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Financial Services & FinTech Updates

Malta Financial Services Authority (MFSA) Updates

MFSA Releases its Guidance on Technology Arrangements, ICT & Security Risk Management, and Outsourcing Arrangements

The MFSA has issued its Guidance on Technology Arrangements, ICT and Security Risk Management and Outsourcing Arrangements and a complementary feedback statement. The Guidance draws inspiration from the European Supervisory Authorities’ guidelines and values technology as a core component, innovation enabler and a major determinant for operational efficiency. The Guidance Document also considers the importance of resilience and regulatory compliance.

The Document indeed comprises suggestions relating to specific technology arrangements, such as cloud computing service models or deployment models, as well as artificial intelligence and machine learning. The guidance also dedicates an entire section to outsourcing arrangements. Moreover, one of the MFSA’s main objectives is that of fostering strong ICT and security risk management archetypes. The Document thus considers information security, ICT governance and strategy, as well as ICT operations management and the use of third-party providers.

The MFSA aims to hold thematic reviews on a sectoral basis on key aspects of the Guidelines in the coming months. 

For more information: https://www.mfsa.mt/publication/mfsa-releases-its-guidance-on-technology-arrangements-ict-and-security-risk-management-and-outsourcing-arrangements/

The Investment Firms Regulation and Directive – 1st Briefing

The MFSA has issued a reminder to stakeholders that the present EU legislative package for investment firms (‘CRR I package’) is to be replaced by the IFR Package.  The IFR package is to comprise the Investment Firms Regulation (‘IFR’) and the Investment Firms Directive (‘IFD’).

The IFR package introduces quantitative indicators, dubbed ‘K-Factors’, to precisely reflect the risks which investment firms face. There are three such categories of K-Factors: (a) risk to customers, (b) risk to market access, and (c) risk to the firm itself.

Class 2 firms will be required to calculate their capital requirement using the K-Factors. However, while Class 3 will not need to calculate K-Factors for their capital requirement, they will still need to calculate such factors for categorisation purposes.

The MFSA further reminds that Category 3 Local Firms Licence holders, which were authorised by the Authority before 26 December 2019, are to increase their own funds to €250,000 by June 2021. Moreover, such licence holders have a maximum of 5 years to increase their own funds to a minimum of €750,000. All such Local Firms are to have an initial capital of €750,000 by 2026.

The CRR I package is also being replaced by the ‘CRR II package’, aside from the IFR Package. The CRR II package is made up of the Capital Requirements Regulation II and the Capital Requirements Directive V.

The CRR II package is also to start applying to Licence Holders at the end of December 2020. However, the European Commission is still presently assessing the applicability of the CRR II Package to investment firms.

For more information: https://www.mfsa.mt/publication/the-investment-firms-regulation-and-directive-1st-briefing/

Securities Financing Transactions Reporting following the end of UK Transition Period

Entities who enter into securities financing transactions (SFTs) and are financial and non-financial counterparties as per the Securities Financing Transactions Regulation (SFTR), are to refer to the MFSA’s circular of 9 December 2020 relating to SFTs reporting following the end of the Brexit transition period on 31 December 2020.

The circular specifically addresses those counterparties which use either (a) the services of a UK Trade Repository for the purposes of reporting their SFTs under the SFTR, or (b) trade with UK counterparties.

Counterparties are to ensure the ongoing reporting of SFTs to a registered or recognised Trading Repository (‘TR’) in the EU. Those counterparties which fall within the scope of the SFTR and which make use of a UK TR for the reporting of their SFTs, are to ensure that they have finalised onboarding with an ESMA-Registered Trade Repository by not later than 31 December 2020.

UK financial counterparties shall no longer be obliged to report SFTs subject to mandatory allocation of responsibility. Such SFTs shall be reported by EU counterparties following the end of the transition period.

For more information: https://www.mfsa.mt/publication/securities-financing-transactions-reporting-following-the-end-of-uk-transition-period-on-31-december-2020/

Derivatives Reporting following the end of UK Transition Period

The MFSA has issued a circular on Derivatives Reporting following the end of the UK Transition Period on 31 December 2020. This circular aims to draw attention to those entities who enter into derivative contracts which fall within the scope of the European Markets Infrastructure Regulation (EMIR), specifically financial and non-financial counterparties.

The circular is thus particularly addressed to those counterparties which employ the services of a UK Trade Repository for the purposes of reporting their derivative transactions under EMIR, as well as those counterparties which trade with other UK counterparties. Such counterparties are therefore to ensure that they have finalised onboarding with an ESMA-Registered Trade Repository by not later than 31 December 2020.

UK financial counterparties shall no longer be obliged to report OTC derivatives subject to mandatory allocation of responsibility as per EMIR. After 31 December 2020, EU counterparties are to become the ones responsible for the reporting of those derivatives.

For more information: https://www.mfsa.mt/publication/derivatives-reporting-following-the-end-of-uk-transition-period-on-31-december-2020/

European Securities and Markets Authority (ESMA) Updates

ESMA updates reporting under the Money Market Funds Regulation

ESMA has updated its validation rules concerning the Money Market Funds Regulation (‘MMFR’). Article 37 of the MMFR requires that MMF managers submit data to National Competent Authorities in order to transmit it to ESMA.

The information will then be included in a central database to ensure effective supervision within the EU. ESMA has developed guidelines and IT guidance that accompany the information included in the technical standards, in order for managers of MMFs to have the necessary information to fill in the reporting template. This would then be sent to the competent authority of their MMF, as specified in Article 37.

A number of documents have replaced the documents published in July 2019, which include the following:

  • Final report on reporting under MMFR;
  • Reporting Instructions (updated on 4 December 2020);
  • Validations (updated on 4 December 2020); and
  • Schemas (updated on 4 December 2020).

For more information: https://www.esma.europa.eu/press-news/esma-news/esma-updates-reporting-under-money-market-funds-regulation

ESAs highlight change in status of STS Securitisation Transactions at end of UK Transition Period

The Joint Committee of the European Supervisory Authorities (‘ESAs’) are highlighting the impact when it comes to the change of status of ‘Simple, Transparent and Standardised’ (‘STS’) securitisation transactions after the end of the Transition Period on 31 December 2020.

In order for a securitisation transaction to qualify as an STS securitisation, the Securitisation Regulation states that the originator, sponsor and the securitisation special purpose vehicle (SSPE) has to be established in the EU. Such securitisation transactions labelled as “STS securitisations” will lose the STS status if one or all securitisation parties (originator, sponsor and the SSPE) are established in the UK after the Transition Period. This also applies to STS asset-backed commercial paper securitisations and STS non-asset backed commercial paper securitisations.

With the loss of the STS status, preferential capital treatment available for investments in these types of securitisations are to stop. The ESAs therefore advise that investors established in the UK should assess the impact of this change of status on their balance sheet and investment sheets prior to 31 December 2020.

For more information: https://www.esma.europa.eu/press-news/esma-news/esas-highlight-change-in-status-simple-transparent-and-standardised-sts

European Insurance and Occupational Pensions Authority (EIOPA) Updates

EIOPA Recommends Actions and Best Practices to Improve Supervisory Practices for Cross-Border Activities

The EIOPA has published the results of its peer review concerning supervisory authorities in the EU on their cross-border supervision on activities of insurance undertakings.

The peer review analyses: (a) how national supervisory authorities approach insurance cross-border activities, (b) how they exchange supervisory information and collaborate, and (c) how data is stored and practices regarding portfolio transfers. EIOPA issued a total of 60 recommended actions that address the following areas:

  • Information exchange and procedures in case of notification process for activities such as freedom of establishment and freedom to provide services
  • Information needed in case of authorisation of a new undertaking in case of previous authorisations sought in other Member States or where the applicant intends to operate exclusively (or almost exclusively) in another Member State;
  • Improvements and updates of the data storage tools aiming to keep readily available all necessary information to share with other authorities concerning cross-border activity.

These recommendations aim to close the gaps that may have had a negative impact on the effectiveness of the supervisory process, which are necessary to further improve cooperation among national supervisory authorities.

For more information: https://www.eiopa.europa.eu/content/eiopa-recommends-actions-and-best-practices-national-supervisory-authorities-improve_en

International Organization of Securities Commissions (IOSCO) Updates

IOSCO Consults on Issues and Concerns regarding Market Data

IOSCO has issued a consultation report seeking feedback on issues relating to access to market data in secondary equity markets.

Market participants require more information on quotations and trade in order to make proper competitive trading decisions and comply with the necessary regulatory requirements. The issue however is that many participants in different jurisdictions are worried about the content, costs, accessibility, fairness and consolidation of market data, which is an essential element of fair and efficient markets.

IOSCO’s consultation report on Market Data in the Secondary Equity Markets sets out these concerns, identifying and describing the concerns that relate to:

  • The market data necessary to facilitate trading in today’s markets
  • Fair, equitable and timely access to market data
  • The interchangeability of market data
  • Fees for market data
  • The need for and extent of data consolidation
  • Additional products and services related to accessing market data.

IOSCO is welcoming comments and responses to the questions in the consultation report up until 26 February 2021.

For more information: https://www.iosco.org/news/pdf/IOSCONEWS584.pdf

For more information on the updates above please contact Dr Ian Gauci and Dr Cherise Abela Grech

This article is not intended to impart legal advice and readers are asked to seek verification of statements made before acting on them.