The 2020 European financial services outlook

Q1 2020

MiFID II / MiFIR review

The long-awaited review of the MiFID II / MiFIR package is underway. The European Commission is under a legislative mandate to review the application of certain provisions of the MiFID II / MiFIR package, and, if deemed appropriate, to propose legislative amendments to the texts. This review started in late 2019, and has included ESMA’s call for evidence and consultation on the functioning of commodity derivative provisions, as well as the publication of its first review report on the development in prices for pre- and post-trade data and on the consolidated tape for equity instruments. More issues are yet to be tackled, including pre- and post-trade transparency provisions, for which ESMA’s consultation is due to start in Q1 2020. This is likely to take place in parallel with the Commission’s consultation on market structure issues, systematic internalisers and reporting requirements.

Finalisation of CCP recovery and resolution reform

Following on from agreement achieved between Member States late in 2019 on their position on the proposed regulation setting out the framework for recovery and resolution for central counterparties (CCPs), trilogue negotiations between the Council, the European Parliament and the European Commission are set to start on 28 January 2020. Given the divergent positions between the legislators and the Commission on a number of issues, the trilogue negotiations are expected to continue throughout the course of Q2 2020.

Brexit and negotiations on future EU – UK relationship

Assuming there are no highly unexpected last minute developments, 31 January 2020 is likely to mark the historic date when the UK leaves the EU. Given that the UK Government has so far ruled out the possibility of extending the transitional period beyond 31 December 2020, the remainder of the year will likely involve intense and complex negotiations between the EU and UK on their future relationship. Earlier in January 2020, the European Commission’s ad-hoc working party on Article 50 shed some light on its internal preparatory discussions regarding its approach to the upcoming negotiations. While the Commission is expected to present its final recommendations after the UK withdrawal, a “no surprises” attitude, including a conservative approach to the future equivalence assessment of the UK legislative and regulatory framework, is expected to dominate the discussion.

Framework for markets in crypto-assets

The public consultation on the potential future framework for markets in crypto-assets will close on 19 March 2020. Launched in December 2019, this is the first step towards the development of European legislation addressing the classification of crypto-assets and their regulatory status, either in the form of a bespoke legal framework or amendments to existing financial services legislation and regulation.

Digital operational resilience for financial services markets

Introduction of measures to enhance digital operational resilience for financial services markets is one of the key issues in the European Commission’s new financial services agenda and part of the upcoming Digital Finance Strategy for the EU. A public consultation is currently in progress and is due to close on 19 March 2020. The Commission recognises the significant usage of information and communication technology (ICT) and data by the financial services sector, and acknowledges that the sector’s operational resilience is therefore highly dependent on ICT. This includes the use of cloud technologies by the financial services sector. The intention behind this initiative is to replace the current horizontal approach to cybersecurity as reflected in European legislation, with a more bespoke framework applicable to financial services.

MiFIR and tick size regime for systematic internalisers

Following amendments recently introduced to MiFIR, the tick sizes regime will become applicable to systematic internalisers (SIs) as of 26 March 2020. As such, SIs’ “quotes, price improvements on those quotes and execution prices” will have to comply with tick sizes set in accordance with the relevant provisions of MiFID II.

Q2 2020

Application of SFTR reporting obligations (Part 1)

Following formal adoption of the Securities Financing Transactions Regulation (SFTR) in November 2015, the reporting requirements it established will gradually become applicable over the course of the year. Initially, the obligation to report securities financing transactions (SFTs) will capture, as of 11 April 2020, credit institutions, investment firms and relevant third-country firms. Persons in scope of the SFTR reporting obligations can find useful guidance provided by ESMA in its January 2019 Guidelines on SFTR reporting obligations.

Finalisation of Basel III reform

Following the completion in early January of its public consultation on the implementation in Union law of the provisions of the final Basel III standards, the European Commission is expected to publish the relevant legislative proposals in June. These are expected to take the form of amendments to the Capital Requirements Regulation and Directive. The proposals are likely to cover, with little prospective divergence, all provisions of the final Basel III standards, including amendments to operational and credit risk frameworks, an overhaul of the credit valuation adjustment (CVA) regime, as well as the introduction of the controversial new output floor provisions and changes to the specialised lending regime.

European Benchmarks Regulation reform

Building on the feedback received in its late 2019 public consultation, the European Commission is expected to propose targeted amendments to the European Benchmarks Regulation (BMR). These are likely to address the issues regarding the scope of the legislation and a potential easing of requirements for non-significant benchmarks. The upcoming amendments are also likely to address provisions governing authorisation and registration procedures, critical benchmarks and the regime for third-country benchmark administrators seeking to provide their products in the EU.

Market Abuse Regulation reform

In parallel to the BMR reform, the European Commission is expected to propose targeted amendments to the Market Abuse Regulation (MAR). As suggested in ESMA’s consultation on MAR review in late 2019, these may include a potential extension of the scope of the legislation to spot foreign exchange (FX) contracts, as well as amendments to the definition of inside information, a review of the appropriateness of the trading prohibition and insider lists for persons discharging managerial responsibilities, as well as setting out rules applicable to pre-hedging.

ESG disclosures by benchmark administrators

Following the adoption in November 2019 of targeted amendments to the BMR (so called “Low Carbon Benchmarks Regulation” or LCBR), by 30 April 2020 benchmark administrators must include in the benchmark statements how the key elements of the methodology reflect environmental, social and governance (ESG) factors for each benchmark or family of benchmarks that they provide. This obligation does not apply to administrators of FX and interest rate benchmarks.

Amendments to EMIR reporting requirements

Following the adoption in May 2019 of targeted amendments to EMIR (known as “EMIR Refit”), the changes to reporting obligations will become effective on 18 June 2020. These were specifically designed to ease the compliance burden applicable to non-financial counterparties below the clearing threshold. As such, the sole responsibility, and legal liability, for reporting the details of such transactions will fall upon financial counterparties.

Q3 2020

MiFID II and MiFIR review continues

With the MiFID II / MiFIR review being an ongoing process over the course of 2020, towards the end of the year the European Commission is expected to launch another public consultation. This will focus on the conduct of business and investor protection provisions of the package.

Application of SFTR reporting obligation (Part 2)

Second in line for ensuring compliance with the SFTR reporting obligations are the operators of CCPs and central securities depositaries (CSDs), for whom the requirements will become applicable on 11 July 2020.

Development of technical details for investment firms prudential rules

The European Banking Authority (EBA) will be busy developing the mandates it received under the Investment Firms Regulation and Directive (IFR and IFD), and concerning technical details for the application of prudential requirements for investment firms. This will include technical standards on the methods for measuring K-factors and adjusting their coefficients, the calculation of the amount of the total margin for the calculation of K-CMG and the calculation of the fixed overheads requirement.

Development of technical details for EMIR 2.2

Following the formal entry into force in November 2019 of a set of amendments to EMIR focused on authorisation requirements for CCPs and the requirements for the recognition of third-country CCPs (known as EMIR 2.2, and based on technical advice received from ESMA, the European Commission will have to finalise secondary legislation setting out the technical details of EMIR 2.2. This will include rules on the criteria to be considered regarding whether a third-country CCP is systematically important or likely to become systematically important (Tier 1 / Tier 2), provisions on comparable compliance for third-country CCPs and supervisory fees paid by such CCPs to ESMA.

Application of the CSDR settlement discipline provisions

Another milestone compliance date in 2020 is the 14 September application of the settlement discipline for CSDs. These provisions will harmonise obligations for CSDs, investment firms and trading venues to address settlement fails, and as such complete the set of European post-trade regulation reform.

Fifth phase of initial margin rules for non-cleared OTC contracts

Obligations to exchange initial margin (IM) for non-cleared over-the-counter (OTC) derivative transactions have been gradually phased in since 1 September 2016. 1 September 2020 will mark the fifth phase of the implementation of the IM exchange requirement for counterparties whose “aggregate average notional amount” (AANA) of non-cleared OTC derivatives exceeds EUR 50 billion. The sixth and final phase of IM requirements implementation, for counterparties with AANA exceeding EUR 8 billion, will take place on 1 September 2021.

New Sustainable Finance Strategy and integration of ESG factors

Following on from its flagship initiative, the European Green Deal, as announced in December 2019, the European Commission is expected to publish its new sustainable finance strategy. As a follow-up to its 2018 Sustainable Finance Action Plan, the new sustainable finance strategy will propose, among other things, the  development of green bonds standards and ecolabels for retail investment products, and measures to further integrate climate and environmental risks into the prudential framework of the European financial system. The upcoming strategy, and in particular any legislative initiatives it includes, will be based on the sustainable finance taxonomy legislation, political agreement on which was achieved in December 2019.

Q4 2020

Application of SFTR reporting obligation (Part 3)

Finally, on 11 October, the obligation to report transactions in SFTs will extend to UCITS funds, alternative investment funds (AIFs), AIF managers and UCITS management companies.

Systemic investment firms authorisation obligation

In one of the first steps of IFR and IFD reform implementation, investment firms that meet the criteria of being “systemic investment firms” and that carried out activities of MiFID-authorised investment firms on 24 December 2019, must apply for authorisation as credit institutions by 27 December 2020.

Potential AIFMD reform

With a broad understanding between the European Commission and the Member States’ experts that the Alternative Investment Funds Managers Directive (AIFMD) has delivered largely positive results since its application in July 2013, there appears to be no urgency to review the existing provisions. That said, the Commission is under an obligation to conduct such review, and it is expected to do so with the launch of a public consultation later during the course of the year.

Brexit and end of transition period

In accordance with the provisions of the Withdrawal Agreement between the UK and the EU, the transition period will end on 31 December 2020.