Welcome to Legal Shorts, a short briefing on some of the week’s developments in the financial services industry.
If you would like to discuss any of the points we raise below, please contact me or one of our other lawyers. 
 
Claire Cummings
020 7585 1406
[email protected]
www.cummingslaw.com

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MiFID II: Application and notification forms due out on 30 January

Firms will be able to apply for authorisation and variations of permission (VoPs) under MiFID II from 30 January 2017. The MiFID II forms should be available on the FCA website from this date. The FCA reminds firms that they must ensure that they have the correct permissions in place to carry out relevant regulated activities under MiFID II by 3 January 2018. The webpage can be found at the following link: https://www.fca.org.uk/markets/mifid-ii/applications-notifications.

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EMIR: Delegated Regulation adopted to correct variation margin requirements

The European Commission has adopted a Delegated Regulation that corrects the previous RTS on margin requirements for uncleared derivatives with regard to the phase-in of the variation margin requirements for intragroup transactions under EMIR. The Delegated Regulation amends the RTS in providing that the derogation for intragroup exemptions between EU and third country group entities is available (pursuant to review from the relevant national competent authorities) in relation to both variation and initial margin. Firms are reminded that the requirement under EMIR for all AIFMs to comply with variation margin obligations on uncleared OTC derivative transactions will come into force on 1 March 2017. In-scope AIFMs will need to amend or replace their collateral documentation to reflect the new rules before 1 March 2017 to ensure trading is not disrupted, and so need to begin reviewing and negotiating documentation as soon as possible.

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EMIR: Delegated Regulation adopted to correct reporting requirements

The European Commission has also adopted a Delegated Regulation and Implementing Regulation that corrects the previous RTS and ITS respectively on the minimum details of the data to be reported to trade repositories under EMIR. Both standards will apply from 1 November 2017, except for Article 1(5) of the ITS (delaying the backloading requirement) which will apply from 10 February 2017.

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EMIR: ESMA speech on reforms to OTC markets

ESMA has published a speech by Steven Maijoor, ESMA Chair, in which he considers the reform of the OTC derivatives markets that is currently taking place. Points of interest include: (i) reform of the OTC derivatives markets, which was implemented largely through EMIR, is generally complete and EMIR has laid the foundations of an “EU derivatives union”; (ii) the focus has now turned to ensuring a consistent application of EMIR requirements by CCPs and their national regulators to ensure that EMIR’s overall objectives are met and that a level playing field exists for all market participants; and (iii) the forthcoming EMIR legislative review must be ambitious to ensure EMIR’s intended objectives are achieved even more effectively and efficiently. To improve the regulatory framework, a mechanism that allows suspension of the clearing obligation should be introduced and EMIR’s application to non-financial counterparties must also be reviewed.

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FCA concerns on accepting business from introducers

The FCA has updated its webpage on investment advisers’ and authorised firms’ responsibilities when accepting business from unauthorised introducers or lead generators. The FCA notes its concern at the increase it has seen in cases in which the introducer has an inappropriate influence on how the authorised firm carries out its business, in particular where the introducer influences the final investment choice. The FCA also has concerns where the authorised firm delegates regulated activities, for example, by outsourcing their advice process to unauthorised entities or to other authorised firms that do not have the relevant permissions, or are not appointed representatives. The FCA reminds authorised firms that they must at all times maintain full and complete ownership of the advisory process between their firm and the customer. If customers are given unsuitable advice by an introducer, the authorised firm may be held responsible for this, and subject to regulatory action.

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FCA consults on CASS changes in relation to SAR

The FCA has published a consultation paper on chapter 7A of CASS and the special administration regime (SAR) review (CP17/2). HM Treasury created the SAR regime following the failure of Lehman Brothers in 2008. The SAR, which is an insolvency regime for investment firms, works with CASS, and in particular CASS 7A, to provide a mechanism under which client assets can be returned to clients in the event of an investment firm failure. Changes proposed by the FCA aim to speed up the distribution of client assets, improve consumer outcomes and reduce the market impact of an investment firm failure. Comments are invited by 24 April 2017. The FCA plans to follow up with a policy statement setting out final rules in summer 2017.

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FSB report on rehypothecation

The Financial Stability Board has published reports on rehypothecation and collateral re-use and non-cash collateral re-use as part of its work to transform shadow banking into resilient market-based finance. In its report on rehypothecation and collateral re-use, the FSB describes potential financial stability issues and examines the possible harmonisation of regulatory approaches to the re-hypothecation of client assets and any residual financial stability risks associated with collateral re-use. In its second report, the FSB sets out the finalised measure and metrics of non-cash collateral re-use in securities financing transactions (SFTs), which authorities will monitor for financial stability purposes.

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MiFID II questionnaire

The Association for Financial Markets in Europe (AFME) has published a questionnaire providing a standardised set of questions that can be sent by MiFID II investment firms to EU equities exchanges that are within the scope of MiFID II. The “MiFID II Exchange Questionnaire” has been created through collaboration between AFME and major EU equities exchanges. It is intended to be sent bilaterally from investment firms to their exchange counterparts and highlights high priority issues, which should be addressed in detail. The questionnaire explains that it has been shared with, but not necessarily endorsed by, individual exchanges as well as the Federation of European Securities Exchanges (FESE) and the Futures Industry Association (FIA).

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CMU mid-term review

The European Commission is consulting on revisions to the capital markets union (CMU) action plan, as part of its mid-term review of the CMU action plan in June 2017. The aim of the review is to take stock of the progress towards implementing the action plan, reframe actions in the light of developments and to complement the action plan with new measures. The Commission is seeking views on potential revisions to the action plan on any additional actions that could, amongst other things, improve financing for innovation, start-ups and non-listed companies, improve the ability of companies to enter and raise capital on public markets and facilitate cross-border investment. Comments are invited by 17 March 2017.

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ESMA speech on benchmark reforms

Steven Maijoor also considered the benchmark reform that is currently taking place in his speech on OTC markets referred to above. Points of interest include: (i) the European Money Markets Institute (EMMI), which administers EURIBOR, is currently testing its new, transaction based methodology and a transition to “EURIBOR+” is expected to start soon; (ii) it essential that a sufficient number of banks contribute data to ensure that it accurately measures the market, as ESMA continues to be very concerned by continuously decreasing panels; and (iii) to date, the European Commission has only designated EURIBOR as a critical benchmark under the Benchmark Regulation and ESMA will deliver the technical standards required under the Benchmark Regulation to the Commission by 1 April 2017.

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ESMA speech on FinTech

ESMA has published a speech on the application of financial technology (FinTech) within the securities sector. Points of interest in the speech include the following: (i) the regulatory response to FinTech is critical for both regulators and market participants. The challenge is to identify when the regulator should step in i.e. the regulatory tipping point; (ii) ESMA and Member States will have their first banning power when MiFID II becomes effective on 1 January 2018. Until then, ESMA can take measures such as issuing warnings or statements; (iii) ESMA has adopted a “wait and see” approach towards distributed ledger technology (DLT); and (iv) the results of the ESA’s joint discussion paper on robo advice (also known as automated advice) highlighted certain risks to the automation of financial advice, compared to traditional personal professional advice and the ESAs are in the process of deciding whether further cross-sectoral action is warranted or needed at this stage.

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Cummings
Tel: + 44 20 7585 1406
Mob: + 44 7734 057 327
www.cummingslaw.com
20 January 2017