Financial Services SpeedRead January 2023 edition

1. Council of the European Union: Review of the MiFIR and MiFID II legislation

On 21 December 2022, the Council of the European Union (the Council) published its proposals for legislative changes regarding the Markets in Financial Instruments Regulation (MiFIR) and the second Markets in Financial Instruments Directive (MiFID II).

The Council included the following requests to the permanent representatives committee:

• a proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 600/2014 with regards to enhancing market data transparency, removing obstacles to the emergence of a consolidated tape, optimising the trading obligations, as well as prohibiting receiving payments for forwarding client orders; and
• a proposal for a Directive of the European Parliament and of the Council amending Directive 2014/65/EU on markets in financial instruments.

The proposals aim to empower investors, particularly smaller and retail investors by enabling them to access market data which is relevant to investing in shares or bonds more easily and by making EU market infrastructures more robust.

2. Council of the EU: CSDR – Member States agree position to revise EU rules on central securities depositories

On 20 December 2022, the Council of the European Union published a press release detailing the EU Member States' agreement on their negotiation position regarding the proposed update of the Central Securities Depositories Regulation (CSDR). The aim of the updates is to enhance the efficiency of securities settlement by, amongst other factors, clarifying the processes for authorisation and making requirements simpler. The proposals also aim to address the burdensome requirements of passporting, which have had the effect of stifling cross-border settlement.

One way in which the proposals do this is by clarifying that the home Member State of the central securities depositories (CSDs) will have authority to decide whether a CSD will be able to provide cross-border services. It is envisaged that in circumstances where the CSD's activities in at least two other Member States are considered very important to protecting investors and enabling the functioning of securities markets, a college of supervisors will be established for the purpose of information exchange. There are also proposals on "mandatory buy-ins" and enabling settlement in foreign currencies by allowing CSDs to access banking-type ancillary services from one another. Negotiations on these proposals will now commence.

3. Council of the EU: Opinion of the European Central Bank on a proposal for a regulation amending the Central Securities Depositaries Regulation (CSDR)

On 15 December 2022, the European Central Bank (ECB) published its Opinion on a proposal for a regulation amending the CSDR (the Proposed Regulation). The ECB received the request from the Council for an opinion on 13 April 2022.

Overall, the ECB welcomes the Proposed Regulation and puts forward the view that the Proposed Regulation will simplify the passporting process under the CSDR and enhance cooperation among competent and relevant authorities. The ECB also strongly supports the general aim of further facilitating capital markets integration by reducing barriers to the cross-border provision of settlement services. The ECB further adds that the Proposed Regulation is broadly aligned with policies pursed internationally in the aftermath of the global financial crisis that emerged in 2008-2009.

• Specific observations from the ECB were made in respect of the following areas: settlement discipline regime;
• cooperation between competent authorities and relevant authorities: review and evaluation;
• cooperation among competent authorities and relevant authorities: establishment of colleges;
• banking-type ancillary services;
• netting; and
• default.

4. ESMA: Amendments to Commission Delegated Regulation (EU) 2017/587 (RTS 1) and Commission Delegated Regulation (EU) 2017/583 (RTS 2)

On 19 December 2022, ESMA published a positive opinion (the ESMA Opinion) on the European Commission's amendments to the regulatory technical standards regarding equity transparency (RTS 1) and non-equity transparency (RTS 2).

The purpose of the reviewed RTS 1 and RTS 2 is to improve the pre-and post-trade transparency regime for equity and non-equity instruments. The ESMA Opinion aims to establish a clearer transparency regime and ultimately improve data aggregation.

The European Commission proposed the following amendments:

• changes to reporting fields in RTS 1 and RTS 2 in order to improve post trade transparency for both equity and non-equity instruments;
• changes to the list of flags for the purpose of non-equity post trade transparency in RTS 2; and
• postponing the application date of certain provisions which require technical implementation effort by investment firms, trading venues and approved publication arrangements of both RTS 1 and RTS 2. The application date has been postponed to 1 January 2024.

The ESMA Opinion has been officially submitted to the European Commission and the latter will have three months to endorse the reviewed RTS.

5. ESMA: Final Report: Guidelines for reporting under EMIR

On 20 December, ESMA published its Final Report providing guidelines on reporting trades in derivatives, the obligations for trade repositories (TRs) and data management under the amended EMIR Refit Regulation 2019/834 (the Final Report). The Final Report contains an assessment of the feedback received from stakeholders from the Consultation Paper published in July 2021 and provides guidelines on compliance with EMIR technical standards to ensure consistent implementation of the revised rules.

For example, the Final Report provides clarification on:

• the transition to reporting under the new rules;
• the number of reportable derivatives;
• intragroup derivatives exemption from reporting;
• delegation of reporting and allocation of responsibility for reporting;
• reporting logic and the population of reporting fields;
• reporting of different types of derivatives;
• ensuring data quality by the counterparties and the TRs
• construction of the Trade State Report and reconciliation of derivatives by the TRs; and
• data access.

The Final Report is accompanied by the validation rules and the reporting instructions on outgoing messages and incoming messages. The validation rules document sets out technical rules on how the TRs should verify the completeness and accuracy of the reported data, as well as the conditions and thresholds to be applied to determine whether the values reported by both counterparties match or not. They further provide a template for notifications of reporting errors and omissions to the National Competent Authorities. The reporting instructions contain EMIR Extensible Mark-Up Language messages which were updated or newly developed based on the revised technical standards and validation rules. The aim is to create a fully standardised format for reporting.

ESMA will continue to engage stakeholders with a view to facilitating a smooth transition to reporting under the amended rules. The guidelines in the Final Report will apply from 29 April 2024.

6. European Banking Authority: Updated List of CET1 instruments

On 19 December 2022, the European Banking Authority (EBA) published an updated list of capital instruments that Competent Authorities across the EU, and for the first time, the EEA, have classified as Common Equity Tier 1 (CET1).

Since the previous publication of the list in December 2021, the list of CET1 instruments compliant with the Capital Requirements Regulation 575/2013 (the CRR) includes certain instruments issued by institutions in Iceland, Liechtenstein and Norway. Some instruments have been deleted as they are no longer used by institutions in the EU/EEA. Finally, an additional type of instrument issued by Spanish investment firms has been included as it was evaluated as being compliant with the CRR. However, this type of instrument may only be issued by investment firms, which is highlighted in the updated list.

7. BoE (PRA)/FCA: Consultation Paper 15/22/CP22/28: Ratio between fixed and variable components of total remuneration (Bonus Cap)

On 19 December 2022, the PRA and FCA published a joint Consultation Paper (the CP) proposing to remove the existing limits on the ratio between fixed and variable components of total remuneration (the Bonus Cap). The proposal would result in removal of the current Bonus Cap requirements. The aim is to avoid unintended consequences of the Bonus Cap, which included growth of the fixed component of total remuneration. Such growth decreases the proportion of compensation that may be subjected to incentive setting tools, and reduces a firm's ability to adjust costs to absorb losses.

The PRA and FCA propose to remove the current Bonus Cap requirements by:

• changing the Remuneration Part and the Disclosure (CRR) part of the PRA Rulebook (Appendix 1 and Appendix 4), and to Senior Management Arrangements, Systems and Controls (SYSC) 19D: Dual-regulated firms Remuneration Code that is part of the FCA’s Handbook (Appendix 2); and
• updating the PRA’s Supervisory Statement (SS)2/17 ‘Remuneration’ (Appendix 3).

Feedback on the CP can be provided until 31 March 2023. The proposed changes resulting from the CP would come into force the next calendar day after publication of the final policy and apply to the performance year after that. As the final policy is targeted for Q2 2023, most firms are likely to apply the rules for the performance years starting 2024.

8. ESMA: Report regarding Technical standards on Cross-Border Activities under the UCITS Directive and the AIFMD

On 21 December 2022, ESMA published a final report containing draft regulatory technical standards (RTS) and implementing technical standards (ITS) for notifications for cross-border marketing and cross-border management of AIFs and UCITS. The draft technical standards aim to:

• facilitate the process for notifying national competent authorities on cross-border marketing and management activities relating to UCITS and alternative investment funds (AIFs); and
• standardise the content and format of information to be provided by management companies and AIF managers (AIFMs) during the provision of cross-border services.

The final report also provides significant feedback, which ESMA received to its 17 May 2022 consultation on the technical standards.

The draft ITS and RTS have been submitted to the European Commission for adoption. From the date of submission, the European Commission has three months to take a decision on whether the ITS and RTS will be adopted.

9. ESMA: Updated Q&A: Application of the AIFMD

On 16 December 2022, ESMA updated its Q&As on the application of the Alternative Investment Fund Managers Directive (AIFMD). The new question covers whether managers of special purpose acquisition companies (SPACs) fall within the scope of AIFMD. The answer is that EU law does not, at present, define SPACs and the structure of SPAC transactions are complex, with significant variations in structuring. It is therefore to be judged on a case-by-case basis in light of whether SPACs meet the definition of "AIF" and whether they would be considered a "holding company" under Article 4(1)(a) and Article 4(1)(o) of the AIFMD respectively.

It is also noted that the occurrence of specific characteristics may suggest that an SPAC does not amount to an AIF, namely:

• where a SPAC does not aim to invest capital raised through an IPO in line with a specified investment policy;
• where all, or substantially all, IPO proceeds are put towards the business combination; and
• after the business combination, the purpose of the SPAC is general or industrial.

No updates for this edition of the FSS.

10. The Proceeds of Crime (Money Laundering) (Threshold Amount) Order 2022

On 19 December 2022, the Secretary of State made an Order relating to the threshold amount for triggering offences under money laundering and proceeds of crime legislation. The "threshold amount" relates to "the value of criminal property below which a bank or similar firm… can carry out a transaction, in operating for a customer, without committing one of the main [POCA] money laundering offences". The threshold has been raised from £250 to £1,000. The rationale behind this is to enhance the Suspicious Activity Report (SAR) regime, to better utilise enforcement resources, and to reflect the fact that larger payments are being made as a result of an increase in the cost of living.

No updates for this edition of the FSS.

No updates for this edition of the FSS.

11. EU: Digital Operational Resilience Act (DORA)

On 27 December 2022, the EU published the Regulation and Directive on Digital Operational Resilience (DORA) in the Official Journal of the European Union (the Official Journal). DORA will apply from 17 January 2025 to a broad range of EU-regulated financial entities, such as credit institutions, electronic money institutions, investment firms and trading venues.

Key requirements under the DORA regime include but are not limited to the following:

• governance and risk management: financial entities are required to have in place an internal governance and control framework, which ensures an effective and prudent management of Information and Communications Technology (ICT) risk;
• CT security: financial entities are required to establish policies, procedures and protocols to ensure the security, resilience and continuity of their IT systems; and
• testing: firms are required to implement a testing programme to cover the resilience of IT systems and processes. Micro enterprises may benefit from a much more flexible regime in relation to digital operational resilience testing programmes.

For further details, please read the 5 December 2022 Ashurst briefing here.

12. Official Journal of the European Union: Publication: Corporate Sustainability Reporting Directive

On 16 December 2022, the Corporate Sustainability Reporting Directive (CSRD) was published in the Official Journal of the European Union. The CSRD entered into force 20 days after its publication in the Official Journal, on 5 January 2023.

Amongst other things, the CSRD will replace existing rules under the Non-Financial Reporting Directive (NFRD) and requires in-scope companies to report on sustainability-related issues in line with the detailed set of disclosure standards developed by the European Financial Reporting Advisory Group (EFRAG).

The CSRD will capture large and listed EU companies, as well as large third country companies which do substantial business in the EU or have securities listed on EU regulated markets.

13. European Commission: Amending the Implementing technical standards regarding the disclosure of environmental, social and governance risks

On 19 December, the European Commission published Commission Implementing Regulation (EU) 2022/2453 (the Amending Regulation) which amends the implementing technical standards (ITS) laid down in Implementing Regulation (EU) 2021/637 (the Implementing Regulation) as regards the disclosure of environmental, social and governance (ESG) risks under Titles II and III of the Capital Requirements Regulation No 575/2013 (the CRR).

The Implementing Regulation sets out uniform disclosure formats and instructions for the disclosures required under the CRR. Under Article 449a of the CRR, large institutions which have issued securities admitted to trading on regulated markets within the Member States are required to disclose ESG risks, including physical and transition risks. Article 449a also requires that such ESG risks are disclosed, as of 28 June 2022, on an annual basis for the first year and biannually thereafter. For those reasons, the first annual disclosure reference date has been set on 31 December 2022.

The Amending Regulation amends the Implementing Regulation to reflect the requirements of Article 449a. The Implementing Regulation entered into force on 8 January 2023 following its publication in the Official Journal.

14. European Commission: Draft Commission Notice on the EU Taxonomy

On 19 December 2022, the European Commission published two draft commission notices on interpreting and implementing certain legal provisions in relation to:

• the Disclosures Delegated Act under Article 8 of EU Taxonomy Regulation on the reporting of Taxonomy eligible and taxonomy aligned economic activities and assets (Article 8 of the EU Taxonomy Regulation); and
• the EU Taxonomy Climate Delegated Act, which was introduced to establish technical screening criteria for economic activities that contribute substantially to climate change mitigation or climate change adaptation and do no significant harm to other environmental objectives (the EU Taxonomy Climate Delegated Act).

The commission notice on Article 8 of the EU Taxonomy Regulation includes general FAQs, which discuss concerns such as the envisioned timeline for the application of Taxonomy-related disclosures set out in the Complementary Delegated Act (CDA), and the ways in which reporting undertakings are expected to disclose comparative information in the disclosures under the Disclosures Delegated Act.

In addition, the commission notice on the EU Taxonomy Climate Delegated Act includes horizontal questions on process, updates and the further development of the Climate Delegated Act, as well as the scope of economic and technical screening criteria in the Climate Delegated Act.

Both draft commission notices were approved in principle by the European Commission on 19 December 2022.

15. European Commission updates list of high-risk third-country jurisdictions

On 20 December 2022, the European Commission amended Delegated Regulation (EU) 2016/1675 and updated the list of high-risk third-country jurisdictions for the purposes of Directive (EU) 2015/849 on preventing money laundering and terrorist financing.

The following countries were added to the list:

Democratic Republic of Congo;

• Gibraltar;
• Mozambique;
• Tanzania; and
• United Arab Emirates

The following countries were removed from the list:

• Nicaragua;
• Pakistan; and
• Zimbabwe.