market conventions for SONIA-linked bonds. A key milestone for the Working Group will be its publication, later in 2018, of best practice for referencing SONIA in bond markets.
In the paper, the Working Group outlines some of the risks faced by bond market participants who are continuing to issue, offer and purchase new Sterling bonds referencing LIBOR, in particular where those bonds are long-dated. "Long-dated" refers to bonds set to mature beyond the end of 2021, when banks' commitments to submit data for purposes of LIBOR are due to end. The Working Group suggests certain steps market participants could take to mitigate some of the risks arising where LIBOR continues to be referenced in new Sterling bonds issued in the interim period before market conventions and infrastructure for referencing alternatives to LIBOR are fully developed.
View the paper.
Bank of England Consults on Term SONIA Reference Rates
The Bank of England's Working Group on Risk-Free Reference Rates has launched a consultation on term reference rates for the Sterling Overnight Index Average.
The Working Group is tasked with facilitating the transition across sterling bond, loan and derivatives markets from the use of sterling LIBOR to the use of SONIA. The Working Group notes that SONIA is an overnight rate, while LIBOR is commonly referenced in longer tenors of three or six months. Some end-users in loan and debt capital markets have reported that term rates are essential for their business needs.
The consultation focuses on how a term SONIA reference rate (TSRR) can be constructed to facilitate sterling LIBOR transition in markets where term rates better suit users' needs. The Working Group seeks feedback on how the development of TSRRs could be catalyzed. The Working Group notes that the International Swaps and Derivatives Association is simultaneously consulting on preventing derivatives market disruption in the event a key IBOR is discontinued and that the Financial Stability Board has also recently stressed the importance to financial stability of transitioning most derivatives to robust overnight risk-free rates.
Comments on the consultation are invited by September 30, 2018. The Working Group anticipates that a number of steps would be required to produce robust and reliable TSRRs by the second half of 2019.
View the consultation paper.
View details of the ISDA consultation on IBOR fallbacks for OTC derivatives contracts.
View details of the Financial Stability Board's position paper.
Final Draft Technical Standards Under the EU Prospectus Regulation Published
The European Securities and Markets Authority has published a final report setting out Regulatory Technical Standards supplementing the Prospectus Regulation, which will apply fully across the EU from July 21, 2019. ESMA consulted on draft RTS in December 2017. The final draft RTS cover:
- the content and format of key financial information for the summary;
- the data necessary for the classification of prospectuses and the practical arrangements to ensure machine readability of that data;
- situations requiring a supplement to the prospectus to be published;
- requirements on the publication of the prospectus; and
- technical arrangements for the notification portal for passporting prospectuses.
ESMA has submitted the final draft RTS to the European Commission for endorsement.
View ESMA's final report.
Final Draft Technical Standards Under the Securitization Regulation Published
The European Securities and Markets Authority has published final draft technical standards under the Securitization Regulation (also known as the STS Regulation). Among other things, the Securitization Regulation, which will apply directly across the EU from January 1, 2019, provides the criteria for identifying which securitizations will be designated as "simple, transparent and standardized" (STS) securitizations. The Securitisation Regulation requires originators and sponsors to notify ESMA when a securitization meets the STS criteria and ESMA will maintain a list of all such securitizations on its website. The Securitization Regulation allows (but does not require) originators, sponsors and securitization special purpose entities to use third-party firms to assess whether a securitization meets the STS criteria, provided that those firms are authorized by the relevant national regulator.
ESMA is mandated under the Securitization Regulation to develop Regulatory Technical Standards and Implementing Technical Standards on these elements. ESMA consulted on proposed draft Technical Standards in December 2017.
EU Secondary Legislation for Money Market Funds Published
A Commission Delegated Regulation amending and supplementing the European Money Market Funds Regulation has been published in the Official Journal of the European Union. The MMF Regulation, which applies directly across the EU from July 21, 2018, allows MMFs to invest in securitizations or asset-backed commercial paper and incentivizes the investment in simple, transparent and standardized securitizations. The Delegated Regulation amends the MMF Regulation (or MMFR) by applying the requirements for STS securitizations provided for in the Securitization Regulation (also known as the STS Regulation).
The MMF Regulation also allows an MMF to enter into a reverse repurchase agreement provided that certain conditions are met. The assets received by the MMF under that agreement must be money market instruments that meet certain requirements. A derogation from those requirements provides that an MMF may also receive instruments that are either: (i) issued or guaranteed by the EU, a central authority or central bank of a Member State, the European Central Bank, the European Investment Bank, the European Stability Mechanism or the European Financial Stability Facility; or (ii) issued or guaranteed by a central authority or central bank of a third country. The Delegated Regulation supplements the MMF Regulation by providing the quantitative and qualitative liquidity requirements for the assets that an MMF receives under a reverse repurchase agreement where the derogation is being used.
European Commission Adopts Regulatory Technical Standards Under the EU Benchmarks Regulation
The European Commission has adopted a series of Commission Delegated Regulations comprising all of the Regulatory Technical Standards to supplement the EU Benchmarks Regulation. The Benchmark Regulation, which took effect across the EU in January 2018, sets out the authorization and registration requirements for benchmark administrators, including third-country entities, and the requirements for governance and control of administrators. It provides for different categories of benchmarks depending on the risks involved, imposes additional requirements on benchmarks considered to be "critical" and gives powers to national regulators to mandate, under certain conditions, contributions to or the administration of critical benchmarks. The RTS outline the behaviors and standards expected of administrators of and contributors to benchmarks. The RTS adopted by the Commission are based on draft RTS prepared by the European Securities and Markets Authority in March 2017.
The European Parliament and the Council of the European Union will now have three months in which to raise any objections to the Delegated Regulations. The Delegated Regulations will take effect 20 days after their publication in the Official Journal of the European Union.
European Securities and Markets Authority Consults on Minimum Standards for an Exemption from Providing a Prospectus Under the Prospectus Regulation
The European Securities and Markets Authority has published a consultation paper on its draft technical advice to the European Commission on the minimum information content of documents provided for the purpose of describing a takeover, merger or division. ESMA was mandated by the Commission in February 2017 to provide it with technical advice for the circumstance where, under the Prospectus Regulation, issuers can benefit from an exemption to the requirement to supply a prospectus when they offer or admit securities connected with a takeover, merger or division. Issuers may, as an alternative to a prospectus, make available to investors an alternative document, which describes the transaction and its impact on the issuer.
ESMA's technical advice sets out the minimum information content of documents describing a merger, division or takeover which is necessary for an exemption from the obligation to publish a prospectus. ESMA invites comments on a range of questions on the content of the following sections of such "exempted documents": (i) operative provisions and definitions; (ii) Minimum Information Content Simplified Disclosure Regime for the Issuer; (iii) the Minimum Information Content Securities; (iv) the Minimum Information Content Description and Impact of Takeover, Merger and Division.
The consultation on the draft technical advice closes on October 5, 2018. ESMA expects to publish its final report on its technical advice in Q1 2019.
View the consultation.
European Securities and Markets Authority Seeks Feedback on Proposed Risk Factors Guidelines Under the Prospectus Regulation
The European Securities and Markets Authority has published a consultation paper setting out draft guidelines for national regulators on risk factors under the Prospectus Regulation. ESMA has prepared the draft guidelines following a mandate from the European Commission to assist national regulators in their review of the specificity and materiality of risk factors within prospectuses and of the presentation of risk factors across categories depending on their nature.
The draft guidelines cover: (i) specificity; (ii) materiality; (iii) corroboration of the materiality and specificity; (iv) presentation of risk factors across categories; (v) focused/concise risk factors; and (vi) risk factors in the summary.
Comments on the draft guidelines are invited by October 5, 2018.
View the consultation paper.
Financial Stability Board Welcomes ISDA Consultation on Fall Backs Risk-Free Rates for Derivatives
The Financial Stability Board has published a statement welcoming the consultation by the International Swaps and Derivatives Association on fall backs based on overnight risk-free rates for certain derivative contracts. The statement has been issued to provide market participants with the FSB's views ahead of the consultation by ISDA. The FSB's view is that overnight RFRs are more robust than interbank or term rates because they are based on active and liquid underlying markets. Overnight RFRs are considered by the FSB to be a better choice than term rates for markets where participants do not need forward-looking term rates. The FSB stated that for those markets where the IBOR may cease, citing the example of LIBOR, a transition to new reference rates will be crucial. The FSB acknowledges the work to reform some IBORS excluding LIBOR. It is therefore unclear whether the FSB has factored in the recently announced changes to LIBOR methodology in making this assessment and reaching these conclusions.
International Swaps and Derivatives Association Consults on Fall Backs Based on Overnight Risk-Free Rates for Certain Derivatives
The International Swaps and Derivatives Association has launched a consultation in which it proposes to amend its standard documentation to implement fall-backs based on alternative risk-free rates for certain key Interbank Offered Rates - GBP LIBOR, CHF LIBOR, JPY LIBOR, TIBOR, Euroyen TIBOR and BBSW. ISDA states that the back-ups will apply if the relevant IBOR is permanently discontinued, based on defined triggers.
ISDA is seeking feedback on the approach to address certain technical issues arising from the necessary adjustments that will apply to the RFRs if the fall backs are triggered.
ISDA intends to consult on the technical issues for these changes for derivatives referencing USD LIBOR, EUR LIBOR and EURIBOR at a later date. It requests preliminary feedback on the technical issues associated with fall-backs for these benchmarks in this consultation.
Responses to the consultation should be submitted by October 12, 2018. ISDA will determine which approach to adopt based on the feedback and will publish the final approach for review and comment before implementing any changes to the ISDA standard documentation.
The FSB issued a statement on the same day welcoming ISDA's consultation and encouraging market participants to respond to the proposals.
View ISDA's consultation.
View details of the FSB's statement.
UK Legislation Published to Permit Islamic Bonds to be Traded on More Venues
The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2018 has been made and comes into force on July 11, 2018. The Order amends the definition of "Alternative Finance Investment Bonds" in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. The result of the amendment is that AFIBs, such as Sukuk, will be permitted to trade on multilateral trading facilities or organised trading facilities and ensure AFIBs are treated in the same way as conventional bonds for trading purposes.
The amendment removes a glitch creating disparity of treatment between AFIBs and conventional bonds, which had created an obstacle to the use of U.K. venues for the issue and trading of AFIBs. This was contrary to the U.K. Government's standing commitment to provide a level playing field for Islamic finance instruments in regulation and taxation in the U.K.
UK Financial Policy Committee Outlines Steps to Reduce Risks to the UK's Financial Stability
The Bank of England has published a Financial Stability Report, dated June 2018, and a record of the Financial Policy Committee Meeting held on June 19, 2018. The Report sets out the FPC's view of the U.K.'s financial stability, the resilience of the U.K.'s financial system and the risks posed to each of those. Where applicable, the Report also notes the steps that the FPC is taking to address the risks. The record of the meeting provides a summary of issues discussed by the FPC in June.
New UK Standard on Risk Management Transactions for New Issuances for the Fixed Income Markets
The U.K. Fixed Income, Currency and Commodities Markets Standards Board has published a new Standard on Risk Management Transactions for New Issuances for the Fixed Income markets.
The FMSB has created several Standards to improve conduct in the FICC markets since its establishment in 2015 in response to the Fair and Effective Markets Review conducted by HM Treasury, the Bank of England and the Financial Conduct Authority. FMSB members commit to applying the FMSB Standards but the Standards do not impose legal or regulatory obligations.
The new Standard describes expected behaviors to improve the practice and awareness regarding risk management activities conducted in and around the new issuance of bonds and includes 12 Core Principles. Following its consultation at the end of 2017 on the proposed Standard on Risk Management Transactions for New Issuances, the FMSB has made some minor changes, including providing more detail on the nature of the conduct risks and amending the Principle on dissemination of information (Core Principle 9).
UK Regulations Implementing Parts of the Prospectus Regulation Published
The Financial Services and Markets Act 2000 (Prospectus and Markets in Financial Instruments) Regulations 2018, dated June 27, 2018, have been laid before Parliament. The U.K. Regulations will come into force on July 21, 2018, implementing parts of the Prospectus Regulation that will apply from that date. The Prospectus Regulation will replace the existing Prospectus Directive and sets out the requirements for a prospectus to be published when securities are offered to the public or admitted to trading on a regulated market. The Prospectus Regulation aims to simplify the rules and administrative obligations for companies wishing to issue shares or debt on the market and reducing the costs of preparing a prospectus, thus fostering cross-border investments in the single market, while at the same time still enabling investors to make informed investment decisions. The remainder of its provisions take effect on July 21, 2019.
U.K. law is not needed to transpose the Prospectus Regulation, which will be directly applicable across the EU. However, certain U.K. legislation will need to be amended to ensure that there is no conflict of laws. The U.K. Regulations amend the Financial Services and Markets Act by increasing the threshold, from €5 million to €8 million, for which a prospectus is required for an offer of securities to the public within the U.K. The U.K. Regulations also amend the U.K. legislation that implemented the Markets in Financial Instruments Directive, including by correcting the definition of a MiFID investment firm.
View the U.K. Regulations (S.I. 2018/786).
View the explanatory memorandum.
European Money Markets Institute Confirms Certain Changes for Euribor
The European Money Markets Institute has published a feedback summary report on its March 2018 consultation on a hybrid determination methodology for the Euro Interbank Offered Rate (Euribor). EMMI is the administrator for Euribor, a major euro interest reference rate for unsecured interbank short-term lending and borrowing. Euribor was classed as a critical benchmark of systemic importance for financial stability by the European Commission in 2016.
EMMI consulted on: (i) introducing a three-level "hybrid" methodology for calculating Euribor; (ii) producing an overnight tenor for Euribor following the implementation of the hybrid methodology; (iii) discontinuing the calculation of three of the eight tenors; (iv) clarifying Euribor's underlying interest; (v) ceasing the publication of individual Panel Banks' submissions; and (vi) simplifying the publication process.
European Central Bank Consults on Assessing Potential Successors to the EONIA Benchmark
The European Central Bank has published a consultation on behalf of the Working Group on Euro Risk-Free Rates. The ECB provides the secretariat for this Working Group. The Working Group is tasked, among other things, with identifying and recommending alternatives to Euro lending benchmark rates, namely EURIBOR and EONIA.
The administrator of EONIA announced in February 2018 that, due to prolonged structural change in the underlying interbank lending market that uses EONIA as a benchmark, EONIA's compliance with the EU Benchmarks Regulation by January 2020 "cannot be warranted" and that the ongoing review of EONIA would therefore be discontinued. The consultation invites comments on three euro risk-free rates that could potentially replace EONIA. These are:
- The euro short-term rate (ESTER), a new wholesale unsecured overnight bank borrowing rate that the ECB proposes to launch before 2020;
- GC Pooling Deferred, a one-day secured, centrally cleared, general collateral repo rate, which is produced by STOXX, a wholly-owned subsidiary of Deutsche Börse Group; and
- RepoFunds Rate, a one-day secured, centrally cleared, combined general and specific collateral repo rate, which is produced by NEX Data Services Limited, a wholly owned subsidiary of NEX Group plc, soon to be acquired by CME Group.
European Securities and Markets Authority Publishes Annual Report
The European Securities and Markets Authority has published its Annual Report, dated June 15, 2018. The report sets out ESMA's key achievements against its 2017 objectives of promoting supervisory convergence, assessing risks to investors, markets and financial stability, completing a single rulebook for the EU financial markets and directly supervising trade repositories, credit rating agencies and third-country CCPs. The report also discusses ESMA's contributions to the work of the Joint Committee of the European Supervisory Authorities.
The report does not consider the focus areas for ESMA in 2018, which are set out in ESMA's work programes. However, ESMA indicates that in 2018 it will be, among other things: (i) issuing further opinions on pre-transparency waivers under the Markets in Financial Instruments package; (ii) engaging with credit rating agencies and trade repositories on their strategy, governance, operational matters and preparations for Brexit; and (iii) continuing its work to finalize the technical standards and technical advice under the EU Prospectus Regulation.
View ESMA's Annual Report.
European Money Markets Institute Announces Cessation of Three Euribor Tenors
The European Money Markets Institute has announced the planned cessation of three of the current tenors for the Euro Interbank Offered Rate (Euribor). EMMI is the administrator for Euribor, a major euro interest reference rate for unsecured interbank short-term lending and borrowing. Euribor was classed as a critical benchmark of systemic importance for financial stability by the European Commission in 2016.
EMMI published a consultation paper in March 2018 seeking views from stakeholders on a proposed hybrid determination methodology for Euribor that will transition Euribor away from a quote-based to a transaction-based methodology. As part of that consultation, EMMI sought feedback on whether to discontinue the calculation and publication of three of the eight tenors it publishes, due to low levels of activity underpinning the markets those tenors represent. The majority of respondents to the consultation supported the discontinuation of the two week, two month and nine month tenors and consequently EMMI will proceed with its proposal.
US Office of the Comptroller of the Currency and US Federal Deposit Insurance Corporation Issue Final Rule to Shorten Settlement Cycle
The US Office of the Comptroller of the Currency and US Federal Deposit Insurance Corporation issued a final rule shortening the settlement cycle for securities purchased and sold by OCC- and FDIC-supervised financial institutions. This final rule follows the transition from a T+3 settlement cycle to a T+2 settlement cycle that occurred in the securities industry on September 5, 2017. The final rule codifies existing OCC and FDIC guidance published in June and July of 2017, respectively, which notified institutions that they should be in compliance with the T+2 settlement cycle by September 5, 2017. The final rule follows a September 2017 notice of proposed rulemaking published by the OCC and FDIC suggesting two alternatives to the wording of the final rule; one that made specific reference to the T+2 settlement cycle and one that made reference to the “standard settlement cycle followed by registered broker dealers in the United States.” The OCC and FDIC settled on the latter of these two options in order to maintain better alignment with the settlement cycle followed by the securities industry going forward. The final rule takes effect 30 days from the date of its publication in the Federal Register.
View full text of the final rule.
Proposed UK Good Practice on Information Confidentiality for the FICC Markets
The U.K. Fixed Income, Currency and Commodities Markets Standards Board has published for consultation a Transparency Draft of a new Statement of Good Practice on Information and Confidentiality for fixed income and commodities markets. The proposed Statement of Good Practice will apply in the European Fixed Income and Commodities markets. It is not intended to apply to the FX markets to which the FX Global Code applies, or to the precious metals markets, which are covered by the Precious Metals Code. The aim of the proposal is to clarify data sharing in the relevant markets and dealing with confidential information within a firm, including what information should not be shared with parties outside of a firm and what can be revealed when discussing "market color." The proposed Statement of Good Practice consists of nine Statements of Good Practice and an explanation of the rationale for each statement.
The consultation closes on August 31, 2018. The FMSB intends to publish the final Statement of Good Practice shortly thereafter. The Statements of Good Practice are not part of the FMSB Standards and are not binding on FMSB members, but reflect the FMSB's view of what constitutes good or best practice in the areas covered.
View the consultation paper.
European Commission Publishes Proposal for a Regulation on Sovereign Bond-Backed Securities
The European Commission has published a proposal for a Regulation to provide an enabling framework for a market-led development of Sovereign Bond-Backed Securities, following the publication of an inception impact statement in January 2018. The proposal forms part of the Commission's efforts to enhance the Banking Union and Capital Markets Union.
SBBSs are to be defined as instruments created by the private sector, whereby a private sector entity would assemble an underlying portfolio of sovereign bonds from the market and would subsequently transfer them to a legally separate, self-standing entity, specifically established for the sole purpose of issuing to investors a series of securities representing claims on the proceeds from this underlying portfolio. Losses from the portfolio would be borne in a certain sequence by tranches of issued securities.
European Commission Proposes Legislative Package on Sustainable Finance
The European Commission has published a package of legislative reforms on sustainable finance. The aim of the package of reforms, which form part of the Commission's broader Capital Markets Union initiative, is to ensure that environmental, social and governance considerations are consistently integrated into the investment and advisory process across sectors. The proposed measures comprise:
(i) a proposed Regulation on the establishment of a framework to facilitate sustainable investment. This will establish an EU-wide classification system for environmentally sustainable economic activities and ensure that investment strategies are oriented towards economic activities that genuinely contribute to achieving environmental objectives. The proposed Regulation will empower the European Commission to adopt delegated acts to specify technical screening criteria to assess the contribution of a given economic activity to a particular environmental objective as substantial. A list of six environmental objectives is set out in the proposed regulation, namely: climate change mitigation; climate change adaptation; sustainable use and protection of water and marine resources; transition to a circular economy, waste prevention and recycling; pollution prevention and control; and protection of healthy ecosystems (which includes biodiversity conservation).