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.
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Brexit: European Commission draft papers on Article 50 negotiations
The European Commission has published the first two draft position papers to be used when the Article 50 Brexit negotiations with the UK start. They are: (i) a working paper on essential principles on citizens' rights; and (ii) a working paper on essential principles on financial settlement, including the single financial settlement related to the EU budget, the termination of the membership of the UK of all bodies or institutions established by the Treaties, the participation of the UK in specific funds and facilities related to the EU policies. The Brexit negotiations are expected to start in the week of 19 June 2017.
Brexit: ESMA opinion on supervisory convergence
ESMA has published an opinion on general principles to support supervisory convergence in the context of the UK withdrawing from the EU. The opinion is intended to be a practical tool to support supervisory convergence in the context of increased requests from UK financial market participants seeking to relocate to the EU27. ESMA assumes that the UK will become a third country after it has withdrawn from the EU. The opinion covers all legislation referred to in the ESMA Regulation, in particular, the AIFMD, the UCITS Directive and MiFID II. In the opinion, ESMA sets out nine general principles aimed at fostering consistency in authorisation, supervision and enforcement relating to the relocation of entities, activities and functions from the UK.
MiFID II: ESMA opinion on third country trading venues and position limits
ESMA has published an opinion on whether commodity derivatives traded on a third-country venue should be considered as traded OTC for the purposes of the position limits regime under MiFID II. ESMA believes that: (i) positions limits should only apply to contracts in commodity derivatives traded on EU trading venues and to OTC contracts economically equivalent to such contracts; and (ii) contracts in commodity derivatives traded on a third-country facility that is considered as a trading venue should not be regarded as OTC and, therefore, the positions resulting from trading those contracts should not count towards the EU position limit regime. ESMA will publish a list of third-country trading venues that meet its criteria in an annex to its opinion and will update the list on an ongoing basis.
MiFID II: ESMA opinion on third country trading venues and post-trade transparency
ESMA has published an opinion on whether the requirement for firms to make information on transactions traded on a trading venue public through an approved publication arrangement (APA) applies also to transactions carried out on a third-country trading venue. ESMA's opinion is that information on transactions concluded by EU investment firms that are truly OTC (that is, bilateral transactions with non-EU firms), or transactions concluded on third country trading venues that would not be subject to a certain level of post-trade transparency should be made public in the EU through an APA under Articles 20 and 21 of MiFIR. As with position limits above, ESMA will publish a list of third-country trading venues that meet its criteria in an annex to its opinion and will update the list on an ongoing basis.
ESMA updates Q&As on MiFID II and MAR
ESMA has updated its Q&A on MiFID II and has published new Q&As providing guidance on implementation of MiFID II and MiFIR. The new Q&As relate to the following topics: (i) market structure; (ii) commodity derivatives; and (iii) transparency. ESMA has also published an updated version of its Q&A on MAR. Changes since the last version include: (i) a new Q&A on the disclosure of inside information related to Pillar II requirements; and (ii) a new Q&A on whether a policy under which, after coming into possession of inside information, the person should immediately and without the exercise of discretion cancel all orders relating to that information (a blanket order cancellation policy) is compliant with the prohibition on insider dealing under MAR.
ESMA has announced the launch of reference data submission under Article 4(1) of MAR. ESMA reports that its IT system for the collection of financial instrument reference data under MAR will become operational from 17 July 2017. From that date, market operators of regulated markets (RMs) and investment firms and market operators operating multilateral trading facilities (MTFs) will be able to transmit via FIRDS reference data concerning financial instruments for which a request for admission to trading was made, which were admitted to trading or were traded from 3 July 2016 onwards. As ESMA explained in its May 2016 communication on reference data submission, the implementation requirements of Article 4(1) of MAR will be delivered through the same IT systems developed for the implementation of Article 27 of MiFIR.
CMU agreement on securitisation
The EU Council has reached agreement with the European Parliament on proposals aimed at facilitating the development of a securitisation market in Europe. The proposals are part of the European Commission's work to establish a capital markets union (CMU) in the EU. The agreement covers two draft regulations: (i) the proposed regulation laying down common rules on securitisation and creating a European framework for simple, transparent and standardised securitisation (Securitisation Regulation); and (ii) the proposed regulation amending the Capital Requirements Regulation (CRR Amendment Regulation). Further technical input is required to finalise the text which will then be submitted to the Council of the EU and the European Parliament for adoption.
EuVECA and EuSEF Regulations
The European Commission has reached agreement with the Council of the EU and the European Parliament on the proposed Regulation amending the European Venture Capital Funds Regulation (EuVECA Regulation) and the European Social Entrepreneurship Funds Regulation (EuSEF Regulation). The agreement reached: (i) extends the range of managers eligible to market and manage EuVECA and EuSEF funds to larger fund managers (i.e AUM of more than EUR500 million); (ii) expands the ability of EuVECA funds to invest in small mid-caps and small and medium-sized enterprises (SMEs) listed on SME growth markets; (iii) decreases costs by explicitly prohibiting fees imposed by competent authorities of host member states where no supervisory activity is performed; and (iv) simplifies the registration process and determines the minimum capital necessary to become a manager. The proposed Regulation is part of the EU's plan to develop a fully functioning CMU diversifying funding sources for EU businesses and long-term projects.
The Joint Committee of the ESAs is consulting on draft RTS under the Fourth Money Laundering Directive (MLD4) in relation to group-level AML and CTF policies and procedures. Implementation of a third country's law may, at times, not permit the application of some or all parts of a group's AML and CTF policies and procedures. In these cases, MLD4 requires firms to ensure that group-wide AML and CTF policies and procedures are implemented effectively across all branches and majority-owned subsidiaries to the extent that local law permits this. Where it does not, firms must takes additional steps to effectively handle the resultant money laundering and terrorist financing risks. The draft RTS aim to provide detail as to what steps firms should take in this situation.
EBA response to consultation on operation of ESAs
The EBA has responded to the European Commission's March consultation on the operations of the ESAs (i.e. ESMA, EIOPA and the EBA). Among other things, the EBA's opinion includes a call for a stronger advisory role to the Commission and the co-legislators. It suggests that this could be achieved through: (i) informal engagement with the Commission before publication of legislative proposals; (ii) a legal requirement that the EBA is consulted in matters falling within the EBA's interest as defined by its founding regulation; (iii) a requirement to bring to the Commission's attention areas where differences in national rules and practices hamper the functioning of the single market and require legislative intervention; and (iv) ongoing access to information on development of draft texts, together with prior discussion of the content and timelines of EBA mandates.
ESMA response to consultation on operation of ESAs
ESMA has also responded to the European Commission's consultation on the operations of the ESAs (i.e. ESMA, EIOPA and the EBA). As a general point, ESMA states that the current supervisory model combining centralised tasks within ESMA with most of the supervision carried out at national level should be continued, but with a clear view to addressing the risks and opportunities that arise with a more important role for cross-border financial markets in the context of CMU and Brexit. The response also discusses a number of issues, including third countries, direct supervision, supervisory convergence, access to data and reporting and a power to temporarily suspend rules.
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2 June 2017