to the point: financial regulation | 07/2023

ESMA issued a public statement on sustainability disclosure in prospectuses setting out how the specific disclosure requirements of the Prospectus Regulation (PR) concerning sustainability-related matters should be met. The statement addresses only applicable disclosure requirements under the PR and does not add any additional disclosure requirements. More specifically, ESMA addresses the following issues:

1. expected ESG disclosure in prospectuses;
2. sustainability-related disclosure in equity prospectuses and consistency with non-financial reporting;
3. prospectuses relating to non-equity securities with a specific ESG component or objective;
4. consistency of sustainability-related disclosure in prospectuses and advertisements; and
5. expected disclosure in relation to "use of proceeds" bonds and sustainability-linked bonds.

The EBA published a final report on guidelines on overall recovery capacity (ORC) in recovery planning, providing guidance to both financial institutions as well as the NCAs in relation to the establishment of a consistent framework for the determination of the ORC by the addressed institutions and the respective assessment thereof. For the purposes of the ORC determination, the guidelines specify in its first section, among other things, the steps that the institutions should follow, mainly in relation to the selection of recovery plans, adjustment of recovery options, calculation of "scenario-specific recovery capacity", and determination of the ORC range. The second section of the guidelines focuses on both the quantitative as well as the qualitative assessment of the ORC by the NCAs.

The EBA published a final report on draft RTSs on initial margin model validation (IMMV) under Art. 11 of the EMIR, setting out the supervisory procedures to ensure the prudent use of initial margin models for OTC derivatives. The draft RTSs envisage a proportionate application of supervisory procedures depending on the respective institution, more specifically a "standard" supervisory procedure aimed at the most significant market participants, and a "simplified" approach applied in relation to smaller counterparties. The RTSs also address, among other things, the issue of how to validate an initial margin model when this is outsourced to external providers.

ESMA issued a final report on the review of RTS with respect to the procyclicality of CCP margin, outlining both the existing requirements for CCP APC (anti-procyclicality) margin measures under EMIR, supplemented by new proposals further harmonising the respective CCP policies and procedures. The proposed changes concern, among other things, the general provisions for CCP APC policies (such as governance and transparency of APC policies, quantitative metrics and application of APC margin measures to all material risk factors), as well as provisions on specific APC tools.

The following lists Q&As have been updated:

1. Q&As on the CRA Regulation – amendments have been made to Part III: Methodologies, models and key rating assumptions; and
2. Q&As on the Securitisation Regulation – the main updates have been made in parts related to Disclosure Requirements and Templates, with several of the accompanying annexes being amended as well.

ESMA released a public statement highlighting the risks of securities lending in relation to retail client financial instruments and clarifying certain important MiFID II investor protection requirements. In addition to addressing investor protection concerns related to securities financing transactions (SFTs) such as counterparty and collateral shortfall risk, ESMA also provides clarifications to, among other things, the following requirements:

1. safeguarding client assets;
2. written agreements and provision of information;
3. revenues from securities lending should directly accrue to the retail client, net of a normal compensation for the firm’s services;
4. obtaining prior consent – this should not be done by way of the firm’s general terms and conditions.

ESMA issued a supervisory briefing on understanding the definition of advice under MiFID II, which serves as an update to "Understanding the definition of advice under MiFID" previously issued by ESMA’s predecessor CESR in 2010. The briefing contains the supervisory expectations by both ESMA and NCAs in relation to investment firms, including credit institutions, UCITS management companies and Alternative Investment Fund Managers (AIFMs), providing investment advice to clients. While the content of the above-mentioned CESR document remains largely unchanged, the new supervisory briefing supplements and further specifies certain aspects. The main aspects covered by the briefing are as follows:

1. the provision of personal recommendations and whether other forms of presenting information (e.g. filtering, general recommendations, etc.) could constitute investment advice;
2. the presentation of a recommendation as suitable for a client or based on the client’s circumstances, including other forms of recommendations;
3. perimeter issues around the definition of personal recommendation; and
4. issues around the form of communication, including modern forms such as apps and social media posts.

ESMA published a final report on review of the technical standards for passporting under Article 34 of MiFID II, adding new information requirements to the list of details investment firms have to provide at the passporting stage. The report contains drafts of both regulatory technical standards (RTSs) as well as implementing technical standards (ITSs) that:

1. specify the information to be notified by, inter alia, investment firms wishing to provide cross-border services without the establishment of a branch; and
2. establish standard forms, templates and procedures for the transmission of the respective information.

ESMA prepared a manual on post-trade transparency under MiFID II and MiFIR, providing market participants and NCAs with guidance on how to apply the relevant MiFIR obligations in a consistent manner. The Manual serves as a convergence tool to promote common approaches and practices in the areas of post-trade transparency and the transparency calculations, and covers, among other things:

1. which instruments and transactions are subject to post-trade transparency;
2. obligations regarding reporting and publishing of post-trade transparency information;
3. information on when and which post-trade information has to be made public; and
4. the common aspects and the differences between the post-trade transparency regime and the transparency calculations in relation to the scope of instruments and transactions.

The Council and the EP reached a provisional agreement on new rules regarding the AIFMD and the UCITS directives, enhancing the integration of asset management markets in Europe and modernising the framework for key regulatory aspects. Among the issues agreed upon between the negotiators are the enhancement of the availability of liquidity management tools, an EU framework for funds originating loans, enhanced rules for delegation by investment managers to third parties, and new measures to identify undue costs that could be charged to funds.

The EBA prepared a final report on ITS reporting on IRRBB (interest rate risk in the banking book) under Commission Implementing Regulation (EU) 2021/451, bringing the data quality required for assessing IRRBB risks. The amendments to the ITS include, among other things, simplified templates for the reporting by SNCIs and "other" institutions, whereas the draft as a whole further supplements a policy package published by EBA in October 2022.

The EBA published a report on interdependent assets and liabilities in the net stable funding ratio (NSFR) under Article 428f(3) of the CRR, outlining the conditions under which assets and liabilities can be treated as interdependent in the NSFR, including a description of the list of activities that are considered to meet such conditions. The report contains several policy recommendations to the EC, as well as an analysis of certain issues such as centralised regulated savings, promotional lending, covered bonds and derivative client clearing activities.

EIOPA published a final report on draft RTSs adapting the minimum euro amounts for PII and for financial capacity of insurance intermediaries under the IDD, reflecting the IDD requirement that changes to the minimum amounts shall be based on the rate of inflation. EIOPA is required to review the minimum amounts for PII and financial capacity every five years, with the proposals being based on a previously-run consultation.

The Financial Analytical Office (FAO) published an amended version of its methodological guideline 7 on PEPs, with the new and changed parts being marked for a comparison. The document also contains a new list of functions that are to be considered as PEPs.