Investment Firms Quarterly Legal And Regulatory Update: July 1 – September 30, 2022 – Commodities/Derivatives/Exchanges

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1.1 ESMA presents CSA 2021 results on MiFID II product governance requirements

On July 8, 2022, the European Securities and Markets Authority (ESMA) issued a public statement setting out the results of the Joint Supervisory Action (CSA) on product governance requirements under Directive 2014/65/EU (MiFID II).

The main conclusions of the findings are that while companies generally define a target market for their products in ESMA’s guidelines on MiFID II product governance requirements, this is often treated as a formalistic level and is done at a insufficiently granular with the use of unclear information. defined terms.

ESMA also clarified that the definition of the target market does not necessarily provide a compatible distribution strategy allowing the product to reach the identified target market.

ESMA also noted the following other areas for improvement:

  • Firms must perform scenario analysis in accordance with Article 9(10) of MiFID II Delegated Directive;

  • Companies must perform an analysis of the pricing structure in accordance with article 9, paragraph 12, of the MiFID II delegated directive;

  • Companies must review the products (ESMA notes that these reviews are not always carried out frequently enough and with an adequate scope to check whether the financial instrument remains consistent with the needs, characteristics and objectives of the target market); and

  • Companies must ensure that information is exchanged between manufacturers and distributors.

Based on the results of the CSA, ESMA has concluded that a revision of its guidelines on governance requirements for MiFID II products is necessary in order to address the most relevant areas where a lack of convergence has emerged and to complement the guidelines with relevant examples of good practice. which emerged from the CSA. ESMA also wishes to align the guidelines with the revised MiFID II delegated directive on the topic of sustainable finance and with the revised MiFID II as part of the Commission’s capital market recovery plan, and incorporate the advice received from the ESMA Proportionality Advisory Committee.

ESMA’s public statement is available here.

1.2 ESMA updates MiFID II Q&A on market structures

On July 15, 2022, ESMA published an updated version of its Questions and Answers (Q&A) on topics relating to market structures under MiFID II and Regulation (EU) 600/2014 (the Regulation on markets in financial instruments or MiFIR). The updates include two questions and answers regarding algorithmic trading.

The first Q&A clarifies that orders that are executed through features that, in addition to routing orders to trading venues, provide automated order management, must be within the scope of the MiFID II definition of algorithmic trading. The second Q&A clarifies that companies using third-party systems offering algorithmic trading functionality are ultimately responsible for complying with the relevant requirements of Article 17 of MiFID II.

On September 23, 2022, a new Q&A update was made to clarify that trading venues may set trading hours at the instrument level for a specific subset of financial instruments (or for a specific financial instrument) provided that these trading hours are made public and communicated to market participants.

A copy of ESMA’s Q&A on MiFID II and MiFIR market structure topics is available here.

1.3 The implementing regulation on the reporting format for third-country companies and supervisory authorities under MiFID II is published in the OJ

On 15 July 2022, the European Commission published, in the Official Journal of the European Union (OJ), Commission Implementing Regulation (EU) 2022/1220 laying down implementing technical standards (TSIs) with regard to concerns the format in which branches of third-party companies in the country and the competent authorities must report the information referred to in Article 41, paragraphs 3 and 4, of MiFID II.

The TSI entered into force on August 4, 2022, i.e. the twentieth day following its publication in the Official Journal.

A copy of the ITS is accessible here.

1.4 ESMA updates questions and answers on MiFIR data reports

On July 19, 2022, ESMA published its updated version of its Questions & Answers (Q&A) on MiFIR data reporting. The updates are included in a new section 19 on reporting of emission allowances under MiFIR.

Updated questions and answers are accessible here.

1.5 ESMA updates Q&A on MiFID II and MiFIR transparency topics

On September 5, 2022, ESMA published updated questions and answers (Q&A) on MiFID II and MiFIR transparency topics.

ESMA has amended question 3 of section 9 on third country issues to clarify that transfers of financial instruments between two branches of the same legal entity or between a branch and its parent company are not subject to the transaction transparency and reporting requirements.

A copy of the Q&A on MiFID II and MiFIR transparency topics is accessible here.

1.6 Public Register of Derivatives Trading Obligation under MiFIR

On September 15, 2022, ESMA published an update to the public register of trading obligations for derivatives under MiFIR.

The Public Register update has removed the USD LIBOR Index and the GBP LIBOR Index from Table 1: Fixed-to-Float Currency Interest Rate Swaps.

A copy of the public register is accessible here.

1.7 ESMA issues final guidance on MiFID II suitability requirements

On September 23, 2022, ESMA published its Final Report on Guidelines on Certain Aspects of MiFID II Suitability Requirements (Guidelines).

The main amendments to the existing guidelines that were published by ESMA in 2018 were to address the introduction of the obligation imposed on scope undertakings under Delegated Regulation (EU) 2021/1253 of the Commission to consider customers’ sustainability preferences when verifying their suitability. ratings.

The guidelines address obligations to help customers understand the concept of sustainability preferences, to collect information from customers about their sustainability preferences, to assess those sustainability preferences and to identify appropriate products that meet customer sustainability preferences and provide sustainability training to staff. topics and maintain appropriate records of each client’s sustainability preferences. The guidelines also incorporate some good and bad practices identified in ESMA’s CSA 2020 on suitability.

The Guidelines will be translated into the official EU languages ​​and published on the ESMA website. The publication of the translations will trigger a two-month period during which national competent authorities must notify ESMA whether they comply or intend to comply with the Guidelines. The guidelines will apply six months after the date of publication on the ESMA website in all official EU languages.

The final report containing the guidelines is available here.


2.1 Minister of Finance signs finalized EU prudential rules for investment firms into national law

On July 5, 2022, the Minister of Finance, Paschal Donohue, signed three regulatory texts which amend the European Union Regulations (Investment Firms) 2021 and the European Union Regulations (Markets in Financial Instruments) 2017 which together transpose Directive (EU) 2019/2034 (the Investment Firms Directive or IFD) into Irish law and give effect to Regulation (EU) 2019/2033 (the Investment Firms Regulation or IFR ). Together, the regulations amend the Central Bank Act 1971, allowing Class 1 firms to apply for re-licensing as credit institutions.

The regulatory texts are accessible here,
hereand here.

2.2 EBA and ESMA issue joint final guidance on the Supervisory Review and Evaluation Process (SREP)

On July 21, 2022, the European Banking Authority (EBA) and ESMA published joint final guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) in the context of the DFI ( SREP Guidance). The SREP Guidelines establish a common process and criteria for assessing the main elements of the SREP. The EBA also published the final draft Regulatory Technical Standards (RTS) on Pillar 2 top-ups for investment firms on this date (please see section 2.3 below).

The orientations of the SREP are articulated around the following main elements; (i) business model analysis; (ii) assessment of internal governance and firm-wide controls; (iii) risks to capital and capital adequacy; and (iv) liquidity risk and liquidity adequacy.

The SREP guidance incorporates a common scoring framework that differentiates specific risks and concerns to enable consistency and comparability. SREP procedures and methodologies follow the principle of proportionality and differ according to four distinct categories of investment firm.

A copy of the SREP guidelines is available here.

2.3 EBA final report presenting the draft RTS on Pillar 2 supplements for investment firms under DFIs

On 21 July 2022, the EBA, in consultation with ESMA, published a final report on the draft regulatory standards (RTS) relating to Pillar 2 top-ups for investment firms under FDI. The EBA notes that investment firms authorized under MiFID II vary significantly in terms of size, business model, risk profile, complexity and interconnectedness. The draft RTS applies to class 2 and 3 investment firms.

The RTS focus on the capital requirement under Article 40(1)(a) of the FDI where the investment firm is exposed to risks or elements of risk, or presents risks for third parties which are significant and are not covered or sufficiently covered by a minimum of own funds. funds. The draft RTS offers several indicative qualitative measures that will assist competent authorities in their identification, assessment and quantification of material risks.

The draft RTS has been developed in conjunction with the SREP guidance (see above) to enable consistent application by competent authorities across the EU.

The EBA will submit the draft RTS to the European Commission for approval before publication in the OJ.

A copy of the RTS project is accessible here.

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