In context

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Financial Markets in brief – new regulations and other developments

February 14, 2019

In context

There have been many developments in national and European financial markets regulation during the past two months. We provide a brief overview of these developments, which include the Dutch financial markets supervisor’s priorities for 2019, contingency measures for a no-deal Brexit, and a bill implementing the Prospectus Regulation.

Highlighted publications

Agenda for the financial sector

The Dutch Minister of Finance has published an overview of measures he intends to take to create a stable, honest and innovative financial sector. His agenda includes:

introducing a licence requirement for crypto management services;
tightening of the rules on remuneration;
investigating the opportunities and risks of FinTech;
promoting and improving cooperation and information exchange between the Dutch supervisors;
encouraging the supervisors to integrate sustainability assessment into their supervision;
increasing the capital buffers for banks;
ensuring that insurers are future proof, including through the evaluation of Solvency II; and
preventing money laundering and terrorist financing by introducing a licence requirement for (1) providers engaged in exchange services between virtual currencies and fiat currencies, and (2) custodian wallet providers.

Dutch financial markets supervisor sets out its priorities for 2019

The Netherlands Authority for the Financial Markets (AFM) has published its priorities for 2019. Based on the significant trends and risks in the financial sector identified in the recent AFM report, it will focus on:

supervising new parties and markets as a result of Brexit;
preventing the irresponsible use of technology and data;
dealing with unsuitable financial products;
sustainability in the financial sector;
market risks in the capital markets;
permanent improvement of the quality of statutory audits; and
the combat of money laundering and other financial-economic criminality.

“No-deal” Brexit

To prepare for a potential no-deal Brexit scenario, a number of contingency measures for the financial sector have been proposed or put in place, including:

Dutch Minister of Finance

a ministerial regulation temporarily exempting UK investment firms active in the Netherlands, from licence requirements and from prudential and conduct supervision under the Dutch Financial Markets Supervision Act. In the event of a no-deal Brexit, UK investment firms would lose their European passport and, therefore, would not be able to provide investment services or perform investment activities in the Netherlands. According to the explanatory memorandum, the exemption is expected to apply until 1 January 2021.

European Securities and Markets Authority

an agreement on memoranda of understanding between the ESMA and the EU securities regulators and the UK Financial Conduct Authority (FCA) on the exchange of information in relation to the supervision of credit rating agencies and trade repositories, respectively, the supervisory cooperation, enforcement and information exchange between individual regulators and the FCA.
a memorandum of understanding between ESMA and the Bank of England on the recognition of UK central counterparties and UK central securities depository.
an update of ESMA’s Q&A document on the Prospectus Directive and the Transparency Directive, clarifying the application of certain provisions in these directives in the event of a no-deal Brexit.
Click here for ESMA’s Brexit page, including various additional publications on Brexit.

European Commission

a communication about preparing for Brexit
a decision ensuring that, for a limited period of 12 months, no immediate disruption in the central clearing of derivatives will take place
a decision ensuring that under certain conditions, and for a limited period of 24 months, no disruption in central depositaries services for EU operators currently using UK operators will take place
two draft delegated regulations (click here and here for the European Parliament’s procedure files) facilitating novation of certain over-the-counter derivatives contracts, where a contract is transferred from a UK to an EU27 counterparty, for a fixed period of 12 months
a report on the granting of an exemption from MiFIR pre- and post-trade transparency requirements to the Bank of England under MiFIR and a related draft delegated regulation (and annex)
a report on the granting of an exemption from MAR requirements to the Bank of England and the UK Debt Management Office and a related draft delegated regulation and annex
a report on the granting of an exemption from certain SFTR requirements to the UK Central Bank and public bodies and a related draft delegated regulation
a report on the granting of an exemption from the scope of EMIR to the Bank of England and a related draft Delegated Regulation

The Dutch Central Bank, the AFM and the European supervisors have also warned financial institutions that they need to take contingency measures.

Bill implementing the Prospectus Regulation

A bill implementing the Prospectus Regulation was recently submitted to the Dutch Parliament.

Because the regulation has direct effect, most articles concerning prospectuses will be removed from the Dutch Financial Markets Supervision Act. Only four articles will remain, which include the responsibility for the information in the prospectus and the national regime for exempted offers of securities to the public. Also, the AFM will be granted the necessary powers under the Prospectus Regulation.

In anticipation of the Prospectus Regulation, the Netherlands raised the exemption limit for offers of securities to the public from EUR 2.5 million to EUR 5 million last year.

EU Banking Reform package

In December 2018, we reported on the provisional political agreement reached by the Council of the EU and the European Parliament on certain aspects of the EU Banking Reform Package. On 25 January 2019, the Council of the EU published a note including the legal text of this provisional agreement.

AFM policy rule on information

The AFM has revised a policy rule (in Dutch) which sets out the criteria the supervisor applies when assessing the information financial institutions provide to their clients. In particular, the AFM explains the rules for advertisements.

Preliminary agreement reached on further extension of the temporary exemption of pension funds from the clearing obligation

In 2017, we reported on a proposal to amend EMIR aimed at improving the functioning of the derivatives market in the EU. Until 17 August 2018, pension funds were exempted from the clearing obligation under EMIR. Part of the proposal includes an extension of the exemption of pension funds from central clearing. As the proposal was not adopted before the exemption had expired, the European supervisor ESMA called upon national supervisors not to enforce the clearing obligation, as it was expected that the legislative process would be finalised soon. The Dutch Central Bank and the AFM confirmed that they would adhere to ESMA’s advice. On 5 February 2019, the Council of the EU announced that a preliminary agreement had been reached by the Romanian presidency of the Council and the European Parliament. It will be submitted to EU ambassadors for endorsement, and will then undergo a legal linguistic revision. Subsequently, the European Parliament and the Council of the EU will be called on to adopt the proposal at first reading.

Crypto regulation

The Netherlands

Based on recommendations of the AFM and the Dutch Central Bank relating to cryptos and ICOS, the Dutch Minister of Finance has announced the following steps:

the introduction of a national licensing regime for crypto exchange platforms and crypto wallet providers
the minister will argue the necessity of amending of the European regulatory framework for corporate funding to enable the use of cryptos that are comparable to shares or bonds.

The Minister will also investigate whether the Dutch definition of a security can be brought in line with the broader definition used in European legislation. This will allow the financial market supervisors to bring specific cryptos under the scope of their supervision.

ESMA advice on ICOs and Crypto-Assets

The European supervisor ESMA has published its advice on initial coin offerings and crypto-assets.

Where crypto-assets qualify as transferable securities or other types of financial instruments, EU financial rules – including the Prospectus Directive, the Transparency Directive and the Market Abuse Directive – are likely to apply to the issuer and firms providing investments services. However, ESMA believes that certain aspects of the new instruments should be clarified. Moreover, EU rules do not address the risks specific to the underlying technology of the crypto-assets. Therefore, ESMA believes that additional Level I measures, complemented by Level 2 technical standards, are required.

Where crypto-assets do not qualify as financial instruments, ESMA is concerned about the risks that these instruments represent to investor protection. It believes that the anti-money laundering requirements, as well as appropriate disclosure requirements, should apply to all crypto-assets and related activities.

FATF amends Glossary and Recommendations to include virtual assets

Finally, the Financial Action Task Force has decided to include new definitions of “virtual assets” and “virtual asset service providers” in their Glossary. As a result, the FATF Recommendations will apply in the case of financial activities involving virtual assets, and jurisdictions must ensure that virtual asset service providers are subject to anti-money laundering regulation (such as conducting customer due diligence including ongoing monitoring, record-keeping, and reporting of suspicious transactions). The providers must be licensed or registered and subject to monitoring to ensure compliance.

ESMA publishes list of prospectus thresholds

The Prospectus Regulation allows member states to raise the threshold for having to publish a prospectus to EUR 8 million. In the Netherlands, the threshold has been raised to EUR 5 million. ESMA recently published a list of the thresholds applicable in the various member states.

European Single Resolution Board publishes 2018 MREL policy for the most complex banking groups

Following the publication by the Single Resolution Board (SRB) of the first part of its 2018 policy statement on the minimum requirement for own funds and eligible liabilities (MREL) for less complex banks in November 2018, the SRB has now published the second part about the plans for the most complex banking groups. To prepare for future regulatory changes pursuant to the EU Banking Reform Package (see above), the SRB is raising the bar in terms of banks’ resolvability and MREL. As soon as the reform package is finalised, the SRB will review its policy for MREL setting for further updates in 2019.

Qualification of a warranty or a subscription as an insurance policy

Following a consultation launched in June 2018, the Dutch Central Bank has now published its final version of a Q&A setting out when a warranty in a purchase agreement qualifies as an insurance policy, together with a feedback statement:

the warranty is a subordinate part of the purchase agreement, and as such is absorbed by the purchase agreement;
the warranty only pertains to the nature of or defect to the product; and
the warranty period is not obviously longer than the generally expected lifespan of the product.

The Dutch Central Bank indicates that it deems that a warranty qualifies as an insurance policy if, according to generally accepted views, it qualifies as such.

In addition, the Dutch Central Bank has launched a consultation on a draft Q&A setting out when a subscription qualifies as an insurance policy. The qualifications are almost identical to those for warranties in a purchase agreement. Feedback must be given by 15 February 2019.

European Central Bank publishes a consolidated guide for bank licence applications

In March 2018, the ECB published its guide to assessments of bank licence applications, setting out the application process and licensing requirements for banks. In January 2019, the ECB published Part 2 of the guide about its supervisory expectations on capital requirements and the programme of operations. A consolidated guide containing both parts was also published. The consolidated guide, which is not legally binding in nature, is aimed at enhancing transparency of the procedure and criteria applied by the ECB when it assesses licence applications.

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