Investment Firms

AFME publishes its Securitisation Data Report for Q3 2022

On 16 December 2022, AFME published its Securitisation Data Report for Q3 2022. The following are the main findings of the report:

• In Q3 2022, EUR 39.4bn of securitised product was issued in Europe, an increase of 13.9% from Q2 2022 and a decrease of 17.3% from Q3 2021. Of the EUR 39.4bn issued, EUR 19.0bn was placed, representing 48.2% of the total, compared to the 47.7% of issuance in Q2 2022 and 48.5% of issuance in Q3 2021.
• Outstanding volumes decreased to EUR 936.3bn outstanding at the end of Q3 2022, a decrease of 2.88% QoQ and a decrease of 3.46% year on year (YoY).
• Credit Quality: In Europe, upgrades comprised 88% of total rating actions by the main CRAs during Q3 2022, remaining unchanged from 88% of total rating actions during Q2 2022.
• STS issuance: In Q3 2022, EUR 9.3bn of securitised product was notified as STS to ESMA, representing 23.6% of the total issued volume in Q3 2022 (EUR 39.4bn). Out of the EUR 9.3bn in STS issuance, EUR 7.0bn was placed, representing 37.0% of total placed issuance in Q3 2022 (EUR 19.0 bn).

The report also presents briefly some of the most important regulatory developments in the EU and the UK, such as the European Supervisory Authorities’ (ESAs’) response to the European Commission’s (EC) Call for Advice and the Edinburgh Reforms respectively.

MFSA publishes revised Application Forms for Investment Firms

On 24 November 2022, the Malta Financial Services Authority (MFSA) issued its Circular to notify prospective applicants regarding the revised Application Form for applicants seeking authorisation as Investment Firms – Form AA04.

The MFSA has continued accepting submissions by Applicants using the previous application form for Investment Firms (Form AA04) until 31 December 2022. As from 1 January 2023, only the updated Form AA04 will be accepted by the MFSA for Applicants seeking authorisation as an Investment Firm. Investment Firms applications completed via Form AA04 should continue to be submitted through the LH Portal.

ESMA consults on rules for passporting for Investment Firms

On 17 November 2022, ESMA, published a consultation document to obtain feedback on the review of the technical standards under Article 34 of the Markets in Financial Instruments Directive (MiFID II), covering the provision of investment services across the EU.

The main amendments proposed add the following items to the information that investment firms are required to provide at the passporting stage:

• the marketing means the firm will use in host Member States;
• the language(s) for which the investment firm has the necessary arrangements to deal with complaints from clients from each of the host Member States in which it provides services;
• in which Member States the firm will actively use its passport as well as the categories of clients targeted; and
• the investment firm’s internal organisation in relation to the cross-border activities of the firm.

The cross-border provision of investment services is a key element of the single market of financial services as it fosters competition and expands the offer available to consumers who can choose among a broader number of firms and investment opportunities.

Lately, ESMA and NCAs have noted the continued increase in cross-border activities to retail clients provided under the MiFID II free provision of services regime. This increase results from several factors, including the development of the single market and the digitalisation of financial services, which further facilitates firms to provide services across borders. The pandemic has also created conditions that contributed to an increase in retail investors’ exposure to securities markets, including cross-border.

This is a welcome development, consistent with the objective to develop the single market for financial services in the EU.

However, the increase in cross-border activities by investment firms clearly requires NCAs to increase their focus on the supervision of cross-border activities and on cooperation. A development of cross-border activities which is not accompanied by increased supervisory focus risks undermining investors’ trust and backfiring on the achievement of the single market.

Interested parties may submit their feedback by filling in Annex 1 of the Consultation document by 17^th February 2023.

The Consultation Document may be accessed through this link.

EBA publishes final technical standards on the measurement of liquidity risks for investment firms

On 14 November 2022, the European Banking Authority (EBA) published its final Regulatory Technical Standards (RTS) on specific liquidity measurement for investment firms under the Investment Firms Directive (IFD). These RTS will ensure that all NCAs follow the same harmonised approach when adopting the decision to impose further liquidity requirements to an investment firm. 

The IFD allows competent authorities to increase an investment firm’s liquidity requirements if, following the assessment of liquidity risk in accordance with the supervisory review and evaluation process (SREP), they conclude that the investment firm is exposed to material liquidity risks, which are not sufficiently covered by the minimum liquidity requirements set out in the Investment Firms Regulation (IFR). 

In order to have a harmonised application of the specific liquidity requirements, these RTS address in detail the main elements that may affect the liquidity risk of an investment firm. In particular, competent authorities will have to assess:

• All elements specific to each service provided by the investment firm under MiFID; 
• Other elements that could have a material impact, such as external factors, group structure, operational or reputational risks.

For small and non-interconnected investment firms, NCAs are expected to assess only a limited set of those elements. This aims at preserving the proportional approach envisaged by the IFR and IFD.

The Final Report may be accessed through this link.

MFSA’s Revisions to the MiFID Firms Quarterly Reporting

On 30 September 2022, the MFSA has issued a Circular on the revisions made by the MFSA in relation to Quarterly reporting submissions by MiFID firms and respective Guidelines.

The guidelines may be accessed through the links below:

• Guidelines on the compilation and submission of the MiFID Firms Quarterly Reporting;
• Guidelines on the Compilation and Submission of the List of Financial Instruments; and

Investment Services Licence Holder Documentation Timetable.

ESMA reminds firms of the impact of inflation in the context of investment services to retail clients

On 28 September 2022, ESMA published a statement drawing the attention of investment firms to consider inflation and inflation risk when applying relevant MiFID II requirements in the interest of investor protection. The MFSA has also published a Circular on 03 October 2022 on same.

Over the past recent months inflation rates have risen in the EU, as in the rest of the world, and this growth in inflation has impacted households both in their daily lives and in their investments and investment decisions.

ESMA notes that from an investor protection perspective, this trend poses a risk for retail investors, as some of them will not fully appreciate the link between inflation and financial markets and may not fully understand how considerations on inflation should be factored in when they make saving and investment decisions.

ESMA is therefore issuing this Statement to remind firms of relevant MiFID II requirements as it believes that investment firms may play a role in considering inflation and inflation risk, both when manufacturing and distributing investment products and when providing investment services to retail clients.  Investment firms can also help raising clients’ awareness of inflation risk.

ESMA publishes final guidelines on MiFID II suitability requirements

On 23 September 2022 ESMA published its Final Report on Guidelines on certain aspects of the MiFID II suitability requirements. The MFSA issued the Circular on these Suitability Guidelines.

The assessment of suitability is one of the most important requirements for investor protection in the MiFID framework. It applies to the provision of any type of investment advice, whether independent or not, and to portfolio management.

The main amendments introduced to the MiFID II Delegated Regulation and reflected in the guidelines on the topic of sustainability are:

• Information to clients on the sustainability preferences – Firms will need to help clients understand the concept of sustainability preferences and explain the difference between products with and without sustainability features in a clear manner and avoiding technical language;
• Collection of information from clients on sustainability preferences – Firms will need to collect information from clients on their preferences in relation to the different types of sustainable investment products and to what extent they want to invest in these products;
• Assessment of sustainability preferences – Once the firm has identified a range of suitable products for client, in accordance with the criteria of knowledge and experience, financial situation and other investment objectives, the firm shall identify the product(s) that fulfil the client’s sustainability preferences; and
• Organisational requirements – Firms will need to give staff appropriate training on sustainability topics and keep appropriate records of the sustainability preferences of the client (if any) and of any updates of these preferences.

This Final Report builds on the text of the 2018 ESMA guidelines, which have been reviewed to consider:

• the adoption by the European Commission of the changes to the MiFID II Delegated Regulation to integrate sustainability factors, risk and preferences into organisational requirements and operating conditions for investment firms;
• the good and poor practices identified in ESMA’s 2020 Common Supervisory Action (CSA) on suitability. These good and poor practices will give practical guidance to firms in some areas where lack of convergence was identified; and
• the amendments introduced through the Capital Markets Recovery Package to Article 25(2) of MiFID II.

By pursuing the objective of ensuring a consistent and harmonised application of the requirements in the area of suitability, including on the topic of sustainability, the guidelines will contribute to the achievement of the objectives of MiFID II.

The Suitability Guidelines may be accessed through this link.

MFSA’s updates to the Conduct of Business Rulebook

On 29 July 2022, the MFSA issued a Circular on updates to the Conduct of Business Rulebook.The changes being carried out to the Conduct Rulebook relate to implementing all the changes made by means of the three (3) Amending Delegated Acts which primarily aim to integrate sustainability issues and considerations into the IDD and MIFID.

The updated Conduct of Business Rulebook may be accessed through this link.

ESMA and EBA publish Guidelines to harmonise the SREP of investment firms

On 21 July 2022, ESMA and EBA published the Final Guidelines to harmonise the SREP of investment firms.

The guidelines are based on the IFD and aim to harmonise the supervisory practices regarding the supervisory review and evaluation process of investment firms. 

The final SREP Guidelines have been developed jointly with the EBA. They set out the common process and criteria for the assessment of the main SREP elements, including:

• Business model;
• Governance arrangements and firm-wide controls;
• Risks to capital and capital adequacy; and
• Liquidity risk and liquidity adequacy.

The criteria for the assessment of risks in the joint Guidelines follow the requirements of the IFR/IFD and the procedures and methodologies provided are proportionate to the nature, size and activities of investment firms.

The SREP Guidelines may be accessed through this link.

ESMA proposes Key Risk Indicators for Retail Investors 

On 20 July 2022, ESMA published an Article on the development of key retail risk indicators (RRIs) for the EU single market. The proposed RRIs highlight risks around:

• Inexperienced investors;
• Use of digital tools by younger investors; and
• Spikes in overall trading during periods of market stress.

This development of RRIs is based on the new mandate ESMA recently received in this regard. ESMA is building on existing consumer analysis and indicators from the Trends, Risks and Vulnerabilities Reports to propose a conceptual framework that:

• Defines key terms;
• Considers how to measure risks practically; and
• Identifies sources of risk to consumers.

Within this framework, RRIs should aim to reflect market developments, especially the rise of online- or mobile-based retail trading.

Investment Instruments and Investment Funds Regime

Applicability of Regulation (EU) No 1286/2014 on KID for PRIIPs to Funds and Fund Managers

On 22 December 2022, the MFSA issued a Circular on the Applicability of Regulation (EU) No 1286/2014 on Key Information Documents (KID) for Packaged Retail and Insurance-based Investment Products (PRIIPs) to Funds and Fund Managers.

Licence Holders shall produce a PRIIPs KID as specified in the Regulation with regards to contents and form. This shall in turn be distributed to the retail investors in good time prior to entering into any contract. Licence Holders already offering PRIIPs should file the PRIIPs KID within 35 business days of 01 January 2023 on ausecurities@mfsa.mt. The same email address should be used for any future amendments to the PRIIPs KID. Such amendments should be notified and explained to the Authority together with an updated copy of the PRIIPS KID.

MFSA consults on the NPIF Regime

On 22 December 2022, the MFSA issued a Consultation Paper on the Proposed Establishment of a Framework for Notified Professional Investor Funds.

This Consultation emanates from the Discussion Paper the MFSA has issued on 28 October 2021 on its Asset Management Strategy. Pillar III thereof proposed policy initiatives and new regulatory frameworks that could further enhance the attractiveness of Malta’s asset management sector. Proposal 9 of the Discussion Paper invited stakeholder feedback on the possible introduction of a regulatory framework for Notified Professional Investor Funds (NPIFs). This proposal was well received by respondents, highlighting that this may contribute towards Malta’s attractiveness as a fund jurisdiction and would address the needs of a specific segment of the market.

The NPIF proposal seeks to provide an additional fund structure which complements existing fund frameworks, entailing potentially lower associated setup and other operational/regulatory costs currently experienced in operating a fully licensed fund. It also takes a more proportionate and risk-based approach to the onboarding process given the regulated status of the funds’ service providers and the qualified status of the target investors.

In its assessment leading to the proposed regime, the Authority has also taken into consideration the inclusion of specific features derived from both the existing Notified AIF and licensed Professional Investor Fund (PIF) regimes. The new framework would moreover require amendments to legislation and a dedicated rulebook. By virtue of this Consultation document, the MFSA is seeking stakeholders’ views on the main features of the proposed framework and its first draft of the dedicated rulebook for the envisaged NPIF framework. Interested parties are to submit their feedback by 31 January 2023.

The documentation may be accessed through these links:

• Consultation Document;
• Draft Investment Services Rules for Notified Professional Investor Fund and related Service Providers - Part A;
• Draft Investment Services Rules for Notified Professional Investor Fund and related Service Providers - Part B;
• Draft New Section to be Inserted in Part A of the Investment Services Rules for Professional Investor Funds; and
• Draft Amendments to the Glossary to the Funds Rules.

ESMA publishes guidelines and technical documentation on reporting under EMIR Refit

On 20 December 2022, the European Securities and Markets Authority (ESMA) published guidelines and technical documentation on reporting under the European Market Infrastructures Regulation(EMIR) Refit.

The guidelines further enhance the harmonisation and standardisation of reporting under EMIR contributing to the high quality of data necessary for the effective monitoring of the systemic risk. Furthermore, increased harmonisation and standardisation of reporting allows to contain the costs along the complete reporting chain - the counterparties that report the data, the trade repositories (TRs) which put in place the procedures to verify the completeness and correctness of data, and the authorities, defined in Article 81(3) of EMIR, which use data for supervisory and regulatory purposes. The Guidelines provide clarifications on the following aspects:

• Transition to reporting under the new rules,
• The number of reportable derivatives,
• Intragroup derivatives exemption from reporting,
• Delegation of reporting and allocation of responsibility for reporting,
• Reporting logic and the population of reporting fields,
• Reporting of different types of derivatives,
• Ensuring data quality by the counterparties and the TRs,
• Construction of the Trade State Report and reconciliation of derivatives by the TRs,
• Data access.

The final report on Guidelines is accompanied by the validation rules and the reporting instructions (link 1 and link 2).

The validation rules document sets out detailed technical rules on how the TRs should verify the completeness and accuracy of the reported data as well as the conditions and thresholds to be applied to determine whether the values reported by both counterparties match or not. Finally, the Validation rules document contains also a template for notifications of reporting errors and omissions to the national competent authorities (NCAs).

The reporting instructions contain EMIR XML messages which were updated or newly developed based on the revised technical standards and validation rules. A fully standardised format for reporting will eliminate the risk of discrepancies due to inconsistent data. End-to-end reporting in ISO 20022 XML is expected to further enhance data quality and consistency and mitigate the data integrity risks, by reducing the need for data cleaning/normalisation and facilitate their exploitation for various supervisory and/or economic analysis based on the changes presented by the EMIR Refit regulation. The implemented schema sets were designed to ensure the backward compatibility of the data reporting.

The publications may be found through these links:

• Final Report: Guidelines for reporting under EMIR;
• Validation rules;
• Reporting Instructions: Link 1; and
• Reporting Instructions: Link 2.

Delegated Regulation on regulatory technical standards for the Key Investment Information Sheet 

On 08 November 2022, the Official Journal of the EU published the Commission delegated regulation (EU) 2022/2119 of 13^th July 2022 supplementing Regulation (EU) 2020/1503 of the European Parliament and of the Council with regards to regulatory technical standards for the key investment information sheet. This Regulation entered into force on 28^th of November 2022. When providing the information in the key investment information sheet referred to in Article 23 of Regulation (EU) 2020/1503, crowdfunding service providers shall use the model laid down in the Annex to this Regulation.

The language used in the key investment information should be clear and any technical terms should be avoided if layman’s terms can be used instead.

The types of main risks which are associated with a crowdfunding offer shall be disclosed in the key investment information sheet relating to that offer in accordance with the instructions set out in Part C of the Annex. Where relevant, other risks shall also be disclosed. The description of the risks associated with a crowdfunding offer shall be of relevance to that specific offer and shall be prepared solely for the benefit of prospective investors and shall not give general statements on investment risks or limit the liability of the project owner or any persons acting on their behalf.

The EC publishes its report on the review of the Securitisation Regulation

On 11 October 2022, the EC published its report on the review of the Securitisation Regulation. Securitisation is one of the main building blocks of the Capital Markets Union. It provides an additional funding source and frees up capacity on banks' balance sheets, enabling them to lend more, thus contributing to a well-functioning financial system that efficiently finances the real economy. It acts as an important tool for capital, liquidity and risk management in banks. Furthermore, securitisation makes new assets accessible to investors, thus providing diversified opportunities for long-term investors.

The report relies on findings from a broad consultation of stakeholders and draws from input provided by the ESAs. It identifies a number of targeted improvements to the framework’s functioning, notably on proportionality of certain requirements, that will be pursued without changes to the Securitisation Regulation itself. In particular, the report provides guidance on certain areas of the Securitisation Regulation like the jurisdictional scope and invites the ESAs to revise technical standards dealing with transparency obligations. Finally, the report also includes an overview of the current and upcoming work on the prudential treatment of securitisation.

The report concludes that the EU securitisation framework works well, even though dynamic market growth has not yet materialised. The Commission takes this as an indication that the Securitisation Regulation has contributed to achieving the 2017 legislation’s core objective of establishing an EU securitisation market that helps finance the economy without creating risks to financial stability. At the same time, it identifies a number of targeted improvements to the framework’s functioning, notably on proportionality of certain requirements, that will be pursued without changes to the Securitisation Regulation itself. In particular, the report provides guidance on certain areas of the Securitisation Regulation like the jurisdictional scope and invites the ESAs to revise technical standards dealing with transparency obligations. Finally, the report also includes an overview of the current and upcoming work on the prudential treatment of securitisation.

This report may be accessed through this link.

Delegated Regulation on derivatives

On 07 October 2022, the EU Official Journal published the Commission delegated regulation (EU) 2022/1856 of 10^th June 2022 amending the regulatory technical standards laid down in Delegated Regulation (EU) 151/2013 by further specifying the procedure for accessing details of derivatives as well as the technical and operational arrangements for their access.This regulation entered into force on 27^th October 2022.

Sustainable Finance

ESMA publishes report on calibrating green criteria for retail funds

On 21 December 2022, ESMA published a Report on calibrating green criteria for retail funds.  The EU Ecolabel is an EU-wide label awarded to green products and services. A version of the label for retail financial products has been considered as an option to help retail investors make informed investment decision on the sustainability features of investment products. In the article, ESMA tested three key Ecolabel criteria on a sample of 3000 sustainability-oriented Units in Collective Investments and Transferable Securities (UCITS) equity funds with EUR 1 trillion in assets under management. Using fund portfolio holdings and proxy data, ESMA found that only 16 funds (0.5 % of their sample) met the proposed minimum portfolio greenness threshold of 50% and exclusion requirements. These findings highlight the trade-off between the stringency and feasibility of the Ecolabel requirements. The article further illustrates the impact of different threshold calibrations on the number of eligible funds and potential volumes of green finance channelled through Ecolabel funds. The analysis does not prejudge any policy developments or decisions regarding an EU Ecolabel for financial products

The Report may be accessed through this link.

ESMA spotlight on markets: ESG disclosures becomes a strategic supervisory priority

On 16 November 2022, ESMA published its Report on environmental, social and governance (ESG) disclosures becoming a strategic supervisory priority.

ESMA is changing its Union Strategic Supervisory Priorities to include ESG disclosures alongside market data quality. The new priority represents an important step in the implementation of the ESMA Strategy, which gives a prominent role to sustainable finance. In addition, ESMA and EU Agency for the Cooperation of Energy Regulators (ACER)strengthened their cooperation to further improve information exchange and avoid potential market abuse in the spot and derivatives markets in Europe by setting up a Joint Task Force.

ESMA and NCAs intend to accompany the growing demand for ESG-related financial products. We will foster transparency and comprehensibility of ESG disclosures across key segments of the sustainable finance value chain such as issuers, investment managers or investment firms and, hence tackle greenwashing.

In addition, ESMA aims to gradually promote an increased scrutiny on ESG disclosures through effective and consistent supervision. This also implies building supervisory capabilities to fully embed sustainable finance into daily supervisory work and supervisory culture. ESMA and the NCAs will therefore take active steps to protect investors and facilitate investments in a credible ESG market.

Regarding costs and performance for retail investment products, ESMA and the NCAs carried out extensive actions such as:

• CSA on costs and fees under the UCITS framework;
• CSA on information on MiFID II costs and charges;
• Mystery shopping exercise (with some NCAs);
• CSA on MiFID II suitability requirements and product governance;
• Interpretative aids (Guidelines, Q&As);
• Draft regulations and technical advice; and
• Annual Statistical Report monitoring costs’ performance.

This report may be accessed through this link.

ECB publishes working paper on Financial Markets and Green Innovation

On 26 July 2022, the European Central Bank (ECB) published a Working Paper on Financial Markets and Green Innovation. The analysis explains that the long-run rate of patenting of “green” technologies in the EU lags behind selected peers: it is three times lower than in the US, and four times lower than in Japan. Moreover, there is substantial heterogeneity across EU member states: some are global leaders in patented “green” technologies, while one-third of the EU member states have less than one “green” patent per million population per year.

The ECB’s model of directed technical change used to to identify the financial and policy factors that are necessary for a healthy rate of “green” innovation concluded that variation in the level of green innovation can be explained by variation in three main factors: carbon taxes, investment in research and development (R&D), and the mix between equity and debt investment

The analysis shows that there is large scope in the EU to improve upon all factors that promote “green” innovation. Relative to selected peers, EU countries on average have low levels of R&D investment and low levels of early- and later-stage Venture Capital financing. Moreover, as of end-2021, only 11 EU member states have some form of carbon tax, and those that do tax carbon below the levels recommended by economists.

The ECB argues that, given the analysis’ observations stimulating green innovation falls squarely in the realm of government policies. Among these are higher carbon taxes and more stringent environmental policies, higher R&D subsidies for “green” applied science, and a Capital Markets Union with a strong equity component to promote venture capital.

Finally, the ECB considers the effectiveness of central bank policies to stimulate “green” innovation are still not up to desirable levels. The ECB argues that their monetary policy tools have limited effectiveness because they face legal and economic obstacles. For one, green monetary policies by the ECB need to be consistent with the primary mandate of price stability, and its operations need to comply with the concepts of market neutrality and the application of appropriate risk controls. More importantly, central bank policies that transmit to the real economy through the bank lending channel have no effect on the development of patented “green” technologies because banks do not materially contribute to innovation in new technologies. To the extent that bond financing is a form of debt and not of equity, purchasing green bonds is unlikely to contribute significantly to green “innovation,” either. The ECB concludes that facilitating the development of new low-carbon technologies in Europe requires bold government action to support green innovation, and that the ECB can at best play a supportive role.

The Working Paper may be accessed through this link.