The reports may be accessed through the below links:

• Draft RTS of DRSPs; and
• Guidelines for DRSPs.

ESMA publishes its Final Report on the EU Carbon Market

On 28th March 2022, ESMA published its Final Report on the European Union Carbon Market (EU carbon market). The Report’s analysis did not find any current major deficiencies in the functioning of the EU carbon market based on the data available. However, ESMA’s analysis of the market has led it to put forward a number of policy recommendations to improve market transparency and monitoring.

Key Findings

The Final Report presents an in-depth analysis of the trading of emission allowances (EUA) and emission allowance derivatives based on data gathered from different sources, including EMIR reporting, MiFIR transaction reporting, MiFID II daily and weekly position reports, auction data and data obtained from the EU Registry.

ESMA, in looking at trading in carbon markets and counterparties in this market, has identified the following:

• long positions in carbon derivatives are mainly held by non-financial entities for hedging purposes;
• short positions are mainly held by banks and investment firms providing liquidity and carbon financing;
• positions by investment funds remain limited, with positions principally held by third-country funds; and
• the share of high-frequency and algorithmic trading is significant in the carbon market, even if the relevant firms are only holding very small or no actual positions.

As far as recent developments are concerned, ESMA is aware that the war in the Ukraine has had a major impact on the carbon market, with EUA prices declining by 30% between 23 February and 4 March, which was the cut-off date for ESMA’s analysis. ESMA notes that the carbon price by 22 March had recovered but appreciates that the situation remains volatile. 

Policy recommendations

ESMA, based on its findings and observations, has formulated a number of policy recommendations on the transparency and monitoring of the EU carbon market from the securities regulators’ perspective, for instance:

• extend position management controls to EUA derivatives;
• amend EUA position reporting;
• track chain of transactions in MiFIR regulatory reports; and
• provide ESMA with access to primary market transactions.

The measures proposed would provide more information to market participants, regulators and the public and are intended to contribute to the continued smooth functioning of the market, which plays an important role for the EU’s transition to a low-carbon economy.

Issues for consideration by the European Commission

ESMA has also identified two possible courses of actions, with arguments in favour and against, that the European Commission could consider regarding:

• the introduction of position limits on carbon derivatives – cited in public discussions as a potential addition to the legislative framework; and
• centralised market monitoring of the carbon market at EU level, in line with the ACER-style monitoring for gas and power.

The EU Carbon Market Report may be accessed through this link.

ESMA publishes peer-to-peer review report on the supervision of cross-border activities of investment firms 

On 10th March 2022, ESMA published its peer review report on the supervision of cross-border activities of investment firms. 

With this peer review, ESMA is also issuing Article 16 recommendations to the Cyprus Securities and Exchange Commission (CySEC), the first time ESMA has issued such recommendations to a National Competent Authority (NCA).

ESMA identifies in the peer review the need for home NCAs to significantly improve their approach in the authorisation, ongoing supervision and enforcement work, relating to investment firm’s cross border activities. This includes calibrating their supervisory work to the nature, scale and complexity of those firms’ cross-border activities and the risks they pose.

The peer review assessed how NCAs supervise the investment services that investment firms and credit institutions provide to retail clients on a cross-border basis using a MiFID II passport. This exercise focused on the AFM (Netherlands), BaFin (Germany), CNB (Czech Republic), CSSF (Luxembourg), CySEC (Cyprus) and MFSA (Malta) in light of the significance of their domestic firms’ cross-border activities.

The documents may be accessed through the following links:   

• Peer to peer review; and
• Recommendations

ESMA makes available the results of the Annual Transparency Calculations for equity and equity-like instruments and proposes amendments on the review of transparency requirements under MiFIR

Annual Transparency Calculations

On 01st March 2022, ESMA today published the results of the annual transparency calculations for equity and equity-like instruments, which became effective last 01 April 2022 until 31 March 2023. From 01 April 2023 the next annual transparency calculations for equity and equity-like instruments, to be published by 01 March 2023, will become applicable.

The calculations made available include:

• the liquidity assessment as per Articles 1 to 5 of Commission Delegated Regulation (CDR) 2017/567;
• the determination of the most relevant market in terms of liquidity as per Article 4 of CDR 2017/587 (RTS 1);
• the determination of the average daily turnover relevant for the determination of the pre-trade and post-trade large in scale thresholds;
• the determination of the average value of the transactions and the related the standard market size; and
• the determination of the average daily number of transactions on the most relevant market in terms of liquidity relevant for the determination of the tick-size regime.

Currently, there are 1,200 liquid shares and 976 liquid equity-like instruments other than shares, subject to MiFID II/MiFIR transparency requirements.

Market participants are invited by ESMA to monitor the release of the transparency calculations for equity and equity-like instruments on a daily basis to obtain the estimated calculations for newly traded instruments and the four-weeks calculations applicable to newly traded instruments after the first six-weeks of trading.

ESMA’s annual transparency calculations are based on the data provided to Financial Instruments Transparency System (FITRS) by trading venues and approved publication arrangements in relation to the calendar year 2021.

The full list of assessed equity and equity-like instruments will be available through ESMA’s FITRS in the XML files with publication date from 1 March 2022 (see here) and through the Register web interface (see here).

Transparency requirements under MiFIR

Furthermore, on 28th March 2022, ESMA has proposed targeted amendments to some of its Regulatory Technical Standards (RTS 1 and RTS 2) which specify the Markets in Financial Instruments Regulation (MiFIR) transparency requirements for equity and non-equity respectively. These amendments aim to clarify, improve and simplify the transparency regime for equity and non-equity instruments.

ESMA had decided to carry out its review of RTS 1 and RTS 2 in two steps:

Both reports can be accessed through the following links:

• Final Report On the review of RTS 1 (equity transparency); and
• Final Report On the review of RTS 2 (non-equity transparency).

Commission Delegated Regulation with regard to regulatory technical standards specifying the amount of total margin for the calculation of the K-factor ‘clear margin given’ 

On 22nd February 2022, the Official Journal of the EU published the Commission Delegated Regulation supplementing the Investment Firms Regulation (IFR) with regard to regulatory technical standards specifying the amount of total margin for the calculation of the K-factor ‘clear margin given’ (K-CMG). This became effective on 14th March 2022.

This was published for the purposes of specifying the calculation of the amount of the ‘total margin required’, referred to in Article 23(2) of the IFR, and in order to increase clarity and consistency in relation to its components, it should be clarified that the amount of the total margin required includes any collateral required by the clearing member in accordance with its margin model.

This Commission Delegated Regulation may be accessed through this link.

ESMA published guidance on appropriateness and execution-only regime under MiFID II

On 03rd January 2022 ESMA published the Final Report on its Guidelines on certain aspects of the MiFID II appropriateness and execution-only requirements.

These requirements constitute an important element of investor protection in the provision of investment services other than investment advice or portfolio management. Under MiFID II, investment firms providing non-advised services are required to request information on the knowledge and experience of clients or potential clients to assess whether the investment service or product envisaged is appropriate, and to issue a warning in case the investment service or product is deemed inappropriate. The execution-only framework allows for an exemption to this assessment in certain conditions, including that the firm issues a warning to the client.

The purpose of the Guidelines is to enhance clarity and to foster convergence in the application of the appropriateness and execution-only requirements. The ESMA Common Supervisory Action (CSA) conducted in 2019 showed there was a need for such convergence in the area of appropriateness and execution-only. The Guidelines cover several important aspects of the appropriateness process, spanning from the information to be provided to clients about the purpose of the appropriateness assessment, the arrangements necessary to understand clients and products, to the matching of clients with appropriate products and the effectiveness of warnings. Moreover, other related requirements are clarified, such as the execution-only exemption and record-keeping and controls.

ESMA conducted a public consultation on these Guidelines to gather the views of relevant stakeholders. The published guidance contains a feedback statement summarising the responses received and highlighting the amendments and clarifications introduced in the final guidelines to consider the feedback received during this consultation.

The ESMA final report may be accessed through this link.

Investment Instruments and Investment Funds Regime

Capital Markets Union: Council agrees its position on updated rules for hedge funds, private debt funds, and other alternative investment funds

On 17th June 2022, the Council reached agreement on its position (general approach) on a review of the alternative investment fund managers directive (AIFMD), the legislative framework which governs managers of hedge funds, private equity funds, private debt funds, real estate funds and other so-called alternative investment funds in the Union.

With other progress made on the implementation of the Capital Markets Union (CMU) agenda, it will contribute to maintaining a competitive and attractive European asset management market and so unlock private investment to finance the green and digital transitions.

The proposal has four main objectives:

• Achieve further market integration for alternative investment funds and therefore a broader capital market integration;
• Improve companies’ access to more diversified forms of financing;
• Strengthen investor protection;
• Enhance the ability of fund managers to deal with liquidity pressure in stressed market conditions.

In its position, the Council stresses the importance of consistent harmonisation in the area of liquidity risk management. In particular, it underlines the need to improve the availability of liquidity management tools, with new requirements on managers to provide for the activation of these instruments.

The Council also supports the creation, as proposed by the European Commission, of an EU framework for loan-originating funds, supplemented with several requirements to alleviate risks for financial stability and to ensure an appropriate level of investor protection.

The Council further clarifies the rules for outsourcing and the delegation of certain functions by fund managers to third parties and increases the supervisory cooperation in this area. It also introduces new reporting requirements on delegation arrangements for the purpose of an improved monitoring and supervision of the application of the EU regulatory framework. Precise reporting obligations on outsourcing will reduce the possibilities for creating letterbox companies.

Other key issues for the Council concern the framework for the provision of cross-border services by depositaries, new reporting obligations for UCITS for the purpose of risk monitoring and new transparency rules to enhance investor protection

ESMA proposes EUR 1 billion increase EMIR clearing threshold

On 03rd June 2022, ESMA published its Final Report von the increase of the commodity derivatives EMIR clearing threshold (CT), and proposes to increase the CT from EUR 3 billion to EUR 4 billion.

The Final Report considers:              

• the need for structural changes in the way the CTs should be calculated (that is, distinguishing between cleared vs. non-cleared transactions rather than between ETD and OTC);
• the time that it will take for these changes to be effective; and
• the exceptional circumstances that non-financial counterparties (NFCs) are facing.

ESMA published a discussion paper on the review of the CTs that ran from 21 November 2021 to 19 January 2022. The feedback received provided valuable input for changes to EMIR Level 1,  recommendations that ESMA sent to the European Commission in its high-level response to the Consultation on the targeted review of the central clearing framework in the EU, and also called for immediate action regarding challenges faced by NFCs entering into commodity derivatives.

The Final Report may be accessed through this link.

European long-term investment funds: Council adopts its position

On 24th May 2022, the Council adopted its position to improve the European long-term investment funds (ELTIFs) regulation to facilitate long-term investment in the real economy. The updated regulation will make these investment funds more attractive to asset managers and investors and develop the number of such investment funds in Europe. ELTIFs are important funds to help finance the green and digital transitions, and they can help finance small and medium-sized enterprises (SMEs). They have an important role to play in the deepening of the CMU.

Since 2015, the ELTIF regulatory framework has set up these new type of funds, by detailing fund rules on eligible assets and investments, diversification and portfolio composition, leverage limits and marketing. ELTIFs are the only type of funds dedicated to long-term investments which can be distributed on a cross-border basis to both professional and retail investors. However, since its adoption, only a limited number of ELTIFs have been launched, and only in four member states (France, Italy, Luxembourg and Spain), due to significant constraints in the distribution process and stringent rules on portfolio composition.

The review is expected to unlock untapped potential to mobilise capital for the financing of long-term projects. It will:

• Make the creation of such funds more attractive for asset managers, by updating the scope of eligible assets and investments, the portfolio composition and diversification requirements, the borrowing of cash and other fund rules, the requirements pertaining to the authorisation, investment policies and operating conditions of ELTIFs; and
• Make it easier for retail investors to invest in ELTIFs, in particular by removing the minimum €10,000 investment threshold, while ensuring strong investor protection.

In its position, the Council underlined three priorities:  

• Channel more financing to SMEs and long-term projects, including by removing existing constraints on the portfolio composition of ELTIFs, especially for those distributed solely to professional investors;
• Enhance the role of retail investors by making ELTIFs more attractive to them, and by lifting the barriers to entry which did not take into account the profile and objectives of each investor; and
• Maintain high investor protection standards and provide retail investors with all the relevant information so that they can take informed decisions

ESMA consults on notifications for cross-border marketing and management of funds

On 17th May 2022, ESMA published its consultation paper the information and templates to be provided, and used by firms, when they inform regulators of their cross-border marketing and management activities under the Units in Collective Investments and Transferable Securities (UCITS) Directive and the AIFMD.

The purpose of the draft Implementing Technical Standards (ITS) and Regulatory Technical Standards (RTS) is to facilitate the process for notifying cross-border marketing and management activities in relation to UCITS and AIFs. This will be achieved by defining harmonised information to be notified to competent authorities, and developing common templates to be used by management companies, UCITS and AIFMs.

This consultation will be of particular interest to alternative investment fund managers, internally managed AIFs, UCITS, management companies, internally managed UCITS, and their trade associations, as well as professional and retail investors investing into UCITS and AIFs and their associations.

The closing date for responses to the consultation is 9 September 2022.

The Consultation Paper maybe accessed through this link.

ESAs recommend changes to make the PRIIPs key information document more consumer-friendly

Taking into account the details provided by the European Commission in January 2021 on their intended approach to this review of the PRIIPs Regulation, on 02nd May 2022, the ESAs (EBA, ESMA and EIOPA) recommend significant changes to the PRIIPs Regulation and encourage the Commission to consider a broad review of the PRIIPs framework as well as to undertake appropriate consumer testing before formulating proposals for changes. The recommended changes aim to improve the presentation of information provided to consumers and to make it easier for them to compare different products.

The advice addresses all the issues requested by the Commission, including how to better adapt the key information document (KID) to the digital age and whether to extend the scope of the Regulation to other financial products. Additionally, it presents the ESAs’ recommendations on a range of other issues where analysis has shown that changes are needed to achieve optimal outcomes for retail investors. In particular, the ESAs are of the opinion that the KID would prove more useful to retail investors if presented in a much simpler and more user-friendly format.

In more detail, the ESAs recommend:

• harnessing the opportunities of digital disclosure, such as by allowing information to be presented in a “layered” format;
  
• not extending the scope to additional financial products at this stage, but further specifying the existing scope;
• allowing different approaches for different types of products where this is necessary to ensure the appropriate understanding of retail investors;
• allowing more flexibility on the information provided in the performance section of the KID including the indication of past performance;
• changing the rules for multi-option insurance products to better facilitate comparison between different investments; and
• introducing a new section in the KID to give prominence to sustainable objectives.

Actively managed funds fail to outperform benchmarks during market stress

On 28th March 2022, ESMA published the outcome of a study analysing the performance of actively managed equity UCITS relative to their prospectus and market benchmark indices, between 19 February 2020 and the end of June 2020.

The results shed light on equity fund performance by type of management, especially during a period of stress such as the first wave of COVID-19. ESMA concludes that actively managed funds did not consistently outperform passive during this period.

The strong market downturn at the beginning of the period followed by a fast recovery and then stabilisation offered a real-life opportunity to test the accepted hypothesis that active equity UCITS outperform their benchmarks during stressed market conditions.

The main findings show that the sample of funds considered active funds, net of ongoing costs, did not on average outperform their related benchmarks. More than half of the active UCITS analysed underperformed their benchmarks during the stressed period (between 19 February and 31 March) and more than 40% during the post-stress period (between 1 April and 30 June). Only funds belonging to the highest-rated class consistently outperformed the benchmarks. For the rest of the funds analysed, benchmark-adjusted performance hovered around zero or was clearly negative.

Sustainable Finance

ESAs provide clarifications on key areas of the RTS under SFDR

On 02nd June 2022, the three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) published a statement providing clarifications on the draft regulatory technical standards (RTS) issued under the Sustainable Finance Disclosure Regulation (SFDR), which include the financial product disclosures under the Taxonomy Regulation.

This statement provides clarification on key areas of the SFDR disclosures, including:        

• use of sustainability indicators;
• principal adverse impact (PAI) disclosures;
• financial product disclosures;
• direct and indirect investments;
• taxonomy-related financial product disclosures;
• “do not significantly harm” (DNSH) disclosures; and
• disclosures for products with investment options.

The statement is part of the ESAs’ on-going efforts to promote a better understanding of the disclosures required under the technical standards of the SFDR ahead of the planned application of the rules on 1 January 2023, as laid out in the Delegated Regulation adopted by the European Commission on 6 April 2022.

ESMA provides supervisors with guidance on the integration of sustainability risks and disclosures in the area of asset management

On 23rd May 2022, ESMA published a Supervisory Briefing to ensure convergence across the EU in the supervision of investment funds with sustainability features, and in combating greenwashing by investment funds.

This work will help combat greenwashing by establishing common supervisory criteria for National Competent Authorities (NCAs), to effectively supervise investment funds with sustainability features.

This briefing covers the following areas:         

• Guidance for the supervision of fund documentation and marketing material, as well as guiding principles on the use of sustainability-related terms in funds’ names; and
• Guidance for convergent supervision of the integration of sustainability risks by AIFMs and UCITS managers

This supervisory briefing may be accessed through this link.

ESG Funds: reasons for lower costs and provision of better returns

Better returns for ESG Funds in 2020

On 05th April 2022, ESMA published its fourth annual statistical report on the cost and performance of EU retail investment products.  A new finding this year is that UCITS with an environmental, social and governance (ESG) strategy (including equity, bond and mixed funds) outperformed their non-ESG peers, and were also overall cheaper.

The Report examines the market over the ten-year period ending in 2020 and finds that, while costs show signs of reducing in certain jurisdictions, in most Member States as well as in the EU as a whole there is limited progress in funds becoming more affordable. Retail investors also continue to pay higher fees than professional investors.

The main findings in the report are:

• Gross performance: Gross performance in 2020 was low or negative and highly volatile due to the COVID-19 pandemic. Investing long-term significantly reduces the risks related to sudden and large changes in the valuation of financial products;
• Costs: Costs remained a critical component when evaluating the ultimate benefits of an investment, they reduced only marginally over time. Total costs were higher for retail investors than for institutional investors, on average. Costs for cross-border funds were higher than those for domestic funds;
• ESG UCITS: ESG equity, bond and mixed funds were overall cheaper than non-ESG peers, while their performance reflected the strong performance of specific sectors since the COVID-19 crisis. Within the ESG fund category, impact funds performed better than other ESG strategies and funds with sustainable investment as objective performed better in net terms, after having included costs, than those promoting environmental or social characteristics despite slightly higher costs;
• Structural market features: 15% of the managers of UCITS in our sample managed 90% of assets. Cross-border funds were, on average, larger than funds sold only in their home market and on average 60% of funds included in the sample were effectively sold cross-border. Heterogeneity across Member States persists;
• Performance and costs by management type: Costs were significantly higher for active UCITS than for passive funds and ETFs. ETF UCITS performance was in line with that of other passive UCITS investing in similar assets;
• Retail AIFs: In 2020, retail investors accounted for only 13% of the total Net Asset Value (NAV) in the EU AIF market. As for UCITS, the annualised monthly gross and net performance across the main retail AIFs fund types, significantly decreased compared with 2019. A full costs analysis could not be carried out due to the unavailability of data on cost composition; and
• Structured Retail Products: Total costs were largely attributable to entry costs and varied substantially by country and by pay-off type, but they did not depend on issuance size or underlying type.

This Report may be accessed through this link.

Study on reasons for lower costs for ESG Funds

On 23rd May, ESMA published a study looking at the potential reasons behind the relatively lower ongoing costs, and better performance, of environmental, social and governance (ESG) funds compared to other funds, between April 2019 and September 2021.

ESMA recently, on 22nd April 2022, determined that ESG equity undertakings for collective investment in transferable securities (UCITS), excluding exchange-traded funds, were cheaper and better performers in 2019 and 2020 compared to non-ESG peers.

Understanding the cost and performance dynamics of ESG funds is of particular interest as it may bring insights for the overall fund industry on how to make funds more affordable and profitable for retail investors.

ESMA, in today’s article, is looking at some of the potential drivers behind this relative cheapness, and outperformance, of ESG funds, and finds several differences between the two categories of funds:

Even after controlling for these differences, ESG funds remain statistically cheaper and better performing than non-ESG peers. Further research is thus needed to identify the other factors driving these cost and performance differences.

The EU Green Bond Standard

On 16th May 2022, the Members of the European Parliament (MEPs) in the Economic and Monetary Affairs Committee adopted their negotiation position on the Regulation on European green bonds, which proposal has been issued on 06 July 2021. The amended proposal seeks to better regulate the entire green bond market, rather than only establishing the European Green Bond label (EuGB) and reduce so-called “green washing”. This also comes after which the Council of the EU has agreed to this Standard on 13th April 2022.

For all bonds that are marketed as green, transparency requirements are introduced, including being aligned with the taxonomy legislation on the use of proceeds derived from the bond issuance. This would allow investors to compare EUGBs with other existing green bonds. In addition, all those issuing green bonds must have safeguards in place to ensure they do not harm people or planet.

This EUGBs has several benefits, including:

ESAs and other international bodies have commented and passed on their views on the proposed EU Green Bond Standard, some of which are provided hereunder:

AFME welcomes EU Parliament’s compromise on EU Green Bond Standard and recommends focusing on the original objectives of the EU Green Bond Standard in the context of the trilogues

On 16th May 2022, commenting on the agreement in the European Parliament on the proposed EU Green Bond Standard, Oliver Moullin, Managing Director for Sustainable Finance at the Association for Financial Markets in Europe (AFME), augured the step forward towards establishing an important element of the EU sustainable finance framework and noted that AFME contributed with practical industry input for the EU Green Bond Standard to support and strengthen the EU green bonds market. It is of utmost priority that in order to support the continued growth of ESG bond markets ­- which is particularly important in current market conditions - the co-legislators should focus on the following as they finalise the standard:

• Maintaining the focus of creating a voluntary standard for green bonds and not extending requirements to other types of instruments such as other bonds marketed as sustainable;
• Maintaining the link with the EU Taxonomy Regulation and avoiding duplicative requirements for transition plans; and
• Ensuring that the standard supports the development of green securitisation.

Additionally, as trialogues begin, AFME hopes that the co-legislators will avoid creating different rules for sovereign and private issuers, as well divergence from other pieces of EU sustainable finance legislation, including the disclosures requirements under the SFDR and the transition plan reporting under the Corporate Social Responsibility Directive (CSRD).

EBA recommends adjustments to the proposed EU Green Bond Standard as regards securitisation transactions

On 2nd March 2022, the European Banking Authority (EBA) published a Report which analyses the recent developments and challenges of introducing sustainability in the EU securitisation market (EBA/REP/2022/06). The EU sustainable market is still at an early stage of development and the application of sustainability requirements in securitisation appears to require further clarification. The Report examines how sustainability could be introduced in the specific context of securitisation to foster transparency and credibility in the EU sustainable securitisation market and to support its sound development.

In particular, the Report explores the following aspects:

• whether and how the EU regulations on sustainable finance, including the EU Green Bond Standard (EU GBS), the EU Taxonomy, and the Sustainable Finance Disclosure Regulations could be applied to securitisation;
• the relevance of a dedicated regulatory framework for sustainable securitisation and;
• the nature and content of sustainability-related disclosures for securitisation products.  

The EBA’s analysis shows that it would be premature to establish a dedicated framework for green securitisation. Rather, the EBA is of the view that the upcoming EU GBS regulation should also apply to securitisation, provided that some adjustments are made to the standard. In this regard, the EBA recommends that the EU GBS requirements apply at originator level (instead of at the issuer/ securitisation special purpose entity (SSPE) level). This would allow a securitisation that is not backed by a portfolio of green assets to meet the EU GBS requirements, provided that the originator commits to using all the proceeds from the green bond to generate new green assets.

The EBA sees the proposed adjustments as an intermediate step to allow the sustainable securitisation market to develop and to play a role in financing the transition towards a greener EU economy. They are also meant to ensure that securitisation is treated in a consistent manner as other types of asset-backed securities.

The EBA also recommends that the Securitisation Regulation is amended in order to extend voluntary ‘principal adverse impact disclosures’ to non-STS (simple, transparent and standardised) securitisations. It also calls for further EBA work on green synthetic securitisation and social securitisation.

It is also noted that the Association for Financial Markets in Europe (AFME) has welcomed the EBA’s recognition of the important role that green synthetic securitisations have to play in freeing up capital from banks active in green lending whilst recognising more time may be needed to assess whether and how the specificities of synthetic securitisation should be reflected in a green framework. AFME believes this is equally relevant to green private securitisations which also fall outside the GBS but are equally important in financing the green transition of the real economy.

The EBA report may be accessed through this link.

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