The European Securities and Markets Authority (“ESMA”) has updated its Questions and Answers (“Q&As”) on the implementation of the Market Abuse Regulation (“MAR”), the Markets in Financial Instruments Directive and Regulation (“MiFID II”/“MiFIR”), the Benchmarks Regulation (“BMR”), and the Central Securities Depository Regulation (“CSDR”).

Q&As on MiFID II and MiFIR investor protection and intermediaries topics
ESMA35-43-349, issued 23 March 2018

The purpose of this Q&A is to promote common supervisory approaches and practices in the application of MiFID II/MiFIR for investor protection topics. ESMA has updated the following Q&As:

• Question 8 in Section 7 Inducements (research)
  Can macro-economic analysis be considered research that can be paid for from an RPA and client research charges under Article 13(1)(b) of the MiFID II Delegated Directive?
• Question 9 in Section 7 Inducements (research)
  How should research related to fixed income, currencies or commodities (FICC) be treated for the purposes of the MiFID II inducements restriction for firms providing portfolio management or independent investment advice (Article 24(7) and (8))?
• Question 11 in Section 8 Post-sale reporting
  What does “hold a retail client account” mean in the context of Article 62(2) of the MiFID II Delegated Regulation?
• Question 12 in Section 8 Post-sale reporting
  For the purpose of Article 62(1) of the MiFID II Delegated Regulation, if the same threshold is exceeded again and again during the same reporting period, should the firm report the fact to the client each time the threshold is exceeded?
• Question 7 in Section 9 Information on costs and charges
  How should investment firms use the product’s costs as presented in the PRIIPs KID?
• Question 6 in Section 12 Inducements
  How should investment firms providing the investment service of portfolio management treat inducements received after 3 January 2018 with regards to financial instruments in which the firm has invested on behalf of the client before that date?
• Question 1 in Section 15 Other Issues
  The term “ongoing relationship” is used in various articles in the MiFID II Directive and the MiFID II Delegated Regulation. How should this term be understood?;

Q&As on MAR
ESMA70-145-111, version 11, last updated on 23 March 2018

The purpose of the Q&A document is to promote common supervisory approaches and practices in the application of MAR and its implementing measures.

ESMA has approved an update to the existing Q5.1 on Pillar 2 requirements and the obligation to disclose inside information, in order to cover the Minimum Requirement for own funds and Eligible Liabilities (“MREL”) exercise. MRELs should ensure that banks have, at all times, enough capital and eligible liabilities to be bailed-in, where necessary.

Q5.1 now reads: “Are credit institutions required under MAR to publish systematically the results of the Pillar II assessment and/or any information received in relation to the Minimum Requirement for own funds and Eligible Liabilities (MREL) exercise?”

Q&As on BMR
ESMA70-145-114, version 6, last updated on 22 March 2018

The purpose of this document is to be a practical convergence tool used to promote common supervisory approaches and practices in the application of the BMR, and also helping investors and other market participants by providing clarity on the requirements.

ESMA has included one new answer to Question 6.1 relating to how supervised contributors should apply Article 16 during the transitional period ending on the date an administrator is authorised or registered with its national competent authority or 1 January 2020, whichever is the earlier.

Q&As on implementation of the Regulation (EU) No 909/2014 on improving securities settlement in the EU and on central securities depositories
ESMA70-708036281-2, issued 23 March 2018

The aim of the CSDR is to harmonise certain aspects of the settlement cycle and settlement discipline and to provide a set of common requirements for CSDs operating securities settlement systems across the EU.

The CSDR Q&As provide common answers to questions regarding practical issues on the implementation of the new CSDR regime. The document is aimed at national competent authorities under the CSDR to ensure that, in their supervisory activities, their actions are converging along the lines of the responses adopted by ESMA. It should also help investors and other market participants by providing clarity on the CSDR requirements.

The changes:

• A new CSD Question 1(c) on Authorisation and supervision of CSDs is added:
  Should the CSD links a CSD has established or intends to establish at the time of its application for authorisation under Article 16 of CSDR be assessed for the purpose of granting authorisation to that applicant CSD?
• CSD Question 4(a) on Conduct of business rules is modified:
  Does Article 35 of CSDR allow CSDs to use internal or proprietary messaging standards in their communication procedures with the participants of the securities settlement system they operate and the market infrastructures they interface with?
• A new CSD Question 10(d) on Requirements for CSD links is added:
  Are links between CSDs participating in T2S interoperable links as defined in the CSDR?

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Earlier this year, the European Securities and Markets Authority (“ESMA”) submitted to the European Commission its draft regulatory and implementing technical standards applicable to critical and significant benchmarks, in relation to the Benchmarks Regulation (“BMR”) which will become fully applicable on 1 January 2018.

Any market participant could be affected, although the BMR will be of particular interest to administrators of benchmarks, contributors to benchmarks and users of benchmarks.

ESMA is now proposing draft guidelines for non-significant benchmarks in the following areas:

1. procedures, characteristics and positioning of the oversight function,
2. appropriateness and verifiability of input data,
3. transparency of methodology, and
4. governance and control requirements for supervised contributors.

ESMA invites responses to their Consultation Paper by 30 November 2017.

Investment managers need to consider their use of benchmarks and any resulting new client disclosure requirements, which may include amendments to terms and conditions and updates to prospectuses and annual client reports.

Whilst formal applications cannot be submitted to the FCA before 1 January 2018, benchmark administrators may now submit a draft application.

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Both MiFID II and the Packaged Retail and Insurance-based Investments Products Regulation (“PRIIPs”) means that next January will be a busy time for many firms as they get to grips with new regulatory regimes.

One further piece of European legislation which will also apply from next January (1st) that hasn’t received as much publicity is the Benchmarks Regulation (2016/1011) (“BMR”).

The Regulation will apply not only to the provision of benchmarks, and the contribution of input data to a benchmark, but will also apply to those that use a benchmark.

For the purposes of the Regulation a ‘benchmark’ is defined as:

“any index by reference to which the amount payable under a financial instrument or a financial contract, or the value of a financial instrument, is determined, or an index that is used to measure the performance of an investment fund with the purpose of tracking the return of such index or of defining the asset allocation of a portfolio or of computing the performance fees”

Currently the FCA supervises eight specified benchmarks, including LIBOR (The London Interbank Offered Rate) and SONIA (Sterling Overnight Index Average). The BMR will apply much more widely, including all indices that are used in the EU as the basis for financial instruments or that are referenced by an investment fund.

The FCA has now published “Handbook changes to reflect the application of the EU Benchmarks Regulation” (CP17/17). However the title of the Consultation Paper doesn’t paint the full picture because whilst parts of the BMR directly apply to e.g. firms that use benchmarks in financial instruments or in relation to investment funds, the Handbook changes brought about by the BMR do not.

Article 29 of the BMR concerns the use of a benchmark – a term which is defined in Article 3(1)(7) and includes, but is not limited to “measuring the performance of an investment fund through an index or a combination of indices for the purpose of tracking the return of such index or combination of indices, of defining the asset allocation of a portfolio, or computing the performance fees”.

A ‘supervised entity’ e.g. a MiFID investment firm or an AIFM (please see Article 3(1)(17) for the full definition) may use a benchmark if the benchmark administrator is located in the Union and is included in a register that will be maintained by ESMA. A benchmark provided by an administrator located in a third country will have to meet the equivalence requirements in Article 30 in order for it to be used in the Union.

At the present time there are only draft technical standards available – which CP17/17, in part, is based upon – so it is possible that the FCA may need to adopt some final tweaks.

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