UK/EU Investment Management Update (December 2021)

Contents:

1. UK – IFPR
2. UK – FCA Updates
3. UK – MiFID
4. UK – Post-Brexit Regulatory Changes
5. UK – Central Bank Digital Currency (CBDC)
6. UK – Market Abuse
7. UK – Financial Crime
8. UK – PRIIPs Regulation
9. UK – EMIR
10. EU – Capital Markets Union
11. EU – AIFMD II
12. EU – MiFIR
13. EU – ESG
14. EU – EMIR
15. EU – CSDR
16. EU – PRIIPs Regulation and UCITS Directive
17. LIBOR

1. UK – IFPR

FCA publishes IFPR final policy statement

On 26 November 2021, the UK Financial Conduct Authority (FCA) published its final policy statement (PS21/17) on the IFPR, in response to its third and final consultation paper on the IFPR (CP21/26). PS21/17 summarises the feedback the FCA received to CP21/26 and sets out its responses and final rules.

For more information on CP21/26, see our September 2021 Update. The IFPR will come into force on 1 January 2022.

For more information on the FCA’s first and second policy statements on the IFPR, see our July 2021 and August 2021 Updates.

For more information on the FCA’s final rules from its first and second policy statements, see our November 2021 Update.

For an overview of the IFPR, see our 10-Step Plan for Investment Managers.

In PS21/17, the FCA has largely implemented its proposals as consulted on in CP21/26, but has made some minor amendments, including the following:

• Disclosure requirements – The FCA will now require disclosures only on risk management, own funds, own funds requirements, investment policy, governance, and remuneration on an individual entity basis, rather than on an individual and consolidated basis.
• Timing of disclosures – The FCA has added a transitional provision (see TP12) that clarifies the timing of the first set of IFPR disclosures. A firm whose financial year ends on 31 December 2022 will be required to publish its first set of disclosures, covering everything except remuneration based on that date. The FCA considers that a full year under the new regime will be sufficient time for firms to collect the relevant information to comply with all relevant obligations. Firms with a financial year end that falls on or before 30 December will be required only to make disclosures in respect of own funds, own funds requirements, and governance. Such firms will be required to make disclosures only for risk management and investment policy starting from its year-end falling in 2023.
• Disclosure platforms – The FCA has removed the requirement to publish the information on a website.
• Investment policy disclosures – The FCA has clarified that the requirement for large non-SNI firms to disclose holdings that exceed 5% of the voting rights of issuers whose shares are traded on a regulated market, will apply in respect of shares traded on a UK recognised investment exchange only and not to shares traded on regulated markets in any other country. For these purposes exceeding 5% means 5% plus one share. The disclosure applies in respect of direct or indirect holdings, which the FCA has confirmed means shares held on the balance sheet of a firm or another group member, or where the firm may exercise voting rights in a fiduciary capacity.
• Governance disclosures – The FCA has amended the requirements so that firms do not need to disclose (i) directorships held in organisations that do not pursue predominantly commercial objectives and (ii) separate directorships held within the same group or within undertakings (including non financial sector entities) in which the firm holds a qualifying holding.

The FCA hosts IFPR webinars

On 30 November 2021, the FCA hosted two webinars on the IFPR focusing on areas where it has received most queries.

The first webinar addressed technical topics concerning the identification, composition and group capital tests for investment firm groups, as well as other technical provisions such as the conditions for small and non-interconnected (SNI) status, own funds, fixed overheads requirements, K-factor requirements, and disclosures required under the IFPR.

The second webinar covered certain practical matters including the Internal Capital and Risk Assessment (ICARA) process, regulatory reporting, MIFIDPRU applications and notifications, and remuneration requirements.

The webinars are available to watch on-demand from the FCA’s website.

Notification obligation for current BIPRU firms regarding capital instruments by 31 December 2021

BIPRU firms, BIPRU-CPMI firms, and exempt CAD firms that will become MIFIDPRU investment firms under the IFPR are required to notify the FCA by 31 December 2021 that their current Capital Instruments qualify as Common Equity Tier 1, Additional Tier 1, or Tier 2 Instruments (as applicable) using form MIFIDPRU TP7 Annex 1.

Under the transitional rules in MIFIDPRU TP7, such firms are subject only to a notification obligation and not to any approval requirement from the FCA, in respect of treating their capital instruments as eligible for MIFIDPRU “own funds” as defined in MIFIDPRU 3. However, in the future, all MIFIDPRU investment firms, must, when issuing new forms of CET1 Instrument, obtain approval from the FCA or when issuing similar CET1 Instruments to existing instruments notify the FCA. New issues of AT1 or T2 Instruments must be notified to the FCA.

2. UK – FCA Updates

FCA Annual Public Meeting 2021

On 24 November 2021, the FCA published its responses to unanswered questions from its Annual Public Meeting 2021, which was held on 28 September 2021.

Of relevance to investment managers, the FCA addressed questions including in relation to processing delays relating to applications to the FCA, cryptoassets applications, and the provision of investment services by UK firms into the EU post-Brexit.

• Delays to the processing of change in control applications. The FCA accepted that its response times are not “good enough and are committed to improving this.” The FCA indicated that it will, “where possible, prioritise cases where delays have a commercial impact.” The FCA also intends to recruit additional staff to increase its capacity as quickly as possible. However, the FCA noted the importance of applications being submitted with “full and substantive information” so as to avoid exacerbating delays and noted that applications that are submitted via Connect (i.e., rather than email) have access to the “Track My Application” function.
• Application delays more generally, including authorisation applications. The FCA noted that covid has affected its capacity but that the FCA is recruiting more authorisations staff and is looking at making use of greater automation for some elements of the authorisations process. The FCA also noted that “too many of the applications we receive for authorisation and/or registration are poor quality or incomplete” and that firms can help to avoid delays by “ensuring applications contain all the relevant information and are not missing any supporting documents.”
• Anti-money laundering regime for cryptoasset businesses. Under the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (MLRs), cryptoasset exchanges and custodian wallet providers are obliged to register with the FCA for anti-money laundering and counter-terrorist financing purposes.
  
  The FCA confirmed that it had decided 108 of 220 applications. Of these, however, only 20 such businesses are currently shown as approved on the FCA register. The FCA noted that “a significantly high number of businesses are not meeting the required standards under the MLRs resulting in an unprecedented number of businesses withdrawing their applications.”
  
  Investment managers are increasingly trading on cryptoasset exchanges. While such exchanges are often offshore, firms should be aware that any such venues based in the UK are likely to be subject to the FCA’s anti-money laundering registration regime. Investment managers should also note that trading in cryptoasset derivatives (as opposed to the underlying cryptoassets) is a regulated activity under the UK Regulated Activities Order and that firms and any UK venues on which such trades are placed will be subject to authorisation requirements. Firms should therefore ensure that both they, and any venue they trade with, have the appropriate regulatory permissions.
• Post-Brexit Investment Services. In response to a question regarding UK firms providing investment services into the EU post-Brexit, the FCA noted that it has encouraged firms to think about the legal basis of any EU business they conduct, including whether they need additional regulatory permissions under local law, whether a local exemption applies in an individual EU member state, or whether reverse solicitation is permitted without local authorisation.
  
  For UK investment management firms that act as sub-advisors to a non-UK affiliate, one key post-Brexit issue is likely to relate to their ability to provide marketing and investor relations activities in relation to funds managed by their affiliate (i.e., as an intermediary).
  

Changes to FCA decision making procedures

On 26 November 2021, the FCA published its policy statement (PS21/16) on changes to its Enforcement Guide and Decisions Procedure and Penalties Manual to streamline the FCA’s decision‑making and governance processes in relation to the issuance of statutory notices. The FCA has acknowledged the need for changes to be made in light of the criticisms and recommendations set out in the independent reviews into the FCA’s regulation of London Capital & Finance and the Connaught Income Fund Series 1 and connected companies.

Under the changes, more decisions will be taken by the FCA’s senior managers rather than by the Regulatory Decisions Committee (RDC). The new process will ensure that decisions to prevent or stop consumer harm are taken more quickly.

More contentious cases will continue to be reviewed by the RDC, which is a committee of the FCA’s Board that operates separately from the regulator. Its members are drawn from business, consumer, and financial services backgrounds.

Senior managers within the FCA are now able to take decisions on the following:

• a firm’s authorisation or an individual’s approval;
• action in straightforward cases to cancel a firm’s permissions where that action is contested;
• starting civil proceedings, such as seeking an injunction;
• starting criminal proceedings, such as a prosecution for insider dealing;
• using the FCA’s powers to vary or limit a firm’s permissions; and
• using the FCA’s powers to impose requirements on a firm.

The FCA will carry out a six-month post-implementation review to assess the effectiveness of the reforms.

Proposed changes to the UK appointed representatives regime

On 3 December 2021, the FCA published a consultation (CP21/34) outlining proposed changes to the appointed representatives (AR) regime.

On the same day, HM Treasury (HMT) published a call for evidence on how market participants use the AR regime; how effectively the regime works in practice; potential challenges to the safe operation of the regime; and possible future reforms.

In the investment management sector, the AR regime is commonly used (particularly by U.S.-headquartered firms) either as a stepping stone to full authorisation of a UK sub-advisor or to facilitate UK marketing activities by local staff.

However, as the FCA noted, the AR regime was originally created to allow self-employed representatives to engage in regulated activities without having to be authorised; over time, the regime has evolved to include a wider range of business models across sectors and markets, which has led to the emergence of greater risks. HMT specifically notes that regulatory hosting platforms (of the type commonly used by investment management firms) are “perhaps furthest removed from the use of ARs originally envisaged when the AR regime was introduced” and regulatory hosting platforms “may also raise the most substantial challenges to effective operation of the current regulatory approach.”

Supervision of ARs has been a focus of the FCA in recent years (including in a thematic review on the use of ARs in the investment management sector in 2019) and the FCA has expressed concern at inadequate due diligence and oversight by principals that appoint ARs.

Of potential concern to the investment management sector is the fact that the FCA has identified that complaints related to ARs are “more prevalent” against firms operating in wholesale financial markets.

In CP21/34, the FCA seeks views on its proposals to:

• require principals to provide additional and more timely information on their ARs and how these are overseen, and
• clarify and strengthen the responsibilities and expectations of principals.

In its call for evidence, HMT notes that in reviewing the AR regime, the government believes that the “overall policy rationale for permitting and regulating the use of ARs remains appropriate” and that the government wants to preserve the benefits of the AR regime “as long as the challenges and risks of this regulatory approach can be effectively managed.” Nonetheless, the government is considering reforms in the following four key areas (that would require legislative amendments for any of these to be introduced):

• the overall scope of the authorisation exemption for ARs, including the regulated activities which ARs are permitted to carry on;
• the regulatory tools available to the FCA, should it be concluded that the FCA should be empowered to do more to prevent abuse of the AR regime;
• whether more direct regulatory requirements should be placed on ARs in order to strengthen incentives for regulatory compliance and high standards of conduct; and
• the role of the Financial Ombudsman Service in relation to ARs and their principals where consumers have experienced detriment whilst dealing with an AR.

The potential for any substantive changes to the AR regime could have a significant impact on the investment management sector. In particular, for firms that may benefit from an AR arrangement as a stepping stone to an FCA-authorised business (e.g., U.S. or Asian firms appointing their first UK-based staff), restrictions on the regulated activities that can be performed by an AR or an increase to the level of compliance obligations incumbent on an AR could increase such firms’ establishment costs and lengthen timelines to operation in the UK.

Both consultations are open for response until 3 March 2022. The investment management sector will likely need to consider an industry-level response to both papers.

3. UK – MiFID

UK MiFID – Deletion of RTS 28 reporting and changes to SME and FICC research rules

On 30 November 2021, the FCA published the final policy statement (PS21/20) on changes to conduct and organisational requirements under UK MiFID.

As discussed in our July 2021 Update, as part of the UK’s MiFID II “Quick Fix”, the FCA decided to remove the requirement for investment firms to publish the “top five broker” best execution reports under RTS 28 (i.e., the top five investment firms in terms of trading volumes where orders were transmitted or placed for execution in the preceding year and information on the quality of execution obtained). PS21/20 sets out the final rules required to implement these changes from 1 December 2021, meaning that firms will not be required to produce a report for the 2021 period (which would otherwise have applied in April 2022).

PS21/20 also sets out changes to the inducement rules for investment research. From 1 March 2022, asset managers and research firms will be able to disapply the rules regarding inducements that require firms to make identifiable payments for research:

SME issuers with a market capitalisation of less than £200 million (based on average closing price at the end of each month to 31 October for the preceding 24 months). Firms will also be able to accept corporate access in respect of SME issuers without paying for such services without this constituting an inducement;
fixed income, currencies and commodities (FICC) instruments. However, the exemption will not extend to macro-economic research. The FCA notes that to allow the exemption to operate as simply as possible, firms will be able to rely on representations from research providers that they are supplying FICC research;
research provided by independent research providers, where the independent research provider is not engaged in execution services and is not part of a financial services group that includes an investment firm providing execution or brokerage services; and
openly available research. The FCA notes the existing European Securities and Markets Authority (ESMA) Q&A relating to openly available research that provides there should be no barriers to accessing research for it to be regarded as openly available and therefore a minor non-monetary benefit; however, the FCA considers that the creation of a specific exemption will bring necessary regulatory clarification, as there may be circumstances where applicable regulation otherwise requires access to such research to be restricted in some way. The FCA will require firms to be able to demonstrate that they have taken proportionate steps to balance the need for research to be openly available versus any restrictions on access required to comply with applicable regulation.

4. UK – Post-Brexit Regulatory Changes

Update on the Wholesale Markets Review

On 23 November 2021, Economic Secretary to the Treasury John Glen MP made a speech at the UK Finance Annual Dinner, which was subsequently published online.

He provided a brief update on the Wholesale Markets Review in relation to the UK MiFID framework. The government intends to, among other things:

• revoke the share trading obligation and the double volume cap;
• recalibrate the transparency regime for fixed income and derivatives markets to ensure that the right instruments are subject to transparency requirements and to remove unnecessary burdens for firms;
• reduce the scope of the position limits regime for commodity derivatives; and
• transfer the setting of position limit controls from the FCA to trading venues.

The government will publish a full summary of the responses to the consultation early in the new year and will set out the government’s plans to take this work forward.

HMT publishes second consultation on the post-EU Future Regulatory Framework Review

On 9 November 2021, HMT published its second consultation on the UK government’s proposals for adapting the UK regulatory framework for financial services following Brexit.

The consultation notes that the existing regulatory framework is based on the Financial Services and Markets Act 2000 and with the Prudential Regulation Authority (PRA) and FCA as dual regulatory bodies remains the most appropriate way to regulate UK financial services.

The government proposes to introduce new secondary objectives for the PRA and FCA based on UK growth and international competitiveness as well as providing the regulators with greater rule-making powers to create new UK standards as retained EU legislation is gradually repealed. In light of such extended powers, the government proposes that the PRA and FCA will be subject to greater accountability to Parliament.

The consultation closes on 9 February 2022.

5. UK – Central Bank Digital Currency (CBDC)

On 9 November 2021, HMT and the Bank of England (BoE) announced the next steps on the exploration of a UK CBDC. The UK CBDC would be a new form of digital money issued by the BoE for use by households and businesses for their everyday payments needs. It would exist alongside cash and bank deposits rather than replace them.

No decision has been made on whether to introduce a CBDC in the UK, but HMT and the BoE will launch a consultation in 2022 that will set out their assessment of the case for a UK CBDC. The results of the consultation will inform a decision as to whether to move into a “development” phase that would span several years.

HMT and the BoE note that the earliest date for launch of a UK CBDC would be in the second half of the decade.

Economic Secretary to the Treasury, John Glen MP, also published a written ministerial statement on the exploration of a UK CBDC.

6. UK – Market Abuse

FCA Market Watch 68

On 16 November 2021, the FCA published the 68th edition of Market Watch, its newsletter on market conduct and transaction reporting issues.

In Market Watch 68, the FCA highlights concerns relating to the emergence of web-based trading platforms (which are widely used for rates and fixed-income products) as the FCA observes that users of web-based platforms may not be able to monitor all their orders to detect potential market abuse.

Whereas many electronic execution platforms (whether part of the systems of a regulated market, MTF, OTF, or Systematic Internaliser) require formal connection and interface with a user’s trading systems, allowing order and trade messages to be systematically recorded, some platforms’ connectivity is made via web-based user interfaces where direct connection to users’ trading systems is not required, meaning that users do not always systematically record related order messages that precede execution and those orders that do not result in a trade.

Firms should consider the FCA’s comments in light of the trading platforms used by their traders and take steps to ensure that the firm is able to monitor all orders and transactions to detect and report potential market abuse.

7. UK – Financial Crime

FCA imposes £624k fine for lapses in financial crime controls

On 12 November 2021, the FCA fined Sunrise Brokers LLP (Sunrise) £642,400 for deficiencies in its anti-money laundering controls, relating to cum-ex trading, dividend arbitrage and withholding tax reclaim schemes.

The FCA found that Sunrise had deficient systems and controls to identify and mitigate the risk of facilitating fraudulent trading and money laundering in relation to business introduced by the Solo Group between 17 February 2015 and 4 November 2015. The FCA found that the trading throughout the period was characterised by a circular pattern of purported trades – characteristics that are highly suggestive of financial crime.

The FCA noted that while a number of red flags had arisen, they were not identified, either by manual oversight or through an effective transaction monitoring tool. As such, while Sunrise had not ignored or improperly discounted transaction monitoring alerts, Sunrise’s system had not generated alerts for the suspicious trades in the first place.

In May 2021, the FCA fined Sapien Trading £178,000 for similar deficiencies regarding cum ex trading, and the FCA’s investigation into the involvement of UK-based brokers in cum ex dividend arbitrage schemes is continuing.

Although these cases relate to brokers, they highlight the importance of firms having adequate systems and controls to identify and mitigate the risk of the firm being used in the furtherance of financial crime and for systems and controls being appropriately calibrated to generate alerts in connection with suspicious activity.

8. UK – PRIIPs Regulation

Next steps for the UK Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation

On 1 November 2021, the FCA decided to delay the publication of its policy statement in response to the consultation on proposed amendments to the PRIIPs Regulation (published on 20 July 2021) until Q1 2022 to consider the implementation date of the new requirements. The FCA will continue to supervise the current PRIIPs Regulation and will act on a case-by-case basis where it identifies consumer harm.

Where investment managers make their (non-UCITS) funds available to retail investors in the UK (subject to compliance with the UK financial promotion regime or the restrictions relating to unregulated collective investment schemes and non-mainstream pooled investments, as applicable), they will be obliged to prepare a Key Information Document in line with the requirements of the PRIIPs Regulation (as it applies as retained law in the UK following Brexit). The FCA’s consultation had sought to address perceived deficiencies relating to information regarding performance scenarios, summary risk indicators, and elements of the transaction costs methodology. The FCA also sought to provide greater clarity on the scope of the PRIIPs Regulation.

See the Regulatory Initiatives Grid for the latest timings and next steps on the PRIIPs Regulation. For more information on the Regulatory Initiatives Grid, see our November 2021 Update.

9. UK – European Market Infrastructure Regulation (EMIR)

The BoE and FCA publish a consultation on UK EMIR

The BoE and the FCA have published a joint consultation on the changes to reporting requirements, procedures for data quality and registration of trade repositories under UK EMIR. The consultation is open for three months, closing on 17 February 2022.

The consultation paper includes proposals for aligning the UK derivatives reporting framework with international guidance from the Committee on Payments and Market Infrastructures and International Organization of Securities Commissions (CPMI-IOSCO). This will enable authorities to better monitor for systemic and financial stability risk.

The proposals also include measures for mandatory delegated reporting requirements, counterparty notifications, and reconciliations processes, and the use of XML schemas and global identifiers. These proposals aim to provide clarity to counterparties and trade repositories.

The FCA is also proposing new rules for trade repositories on the registration and reconciliation processes, to streamline the process for registration.

The changes would be delivered by amending the relevant onshored EU regulatory technical standards and introducing new UK rules for trade repositories.

10. EU – Capital Markets Union (CMU)

CMU – European Commission adopts package to ensure better data access and revamped investment rules

On 25 November 2021, the European Commission (the Commission) adopted a package of measures to ensure that investors have better access to company and trading data. The proposals deliver on several key commitments in the 2020 CMU action plan. They will help connect EU companies with investors, improve their access to funding, broaden investment opportunities for retail investors, and better integrate capital markets.

The package includes four legislative proposals as well as a communication explaining how the different measures fit together. The four legislative proposals are as follows:

• European Single Access Point;
• Review of the European Long-Term Investment Funds Regulation;
• Review of AIFMD; and
• Review of MiFIR.

The Commission will follow up in 2022 with more CMU actions, including a proposal on listing, an open finance framework, an initiative on corporate insolvency, and a financial competence framework.

11. EU – AIFMD II

Commission proposal for AIFMD II

The Commission proposals amending AIFMD (as amended, AIFMD II) include a number of changes that will be relevant not only to EU AIFMs but also to non-EU investment managers, including in relation to their ability to market funds under the national private placement regimes (NPPRs) under Article 42 of AIFMD as well as minimum substance requirements and tightened delegation rules for EU AIFMs that may appoint a non-EU investment manager to perform certain functions, including portfolio management or risk management.

Please see our Sidley Update for a discussion of the implications of AIFMD II for investment managers.

12. EU – MiFIR

Review of MiFIR

As part of the package or proposed measures under the CMU, the Commission has published proposals to revise certain parts of MiFIR, with a small number of consequential changes being made to MiFID II at the same time.

The key proposals for investment managers to be aware of:

Consolidated Tape. The framework for development of a consolidated tape provider (CTP) would be overhauled, with ESMA empowered to select, and to oversee, a CTP for each asset class. Mandatory contribution of transaction information to the CTP would be imposed upon trading venues, and firms trading over the counter.
Derivatives Trading Obligation. Its scope would be amended such that it no longer applies to small financial counterparties (i.e., those financial counterparties that are below the EMIR clearing thresholds).
Share Trading Obligation. It would be limited to shares with a European Economic Area ISIN, with exemptions for shares traded on a third-country venue in the local currency. However, the current exemption for transactions that are non-systematic, ad-hoc, irregular, and infrequent would be deleted.
Waivers. The “size specific to instrument” waivers would be deleted, and the reference price waiver for equity instruments would be made subject to a minimum threshold trade size of greater than twice the standard market size. The current double volume cap on waivers would become a single volume cap, set at 7% of the total volume traded in that financial instrument in the EU.
Deferrals. The possibility for deferrals to be extended would be limited to certain sovereign debt instruments. ESMA would harmonise deferral periods in technical standards according to transaction type.
Direct electronic access (DEA). Authorisation requirements for those firms accessing EU trading venues via DEA would be removed under the proposed changes to MiFID II.

13. EU – ESG

EU SFDR – Further delay to regulatory technical standards

In a letter dated 25 November 2021, the Commission has notified the European Parliament and the European Council of a further six-month delay to the application of the delegated RTS that will set out the detailed requirements regarding the form and content of disclosures to be made under the EU Sustainable Finance Disclosure Regulation (EU) 2019/2088 (SFDR).

The SFDR mandates the development of 13 RTS on ESG disclosures under Articles 2a, 4(6), 4(7), 8(3), 8(4), 9(5), 9(6), 10(2), 11(4), and 11(5) of the SFDR, which were originally supposed to apply from 1 January 2022. As discussed in our August 2021 Update, the RTS had already been delayed by six months to 1 July 2022, and so the Commission’s letter extends this delay by a further six months.

In October 2021, the European Supervisory Authorities published a Final Report setting out the draft RTS with regard to the content and presentation of disclosures pursuant to Articles 8(4), 9(6), and 11(5). The Final Report contained a revised set of disclosure templates to which financial market participants with financial products falling within Article 8(1) or Articles 9(1), 9(2), or 9(3) of the SFDR may wish to have regard during the intervening period before the legally binding text of the combined RTS is finalised.

For financial market participants that will be subject to the requirement in Article 4(1)(a) of the SFDR to disclose information regarding the principal adverse impacts of their investment decisions on sustainability factors (PAI disclosures), the Commission notes that as a result of the delay, it expects that such firms will have to comply with the PAI disclosure requirements for the first time by 30 June 2023, meaning that the first reference period will be 1 January 2022 to 31 December 2022.

EU Taxonomy Regulation – Application from 1 January 2022

Notwithstanding the delays to the SFDR RTS, which incorporate certain disclosures relating to the EU Taxonomy Regulation (EU) 2020/852, the EU Taxonomy Regulation has not itself been delayed. As such, the provisions of the EU Taxonomy Regulation will come into force on 1 January 2022. This includes provisions relating to the extent to which certain financial products falling within Articles 8 or 9 of the SFDR are aligned with the EU Taxonomy.

Delegated regulatory technical standards specifying economic activities that contribute to the climate mitigation or climate adaptation environmental objectives under the EU Taxonomy (the Climate RTS) are expected to be published in the Official Journal of the EU on 9 December 2021 after reports that a last-minute challenge to the Climate RTS in the Council of the European Union did not materialise, as efforts by France to secure enough votes (at least 15 member states representing at least 65% of the total EU population) to veto the draft legislation were unsuccessful.

The Climate RTS will come into force on 1 January 2022, having been adopted by the Commission in June 2021 (and having cleared the European Parliament in October 2021).  

ESMA – How the asset management industry can contribute to the CMU and the climate transition

On 19 November 2021, Natasha Cazenave, Executive Director of ESMA, gave a speech to the European Fund and Asset Management Association Investment Management Forum.

Cazenave outlined the possibility for changes at the level of the regulatory framework to ensure that it is fit for purpose and how effective and convergent supervision can support the objectives of the CMU, and she looked ahead to the challenges ESMA faces in ensuring credible sustainability disclosures.

In respect of the move towards sustainability, Cazenave noted that ESMA is concerned about greenwashing and the discrepancy between investors’ understanding of an investment and what the product can actually deliver. There is a risk of a breach of trust and potential misallocation of capital.

While ESMA recognises that there are challenges with the current legislative framework, as not all rules are in place and there are consistency and sequencing issues, ESMA nonetheless expects firms to comply with the obligations set out in the Level 1 texts; both the core SFDR disclosures since 10 March 2021 and the additional taxonomy-related product disclosures starting from 1 January 2022.

Cazenave highlighted that the European Supervisory Authorities are preparing Q&A guidance on key issues related to the practical application of the SFDR and Taxonomy Regulation, and further questions on the interpretation of the legal texts will be submitted to the Commission. In 2022, ESMA will focus on the supervisory challenges related to sustainability disclosures to bring greater clarity and coherence, including Q&As, guidelines, or thematic reviews.

14. EU – EMIR

EMIR Q&A

On 19 November 2021, ESMA published an updated Questions and Answers document in relation to the practical application of EMIR.

In the document the Commission has responded to questions on the calculation of positions for the clearing thresholds and the definition of hedging.

Calculation of positions for the clearing thresholds. When a financial counterparty calculates its positions for the purpose of the clearing threshold determination in accordance with Article 4a(3) of EMIR, it should include the OTC derivative contracts that are objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity entered into by the non-financial counterparties (NFCs) that are part of the same group.

Article 4a(3), unlike Article 10(3) of EMIR, does not provide for a hedging exemption. The hedging exemption in Article 10(3) of EMIR is meant to avoid impediments for NFCs to appropriately mitigate their commercial risks, but it is not meant to be applied when it comes to determining whether a financial counterparty should be subject to the obligation to clear centrally. Article 10(3) of EMIR only refers to “non-financial counterparty or by other non-financial entities within the group to which the non-financial counterparty belongs” and not to financial entities within that group. NFCs belonging to a group are not affected by the way the financial counterparties belonging to the same group calculate the threshold.
Hedging definition. NFCs whose core activity is to buy, sell or own financial instruments, can benefit from the hedging exemption when using OTC derivative contracts to hedge certain risks, for example risks arising from the potential indirect impact on the value of assets the NFC buys, sells, or owns resulting from the fluctuations of interest rates, inflation rates, foreign exchange rates, or credit risk.

The hedging exemption set out in Article 10(3) of EMIR applies to all NFCs, irrespective of what their core activity is. The list of financial counterparties in Article 2(8) of EMIR is a closed list. It does not allow for the treatment of NFCs as financial counterparties for certain EMIR provisions, such as Article 10(3). That provision itself does not distinguish which NFC is allowed to use the hedging exemption depending on that counterparty’s specific activity.

ESMA review of the clearing thresholds

On 22 November 2021, ESMA published a discussion paper on the clearing thresholds under EMIR. The paper asks for stakeholder input on a number of matters related to the clearing thresholds, including the identification of hedging contracts, as well as whether the thresholds should be calibrated differently for financial counterparties and NFCs. At this stage, ESMA has not advocated for any specified change to the level of the thresholds.

Comments may be submitted up until 19 January 2022.

15. EU – CSDR

Political agreement to delay mandatory buy-in provisions

As reported in our October 2021 Update, ESMA had written to the Commission, warning of “serious difficulties” for firms in implementing the mandatory buy in (MBI) provisions under the CSDR and asking the Commission to consider delaying implementation beyond the scheduled date of February 2022.

On 8 November 2021, the Commission reached a political agreement with the European Parliament and Council to delay the regime. It is understood that an amendment will be made to the CSDR effectively permitting ESMA to set a new, later date for implementation of the MBI that differs from the general implementation date for other aspects of the settlement regime.

The new implementation date for the MBI will need to be set via a separate legislative amendment to technical standards, which could take several months. However, it is hoped that ESMA will issue a statement this month confirming that it does not expect firms to comply with the MBI from 1 February 2022.

16. EU – PRIIPs Regulation and UCITS Directive

European Parliament votes on “quick fixes” for PRIIPs Regulation and UCITS Directive

On 23 November 2021, the European Parliament plenary voted to formally adopt two “quick fixes” for the PRIIPs Regulation and UCITS Directive. Funds already producing a UCITS Key Investor Information Document (KIID) will now have until 31 December 2022 to produce a PRIIP Key Information Document (KID). A UCITS KIID is no longer required as long as a PRIIP KID is produced.

The Commission must now align the application date of the outstanding PRIIPs RTS. These RTS must be published in the EU Official Journal together with the “quick fixes” before year-end.

17. LIBOR

Financial Stability Board (FSB) urges swift action to ensure preparedness for LIBOR cessation

On 22 November 2021, the FSB published a statement to support preparations for LIBOR cessation.

The FSB statement emphasises that market participants still need to finalise preparations to cease new use of LIBOR by end-2021; that transitions should primarily be to overnight Risk-Free Rates; and that active transition of legacy contracts is the best way for market participants to have control and certainty over their existing arrangements.

The FSB will continue to monitor the final steps in completing LIBOR transition over the coming months.