This month's roundup of developments affecting banks, wealth managers, brokers and funds includes: Investment & Investment Services; Derivatives; Securities and Capital Requirements.

Investment & Investment Services
  • ESMA restrictions on binary options and CFDs for retail investors
  • FCA expectations for automated investment services
  • ISDA Common Domain Model to reduce complexity in derivatives trading
  • ESMA updates UCITS Q&A on application of remuneration disclosure requirements to delegates
Capital Requirements
  • Council of EU reaches agreement on banking reform package
  • PRA consults on the securitisation framework and significant risk transfer
  • CRD IV benchmarking rules are amended
Investment & Investment Services
ESMA adopts restrictions on binary options and CFDs for retail investors

The European Securities and Markets Authority (ESMA) has formally adopted new measures on the provision of contracts for differences (CFDs) and binary options to retail investors. The measures have been published in the Official Journal of the European Union. They will apply for a period of three months from 2 July 2018 for binary options and from 1 August 2018 for CFDs.

ESMA, 1 June 2018

CMA roundtables with pension trustees and scheme staff as part of investment consultants market investigation

The Competition and Markets Authority (CMA) has published summaries of roundtables that it held with pension trustees and pension scheme in-house investment staff as part of its work on the market investigation into the supply and acquisition of investment consultancy services and fiduciary management services to and by institutional investors and employers in the sector.

CMA, 30 May 2018

IA publishes updated model discretionary investment management agreement

The Investment Association (IA) has published an updated version of its model discretionary investment management agreement.

IA, 29 May 2018

FCA sets out its expectations for automated investment services

The Financial Conduct Authority (FCA) has published a press release setting out its expectations of firms offering automated investment services. In its 2017/18 business plan the FCA stated that it would monitor developments and review services providing automated investment services to help inform its regulatory strategy. The FCA also announced its intention to review new entrants to the market. The press release discusses the reviews the FCA has undertaken.

FCA, 21 May 2018

ISDA says Common Domain Model will reduce complexity in derivatives trading

The International Swaps and Derivatives Association (ISDA) has published an initial digital representation of the Common Domain Model (CDM). ISDA says the CDM will reduce complexity and create greater efficiency in the derivatives market. The CDM is intended to provide a standard digital representation of events and actions that occur during the life of a derivatives trade, expressed in a machine-readable format. Using this common standard will enhance consistency and facilitate interoperability across firms and platforms, irrespective of the programming language ultimately used for each technology.

ISDA, 5 June 2018

Joint response to Pillar 3 consultation raises concerns about disclosure requirements

The Institute of International Finance, International Swaps and Derivatives Association and Global Financial Markets Association have submitted the joint response letter to the Basel Committee’s consultation on Pillar 3 disclosure requirements. The associations endorse the underlying policy goals of the Pillar 3, but have raised concerns about the quantity and granularity of disclosure requirements.

IIF, ISDA & FMA, 31 May 2018

ISDA paper analyses the use of notional amount in derivatives regulation

The International Swaps and Derivatives Association (ISDA) has published a research note highlighting a number of examples where notional amount outstanding is used in derivatives regulations in different jurisdictions. The paper concludes that notional amount may be the most appropriate metric to use in some instances, such as those related to trade size, but that a risk-based measure would be more appropriate in others, such as clearing and margin.

ISDA, 25 May 2018

BoE publishes working paper analysing the UK OTC derivatives market

The Bank of England (BoE) has published a Staff Working Paper on multiplex network analysis of the UK over-the-counter (OTC) derivatives market.

BoE, 21 May 2018

ECON supports revised rules for OTC derivatives: proportional treatment of small and non-financial firms

The Economic and Monetary Affairs Committee (ECON) of the European Parliament voted on 16 May 2018 to support the Commission's proposals to simplify clearing rules for small and non-financial counterparties and to temporarily exempt pension funds from clearing.

ECON, 17 May 2018

BIS releases OTC derivatives statistics

The Bank for International Settlements (BIS) has released its OTC derivatives statistics for the end of December 2017. Since 2015, the notional amount of outstanding OTC derivatives contracts has fluctuated in a range between about $480trn and $550trn.

BIS, 3 May 2018

ESMA updates UCITS Q&A on application of remuneration disclosure requirements to delegates

The European Securities and Markets Authority (ESMA) has updated its Q&As on the application of the Undertakings for the Collective Investment in Transferable Securities Directive (UCITS). The document includes one new Q&A on the application of remuneration disclosure requirements to delegates.

ESMA, 25 May 2018

ICMA publishes overview of ESMA's liquidity assessment for bonds (May-Aug 2018)

The International Capital Markets Association (ICMA) has published an overview of the first liquidity assessment for bonds subject to the pre- and post-trade requirements of MiFID II/MiFIR which the European Securities and Markets Authority (ESMA) published on 2 May 2018. The liquidity assessment became applicable on 16 May 2018 and will be valid until 15 August 2018. The overview includes the list of liquid bonds.

ICMA, 22 May 2018

IOSCO conference focuses on key challenges facing securities regulators

The International Organization of Securities Commissions (IOSCO) is holding its 43rd annual conference in Budapest, focusing on protecting investors, ensuring fair, efficient and transparent markets, and mitigating systemic risk.

IOSCO, 10 May 2018

Capital Requirements
Council of the EU publishes compromise text on CRD IV amendment

The Council of the EU has published a Presidency compromise text of the proposed Directive amending the Capital Requirements Directive 2013/36/EU (CRD IV) as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures.

Council of the EU, 29 May 2018

Council of EU reaches agreement on banking reform package

The Council of the EU has agreed its position on the package of proposals adopted by the European Commission in November 2016 on bank capital requirements and bank recovery and resolution. Ministers have asked the Council presidency to start negotiations with the European Parliament as soon as the Parliament is ready to negotiate.

Council of the EU, 25 May 2018

Commons European Scrutiny Committee considers legislative proposals for banking reform

The House of Commons European Scrutiny Committee has considered the EU’s legislative proposals for banking reform set out in the proposed new Capital Requirements Directive (CRDV), Capital Requirements Regulation (CRR II) and Bank Recovery and Resolution Directive (BRRD II). The Committee has not cleared the proposed package of legislation from scrutiny and has requested further information. The Committee, however, granted a scrutiny waiver for general approach at the meeting of the Economic and Financial Affairs Council (ECOFIN), which is due to take place on 25 May 2018.

House of Commons European Scrutiny Committee, 23 May 2018

EBA consults on RTS and guidelines on estimation and identification of an economic downturn in IRB modelling

The European Banking Authority (EBA) has launched a second consultation on draft regulatory technical standards (RTS) specifying an economic downturn (which follows on from the first consultation launched in March 2017) and a consultation on a set of guidelines related to the estimation of loss given default (LGD) appropriate for conditions of an economic downturn. This package is part of the EBA's broader work on the review of the internal ratings-based (IRB) approach aiming at reducing the unjustified variability in the outcomes of internal models, while preserving the risk sensitivity of capital requirements. The closing date for responses is 22 June 2018.

EBA, 22 May 2018

PRA consults on the securitisation framework and significant risk transfer

The Prudential Regulation Authority (PRA) is consulting on its proposed approach to the EU Securitisation Regulation and certain aspects of the revised Capital Requirements Regulation (CRR)’s banking securitisation capital framework. Consultation paper (CP) 12/18 also proposes to update firms on the PRA’s expectations with regard to significant risk transfer (SRT) securitisation. Feedback is sought by 22 August 2018.

PRA, 22 May 2018

RTS on transactions with non-financial counterparties under CRR published in the Official Journal

Commission Delegated Regulation (EU) 2018/728 of 24 January 2018 supplementing Regulation (EU) No 575/2013 of the European Parliament and of the Council (Capital Requirements Regulation, CRR) with regard to regulatory technical standards (RTS) for procedures for excluding transactions with non-financial counterparties established in a third country from the own funds requirement for credit valuation adjustment risk has been published in the Official Journal.

European Commission, 18 May 2018

Loan Market Association highlights importance of different credit protection products

The Loan Market Association (LMA) has responded to a consultation by the Prudential Regulation Authority on the eligibility of guarantees used as unfunded credit mitigation under the Capital Requirements Regulation (EU) 575/2013. The LMA highlights the importance of different credit protection products, including risk participations, export credit agency guarantees and credit risk insurance policies, which would potentially be severely impacted by the proposals in the event that they are published in their current form.

LMA, 18 May 2018

Insurance Europe backs Commission proposals on STS securitisations

The European Commission launched a consultation in April on a draft delegated regulation amending Delegated Regulation (EU) 2015/35 as regards the calculation of regulatory capital requirements for securitisations and STS securitisations held by insurance and reinsurance undertakings.

Insurance Europe (IE) supported these proposals, also noting:

  • non-STS securitisations remain significantly penalised, without this being justified by historical performance statistics
  • inconsistency in treatment between a whole mortgage loans pool versus RMBS, the latter being heavily penalised in terms of capital

IE, 18 May 2018

CRD IV benchmarking rules are amended

Amendments to CRD IV benchmarking rules were published in the Official Journal. The Changes take into account the EBA's report, exposures or positions to be included in the benchmarking portfolios and reporting requirements.

Official Journal, 18 May 2018

General Developments
First meeting of the UK's crypto-assets taskforce

The UK's crypto-assets taskforce has held its first meeting, exploring the impact of crypto-assets, the potential benefits and challenges of the application of distributed ledger technology in financial services, and assessing what, if any, regulation is required in response. Announced in April 2018 by the Chancellor of the Exchequer as part of the government’s FinTech sector strategy, the taskforce is part of the government and financial regulators’ efforts to understand and engage with the implications of new technologies in financial services.

HM Treasury, 22 May 2018

JMLSG updates its anti-money laundering guidance for UK financial services

The Joint Money Laundering Steering Group (JMLSG) has updated its guidance on AML. The revisions do not change the substance of the guidance, instead they describe how the sector works, how to assess risks and how to identify who the customers are.

JMLSG, 18 May 2018

ECB publishes responses to its euro unsecured overnight interest rate consultation

The European Central Bank (ECB) published its response to the consultation launched in March 2018 to seek views on the defined methodology of the new rate and key operational and technical parameters.

ECB, 18 May 2018

FCA video offers guidance for asset managers on ‘hard to value’ assets

The Financial Conduct Authority (FCA) has released a video in which its head of asset management, Nick Miller, presents the findings of the FCA’s 2017 multi-firm review of how asset management firms value so-called ‘hard to value’ assets. Mr Miller sets out what the FCA looked at during the review, what it found, examples of good practice, and areas for improvement. A transcript of the video is also available.

FCA, 11 May 2018

FIA, AFME and UK Finance raise concerns on PRA algorithmic trading proposals

The Futures Industry Association (FIA), the Association for Financial Markets in Europe (AFME) and UK Finance have submitted a joint response to the Prudential Regulation Authority (PRA) consultation paper (CP 5/18) on algorithmic trading. The associations asked the PRA to clarify the policies in several areas, align its policies with other market integrity regulations, and reassess the timing of any policy changes given the proximity to the Markets in Financial Instruments Directive (MiFID II) implementation.

FIA, 11 May 2018

ESMA launches one-stop company portal

The European Securities and Markets Authority (ESMA) has launched a company portal allowing investors to check whether a financial service provider is authorised within the EU. The portal also provides reference to sanctions applied by the competent authorities in the Member States under several European legislations.

ESMA, 8 May 2018

Key Contacts

Lorna Finlayson

Lorna Finlayson

Partner, Financial Regulation

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Richard Small

Richard Small

Partner, Financial Regulation
London, UK

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