European Financial Industry Developments

ESMA Asks European Commission to Clarify Scope of Exemptions from EMIR Financial Obligations

On April 27, 2018, the European Securities and Markets Authority ("ESMA") published a letter from Steven Maijoor, ESMA Chair, to Oliver Guersent, European Commission Director General, Financial Stability, Financial Services and Capital Markets Union, relating to exemptions from the financial obligations under Articles 41 and 42 of EMIR (the Regulation on OTC derivative transactions, central counterparties and trade repositories) (Regulation 648/2012). The letter can be found here.

In the letter, Mr. Maijoor explains that, during its March 2018 meeting, the ESMA Board of Supervisors discussed whether a central counterparty ("CCP") can exempt certain clearing members (typically public entities such as government entities, central banks and supranational entities) from the financial obligations under Articles 41 and 42 of EMIR. Under these provisions, the CCP is to be provided with initial margin and default fund contributions.

ESMA has noted different practices across EU CCPs. It has also noted different interpretations across the relevant national competent authorities ("NCAs") of "credit exposures" from clearing members that are public entities among those mentioned above. In particular, NCAs, believing that these public entities should be exempt from EMIR, have authorised their CCPs to consider the zero risk-weight envisaged under the Capital Requirements Regulation (Regulation 575/2013) ("CRR") for these entities to strike down their respective credit exposures. This implies that no initial margins and no default fund contributions are due from such clearing members. However, other EU CCPs apply no exemptions for this category of clearing member.

ESMA believes that this issue needs to be clarified to ensure supervisory convergence and a level playing field across EU CCPs. As this issue relates to the scope of EMIR, it asks the Commission to clarify whether CCPs are allowed not to collect margin and default fund contributions from these public entities and, if so, whether a specific amendment of EMIR (in the context of the ongoing review process) would be appropriate.

Council of EU Presidency Compromise Proposal on PEPP Regulation

On April 23, 2018, the Council of the EU published a compromise proposal (8098/18), on the proposed Regulation on a pan-European personal pension product ("PEPP") (2017/0143 (COD)) (PEPP Regulation).

The European Commission adopted its legislative proposal for the Regulation in June 2017. The proposal can be found here.

EU General Court Considers Meaning of Effective Director Under CRD IV Directive

The EU General Court has ruled that the same person cannot occupy both the post of chairman of the board of directors and that of "effective director" in credit institutions subject to prudential supervision under the CRD IV Directive (2013/36/EU).

Under the Regulation establishing the Single Supervisory Mechanism (Regulation 1024/2013) ("SSM Regulation"), the European Central Bank ("ECB") is responsible for the prudential supervision of Crédit Agricole (a non-centralised French banking group that is comprised, among others, of regional agricultural credit union branches). In this role, the ECB approved the appointment of certain individuals as chairmen of the board of directors of four of those regional branches, but objected to them carrying out at the same time the function of "effective director". The branches asked the General Court to annul the ECB's decision, arguing that the ECB did not correctly interpret the concept of effective director when it said that there must be a separation of the exercise of executive and non-executive functions within a management body.

The General Court rejected the actions of the four regional branches and held that the ECB had correctly interpreted the concept of effective director. The court analysed the concept of effective director of a credit institution in the light of Article 13 of the CRD IV Directive. Its analysis of the textual, historical, teleological and contextual interpretations of Article 13 established that the concept refers to the members of the management body who are part of the senior management of the credit institution. The court held that, as the ECB had correctly interpreted the concept of effective director, it had also correctly applied Article 88 of the CRD IV Directive, which provides that the chairman of the management body in its supervisory function of a credit institution (such as the chairman of the board of directors) may not exercise at the same time (without express authorisation of the competent authorities) the function of CEO in the same institution. The court found that the effectiveness of the supervisory function may be jeopardised if the individual appointed to the non-executive role of chairman of the board of directors, while not formally occupying the role of CEO, was also responsible for the effective direction of the business of the credit institution.

Impact Finance

U.S. Department of Labor Releases Guidance on Consideration of ESG Factors for ERISA Plan Fiduciaries

On April 23, 2018, the U.S. Department of Labor issued Field Assistance Bulletin No. 2018-1, which provides guidance on environmental, social and governance ("ESG") issues.

The Bulletin's stated purpose is to provide guidance to the Employee Benefits Security Administration's to assist in addressing questions they may receive from ERISA plan fiduciaries and other interested stakeholders about two previous DOL bulletins, Interpretive Bulletin 2016-1 relating to exercise of shareholder rights and written statements of investment policy, and Interpretive Bulletin 2015-01 relating to "economically targeted investments." The Bulletin notes that the DOL has a longstanding position that ERISA fiduciaries cannot sacrifice investment return or take on additional investment risk as a means of promoting collateral social policy goals. The Bulletin states that ERIS fiduciaries must always put the economic interests of the ERISA plan first in making investment decisions, and that fiduciaries "must not too readily treat ESG factors as economically relevant to the particular investment choices at issue when making a decision." The Bulletin also notes that ESG issues could constitute material business risk or opportunities to companies that would be treated as economic considerations under generally accepted investment theories, and that to the extent ESG factors involve business risks or opportunities that are properly treated as economic considerations in evaluating alternative investments, the weight that the fiduciary gives to those factors should be "appropriate to the relative level of risk and return involved compared to other relevant economic factors."

Rating Agency Developments

On April 25, 2018 Moody's published a rating methodology for Generic Project Finance. Release.

On April 24, 2018 S&P published a table of contents for S&P's Global Ratings Structured Finance Criteria. Release.

On April 23, 2018 Moody's published a report on The Performance of Moody's Structured Finance Ratings – 2018Q1. Release.

On April 23, 2018 DBRS published a rating methodology for Canadian Covered Bonds. Release.

On April 20, 2018 DBRS published a rating methodology for Operational Risk Assessments for Canadian Structured Finance. Release.

On April 20, 2018 Fitch published its rating criteria for U.S. RMBS Seasoned, Re-Performing and Non-Performing Loans. Release.

On April 19, 2018 DBRS published a rating methodology for Canadian Public Hospitals. Release.