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Key Regulatory Topics: Weekly Update 14–20 February 2020

20 February 2020

Our weekly update on key regulatory topics affecting the financial services sector.

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Capital Markets

Please see the Markets and Markets Infrastructure section for the euro-risk-free rate working group’s report on the transfer of EONIA’s liquidity to €STR.

EC’s High Level Forum interim report on new vision for Capital Markets Union (CMU)

On 20 February, the EC published the High Level Forum’s (HLF) interim report on the CMU. The HLF was set up in November 2019 by the EC to review progress and propose new targeted actions to further advance the CMU initiative. In the report HLF addresses the main challenges associated with the CMU including: (i) financial stability and the EU economy’s overreliance on traditional lending; (ii) disruption caused by rapid technological change; (iii) climate sustainability; and (iv) low investor confidence. HLF calls for the support and commitment of Member States and the collaboration of all EU institutions in building a genuine CMU. This report will feed into the HLF’s final report due to be published in May, which will contain specific policy proposals and also assist the EC in its 2020 CMU action plan.

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ESMA updates Q&As on implementation of Credit Rating Agencies Regulation

On 17 February, ESMA published an updated version of its Q&As on the implementation of Regulation (EU) No. 462/2013 (CRAR III). The update provides clarification on what steps a credit rating agency should take in order to ensure a sufficient level of quality and transparency in the periodic review of credit ratings.

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LSB on compliance with standards of lending practice for business customers in financial difficulty

On 18 February, the Lending Standards Board (LSB) published a report setting out its findings from a 2019 thematic review, to understand how registered firms are meeting the LSB's standards for business customers in financial difficulty. The assessment considered the key controls that six firms have in place to ensure compliance with the standards and correct customer outcomes. Its scope covered all micro-enterprise businesses with a turnover of up to £6.5m for both secured and unsecured borrowing. It looked at governance, staff training, internal systems, monitoring and the oversight of policies and procedures. Across all six firms, significant work has been undertaken since the standards were launched in 2017, to promote a culture that is supportive of business customers in difficulty. Areas of improvement included: (i) enhancing oversight, quality assurance and testing to focus on conduct; (ii) early intervention and assessments of vulnerable business customers; (iii) soft skills training to ensure a full understanding of customers’ circumstances; and (iv) a tailoring of policies and processes for business customers recognising their differences to personal customers. All six firms received individual action plans which will be followed up at a later date.

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Financial crime

Please see the Other Developments section for the Financial Stability Board’s letter on emerging vulnerabilities in the financial system.

European Systemic Risk Board’s (ESRB) report on systemic cyber risk

On 19 February, the ESRB published a report on systemic cyber risk. The ESRB has identified cyber risk as a source of systemic risk to the financial system. The ESRB has developed an analytical framework to assess how cyber risk can become a source of systemic risk to the financial system. The four stages of this conceptual model (context, shock, amplification, systemic event) facilitate a systematic analysis of how a cyber incident can grow from operational disruption into a systemic crisis. A cyber incident can evolve into a systemic crisis when trust in the financial system is eroded. This involves an assessment of whether or not the incident escalates from an operational level into the financial and confidence realms. The ESRB’s analysis illustrates how a cyber incident could, under certain circumstances, rapidly escalate from an operational outage to a liquidity crisis. Further work is required to address system vulnerabilities and reduce the potential for widespread disruption through amplification channels. The ESRB intends to explore some of the potential systemic mitigants in future work.

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Please see the Other Developments section for the Financial Stability Board’s letter on emerging vulnerabilities in the financial system, specifically in relation to stablecoins and cross-border payment systems.

Markets and markets infrastructure

Please see the Other Developments section for the Financial Stability Board’s letter on emerging vulnerabilities in the financial system, specifically in relation to the transition away from LIBOR. .

Industry Working Group’s report to support smooth transfer of EONIA’s liquidity to €STR

On 19 February, the ECB published the euro-risk-free rates industry working group’s report entitled ‘On the transfer of EONIA’s cash and derivatives market’s liquidity to the €STR’. The report contains recommendations, clarifications and guidance on how to ensure a liquid €STR market and a smooth transition from EONIA before it is discontinued on 3 January 2022. The report recommends, inter alia: (i) that market participants replace EONIA products with €STR as soon as possible with major CCPs having set their discounting switch date on or around 22 June – any contracts that continue to reference EONIA beyond the discontinue date will entail significant risks; and (ii) that market-makers proactively price in the €STR rather than EONIA as their default and that nettability of the EONIA and €STR should be considered at CCP level.

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ESMA updates Prospectus Regulation Q&As

On 18 February, ESMA updated its Q&As on the Prospectus Regulation including two new Q&As relating to the length of the prospectus summary. Clarification is provided as to, inter alia: (i) the number of additional pages that can be included in a summary where there is more than one guarantor; and (ii) the number of additional pages that can be included in a summary relating to several securities.

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ESMA updates MiFID II Q&As on investor protection and intermediaries

On 18 February, ESMA updated its Q&As on investor protection and intermediaries under MiFID II and MiFIR. ESMA has added new Q&As on practices for firms selling financial instruments subject to the resolution regime under BRRD II. It has provided greater clarity on, inter alia: (i) sales of subordinated eligible liabilities and the assessment of suitability; (ii) information to be collected from clients; (iii) calculation and monitoring of the 10% threshold; and (iv) what happens if a transaction relating to subordinated eligible liabilities is deemed unsuitable by the firm, but the retail client wishes to proceed anyway. Member states have until 28 December to adopt and publish the measures necessary to comply with BRRD II, with certain exceptions.

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EC consults on review of MiFID II regulatory framework for investment firms and market operators

On 17 February, the EC published a consultation paper and impact assessment on its review of the regulatory framework for investment firms and market operators under MiFID II and MiFIR. The consultation should be considered alongside the separate related ESMA consultations, which together will inform the EP and Council in furthering their plans for the Capital Markets Union. The consultation seeks stakeholders views as to: (i) their experience of two years of the application of MiFID II/MiFIR and whether a targeted review to address urgent shortcomings is needed; (ii) the technical aspects of the regime in relation to specific issues; and (iii) any further issues previously unaddressed by the EC. The paper looks at, inter alia: (a) investor protection rules; (b) SMEs research coverage; and (c) the introduction of a new transparency tool allowing access to live asset prices across the EU in a consolidated format. The deadline for comments on the consultation is 20 April. The deadline for comments on the impact assessment is 16 March. 

Consultation paper

Impact Assessment

ESMA updates Q&As on CSDR

On 17 February, ESMA published an updated version of its Q&As on the implementation of CSDR. ESMA have added three new Q&As under the Settlement Disciple section on cash penalties, central counterparties (CCPs) settlement instructions and the buy-in process. It clarifies: (i) that penalty mechanism costs charged to participants by a CSD should not be allocated based on the number or value of penalties applied; (ii) the obligations and specific requirements concerning the settlement instructions sent by CCPs; and (iii) that the length of the extension period of the buy-in-process should be determined based on the liquidity classification of the relevant financial instrument as at the intended settlement date of the transaction.

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Payment services and payment systems

BoE and Pay.UK Standards Advisory Panel on proposed guidance for enhanced data ISO messages

On 17 February, the BoE published minutes of a meeting of its Standards Advisory Panel (SAP) held on 2 December 2019 with Pay.UK. SAP discussed, inter alia, its approach for producing thematic market guidance on the use of enhanced messaging by the end of 2020. The guidance will explain how to populate enhanced data ISO messages, depending on the payment purpose. The BoE and Pay.UK envisage themselves as coordinators of the guidance, which is created and owned by the industry.

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PSR’s policy statement on varying specific direction 10: confirmation of payee

On 14 February, the Payment Systems Regulator (PSR) published its policy statement on confirmation of payee and its decision on varying specific direction 10 (SD10), following the January consultation. The PSR has decided to proceed with SD10 in the varied form proposed in the consultation, subject to one alteration, namely that the PSR will always impose a new date for compliance with SD10’s requirements if it approves an exemption under the ‘additional basis’. The consultation proposed an ‘additional basis’ for a directed PSP to request an exemption from an obligation under SD10 in circumstances where it is not reasonable or proportionate to require the PSP to comply. The PSR has published the varied SD10 and the full stakeholder submissions to the consultation.

PSR Policy Statement (20/1)

Varied SD10

Stakeholder Submissions

Prudential regulation

Single Resolution Board (SRB) consults on changes to MREL policy

On 17 February, the Single Resolution Board (SRB) published a consultation paper setting out the proposed changes to its MREL policy in light of the 2019 EU Banking Package: CRD V, CRR II and BRRD II. Areas covered include: (i) MREL calibration; (ii) subordination requirements and ‘no creditor worse off’ risk methodology; (iii) internal MREL for non-resolution authorities; (iv) application of MREL to cooperative groups; (v) eligibility of liabilities under third countries’ laws; and (vi) the transitional arrangements for implementing the new requirements up to the 2024 deadline. The responses to the consultation will support the SRB in preparing the final MREL policy, expected to be published in Q2 2020. MREL decisions implementing the new single resolution mechanism regulation framework will be taken in 2021. The deadline for comments is 6 March.

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EC adopts Implementing Act amending supervisory reporting of institutions under CRR

On 14 February, the EC adopted an Implementing Act amending Commission Implementing Regulation (EU) 680/2014 on supervisory reporting of institutions according to the CRR. The Implementing Act amends the supervisory reporting requirements relating to: (i) COREP, concerning the new securitisation framework and changes to the liquidity coverage requirement brought in by Delegated Regulation (EU) 2018/1620; and (ii) FINREP, concerning non-performing exposures (NPE) and forbearance to allow the monitoring of reporting institutions’ NPE strategies, the reporting requirements on profit and loss items and the implementation of the new IFRS 16 on leases. The amendments will apply on different dates (from 30 March to 1 June) as a result of different application dates of the underlying regulatory framework. Following completion of the EU legislative procedure, it will be published in the OJ and is proposed to enter into force the day after publication occurs.

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Recovery and resolution

Please see the Markets and Market Infrastructure section for the updated ESMA Q&As on investor protection and intermediaries.

Other developments

FCA February 2020 sector views

On 18 February, the FCA published its sector views, setting out its annual analysis of the way the financial environment is changing and the impact this has on consumers and market effectiveness. The FCA provides an overall view of how each financial sector is performing as at mid-2019 and the main challenges faced in those sectors. The FCA has identified four themes having the greatest cross-sector impact: (i) macro-economic challenges such as sustained low-interest rates and high level of consumer debt; (ii) societal changes such as climate change; (iii) technological developments such as open banking, open finance and Fintech; and (iv) Brexit.

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Financial Stability Board’s (FSB) letter on emerging vulnerabilities in the financial system

On 18 February, the FSB published a letter to the G20 Finance Ministers and Central Bank Governors on new and emerging vulnerabilities in the financial system arising because of: (i) the transition away from LIBOR; (ii) the rapid progress of technology, specifically cyber incidents; (iii) the development of stablecoins and cross-border payment systems; and (iv) nonbank financial intermediation (NBFI). Scanning the horizon to identify and assess new and emerging risks to global financial stability is at the core of the FSB mandate. In addition, the FSB will continue its assessments of current vulnerabilities, including through regular discussion by its members of macro-financial developments and through the biannual Early Warning Exercise conducted jointly with the International Monetary Fund. The FSB will also focus on, inter alia: (a) the impact on global financial stability of the growth of NBFI and operational issues; and (b) the financial stability implications of a ‘lower for longer’ interest rate environment against the backdrop of elevated debt levels, including follow-up work on the December 2019 FSB report on leveraged loans and collateralised loan obligations.

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