European Union: Legal News - January-February 2019

Capital markets

ESMA Recommendation on ICOs and Cryptoassets

On January 9, 2019, ESMA published its recommendations on ICOs and cryptoassets to EU institutions. The recommendations clarify the EU rules applicable to security tokens and give ESMA's position on the shortcomings of the current regulatory framework.

As such, ESMA has identified two categories and two findings:

  • for security tokens within the meaning of MiFID 2, certain areas require a reinterpretation or reassessment of certain specific requirements in order to allow effective application of the regulations in force; and
  • for cryptoassets other than security tokens, the absence of applicable rules exposes investors to significant risks.

ESMA believes that at a minimum, anti-money laundering (AML) requirements should apply to all activities related to cryptoassets and that appropriate risk information should also be put in place prior to the purchase of such assets.

These recommendations are not new and are in line with the work and studies carried out in the EU during 2018, which mainly distinguish tokens according to whether they are security tokens or other types of tokens.

ESMA report on accepted market practices

On December 18, 2018, ESMA published its annual report on accepted market practices (AMP), in accordance with the Market Abuse Directive/Regulation (MAD/MAR).

As a reminder, the objective of MAD/MAR is to guarantee the integrity of European financial markets and promote investor confidence by generally combating insider trading, illegal disclosure of inside information and market manipulation.

However, MAD/MAR do allow certain exceptions, practices considered admissible by the legislator when they are supervised and controlled by the competent national authorities (NCAs). A list of non-exhaustive criteria should be taken into consideration by NCAs when assessing whether these practices can be accepted.

Thus, the report presents ESMA's views on the implementation of AMPs, as well as recommendations to NCAs.

The report thus covers several European AMPs (per NCA). Among those targeted are the AMPs of the Portuguese Securities Market Commission (Portugal), the Netherlands Authority for the Financial Markets (Netherlands), the Comisión Nacional del Mercado de Valores (Spain), the Commissione nazionale per le società e la Borsa (CONSOB) (Italy) and the AMF.

ESMA notes that the only MAR AMPs (as opposed to MAD) are AMPs relating to the management of issuers' liquidity through the provision of liquidity contracts. ESMA considers in its analysis that alternatives to liquidity contracts should be developed by the players.

On the basis of its overall analysis, ESMA considers that the legal framework designed by MAR is stricter than that of MAD. Therefore, ESMA that fears normative contradictions arise allowing MAD-based AMPs where MAR would have prohibited them.

For example, with regard to CONSOB, it was noted that the two of the three MPAs established do not seem to be compatible with MAR. Consequently, ESMA recommends that CONSOB withdraw these MAD-based AMPs.

Recommendation and Joint ESA Report on KID amendments (PRIIPs)

On February 8, 2019, the ESAs published a joint final report on the changes to the KID documentation (PRIIPs). This report contains their final recommendations following a targeted consultation on the amendments to the delegated regulations governing KID rules.

Indeed, the ESAs had noted in particular that while these certain practices in the drafting of the KID may have been intended to protect retail investors, some of them nevertheless raised other concerns (in particular effective control) insofar as they could be perceived as contradictory and not complementary to other information provided in the KID.

Therefore, in the consultative document, the ESAs had declared their intention to communicate their views on these practices in order to promote appropriate and consistent approaches before a full review of PRIIPs.

After taking into account the reactions received and considering in particular the implications of a possible decision by the European co-legislators to postpone the application of the KID for certain types of investment funds beyond 2020, the ESAs decided:

  • not to propose any targeted changes at this stage; and
  • to initiate a more comprehensive review of the delegated PRIIPS regulations during 2019, including the publication of a consultation on the draft NTR.

In addition, on the same day, the ESAs issued a Supervisory statement on performance scenarios to promote consistent approaches and improve the protection of retail investors before the end of the review. The ESAs consider that there is a risk that retail investors may have inappropriate expectations regarding returns and performance. Therefore, the ESAs recommend that producers of products (PRIIPs) include a warning in the KID to ensure that retail investors are fully aware of the limitations of the figures provided in the performance scenarios.

Update of ESMA Q&As on EMIR reporting

Update on February 4, 2019, of ESMA's EMIR Q&As for EMIR reporting for trade repositories.

These changes concern:

  • question-answer 34 on contracts with no maturity date, and now confirm that counterparties can report "P" for a derivative in the Action Type field if the derivative is included in a position on the same day it is reported;
  • question-answer 38, and further clarify when reports must be submitted to the Action Type "N" and "P" field for derivatives that expired before the reporting date; and finally
  • a new question-answer 50, and specify the approach that counterparties must take to report the Confirmation Means field. Following the modification of the EMIR report validation rules on August 9, 2018, scenarios may be reported in which a derivative is traded on a platform and then confirmed on a different or finally unconfirmed platform.

Update of ESMA Q&As on MiFIR reporting

Update on February 4, 2019, of ESMA's MiFIR Q&As for MiFIR reporting for NCAs.

Two new Q&As provide additional clarification regarding:

  • reporting of issuers' LEIs to the Financial Instrument Reference Data System (FIRDS) in cases where the issuer of the instrument has one or more branches that have an LEI; and
  • notification of maturity, expiry and termination dates to the FIRDS.

A change is also made to the question-answer regarding the reporting of complex transactions, namely the use of the Trading Venue Transaction Identification Code(TVTIC).

While these obligations are not new, we have seen an increase in questions relating to transaction reporting regimes in recent months. On this occasion, it will be necessary to specify the outlines of the reporting obligations arising from the EMIR (for OTC) and MiFIR (for the list) regulations, obligations that may be separate or sometimes complementary due to the sometimes complex nature of the financial instruments declared.

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