WIth the go-live date of MiFID II just around the corner, I take the liberty to offer you an overview of regulations coming in the next period and which should have your focus.
Also, I take the opportunity to wish you all a Happy, Successful and Healthy 2018!
The enclosed presentation covers a number of the most important regulatory topics to hit the financial markets as of 2018.
1. EU Regulatory Agenda 2018
Presented to you by:
RC CONSULTANCY ADVISORY & TRAINING
Roger Coenen
rc_consultancy@kpnmail.nl
Mobile +31 6 42 600 245
2. Introduction
This presentation gives you an overview of the most important regulations to
come into force in 2018 and 2019
The reason to include 2019, is that firms should already start to test relevant
regulatory solutions in 2018, in order to be ready for implementation and on-
boarding in 2019
This presentation does not claim to be complete on all the financial
regulation that is to come, a selection has been made for the ones with the
biggest impact on financial markets and its participants
RC Consultancy Advisory & Training aims to have you better prepared for what
is coming in the coming period
2 January 2018
2
4. Timeline 2018
4
EU Regulatory Agenda 2018
1-jan SFTR
29-Mar Brexit
21-jun EMIR: clearing obligation for Category 3 counterparties for all OTC derivatives
21-jul Prospectus Regulation (PD3)
Q4
2019
Q1 Q2 Q3
03-January:
MiFID II comes into force
01-January:
* Benchmark Regulation
* PRIIPs
25-May:
GDPR
Agreements on terms EMIR II Regulation expected during 2018
13-January:
PSD2
RC CONSULTANCY ADVISORY & TRAINING
5. PRIIPs
5
Scope:
Firms developing, advising or selling
PRIIPs
Packaged Retail Investment and Insurance-based investment based Products
Per 1-Jan-2018
Further remarks:
• PRIIPs is a Regulation
• 31-12-2018: EC determines if
pension products should be in
scope
• 31-12-2019: exemption period
ends for UCITS and Investment
Companies
Requirements:
• Product manufacturer: obliged to provide KID (Key
Information Document), even if located outside EU;
• Seller/advisor of product: obliged to provide KID to
retail investor
• Whenever a PRIIPs in-scope product is offered to
an EU retail investor, then the KID must be
provided before the investment decision is made
Target group:
Retail investors (being a non-
professional client under MiFID II)
What products?
Investment products and insurance
products with an investment
component (e.g. mutual funds,
investment objects, structured
products, structured deposits,
derivatives)
Goal:
Increasing transparency of
investment products for investor
protection
RC CONSULTANCY ADVISORY & TRAINING
6. Benchmark Regulation
6
Scope:
• Benchmark administrators,
supervised contributors (of input
data) and benchmark users
• Benchmark administrators:
• EU: authorisation and
registration obliged
• Non-EU: either deemed
‘equivalent’, accepted by EU
member state of reference or
by EU supervised entity
Regulates authorisation and supervision of administrators of benchmarks
used by EU regulated entities
Per 1-Jan-2018
Requirements:
• Governance of and control by administrators over the
benchmark process
• Ensuring that administrators avoid conflicts of interest and
have policies and procedures how to manage them
adequately
• Disclosure of input data used for determining a benchmark
• Methodology used for determining a benchmark
• Code of conduct, that an administrator shall have in place
for its contributors
What products?
Benchmark Regulation defines what is deemed as an index
An index becomes a benchmark in certain situations (e.g.
used for determining amounts payable, valuations or to
measure the performance of an investment fund)
Goal:
Ensure accuracy and integrity of
benchmarks
RC CONSULTANCY ADVISORY & TRAINING
7. MiFID II
7
Scope:
Investment firms, credit institutions,
trading venues, financial/non-financial
(above clearing threshold) counterparties
under EMIR, CCPs, Data reporting service
providers, third country investment firms
Markets in Financial Instruments Directive: revised legislative framework strengthening investor protection
and improve the functioning of financial markets making them more efficient, resilient and transparent
Per 3-Jan-2018
Further remarks:
• MiFID II consists of a Directive
(MiFID) and a Regulation (MiFIR)
• ESMA announced 6 months
transition period for LEIs (20-
Dec)
• Equivalence granted on US
designated contract markets and
SEFs re MiFIR trading venues (5-
Dec)
• Many of 28 EU Member States
still racing to convert MiFID II
into law
• Regulators probably will take
softer stance on compliance, in
the beginning
• Complacency in implementation,
however, is not an option!
Main characteristics:
Directive
• Investor protection
• Organisational requirements
• High frequency trading/Algorithmic
trading
• Third country access
• Position limits on commodity derivatives
Regulation:
• Market infrastructure
• Transparency (pre- and post-trade)
• Transaction reporting
• Third country access
Target group:
Retail AND Wholesale investors
What products?
Almost all financial instruments,
including derivatives, as described in
Directive 2014/65, Annex I, Section C
Goals:
• Establish a safer, more transparent
financial system
• Adapt regulation to more complex
financial markets and trading
technologies
• Better investor protection
• Increase transparency
New in scope:
• Market makers
• Commodity firms
Not in scope:
• Custodians
RC CONSULTANCY ADVISORY & TRAINING
8. PSD2
8
Scope:
• All payment accounts where payment transactions,
like fund transfer transactions, are executed
• Freely available (online) savings accounts (*NEW*)
• Deposit savings accounts are excluded
• One-leg transactions (payments where only one of
the payment services providers is located within the
EU/EEA. Being either, the provider of the payer or
the receiver)
• Payments from and to non-EU/EEA accounts
• Applicable to all currencies
Payment Service Directive 2: is the revised PSD, designed by the EU, where a banks’
monopoly on their customer’s account information and payment services is broken
Per 13-Jan-2018
Changes from PSD:
PSD introduced SEPA payment products and scope was
only on EU/EEA currencies (2007)
PSD2 captures new services for payment transactions
regarding online initiating and viewing of payment
transactions for payment accounts
Scope extension
Less exemptions
Limitations to charging card payment costs to clients
Decreasing consumer liability
Imposing higher demands on payment institutions
Access to payment accounts, by third parties and
authentication by clients
Retailers will be able to ‘ask’ consumers for permission
to their bank details. Once given permission the retailer
receives the payment directly from the consumer’s bank
(no intermediaries)
Goal:
On top of the PSD goal (creating a single market
for payments in the EU), PSD2 is set to create a
level playing field (a.o. enabling access for new
companies in the payments business)
RC CONSULTANCY ADVISORY & TRAINING
9. GDPR
9
Scope:
• Applies to all companies processing the
personal data of data subjects residing
in the Union, regardless of the
company’s location (extended
jurisdiction)
• Applicable to processing of personal
data by controllers and processors in
the EU, regardless of whether the
processing takes place in the EU or not
• Applicable to processing of personal
data of data subjects in the EU by a
controller or processor not established
in the EU, where the activities relate
to: offering goods or services to EU
citizens (irrespective of whether
payment is required) and monitoring of
behavior that takes place within the EU
• If non-EU businesses process data of EU
citizens they are obliged to appoint
a representative in the EU
The EU General Data Protection Regulation (GDPR) covers the capture,
control and consent to use personal information
Per 25-May-2018
Further remarks:
• Non-compliance fines up to 4 percent of
global turnover or €20 million (whichever
greater)
• Responsibility of protecting personal data of
customers lies with the organisation!
Main characteristics:
• Breach notifications: data breaches must
be reported within 72 hours
• Right to access: data subjects have greater
control of who has their data and how it
will be used
• Right to be forgotten: data erasure rights
of data subject. Controllers are required to
compare the right to the ‘public interest in
the availability of data’ with the request
• Data portability: data subject’s right to
transfer personal data to another controller
• Privacy by design: inclusion of data
protection from the onset of the designing
of systems, rather than an addition
• Data protection officers: mandatory for
controllers and processors whose core
activities consist of processing operations
which require regular and systematic
monitoring of data subjects on a large scale
or of special categories of data or data
relating to criminal convictions and
offences
How to become compliant?
Answer two critical questions:
1) Where is my data?
2) Who is responsible for that data?
And show proof of the answers!
Goal:
Replaces the Data Protection Directive
95/46/EC and GDPR is designed to
harmonize data privacy laws across
Europe, to protect and empower all EU
citizens’ data privacy and to reshape how
organizations approach data privacy
RC CONSULTANCY ADVISORY & TRAINING
Data Governance
is key!
10. EMIR II (1/3)
10
Definitions:
• Alternative Investment Funds (AIF) currently falling
under national regimes and Special Purposes
Vehicles (SPVs) in the EU to be considered as
Financial Counterparties under EMIR
• UCIT management companies and AIF managers
become responsible and will be liable for ensuring
EMIR reporting is done for the funds they manage
European Market Infrastructure Regulation II: the Commission released on 3rd May 2017 its
proposed draft update of EMIR II (following the adoption of a report on the review of EMIR)
During 2018
Clearing obligation:
• Clearing thresholds: modification of calculation for Non-
Financial Counterparties (NFCs). Threshold will be based on the
aggregate month-end average positions for the months March,
April both for FCs and Non-Financial Counterparties (NFCs)
• Clearing obligation: the new text introduces the concept of
Small Financial Counterparties (SFCs), with the same
thresholds as NFCs regarding the clearing threshold
• For NFCs: clearing obligation will only concern the classes of
derivatives which breach the clearing threshold
• Front loading obligation: removed for new OTC contracts onto
a clearing platform, clearing will start at the live date of the
first clearing
• Pension schemes exemption from the clearing obligation:
further extended by 3 years (until 16/08/2020)
• Clarification status of assets held at clearing member level:
obligation to hold assets exclusively on behalf of clients,
whether held in omnibus or segregated form. Assets shall not
be part of a defaulting clearing member’s pool of assets
Goal:
The Commission intends to improve the transparency of
Over-the-Counter (OTC) derivatives positions and
exposures as well as simplify and better balance the
clearing and reporting obligations for market
participants
RC CONSULTANCY ADVISORY & TRAINING
Main updates of the proposal:
Also applies at indirect clearing member’s level
11. EMIR II (2/3)
11
European Market Infrastructure Regulation II: the Commission released on 3rd May 2017 its
proposed draft update of EMIR II (following the adoption of a report on the review of EMIR)
During 2018
Reporting obligation:
• Backloading: it will no longer be required to
report the transactions that were not
outstanding prior to 12 February 2014
• Intra-group transactions: where at least one of
the counterparties is a NFC, these transactions
will be exempted from the reporting obligation
• Central Counterparty (CCP): becomes
responsible and liable for reporting on behalf of
both the trading parties for exchange-traded
derivatives transactions (ETD). MiFIR requires all
derivatives traded on a regulated market to be
cleared through a CCP result of MiFIR
• FCs: are responsible and liable for reporting the
transactions they perform with NFCs not subject
to the clearing obligation (the so-called NFC-)
RC CONSULTANCY ADVISORY & TRAINING
Main updates of the proposal (cont.):
Dispositions on data reported to TRs:
• Trade Repositories (TRs) are forced to have an
appropriate procedure to verify the completeness
and the accuracy of the data reported to them as
well as a proper reconciliation of the data process
• TRs will have to ensure the safe transfer of data to
another TR at the customer’s demand
12. EMIR II (3/3)
12
European Market Infrastructure Regulation II: the Commission released on 3rd May 2017 its
proposed draft update of EMIR II (following the adoption of a report on the review of EMIR)
During 2018
Classification of counterparties
• “Securitization Special Purpose Entities”:
proposal not to be classified as financial
counterparty
• Alternative Investment Funds (AIFs): proposal to
classify as Financial Counterparty if established
in the EU or whose manager is authorized or
registered under the EU’s AIFM Directive
• If proposal is agreed, then SSPEs and a large
proportion of AIFs will (as currently the case) not
be subject to EMIR’s clearing and margin
requirements (unless they constitute NFC+
entities)
RC CONSULTANCY ADVISORY & TRAINING
Main updates of the proposal (cont.):
Next steps:
• Also, an article is introduced mandating another
review by ESMA, within 3 years
• Currently, the mandatory draft update of EMIR
regulation is being reviewed by the European
Parliament
• After validation by the parliament, a quick
publication of the text is expected to ensure an
effective application of the new rules
13. EMIR margin exchange
13
Required exchange of margin for non-cleared derivatives:
• Largest counterparties already exchange Initial Margin (IM)
• Between now and September 2020 all counterparties trading derivatives (with an aggregated notional amount in excess of €8
billion) will be subject to IM requirements (unless other exemption applies)
• Variation margin (VM) requirements began to apply to most counterparties from 1 March 2017
• However, VM requirements posed difficulties in meeting them by most counterparties
• Physically settled fx forwards: are exempted from posting Initial Margin (IM)
• Also exempted are: fx swaps and currency swaps
• Dodd-Frank in the US exempts physically-settled fx forwards from requirements to exchange VM
• EMIR has no provision for a VM requirements exemption on above mentioned fx forwards
• Council of the EU recognized need for international regulatory convergence
• Proposed amendment: if either counterparty to the physically-settled FX forward is an entity who is neither (a) an EU credit
institution or EU MiFID investment firm (each, an “institution”), nor (b) a non-EU entity that would be an institution if it were
established in the EU, then no variation margin will need to be exchanged
• New standards become effective the day after publication in the Official Journal
• Foreseen date for VM requirements is 3 January 2018
• As a result, above changes are highly unlikely to be effective then
• Competent authorities, for institution to non-institution transactions, should apply the EU framework in a risk-based and
proportionate manner until the amendment has become effective (meaning not seeking to enforce VM arrangements)
European Market Infrastructure Regulation: regulates derivatives in the EU and has been in
force since 16 August 2012
Day after publication in
Official Journal
RC CONSULTANCY ADVISORY & TRAINING
15. SFTR (1/2)
15
Scope:
• If trading repo or buy/sell-backs
• If lending or borrowing equities
• As a prime broker lending margin
to hedge funds
Be ready to report
Principal parties to trade reporting:
• European entities and their
branches
• European branches of non-
European entities
• Financial and non-financial firms
are required to report
• Both sides to SFT report (if in
scope)
The European Commission want to increase the transparency of Securities Financing Transactions
markets, which are not currently covered through other regulations. As such this regulation will require
firms to report their SFTs to an approved EU trade repository.
Q1-2019 (est. phased go-live)
What products?
Securities Finance Trades:
Repo
Securities and Commodities Borrowing and Lending (SBL)
Buy Sell Backs (BSB)
Margin Lending (ML) by prime brokers
Goal:
Increase transparency in shadow banking activities. SFTR will
provide transparency to regulators and investors on the use
of SFTs, and will better allow to identify risks associated with
collateral and its re-use
RC CONSULTANCY ADVISORY & TRAINING
16. SFTR (2/2)
16
The European Commission want to increase the transparency of Securities Financing Transactions
markets, which are not currently covered through other regulations. As such this regulation will require
firms to report their SFTs to an approved EU trade repository.
When to report?
Timely and accurate reporting:
• T+1 for transactions
• T+1 for collateral known at point of trade
• S+1 for collateral at settlement
• 180 day rules for back-book trades at regulation
go-live
RC CONSULTANCY ADVISORY & TRAINING
Q1-2019 (est. phased go-live)
What is reported?
• Transaction level reporting:
•For repo, securities lending, buy-sell back
• Position level reporting:
•For margin lending
• Initial and modification reports:
•New trades and modification to open positions
•Collateral and re-use of collateral
•Certain CCP novation activity
Reporting requirements phasing-in after initial go-live date
Phase 1 Investment firms and credit
institutions
On Day 1
Phase 2 CCPs and CSDs After 3 months
Phase 3 Insurance, UCITS, AIF, pension
funds
After 6 months
Phase 4 Non-financial counterparties
(NFCs)
After 9 months
What data?
• Up to 153 fields (depending on product/report type)
• Considerable number of fields will not be
currently/readily available
• Unique Trade Identifiers (UTI) required for transactions
• ISO20022 Standards
17. Brexit (1/2)
17
Post-Brexit relationship:
• What will be the post-Brexit status of non-UK citizens
resident in the UK?
• What will be the amounts that the UK should pay to the
EU in respect of EU budgetary funding that already has
been committed?
• What is the nature of the post-Brexit border between
Northern Ireland and the Republic of Ireland?
• Final deal on the UK’s future relationship with the EU
should be completed by October 2018
On 29 March 2017, the UK government formally notified the European Council of the
UK’s intention to withdraw from the EU. The effect from Article 50 is that the UK now
has until 29 March 2019 to negotiate and agree the terms of the UK exit
Per 29-Mar-20191
Considerable uncertainties remain:
Terms of relationship between UK and EU after 29 March 2019, including whether or not the UK will remain
part of the single market, and if so, whether that would be purely during any agreed transitional period
The extent to which, in a transition period, there would be any difference in the rights and obligations of
the UK as they currently stand
Expectations post-Brexit:
• Likely that UK financial services firms will no
longer be able to take advantage of the MiFID
“passport”
• Meaning: separate authorisation may be
necessary for UK firms carrying out financial
activities in the EU (unless they can rely on
“equivalence” provisions in MiFID II and other
EU legislation)
RC CONSULTANCY ADVISORY & TRAINING
1 Assuming no extension is agreed by the other EU member states
18. Brexit (2/2)
18
On 29 March 2017, the UK government formally notified the European Council of the
UK’s intention to withdraw from the EU. The effect from Article 50 is that the UK now
has until 29 March 2019 to negotiate and agree the terms of the UK exit
Per 29-Mar-20191
Clearing euro-denominated derivatives EC proposal (June 2017):
1. Joint supervision of “systemic” clearing houses outside the EU that handle large amounts of derivatives
and other contracts traded in euros
2. Smaller firms to carry on operating under existing rules
3. Firms deemed systematically important to face stricter scrutiny and, ultimately, could be forced to move
derivatives clearing denominated in EU currencies inside the EU
• France advocates, again, for tough controls and to impose additional requirements on clearing houses by
EU regulators (EC and ESMA), in order to have a say (up to a veto right) on some decisions taken by third-
country authorities
• Germany prefers to give more power to the ECB, rather than to Paris-based ESMA
• Clearing in euros has become a battleground between London and Brussels in the Brexit talks
• The vast bulk of euro-denominated derivatives are cleared in London (e.g. around 75% of interest rate
derivatives), with the Bank of England acting as supervisor and responsible for the oversight
RC CONSULTANCY ADVISORY & TRAINING
1 Assuming no extension is agreed by the other EU member states
19. EMIR clearing obligation Category 3
19
Definition and dates:
• Category 3 counterparties are financial counterparties or alternative investment funds
(AIFs), who are not clearing members of an EU authorised central clearing counterparty,
and whose outstanding trades have a gross notional amount of EUR 8 billion or less
• Clearing obligation for OTC interest rate derivatives denominated in EUR, GBP, JPY and
USD was set on 21 June 2017
• Clearing obligation for OTC index credit default swaps and OTC interest rate derivatives
denominated in NOK, PLN and SEK was set on 9 February 2018
• New effective date for all of the above types of OTC derivatives is 21 June 2019
European Market Infrastructure Regulation: regulates derivatives in the EU and has been in
force since 16 August 2012
21-Jun-2019
RC CONSULTANCY ADVISORY & TRAINING
20. PD3 (1/2)
20
Scope:
EU rules on the information that must
be provided by companies that want to
attract investors, raise capital and
finance their growth
The EU’s new Prospectus Regulation entered into force in July 2017 and the vast majority of its
provisions will take effect from 21 July 2019
21-Jul 2019
Exemptions:
From requirement to prepare a prospectus:
• Apply to an offer of securities to the public with a total
consideration of less than EUR1 million over a 12-month period
• Member states can increase this amount to EUR 8 million
• The “wholesale denomination” exemption for public offers of
securities with a minimum denomination of EUR100,000 is still valid
Goals:
• Make it easier and cheaper for smaller
companies to access capital
• Introduce simplification and flexibility
for all types of issuers, in particular for
secondary issuances and frequent issuers
which are already known to capital
markets
• Improve prospectuses for investors by
introducing a retail investor-friendly
summary of key information, catering for
the specific information and protection
needs of investors
RC CONSULTANCY ADVISORY & TRAINING
High-denominated securities:
Lighter (proportionate) disclosure requirements are envisaged for:
• those that are admitted to trading on a regulated market, and
• other non-equity securities that are to be traded only on markets
(or segments thereof) to which only qualified investors have access
• And no prospectus summary will be required under the new regime
21. PD3 (2/2)
21
Other securities:
• Prospectus summary must be no longer
than seven pages of A4-sized paper
• Must be presented and laid out in a way
that is easy to read, with characters of
readable size and written in a style and
language that facilitates the
understanding of the information
• It may contain no more than the 15
most significant risk factors specific to
the issuer
• A summary will no longer be required in
the base prospectus itself, but the final
terms for each issuance of securities
must include, as an annex to the final
terms, a summary of that issuance
The EU’s new Prospectus Regulation entered into force in July 2017 and the vast majority of its
provisions will take effect from 21 July 2019
21-Jul 2019
Risk factors:
• Will be required to be presented in a limited number of categories,
depending on their nature, and must be ranked by materiality, based
on both the probability of their occurrence and the expected
negative impact if the relevant risk occurs
Universal Registration Document (URD):
• A new Universal Registration Document regime will be brought in by
the new Regulation (similar to the U.S. shelf registration system)
• Issuers with a URD will benefit from a faster approval process and
after having had a URD approved by the relevant competent
authority for two consecutive years, will be allowed to file further
URDs without prior approval, although they will still be subject to
review by the authority
RC CONSULTANCY ADVISORY & TRAINING
Non-EU issuer:
The relevant EU competent authority may permit a non-EU issuer to draw up the required prospectus under the rules of its home
jurisdiction, provided that those rules are determined to be equivalent to the Regulation and cooperation arrangements are in place
between the relevant authorities in its home jurisdiction and the relevant EU competent authority
22. Contact information
22
Roger Coenen
RC Consultancy Advisory & Training
Consultant/Business Analyst Financial Regulation
Mobile +31 6 42 600 245
rc_consultancy@kpnmail.nl
23. Disclaimer
23
The provided information in this presentation does not pretend to be complete
and is based on information from public sources. You will find highlights of
financial regulation that need attention in the period to come, but the detail of
focus, of course, varies per business line
And although RC Consultancy Advisory & Training, represented by Roger Coenen,
can rely on a long-standing and broad experience in the financial markets and the
regulations concerned, no liability is accepted for the content of this
presentation. The presented information has been treated and processed very
thoroughly, however an accidental error might still occur
Neither should this presentation be seen or used to take investment decisions,
project decisions, legal decisions or other relevant business decisions. Always ask
for (external) advice from professionals, as financial regulation needs tailor-made
solutions