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The Investment Firms Regulation and Directive – 2nd Briefing

On 3 February 2021, the Authority issued a second briefing on the implementation of the Investment Firms Directive (“IFD”) and the Investment Firms Regulation (“IFR”) (collectively the “IFR Package”) which will replace the current EU legislative package for investment firms composed of the Capital Requirements Regulation and the Capital Requirements Directive IV.

This briefing focuses on the application of K-factors. These K-factors are the quantitative indicators introduced in the IFR package which are utilised to accurately reflect the risks the investment firms face.

The K-factors are relevant to ‘Class 2’ Firms for calculating the capital requirements and to ‘Class 3’ Firms for categorisation purposes. There are three groups of K-Factors; Risk-to-Client, Risk-to-Market, and Risk-to-Firm (itself).

CSP Act Reform: Ensuring Fit and Proper Standards

On 5 February 2021, the Authority issued a press release addressed to CSPs, highlighting that the CSP Act has undergone amendments with the objectives of “ensuring fit and proper standards, basic good business standards and applicable legal and AML/CFT requirements are met on an ongoing basis, while applying a risk-based and proportionate regulatory approach”.

The changes affected are the following:

  • CSPs providing services to third parties by way of business, including warranted professionals, will be required to apply for authorisation from the MFSA;
  • the introduction of three classes of CSPs; and
  • the change from registration to authorisation for all CSPs.

Furthermore, the MFSA issued a ‘Consultation Document’ on the proposed CSP Rulebook and will be issuing a statement on the feedback received. The Authority will communicate any information and developments in this respect and a legal notice will be published giving notice of the coming into force of the amending Act.

The implementation of the Sustainable Finance Disclosure Regulation (“SFDR”)

On 9 February 2021, the Authority issued a circular on the implementation of the SFDR outlining the process to be implemented for the submission of offering documents of locally based Collective Investment Schemes (“CISs”) when such documents are updated in line with the SFDR requirements. The SFDR requires applicable entities to make pre-contractual and ongoing disclosures to investors regarding the integration of sustainability risks and impacts of adverse sustainability as well as the promotion of Environmental, Social and Governance (“ESG”) characteristics and sustainable investments.

The MFSA adopted a ‘self-certify’ approach, where applicable entities were required to update the offering documents of locally based CISs to include the pre-contractual disclosures emanating from the SFDR. The CISs were required to submit the following documentation to the MFSA:

  • The updated Offering Documentation of the relevant scheme and its sub-funds (both in tracked changes and final dated);
  • A Board attestation certifying that the amendments to the Offering Documentation are in line with the SFDR requirements and no other amendments have been affected to the Offering Documentation;
  • A Board Resolution confirming that they have seen and approved the proposed changes to the Offering Documentation
  •  A confirmation by the Compliance Officer of the Scheme that the proposed changes are in line with the requirements emanating from SFDR;
  • In the case of Alternative Investment Funds (“AIFs”), the Alternative Investment Fund Manager’s approval of the content of the Offering Memorandum and/ or Offering Supplements/s (as applicable) in accordance with R5.05 of the Investment Services Rules for Alternative Investment Funds; and
  • In the case of Notified AIFs, the required documentation as per R.11.38 and R.11.39 of Part B III of the Investment Services Rules for Investment Services Providers.

CISs were required to submit the above documentation to the MFSA by not later than 10 March 2021.

Circular on Regulation No648/2012 – The European Markets Infrastructure Regulation (“EMIR”)

Further to the circular issued on 14 October 2020, the MFSA issued another publication on 17 February 2021 highlighting the main requirements under EMIR. These are:

  • The clearing obligation for certain OTC derivatives

‘EMIR Refit’ provides for a new regime to determine when counterparties are subject to the clearing obligation.

  • The reporting obligation of derivative transactions to Trade Repositories

Details of the transactions should be reported by Counterparties by not later than the working day following the conclusion, modification or termination of the contract. ‘EMIR Refit’ has introduced new requirements when determining which counterparty will be responsible for reporting the derivative transactions.

  • The Risk Mitigation Techniques for non-cleared OTC derivatives

These requirements apply to all non-centrally cleared OTC derivative transactions. Those techniques include timely confirmation, portfolio reconciliation and compression, dispute resolution procedures and the exchange of collateral.

Following EMIR coming into force since 2012 and several compliance inspections held by the Authority, the MFSA expects Counterparties to be fully compliant with EMIR requirements, especially with respect to reporting obligations where non-adherence to these requirements would result in regulatory action.

Common Supervisory Action in relation to MiFID II Product Governance Rules

On 17 February 2021, the Authority issued a circular outlining ESMA’s intention in establishing a common supervisory culture on the application of MiFID II Product Governance Rules.  In this regard, ESMA has launched a Common Supervisory Action (“CSA”) to ensure a uniform implementation across the European Union and enhance investor protection.

The Conduct Supervision Unit within the MFSA is conducting focused on-site inspections to assess the application of product governance rules adopted by Investment Firms as part of a CSA being undertaken with ESMA and other National Competent Authorities. Such inspections are focused on assessing the following requirements:

  1. How manufacturers ensure that financial products’ costs and charges are compatible with the needs, objectives and characteristics of their target market and do not undermine the financial instrument’s return expectations;
  1. How manufacturers and distributors identify and periodically review the target market and distribution strategy of financial products; and
  1. What information is exchanged between manufacturers and distributors and how frequently this is done.

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