European Commission
Digital Finance Outreach 2020 - speech by Valdis Dombrovskis, Vice President of the European Commission - 23 June 2020
Valdis Dombrovskis (Vice President of the European Commission) has delivered a speech addressing the European Commission’s intentions to adopt legislative proposals on cryptoassets and digital operational resilience later in 2020. The Commission published consultations on potential legislative frameworks for cryptoassets and operational and cyber resilience in the financial sector in December 2019.
In relation to cryptoassets, among other things, he states that the Commission intends to: (i) adjust the existing rules for cryptoassets covered by EU legislation to ensure that the relevant rules remain fit for purpose; (ii) introduce a pilot scheme to allow some regulatory flexibility and experimentation with distributed ledger technology; and (iii) create a bespoke, proportionate regime and passport for markets in cryptoassets that are not currently covered by EU legislation, although potentially systemic cryptoassets, such as global stablecoins, would be subject to greater regulation.
In relation to digital operational resilience, he states that the Commission intends to adopt a legislative proposal in autumn 2020 requiring all financial institutions to comply with certain operational resilience standards, including reporting cyber incidents and testing institutions’ cyber resilience. The Commission also intends to create a financial oversight mechanism for third-party information and communications technology (ICT) providers, such as cloud service providers, and plans to consider rules to mitigate the concentration risks arising from institutions’ reliance on a small number of external providers.
Speech by Valdis Dombrovskis (Vice President of the European Commission) on the Commission’s planned legislative proposals on cryptoassets and digital operational resilience
European Parliament and Council of the European Union
EU CCP Regulation - political agreement reached between the European Parliament and Council of the EU - 23 June 2020
The European Parliament and Council of the European Union have announced that they have reached political agreement on the text of proposed Regulation (EU) 2016/0365(COD) on the establishment of a framework for the recovery and resolution of central counterparties (CCPs) (EU CCP Regulation). The proposed EU CCP Regulation sets out a harmonised risk management system, designed to enable CCPs in financial difficulty to continue to provide clearing services while minimising the need for public financial assistance. The Regulation covers: (i) risk management and recovery plans; (ii) resolution tools; and (iii) compensation for losses.
The Parliament highlights several amendments made to the proposed EU CCP Regulation, as agreed between it and the Council of the EU, including:
- a requirement for CCPs to draw up resolution plans for addressing ‘default events’, when one or more clearing members fail to honour their financial obligations, and ‘non-default events’, such as a business failure incurring losses;
- a prohibition or restriction of dividends and bonuses where a default event has been caused by mismanagement;
- in case of default of a clearing member, CCPs should use their own default fund, in which they are obliged to hold capital and to which their clearing members also contribute, and other financial contributions from non-defaulting members before the authorities provide financial assistance;
- introducing a proportional and risk-based requirement for CCPs to hold a second fund to be used after the default fund; and
- a requirement that a CCP should compensate non-defaulting clearing members and clients through cash payments or ownership in future profits where it has reduced payments to these members and clients in a non-default scenario.
The Council of the EU states that, with certain limited exceptions, the new CCP recovery and resolution framework provided for under the proposed EU CCP Regulation will start to apply 18 months following the Regulation’s entry into force.
The Parliament and Council of the EU are expected to adopt the Regulation by an early second reading agreement under Article 294(7) of the Treaty on the Functioning of the European Union (TFEU).
Press release: European Parliament reaches political agreement with Council of EU on proposed EU CCP Regulation establishing a recovery and resolution framework for CCPs
Press release: Council of the EU reaches political agreement with European Parliament on proposed EU CCP Regulation establishing a recovery and resolution framework for CCPs
Official Journal of the European Union
Taxonomy Regulation - published in the Official Journal - 22 June 2020
Regulation (EU) 2020/852, of 18 June 2020, on the establishment of a framework to facilitate sustainable investment (Taxonomy Regulation) has been published in the Official Journal of the European Union. Broadly speaking, the Taxonomy Regulation lays down six environmental objectives and allows for the categorisation of economic activity as environmentally sustainable if it contributes to at least one of the objectives without significantly harming any of the others.
The Council of the European Union adopted the Taxonomy Regulation at first reading on 15 April 2020, with the European Commission and European Parliament adopting the Regulation on 23 April 2020 and 18 June 2020 respectively.
The Taxonomy Regulation will enter into force on 12 July 2020.
Official Journal: Taxonomy Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment
European Securities and Markets Authority
MMF Regulation - ESMA publishes translated Guidelines - 22 June 2020
The European Securities and Markets Authority (ESMA) has published official translations of its updated Guidelines on reporting to national competent authorities (NCAs) under Article 37 of the Money Market Funds Regulation (EU) 2017/1131 (MMF Regulation). Article 37 of the MMF Regulation requires money market fund managers to submit data to their NCAs.
ESMA states that reporting entities should use the updated instructions to submit reports under Article 37 MMF Regulation for Q1 and Q2 2020 by September 2020.
ESMA Guidelines on reporting to NCAs under Article 37 of the MMF Regulation
Webpage
Bank of England
LIBOR transition - Bank of England confirms it will publish a daily SONIA compounded index - June 2020
The Bank of England has published a document summarising feedback received in respect of its February 2020 Discussion Paper on the publication of a daily Sterling overnight index average (SONIA) compounded index.
The Bank will publish a daily SONIA compounded index from August 2020. The compounded index aims to support the use of SONIA in a range of financial products by simplifying the calculation of compounded interest rates. However, following feedback received, the Bank has confirmed that it will not produce SONIA period averages at this time.
Bank of England summary of responses on the publication of a SONIA compounded index
Bank of England feedback and market responses to its discussion paper on the publication of a SONIA compounded index
Webpage
Association for Financial Markets in Europe
LIBOR transition - AFME publishes paper on managing conduct and compliance risks associated with client communications - June 2020
The Association for Financial Markets in Europe (AFME) has published guidance for firms on managing the conduct and compliance risks associated with client communications during the transition away from the London Interbank Offered Rate (LIBOR) to alternative risk-free rates ahead of its planned cessation by the end of 2021.
The guidance provides information for firms on what to consider when engaging with clients during the transition. The guidance covers: (i) the importance of establishing a client communications strategy; (ii) the content of client communications; (iii) methods and timing of client communications; and (iv) monitoring and record keeping. The guidance acknowledges that each firm’s client communications may differ depending on various factors, including its type of business and client base, the scope of services offered and its technical options available for implementing LIBOR transition.
AFME guidance for firms on managing conduct and compliance risks associated with client communications during LIBOR transition
Press release
FICC Markets Standards Board
Algorithmic trading - FMSB consults on draft statement of good practice - June 2020
The Fixed Income, Currency and Commodities (FICC) Markets Standards Board (FMSB) has published for consultation a new draft statement of good practice on algorithmic trading in FICC markets. The FMSB states that as the use of computer algorithms in FICC markets continues to increase, so does the potential for such trading activities to adversely impact market or firm stability and clients.
The statement of good practice aims to enhance the integrity and effective functioning of FICC markets by promoting good conduct and governance practices for participants engaged in algorithmic trading across all FICC asset classes and markets, in particular those subject to less stringent regulatory requirements.
The consultation period closes on 21 August 2020.
FMSB draft statement of good practice on algorithmic trading in FICC markets
Press release
Please see the Brexit section for an item on the written ministerial statement outlining the UK’s approach to the implementation of a range of financial regulatory reforms before the end of the Brexit transition period, including in relation to Solvency II, CSDR, SFTR, EMIR Refit, BMR, MAR, PRIIPs and BRRD II.
Please see the Banking and Finance section for an item on HM Treasury’s updated policy statement on prudential standards in the Financial Services Bill and the FCA’s Discussion Paper on the prudential regime for investment firms.
