United States: Banking, Finance And Insurance Letter - Janvier-Février 2018


Order amending the AMF General Regulation

On December 20, 2017, the Order approving the amendments to the AMF General Regulation was published.

This Order amends Books II to V and repeals Book VII of the AMF General Regulation and was issued as a result of:

  • the entry into force on January 3, 2018 of the MiFID II Directive;
  • the implementation of the separation of the legal regime for investment firms and portfolio management companies following the entry into force of the MiFID II Directive.

Summary of the responses to its public consultation on Initial Coin Offerings "ICO"

Following its consultation on ICOs on October 26, 2017 and its UNICORN programme, on February 22, 2018 the AMF published a summary of the responses to this consultation, to which a large majority of the players responded that they were in favour of setting up an appropriate legal framework specific to ICOs.

The prior legal analysis carried out by the AMF was in fact followed by the majority of players who note, in practice, the difficulty of qualifying the different tokens issued during these ICOs.

The AMF proposed three options:

  • to promote a good practices guide on the basis of existing legislation;
  • to extend the scope of existing texts to include ICOs as offers of financial securities to the public; and
  • to propose a new legislation, adapted to ICOs.

This last proposal got the most support.

The players also believe that an information document is necessary for investors. This document, which could be the subject of a visa granted by the AMF or an ad hoc institution, should specify the following points:

  • the project related to the ICO and its evolution;
  • the rights conferred by tokens;
  • the accounting treatment of the funds raised during the ICO; and
  • the identification of the legal entity responsible for the offer, its founding leaders and their expertise.

The actors also specify that it would be necessary to establish rules to ensure the escrow of funds raised and the implementation of a mechanism to prevent money laundering and terrorist financing.

Given this vast amount of convergent feedback, the AMF intends to continue its reflection in order to define a specific legal framework for ICOs by providing, in particular, the appropriate guarantees in terms of information.

The European Supervisory Authorities "ESA" warn potential investors against the risks of buying virtual currencies

Pursuant to Article 9 (3) of the three Founding Regulations of the ESAs and following two ESMA publications on ICOs, including one warning and two EBA Cryptocurrency Notices, on February 12, 2018; ESMA, EBA and EIOPA issued a pan-European joint warning regarding the risks associated with the purchase of cryptocurrencies for investors. ESAs alert investors by recalling that cryptocurrencies are highly risky, unregulated and not suitable for investment, savings or retirement plans.

In addition to the high volatility of prices, cryptocurrencies raise many legal issues, in particular the lack of protection and guarantees for European investors. For example, in the event of bankruptcy of a platform, investors do not benefit from any action against it and cannot expect the reimbursement of their deposits.

In addition, some cryptocurrency platforms have experienced serious operational problems (inability to sell during the crisis, hacking, etc.)

The ESAs therefore hope to rationalize the behaviour of investors to avoid the risks related to the possible bursting of this bubble.

Capital Markets - Derivatives

Platforms for trading in cryptocurrency derivatives must comply with the obligations regarding the offer of financial instruments

On February 22, 2018, the AMF issued its analysis concerning cryptocurrency derivatives. This analysis was done in two stages:

  • legally qualify derivative products; and
  • assess whether a cryptocurrency can be considered as an eligible underlying in the light of the texts.

Following its analysis, the AMF considers that contracts settled by a cash payment can be considered as financial contracts within the meaning of Article L. 211-1 of the Monetary and Financial Code without it being necessary to legally qualify cryptocurrencies. The AMF therefore retains the qualification of derivative, per se, regardless of the qualification of the underlying. This analysis is supported by several arguments that it develops in particular by evoking the example of financial contracts with payment of a differential as one of the means of proof that a derivatives contract is not necessarily based on the qualification of its underlying.

The AMF also analyses the concept of index within the meaning of the Benchmark Regulation in order to reconcile the cryptocurrency derivative contracts with index derivative contracts (such as contracts relating to the LIBOR and EURIBOR).

The AMF finally concludes:

"a derivative whose underlying is a cryptocurrency and which is settled by a cash payment is a financial contract. Accordingly, the regulations applicable to the offer of financial instruments in France applies to derivatives on cryptocurrencies".

As a result, platforms that offer derivatives on cryptocurrencies must comply with the regulations applicable to financial instruments, in particular the rules on accreditation, good conduct and the reporting of transactions to a centralised repository under the EMIR Regulation. Finally, these products fall under the prohibition of advertising introduced in France on certain financial contracts by the Sapin 2 Law.

Applying other rules such as MiFID II / MiFIR is also not to be excluded. ESMA and other regulators are actively studying these issues from the perspective of investor protection and market integrity.

Update of ESMA Q&As on transparency obligations

The last update of February 7, 2018 of the Q&As related to transparency obligations concern pre-arranged transactions and the related trading obligations under MiFIR.

ESMA considers that when these transactions are transactions on shares and similar instruments, they may, within the meaning of Article 4(1)(b) of MiFIR, benefit from the exemption of large in scale ("LIS") transactions.

In addition, ESMA states that, although MiFIR does not contain any specific provisions for this type of transaction on instruments other than shares and similar instruments, it is possible to use the platforms for this type of transaction provided that they meet the pre-trade exemption criteria provided for in Article 9 (1) of MiFIR, but distinguishing between two cases:

  • derivatives not subject to the platform trading requirement, for which the following exemptions will be possible:

    • 9(1)(a) (only for high orders), 9(1)(c), 9(1)(d) and 9(1)(e) of MiFIR; and
  • derivatives which are subject to the trading requirement, for which the following exemptions are possible:

    • 9(1)(a) and 9(1)(e).

Finally, regarding pre-arranged transactions on derivatives cleared in clearing houses subject to the platform trading requirement, they are subject to the requirements of pre-trade control by the platforms and clearing members pursuant to Article 2 of Delegated Regulation 2017/582.

ESMA points out that when platforms execute these transactions according to their rules, they must ensure that these transactions comply with the regulations, including the regulations on market abuse.

ESMA publishes its Interactive Single Rulebook

On February 14, 2018, ESMA launched its Interactive Single Rulebook, a new service for market players and other EU stakeholders. The tool has been made available to the public and contains the Level 1 text of the UCITS Directive and links to all Level 2 and 3 texts.

The purpose of this digital work is to facilitate the consistent application of the European Capital Markets Regulation.

This new online tool will eventually provide a comprehensive overview of all directives, regulations, acts, notices and questions and answers regarding their implementation.

The objective of ESMA is to provide an interactive version for each Level 1 key text which it interprets.

ESMA will soon make available on the site: the Regulation on Rating Agencies and MiFID II /MiFIR.

Consultation of the Monetary Authority of Singapore (MAS) on the obligation to trade OTC derivatives on organised markets

On February 21, 2018, MAS issued a proposal for a regulation to require the trading of OTC derivatives for certain counterparties on organised markets to enhance market transparency. This requirement will complement the implementation by MAS of the G20 OTC derivatives reform.

These obligations concern interest rate swaps denominated in US dollars, Euros and pounds sterling on organised markets. These obligations will apply to banks whose gross notional outstanding exceeds 20 billion dollars. According to MAS, this proposal should affect over 80% of the Singapore market for the products concerned.

Update of the AMF Doctrine following the entry into force of the Benchmark Regulation

Following the entry into force of the Benchmark Regulation on January 1, 2018, the AMF has updated its doctrine, stating:

  • the procedures for approving and registering benchmark administrators which must be appended in an ad hoc document to the activity programme of the management company or the investment firm. For management companies, the procedure for approving or registering as a benchmark administrator is considered an extension of approval;
  • prospectus models for UCITS and AIFs, in order to incorporate the requirement to indicate whether the benchmark used is provided by an administrator registered in the ESMA public register;
  • measures to prevent and manage conflicts of interest, including intra-group conflicts of interest.

Update by ESMA of EMIR declaration validation rules

On March 1, 2018, ESMA updated the validation rules on the application of Article 9 of EMIR. The changes to ESMA concern the validation rules applicable in the context of the declarations of Article 9, as detailed in the Annex to Delegated Regulation 2017/104 of October 19, 2016. These modifications will allow:

  • to make the reporting requirements of certain derivatives traded on a platform consistent (pursuant to the provisions of MiFID II / MiFIR); and
  • to clarify how product identification must be validated in the reports subsequent to January 3, 2018.


Publication of changes to the technical documentation for the calculation of interest rates under Solvency II

On January 31, 2018, EIOPA published a report on the application of group supervision in accordance with the Solvency II Directive.

EIOPA has changed the methodology for calculating the structure of risk-free interest rates by, inter alia:

  • the ticker for the OIS rates of the Swiss franc;
  • the derivation of ultimate forward rates in accordance with what EIOPA had already announced. These changes have been incorporated in Annex 14.G.

Finally, EIOPA provided clarifications concerning the treatment of Icelandic government bonds as well as clarifications concerning their calculation in the medium and long term.

Adoption of the postponement of the entry into force of the Insurance Distribution Directive

On March 1, 2018 the European Parliament adopted at first reading a resolution amending Directive 2016/97 of January 20, 2016 on the distribution of insurance called "DDA".

Parliament justified this decision by emphasising the need to give more time to insurance companies and insurance product distributors to better prepare for the correct and effective implementation of the DDA as well as to implement the technical and organisational changes necessary to comply with Delegated Regulations 2017/2358 and 2017/2359.

Parliament therefore states that no later than July 1, 2018, Member States must have adopted and published the necessary legislation to comply and must apply the new provisions from October 1, 2018 at the latest.

The French Conseil d'Etat is examining the texts to be published as soon as possible despite the extension of the time limits to allow insurers and distributors of insurance products to best prepare for the entry into force of the texts on October 1, 2018.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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