Financial Services Regulatory Update – February 2021 Round Up

Benchmarks

Regulation 2021/168 amending the Benchmarks Regulation as regards the exemption of certain third country foreign exchange benchmarks and the designation of replacement benchmarks for certain benchmarks in cessation was published in the EU’s Official Journal (“OJ”) (here) on 12 February. The Regulation entered into force and has applied since 13 February.  See our briefing here.

The European Money Markets Institute published a press release confirming that it has conducted its first annual review of the hybrid methodology for EURIBOR (here). The review suggested four changes to the methodology which will be implemented on 19 April 2021.

The Working Group on Sterling Risk-Free Reference Rates published a paper: “Path to ending new use of GBP LIBOR-linked derivatives”, which aims to help market participants meet its 2021 quarterly milestones for ending new use of GBP LIBOR in derivatives (here).

Brexit – MoUs

The ECB published the memorandum of understanding (“MoU”) it has entered into with the Bank of England and the FCA on post-Brexit supervisory co-operation (here), on 19 February.

The MoU focuses on information exchange and supervisory co-operation between the UK authorities and the ECB in the field of prudential supervision of supervised entities and their cross-border establishments.  A related press release is available here.

Capital Requirements – Closely Correlated Currencies

Commission Implementing Regulation (EU) 2021/249 of 17 February 2021 amending Implementing Regulation (EU) 2015/2197 with regard to closely correlated currencies in accordance with the Capital Requirements Regulation (“CRR”) (here) was published in the OJ on 18 February.

The amending Implementing Regulation replaces the text of the Annex to Implementing Regulation (EU) 2015/2197 to update the list of closely correlated currencies. It will enter into force on 10 March 2021.

Capital Requirements – Tri-Party Repurchase Agreements

The EBA published final guidelines specifying the conditions for the application of the alternative treatment of institutions’ exposures related to ‘tri-party repurchase agreements’ set out in Article 403(3) of the CRR for large exposures purposes (here) on 16 February.

Under the alternative treatment, institutions have the ability to replace the total amount of their exposures to a collateral issuer due to tri-party repurchase agreements facilitated by a tri-party agent, with the full amount of the limits that the institution has instructed the tri-party agent to apply to those exposures. If institutions perform such a replacement, the CRR requires them to comply with three conditions, which are further specified in the final guidelines, which will apply from 28 June 2021.

Central Bank of Ireland (“CBI”) – Governance and Risk Management

Ed Sibley, Deputy Governor of the CBI gave a speech entitled “Governance and risk in a time of uncertainty and change” (here), on 17 February.  Topics covered in the speech include: accountability and decision making; diversity and inclusion; technology and innovation; and climate change.  In the case of climate change, the CBI states that it will seek evidence that:

• boards are meaningfully considering climate change risk;

• climate change risks are being incorporated and embedded in organisational risk management frameworks and mitigation;

• climate risks are being considered as part of stress testing; and

• the EU taxonomy of sustainable activities is being proactively applied.

CBI – Outsourcing

On 25 February, the CBI issued:

• a consultation paper on cross-industry guidance on outsourcing (here); and

• draft cross-industry guidance (here).

The CBI is proposing to introduce the guidance to assist regulated firms in developing their outsourcing risk management frameworks so as to effectively, identify, monitor and manage their outsourcing risks. The consultation is open until 26 July 2021 and the CBI is proposing to publish the guidance before the end of the year.

CBI – Securities Markets Risk Outlook Report

The CBI published its first Securities Markets Risk Outlook Report (here), on 8 February.  The report:

• sets out key conduct risks to securities markets along with actions for firms to take in order to identify, mitigate and manage those risks;

• outlines the CBI’s supervisory priorities for securities markets in 2021, which include an industry-wide review of compliance with the Market Abuse Regulation and further work arising from findings in the CBI’s 2020 thematic reviews in the funds sector; and

• states that the CBI will continue its work with ESMA on common supervisory actions (“CSA”), including follow-up actions relating to the ESMA CSA on Liquidity Management in UCITS and a new CSA on UCITS costs and fees.

Climate Risk Management Tools for Financial Institutions

The United Nations Environment Programme Finance Initiative (“UNEP FI”) issued the following three reports on climate risk management tools for financial institutions (here), on 17 February:

• Pathways to Paris: A practical guide to climate transition scenarios for financial professionals.

• Decarbonisation and Disruption: Understanding the financial risks of a disorderly transition using climate scenarios.

• The Climate Risk Landscape: A comprehensive overview of climate risk assessment methodologies.

A related press release is available here.

EMIR – Delegated Regulations on Clearing Obligation and Risk Mitigation

Two Delegated Regulations made under EMIR were published in the EU’s OJ, on 17 February (here):

• Commission Delegated Regulation (EU) 2021/236 of 21 December 2020 amending technical standards laid down in Delegated Regulation (EU) 2016/2251 as regards to the timing of when certain risk management procedures will start to apply for the purpose of the exchange of collateral;

• Commission Delegated Regulation (EU) 2021/237 of 21 December 2020 amending regulatory technical standards laid down in Delegated Regulations (EU) 2015/2205, (EU) 2016/592 and (EU) 2016/1178 as regards the date at which the clearing obligation takes effect for certain types of contracts.

The Delegated Regulations entered into force on 18 February 2021.

On 2 February, the CBI published a statement on margining and clearing requirements under EMIR (here), confirming that it will apply the EU framework, which was in force prior to the Delegated Regulations entering into force in a risk-based and proportionate manner.

EMIR – Supervisory Review and Evaluation Process (“SREP”) of Central Counterparties

On 24 February, ESMA published a final report on guidelines to clarify common procedures and methodologies for the SREP of central counterparties by their National Competent Authorities ("NCAs") (here). The guidelines cover review and evaluation of: capital and organisational requirements; business continuity; conduct of business; prudential requirements; and interoperability arrangements.

European Single Electronic Format (ESEF) Regulation

The ESEF Regulation requires that all issuers with securities listed on an EU regulated market prepare their annual financial reports in xHTML and mark-up the IFRS consolidated financial statements using XBRL tags and the iXBRL technology.

Following political agreement between the co-legislators, EU Member States may delay ESEF obligations by 1-year thus allowing issuers to apply the ESEF reporting requirements from financial years beginning on or after 1 January 2021 and not 1 January 2020, as set out in the original legislation. Ireland has opted for the one-year postponement, and on 2 February, the CBI advised (here) that:

• It will continue to accept annual financial reports from Irish issuers subject to the Transparency (Directive 2004/109/EC) Regulations 2007 and ESEF Regulation in PDF format for financial years beginning between 1 January 2020 and 31 December 2020.  Similarly, in examining the compliance of those financial reports from such issuers with the relevant financial reporting framework, the Irish Auditing and Accounting Supervisory Authority has indicated it will also accept financial statements in PDF format. 

• Issuers who wish to publish their annual financial reports in accordance with the ESEF Regulation in 2021 (for financial years beginning between 1 January 2020 and 31 December 2020) will still be able to proceed. Where an issuer chooses to publish its annual financial reports in ESEF in 2021, it must comply with all relevant requirements of the Transparency Regulations and the ESEF Regulation.

Insurance – CBI – Business Interruption Insurance

On 17 February, the CBI published a statement setting out its expectations of firms as regards the fair treatment of customers, in the context of the CBI’s supervisory examination of business interruption supervisory issues (here). 

The CBI also indicated that following the High Court’s judgment on business interruption claims, the CBI has contacted insurers to reaffirm its expectations in relation to insurers’ fair treatment of customers, setting out its expectation that firms take a proactive and speedy approach in communicating with affected customers and resolving relevant claims.

Insurance – Business Interruption Risk

EIOPA published a staff paper on measures to improve the insurability of business interruption risk in the light of pandemics (here), on 12 February.  In the paper, EIOPA analyses issues and opportunities for improving the insurability of business interruption risks through:

• Prevention measures to reduce losses
• Capital markets risk transfer
• Multi-peril solutions for systemic risk

The paper also addresses the general challenges related to modelling and triggers for claims in the context of pandemics.  Comments can be provided on the paper until 31 March 2021.  A related press release is available here.

Insurance – Strategic Supervisory Priorities for NCAs

Under the revised EIOPA Regulation, EIOPA must identify, at least every three years, by 31 March, up to two priorities of EU-wide relevance, which reflect future developments and trends.  NCAs must then take those priorities into account when drawing up their work programmes and notify EIOPA accordingly.

On 19 February, EIOPA published a document identifying the following two priorities (here):

• monitoring the impact of the prolonged low-yield environment as well as of the COVID-19 crisis on the business model sustainability and development of insurers and institutions for occupational retirement provision; and

• monitoring the impact of the COVID-19 crisis on products and ensuring that product and oversight governance requirements and other relevant consumer protection and conduct of business related requirements are adequately implemented to address the deficiencies which emerged in the crisis.

Insurance – Supervisory Convergence Plan

EIOPA published its supervisory convergence plan for 2021 for the insurance sector, on 17 February (here), which defines EIOPA’s annual priorities to strengthen supervision in the EU in 2021.

According to the 2021 plan, EIOPA intends to complete the priorities stemming from the previous plans, while allowing for flexibility to continue monitoring and mitigating the impact from the COVID-19 pandemic. EIOPA has also identified the following new priority areas: supervisory approach to environmental, social and governance risks; supervisory concerns arising from the recent market development of multi-employer institution for occupational retirement provision providers; and consistencies in the way NCAs treat third country reinsurance undertakings.

Investment Funds – Investment Limited Partnerships (“ILPs”)

Ireland’s new legislative framework for ILPs entered into force on 1 February 2021. The next day, the CBI published (here):

• guidance on share class features of closed-ended qualifying investor alternative investment funds, which will facilitate, inter alia, different levels of investor participation within the same QIAIF, which is a common feature of closed-ended vehicles;

• guidance setting out the Central Bank’s requirements for depositaries of assets other than financial instruments seeking authorisation under Regulation 22(3)(b) of the AIFM Regulations; and

• updated AIFMD Q&A to include new Q&A relating to the authorisation of a DAoFI and the scope of the defined term “issuing body” as contained in the AIF Rulebook.

See our related briefing here.

Ireland for Finance Action Plan

On 11 February, Minister of State for Financial Services, Credit Unions, and Insurance Seán Fleming TD launched the Ireland for Finance Action Plan for 2021 (here). The 2021 Action Plan sets out four priority areas: sustainable finance; diversity; regionalisation; and digital finance. The Action Plan also contains a number of ongoing initiatives.

MiFID – Common Supervisory Action – Product Governance

On 1 February, ESMA published a press release announcing the launch of a CSA with NCAs on the application of product governance rules under the Markets in Financial Instruments Directive (here).  The CSA will be conducted during 2021 and will allow ESMA and the NCAs to assess the progress made by manufacturers and distributors of financial products in the application of these requirements.  The CSA will assist in the analysis of:

• how manufacturers ensure that financial products’ costs and charges are compatible with the needs, objectives and characteristics of their target market and do not undermine the financial instrument's return expectations;

• how manufacturers and distributors identify and periodically review the target market and distribution strategy of financial products; and

• what information is exchanged between manufacturers and distributors and how frequently this is done.

ESMA has issued guidelines on the topic in 2017 and has also more recently published a series of Q&As, all of which will be considered for this 2021 CSA.

MiFID – COVID-19 Amendment Directive

Directive 2021/338 was published in the OJ on 26 February (here) and entered into force the next day. The Directive amends MiFID and the Capital Requirements Directives (CRD IV and V) to facilitate recovery from the COVID-19 crisis. The MiFID amendments affect information requirements, product governance and position limits, while the amendments to the Capital Requirements Directives cover their application to investment firms.

MiFID – Q&A

ESMA published an updated version of its Q&As on market structures topics and transparency topics under the MiFID II Directive and MiFIR (here), on 3 February. The updated Q&As provide clarification on the classification of Direct Electronic Access (DEA) trades; and matched principal trading by investment firms.

MiFID – Review

On 24 February, the European Commission published a speech by Mairead McGuinness, European Commissioner for Financial Services, Financial Stability, and Capital Markets Union (here), which considers next steps in the Commission’s review of MiFID II.  According to Commissioner McGuinness, the Commission intends to adopt a legislative proposal relating to a review of MiFID II at the end of 2021, which may address the following issues:

• Strengthening transparency requirements.  The European Commission is aware of the decline in the volume of trading in shares executed on transparent regulated exchanges, and the apparent growth in trading in more opaque alternative venues, such as trading through banks' internal books. It will assess whether different execution venues are operating on a level playing field.

• Consolidated tape.  The European Commission intends to establish the right conditions for a consolidated tape that collects and aggregates indispensable trade transparency data reported by all EU execution venues in equity and corporate bonds. This follows a commitment made in its September 2020 Capital Markets Union action plan that the Commission would adopt amendments to legislation to support the establishment of a post-trade consolidated tape for equity and equity-like financial instruments.

• Retail investment and investor protection.  The European Commission wants to focus on retail investment and investor protection more broadly to ensure that retail investors seize the investment potential of the internal market.  It is of the view that there may be merit in looking at the investor’s journey in a horizontal way, from the very beginning until the very end of the investment process.

Payment Services

The EBA published an Opinion on supervisory actions to ensure the removal of obstacles to account access under the revised Payment Services Directive (“PSD2”) (here) on 22 February.  Under Article 32(3) of Commission Delegated Regulation 2018/389 (“CDR”), account servicing payment service providers (“ASPSPs”) that have implemented a dedicated interface must ensure that the interface does not create obstacles to the provision of payment initiation and account information services.

The Opinion sets out supervisory actions that NCAs should take to ensure that remaining obstacles are removed from the interfaces of ASPSPs.  The EBA will monitor the way in which the supervisory actions referred to in the Opinion are taken into account.  If the EBA identifies inconsistencies in the application of the PSD2 and the CDR, it will take action to remedy those inconsistencies.

PRIIPs

On 3 February, the European Supervisory Authorities ("ESAs") published press releases confirming that they have submitted the final draft RTS on amendments to the key information documents for packaged retail and insurance-based investment products (here). The draft report follows a request from the European Commission in December 2020 for the ESAs to submit the draft.  The next step will be for the Commission to adopt the draft report, following which it will be scrutinised by the Council of the EU and the European Parliament.

The European Commission has also published further details on its approach to the broader review of the PRIIPs Regulation.

Sustainable Finance Disclosure Regulation – Draft RTS

The ESAs’ Final Report and draft RTS setting out the proposed “Level 2” requirements under the Sustainable Finance Disclosure Regulation (“SFDR”) were published on 4 February 2021 (here).

While the ESAs are proposing that the RTS should legally apply from 1 January 2022, they have also recommended that the draft RTS be used as a reference when applying the provisions of the SFDR in the interim period between the application of SFDR (as of 10 March 2021) and the application of the RTS. This recommendation was published by the ESAs on 25 February (here).

See our briefing here.

Selected Consultations, Discussion Papers, Speeches and Reports Published

• Central Bank of Ireland – Consultation on enhancing its engagement with stakeholders (CP136) (here).  The consultation is open until 11 May 2021.

• Central Bank of Ireland – Consultation on a new methodology to calculate funding levies payable by payment institutions and e-money institutions (CP137)(here). The consultation is open until 16 April 2021.

• EBA – Consultation on specifying the criteria to assess the exceptional cases when institutions exceed the large exposure limits of Article 395(1) of the Capital Requirements Regulation (“CRR”) and the time and measures to return to compliance pursuant to Article 396(3) of the CRR (here). The consultation is open until 17 May 2021.

• ESMA – Consultation on draft guidelines under the Benchmarks Regulation on the methodology to be used in exceptional circumstances and amendment to the guidelines on non-significant benchmarks (here). The consultation is open until 30 April 2021.

• European Commission – Consultation on a targeted review of the Financial Collateral Directive (here). The consultation is open until 7 May 2021.

• European Commission – Consultation on a targeted review of the Settlement Finality Directive (here). The consultation is open until 7 May 2021.

• European Commission – Summary report of consultation on renewed sustainable finance strategy (10 February 2021)(here).

• European Commission – Summary report of consultation as part of its review of Solvency II Directive (1 February 2021)(here).

• Working Group on Sterling Risk-Free Reference Rates – Consultation on the successor rate to GBP LIBOR in legacy bonds referencing GBP LIBOR (here). The consultation is open until 16 March 2021.

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