U.S. Financial Industry Developments

SEC Division of Investment Management Letter on Cryptocurrency Related Investment Products; Joint Statement by SEC and CFTC Enforcement Directors Regarding Virtual Currency Enforcement Actions

On January 18, 2018, in a letter to the Investment Company Institute and SIFMA, Dalia Blass, Director of the SEC's Division of Investment Management, warned market participants against the risks of creating and marketing investment products to retail investors that hold "substantial amounts" in "cryptocurrencies and related products." The risks/concerns posed by cryptocurrency ETFs and funds, including transparency of information, trading, valuation and custody, were highlighted.

Also, on January 19, 2018, SEC Co-Enforcement Directors Stephanie Avakian and Steven Peikin and CFTC Enforcement Director James McDonald issued the following Statement:

"When market participants engage in fraud under the guise of offering digital instruments – whether characterized as virtual currencies, coins, tokens, or the like – the SEC and the CFTC will look beyond form, examine the substance of the activity and prosecute violations of the federal securities and commodities laws. The Divisions of Enforcement for the SEC and CFTC will continue to address violations and bring actions to stop and prevent fraud in the offer and sale of digital instruments." Release.

CFPB Statement on Payday Rule

On January 16, 2018, the Bureau of Consumer Financial Protection issued a statement that it would submit the Payday, Vehicle Title, and Certain High-Cost Installment Loans (more commonly known as the Payday Rule) through a review process and that it may, in the interim, waive certain requirements thereunder. Release.

Civil Money Penalties: Notice Adjusting Civil Money Penalties for 2018

On January 16, 2018, the Office of the Comptroller of the Currency announced that it had finalized its rule about maximum civil money penalties. This action was taken in response to a law that directed federal agencies to change their limits each year for inflation, as opposed to every four years.

Federal Reserve Board Announces It Has Finalized a Rule Adjusting the Board's Maximum Civil Money Penalties

On January 12, 2018, the Federal Reserve Board announced that it had finalized its rule about maximum civil money penalties. This action was taken in response to a law that directed federal agencies to change their limits each year for inflation, as opposed to every four years. Release.

Securities and Exchange Commission Adopts Final Rule That Provides New Exemptions From Investment Adviser Registration for Advisers to Small Business Investment Companies

On January 5, 2018, the SEC adopted amendments to Rule 203(l)-1 under the Investment Advisers Act of 1940 (the "Advisers Act") that defines a "venture capital fund" and Rule 203(m)-1 under the Advisers Act that implements the private fund adviser exemption under the Advisers Act. These amendments were adopted to reflect changes made by title LXXIV, sections 74001 and 74002 of the Fixing America's Surface Transportation Act of 2015 (the "FAST Act"). That legislation amended sections 203(l) and 203(m) of the Advisers Act. The amendments are effective on March 12, 2018.

In particular, Title LXXIV, section 74001 of the FAST Act amended the exemption from investment adviser registration for any adviser solely to one or more "venture capital funds" in Advisers Act section 203(l) by deeming "small business investment companies" to be "venture capital funds" for purposes of the exemption. Accordingly, the SEC amended the definition of a "venture capital fund" in Rule 203(l)-1 to include "small business investment companies."

Title LXXIV, section 74002 of the FAST Act amended the exemption from investment adviser registration for any adviser solely to "private funds" with less than $150 million in assets under management in Advisers Act section 203(m) by excluding the assets of "small business investment companies" when calculating "private fund assets" towards the registration threshold of $150 million. Accordingly, the SEC amended the definition of "assets under management" in Rule 203(m) to exclude the assets of "small business investment companies."

European Financial Industry Developments

ESMA Call for Evidence on Potential Product Intervention Measures on CFDs and Binary Options to Protect Retail Clients

On January 18, 2018, European Securities and Markets Authority ("ESMA") published a call for evidence ("CfE") on potential product intervention measures on contracts for differences ("CFDs") and binary options in order to protect retail clients (ESMA35-43-904).

In December 2017, ESMA published a statement explaining it was considering the possible use of its product intervention powers under Article 40 of the Markets in Financial Instruments Regulation (Regulation 600/2014) (MiFIR) to address investor protection concerns arising out of the marketing, distribution and sale of CFDs and binary options to retail investors. It is now seeking feedback from stakeholders on the impact of certain potential measures.

In relation to CFDs, ESMA is considering implementing the following:

• A standardized risk warning by CFD providers in any communication to, or published information accessible by, a retail client relating to the marketing, distribution or sale of a CFD. At present, ESMA's preferred option is that this standardized warning would indicate the percentage range of retail investor accounts having losses.
• Leverage limits on the opening of a position by a retail client that would apply to any payment made to a product provider for the purpose of entering into a CFD, excluding any commission and transaction fees owed to the provider. They would range from 30:1 to 5:1 depending on the different classes of underlying assets.
• A margin closeout rule on a position-by-position basis. This would standardize the percentage of margin at which providers are required to close out a retail client's open CFD. The aim is that clients are routinely protected from losing more than they have invested in a consistent manner across providers.
• Negative balance protection on a per-account basis, to provide an overall guaranteed limit on retail client losses.
• A restriction on incentivization of trading provided directly or indirectly by a CFD provider, such as providing retail clients with a payment (other than a realized profit on any CFD provided) or a non-monetary benefit in relation to the marketing, sale or distribution of a CFD.

ESMA is currently considering how CFDs on cryptocurrencies fit within the MiFID II regulatory framework as financial instruments. It is seeking views on this and asks whether it should introduce specific restrictions concerning CFDs in cryptocurrencies.

ESMA is also considering a prohibition on the marketing, distribution and sale to retail clients of binary options. This is on the basis that the risks relating to binary options are due to inherent product features that are unlikely to be sufficiently addressed through product restrictions.

The CfE closes to responses on February 5, 2018.

Delegated Regulations Under MiFID II Directive and BMR Published in OJ

The following Delegated Regulations were published on January 17, 2018 in the Official Journal of the EU (OJ):

Commission Delegated Regulation (EU) 2018/63, which amends Delegated Regulation (EU) 2017/571 supplementing the MiFID II Directive (2014/65/EU) with regard to regulatory technical standards on the authorization, organizational requirements and the publication of transactions for data-reporting services providers. The Commission adopted this Delegated Regulation on September 26, 2017.

Commission Delegated Regulation (EU) 2018/64, which supplements Regulation (EU) 2016/1011 (BMR) on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds with regard to specifying how the criteria of Article 20(1)(c)(iii) of the BMR are to be applied for assessing whether certain events would result in significant and adverse impacts on market integrity, financial stability, consumers, the real economy or the financing of households and businesses in one or more member states.

Commission Delegated Regulation (EU) 2018/65, which specifies technical elements of the definitions laid down in Article 3(1) of the BMR.

Commission Delegated Regulation (EU) 2018/66, which supplements the BMR specifying how the nominal amount of financial instruments other than derivatives, the notional amount of derivatives and the net asset value (NAV) of investment funds are to be assessed. The Commission adopted Delegated Regulations (EU) 2018/64, (EU) 2018/65 and (EU) 2018/66 on September 29, 2017.

Commission Delegated Regulation (EU) 2018/67, which supplements the BMR with regard to the establishment of the conditions to assess the resulting impact from the cessation of or change to existing benchmarks. The Commission adopted this Delegated Regulation on October 3, 2017.

All the Delegated Regulations will enter into force twenty days after their publication in the OJ on February 6, 2018.

EBA Final Report on Implementation of Guidelines on Methods for Calculating Contributions to Deposit Guarantee Schemes

The European Banking Authority ("EBA") published its final report on the implementation of its guidelines on methods for calculating contributions to deposit guarantee schemes (DGSs) on January 17, 2018.

This follows the publication of a consultation paper on a draft report by the EBA in July 2017 (EBA/CP/2017/10).

The final report assesses authorities' compliance with the principles outlined in the guidelines. The report concludes that:

• the guidelines have broadly met the aim of introducing different contribution levels for institutions according to their risk levels. However, the method outlined in the guidelines, and currently in use, allows too much flexibility and may need to be reviewed to ensure a more consistent approach while still catering for national specificities;
• the approach taken by member states seems to ensure a good level of transparency to stakeholders and does not cause excessive additional reporting requirements. Therefore, the guidelines do not appear to require amendment. However, changes to the way information is disclosed to the contributing institutions may be considered in the future; and
• further analysis and greater experience of the risk-based systems currently in use is needed before proposing any changes to the guidelines, as the available data covers only one year of risk-based contributions.

The EBA states that it intends to consider a number of suggested improvements to the guidelines as part of a wider review of the Deposit Guarantee Schemes Directive (2014/49/EU) ("DGSD") in 2019.

The assessment on the implementation of the methods for calculating contributions to DGSD has been carried out in accordance with Article 13(3) of the DGSD.

European Parliament to Expedite Process for Adopting Proposal to Delay Application Date for IDD and IDD Delegated Regulations

European Parliament's Committee on Economic and Monetary Affairs ("ECON") published a letter (dated January 9, 2018) on January 16, 2018. The letter was sent by the ECON Chair to the Chair of the Council of the EU's Permanent Representatives on the legislative proposal to postpone the application date of the Insurance Distribution Directive ((EU) 2016/97) ("IDD") to October 1, 2018.

The proposal was adopted by the European Commission on December 20, 2017. ECON had urged the Commission to adopt a legislative proposal "swiftly" in November, to enhance legal certainty on the applicable provisions and to allow for the necessary organizational and technical changes needed to comply with the provisions introduced by the Delegated Regulations Legal update. ECON urged the Commission to take into account European Parliament's recommendation to postpone the IDD application date to October 1, 2018.

In its latest letter, ECON confirms its support for a "postponement of the date of transposition of [the IDD] by a few months, such as 1 July 2018". ECON goes on to confirm its intention to "steer the adoption of [the proposed amending Directive] in an expedited manner while respecting [Parliament] Rules of Procedure, and in order to avoid trialogue procedures". ECON explains that it does not intend to object to the adoption of the proposed Directive to speed up its entry into force, and states that it trusts the Council will do the same.

Rating Agency Developments

On January 17, 2018, Fitch issued a report entitled: Fitch Updates Asset-Backed Commercial Paper Rating Criteria. Release.

On January 11, 2018, Fitch issued a report entitled: Fitch Updates Non-Performing Loan Securitizations Rating Criteria. Release.