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Welcome to Euro Shorts, a short briefing on some of the week’s developments in the financial services industry in Europe.

If you would like to discuss any of the points we raise below, please contact me or one of our other lawyers.


Claire Cummings

020 7585 1406



On Thursday 8 March 2018, Cummings Law will be hosting a roundtable to discuss digital assets, including cryptocurrencies and initial coin offerings (“ICOs”). The discussion will cover basics of ICOs and cryptocurrencies and FCA regulatory issues such as whether tokens, cryptocurrencies and ICCs are regulated by the FCA, how are tokens subscribed for in a fund offering and how they can be converted into a fiat currency as well as the potential benefits and drawbacks of using these new technologies. If you would like more details on this event, please e-mail Claire Cummings at or Sandra Bishop at


Intragroup exemptions from margin – EU/CFTC equivalence

In October 2017, the EC adopted an implementing act determining the United States to be equivalent to the EMIR in terms of the legal, supervisory and enforcement arrangements for non-centrally cleared OTC derivatives transactions. Of particular note is the decision that CFTC rules on risk monitoring and mitigation for OTC derivative contracts not cleared by a central counterparty are equivalent to EMIR. The EC have now confirmed that this equivalence determination does include intragroup exemptions under EMIR. This means that the temporary intragroup exemptions granted by the FCA for trades between UK and US firms technically expire on 2 March 2018, that is four months after the coming into effect of the EC’s equivalence decision on the US. However, the positive equivalence determination also allows firms to apply for exemptions with no expiry date. The FCA has decided to adopt a streamlined process for firms that want to apply for these new exemptions. UK firms that benefit from the derogation with US group entities covered by the equivalence decision must notify the FCA by email of the entity pairs to which the equivalence decision applies and confirm whether there have been any other changes to the conditions under which the original intragroup derogation was granted.


Regulators issue warning on digital assets

The EBA, EIOPA and ESMA (collectively the ESAs) have published a joint warning to consumers on to the risks of buying, or holding, virtual currencies, which risks they deem to be high. They explain that virtual currencies are not issued or guaranteed by a central bank or public authority and do not have the legal status of currency or money and that most virtual currencies leverage on distributed ledger technology (commonly referred to as blockchain). In particular, the ESAs warn that: (i) most virtual currencies are subject to extreme price volatility and have shown clear signs of a pricing bubble; (ii) while the proposed Fifth Money Laundering Directive will apply to wallet providers and virtual currencies exchange platforms, virtual currencies remain unregulated under EU law; (iii) price formation is often not transparent and consumers may not receive a fair and accurate price; and (iv) the information made available (if provided at all) is in most cases incomplete, difficult to understand, does not properly disclose the risks of virtual currencies and may therefore be misleading.


FCA and ICO update on GDPR

The FCA and the ICO have published a joint update on the GDPR. The update explains that firms have asked about their ability to comply with both the GDPR and the FCA's rules. The update and sets out their view that the GDPR does not impose requirements that are incompatible with the rules in the FCA Handbook, with the FCA noting that when it makes rules, it takes into account how its requirements will affect the privacy interests of individuals such as firms' customers and employees, and notes that a number of requirements are common to both. As an example, they cite the requirement to treat customers fairly which is central to both data protection law and the financial services regulatory framework. The update also makes it clear that compliance with the GDPR is a board level responsibility and firms must be able to produce evidence to demonstrate the steps that they have taken to comply. The update explains that while the ICO will regulate the GDPR, the FCA will consider compliance with the GDPR requirements under its rules. The FCA and ICO recognise that there are still on-going discussions to ensure specific details of the GDPR can be implemented consistently within the wider regulatory landscape and state that they will continue to collaborate in the coming months to address firms' concerns and support their preparations for the introduction of the GDPR in May 2018.


EC survey on the functioning of the AIFMD

The EC has published an online survey about the functioning of the AIFMD. The EC contracted KPMG to carry out research on how the AIFMD has worked in practice and to what extent its objectives have been met. This survey forms part of KPMG's research. The aims is is to gather stakeholders views on AIFMD requirements and the experience of applying them, as well as and the impact of the AIFMD on the market. The survey seeks the views of stakeholders on: (i) the impact of AIFMD on the information provided to investors before they invest; (ii) whether retail investors are affected by AIFMD; and (iii) whether other legislation has assisted or hindered the achievement of the AIFMD's objectives. The survey does not specify when the survey will close to submissions however, the information from the survey will help to inform a final report.


Leverage and liquidity in investment funds

The ESRB has published a recommendation on liquidity and leverage risks in investment funds. In this publication they raise the concern that increased financial intermediation by investment funds may result in the amplification of any future financial crisis following mismatches between the liquidity of funds' assets and their redemption profiles. They note that any resultant fire sales could adversely affect other financial market participants. The document includes the following specific recommendations: (i) the EC should develop legislation that sets out a legal framework governing liquidity management tools in the design of investment funds; (ii) the EC should develop legislation that includes measures to limit the extent to which the use of liquidity transformation in open-ended AIFs can contribute to the build-up of systemic risks or the risk of disorderly markets; (iii) ESMA should develop guidance for managers of AIFs and UCITS for the stress testing of liquidity risk for individual funds; (iv) the EC should develop legislation that requires reporting of UCITS liquidity risk and leverage data to national competent authorities; and (v) ESMA should provide guidance on Article 25 of the AIFMD, including guidance on the framework to assess the extent to which use of leverage within the AIF sector contributes to systemic risk, and on macroprudential leverage limits.


FCA reports on algorithmic trading

The FCA has published a report on algorithmic trading compliance in wholesale markets. The findings are relevant to all firms that develop or use algorithmic trading strategies. In he report, the FCA notes that, while automated technology brings benefits to investors, it can also amplify certain risks and without appropriate systems and controls, the increased speed and complexity of financial markets can turn otherwise manageable errors into extreme events with potentially widespread implications. To understand how key risks are managed by regulated firms, the FCA conducted a number of cross-firm reviews in which they reviewed the entire development, testing and deployment lifecycle and conducted interviews with front line staff and staff in the relevant control functions such as risk and compliance, as well as senior management. The report includes examples of good and poor practice observed during the FCA's reviews and highlights key requirements in MiFID II relating to algorithmic trading activity. It identifies five key areas of focus: (i) defining algorithmic trading; (ii) development and testing; (iii) risk controls; (iv) governance and oversight; and (v) market conduct. The FCA states that it will continue to assess whether firms have taken sufficient steps to reduce risks arising from algorithmic trading. On the same day as the FCA published the report, the PRA published a consultation paper on a supervisory statement that sets out expectations for the prudential aspects of risk management and governance of algorithmic trading at PRA regulated firms.


A global sandbox?

The FCA has published a new webpage on a global sandbox. It explains that the FCA's sandbox only allows firms to conduct tests in the UK and acknowledges the global nature of financial markets and FinTech. They have therefore asked for views on the merits of creating a global sandbox which would both allow firms to conduct tests in different jurisdictions at the same time and allow regulators to work together and identify and solve common cross-border regulatory problems. The FCA sets out a structure for the activities that a global sandbox could focus on, and specifically mentions AML compliance, KYC on-boarding, and payment services as regulatory problems that cross jurisdictional boundaries. The regulatory sandbox was set up as part of the FCA's Project Innovate and provides a space where firms can pilot innovative products and services in a live environment.


ESMA Publishes 2018 Risk Assessment Work Programme

ESMA published its Risk Assessment Work Programme setting out its priorities in assessing risks for securities markets for 2018 and provides an overview of the analytical, research, data and statistical activities by ESMA. As market data collected under the AIFMD, MiFID and EMIR mandates and others are becoming available, ESMA is, in close cooperation with the National Competent Authorities, completing the necessary technical infrastructure for their processing, programming routines for their management, and making them available for the relevant analytical evaluation. ESMA is also planning to complement its ongoing market monitoring by launching an annual report series on EU derivatives markets, based on EMIR data, as well as an annual report series on EU alternative investment funds, drawing on AIFMD data.


We have taken great care to ensure the accuracy of this version of Euro Shorts. However, Euro Shorts is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from, action taken or refrained from on the basis of this publication. If you would like to be removed from the mailing list of this publication please click unsubscribe below. Nothing within this communication may be copied, re-printed or similar without prior written consent from Cummings.

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Cummings Law
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25 05 2019

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