ESMA Q&As: implementation of the Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR)
On 14 June 2019, ESMA published an updated version of its Q&As on the implementation of EMIR (the Regulation on OTC derivatives, central counterparties (CCPs) and trade repositories). The aim of the Q&As is to promote common supervisory approaches and practices in the application of EMIR. It provides responses to questions posed by the general public, market participants and competent authorities in relation to the practical application of EMIR. The updated Q&As provide further clarity on data reporting under the new framework introduced by Regulation 2019/834 amending EMIR (EMIR Refit Regulation) with regards to the:
- calculation framework towards the clearing thresholds .
- notifications to be made by market participants to their competent authorities to apply an intragroup exemption from reporting .
The aim of the Q&As is to promote common supervisory approaches and practices in the application of EMIR.
Law Commission report on the SARs regime
On 18 June 2019, the Law Commission published its final report entitled Anti-money laundering: the SARs regime. The report looked at the current flaws in the making of suspicious activity reports (SARs) of which there are many and which are often of low quality. The review conducted by the Law Commission focused on the consent regime provided for in sections 327 to 329, 335, 336 and 338 of the Proceeds of Crime Act 2002 (POCA 2002) and sections 21 to 21ZC of the Terrorism Act 2000 (TA 2000), as well as the disclosure offences provided for in sections 330 to 333A of POCA 2002 and sections 19, 21A and 21D of TA 2000.
The final report makes 19 recommendations to the Government including the following:
- establishment of an advisory board with a remit to oversee the drafting of guidance, measurement of the effectiveness of the regime and to advise the Secretary of State on ways to improve it;
- retention of the consent regime, subject to amendments to improve effectiveness;
- an exemption from the disclosure offences to allow ringfencing of suspected criminal property by a credit or financial institution; and
a standardised form for the submission of SARs.
It remains to be seen which recommendations the Government will accept.
FCA and China Securities Regulatory Commission (CSRC) announce their support for the Shanghai-London Stock Connect scheme
On 17 June 2019, the FCA and the CSRC made a joint announcement of their approval of the Shanghai and London Stock Exchanges’ proposed new Shanghai-London Stock Connect. They have also published a memorandum of understanding (MoU) aimed at providing the basis for the regulatory co-operation that will support the success of the scheme. The Stock Connect scheme is a reciprocal arrangement between the Shanghai Stock Exchange (SSE) and London Stock Exchange. It will encourage cross-border investment between the countries and provide investors and companies in the UK and China with mutual access to each other’s capital markets. A joint initiative of the two exchanges, the scheme’s development has been supported by Economic and Financial Dialogues between the UK and Chinese governments. Through the joint announcement and through the signing of the MOU, the two countries’ securities regulators have now lent their support too.
The two regulators’ joint announcement sets out high-level details of the scheme. The Shanghai-London Stock Connect will enable Shanghai-listed Chinese companies to apply to be admitted to trading on a newly formed Shanghai Segment of London Stock Exchange’s Main Market, while companies with a premium listing in the UK will be able to apply for admission to the Main Board of the SSE.
In both cases, the securities traded will be in the form of depository receipts. This investment structure is a tried and tested way of enabling overseas companies to access institutional investors in global financial centres like London. However, the structure is new to China and offers Chinese investors a unique opportunity to gain exposure to international securities via an exchange located in their own country and currency. From a UK perspective, the scheme offers institutional investors a broader opportunity to gain exposure to the Chinese A-share market which has been historically restricted to those western institutions with ‘Qualified Foreign Institutional Investor’ status.
Signed in Madrid at the International Organization of Securities Commissions last year, the MOU sets out a framework for co-operation between the two regulators to support the success of the scheme. Among other things it aims to protect investors and combat cross-border market abuse and other serious misconduct.
LF Woodford Equity Income Fund
On 18 June 2019, Andrew Bailey, Chief Executive of the FCA today wrote to Rt Hon. Nicky Morgan MP, Chair of the Treasury Committee. This was in response to Nicky Morgan’s letter on the 10 June 2019 which asked for information from the FCA regarding issues relating to the suspension of the LF Woodford Equity Income Fund (Woodford).
Woodford is a closed-ended funds and the FCA authorised its investment manager, Link Fund Soluctions Limited (Link). Mr Bailey explained that subject to certain restrictions, FAC rules allow fund managers to delegate functions such as investment management to appropriate third parties. Link had appointed Woodford Investment Management (‘WIM’) to manage the assets within the fund in line with the investment mandate it has given to WIM. As an FCA authorised investment manager, WIM undertook the regulated activity of ‘managing investments’, by for example, making investment decisions and buying and selling securities in a fund. Link had the regulatory responsibilities in relation to operating Woodford and therefore it is Link which is accountable to the FCA.
The letter explains that Link deemed the suspension necessary due to the risk that, in the event Woodford did not suspend, assets would have to be sold at prices below current values and that the resulting composition of Woodford’s assets becoming more illiquid. Neither outcome was deemed to be in the best interests of remaining investors. In the letter the FCA explained the following:
- the rules make it clear that the liquidity of a transferable security, listed or unlisted, should not compromise the ability of the authorised fund manager (AFM) to comply with its obligation to redeem units at the request of any qualifying unitholder (COLL 5.2.7AR(b));
- the events surrounding Woodford have underlined that just because securities are listed on an eligible market does not automatically mean that those specific securities are liquid. The FCA states in its letter that a case can be made for reviewing the UCITS eligibility rules to take greater account of the depth of the market for the individual securities listed;
- that it will take action, which may include opening an investigation, where it suspects that firms, including fund managers, have failed to uphold the best interests of investors at all times; and
- that there is no direct read-across between the Woodford suspension and the FCA’s proposed new rules for open-ended funds investing in illiquid.
The FCA will appear before the House of Commons Treasury Committee on 25 June 2019.
Final report of IOSCO cyber taskforce
On 18 June 2019, the International Organization of Securities Commissions (IOSCO) published the final report (FR09/2019) of its cyber taskforce.
The report seeks to promote sound cyber practices across all IOSCO members. It provides an overview of the following three internationally-recognised cyber standards and frameworks used by IOSCO members:
- Committee on Payments and Market Infrastructures (CPMI) and IOSCO guidance on cyber resilience for financial market infrastructures (FMIs);
- National Institute of Standards and Technology framework for improving critical infrastructure cybersecurity; and
International Organization for Standardization 27000 series standards.
- The report stated that while IOSCO members have made good progress in establishing appropriate cyber regimes, there is still work to be done in key areas. The report identifies potential gaps in the application of the core standards.
Among other things, the taskforce found that many IOSCO members consider cyber to be at least one of the most important risks faced by firms in their jurisdictions. Also, over a third of members who responded to the taskforce’s cyber survey plan to issue, within the next year, new regulations, guidance or supervisory practices on cybersecurity for all or part of the financial services sector. The report is designed to be used as a resource for regulators and firms to raise awareness of existing international cyber standards and frameworks, and to encourage adoption of good practices to protect against cyber risk. It sets out a series of questions that regulators and firms may use to promote awareness of cyber good practices, or to guide them as they review their own cyber practices.
By highlighting the application of the core standards by some IOSCO members, the cyber taskforce hopes more members will review their own cyber standards against the core standards and, where relevant, use the core standards as a model to further improve their cyber regimes. The cyber taskforce plans to consider using sector-wide organisational surveys as part of the next phase of its work to gain a better understanding of where the gaps lie.
Claire practises financial services law with a focus on regulatory issues, cryptocurrencies and tokens, trading and brokerage documentation and advising both existing and start-up funds and fund managers.
If you would like to discuss any of the points we raise, please contact me or one of our other lawyers.
Phone: 0207 585 1406