Welcome to our to the point newsletter. Every
month we look back at the most relevant developments in the area of
financial regulation in the CEE region.
Insights waiting for you in this edition:
LMA – Best Practice Guide to Sustainability – Linked Leveraged Loans
Council of the EU – new regulation on European Green Bonds
LMA – Term Sheet for Draft Provisions for Sustainability-Linked Loans
LMA – EMMI consults on proposed changes to EURIBOR methodology
- Cross-sectoral regulation
ESAs – joint criteria on the independence of supervisory authorities
- Cross-sectoral regulation
Council of the EU – new directive concerning financial services contracts concluded at a distance
30/10: EBA – technical package for phase 3 of its 3.3 reporting framework
- Insurance companies
EIOPA – updated technical documentation for calculating risk-free interest rate term structures (RFR)
EFAMA: New AML package – call for clear rules that help identify beneficial owners
- Czech Republic: Cross-sectoral
Government of the Czech Republic – Draft law amending certain laws in connection with the implementation of European Union regulations in the field of digital finance and sustainability financing
- Czech Republic: Investment companies
and investment funds
Government of the Czech Republic – Draft law amending the Investment Companies and Investment Funds Act
- Czech Republic: Banks
Government of the Czech Republic – Draft Decree implementing the Non-Performing Loans Market Act
- Czech Republic: AML
Government of the Czech Republic – Draft law amending the AML Act
01/11: LMA – Best Practice Guide to Sustainability-Linked Leveraged Loans
- The Loan Market Assocation (LMA) and the European Leveraged
Finance Association released an updated Best Practice Guide to Sustainability-Linked
Leveraged Loans (SLLLs), setting out what borrowers, finance
parties and their respective advisors should consider when
integrating sustainability factors into leveraged loan facility
agreements. The key points in the updated guide are:
- Terminology – The Guide continues to reference the Glossary of Terms published by the LMA, which has evolved with additional terms and clarifications to help navigate the jargon in sustainability lending.
- Roles – The Guide outlines roles such as sustainability coordinator and external reviewer, and introduces a new role, the Second Party Opinion (SPO) provider, providing more detail on their responsibilities in the SLLL transaction.
- Selection and Disclosure of KPIs – It emphasises the importance of selecting material key performance indicators (KPIs) and suggests flexibility in the timing of disclosing KPIs, especially during the underwriting phase.
- Calibration of SPTs – Sustainability performance targets (SPTs) must now be ambitious and go beyond regulatory requirements. The Guide discourages rushing into structuring an SLLL and recommends setting SPTs before or concurrently with loan origination.
- Reporting & Verification – Borrowers should regularly report SPTs and provide sustainability confirmation statements with verification reports to promote transparency. Independent external verification is required after reaching the last SPT trigger event.
- Documentation – The Guide mentions the availability of model provisions for SLLs and other resources published by industry associations to assist market participants in incorporating sustainability-related terms into their SLLL agreements.
Overall, the updated Guide aims to align with market developments, reduce greenwashing and reflect changes in the SLLP, providing essential guidance for stakeholders in the leveraged finance market amid the growing significance of ESG considerations in commercial transactions.
24/10: Council of the EU – new regulation on European Green Bonds
- The Council has approved a new regulation aimed at promoting sustainable finance through the creation of a European green bond standard, which establishes uniform requirements for bond issuers seeking to label their environmentally sustainable bonds as "European green bonds". These bonds are intended to finance investments in green technologies, energy efficiency, resource efficiency, sustainable transport infrastructure and research infrastructure. European green bonds will adhere to the EU's sustainable activities taxonomy and will be accessible to global investors. The new regulation seeks to enhance consistency and comparability in the green bond market, benefiting both issuers and investors, as it allows issuers to demonstrate their support for genuine green projects aligned with the EU's sustainability criteria, thereby increasing investor confidence and reducing the risk of greenwashing. Additionally, the regulation introduces a registration system and supervisory framework for external reviewers of European green bonds. Also, to prevent greenwashing in the broader green bond market, the regulation includes voluntary disclosure requirements for other environmentally sustainable bonds and sustainability-linked bonds issued in the EU. All proceeds from European green bonds must be invested in economic activities that align with the EU's sustainability taxonomy, with a 15 % flexibility allowance for sectors not yet covered by the taxonomy.
12/10: LMA – Term Sheet for Draft Provisions for Sustainability-Linked Loans
- The LMA published their Term Sheet for Draft Provisions for Sustainability-Linked Loans, which complements the document Draft Provisions for Sustainability-Linked Loans published in May 2023.
11/11: LMA – EMMI consults on proposed changes to EURIBOR methodology
- The European Money Markets Institute (EMMI) released a consultation paper outlining proposed changes
to the EURIBOR methodology, a key benchmark interest rate. The
changes aim to improve the benchmark and eliminate the need for
expert judgment from panel banks in its calculation. Two primary
changes could be:
1. Reformulation of Level 2.3, which involves altering the calculation methodology by expanding the starting point and redefining the Market Adjustment Factor (MAF) to better represent interest rate changes and credit risk. The EMMI suggests using EMMI EFTERM along with a credit risk component.
2. Discontinuation of Level 3. This move is anticipated to reduce operational and cost burdens on panel banks and potentially allow for the expansion of the EURIBOR panel while maintaining the benchmark's reliability.
Responses to the consultation paper must be submitted by 11 December 2023. A summary of the feedback received is set to be published by the end of February 2024. Users of EURIBOR are encouraged to participate in the consultation process.
25/10: ESAs – joint criteria on the independence of supervisory authorities
- The ESMA, EBA and EIOPA jointly published criteria for ensuring the independence of
supervisory authorities, as independence is crucial to making
fair, effective and transparent decisions and to protecting
customers and consumers of financial services. These criteria are
based on four key principles:
- operational independence – supervisory authorities should function without undue influence from the industries they oversee and from the government, and possess adequate legal powers and operational resources to carry out their responsibilities effectively;
- personal independence – the rules should be transparent and be in place for the appointment, selection and removal of members of the supervisory authority's governing body. Additionally, high ethical standards should be maintained for both the staff and governing body members of the supervisory authority;
- financial independence – supervisory authorities must have sufficient financial resources to fulfil their mandates, ensuring that they can operate independently without being financially compromised; and
- accountability and transparency – the aforementioned authorities should conduct their tasks in a transparent and accountable manner, ensuring that their actions and decisions are open to scrutiny and public understanding.
23/10: Council of the EU – new directive concerning financial services contracts concluded at a distance
- The Council has approved a directive aimed at enhancing the safety of contracting financial services online or by phone, adopting text simplifying existing legislation, increasing consumer protection, and establishing a level playing field for financial services conducted online, over the phone or through other remote methods. It repeals the 2002 legislation and introduces new provisions for financial services contracts concluded at a distance as an additional chapter of the consumer rights directive (CRD). The directive clarifies the scope of application, improves rules on information disclosure and modernises pre-contractual information obligations. It also grants consumers the right to request human intervention on websites utilising automatic information tools like robo-advice or chatbots. In addition, the directive facilitates the right of withdrawal from distance contracts and introduces additional protections against deceptive user interfaces (dark patterns).
30/10: EBA – technical package for phase 3 of its 3.3 reporting framework
- The European Banking Authority has released the technical package for phase 3 of version 3.3 of its reporting framework. This package includes standard specifications, validation rules, the Data Point Model (DPM) and XBRL taxonomies to facilitate new reporting on Interest Rate Risk in the Banking Book (IRRBB).
02/10: EIOPA – updated technical documentation for calculating the risk-free interest rate term structures (RFR)
- The European Insurance and Occupational Pensions Authority published updated technical documentation for calculating risk-free interest rate term structures (RFR). The main changes are evaluation of financial instruments used to construct the RFR information, a Peer Country review for 2023, and a technical modification in the calculation of the Credit Risk Adjustment for certain currencies. This technical information is crucial for calculating technical provisions in the context of (re)insurance obligations, aligning with the Solvency II Directive.
12/10: EFAMA: New AML package – call for clear rules that help identify beneficial owners
- The European Fund and Asset Management Association published their comments on the AML package proposal in its position paper, saying that the European Parliament and Council are finalising the European Commission's anti-money laundering (AML) package proposal. Key points of discussion include setting a 25 % threshold for identifying beneficial owners across all industries to prevent overcomplication and ensuring clear and enforceable criteria for "control exercised via other means". Additional rules for collective investments should not add complexity, as they are already subject to specific AML/CFT regulations. The goal is to create a risk-oriented framework with clear rules that align with international standards to combat illicit activities in the financial industry effectively. To maintain efficient protection of the financial system against money laundering and terrorist financing, it is of the utmost importance that the framework aimed at combating illicit activities is risk oriented and acknowledges the specificities of each sector of the financial industry.
Czech Republic: Cross-sectoral regulation
11/10: Government of the Czech Republic – Draft law amending certain laws in connection with the implementation of European Union regulations in the field of digital finance and sustainability financing
- The Czech government is currently discussing a new draft law that builds on the Czech draft of the expected Digital Finance Act by transposing Directive (EU) 2022/2556 of the European Parliament and of the Council. The expected Digital Finance Act transposes the requirements of EU regulations DORA, MiCA and the future Green Bond Regulation into Czech law. The draft law now allows a CSD to access the basic registers to update personal information of clients, especially those whose securities are kept in the so-called unclassified register. This will lead to more efficient communication with clients as well as effective compliance with anti-money laundering rules (AML processes, international sanctions, etc.). The draft law amends a total of 15 laws.
Czech Republic: Investment companies
and investment funds
04/10: Government of the Czech Republic – Draft law amending the Investment Companies and Investment Funds Act
- The Government of the Czech Republic adopted and sent to the Chamber of Deputies a draft law amending Act No. 240/2013 Coll., on Investment Companies and Investment Funds, as amended, and other related laws. The main proposed measures include the regulation of unlicensed managers (administrators) so that their activities do not circumvent the Investment Companies and Investment Funds Act. It is proposed to increase the information obligation towards investors and to explicitly set the minimum amount of each investor's deposit corresponding to EUR 125,000, unless the number of investors from a given entity exceeds 20 people. In addition, a sanction will be introduced to remove persons under Article 15 from the list maintained by the Czech National Bank in the event of serious or repeated breaches of obligations. It is also proposed to introduce the possibility for limited partnerships on investment certificates to create sub-funds and to adjust the administrative fees to reflect the costs associated with the administrative procedure.
Czech Republic: Banks
16/10: Government of the Czech Republic – Draft Decree implementing the Non-Performing Loans Market Act
- The Draft Decree mainly regulates the licensing procedures in respect of non-performing loan servicers. A draft of the Non-Performing Loans Market Act is currently in the Chamber of Deputies.
Czech Republic: AML
12/10: Government of the Czech Republic – Draft law amending the AML Act
- The Draft Decree mainly regulates the licensing procedures in respect of non-performing loan servicers. A draft of the Non-Performing Loans Market Act is currently in the Chamber of Deputies
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.