Trouble viewing this email? Read it online

cummings-logo-2013 (2).jpg

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

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


Firms offering cryptocurrency derivatives must be FCA authorised

The FCA recently published a statement confirming that, while cryptocurrencies are not currently regulated provided they are not part of other regulated products or services and the FCA does not consider them to be currencies or commodities under MiFID II, cryptocurrency derivatives are capable of being financial instruments under MiFID II. Firms conducting regulated activities in cryptocurrency derivatives must therefore comply with relevant provisions in the FCA's Handbook and directly applicable EU regulations. The FCA explains that it is likely that dealing in, arranging transactions in, advising on or providing other services that amount to regulated activities in relation to derivatives that reference either cryptocurrencies or tokens issued through an initial coin offering (ICO), will require authorisation. This includes: (i) cryptocurrency futures. a derivative contract in which each party agrees to exchange cryptocurrency at a future date and at a price agreed by both parties; (ii) cryptocurrency contracts for differences (CFDs): a cash-settled derivative contract where the parties seek to secure a profit or avoid a loss by agreeing to exchange the difference in price between the value of the cryptocurrency CFD contract at its outset and at its termination; and (iii) cryptocurrency options. a contract that grants the beneficiary the right to acquire or dispose of cryptocurrencies.


Discussion of FCA Business Plan 2018/19 – Cryptocurrencies

The FCA has published its Business Plan for 2018/19 which sets out the key priorities for the coming year. The plan notes that the area of cryptocurrencies is of increasing interest for markets and regulators globally. While cryptocurrencies themselves (i.e. those designed primarily as a means of payment/exchange) are not currently within the FCA’s regulatory perimeter, some models of use or packaging cryptocurrencies bring them within the FCA’s regulatory perimeter. The FCA will work with the Bank of England and the Treasury as part of a taskforce to develop thinking and publish a discussion paper later this year outlining its policy thinking on cryptocurrencies.


FCA policy statement and final rules implementing asset management market study remedies and consultation on further remedies

The FCA recently published a policy statemen implementing some of the remedies identified in its asset management market study. The main changes to the rules relate to value for money assessments and reporting, independent directors, the senior managers and certification regime (SM&CR), box profits and share classes. The final rules for the governance remedies, which require authorized fund managers (AFMs) to assess whether their offering is in line with their need to act in the best interest of investors, and the independent directors’ requirements will come into effect on 30 September 2019. The final rules for the prescribed responsibility for AFMs will come into effect at the same time as the rules for the extension of the SM&CR in general, which the FCA expects to happen in mid to late 2019. The FCA proposes to: (i) publish guidance reminding AFMs how they should express fund objectives and investments policies to make them more useful to investors; (ii) make new rules requiring AFMs to explain why they use benchmarks, or if they do not, how investors should assess the performance of the fund; (iii) require that, if an AFM uses benchmarks, the benchmarks must be referenced consistently across the fund's documents; and (iv) amend its performance fees rules to provide that performance fees must be calculated on performance net of other fees in all cases.


ESMA request for ancillary activity test under MiFID II clarity

ESMA has published a letter from the ESMA Chair to theEuropean Commission Vice President relating to the exemption from authorisation as an investment firm for non-financial entities whose commodity derivative trading activity is ancillary to their main business. In this letter, ESMA invites the Commission to provide further guidance on how the ancillary criteria set out in Article 2(4) of MiFID II, and further specified in RTS 20, are to be interpreted and implemented, and at which level the tests be performed. The letter refers to the criteria and tests and says that there have been questions recently about how the tests, explaining that there are legislative indications that those tests should be performed at group level yet the context of some drafting amendments that were introduced to RTS 20 lead to an argument that the ancillary tests should be performed at a single entity level.


Prospectus Regulation: ESMA final report on technical advice under the Prospectus Regulation (corporate aspects)

ESMA recently published its final report on the technical advice under the new Prospectus Regulation. The final report sets out the changes to the draft technical advice that ESMA proposed in three consultations including in relation to the following areas: (i) the format of the prospectus, the base prospectus and the final terms, the content of the share registration document, the content of the securities note, the content of the registration document for securities issued by third countries and their regional and local authorities, the content of the building block for pro forma financial information, the list of specialist issuers, the content of universal registration document, as well as the content of the secondary issuance regime; (ii) the format of the EU Growth prospectus, the content of the EU Growth registration document, the content of the EU Growth securities note, as well as the content of the EU Growth summary; and (iii) scrutiny of the prospectus, scrutiny and review of the universal registration document, approval of the prospectus, approval and filing of the universal registration document, as well as conditions for losing the status of frequent issuer. The final report also contains an annex with the text of ESMA's technical advice, noting in some cases that further recitals will depend on the advice that is adopted. The report has been delivered to the European Commission. Subject to endorsement by the Commission, this technical advice will form the basis for the delegated acts to be adopted by the Commission by 21 January 2019. ESMA also has a mandate to provide technical advice, by 31 August 2018, focusing on documents containing the minimum information required for a takeover by way of exchange offer, a merger or division, together with further advice relating to general equivalence criteria to be applied in respect of the information requirements imposed by third countries.


ISDA, EBF, ICMA and ISLA publish whitepaper on the benefits of post-trade risk reduction services

ISDA, EBF, ICMA and ISLA recently published a whitepaper on the benefits of post-trade risk reduction services as a crucial risk management tool. These risk-mitigating benefits are recognized in the EU under MIFID II and MIFIR, which exempt post-trade risk reduction administrative transactions from the trading obligation. There is, however, currently no exemption from the clearing obligation in the EU for these transactions. The failure to recognize these strictly non-trading and market risk neutral administrative transactions within EMIR limits systemic risk reduction in derivatives markets. It is recommended in the whitepaper that EMIR be amended to exempt transactions resulting from post-trade risk reduction services from the clearing obligation, or to empower ESMA to do so.


GFMA cybersecurity penetration testing framework

The Global Financial Markets Association (GFMA) recently published a framework for cybersecurity penetration testing in the financial services industry. GFMA explains that penetration testing and red teaming (in which the tester assumes the role of an adversary to exploit vulnerabilities found in IT systems) are key tools in a robust security program. The framework outlines a testing lifecycle consisting of four phases: (i) threat intelligence phase: a firm's internal intelligence should be enhanced by government agencies and sectoral financial industry resources; (ii) planning phase: test activities should be prioritised and scheduled according to threat intelligence and regulator input in planning the scope of the exercise; (iii) testing phase: this should begin after operational planning and attack methodologies have been agreed; and (iv) analysis and response phase: this includes the development of executive and technical reports and the receipt of responses from firms.


ECON draft report on regulatory and supervisory relationships between EU and third countries

The European Parliament's Committee on Economic and Monetary Affairs recently published its draft report on relationships between the EU and third countries concerning financial services regulation and supervision. The draft report contains a motion for a Parliament resolution, the text of which includes the following recommendations: (i) the European Supervisory Authorities (that is, ESMA, EIOPA and the EBA) should be given the power to monitor regulatory developments in third countries and the Parliament should be kept informed of ongoing regulatory monitoring in third countries; (ii) the EC should adopt a legislative act establishing a clear framework for a transparent, coherent and consistent application of equivalence procedures; (iii).the relevant ESA should review equivalence decisions at least once every three years and make such reviews public; (iv) the EC should consider introducing an application process for granting equivalence that could be opened to third countries; (v) the EC should review all equivalence decisions taken; (vi) the ESAs should develop further co-operation between national competent authorities to share best practice on regulatory co-operation and activities with third countries; and (vii) the EU should seek a financial services chapter as part of any potential future EU-US trade agreement.


We have taken great care to ensure the accuracy of this version of Legal Shorts. However, Legal 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.

Authorised and regulated by the Solicitors Regulation Authority. Please contact us if you would like to arrange a meeting. This message (including any attachments) from the law firm of Cummings is confidential and may contain information which is proprietary, privileged or otherwise legally protected against unauthorised use or disclosure. If you are not the intended recipient, please do not read, copy, distribute, disclose or otherwise use or place any reliance on any information in this message or any attachments; and please alert the sender by return e-mail, delete this message and any attachments from your system and destroy any hard copies. Neither Cummings nor the sender accepts liability for any corruption, interception or unauthorized amendment of messages or attachments transmitted by e-mail. It is your responsibility to scan this message and any attachments for computer viruses in accordance with good working practice. The firm is not authorised by the Financial Conduct Authority, but is authorised and regulated by the Solicitors Regulation Authority (for the code of conduct please see and undertakes certain activities in relation to investments which are limited in scope and incidental to its legal services or which may reasonably be regarded as a necessary part of its legal services.


Tel: + 44 20 7585 1406
Mob: + 44 7734 057 327

Cummings Fisher
Devonshire House 1 Mayfair Place
London Greater London W1J 8AJ
United Kingdom

25 05 2019

Subscribe a friend | Unsubscribe

email sent by multimail