ESMA: Russian War Adds Uncertainty and Volatility to EU Financial Markets
September 1, 2022
ESMA has published its second “Trends, Risks and Vulnerabilities (TRV) Report of 2022,” which shows that the “risk environment” in the EU financial markets has been impacted by the
Russian invasion of Ukraine, its effects and rising inflation. Volatility has risen, and market corrections are expected. ESMA has also mentioned the following:
- Market environment: ESMA explains that the Russian invasions are causing a “commodity supply shock,” in addition to the inflationary pressures of the pandemic and the tightening of global monetary policy.
- Securities markets: Spreads, bond yields and volatility have increased. Inflation has led to higher rates. The value of more “invasion-sensitive” commodities has risen.
- Asset management: “Macroeconomic conditions” worsened, increasing the interest rate risk, vulnerabilities and the prospect of higher inflation. Invasions did not have much direct effect on asset management.
- Consumers: Due to uncertainty and geopolitical risks, consumer sentiment has deteriorated.
- Sustainable finance: There was a fall in ESG bond issuance and net outflows in ESG equity funds, but the price of long-term green bonds showed resilience, and funds with an “ESG impact objective” were spared.
- Financial innovation: The value of crypto-asset markets fell sharply.
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AFG: Banque De France—Questionnaire on the Evolution of UCI Inflows
September 5, 2022
The BCE has initiated a process to review the regulations on the collection of statistics on the activity of investment funds, namely the ECB Regulation 2013/33 for money market funds and 2013/38 for non-money market funds. The aim is to improve the available statistics.
As part of the European discussion on enhancing statistics on collective investment schemes, an online questionnaire has been developed to assess the potential costs of these changes, in particular setup and operating costs.
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ESMA: ESAs Warn of Rising Risks Amid a Deteriorating Economic Outlook
September 12, 2022
EBA, EIOPA and ESMA (together the ESAs) have published their Autumn 2022 joint risk report. It shows that the Russian invasion of Ukraine has delayed the recovery associated with the pandemic slowdown. Financial market risks, inflation and policy rates have risen. Operational challenges will increase for financial institutions. Nevertheless, to date, the financial system has been resilient despite the uncertainty.
The ESAs joint committee has advised financial market participants, institutions and national competent authorities on the following points:
- Supervisors and financial institutions shall be well prepared for asset quality deterioration.
- Monitor the impacts of policy rates increases and “increases in risk premia” on financial market participants and institutions.
- Inflation risks shall be considered and monitored by supervisors and financial institutions.
- Supervisors shall monitor the risks that retail investors may face.
- Environmental and cyber risks shall be managed by supervisors and financial institution.
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France Invest: External Growth at the SME Level: Under the Radar, a Dynamic Market and Ambitious Managers
September 14, 2022
Bpifrance Le Lab and France Invest surveyed the external growth of small and medium enterprises (SMEs). The survey showed that, despite its complexity and costs, business takeovers are common for SMEs. The survey showed that 65% of SME managers believe that acquiring other companies is essential for the development of SMEs.
Furthermore, it highlights the importance of investment funds for the external growth of SMEs. Indeed, the survey showed that 40% of “acquirers accompanied by an investment fund” believe that the result of their business acquisition exceeded their objectives. The survey also showed that they complete larger deals. However, only 12% said they “had opened up their company’s capital to a fund.”
The study mentions that investment funds are involved and present alongside investments, unlike lenders. This is beneficial in terms of growth, governance and strategy.
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AMF: Alert in the Event of a 10% Fall in the Value of a Leveraged Financial Instrument: An Obligation for the Intermediary
September 21, 2022
The MiFID II Directive requires financial intermediaries to alert retail investors when there is a 10% fall in the value of the leveraged financial instrument. In addition, Delegated Regulation (EU) 2017/656 supplementing the MiFID directive mentions that “investment firms holding the account of a retail client containing positions in leveraged financial instruments or transactions” shall have a client alert system.
For investment firms providing portfolio management services, the client must receive an alert when there is a 10% decrease in “the total value of the portfolio” and for every 10% thereafter.
The AMF would like to remind that investment firms providing portfolio management services and investment firms holding the account of a retail client containing positions in leveraged financial instruments (as in our case in point) or transactions involving contingent liabilities are required to establish a client alert system.
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ESMA: ESMA Responds to the EU Commission Regarding Recent Developments in the Energy Derivatives Markets
September 22, 2022
The EU Commission has asked ESMA to provide input on actions to reduce excessive volatility and strengthen CCP margins and collateral. In its response, ESMA has conducted a comprehensive assessment of these areas and has stressed that, together with the NCAs, it has been monitoring developments in energy markets and will continue to cooperate to identify situations of market manipulations or market integrity threats.
ESMA includes additional suggestions concerning “commodity clearing thresholds, improving regulatory reporting on commodity derivatives, and regulating and supervising commodity traders.”
ESMA has indicated that it would be willing to contribute to a review of the function of commodity derivatives markets and potential ways to improve supervision.
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ESMA: New Q&As Available
September 23, 2022
ESMA has updated its Questions and Answers on the following:
- European crowdfunding service providers for business Regulation: Questions 3.8, 3.9, 3.10, 3.11, and 3.12 have been updated. In addition, Questions 5.10, 5.11, 5.12, 5.13, 5.14, and 5.15 related to crowdfunding service providers have been updated.
- Market Abuse Regulation (MAR): Two new questions have been added, Question 5.11 on “financial guidance and disclosure of inside information” and Question 5.12 on “market analysts’ expectations and the identification of inside information.”
- MiFID II and MiFIR commodity derivatives topics Q&A has been updated to reflect the changes implemented by the Recovery Package for commodity derivatives. Major changes have been introduced in the European framework for commodities derivatives, notably:
- The amendment of the exemption and deletion criteria for the ancillary activity
- The yearly notification of eligibility by the market participant
- The introduction of “new exemptions to the position limits regime”
- The exclusion of “securitized derivatives based on commodities or commodity indices from position limits and position reporting”
- Update regarding the position limit criteria for agricultural commodity derivatives
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ESMA: ESMA Publishes Final Guidelines on MiFID II Suitability Requirements
September 23, 2022
The suitability assessment requirement is key for investor protection. Investment firms providing asset management or investment advisory services shall “make suitable investment decisions on behalf of their clients” and “provide suitable personal recommendations” under MiFID II and MiFID II Delegated Regulation.
The main amendments to the MiFID II Delegated Regulation, mentioned in the Guidelines, are as follows:
- Firms will be required to help clients understand the “sustainability preferences” concept and to clarify the differences between products with and without sustainability features.
- Firms will be required to collect information on clients’ sustainability preferences.
- After identifying the “range of suitable products,” the firm will have to determine which products meet the clients’ sustainability preferences.
- Staff should be trained in sustainability topics and keep a record of clients’ sustainability preferences.
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AFG: AFG’s Response to the IRS Label Committee’s Consultation on the Guidelines for the Evolution of the IRS Label
September 26, 2022
The AFG has published its response to the consultation for developing the Socially Responsible Investment label (the Investissement Socialement responsible, “IRS”).
In its response, the AFG supports the IRS label, but proposes to group all French labels, including the IRS, under a single “Sustainable Finance” banner. There would be a “common IRS base” to ensure a minimum level of requirements for labeled products and a “label with branches,” i.e., each branch would correspond to a different type of label (e.g., the IRS for the generalist branch and Greenfin for the green branch).
The IRS label must be able to apply to all management strategies and asset classes. The AFG also mentions that the consideration of climate change should not be to the detriment of the other ESG issues.
The AFG indicates that the IRS label should consider the evolution of EU rules. Furthermore, the AFG supports a “European passport” that will facilitate cross-border marketing and the integration of the IRS label in the European region.
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ESMA: ESMA Reminds Firms of the Impact of Inflation in the Context of Investment Services to Retail Clients
September 27, 2022
Rising inflation rates are happening worldwide, including in the EU. This poses risks for retail investors, as many do not understand the connection between financial markets and inflation.
ESMA has issued a statement reminding firms to consider inflation and associated risks when implementing MiFID II provisions to provide “fair, clear and not misleading information” and respect product governance requirements. It is mentioned that firms can be key in addressing inflation when “manufacturing and distributing investment products” and “providing investment services to retail clients,” as well as raising awareness of inflation risks.
ESMA and national competent authorities are monitoring the situation and point out that market participants shall comply with all MiFID II requirements.
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ESMA: Report on the Review of the Clearing Thresholds Under EMIR
September 28, 2022
ESMA released a report on the review of the clearing under EMIR and proposes to increase the clearing threshold for commodity derivatives from the current €3 billion to €4 billion. ESMA also proposes to shift from the current approach of ETD vs. OTC, to adopt a cleared vs. uncleared approach. With this approach, only those derivatives that are not cleared in an authorized or recognized CCP count toward the clearing threshold. The report has been submitted to the European Commission.
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ESMA: ESAs Propose Disclosures for Fossil Gas and Nuclear Energy Investments
September 30, 2022
The ESAs were mandated to propose amendments to the SFDR Delegated Regulation. The purpose was to ensure that information regarding the Commission Delegated Regulation (EU) 2022/1214 (Complementary Climate Delegated Act [CDA]), which covers “nuclear and fossil gas,” is provided to investors. The CDA was adopted by the European Commission (EC) in March 2022 and will apply from January 2023.
The ESAs have created draft Regulatory Technical Standards (RTS) on the presentation and content to be included in periodic reports, websites, and pre-contractual documents on “exposure of financial products to investments in fossil gas and nuclear energy activities.” ESAs intended to include disclosures to promote transparency regarding “investments in taxonomy-aligned gas and nuclear economic activities,” enabling investors to make informed decisions.
One of the proposed changes is to amend Chapter III of the SFDR Delegated Regulation to have identical language as in Article 2 of the CDA on the disclosure of taxonomy-aligned economic activities. The other proposed change concerns the disclosure templates, which should reveal “the proportion of investments in gas and nuclear taxonomy-aligned activities.” Other minor technical changes have been proposed to rectify certain inconsistencies.
According to the ESAs, the existing disclosures found in the SFDR Delegated Regulation appear to be “sufficient for fossil gas or nuclear energy investments by financial products that are not covered by the EU Taxonomy.”
The next step will be for the EC to verify the proposed RTS.
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AMF: Findings of Studies Conducted on the Readability of Information Documents Intended for Retail Investors
September 30, 2022
Under the EU regulations, professionals must provide investors with clear and explicit information, particularly on the “characteristics of proposed investment products.” To make informed investments, investors must understand the prospectus and Key Information Documents (KIDs).
Since 2018, the AMF has been gathering the perceptions of a sample of retail investors on the readability and clarity of regulatory documentation. In summary, the findings show that there is a need to use less technical language and that there are difficulties in understanding the documentation. The AMF stresses the importance of using formats and language that are easy to understand. In some cases, regulatory documents are standardized at the EU level, but there is room for modification of content and format.
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