PRIORITIES FOR EU COMMISSIONER- DESIGNATE
The European Parliament's meetings with the proposed new EU commissioners are due to take place between 4 and 12 November 2024.
The incoming Commission's new mandate (including the items set out in the Commission President Ursula von der Leyen's mission letter to the EU Commissioner-designate for Financial Services and the Savings and Investments Union) cannot start until after that. For more insights on key priorities for the Commissioner-designate, read our insights here: EU Financial Services: Key points to watch for the rest of 2024 .
It is hoped that key outstanding financial services files will progress swiftly to trilogue negotiations. Those files include the Bank Crisis Management and Deposit Insurance (CMDI) proposal (read our insights here), the proposed changes to the EU Benchmarks Regulation (which would limit the registration and authorisation requirements, and most of the existing Regulation's substantive requirements, to critical benchmarks, significant benchmarks, EU climate transition benchmarks, EU Paris-aligned benchmarks and certain commodity benchmarks), PSD3 (the planned new Payment Services Regulation and related Directive), and the Retail Investment Package (read our insights here).
PROGRESS ON OTHER FINANCIAL SERVICES FILES
We have already seen progress in recent weeks on financial services files where the only outstanding matters are lawyer-linguist revision and final endorsement by the Council of the EU before they can be published in the Official Journal.
Both of those steps have been completed in respect of the Listing Act – the next step will be publication in the Official Journal. Read our insights here: EU Prospectus Regulation: Listing Act changes relevant to debt capital markets and EU Market Abuse Regulation: Listing Act changes relevant to debt capital markets.
Lawyer-linguistic revision has taken place for the ESG Ratings Regulation, EMIR 3.0, the proposed Insurance Recovery and Resolution Directive and the proposed changes to Solvency II. Approval by the Council of the EU is imminent.
BANKS – DAISY CHAIN DIRECTIVE
The ‘Daisy Chains' Directive addresses issues specific to the treatment of internal MREL (minimum requirement for own funds and eligible liabilities) in bank resolution groups. It amends the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation (SRM Regulation).
Under the Directive:
- Resolution authorities have the power to set internal MREL on a consolidated basis (subject to certain conditions). In those cases, intermediate subsidiaries are not be obliged to deduct their individual holdings of internal MREL, thereby addressing a proportionality issue which concerned the Commission.
- A specific MREL treatment has been introduced for entities in a banking group that are to be wound-up in accordance with insolvency laws (and therefore will not be subject to resolution action such as a conversion or write-down of MREL instruments) (known as Liquidation Entities). Liquidation Entities will not be required to comply with an MREL requirement unless the resolution authority decides otherwise. The own funds of Liquidation Entities issued to intermediate entities will not need to be deducted, save where they represent a material share of the own funds and eligible liabilities of the intermediate entity.
The changes giving resolution authorities the power to set internal MREL on a consolidated basis have applied since 13 May 2024.
EU Member States were required to transpose the changes to the BRRD by 13 November 2024 and apply those changes from 14 November 2024. Ireland has done so via the European Union (Bank Recovery and Resolution) (Amendment) (No. 2) Regulations 2024 (those regulations will take effect on 14 November 2024).
The changes to the SRM Regulation in respect of Liquidation Entities will apply from 14 November 2024. As part of that, the Single Resolution Board (SRB) has announced changes to its MREL policy arising from the Daisy Chain Directive as follows:
- The SRB will not determine the MREL for Liquidation Entities unless it considers it to be justified to determine the requirement in an amount exceeding the amount sufficient to absorb losses.
- Articles 77(2) and 78a of the Capital Requirements Regulation (CRR) will not apply to Liquidation Entities for which the SRB has not determined the MREL.
- As a result of the above, the reporting and disclosure obligations will not apply to the Liquidation Entities for which the SRB doesn't determine the MREL.
The SRB also confirmed that, during the course of the 2024 resolution planning cycle, its adopted decisions setting the MREL at the level equal to the loss absorption amount will be repealed from 14 November 2024, and prior permissions granted to Liquidation Entities under Article 78a of the CRR and the process set out in Commission Delegated Regulation (EU) 241/2014 will be repealed from 14 November 2024. The result of this is that impacted Liquidation Entities won't be limited by the prior permissions previously granted by the SRB and they will be able to reduce eligible liabilities instruments without the SRB's prior permission.
For more information on the Daisy Chains Directive, read our insights here: ‘Daisy Chains' Directive published in Official Journal
BANKS – RESULTS OF EBA 2024 TRANSPARENCY EXERCISE
The European Banking Authority (EBA) is expected to publish the results of its 2024 EU-wide transparency exercise, together with its Risk Assessment Report, by the end of November 2024. As with previous years, the exercise relied only on supervisory reporting data and covered capital positions, profitability, financial assets, risk exposure amounts, sovereign exposures and asset quality.
BANKS – PILLAR 3 DISCLOSURES
The EBA's consultation on draft implementing technical standards (ITS) on the Pillar 3 data hub, which will centralise prudential disclosures by institutions through a single electronic access point on the EBA website, closes on 11 November 2024.
This is part of the EU Banking Package (the revised Capital Requirements Regulation (CRR3) and the revised Capital Requirements Directive (CRD6)).
The draft ITS contain IT solutions and processes to be followed by large and other institutions when submitting their Pillar 3 disclosures.
The EBA also confirmed that it is contemporaneously running a pilot exercise with certain institutions (who volunteered to be involved) to test the process for large and other institutions. Conclusions and feedback from that pilot exercise, together with the feedback on the consultation, will be factored in when the EBA finalises the draft ITS to submit to the Commission for adoption.
FUND NAMES USING ESG/ SUSTAINABILITY-RELATED TERMS
ESMA's Guidelines on funds' names using ESG or sustainability-related terms will start to apply on 21 November 2024.
The transitional period for funds existing before the application date will be 21 May 2025. Any new funds created on or after the application date should apply these Guidelines immediately. Our Irish Developments section contains more information on the Central Bank's recent Notice of Intention regarding the application of those Guidelines.
LEGAL ENTITY IDENTIFIERS (MICA / DORA)
ESMA's survey on optionality in the context of legal entities identifiers (LEIs) closes on 12 November 2042.
When the European Commission reviewed certain draft technical standards from ESMA, specifically the draft ITS to establish the templates for the register of information under DORA (the digital operational resilience act) (which mandates the use of LEIs to identify third party providers of information and communication technology (ICT)), and the draft regulatory technical standards (RTS) on record-keeping under MiCA (the markets in crypto assets regulation) (which mandates the use of LEIs to identify buyers/sellers engaging in transactions in crypto assets), it was concerned about the prospect of mandating the use of LEIs for non-financial entities. It asked that optionality be introduced whereby a non-financial entity could be identified via an LEI or an EUID (European Union Identifier).
The aim of the ESMA survey is to collect evidence on the impacts of including alternatives to the LEI for reporting or record-keeping requirements. ESMA is, in particular, looking for feedback from financial market participants who are subject at least one reporting regime, from entities such as crypto asset service providers (who will have record-keeping requirements under MiCA), and from financial entities subject to DORA.
As part of the survey, ESMA is looking for feedback on whether the EUID meets the criteria set out in detail in the European Supervisory Authorities' opinion on DORA register (i.e. unique; neutral; reliable; open-source; scalable; accessible; available for free or at a reasonable cost; and subject to a governance framework) and whether there is another identifier that could meet those criteria.
NON-BANKS' MACROPRUDENTIAL POLICIES
The European Commission's targeted consultation on macro-prudential policies for non-bank financial intermediaries (NBFIs), launched on 22 May 2024, closes on 22 November 2024.
While the Commission was explicit that it does not want to revisit recent legislative initiatives that are close to completion (such as EMIR 3.0 and the changes to Solvency II), it noted when it launched the consultation that the consultation's scope is wider than its mandate under Article 513 of the CRR to “review whether the [CCR and Capital Requirements Directive] macroprudential rules are sufficient to mitigate systemic risks”. The Commission is also looking at whether existing tools have achieved their purpose, whether existing microprudential and reporting tools need to be repurposed or reviewed, whether new macroprudential tools (activity-based or entity-based) are needed, and improving EU-wide coordination.
For more information, read our insights here: Non-Banks: European Commission consults on macroprudential policies.
SECURITISATION
Stakeholders across the EU securitisation industry will continue to work on their responses to the European Commission's 8-week targeted consultation on the functioning of the EU securitisation framework which contains 167 questions and closes on 4 December 2024.
Among the questions posed by the consultation are whether the jurisdictional scope of the Securitisation Regulation (EU SECR) should be more clearly set out in the Level 1 text (questions of jurisdictional scope have been a long-running theme – read our update on the ESAs 2021 opinion on jurisdictional scope, and the Commission's responses here: Securitisation Regulation: European Commission publishes long-awaited Report). The Commission has also sought feedback on whether the definitions of “securitisation” and “sponsor” should change. Due diligence and transparency/disclosure are the subject of a number of detailed consultation questions.
Over the coming weeks, we also expect to see:
- The report from the European Supervisory Authorities under Article 44 of EU SECR which, among other matters, is expected to address Article 5(1)(e) of EU SECR (which has been the subject of combined submissions from industry bodies such as AFME and the ICMA).
- ESMA's feedback statement on its December 2023 consultation on possible changes to its RTS and ITS on disclosures.
- A consultation from ESMA on guidelines on the due diligence requirements in Article 5 of EU SECR.
The UK's new securitisation framework (which will replace the on-shored post-Brexit securitisation regime) comes into force on 1 November 2024, comprising new regulations (here and here) together with new regulatory rules set out in the Financial Conduct Authority's PS 24/4: Rules Relating to Securitisation and the Prudential Regulation Authority's PS 7/24 – Securitisation: General Requirements. The FCA and PRA also plan to consult on further changes to the securitisation rules in Q4 2024 / Q1 2025. That will include, among other things, a review of the definition of public and private securitisations and the proportionality of the reporting regime.
SETTLEMENT – MOVE TO T+1
ESMA is on track to deliver its report on a possible shortening of the EU securities settlement cycle to T+1 settlement in the coming weeks. However, a recent joint statement by ESMA, the Commission and the ECB noted that it is “urgent to act if the EU wants to avoid prolonging and amplifying the negative effects of the misalignment with major jurisdictions internationally” - in light of that, the technical work needed to support a move to T+1 is to be accelerated with details of a governance structure to be published shortly which will oversee and support that technical work.
For more information, read our latest insights here: T+1 Settlement: Next Steps (EU governance structure)
SYSTEMICALLY IMPORTANT PAYMENT SYSTEMS
The ECB's consultation on a recast version of the ECB Regulation on oversight requirements for systemically important payment systems (the SIPS Regulation) closes on 29 November 2024. The SIPS Regulation contains oversight requirements for large-value and retail payment systems of systematic importance. It applies to payment systems operated by central banks and by private operators.
The changes proposed by the ECB are highlighted in this version of the SIPS Regulation with proposed changes tracked: Regulation (EU) [2024/[XX]] of the ECB of [x] on oversight requirements for systemically important payment systems (recast) - track changes.
The key proposed changes are:
- Expanding the definition of “SIPS operator” to include, on an exceptional basis, a euro area branch of a legal entity located outside the euro area where that branch has been established to be responsible for the operation of a SIPS. Where such a branch is designated as a SIPS operator, the provisions of the SIPS Regulation regarding the composition, roles, skills and responsibilities of the management of a legal entity will be applied to the management of that branch. The executive directors of any such branch would also be subject to the same requirements as the members of management of a legal entity that is a SIPS operator.
- A new provision requiring the board of a SIPS operator to set-up a risk committee.
- A requirement to ensure that no member of management has a record of convictions or penalties for breaches of relevant commercial law, insolvency law, financial services law or (in the context of AML / CFT) fraud.
- A requirement for a SIPS operator to put a cyber resilience strategy in place.
- Regarding outsourcing, a requirement for a SIPS operator to retain responsibility for outsourced functions, operations and services (whether intra-group or otherwise); to have appropriate contractual arrangements and frameworks in place to assess and mitigate the risks inherent in outsourcing arrangements; and to have an exit plan should the outsourcing arrangement be discontinued.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.