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Key Regulatory Topics: Weekly Update, 3-9 August 2018

17 August 2018

Allen & Overy publish weekly updates on key regulatory topics affecting the financial services sector. If you would like to receive this update by email and be added to our marketing mailing list please contact



Draft Short Selling (Amendment) (EU Exit) Regulations 2018
On 9 August, HMT published a draft version of the Short Selling (Amendment) (EU Exit) Regulations 2018 and an explanatory information document. The draft Regulations will amend the SSR, Commission Delegated Regulation 918/2012 supplementing the SSR, and Part 8A of FSMA (which implemented parts of the SRR in the UK), to address areas of retained EU law which would not otherwise operate effectively, and other deficiencies arising from the UK's withdrawal from the EU. Regulation 1 of the draft Regulations will come into force on the day after the day on which the draft Regulations are made. The other provisions will come into force on exit day. HMT intends to lay the draft Regulations before Parliament in the autumn.
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FCA Dear CEO letter on cross-border booking arrangements
On 8 August, the FCA published a Dear CEO letter on cross-border booking arrangements. In the letter, the FCA explains that the UK’s withdrawal from the EU has resulted in firms needing to put in place contingency plans which, when executed, will impact current business models, legal entity strategies and booking arrangements. It appreciates the information firms have already provided on their plans, and reminds firms of the importance of continuing to provide all necessary information. Firms should not take decisions without speaking to the FCA first. The FCA has an important statutory objective relating to the integrity of UK financial markets. The duties it has gained from implementation of EU directives and regulations will continue, as will its responsibility for conduct of business in financial markets. As the FCA has stated publicly, it does not intend to restrict market access using regulatory or supervisory tools. This approach would be inconsistent with its objectives. It would result in a fragmented market, costs being imposed on clients, and increased risk of financial instability. Firms expanding their presence elsewhere in the EU must ensure that the structures put in place enable the FCA to supervise the conduct of their UK business effectively. They must also ensure continued compliance with the FCA's Threshold Conditions. When designing the structures, firms should assess whether the proposed changes are in clients' best interests. The FCA is aware that some EU supervisors have set out specific business model requirements. The FCA is open to a broad range of legal entity structures or booking models. This includes those making use of back-to-back and remote booking, providing the associated conduct risks are effectively controlled and managed. Its starting point is not to restrict business models, but to understand the principles and practices involved, and how the conduct risks arising from them are managed. The FCA sets out in the letter six principles that booking models should comply with. The FCA expects UK boards and senior managers to ensure that effective governance is in place to identify and mitigate the potential harm that could arise from modified booking arrangements. Firms should also be able to demonstrate how the principles have been observed and implemented. For dual-regulated firms, the FCA explains that this approach is consistent with the PRA's established approach to booking practices. It continues to liaise closely with the PRA in the context of EU withdrawal work.
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FMLC report on legal uncertainty arising in context of robustness of financial contracts after Brexit
On 6 August, the FMLC published a report on issues of legal uncertainty arising in the context of the robustness of financial contracts after Brexit. The FMLC has considered whether, in the context of a hard Brexit, the performance of existing financial contracts would continue, or whether Brexit would make their performance illegal, impractical or impossible in some way. The report sets out the FMLC's in-depth analysis of this issue. It highlights the legal uncertainty that will arise if there is no clarity as to the future of the UK/EU relationship post-Brexit. The analysis focuses on existing contracts, although the FMLC notes some of the points raised may be equally relevant to new contracts concluded after exit day. The analysis also exclusively concerns contractual rights and obligations, although the FMLC recognises that the performance of services and activities relating to financial contracts are integral to the assessment of business continuity. For the most part, the FMLC finds that it agrees with the EC's July communication. It considers it unlikely that Brexit will give rise to issues of contractual continuity in a general sense, so far as it is a matter of English law and jurisdiction. Nevertheless, the FMLC has explored the potential consequences to all concerned, including clients and markets, where authorisations are lost without adequate alternatives. It has also examined some of the ways in which the identified issues might be mitigated by firms themselves and through legislative action, including within an agreement between the UK and the EU.
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Services procurement guidelines for ECB's TIBER-EU framework
On 7 August, the ECB published the TIBER-EU framework: services procurement guidelines. The EU framework for the TIBER-EU is the first EU-wide framework for controlled and bespoke tests against cyber-attacks in the financial sector. In summary, the framework allows national authorities and financial services institutions to establish a programme to test and improve firms' resilience against sophisticated cyber-attacks. To ensure a controlled and safe test, one prescribed control is the use of specialist external TI and RT providers that have the requisite experience in threat intelligence and red team testing in financial services. Such external providers also bring a fresh and independent perspective and are likely to have more resources and up-to-date skills to deploy. The guidelines are an integral part of the TIBER-EU framework and detail the different elements of TIBER-EU procurement. They are divided into three parts that: (i) set out the requirements and standards that must be met by the TI and RT providers to deliver recognised TIBER-EU tests; (ii) offer guiding principles and selection criteria for entities as they look to procure services from prospective providers; and (iii) provide questions and agreement checklists that could be used when entities undertake their due diligence and look to formalise the procurement process with TI and RT providers. The guidelines are directed at national and EU authorities responsible for the adoption, implementation and management of the framework, entities looking to undertake TIBER-EU tests, organisations interested in providing cyber threat intelligence services under TIBER-EU, organisations interested in providing red team testing services under TIBER-EU, and accreditation and certification providers.
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ESMA responds to EIOPA questions on AIFMD interpretation
On 7 August, ESMA published a letter (dated 25 July) from Steven Maijoor, ESMA Chair, to Gabriel Bernardino, EIOPA Chair, on issues relating to the interpretation of AIFMD. The letter responds to questions raised by EIOPA under section 11.5.2 of its second set of advice to the EC on specific terms in the Solvency II Delegated Regulation (EIOPA-BoS-18/075). The questions (and ESMA's response) relate to the definition of AIF and the leverage calculation in the AIFMD and its implementing measures. More specifically, ESMA sets out its response to the following questions: (i) Are AIFs that use borrowing arrangements under Article 6(4) of Commission Delegated Regulation ((EU) No 231/2013) or derivative instruments under Article 8(7) of Commission Delegated Regulation ((EU) No 231/2013) considered to be "leveraged" under the AIFMD? (ii) Are AIFs that are managed by AIFMs as defined in Article 3(2) of the AIFMD (often referred to as "registered" or "sub-threshold" AIFMs) to be considered as AIFs as defined in Article 4(1)(a) of the AIFMD?
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Investment Association updates guidance on charity authorised investment funds
On 3 August, the IA published an updated guide on CAIFs (dated July) and a revised version of its model trust deed (dated 31 July). The IA first published industry guidance on setting up a CAIF and the model trust deed in October 2016, which it had produced with the Charity Investors Group and the Charity Law Association. The contents of the guide are stated as having been reviewed by the Charity Commission for England and Wales and the FCA. The IA states in the guide that it endeavours to keep the guide up to date to reflect changes in processes. The IA has not announced how the latest version of the guide and deed have been updated.
CAIF Guide
Revised Model Trust Deed


EIOPA joins Sustainable Insurance Forum
On 8 August, EIOPA published a press release announcing that it has become a member of the SIF. The SIF is a network of insurance supervisors and regulators from around the world working together on sustainability challenges facing the insurance sector. In July, SIF and the IAIS jointly published an issues paper on climate change risk in the insurance sector. In the paper, SIF and the IAIS call on the insurance sector to enhance awareness of climate change risk. EIOPA considers that the case studies on supervisory practice set out in the paper are of "high value" for all supervisors. EIOPA will consider transition and physical risks relating to climate change. It will also provide input from an EU perspective on taxonomy, fiduciary duty, governance, ORSA, as well as disclosure in the sustainable action plan it intends to publish in the autumn.
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ESMA updates EMIR validation rules
On 9 August, ESMA published an updated version of its validation rules for the reports submitted under the revised technical standards on reporting under Article 9 of EMIR. The amendments are shown in red font. In a related press release, ESMA explains that it has updated the validation rules, with effect from 5 November, relating to the following fields: (i) reporting timestamp; (ii) reporting counterparty ID; (iii) ID of the other counterparty; (iv) underlying identification; and (v) confirmation means. ESMA last updated the validation rules in March.
Updated validation rules
Press release
Implementing Regulations supplementing BMR published in OJ
On 9 August, the following two Implementing Regulations supplementing the BMR were published in the OJ: (i) Commission Implementing Regulation (EU) 2018/1105 laying down ITS with regard to procedures and forms for the provision of information by competent authorities to ESMA under the BMR. Article 47(2) of the BMR requires competent authorities to provide ESMA with all information necessary to carry out its duties; and (ii) Commission Implementing Regulation (EU) 2018/1106 laying down ITS with regard to templates for the compliance statement to be published and maintained by administrators of significant and non-significant benchmarks pursuant to the BMR. Article 25(7) of the BMR obliges administrators of significant benchmarks that choose not to comply with one or more particular requirements of the BMR to publish and maintain a compliance statement stating why it is not appropriate for them to comply with those requirements. Article 26(3) of the BMR imposes a similar obligation on administrators of non-significant benchmarks, but regarding a broader range of requirements. The template for the Article 25(7) compliance statement is set out in Annex I to the Implementing Regulation. The template for the Article 26(3) compliance statement is set out in Annex II to the Implementing Regulation. Both Implementing Regulations are dated 8 August. They come into force on 29 August (that is, 20 days after publication in the OJ) and will apply from 29 October. The Implementing Regulations are based on draft ITS submitted by ESMA to the EC in March 2017.
Commission Implementing Regulation (EU) 2018/1105
Commission Implementing Regulation (EU) 2018/1106
BCBS, CPMI, FSB and IOSCO second report on central clearing interdependencies
On 9 August, BCBS, CPMI, the FSB and IOSCO published their second report on central clearing interdependencies. The report analyses interdependencies between central counterparties (CCPs) and their clearing members and other financial services providers. The BCBS, CPMI, FSB and IOSCO sought to assess whether the findings of their first report, published in July 2017, were stable over time. They conducted another, more streamlined, data collection from the same 26 CCPs. The results are broadly consistent with the previous analysis and demonstrate that: (i) prefunded financial resources are concentrated at a small number of CCPs; (ii) CCP exposures are concentrated among a small number of entities; (iii) relationships mapped are characterised, to varying degrees, by a core of highly connected CCPs and entities and a periphery of less highly connected CCPs and entities; (iv) a small number of entities tend to dominate the provision of the critical services required by CCPs; and (v) clearing members and clearing member affiliates are also important providers of other critical services required by CCPs and can maintain several types of relationships with multiple CCPs simultaneously. The results also identify some changes to the interdependencies in central clearing, such as a decrease in the concentration of client clearing activity. In addition, initial margins from clients are now concentrated in two CCPs, compared with only one previously. The analysis is a useful starting point for understanding potential sources of systemic risk in central clearing and is intended to assist with the design of supervisory stress tests. It has also informed the policy work set out in the joint workplan to promote CCP resilience, recovery and resolvability.
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FSB, BCBS, CPMI and IOSCO consult on impact of G20 regulatory reforms on incentives to centrally clear OTC derivatives
On 7 August, the FSB published a consultation paper on the impact of the G20 regulatory reforms on incentives to centrally clear OTC derivatives. The consultation paper has been published jointly with the BCBS, the CPMI and IOSCO (the authorities). It has been produced by the authorities' DAT. In the consultation paper, DAT assesses how the G20 post-crisis reforms to the OTC derivatives markets are, directly or indirectly, relevant to incentives to centrally clear. It considers how these reforms interact and how they could affect incentives. In general terms, DAT has found that some aspects of regulatory reform may not incentivise the provision of client clearing services. Its analysis suggests that, overall, the reforms are achieving the goal of promoting central clearing, especially for the most systemic market participants. However, beyond the systemic core of the derivatives network of CCPs, dealers and clearing service providers, and larger, more active clients, the incentives are less strong. Analysis of quantitative and qualitative survey data and market outreach suggests that the treatment of initial margin in the leverage ratio can be a disincentive for banks to offer or expand client clearing services. Bearing in mind the original objectives of the regulatory reform, DAT considers that additional analysis would be useful to further assess these effects. However, it notes that, ultimately, the final responsibility for deciding whether and how to amend a particular standard or policy remains with the body responsible for issuing that standard or policy. Comments can be made on the consultation paper until 7 September. The plan is to publish the final report around the time of the G20 summit at the end of November.
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Updated version of GFXC's FX global code
On 6 August, the GFXC published a paper looking back over the first year of the FX global code, and also looking ahead. Looking forward, the paper highlights the GFXC's priorities, which include: (i) continuing its working group to strengthen FX disclosures, and its working group on "cover and deal" arrangements; and (ii) establishing a working group on buy-side outreach, and another to focus on embedding and integrating the code into the fabric of the FX market. An Annex to the paper contains feedback from market participants on local FX committees from all GFXC member jurisdictions on their experiences with the code to date, and their views on future work. The GFXC was established in May 2017 as a forum to bring together central banks and private sector participants, with the aim of promoting a robust, liquid, open and transparent FX market. The code, which was originally published in May 2017, comprises a set of global principles of good practice in the FX market.
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FCA research report on EMIR data and derivatives market policies
On 6 August, the FCA published a research note on EMIR data and derivatives market policies. The note sets out the FCA's findings from assessing the impact of two EMIR requirements by making use of a sample of data reported to TRs, which has been made available to the FCA through the EMIR reporting obligations. Part 1 of the note considers options for recalibration of the scope of the EMIR clearing obligation for firms as part of the current EMIR review. Part 2 focuses on the impact of the phased-in implementation of the EMIR initial margin requirements. The FCA has found that: (i) a clearing exemption calibrated to minimise the number of counterparties that will be subject to the clearing obligation, while maximising the amount of activity that is captured, could significantly reduce burdens on those counterparties without compromising EMIR's overall objectives; and (ii) the phase-ins implementing the initial margin requirements do not result in the intended gradual increase in the number of counterparties subject to the requirements. Rather, there is a sharp increase (by about ten times) in the very last phase-in. The FCA notes that a full set of data on the derivatives market did not exist when the initial EMIR requirements and calibrations were implemented. This data is now available, through EMIR and other G20 reporting regimes, to EU and global regulators. As a result, authorities can make better informed policy decisions on how to set new thresholds and review the appropriateness of existing ones. The analysis set out in the note has been based on data available to the FCA as one of the relevant authorities. It believes that the EMIR review presents a valuable opportunity for similar analysis to be carried out on the wider EU data set. This will help to ensure that new and existing policies achieve their intended objectives in the most efficient and proportionate manner for markets.
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ESMA updates MiFID II TTCs for equity derivatives, equities and equity-like instruments
On 6 August, ESMA updated its FAQs on TTC for equity derivatives, equities and equity-like instruments required under MiFID II and MiFIR. An accompanying press release explains that an updated version of the TTC has been published. The update relates to the TTC for: (i) equity derivatives I; (ii) equity and equity-like instruments; and (iii) tick size band assessment. Trading venues are expected to apply the new results from 13 August.
Press Release
ECB consults on draft Regulation amending Regulation on money market statistics
On 6 August, the ECB published for consultation a draft regulation amending Regulation (EU) 1333/2014 concerning statistics on the money markets (the MMSR Regulation), together with an explanatory memorandum. The ECB has been collecting data on the euro money market since 1 July 2016 under the MMSR Regulation. However, experience gained since reporting began shows a need to clarify and simplify some of the existing reporting requirements, and to improve the quality of the data. In a related press release, the ECB explains that the draft Regulation will guarantee that transactions with all financial counterparties are covered under the MMSR Regulation. It will also further support the reporting of the LEI of counterparties, when one is available, to ensure that the data collection benefits from the extended mandatory use of the LEI in reporting in the EU. In addition, it will firm up the obligations of reporting agents to meet high standards designed to protect the integrity of information. The draft Regulation also specifies that the data collected may be used for the development and administration of an unsecured overnight interest rate. The draft Regulation states that it will enter into force 20 days after it is published in the OJ. Comments can be made on the draft Regulation until 10 September. The ECB will consider comments received while finalising the draft Regulation, and intends to publish a feedback statement.
Draft Regulation
Explanatory Memorandum 
Press Release


Updated ESMA communication on clearing and trading obligations for pension scheme arrangements
On 8 August, ESMA published an updated communication on clearing and trading obligations for PSAs. ESMA is aware of the challenges that certain PSAs would face to start clearing their OTC derivative contracts and trading them on trading venues on 17 August. This is the date on which the current temporary exemption from the clearing obligation under EMIR expires. ESMA introduced the temporary exemption to allow time for a suitable technical solution for the transfer of non-cash collateral as variation margins to be developed by CCPs. With two extensions already granted, there is no possibility of further extending the temporary exemption. However, as there is not yet a suitable technical solution, the EMIR Refit Regulation includes a further extension of the temporary exemption for PSAs. The positions adopted by the EP and the Council of the EU on the EMIR Refit Regulation appear to support the view that a further extension of the temporary exemption is necessary. Negotiations on the EMIR Refit Regulation have not finished, and the resulting text is not expected to start applying by the time the temporary exemption applies. This means there would be a timing gap during which PSAs would need to start clearing their derivative contracts before they are, once again, no longer required to do so. They would also become subject to the trading obligation under MiFIR. From a legal perspective, neither ESMA nor NCAs have formal power to disapply a directly applicable EU law, or even delay the start of its obligations. Any changes to the application of EU law would need to be implemented through EU legislation (in this case, by amending EMIR as a result of the EMIR Refit Regulation). During the limited period of time that the temporary exemption does not apply, ESMA expects NCAs not to prioritise their supervisory actions towards entities that are expected to be exempted again in a relatively short period of time. They should generally apply their risk-based supervisory powers in their enforcement of applicable legislation in a proportionate manner.
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New House of Commons Work and Pensions Committee inquiry into transparency around pension charges, investment strategy and performance
On 3 August, the House of Commons Work and Pensions Committee published a webpage on a new inquiry into transparency around pension charges. The terms of reference for the inquiry are set out in a related press release. The inquiry will focus on whether the pensions industry provides consumers with sufficient transparency around charges, investment strategy and performance. It will examine whether enough is being done to ensure individuals: (i) get value for money for their pension savings; (ii) understand what they are being charged and why; (iii) understand the short and long-term impact of costs on retirement outcomes; (iv) can see how their money is being invested and how their investments are performing; (v) are engaged enough to use information about costs and investments to make informed choices about their pension savings; and (vi) get good value, impartial service from financial advisers. Written submissions can be sent to the committee until 3 September. This inquiry follows on from the committee's recent inquiry into pension freedom and choice.
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Clarification of certain aspects of procedure for supervising prudential requirements under CRD IV and CRR (ECJ)
On 7 August, the ECJ handed down a provisional version of its judgment in a preliminary reference concerning the interpretation of certain aspects of the procedure for supervising prudential requirements under CRD IV and the CRR. The case, before the Austrian courts, concerns a credit institution classified as a significant supervised entity under the SSM Framework Regulation. In 2014 and 2015, the Austrian FMA issued decisions under national banking law requiring the credit institution to pay "absorption" interest on the grounds it had exceeded the large exposure limits set out in Article 395(1) of the CRR. The credit institution brought an annulment action, arguing it is not required to pay such interest. Proceedings were stayed by the Austrian courts and a preliminary reference made to the ECJ, under which three specific questions were raised. In March, Advocate General Campos Sánchez-Bordona issued his opinion in the case. Having regard to this, the ECJ ruled that: (i) Articles 64 and 65(1) of CRD IV and Article 395(1) and (5) of the CRR are to be interpreted as precluding national legislation that provides that, where the exposure limits set out in Article 395(1) of the CRR are exceeded, absorption interest is to be levied automatically on a credit institution, even if that institution fulfils the conditions laid down in Article 395(5) of the CRR under which a credit institution may exceed those limits; and (ii) Article 48(3) of the SSM Framework Regulation is to be interpreted as meaning that a supervisory procedure cannot be regarded as having been "formally initiated", either where a credit institution reports to the NCA that the limits set in Article 395(1) of the CRR have been exceeded, or where the NCA has already adopted a decision in a parallel procedure concerning similar breaches. In reaching this conclusion, the ECJ noted that, under Article 2(25) of the SSM Framework Regulation, only a procedure conducted by an NCA may be regarded as a "supervisory procedure" and such procedure is directed towards preparing the issue of a supervisory decision. In addition, as the Advocate General observed in point 89 of his opinion, the use of "formally" in Article 48(3) of the SSM Framework Regulation refers to an express decision to open the procedure, whatever the material grounds.
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FCA consults on GFIN
On 7 August, the FCA published a press release announcing, in collaboration with 11 other financial regulators and related organisations, the creation of a GFIN, and the publication of a related consultation document. The network will seek to provide a more efficient way for innovative firms to interact with regulators as they look to scale new ideas. It will also create a new framework for co-operation between financial services regulators on innovation related topics, sharing different experiences and approaches. The consultation document outlines the key themes that have emerged during an initial informal consultation on the idea of a global sandbox and provides an update on the next steps of the project. The themes identified include regulatory co-operation and engagement, the time it takes to bring ideas to international markets, governance, and emerging technologies with notable cross-border application. Chapter 3 of the document sets out a mission statement that outlines the role the FCA anticipates GFIN will play in supporting responsible innovation. The FCA envisages that the GFIN could serve three main functions to: (i) act as a network of regulators to collaborate, sharing experience and best practice, and communicate to firms; (ii) provide a forum for joint policy work; and (iii) provide firms with an environment in which to trial cross-border solutions (B2C or B2B). The FCA explains in the remainder of the document why it believes that the three functions constitute an important part of the GFIN, and how it will potentially operate in practice. The deadline for responses to the consultation is 14 October. The FCA encourages a wide range of entities to respond including innovative financial services firms, financial services regulators, technology companies and providers. The FCA expects agreement on next steps, including a timeline for the launch of the GFIN, in the autumn. The press release lists the current GFIN members. The named organisations are committed to exploring the idea further, but the consultation process will help inform any future involvement. Similarly, regulators not named may decide to get involved in the future, or after the formal launch of the GFIN.
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BoE policy finalises procedures for enforcement decision making committee
On 3 August, the BoE published a policy statement setting out the final procedures for the operation of a new EDMC. The EDMC will be the BoE's decision making body for contested enforcement cases within the statutory regimes operated by the BoE relating to prudential regulation, FMI, and resolution and note issuances (that is, all the areas in which the BoE has enforcement powers). It will strengthen the BoE's enforcement processes by ensuring a functional separation between its investigation teams and its decision makers in contested enforcement cases. The BoE consulted on proposals on the operation of the EDMC in a November 2017 consultation paper. It received three responses that supported the establishment of a unified EDMC, but raised questions relating to the independence of legal and administrative support available to the EDMC, the mechanism for determining whether a case is contested, and the ability to object to a specific panel member hearing a case. The BoE's feedback to those responses is set out in chapter 2 of the policy statement. In implementing the proposals to create the EDMC, it has been necessary for the BoE to delegate its decision making function relating to contested enforcement cases to the EDMC and to amend existing statements of policy and procedure to reflect the establishment of the EDMC. Accordingly, the following new and revised documents have been published alongside the policy statement: (i) Procedures - The Enforcement Decision Making Committee; (ii) Updated statement of policy: The Prudential Regulation Authority's approach to enforcement: statutory statements of policy and procedure. The amendments made to the statement of policy are shown in tracked changes in Appendix 2 to PS/EDMC2018; and (iii) Updated policy statement: Statutory statements of procedure in respect of the BoE’s supervision of financial market infrastructures.
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