Recent regulatory developments of interest to financial institutions and markets. Includes the extension of the senior managers regime to benchmark administrators, updates relating to MiFID II, EMIR, ESMA's draft guidelines on outsourcing to cloud service providers, and more.

Contents

• COVID-19: BoE Dear CEO letter to FMIs on distribution of profits
• COVID-19: BoE speech on financial markets and BoE's balance sheet operations
• FMI supervision: BoE consults on 2020/21 fees regime
• Benchmark administrators: FCA PS20/5 on senior managers regime
• EMIR: ESMA technical advice on FRANDT commercial terms for clearing services
• MiFID II: ESMA updates transparency and position limits opinions for third-country trading venues
• ESMA consults on draft guidelines on outsourcing to cloud service providers
• Prospectus RTS Regulation: Commission draft amending Regulation
• IBOR benchmark fallbacks: ISDA factsheet and video

COVID-19: BoE Dear CEO letter to FMIs on distribution of profits

On 4 June 2020, the Bank of England (BoE) published a Dear CEO letter from Sir Jon Cunliffe, Deputy Governor, Financial Stability, sent to UK financial market infrastructures (FMIs) and specified providers. The letter concerns the distribution of profits given the demands arising from COVID-19.

The BoE states that, when considering any distributions to shareholders or making decisions on variable remuneration, the BoE expects UK FMI boards to pay close attention to the additional risks and potential financial and operational demands arising from COVID-19. The BoE also expects them to discuss these matters with the BoE before making any distribution to shareholders.

CEOs are asked to share a copy of the letter with boards.

COVID-19: BoE speech on financial markets and BoE's balance sheet operations

On 4 June 2020, the BoE published a speech by Andrew Hauser, Executive Director, Markets, on COVID-19, financial markets and the BoE's balance sheet operations. Mr Hauser outlines the unprecedented package of measures that were taken by the BoE and HM Treasury to respond to the rapidly growing economic consequences of the spread of COVID-19 and considers longer-term questions and implications for the markets.

FMI supervision: BoE consults on 2020/21 fees regime

The BoE is consulting on supervisory fees for financial market infrastructure (FMI) for 2020/21 and some amendments in relation to Special Project Fees (SPFs). The proposals include the fee rates, how the BoE intends to apportion surpluses from the 2019/20 FMI fees, and amendments to the SPF invoicing process and the SPF hourly rate to be charged, where applicable.

The consultation ends on 29 July 2020. The proposed implementation date for the proposals is Q3 2020, at which point invoices are expected to be issued for the 2020/21 fee year.

Benchmark administrators: FCA PS20/5 on senior managers regime

Following its consultation in CP19/31, the Financial Conduct Authority (FCA) has published, in PS20/5, a summary of, and response to, the feedback it received, and its final rules and guidance on extending the senior managers regime (SMR) to benchmark administrators in the UK that do not undertake any other regulated activities. PS20/5 also affects appointed representatives and their principals.

The FCA confirms that it is implementing the proposals largely as consulted on with some changes to respond to the feedback received.

The final text of the Handbook rule changes is set out in the Individual Accountability (FCA-Authorised Benchmark Firms) Instrument 2020 (FCA 2020/23). The majority of the amendments come into force on 7 December 2020, with the exception of the amendments to SYSC, SUP and PROF which come into force on 3 June 2020. The FCA will continue to process applications for controlled functions under the approved persons regime until the rules come into force. In the meantime, administrators should ensure they have the right individuals in the right controlled functions to support conversion from the approved persons regime.

The FCA is not introducing the certification regime because benchmark administrators are subject to the Benchmarks Regulation which should achieve a similar outcome.

EMIR: ESMA technical advice on FRANDT commercial terms for clearing services

The European Securities and Markets Authority (ESMA) has published a final report setting out technical advice to the European Commission on how to specify the conditions under which the commercial terms are to be considered to be fair, reasonable, non-discriminatory and transparent (FRANDT) when providing clearing services to clients in accordance with Article 4(3a) of the European Market Infrastructure Regulation (EMIR). ESMA's final report takes into account the feedback provided by the respondents to its earlier consultation.

ESMA explains that its final technical advice aims to strike a balance between improving clearing clients' access to clearing services and ensuring these services are provided on FRANDT-compliant terms, while also ensuring the requirements are proportionate and within its mandate.

The FRANDT requirements will apply from 18 June 2021 in accordance with Article 2(c) of EMIR Refit.

MiFID II: ESMA updates transparency and position limits opinions for third-country trading venues

ESMA has published updated versions of the following opinions on transparency and position limits for third-country trading venues (TCTVs) under the Markets in Financial Instruments Directive (MiFID) and the Markets in Financial Instruments Regulation (MiFIR) following its assessment of over 200 third-country trading venues (TCTV) against criteria published in opinions in 2017:

• opinion determining TCTVs for the purpose of transparency under MiFIR and related Annex; and
• opinion determining TCTVs for the purpose of position limits under the MiFID II Directive and related Annex.

MiFID II: ESMA updates compliance function requirements

ESMA has published its final guidelines on certain aspects of the MiFID II compliance function under Article 16(2) of MIFID and Article 22 of the MiFID Delegated Regulation. These guidelines replace the ESMA guidelines on the same topic issued in 2012.

The guidelines are addressed to investment firms and credit institutions providing investment services and activities, investment firms and credit institutions selling or advising clients in relation to structured deposits, UCITS management companies and external alternative investment fund managers (AIFMs) when providing investment services and activities in accordance with the UCITS Directive and the AIFMD.

The publication of the translations in all official languages of the EU will trigger a two-month period during which national competent authorities must notify ESMA whether they comply or intend to comply with the guidelines.

ESMA consults on draft guidelines on outsourcing to cloud service providers

ESMA is consulting on guidelines on outsourcing by financial market participants to cloud service providers. The guidelines aim to help firms and competent authorities identify, address and monitor the risks and challenges that arise from cloud outsourcing arrangements.

The proposed guidelines set out the:

• governance, documentation, oversight and monitoring mechanisms that firms should have in place;
• assessment and due diligence which should be undertaken prior to outsourcing;
• minimum elements that outsourcing and sub-outsourcing agreements should include;
• exit strategies and the access and audit rights that should be catered for;
• notification to competent authorities; and
• supervision by competent authorities.

ESMA states that the proposed guidelines are consistent with the recommendations on outsourcing to cloud service providers published by the European Banking Authority (EBA) in February 2017 and subsequently incorporated into revised EBA guidelines on outsourcing arrangements in February 2019, and the guidelines on cloud outsourcing published by the European Insurance and Occupational Pensions Authority (EIOPA) in February 2020.

The consultation closes on 1 September 2020. ESMA aims to publish a final report on the guidelines by Q1 2021.

T2-T2S consolidation project: ECB FAQ

The European Central Bank (ECB) has published FAQs on the TARGET2 (T2) - TARGET2-Securities (T2S) consolidation project. The FAQs cover information that T2 participants (that is, banks and ancillary systems) need to take into account. This includes information to help parties better understand the migration strategy and the key project milestones, as well as details on service providers, connectivity, migration rehearsals and the organisation of the migration.

Prospectus Delegated Regulation: Commission draft amending Regulation

The European Commission has published a draft Regulation and Annexes amending and correcting the Prospectus Delegated Regulation (EU) 2019/980. Delegated Regulation (EU) 2019/980 supplements the Prospectus Regulation as regards the format, content, scrutiny and approval of the prospectus.

The draft regulation is to take effect on the third day following its publication in the Official Journal save that Article 1(1) to (8) (amendments to Articles 2, 4, 12, 13, 24, 25, 28 and 30) and Article 2 (corrections to Article 33 and 42(2)(g)) of the draft regulation are to apply retrospectively from 21 July 2019.

Prospectus RTS Regulation: Commission draft amending Regulation

The European Commission has published a draft Delegated Regulation and Annexes to amend Delegated Regulation (EU) 2019/979 (Prospectus RTS Regulation) containing regulatory technical standards under the new Prospectus Regulation.

The draft Delegated Regulation is to come into force on the third day following its publication in the Official Journal. Its provisions will apply retrospectively, with effect from 21 July 2019, apart from the insertion of a new Article 22a (relating to summaries of prospectuses containing certain financial information that have been approved between 21 July 2019 and the date the draft regulation comes into force) which will apply from the date the draft Delegated Regulation comes into force.

IBOR benchmark fallbacks: ISDA factsheet and video

ISDA plans to publish a supplement to the 2006 ISDA Definitions in July 2020 to incorporate new fallbacks for derivatives that reference certain key interbank offered rates (IBORs). Simultaneously, ISDA will publish a protocol that will allow market participants to choose to incorporate the revisions into their legacy derivatives trades.

Ahead of the publication, ISDA has published a factsheet, Understanding IBOR Benchmark Fallbacks, as well as a video interview with Ann Battle, Head of Benchmark Reform at ISDA, explaining why changes to fallbacks are necessary.

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