European Commission statement on regulating virtual currencies and ICOs
On 13 November 2018, the EC published a statement by Valdis Dombovskis, its vice-president, at a European Parliament debate on regulating virtual currencies and initial coin offerings (ICOs). Points of interest include:
- The Commission considers that cryptoassets and ICOs present both opportunities and risks. While it is still early days and the technology has a long way to go, it believes that cryptoassets are here to stay.
- The Commission considers that cryptoassets cannot be separated from the underlying blockchain technology, as blockchains are chains of cryptoasset transactions. Pursuing the opportunities of blockchain implies that it takes an interest in both the advantages and risks of cryptoassets.
- The Commission supports agrees with the assessment of the Financial Stability Board’s (FSB) that cryptoassets do not currently pose a financial stability risk however, this may change if the market grows quickly.
- The market remains volatile and presents significant investor protection and market integrity risks. Warnings to investors may not be sufficient. Rules of the road are needed, both to protect investors and increase market integrity and to provide legal clarity and certainty for a legitimate cryptoasset eco-system.
- The Commission has already expanded the scope of EU anti-money laundering legislation to cryptoasset exchanges and wallet providers through the Fifth Money Laundering Directive ((EU) 2018/843)
- The main question for financial regulators is whether cryptoassets are financial instruments and are therefore covered by financial regulation. The next question is whether that regulation is suitable and addresses the risks, while enabling the opportunities. The Commission is assessing this with the European Supervisory Authorities (ESAs), which are expected to present their conclusions by the end of 2018. Following this, the Commission will assess the possible way forward.
ESMA updates MiFID II Q&As on transparency and market structures
On 14 November 2018, ESMA published:
- An updated version of its Q&As on transparency topics (ESMA70-872942901-35) under the MiFID II Directive (2014/65/EU) and the Markets in Financial Instruments Regulation (600/2014) (MiFIR). ESMA has added two new points to Q&A 7 and modified Q&A 10 in section 2 (General Q&As on transparency topics), and added a new Q&A 11 to section 7 (The systematic internaliser regime).
- An updated version of its Q&As on market structures topics (ESMA70-872942901-38) under the MiFID II Directive and MiFIR. ESMA has added a new Q&A 29 to section 3 (Direct electronic access (DEA) and algorithmic trading).
FSB fourth progress report on reforming major interest rate benchmarks
On 14 November 2018, the Financial Stability Board (FSB) published a fourth interim progress report on reforms to existing major interest rate benchmarks and the development and introduction of alternative near risk-free interest rate benchmarks (RFRs). The FSB’s findings since October 2017 include the following:
- Strengthening of interbank offered rates (IBORs).
- Identification of and transition to alternative reference rates.
- Enhancing contractual robustness. The FSB member authorities, national working groups, ISDA and other trade associations continue to work on the task of strengthening contractual robustness to the risk of discontinuation of major interest-rate benchmarks.
The FSB will publish a further progress report in late 2019.
FCA report analysing first year of firms’ REP-CRIM data
On 13 November 2018, the FCA published a report analysing firms’ data following its first financial crime survey. The report provides an analysis of the FCA’s first year of data. The results provide a collective view of what the FCA describes as the “significant amount of activity” being undertaken in the UK to combat financial crime.
- The report and analysis cover four key areas:
- The number of customers deemed to pose a higher risk of financial crime.
- An overview of the work that industry is doing to tackle financial crime.
- Industry views on fraud risks.
- Firms’ views of country risks.
The FCA considers that the data obtained from the REP-CRIM represents an important step, both for the FCA and firms. This is because, historically, it has been difficult for agencies to acquire robust figures on financial crime. The annual submission of the REP-CRIM by firms means the FCA will be able to chart the evolution of different threats over time.
ESMA updated supervisory briefing on MiFID II suitability rules
On 13 November 2018, ESMA published an updated version of its supervisory briefing on the suitability requirements in the MiFID II Directive. The briefing takes into account ESMA’s guidelines on certain aspects of the MiFID II suitability requirements and covers topics including how to determine situations where the suitability assessment is required, providing information to clients about the purpose of the suitability assessment, obtaining information from clients, suitability reports, qualifications of firm staff and record-keeping. The briefing is aimed at competent authorities and is also meant to give market participants indications of compliant implementation of the MiFID II suitability provisions. It summarises the key elements of the rules and explains the associated objectives and outcomes. It also includes indicative questions that supervisors could ask themselves, or a firm, when assessing firms’ approaches to the application of the MiFID II rules. The 2018 guidelines will apply from 7 March 2019.
Government issues guidance for controllers on information sharing agreements under the Digital Economy Act 2017
The government has published guidance for controllers relating to the register of information sharing agreements under Part 5 of the Digital Economy Act 2017. The guidance includes details on responsibility for submitting the information, when to submit, what agreements are in scope and what information to include.
ECB Vice-President identifies regulatory actions to mitigate financial stability risks in investment fund sector
On 12 November 2018, the ECB published a speech given by Luis de Guindos, its Vice-President, on the rising role of the investment fund sector for financial stability in the euro area.
Mr de Guindos states that, over the past decade, the investment fund sector has almost tripled in terms of total assets and has taken on more risk. It therefore deserves greater attention from a financial stability perspective. He stresses that regulation needs to adapt to the evolving financial system and sets out some regulatory actions that could contribute to mitigating risks arising from interconnectedness, liquidity and leverage in the sector:
Work is needed on the different layers of interconnectedness between exchange-traded funds (ETFs) and their counterparties.
- The enhanced micro-prudential framework for the European fund sector is a key element in boosting the resilience of the financial system overall.
- Macro-prudential authorities need to be equipped with the necessary tools to address systemic risks both ex ante and ex post.
- European supervision of investment funds must be strengthened while ensuring there is a globally consistent approach to monitoring.
Ron is a partner at Cummings Fisher and heads the derivatives and documentation practice. Drawing on his work in private practice with buy-side clients and in house at investment banks, he has broad experience in providing legal advice in relation to derivatives and structured finance transactions, prime brokerage and asset custody arrangements.
If you would like to discuss any of the points we raise, please contact me or one of our other lawyers.
Phone: +44 (0)207 861 4170