Markets and trading
Following a series of major legislative breakthroughs during 2023 on new rules for European securities markets, market participants can expect the development of a more nuanced regulatory framework in 2024.
Bond and derivative markets
Lawmakers recently agreed to a comprehensive revamp of the EU’s flagship rules for trading and investment, the Markets in Financial Instruments Regulation and Directive (MiFIR-D) and changes will begin to apply from as early as March this year. The new legislative framework will keep European regulators busy as they develop the technical rules necessary to bring to life the new regime. Specifically, the European Securities and Markets Authority (ESMA) will deliver over the course of this year draft rules for market data costs, bond and derivative market transparency calibrations, and the consolidated tape regime.
Public equity markets
Improving the attractiveness of European public capital markets will remain a priority in 2024 with legislators rushing to agree on a final version of the Listing Act. This will introduce changes to the Prospectus Regulation, Market Abuse Regulation and MiFIR-D to facilitate better access to public capital by listing on stock exchanges. Among other important changes, the legislators are debating whether to scrap completely the research unbundling rules that require asset managers to pay for research directly. These discussions are part of a broader discussion over how to increase the availability of investment research covering midcaps and smaller enterprises.
Single access point
European lawmakers will also develop rules to implement the new legislative framework to establish the European Single Access Point. This will introduce an EU-wide platform that provides access to public company information, similar to the EDGAR system in the US, to improve the process of finding and comparing investment products and companies. ESAP will not require additional reporting for companies, and the platform should be available from summer 2027.
Derivatives reporting
Firms that trade derivatives will soon face an overhaul of transaction-reporting requirements under the European Markets Infrastructure Regulation, known as EMIR Refit. Regulators expect that firms ensure timeliness, accuracy, and completeness of reporting to their relevant Trade Repository from April 29, 2024. Already, national regulators in Finland and Ireland have imposed fines for EMIR reporting violations on the buy-side for the first time. In parallel, lawmakers are debating proposals to incentivize the relocation of derivatives clearing activity to the EU, known as EMIR 3.0, with a view to finalizing the legislation before the end of the current Parliament term.
Settlement and clearing
With the revisions to the rules governing central securities depositories (CSDs) now official, the new CSDR regime hopes to simplify the rules for a CSD based in one EU member state providing services in another member state. The new CSDR also contains a range of measures to improve settlement efficiency by amending elements of the settlement disciple regime, such as requiring mandatory buy-in only as a measure of last resort. ESMA is consulting on a possible revamp of the penalty mechanism designed to discourage settlement fails. It will be for the EU Commission to decide on final rule changes.
Looking ahead to the next political cycle in the EU, ESMA is collecting feedback on reducing the settlement cycle to T+1, in line with other jurisdictions such as the US. Building on ESMA’s findings, the new EU Commission will release a legislative proposal setting out its approach to shortening the settlement cycle in the EU.
Digital finance
As technological innovation continues to reshape financial services, European policymakers remain committed to staying at the forefront of policy-making on a range of initiatives to set standards, protect consumers, and provide regularity clarity.
Operational resilience
Delivering technical rules on operational resilience will remain a top priority ahead of the January 17, 2025, application date of the Digital Operational Resilience Act (DORA). The Regulation seeks to embed digital and operational resilience in the financial sector through new requirements for financial entities relating to digital risk management, incident reporting, resilience testing, and third-party outsourcing. DORA will also establish an oversight regime for so-called critical ICT third parties that service financial institutions. The EU Supervisory Authorities are currently finalizing the technical rules to implement DORA.
Artificial intelligence
In response to the generalized adoption of AI across numerous sectors, EU lawmakers will focus in 2024 on operationalizing the recently agreed legislation establishing the first comprehensive regulatory regime for AI technology, known as the AI Act. The EU will introduce a risk-based approach that categorizes AI applications depending on their risk profile by use cases, complemented with a specific regime for large foundation models and generative AI. The rules will be phased-in from early 2025 when the prohibition of use cases that represent unacceptable risks to society, such as social scoring, will become effective.
As part of the preparation for its new AI framework, the EU has just established the AI Office as a central coordination body for AI policy at the EU level.
Crypto-assets
2024 will also be the year when the EU develops the technical rules that would bring to life the Markets in Crypto Assets Regulation (MiCA), which is designed to introduce an EU-wide regulatory framework by bringing crypto-related assets, issuers and service providers within the regulatory perimeter, as well as to introduce requirements on stablecoin issuers. Key requirements on stablecoins and asset referenced tokens will begin to apply from June 30, 2024, while the remaining provisions will become effective six months later.
As part of its preparation, ESMA is consulting on both the reverse solicitation exemption and the perimeter gap between MiCA and MiFID II instruments, with a view to issuing a final report by year-end.
Open finance
Building on the success of Open Banking measures in the EU, the focus is now on Open Finance as the next step. EU lawmakers will have in sight an agreement on the legislative proposal for a framework for financial data access that would allow customer data sharing in the financial sector beyond payment accounts.
Green finance
As the EU inches closer to its 2030 emission reduction deadline, the EU’s sustainable finance framework remains extremely topical for firms and regulators alike. With the 2024 EU elections around the corner, a change in power structure within the EU institutions may have particular consequences for the EU’s green agenda. Current policymakers are therefore under pressure to deliver on this mandate’s ambitious goals.
Sustainability reporting
The first set of European Sustainability Reporting Standards started to apply from January 2024, in time for companies to prepare their first reports according to the EU’s Corporate Sustainability Reporting Directive. With the focus being on implementing this first set of standards, the Commission has decided to delay the adoption of the sector- and third-country-specific standards until 2026. This is part of a series of measures presented in October 2023 aimed at reducing the reporting burden for companies by 25%.
Disclosure
The EU has also gathered feedback from the industry with a view to revising the Sustainable Finance Disclosure Regulation (SFDR) in the near future. As part of its revision, the Commission is considering introducing sustainability product categories, which would help market participants differentiate more clearly between Article 8 and 9 funds under the SFDR regime.
Sustainability due diligence
The newly agreed Corporate Sustainability Due Diligence Directive will require a broad range of companies to identify and prevent any negative impacts on human rights and the environment within their operations and, in some cases, across global value chains.
ESG ratings
The regulation on ESG ratings has entered the thick of negotiations as EU lawmakers seek to reach a compromise before the EU elections. This initiative aims to ensure the transparency, governance, and independence of ESG ratings provided in the EU. Lawmakers have until March to conclude negotiations on this file, or its progress may be re-examined during the next legislature.
Risk, capital and financial stability
At a time of higher interest rates and the emergence of new pockets of geopolitical risks, there is a renewed regulatory focus on ensuring the safety and stability of the European financial sector in 2024.
Bank capital standards
European legislators are close to signing off the legislation to implement the remaining Basel III bank capital standards in the EU. This will bring about important changes to the areas of credit risk, operational risk, credit valuation adjustment risk, and market risk. It will also introduce a transitional prudential regime for crypto assets and amendments to improve banks’ management of ESG risks. The regulation (CRR III) is expected to apply from January 1, 2025, with certain elements of the regulation phasing in over the coming years. Member states will have until June 30, 2026, to transpose the directive (CRD VI).
Fund management
Reform of the EU regulatory framework for EU investment funds, the Alternative Investment Fund Managers Directive, will take effect in 2024. The AIFMD review aims to enhance the availability of liquidity management tools, increase transparency on delegation rules and establish a framework for funds that provide credit to companies (fund-originating loans). ESMA will consult on technical rules to help implement the new regime later this year.
Insurance
Work continues on the implementation of the reformed flagship insurance regulation, Solvency II, ahead of the mid-2025 go-live. Under the new rules, insurers are incentivised to scale up their long-term investment, improve the resilience of the insurance sector, and introduce certain relief for smaller insurance companies.
Retail investment and disclosure
During the final months of the current legislative term EU lawmakers will be busy trying to reach an agreement on the Retail Investment Strategy, which contains a range of measures designed to improve the information that retail clients receive and address potential conflicts of interest by banning inducements for “execution-only” sales. The package contains revisions to a range of existing legislation, including the Packaged Retail and Insurance-based Investment Products regulation.
Benchmarks
Legislators are looking to reach an agreement on the revised Benchmarks Regulation ahead of the expiration of the current third-country exemption on January 1, 2026. The proposals under debate relate to the scope of the rules for benchmarks, the use of benchmarks in the EU provided by third-country administrators, and certain reporting requirements. The review will ensure that only EU administrators can administer EU climate benchmarks.
Finally, global regulators continue to monitor the final stage of the market’s transition away from LIBOR. The last remaining LIBOR panel, the US dollar LIBOR, ended on June 30, 2023. To ensure an orderly wind-down, the one-, three- and six-month US dollar LIBOR settings will be published in a synthetic unrepresentative form until end-September 2024.
Conclusion
As the EU legislators seek to finalize a number of initiatives for financial services, 2024 will also see European regulators develop technical, firm-facing rules to operationalize many of the new provisions of the key reforms.
At the same time, the EU is looking toward its priorities for the next half decade as it seeks to determine its policy approach to navigating the green and digital transitions, and ensuring European competitiveness in an age of geopolitical upheaval. This will provide financial services professionals operating in the EU with no shortage of regulatory initiatives over the coming years.
Bloomberg
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