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Welcome to the weekly Financial Services highlights from the Financial Services team for the week ending 12 April 2018.
The Alternative Investment Management Association (AIMA) published a position paper entitled ‘Brexit and Alternative Asset Managers: Managing the Impact’. The paper offers a detailed assessment of what will need to be addressed during the transition period recently agreed between the UK and the EU. AIMA believes that addressing these points will minimise disruption for UK fund managers and EU investors when the UK leaves the EU.
The International Swaps and Derivatives Association (ISDA) published an updated version of its Brexit FAQs.
The Financial Conduct Authority (FCA) updated the webpage providing information on its recent and upcoming publications. This webpage is usually updated on the first Friday of each month – the new version is current as of 6 April 2018.
The FCA published a Discussion Paper (DP18/3) which asks for views on whether its past interventions have been effective and what impact they have had. Within DP18/3, the FCA sets out a framework which outlines how it approaches measuring the impact of its interventions and explains why it does after the event (ex post) impact evaluations.
The Prudential Regulation Authority (PRA) set out its 2018/19 Business Plan which addresses how it will face the challenges of EU withdrawal and operational resilience over the coming year. Key areas covered within the Business Plan include the continuing roll-out of the Senior Managers Regime (due to be extended to insurers by the end of 2018) which is intended to strengthen accountability within firms and improvements to the implementation of Solvency II to tackle the problems with risk margin.
The European Parliament's Committee on Economic and Monetary Affairs (ECON) published its draft report on relationships between the EU and third countries concerning financial services regulation and supervision.
The European Central Bank (ECB) published its annual report for 2017. The report includes information on the analytical and policy contributions which the ECB made to a number of regulatory initiatives at the international and European levels in 2017.
Pentti Hakkarainen, a member of the Supervisory Board of the ECB gave a speech at the European Bank Executive Committee Forum in Brussels on 11 April 2018. The speech entitled, 'Financial Integration, Competition and Efficiency' considered the benefits of further financial integration and the boost it has provided to competition in the European banking sector.
The PRA published its proposals for fees and levies for 2018/19 in Consultation Paper 7/18 (CP7/18). The proposed implementation date for the proposals contained in CP7/18 is 1 July 2018. The consultation closes on 21 May 2018.
The FCA published a consultation paper (CP18/10) on its proposed regulatory fees and levies for 2018/19. The closing date for responses is 1 June 2018.
The European Commission published a report on the effects of the Capital Requirements Regulation (CRR) (Regulation 575/2013) and the Capital Requirements Directive IV (Directive 2013/36/EU).
Decisions of the ECB on the delegation of the power to adopt own funds decisions, and the nomination of heads of work units to adopt delegated own funds decisions were published in the Official Journal of the EU.
The European Commission adopted a Commission Delegated Regulation (C(2018) 2080 final) amending and supplementing the Money Market Funds Regulation (EU) 2017/1131 (MMF Regulation).
The European Banking Authority (EBA) published an update of its Risk Dashboard summarising the main risks and vulnerabilities in the EU banking sector for Q4 2017. European banks continued to strengthen their capital ratios to improve the overall quality of their loan portfolios. The stock of non-performing loans (NPLs) is decreasing but still elevated suggesting that further efforts are needed to tackle NPLs. Return on equity remains below the cost of equity with legacy assets, cost-efficiency and banks' business models still being some of the main obstacles towards reaching sustainable profitability levels.
The PRA published its annual report of its Prudential Regulation Committee (PRC) to the Chancellor of the Exchequer under paragraph 19 of Schedule 6A to the Bank of England Act 1998 (as amended). It relates to the period of 1 March 2017 to 28 February 2018. The PRA published the report as part of its commitment to transparency.
The EBA published a proposed update of the Annex to Implementing Regulation (EU) 2015/2197, which sets out a list of currencies considered to be 'closely correlated' in accordance with the methodology laid down in Article 354(1) of the CRR.
The ECB launched a public consultation calling on financial market infrastructures (FMIs) and other interested parties to give their input on draft cyber resilience oversight expectations based on the guidance was published by the Committee on Payments and Market Infrastructures and the International Organisation of Securities Commissions (CPMI-IOSCO) in June 2016. The closing date for responses is 5 June 2018.
Criminal cyber-attacks against UK firms continue to increase, according to a report from the National Cyber Security Centre (NCSC) which shows a rise in 2017/18. The report highlights ransomware, fake news, data breaches and weaknesses in the supply chain as key threats to UK businesses, and identified ‘crypto-jacking’, theft from cloud storage and the ‘internet of things’ as emerging threats. Experts from Bindmans LLP, Cooley (UK) LLP, and Institute of Chartered Accountants in England and Wales (ICAEW) point to ‘[b]uilding a cyber-culture’ by changing business and individual attitudes to the threat of cybercrime.
The EBA published a report 'Benchmarking of remuneration practices at the European Union level and data on high earners (data as of end 2016)'. The report shows a decrease in high earners in 2016 and differences in remuneration practices across the EU.
The ECB published a speech by Danièle Nouy, Chair of the Supervisory Board of the ECB, on banks' risk appetite frameworks. Ms Nouy says that risk appetite frameworks are now better structured, subject to clearer governance and cover a broader set of risks, but further improvements are required on adopting and applying risk appetite limits and embedding them in banks' strategic processes.
CPMI and IOSCO published a report providing technical guidance to authorities on harmonised definitions, formats and usage of a set of critical data elements for OTC derivative transactions reported to trade repositories, excluding the unique transaction identifier (UTI) and the unique product identifier (UPI).
CPMI and IOSCO published the 'Framework for supervisory stress testing of central counterparties (CCPs)'. The framework is intended to provide authorities with guidance to support their design and implementation of supervisory stress tests (SSTs) for CCPs.
ISDA, the European Banking Federation (EBF), the International Capital Market Association (ICMA) and the International Securities Lending Association (ISLA) (the Associations) published a whitepaper 'EMIR REFIT: Incentivising Post-trade Risk Reduction' in which they propose amending the European Market Infrastructure Regulation (EU) 648/2012 (EMIR) to allow transactions that result from post-trade risk reduction services such as portfolio compression and counterparty re-balancing to be exempted from the clearing obligation. Post-trade risk reduction administrative transactions are exempt from the trading obligation under the Markets in Financial Instruments Regulation (EU) 600/2014 (MiFIR) but there is currently no corresponding exemption from the EMIR clearing obligation.
The European Securities and Markets Authority (ESMA) published a letter to Vice-President Dombrovskis on the interpretation of the provisions of the Markets in Financial Instruments Directive 2014/65/EU (MiFID II) and Commission Delegated Regulation (EU) 2017/592 which provide that a non-financial entity is eligible for exemption from the requirement for authorisation as an investment firm when its commodity derivative trading activity is ancillary to its main business.
ESMA published three opinions on position limits regarding commodity derivatives under MiFID II/MIFIR.
ESMA published a list of market makers and authorised primary dealers who are using the exemption under the Short Selling Regulation (SSR).
ESMA drew attention to a section in its 20 March 2018 report 'Trends, risks and vulnerabilities (TRV) No 1, 2018' which shows that the EU market for exchange-traded derivatives (ETDs) is worth approximately €200trn and has an average daily turnover of €1.3trn. The TRV report also shows high concentration both in terms of products and trading venue location—interest rate derivatives represent more than 80% (€166tn) of total EU volumes, with the UK being the largest market followed by Germany.
ESMA updated its public register regarding the double volume cap (DVC) mechanism under MiFID II. The double volume cap mechanism (DVCM) (Article 5 of MiFIR) aims to limit the trading under the reference price waiver (Article 4(1)(a) of MiFIR) and the negotiated transaction waiver for liquid instruments (Article 4(1)(b)(i) of MiFIR) in an equity instrument.
ESMA published trading volumes and calculations for the March 2018 double volume cap (DVC) under MiFID II and MiFIR.
ESMA held an open hearing at its premises on 13 April 2018 on ESMA's consultations on draft RTS on application for registration as a securitisation repository and on technical advice on fees for securitisation repositories. The closing date for both consultations is 23 May 2018.
ESMA published the responses received to its consultations on securitisation.
HM Land Registry announced the entering of the first digital mortgage deed into the Land Register by Coventry Building Society and Enact Conveyancing. This registration comes as part of HM Land Registry’s plans to transform the conveyancing market through quicker and simpler digital services and improved use of technology, making transactions quicker and simplifying the home buying process. Yasmin Mistry, partner at JPC law, says it is a 'historic day' yet 'whilst simplifying and speeding up processes using technological advances can clearly lead to a positive outcome, the risk of online fraud must still be considered and minimised'.
The FCA published the latest steps in its response to the concerns identified through its asset management market study. The FCA's publications, comprising a policy statement, consultation paper and occasional paper, are part of a package of remedies to ensure fund managers compete on the value they deliver, and act in the interests of the millions who entrust them with their savings.
The Competition and Markets Authority (CMA) published summary of a roundtable with Asset Managers held in February. The purpose of the roundtable was to obtain views from asset managers on the roles played by investment consultants and fiduciary managers in the investment value chain, and the competitive features of these markets.
The International Capital Markets Association's (ICMA) Asset Management and Investors Council (AMIC) published a statement on the importance of fund delegation to the asset management business model and the threat it faces from recent legislative proposals.
IOSCO published its recommendations for improving the information on secondary corporate bond markets available to both regulators and the public. The recommendations seek to ensure that regulators have better access to information so they can perform their functions more effectively, to enhance cross-border information sharing and understanding and to facilitate better informed investment choices by enhancing pre- and post-trade transparency.
The PRA published two Solvency II consultation papers (CP8/18 and CP9/18). The first sets (CP8/18) out the PRA's proposal to amend the rule that requires an external audit of the public disclosure requirement for all Solvency II firms. The PRA intends to apply further proportionality to the rule which will remove approximately 150 smaller UK Solvency II firms from the requirement. The second consultation paper (CP9/18) sets out the PRA's proposal to consider applications from internal model firms that include a dynamic volatility adjustment (DVA).
The European Commission published a report on the application of Title III of Solvency II regarding the supervision of insurance and reinsurance undertakings in a group, and the assessment of the transitional period for the occupational retirement provision business of life insurance undertakings.
The Sustainable Insurance Forum (SIF) and the International Association of Insurance Supervisors (IAIS) published for consultation a draft issues paper on climate change risks to the insurance sector. It is intended the paper will, among other things, raise awareness for insurers and supervisors of the challenges presented by climate change, including current and contemplated supervisory approaches for addressing these risks. Feedback on the draft paper is invited by 29 April 2018.
In the final report of its inquiry into pension freedom and choice, the House of Commons Work and Pensions Committee called for a single, publicly hosted pensions dashboard to be introduced by April 2019, funded by the industry levy. It also called for the introduction of a default decumulation pathway to protect the less engaged. Rosalind Connor, partner at ARC Pensions Law, says the complexity of the proposed pensions dashboard raises doubts about how likely it is to succeed. James Borshell, senior associate at Dentons, adds that the default pensions pathway is a 'practical approach' to the disengagement problem highlighted in the report.
Commission Delegated Regulation (EU) 2018/541 of 20 December 2017 amending Delegated Regulation (EU) 2017/2358 and Delegated Regulation (EU) 2017/2359 as regards their dates of application was published in the Official Journal of the EU. The amendments bring the dates of applications in line with the application date of Directive (EU) 2016/97 (Insurance Distribution Directive).
A notice concerning the entry into force of the bilateral agreement between the EU and the US on prudential measures regarding insurance and reinsurance was published in the Official Journal of the EU. The notice confirms the agreement entered into force on 4 April 2018.
On 6 April 2018, Council Decision (EU) 2018/539 of 20 March 2018 on the conclusion of the bilateral agreement between the EU and the US on prudential measures regarding insurance and reinsurance was published in the Official Journal of the EU. The decision on the signing of the agreement on behalf of the EU was also published in the Official Journal of the EU.
On 9 April 2018, a notice concerning the entry into force of the bilateral agreement between the EU and the US on prudential measures regarding insurance and reinsurance was published in the Official Journal of the EU. The notice confirms the agreement entered into force on 4 April 2018.
The European Insurance and Occupational Pensions Authority (EIOPA) published technical informationon the relevant risk free interest rate term structures (RFR) with reference to the end of March 2018. This RFR information has been calculated on the basis of the updated representative portfolios published on 18 December 2017 and the Technical Documentation published on 1 February 2018.
EIOPA published the technical information on the symmetric adjustment of the equity capital charge for Solvency II with reference to the end of March 2018.
The New Payment System Operator (NPSO) published an updated version of the Code of Conduct for Indirect Access Providers (IAPs). The update takes account of the requirements under the second Payment Services Directive (EU) 2015/2366 (PSD2) for indirect access to designated payment systems.
The FCA published a speech given by Karina McTeague, director of retail banking supervision at the FCA, on PSD2 and the open banking initiative. Ms McTeague described some of the opportunities offered through PSD2 and open banking and said that they depend on the inherent risks being effectively managed—those risks can best be managed by the retail banking and payments sectors working together.
The judgments of the Court of Justice of the European Union (ECJ) in American Express Co. v Lords Commissioners of HM Treasury (Cases C-304/16 and C-643/16) were published in Official Journal of EU. The ECJ's judgments were handed down on 7 February 2018.
The FCA issued a statement confirming that firms conducting regulated activities in cryptocurrency derivatives must comply with all applicable rules in the FCA's Handbook and any relevant provisions in directly applicable European Union regulations. Specifically, it is likely that dealing in, arranging transactions in, advising on or providing other services that amount to regulated activities in relation to derivatives that reference either cryptocurrencies or tokens issued through an initial coin offering will require authorisation by the FCA. This includes cryptocurrency futures, contracts for differences and options.
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