Authors

Charlotte Hill

Partner

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Daniel Hirschfield

Senior professional support lawyer

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Clare Reynolds

Senior associate

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Julia Steinhardt

Associate

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Katie Fry-Paul

Associate

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Lauren Clarke

Associate

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Authors

Charlotte Hill

Partner

Read More

Daniel Hirschfield

Senior professional support lawyer

Read More

Clare Reynolds

Senior associate

Read More

Julia Steinhardt

Associate

Read More

Katie Fry-Paul

Associate

Read More

Lauren Clarke

Associate

Read More

3 July 2020

COVID-19: how the European financial regulators are responding

  • IN-DEPTH ANALYSIS

The European Central Bank (ECB), the European Systemic Risk Board (ESRB), and the European Supervisory Authorities (ESAs) are closely monitoring the COVID-19 situation and have taken measures to seek to protect markets and consumers and to ensure firms have adequate contingency plans in place.

This webpage sets out the measures taken by the EU financial regulators to date and key points firms should be aware of. Please see our separate webpage on the measures taken by the UK financial services regulators in response to COVID-19 here.

European Central Bank

In line with other central banks, the ECB has announced a €750bn Pandemic Emergency Purchase Programme (PEPP) to buy public (including Italy and Greece) and private sector debt across the eurozone. Purchases under the PEPP will be conducted in a flexible manner for maximum impact and alignment with other measures by the ESAs. Further, the ECB announced measures providing added flexibility to banking supervision to ensure that its directly supervised banks can continue to fulfil their role to fund households and corporations. To this extent it introduced supervisory flexibility to its treatment of non-performing loans and encouraged banks to avoid excessive procyclical effects when applying the IFRS 9 international accounting standard (an approach consistent with ESMA). The ECB also activated capital and operational relief measures already announced amounting to €120 billion, which could be used to absorb losses or potentially finance up to €1.8 trillion of lending. On 27 March 2020, the ECB released a statementadvising banks to be prudent when deciding dividend payments and share buyback schemes. It stated that banks should be forward-looking and preserve liquidity to support households and businesses.

On 16 April 2020, the ECB announced a temporary reduction in capital requirements for market risk by allowing banks to reduce a supervisory measure, the qualitative market risk multiplier, to adjust for the market volatility and retain market liquidity.

The ECB published an opinion on 20 May 2020, on the proposed Regulation containing amendments to the Capital Requirements Regulation (575/2013) (CRR) as regards adjustments in response to the COVID-19 pandemic. The ECB provided its general comments on the proposals and specific observations on each of the key reforms introduced.

European Systemic Risk Board

On 14 May 2020, the ESRB published a press release highlighting the first set of actions to address the impact of COVID-19 as discussed at the extraordinary meeting of the General Board of the ESRB. The General Board aims to use the flexibility in the existing EU regulatory standards to ensure adequate capital and liquidity resources are available, as well as sustaining a stable Single Market through equivalent policy responses across sectors and Member States. The actions are in five key priority areas:

  • implications for the financial system of guarantee schemes and other fiscal measures to protect the real economy
  • market illiquidity and implications for asset managers and insurers
  • impact of large-scale downgrades of corporate bonds on markets and entities across the financial system
  • system-wide restraints on dividend payments, share buybacks and other pay-outs
  • liquidity risks arising from margin calls.

The ESRB published its second set of actions to address the impact of COVID-19 on 8 June 2020, following the extraordinary meeting of the General Board on 27 May 2020. This set of actions includes:establishing an EU-wide framework to monitor debt moratoria, guarantee schemes and other fiscal measures put in place by member states:

  • establishing a liquidity monitoring framework for (re)insurers and  enhancing the Pillar 2 provisions in the Solvency II regulatory regime in the medium term to enable supervisors to require individual (re)insurers to hold a liquidity buffer
  • introducing restrictions on dividend payments, share buybacks and other pay-outs for certain financial institutions, including banks and insurers  (similar to measures taken by the UK regulators)
  • introducing measures to address liquidity risks arising from margin calls issued by central counterparties.

On 22 June 2020, the ESRB published its decision on the on the cancellation of certain reports on actions and measures taken pursuant to Recommendation ESRB/2014/1 (relating to guidance for setting countercyclical buffer rates) and Recommendation ESRB/2015/2 (addresses the cross-border effects of macro-prudential measures). The reports, which were due by 30 June 2020, are no longer required to be submitted, however, the submission of subsequent reports is not affected.

European Securities and Markets Authority

The European Securities and Markets Authority (ESMA) published an initial public statement on 11 March 2020 highlighting the ongoing priority of ensuring business continuity, and making various recommendations to financial market participants. The recommendations include specific reminders to issuers of the need to disclose any relevant significant information concerning the impacts of COVID-19 on their fundamentals, prospects or financial situation as soon as possible in accordance with the Market Abuse Regulation (MAR), and providing transparency in any financial reporting disclosures. Further, on 20 March 2020, ESMA extended the response date for all ongoing consultations due to close on, or after, 16 March 2020 by four weeks to allow institutions to focus on their core operations.

ESMA has also issued a public statement on the recording requirements of telephone conversations pursuant to MiFID II. ESMA acknowledges that recording may not be practicable in certain circumstances, but it expects firms to mitigate any potential risks and to use all possible efforts to restore recording of telephone conversations as soon as possible.

In its updated webpage, on 11 May 2020 ESMA stated that it is continuously engaging with Credit Rating Agencies (CRAs), as the single EU direct supervisor of CRAs. Its focus is on business continuity and compliance with key regulatory requirements (e.g. conflicts of interest, internal controls, transparency and governance).

On 20 May 2020, ESMA published a public statement addressing the implications of COVID-19 on the half-yearly financial reports of listed issuers. In the statement, ESMA reminds issuers to not unduly delay their reports and to ensure compliance with their obligations under MAR. The statement also sets out specific guidance on the preparation of half-yearly financial statements and makes recommendations on the detailed and entity specific disclosures it expects issuers to include in their interim management reports.

ESMA's 14 Edition Newsletter was published on 27 May 2020. The newsletter noted that ESMA continues to closely monitor the impact of COVID-19 and provided an update on ESMA's recent activities related to COVID-19. It also highlighted deadlines for closing consultations next month and catch up on the full list of publications from April and May.

On 10 June 2020, ESMA issued a decision renewing the temporary requirement to natural or legal persons who have net short positions to temporarily lower the notification thresholds in relation to the issued share capital of companies whose shares are admitted to trading on a regulated market to notify the national competent authorities (NCAs) if the position reaches or exceeds 0.1% of the issued share capital after the entry into force of the decision. The decision entered into force on 17 June 2020 and applies until 17 September 2020.

The ESMA published a statement on 11 June 2020 on open access provisions for exchange traded derivatives (ETDs) under the Markets in Financial Instruments Regulation (600/2014) (MiFIR) in the light of COVID-19. In the statement, ESMA explained that as of 4 July 2020, trading venues (TVs) and central counterparties (CCPs) offering the trading and clearing of ETDs will be subject to the open access regime for trading and clearing ETDs under MiFIR. The high degree of uncertainty and volatility driven by COVID-19, may increase TVs and CCPs operational risk. These increased risks, combined with limited capacity for assessing access requests and managing the migration of transactions flows, may impact the orderly functioning of markets or financial stability.

On 15 June 2020, ESMA published a revised work programme in response to the significant resources diverted in its responses to COVID-19. ESMA's focus has been on maintaining markets that are open and orderly and that allow prices to adjust and liquidity to be provided. To appropriately deal with COVID-19 a full assessment of ESMA activities for 2020 was undertaken and each originally planned workstream was assessed and classified into high, medium or low priority. The result of the assessment formed the basis of the revised work programme.

 

European Banking Authority

On 12 March 2020 from the European Banking Authority (EBA) released a public statement announcing its decision to postpone the EU-wide stress test exercise to 2021 to allow banks to prioritise supporting their customers and address the key operational challenges they may be facing. The EBA also reminded NCAs and banks of the flexibility in capital and liquidity regulations.

The EBA subsequently released two statements on 25 March 2020, providing clarity on the functioning of the prudential framework and addressing consumer and payment issues in light of COVID-19. The ECB called for flexibility and pragmatism in the application of the prudential framework and clarified that, in case of debt moratoria, there is no automatic classification in default, forborne, or IFRS9 status. Nonetheless, it asked institutions to ensure adequate risk management measures are in place, to use the measures in compliance with EU law and ensuring consumer protection remains a priority. The EBA also emphasised the importance of contactless payments and encouraged payment services providers to use the maximum thresholds available.

Following on from the EBA's statement on the prudential framework, on 3 April 2020, the EBA published a final report containing guidelines on the legislative and non-legislative moratoria on loan repayments. It clarified that the payment moratoria do not trigger classification as forbearance or distressed restructuring if the measures are taken based on market led initiatives. The EBA also recognised the importance of accurate and transparent monitoring and recording of the scope and effects of COVID-19 on the market, and urged institutions to consider the longer term financial difficulties that may be faced.

On 22 April 2020, the EBA released a statement on the application of the prudential framework to mitigate the impact of COVID-19 on the EU banking sector. The statement addressed the following: a postponement of the revised market risk reporting requirements (Fundamental Review of the Trading Book (FRTB)), a deferral to the implementation of the final two phases of the framework for margin requirements for non-centrally cleared derivatives and flexibility under the CRR to mitigate the increase in aggregated amounts of additional valuation adjustments (AVAs). In conjunction, the EBA also published a final report on the proposed amendments to the regulatory technical standards (RTS) on prudent valuation under the CRR.

On 2 June 2020, the EBA published its final report on guidelines on reporting and disclosure of exposures subject to measures applied in response to COVID-19. The guidelines follow the implementation of a broad range of measures, such as legislative moratoria on loan repayments and public guarantees in Member States, with the aim to support the operational and liquidity challenges faced by borrowers. The guidelines have been developed to address data gaps associated with such measures to ensure an appropriate understanding of institutions’ risk profile and the asset quality on their balance sheets both for supervisors and the wider public.

In a press release published on 18 June 2020, the EBA announced its decision to extend the application date of its Guidelines on legislative and non-legislative moratoria to 30 September 2020 (initially 30 June 2020). The Guidelines allowed banks to grant payment holidays to customers, under either legislative or non-legislative moratoria. As a result of the continued impact of COVID-19, the EBA has stressed the crucial role of banks in providing financing and this extension can ensure the adequate treatment of borrowers across the EU.

European Insurance and Occupational Pensions Authority

On 17 March 2020, the European Insurance and Occupational Pensions Authority (EIOPA) published a statement on actions to mitigate the impact on the EU insurance sector. They emphasised the need for insurers to take steps for business continuity and urged national authorities to give flexibility and offer operational relief. Similarly, the EIOPA stated insurance companies should preserve their solvency capital positions (under Solvency II) to protect the industry and the insured. To ensure the EIOPA's priorities are consistent, they have extended or delayed projects where input from NCAs and/or the industry is foreseen. In a statement on 2 April 2020, the EIOPA also urged all (re)insurers to temporarily suspend all discretionary dividend distributions and any planned share buy backs. They stated, in the current turbulent market it is prudent for insurers to protect their capital position.

On 18 May 2020, the EIOPA published its updated Risk Dashboard based on the fourth quarter 2019 Solvency II data. While the report does not capture the latest market developments resulting from COVID-19, it showed that insurers face very high market risk but the general market perceptions and imbalances remained at a medium level.

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If you would like to discuss any of the points arising out of the regulators' announcements or need assistance with reviewing your contingency plans, please get in touch.

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