Each month, FactSet's Regulatory team offers a rundown of the most important developments in compliance and regulatory news. Read on to see which stories dominated the conversation last month.

EU

EU Delivers a Payload of ESG Developments

On December 6, 2019, the European Banking Authority (EBA) published an Action Plan on Sustainable Finance, setting out a multi-year program on how it will deliver the suite of ESG related tasks it has been delegated under several recently published EU legislative texts.

The Action Plan contains a broad range of initiatives including the integration of ESG-risks into supervisory reviews and stress tests, the development of ESG-related technical standards and disclosures, and the evaluation of whether ESG-related assets or activities should attract favorable capital treatment.

In the same week as the Action Plan, on December 11, 2019, the European Commission announced in a press release that it had issued a formal Communication setting out the European Green Deal—a suite of economic and social policies strategically centered around a core of environmental initiatives that commit the EU to the following (as summarized in the EU Green Deal Factsheet):

1. To become climate-neutral by 2050
2. To protect human life, animals, and plants by cutting pollution
3. To help companies become world leaders in clean products and technologies
4. To help ensure a just and inclusive transition

A week later, on December 17, 2019, the newly appointed European Commission followed up on this announcement with a 2020 Annual Sustainable Growth Strategy, which puts the Green Deal and UN Sustainability Development Goals (SDGs) at the front and center of its economic strategy for the coming year and the broader 2019-2024 EU political cycle.

Also on December 17, 2019, the European Parliament and Council announced a final agreement on the ‘Taxonomy Regulation,’ which establishes an EU-wide classification system governing what constitutes an environmentally (i.e., "green") and socially sustainable economic activity. The following day, the European Commission welcomed the development and published a Q&A on the new Taxonomy.

On the same day the Taxonomy Q&A document was published, an EIOPA Report, EBA Report, and ESMA Report—each on the topic of "Undue Short-Term Pressures on Corporations" from the financial services sector—was published, delivering a further tranche of proposals for regulatory reform, which the Commission is now evaluating.

New Prudential Regime for Investment Firms & MIFID II Tick Size Modification

As previewed and summarized in our update of March 2019, the EU has published the new prudential regime for investment firms in the form of Regulation (EU) 2019/2033 (Investment Firms’ Regulation) and Directive (EU) 2019/2034 (Investment Firms’ Directive) in the Official Journal. The regime goes live on June 26, 2021.

The EBA and ESMA are delegated the task of drafting technical standards for many of the requirements. However, the delivery dates of these drafts fall after the regime goes live, requiring firms to comply with a regime, parts of which have yet to be written, presenting implementation challenges for in-scope firms.

Under the new regime, investment firms will be subject to new capital, liquidity, risk management, consolidation, reporting, governance, and remuneration requirements that include new "K-Factor" capital calculations.

The new regime does not apply to large investment firms that pose similar risks to banks and which carry out bank-like activities, who will remain subject to the more stringent prudential rules and supervisory oversight applicable to banks.

The new regime is designed to deliver a more proportionate and appropriate prudential regime that better reflects the risk profiles and business models of investment firms while maintaining financial stability. This is set to be achieved by bucketing firms into different classes according to their size, nature and complexity, and applying the rules deferentially based on these classifications.

The new regime also enhances MiFIR third-country firm equivalence rules by empowering the European Commission (EC) to assess capital requirements applicable to such firms, where their activities are likely to be of systematic importance to the EU.

Finally, the IFR amends the MiFID II tick size regime by requiring systematic internalizes to comply with the tick-size regime for equities applicable to trading venues from March 26, 2020.

EU Derivatives Regulatory Regime Updated

Following the publication of "EMIR 2.1" (also known as "EMIR Refit") in May 2019, Regulation (EU) 2019/2099 (referred to as "EMIR 2.2") was published in the Official Journal on December 12, 2019.

EMIR 2.2., which applied from January 1, 2020, amends the European Market Infrastructure Regulation (Regulation (EU) No 648/2012 - EMIR) rules governing the authorization of central counterparties (CCPs) and, largely in response to Brexit, imposes new requirements for recognition of third-country CCPs (TC-CCPs).

The new rules introduce a tier system for TC-CCPS, with Tier 2 TC-CCPs regarded as systemically important to the financial stability of the EU or one or more Member States. Given their importance, Tier 2 TC-CCPs are subject to enhanced regulatory requirements including compliance with EU CCP prudential requirements. Tier 1 CCPs are regarded as not reaching the systemically important threshold and thus not subject to the additional rules.

EMIR 2.2 also introduces rules mandating coordination and consistency in relation to cross-EU CCP authorization and supervision, together with enhanced supervisory, investigatory, and enforcement powers for ESMA, which include responsibility for conducting EU-wide CCP resilience assessments, powers to investigate Tier 2 TC-CCPs, or to appoint independent investigation officers to undertake investigations and new powers to impose sizable fines.

ESMA is also empowered, in consultation with the European Systemic Risk Board and Member State central banks, to declare TC-CCPs of such systemic importance that authorization of their EU based operations should be contingent on relocating such business to the EU.

Full implementation of EMIR 2.2 requires publication of several sets of technical standards on tiering, comparable compliance and fees for TC-CCPs, which ESMA has been consulting on over the last year. These are set to be released in the Official Journal in due course.

In a separate, related development, on January 7, 2020, ESMA published a report on CCPs’ Membership Criteria and Due Diligence in response to the default of an individual acting as a Direct Clearing Member on the Commodities Segment of Nasdaq Clearing AB in September 2018. The Report focuses on the need for robust due diligence requirements with a particular focus on individuals and non-financial members of CCPs. The EMIR Q&A has been updated in response to the guidance in the Report.

ESAs Propose Measures to Align EU Derivatives Margining Rules with Global Framework

In order to align EU rules with the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions global framework, on December 5, 2019, the European Supervisory Authorities (ESAs) published draft Regulatory Technical Standards (RTS) proposing several technical amendments to the EMIR Delegated Regulation  on bilateral margining for non-centrally cleared OTC derivatives.

Simultaneously, the ESAs published a Joint Statement on why they consider margining rules should not automatically apply in the event that fall-back clauses in legacy OTC derivative contracts are triggered when a relevant interest rate benchmark ceases or is substantially changed. The Statement further states that the ESAs are working with the EU co-legislators (the Parliament and Council) to achieve legislative change to give legal effect to this position.

In its press release, ESMA states that "in view of the clarifications and changes of the global framework made over the past months by the BCBS and IOSCO, the report and related RTS clarify the expectations in relation to the threshold above which initial margin is expected to be exchanged, as well as introduce a further phase-in of one year for the smaller counterparties in scope for the initial margin requirements."

Until the RTS is formally adopted by the Commission and published in the Official Journal, the ESAs state that they "expect competent authorities to apply the EU framework in a risk-based and proportionate manner" and thus not enforce rules set to for imminent change.

EU Covered Bond Regime Published in Official Journal

As previewed and anticipated in last months’ regulatory update, on December 18, 2019, a Covered Bond Regulation and Covered Bond Directive were published in the EU’s Official Journal.

The Directive establishes a formal definition of covered bonds and specifies those institutions eligible to issue them together with harmonized features such as dual recourse, bankruptcy remoteness, eligible assets, quality and compositional requirements, investor protection measures, quarterly investor disclosures, and liquidity requirements that include a cover pool liquidity buffer.

The Directive also contains supervision and sanctions requirements and voluntary labeling requirements in relation to a "European Covered Bond" and "European Covered Bond (Premium)." The Regulation modifies the Capital Requirements Regulation (CRR), providing risk-weighted capital relief for covered bonds that meet specified requirements such as over-collateralization. The measures in the Regulation and Directive apply from July 8, 2022, with the Directive containing several transitional measures.

First Official MiFID II Report Recommends Real-Time CTP for Equities

On December 5, 2019, ESMA published the first in a series of legally mandated official reports into the MIFID II regime. This first report focuses on the cost of market data and the development of a consolidated tape for equities.

Unsurprisingly ESMA concedes in the report that it has "not met its objective to reduce the cost of market data," further noting that "no consolidated tape has materialized" either. Perhaps somewhat surprisingly, the report recommends the establishment of an EU wide real-time consolidated tape for equity instruments, with the surprise being the "real time" nature of the tape rather than a "tape of record," which would be much easier to deliver.

As ESMA concedes in its press release accompanying the report, a "real-time consolidated tape is a technically demanding task, which will require a substantial investment of both time and resources by all parties involved, including the need to change the legal framework."

In terms of the cost of market data, ESMA has said it will provide further guidance in the future on proposed developments but in the interim, the Report proposes "a mix of legislative changes and supervisory guidance to improve transparency and to ensure that market data is provided on a reasonable commercial basis."

The report will feed into the Commission’s overall MiFID II review, which is expected to conclude with a package of reforms to the existing MiFID II framework.

UK

New Divergent UK Financial Services Regulation on the Table Following Brexit

Following the UK General Election of December 12, 2019, the new UK government has pledged to ensure that the UK leaves the EU by January 31, 2020, after which it will commence trade discussions with the EU in earnest but with the UK government not ruling out a Hard Brexit.

Simultaneously, the UK will develop a divergent domestic legislative agenda, which expressly includes financial services regulation, as indicated in the Queen's Speech of December 19, 2019, as delivered at the opening of the new Parliament.

Meanwhile, the UK Chancellor of the Exchequer has selected Andrew Bailey, the current FCA CEO, to take over as Governor of the Bank of England on March 17, 2020. Bailey is on record as advocating a new, divergent regulatory regime following Brexit, which is likely to cause some in Brussels to bristle, given that the UK was responsible for initiating and drafting much of the existing EU financial regulatory regime.

FCA Extends Senior Managers Regime to 47,000 More Firms

The FCA announced in a press release that it had, as of December 9, 2019, extended the Senior Managers and Certification Regime (SM&CR) to a further 47,000 firms, together with their senior managers and "certification staff."

In a nutshell, the SM&CR replaces the former FCA Approved Person regime with a new three-part regime, comprised of 1. conduct rules that apply to all employees, 2. a Certification Regime which requires firms to ensure and certify individuals in specified roles are fit and proper to undertake the role assigned to them; and finally, 3. a Senior Managers Regime, which requires the assignment of prescribed responsibilities to senior managers, in relation to which they remain accountable.

The SM&CR already applied to the banking and insurance sectors. The new extension applies the rules across the rest of the financial services sector and specifically to "solo-regulated firms" (i.e., firms regulated by the FCA but not also by the Prudential Regulatory Authority). The FCA has in response updated the SM&CR webpage and guidance for solo-regulated firms.

UK Authorities Publish "Operational Resilience" Policy and Consultation Papers

Following outages in 2018 and 2019 at the London Stock Exchange and a number of UK high street banks, the UK Treasury Select Committee’s report of October 28, 2019, on "IT failures in the financial services sector" directed regulators to take action.

Consequently, building on the FCA, PRA, and Bank of England Discussion Paper of 2018, on December 5, the FCA, PRA, and Bank of England have now taken the first step in the action demanded by the Select Committee by publishing a Shared Policy Summary and coordinated consultation papers (CPs) (see FCA Consultation Paper and PRA Consultation Paper) setting out new requirements to strengthen the operational resilience of financial services firms and "Financial Market Infrastructures" (FMIs).

Under the proposals, firms and FMIs will be expected to:

• identify their important business services that if disrupted could cause harm to consumers or market integrity, threaten the viability of firms, or cause instability in the financial system
• set impact tolerances for each important business service, which would quantify the maximum tolerable level of disruption they would tolerate
• identify and document the people, processes, technology, facilities, and information that support their important business services
• take actions to be able to remain within their impact tolerances through a range of severe but plausible disruption scenarios.

The PRA also published a consultation paper on Outsourcing and Third-Party Risk Management that seeks to deliver on the Bank of England’s commitment to "facilitate greater resilience and adoption of the cloud and other new technologies," as set out in the Bank’s Response to the Future of Finance Report.

"Operational Resilience" is the new moniker for an expanded concept of "business continuity arrangements."  A summary of the measures is set out in an FCA press release and a speech delivered by the FCA’s Head of Supervision on December 5, 2019. The consultation period closes on April 3, 2020.

Meanwhile, in a related development, the European Commission, on December 19, 2019, published a consultation by way of questionnaire, on "Improving Resilience against Cyberattacks." Completed questionnaires must be submitted by March 12, 2020. 

UK Delivers New ESG and Value for Money Duties on Pension Governance Committees

On December 17, 2019, the FCA published Policy Statement PS19/30, which contains final rules that amend the COBS and SYSC modules of the FCA Handbook by extending the obligations of pension Independent Governance Committees (IGCs).

Under the new rules, IGCs, which are responsible for oversight of the value for money of workplace personal pensions while under management, will also be responsible for overseeing the value for money at the pension draw down stage also and specifically in relation to "investment pathway solutions."

More generally, new rules also introduce a new duty that requires IGCs to "consider and report on their firm’s policies on environmental, social, and governance (ESG) issues, member concerns, and stewardship for the products that IGCs oversee." The Policy Statement also includes related guidance for providers of pension product and investment-based life insurance products.

The Rules and Guidance will come into force on April 6, 2020. The FCA has further stated that it intends to publish the findings of its review into the effectiveness of IGCs in Q2 2020.

FCA Investigating Sale of Bank of England Press Conference Audio Feeds to Hedge Funds

On December 18, 2019, the Bank of England issued a statement confirming that over the last year an audio feed of certain press conferences had been sold by one of the Bank’s third-party suppliers. The matter is being investigated by both the Bank of England and the FCA.

Certain statements and information disclosed in Bank of England press conferences can move markets, especially the GBP FX and gilt market, and early access to this information could allow traders to profit on the sensitive information by trading ahead of the market.

In a related development, the incident comes at a time when ESMA is reviewing whether to extend the Market Abuse regime to spot FX contracts.

U.S.

SEC Proposes to Amend “Accredited Investor” Definition

Following the June 18, 2019 concept release seeking public comment on means to simplify and harmonize the exempt offering framework under the ’33 Act, the SEC has published a proposal to amend the definition of “accredited investor” in Rule 501(a) of Reg D.

The definition of “accredited investor” is central to various exemptions from registration requirements under state and federal securities laws, and, significantly, entails access to participation in private market investment opportunities—such as hedge funds, PE, and VC funds—that are generally not available to non-accredited investors.

The SEC is characterizing this definitional change as an “initial step” in a longer process of reviewing and improving the exempt offering framework to make it “effective for both issuers and investors.”

The proposed changes to the definition of “accredited investor” include:

• enabling natural persons to qualify based on certain professional credentials or with respect to investments in a private fund, based on status as a “knowledgeable employee” of the fund;
• adding certain entity types to the existing list, such as registered investment advisers, rural business investment companies, limited liability companies, and other entities such as Indian tribes and labor unions;
• adding family offices with at least $5 million in AuM and their “family clients”;
• adding the concept of “spousal equivalent” which will enable pooling of finances for qualification purposes; and
• codification of certain staff interpretive positions.

The SEC is soliciting public comment on the proposal, which may be received on or before 60 days after its publication in the Federal Register.