The following posts provide a snapshot of selected UK, EU and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructures, asset managers and corporates.
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Delegated Regulations under the EU Digital Operational Resilience Act Published
May 30, 2024
The following Delegated Regulations supplementing Digital Operational Resilience Act have been published in the Official Journal of the European Union:- Delegated Regulation (EU) 2024/1502 on the criteria for the designation of ICT third-party service providers as critical for financial entities.
- Delegated Regulation (EU) 2024/1505 determining the amount of the oversight fees to be charged by the Lead Overseer to critical ICT third-party service providers and the way in which those fees are to be paid.
Both Delegated Regulations will enter into force on June 19, 2024, except for the systemic assessment sub-criterion on the ICT third-party service provider's dependency on subcontractors, which will be effective as of January 16, 2025.Topic : Operational Resilience -
EU Statement on the Use of AI in the Provision of Retail Investment Services
May 30, 2024
The European Securities and Markets Authority has published a public statement on the use of AI in the provision of retail investment services. When using AI, ESMA expects firms to comply with relevant Markets in Financial Instruments package requirements, particularly when it comes to organizational aspects, conduct of business, and their regulatory obligation to act in the best interest of the client.
ESMA reminds firms that although AI technologies offer potential benefits to firms and clients, they also pose inherent risks, such as: (i) algorithmic biases and data quality issues; (ii) opaque decision-making by a firm's staff members; (iii) overreliance on AI by both firms and clients for decision-making; and (iv) privacy and security concerns linked to the collection, storage, and processing of the large amount of data needed by AI systems.
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UK Payment Systems Regulator Publishes Policy Statement on Changes to Card-Acquiring Market Remedies
May 29, 2024
The Payment Systems Regulator has published a policy statement on card-acquiring market remedies. The statement confirms the PSR's decision to update the list of directed firms and to introduce a new streamlined method for the transfer of legal entities. The PSR consulted on these changes in January, when it proposed a mechanism to automatically move the obligations of Specific Directions 14, 15 and 16 where the relevant business (i.e. the business of a PSP that caused it to be a directed party) moved to another PSP (whether as part of a reorganization of legal entities within the same group or a transfer to a third-party PSP). The PSR's rationale behind this decision was to provide a mechanism for capturing new entities without having to vary the existing directions. Overall, the PSR received broadly supportive responses to the proposal and is amending the Specific Directions accordingly.Topic : Payment Services -
UK Delays Legislation for Amending Ancillary Activities Test
May 29, 2024
The Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) (Amendment) Order 2024 was published on May 29, 2024 and enters into force on December 31, 2024. The 2024 Amendment Order amends the Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023 (S.I. 2023/548) by omitting the provisions relating to the new ancillary activities regime.
The 2023 Order, which enters into force on January 1, 2025, among other things, paved the way for the Financial Conduct Authority to develop a simpler test for determining which firms need to be authorized as investment firms as a result of their commodities and emission allowances trading business, known as the "ancillary activities test". The ancillary activities test is an exemption from investment firm authorization requirements for firms that trade commodity derivatives or emission allowances as an ancillary activity to their main business, such as energy and other commodity trading firms which are active in both physical trading and financial instrument trading. Under the MiFID II regime, the ancillary activities exemption became based upon a hard-edged test with various financial thresholds. Some of these tests resulted in counterintuitive outcomes for firms, while other issues with the way in which the legislation had been drafted needed resolving via unusually narrow or arguably unnatural interpretations of the text, sometimes supported by regulatory or industry guidance. The 2023 Order simplified the process for determining when a firm satisfies the "ancillary activities" test in the post-Brexit U.K.
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European Securities and Markets Authority Statement on Good Practices for Pre-Close Calls
May 29, 2024
The European Securities and Markets Authority has published a statement on good practice in relation to "pre-close calls" (i.e. communication sessions between an issuer and analysts who generate reports on the issuer's financial instruments). The statement seeks to remind issuers about the applicable legislative framework for pre-close calls and encourages them to follow good practices when engaging in such calls, with the goal of maintaining fair, orderly, and effective markets. Following recent media reports suggesting a connection between episodes of high volatility in share prices and pre-close calls, ESMA reminds issuers that any disclosure of inside information should only take place in accordance with the EU Market Abuse Regulation. Consequently, issuers should only share non-inside information during these pre-close calls.
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UK Financial Conduct Authority Shares Insights on Firms’ Preparations for Operational Resilience
May 28, 2024
The Financial Conduct Authority has set out its observations and insights on the preparations firms have made towards complying with its operational resilience rules ahead of March 31, 2025. The FCA expects firms to use these observations to review their approach and assess their readiness on the following key areas of the policy:- important business services;
- impact tolerance;
- mapping and third parties;
- scenario testing;
- vulnerabilities and remediation;
- response and recovery plans; and
- governance and self-assessment.
Read more.Topic : Operational Resilience -
EU Final Guidelines on Simple, Transparent And Standardized Criteria for On-Balance Sheet Securitizations
May 27, 2024
The European Banking Authority has published final guidelines on the simple, transparent, and standardized criteria for on-balance-sheet securitizations. The main objective of the guidelines is to provide a single point of consistent interpretation of those criteria and ensure a common understanding of them by originators, original lenders, securitization special purpose entities, investors, competent authorities, and third-party verification agents verifying STS compliance in accordance with Article 28 of the EU Securitisation Regulation throughout the Union.
The EBA has also published amending guidelines, which make targeted amendments to the existing non-asset-backed commercial paper and asset-backed commercial paper securitisation guidelines, for a specific number of these requirements, to ensure that the interpretation provided by the EBA is consistent across all three guidelines. The guidelines will be applied on a cross-sectoral basis throughout the EU with the aim of facilitating the adoption of the STS criteria for OBS securitization, which is one of the prerequisites for the preferential risk weight treatment under the CRR, supporting further lending to the real economy and thus contributing further to the objectives of the Capital Markets Union.Topic : Securities -
UK Payment Systems Regulator Writes to Payment Firms on Implementation of Authorized Push Payment Scams Reimbursement Requirements
May 24, 2024
The Payment Systems Regulator has published a letter it sent to payment service providers on the new authorized push payment scams reimbursement requirement. The letter highlights three key areas where the PSR would like firms to focus their implementation activities over the coming months to ensure effective and timely implementation by October 7, 2024, when the new requirement comes into effect. The three areas of focus are:- Understanding the new reimbursement requirements—all PSPs participating in the FPS will need to consider whether the requirements apply to them either as a sending PSP or as a receiving PSP providing a relevant account to a service user. The requirements apply to both direct and indirect participants of the system.
- Claim management and data reporting through Pay.UK—Pay.UK has procured a reimbursement claim management system which firms will use to communicate with each other and to manage APP scam claims, as well as to report data to Pay.UK so it can monitor and manage firms' compliance with FPS reimbursement rules. Firms have until August 20, 2024 to register with Pay.UK.
- Consumer awareness—the PSR wants firms to be transparent in communicating the reimbursement requirements to consumers and take proactive steps to notify them of the protections available under the new reimbursement requirement.
Read more.Topic : Payment Services -
European Banking Authority Reports on Virtual IBANs
May 24, 2024
The European Banking Authority has published a report on the issuance of virtual IBANs (vIBANs). The report summarizes the EBA's observations from its fact-finding exercise on the issuance and use by payment service providers of vIBANs. It highlights risks and challenges that vIBANs may present to consumers, financial institutions, national competent authorities and to the integrity of the overall EU financial system, based on the six most common vIBAN use cases in the EU. Uses of vIBANs include the automation of payment reconciliation and overcoming IBAN discrimination by associating the vIBAN with a particular Member State's IBAN country code.
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HM Treasury Designates Banks Under Access to Cash Framework
May 24, 2024
HM Treasury has designated a number of firms for the provision of cash access services, including setting the geographic baselines. The Financial Services and Markets Act 2023 introduced various measures to protect access to cash (e.g., via ATMs) for those reliant on it, in particular the elderly and vulnerable. In addition, HMT published the decision notices for those designated as operators of cash access coordination arrangements (i.e., firms which coordinate the provision of cash access services by multiple providers). Designated firms must ensure reasonable access to withdrawal and deposit facilities for individuals and reasonable access to deposit facilities for SMEs. The FCA is responsible for supervising the designated firms and can impose requirements to ensure that designated firms preserve reasonable cash access services. All the designations came into force on May 24, 2024.
The Bank of England oversees the wholesale cash industry to ensure it continues to operate effectively and remains sustainable and resilient. The wholesale cash system consists of a select group of key market participants which facilitate the production and distribution of banknotes and coins. -
European Securities and Markets Authority Proposes Draft Technical Standards for Consolidated Tape Providers
May 23, 2024
The European Securities and Markets Authority has opened a consultation on draft technical standards related to consolidated tape providers and data reporting service providers, and the assessment criteria for the CTP selection procedure. The Markets in Financial Instruments Regulation envisaged the establishment of a "consolidated tape" for all equity and non-equity transactions. The CTP would collect post-trade information published by trading venues and Approved Publication Arrangements, and consolidate this into a continuous live data stream made available to the public. No consolidated tape has yet been set up in either the EU or the U.K. Following the March publication in the Official Journal of the European Union of the EU's MiFID Review legislation, the provisions in MiFIR on CTPs and DRSPs have been revised to, among other things, require trading venues and APAs (collectively referred to now as "data contributors") to submit market data directly and exclusively to the entities appointed by ESMA as the CTP for each asset class.
Read more.Topic : MiFID II -
EU Consultation on Amendments to Commodity Derivatives Technical Standards
May 23, 2024
The European Securities and Markets Authority has published a consultation paper on proposed changes to the rules for position management controls and position reporting. These proposals arise out of the MiFID Review, and the resulting changes to the Markets in Financial Instruments Regulation and Directive, which were published in March. MiFID II requires national regulators to establish and apply position limits on the size of a net position in commodity derivatives traded on trading venues and economically equivalent OTC contracts. The limits apply to the size of a position that a person can hold, including any other positions held on behalf of that person by group entities. Trading venues are required to apply position management controls, including monitoring of open interest and obtaining information about the size and purpose of a position entered into, beneficial or underlying owners, concert arrangements, and any related assets or liabilities. Trading venues also have powers to require termination or reduction of positions and to require a person to provide liquidity back into the market at an agreed price and volume to mitigate the effect of a large or dominant position. The position reporting regime is intended to support the application and enforcement of position limits.
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European Commission Consults on Adequacy of Macroprudential Policies for Non-Bank Financial Intermediation
May 22, 2024
The European Commission has launched a consultation to gather further insight into the markets and business models of non-bank financial intermediation, and the interconnectedness among them and with banks. It also aims to identify gaps in the macroprudential framework and other factors that may contribute to the build-up of systemic risks in NBFI.
The Commission hosted a technical workshop on May 22, 2024 to kickstart the initiative. The focus of the technical workshop was on: (i) the impact of NBFI on financial stability in the EU and how to ensure effective monitoring and risk management for investment funds; (ii) the role of macroprudential authorities in monitoring interconnectedness, deploying macroprudential tools, and ensuring cross-border coordination within the EU; (iii) international cooperation in the regulation and supervision of NBFI; and (iv) international experience and evidence regarding macroprudential policies for NBFI.
The consultation aims at identifying the vulnerabilities and risks of NBFIs and mapping the existing macroprudential framework, and seeks to gather feedback on current challenges to macroprudential supervision and discuss areas for further improvement.
The closing date for responses is November 22, 2024. The Commission will use the information gathered in this consultation to inform the policy planning of the upcoming 2024–2029 College of Commissioners.Topic : Shadow Banking -
New UK Securitization Regime Set to Start on November 1, 2024
May 22, 2024
The Securitisation (Amendment) Regulations 2024 were made on May 22, 2024 and come into force for the most part on November 1, 2024. The Amending Regulations supplement the new U.K. securitization regime established under the U.K. Securitisation Regulations 2024, including establishing November 1, 2024 as the commencement date for the Securitisation Regulations 2024. The Amending Regulations do not revoke the onshored EU Securitisation Regulation 2017, which will take effect through commencement regulations. The Securitisation Regulations 2024 designate, under the new designated activities regime, certain securitization activities when undertaken by a firm in the U.K. and introduce a new definition of "institutional investor", removing overseas Alternative Investment Fund Managers that market or manage AIFs in the U.K. from due diligence requirements.
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European Securities and Markets Authority Launches Consultation on Technical Standards Arising out of MiFIR Review
May 21, 2024
The European Securities and Markets Authority has launched its first consultation on regulatory technical standards arising from the MiFID Review and the resulting changes to the Markets in Financial Instruments Regulation and Directive, which were published in March. The MiFID Review amendments aim to enhance the availability of information on trading and companies for investors. ESMA's consultation covers:- Amendments to RTS 2 - the amendments relate to pre- and post-trade transparency requirements for non-equity instruments (bonds, emission allowances and structured products), and aim at ensuring trade information is available to stakeholders by improving, simplifying, and harmonising transparency requirements, and combining the right balance between real-time transparency and the ability to defer publication.
- Amendments to RTS 23 - the amendments relate to the obligation to provide instrument reference data that is fit for both transaction reporting and transparency purposes. ESMA also proposes to align this data with other relevant reporting frameworks and international standards in relation to reference data.
- New draft RTS on the obligation to make pre-and post-trade data available on a "reasonable commercial basis"—this is intended to guarantee that market data is available to data users in an accessible, fair, and non-discriminatory manner. The consultation elaborates on the cost-based nature of fees and the applicable reasonable margin.
Responses to the consultation may be submitted until August 28, 2024. ESMA intends to submit the draft RTS to the European Commission by the end of Q4 2024.Topic : MiFID II -
UK Prudential Regulation Authority Publishes Dear CEO letter on Non-Systemic Firms' Recovery Planning
May 15, 2024
The U.K. Prudential Regulation Authority has published a Dear CEO letter addressed to non-systemic U.K. banks and building societies setting out proposals for improvement on resolvability and recovery planning. The PRA's proposals are also applicable to PRA-regulated international banking subsidiaries operating in the U.K. The letter follows the PRA's recent review of the recovery planning capabilities of a sample of such firms, which found that although many firms understood the basics of recovery planning, there were significant areas for improvement, in particular the development of recovery scenarios and calculation of recovery capacity.
In particular, the PRA found that, with respect to recovery scenarios, firms were not using scenarios of sufficient severity. They are encouraged to provide analysis on how they define and calculate their point of non-viability and to ensure their recovery capacity calculation reflects the parameters of the stress. With respect to recovery capacity, firms were found not to be calculating their recovery capacity effectively and are requested to review their methodology for such calculations.
The PRA proposes to engage with firms and trade associations on the substance of the letter in H2 2024. Firms are expected to consider the PRA's proposals and update their recovery plans to meet expectations in PRA Supervisory Statement 9/17 on Recovery Planning.Topic : Recovery & Resolution -
UK Updates and Expands Equivalence for US Derivatives Trading Venues
May 14, 2024
The Markets in Financial Instruments (Equivalence) (United States of America) (Commodity Futures Trading Commission) Regulations 2024 (SI 2024/638) were made on May 14, 2024 and entered into force on June 4, 2024. In preparation for Brexit, the U.K. onshored the EU's 2017 equivalence decision for the legal and supervisory framework applicable to designated contract markets and swap execution facilities in the U.S. for the purposes of the trading obligation for derivatives under the Markets in Financial Instruments Regulation. MiFIR requires that derivatives declared subject to the derivatives trading obligation must be traded on U.K. trading venues or third-country trading venues following an equivalence decision by HM Treasury. The onshored 2017 equivalence decision covers designated contract markets and swap execution facilities supervised and authorized by the Commodity Futures Trading Commission, and ensured that, when the U.K. left the EU, U.K. counterparties could continue to satisfy the DTO when they trade derivatives instruments on covered DCMs and SEFs.
HM Treasury has committed to reviewing the U.K.'s equivalence decision under the Smarter Regulatory Framework. In addition, HM Treasury considers that the CFTC's regime remains equivalent to U.K. MiFIR. The new Regulations therefore revoke and replace the onshored 2017 equivalence decision, updating the list of trading venues to include all current CFTC-authorized DCMs and SEFs. -
UK Grants Equivalence to EEA UCITS Under Overseas Funds Regime
May 13, 2024
The Financial Services and Markets Act 2000 (Overseas Funds Regime) (Equivalence) (European Economic Area) Regulations 2024 (SI 2024/635) were made on May 13, 2024 and enter into force on July 16, 2024. Established by the Financial Services Act 2021, the Overseas Funds Regime is an equivalence framework for allowing overseas funds to market into the U.K. The OFR is a new, efficient way for overseas funds to market as it does not require a detailed assessment by the Financial Conduct Authority of each individual fund application, which was the only process available prior to the OFR.
The Financial Services and Markets Act 2000 (Overseas Funds Regime) (Equivalence) (European Economic Area) Regulations 2024 grant equivalence to each EEA state for Undertakings for Collective Investment in Transferable Securities funds, except for those that are authorized as Money Market Funds. The UCITS can be stand-alone schemes or sub-funds.
Currently, EEA funds market into the U.K. using the Temporary Marketing Permissions Regime. The TMPR is due to expire at the end of 2025, subject to legislation extending that date to the end of 2026. Unlike the TMPR, an equivalence decision under the OFR does not have an expiry date. In addition, the TMPR only captures standalone and umbrella UCITS funds that were marketing to U.K. clients using a UCITS passport (while the U.K. was in the EU) and who applied to the FCA to continue doing so.Topic : Funds