EBA Clarifies Use of 2016 EU-Wide Stress Test Results in SREP Process
On July 1, 2016, the EBA published additional information on how the results of the EU-wide stress test will inform the Supervisory Review and Evaluation Process ("SREP").
The focus of the update is to explain how additional capital guidance can be used to cover potential shortfalls in own funds based on the outcomes of supervisory stress tests. Although capital guidance does not constitute any form of minimum capital requirement, institutions are expected to incorporate it in their risk management frameworks. Competent authorities should also monitor its fulfillment.
The 2016 EU-wide stress test does not contain a pass fail threshold and instead is designed to be used as a crucial piece of information for SREP in 2016. The results will allow competent authorities to assess banks' abilities to meet applicable minimum and additional own funds requirements under stressed scenarios based on a common methodology and assumptions. If competent authorities identify capital shortfalls leading to potential breaches of applicable own funds requirements revealed by the stress tests, they can employ the capital guidance to address their concerns.
The results of the EU-wide stress test, which was launched by the EBA in February 2016, are expected to be published in the early part of the third quarter of 2016.
EIOPA Publishes Final Report on Identification and Calibration of Infrastructure Corporates under Solvency II
On June 30, 2016, The European Insurance and Occupational Pensions Authority ("EIOPA") published a final report providing technical advice to the European Commission on the identification and calibration of other infrastructure investment risk categories (that is, infrastructure corporates) under the Solvency II Directive. An infrastructure corporate is an entity or corporate group that carries out infrastructure activities (such as energy generation, social housing, healthcare or hospitals).
On October 14, 2015, EIOPA received a request from the European Commission for further technical advice on the issue of infrastructure corporates. In response, in November 2015, EIOPA published a call for evidence on the treatment of infrastructure corporates. The final report follows EIOPA's April 2016 consultation on the issues.
In the report, EIOPA recommends that the asset class is extended in two ways:
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To allow certain infrastructure corporates to qualify for the treatment for infrastructure projects provided that there is an equivalent level of risk.
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To create a separate differentiated treatment for equity investments in high-quality infrastructure corporates.
For those corporates that have a lower risk profile, EIOPA proposes reduction in the risk charges for equity investments.
EIOPA also recommends that insurers are required to conduct adequate due diligence, establish written procedures to monitor the performance of their exposures and perform stress testing on the cash flows and collateral values supporting their investment.
European Commission Adopts Delegated Regulation on RTS on Key Information Documents for PRIIPS
On June 30, 2016, the European Commission adopted a Delegated Regulation and related annexes supplementing the Regulation on key information documents ("KIDs") for packaged retail and insurance-based investment products (PRIIPs) (PRIIPs KID Regulation). The delegated act introduces RTS specifying the content and underlying methodology of the KIDs that will have to be provided to retail consumers when they buy certain investment products.
The RTS specify the exact contents of the KID, which must outline the product's aims, how risky it is, when investors can get their money back, how much it costs and its expected returns. The information must be set out in a standard way, regardless of the type of investment product.
The European Parliament and Council now have a two-month scrutiny period, which they can extend for a further month, during which to consider the Delegated Regulation. If neither of them objects, it will enter into force 20 days after its publication in the OJ and it will apply from December 31, 2016.
European Commission Adopts Delegated Regulation on RTS Specifying Obligation to Clear Derivatives Traded on Regulated Markets and Timing of Acceptance for Clearing under MIFIR
On June 29, 2016, the European Commission adopted a Delegated Regulation supplementing the Markets in Financial Instruments Regulation ("MiFIR") with regard to RTS specifying the obligation to clear derivatives traded on regulated markets and timing of acceptance for clearing.
Under Article 29, ESMA was required to develop draft RTS to specify the requirements to ensure that cleared derivative transactions concluded on a trading venue or on a bilateral basis are submitted and accepted for clearing as quickly as technologically practicable using automated systems in order to facilitate clearing and trading certainty. The Commission's Delegated Regulation is based on the draft RTS submitted by ESMA to the Commission in September 2015.
The RTS lay down requirements for the transfer of information, pre-trade checks and timeframes for the transfer of such information for cleared derivative transactions concluded either on a trading venue or on a bilateral basis. It also provides rules on the treatment of cleared derivative transactions which are not accepted for clearing by the CCP.
The Council of the EU and the European Parliament will consider the Delegated Regulation and if neither of them objects, it will enter into force 20 days after its publication in the OJ. It will apply from the date appearing in the second paragraph of Article 55 of MiFIR.
European Commission Adopts Delegated Regulation of RTS for Specifying Information to be Notified by Investment Firms, Market Operators and Credit Institutions under MIFID II
On June 29, 2016, the European Commission adopted a Delegated Regulation supplementing the MiFID II Directive with regard to regulatory technical standards (RTS) specifying information to be notified by investment firms, market operators and credit institutions exercising their rights under the freedom to provide services or the freedom of establishment.
ESMA was required to develop an exhaustive list of information to be notified to the relevant competent authority by such investment firms and credit institutions under Articles 34(8) and 35(11) of MiFID II. The Commission's Delegated Regulation is based on the draft RTS submitted by ESMA to the Commission in June 2015.
The purpose of the RTS are to provide certainty, clarity and predictability in the passport notification process for investment firms and to facilitate the review by competent authorities through the use of harmonized documents.
The Council of the EU and the European Parliament will consider the Delegated Regulation and if neither of them objects, it will enter into force 20 days after its publication in the Official Journal of the EU (OJ). It will apply from the date appearing in the second sub-paragraph of Article 93(1) of the MiFID II Directive.
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