The European Commission has presented its new strategy for a Savings and Investment Union (SIU). This initiative aims to facilitate access to the capital markets for citizens and open up more financing channels for companies in the EU. Planned innovations also concern supervision and deposit protection. Renate Prinz and Dr. Cornelius Hille have assessed the plans for us.
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The EU’s new attempt at a financial union: what banks need to know now
By Renate Prinz | Dr. Cornelius Hille on 10. April, 2025
Posted In EU, Financial Services
EMIR 3: Active Accounts, clearing threshold and exemptions
By Michal Chajdukowski on 06. December, 2024
On December 4, 2024, EU Regulation 2024/2987 (“EMIR 3”), amending EU Regulation 648/2012 on the European Market Infrastructure (“EMIR”), was published in the EU Official Journal. EMIR 3 will enter into force on December 24, 2024, although certain provisions will remain subject to the Regulatory Technical Standards that will be published by the European Securities and Markets Commission (“ESMA”).
EMIR 3 introduces a requirement for certain EU counterparties to open and maintain an account with a central counterparty (“CCP”) established in the EU, and makes targeted amendments relating to the clearing thresholds and certain exemptions.
Origins of EMIR 3
EMIR 3 responds to the concerns raised by the European Commission and EU Member States about the fact that, despite Brexit, EU counterparties continue to clear their trades in CCPs established in the UK.
Initially, to incentivise EU counterparties to instead clear their trades in CCPs established in the EU, the European Commission intended to require all financial counterparties (“FC”) and non-financial counterparties (“NFC”) that are subject to the clearing obligation under EMIR to clear their trades in accounts held with CCPs established in the EU.
This proposal, however, drew considerable criticism from EU market associations, which argued that such a broad requirement would put EU counterparties at a competitive disadvantage compared to their UK or U.S. counterparties. As a result of these critiques, the final requirement has been significantly watered down, and will only apply to certain FCs and NFCs.
Active Account Requirement
EMIR 3 imposes a requirement to open and maintain an ‘active’ account with a CCP established in the EU on FCs and NFCs that are subject to the clearing obligation under EMIR and exceed the clearing threshold in any of the following derivatives: (i) interest rate derivatives denominated in EUR or PLN or (ii) short-term interest rate derivatives denominated in EUR ( “In-Scope Counterparties”). Contrary to the initial proposal, credit default swaps denominated in EUR have been excluded from the scope of this requirement.
In-Scope Counterparties that hold a clearing volume of at least EUR 6 billion in open positions will additionally be required to clear in their ‘active’ accounts at least 5 trades per class of derivatives during the relevant reference period. The details of this requirement will be further specified by ESMA.
Targeted Amendments
In connection with the ‘active’ account requirement, the European Commission introduced a number of targeted amendments to EMIR. These relate to, among other things, the calculation of the clearing thresholds and the exemptions from clearing, margin or reporting requirements.
Clearing Threshold Calculation
EMIR requires FCs and NFCs to clear their over-the-counter (“OTC”) derivatives if their average positions exceed certain clearing thresholds. For the purposes of calculating these thresholds, EMIR defined OTC derivatives as derivatives that are not traded on an EU regulated market or an equivalent non-EU trading venue.
This calculation mechanism has, however, proven to be problematic for the derivatives industry following Brexit as UK trading venues are no longer considered as EU-regulated markets and have not been, in the meantime, declared as equivalent to EU trading venues.
EMIR 3 responds to this issue by amending the definition of OTC derivatives, which shall now refer to derivatives not cleared in EU- or EU-equivalent CCPs, instead of those not traded on an EU trading venue (noting that the EU has already recognized UK CCPs as EU-equivalent).
Exemptions
In addition, EMIR 3 introduces a number of changes to the EMIR exemptions landscape:
- Clearing: EMIR 3 has extended the existing EU pension scheme exemption to also cover transactions with non-EU pension schemes that are authorised under national law and have been exempted from the clearing obligation under that law. In addition, EMIR 3 has introduced a new exemption from the clearing obligation relating to market neutral post-trade risk reduction transactions.
- Margin: EMIR 3 has permanently exempted uncleared single-stock options and equity index options from the requirement to exchange initial and variation margin.
- Reporting: EMIR 3 has narrowed the scope of the existing exemption from the reporting requirement for NFCs in relation to intra-group trades. The revised exemption no longer applies to so-called NFC+ (i.e., NFCs that are subject to the clearing obligation).
Please feel free to reach out if you have any questions on how EMIR 3 may apply to your company. Our specialists Vlad Maly and Michal Chajdukowski are here to help you navigate through the complexities of the updated EMIR regime.
An Overview of the New Consumer Credit Directive
By Renate Prinz on 06. December, 2024
Posted In EU
One year after the new EU Consumer Credit Directive (Directive 2023/2225) came into force, questions remain: When will it be implemented? What will be regulated? How is the business community reacting? The directive brings significant changes and extensions in an effort to strengthen consumer protection and meet the challenges of digitization. But does it really provide consumers with the desired added value and protection, or does it prevent innovative, successful business models – from which consumers benefit – via overregulation?
Key Contents of the Directive
The new directive significantly expands the scope of application for consumer credit and covers loans of less than €200, as well as free loans and leasing transactions. This extension aims to ensure that smaller and previously unregulated forms of credit are protected by the directive. Overdrafts are now also subject to more comprehensive regulations. And with the regulation of free loans, purchases on accounts and the popular “buy now pay later” offers will be covered by the Consumer Credit Directive. This payment method, which is particularly popular in Germany, is regarded as interest-free credit. However, there are certain exceptions and regulations that affect purchases on accounts. Small- and medium-sized companies can continue to offer purchases on accounts without having to comply with the stricter regulations if it is free, processed within 50 days, and does not involve external service providers. However, the stricter rules apply to larger retailers.
The goal of the directive is to prevent consumers from becoming over-indebted, for example, because of excessive financial demands, high interest rates, or unfair contract terms that were not sufficiently publicized before the contract was concluded. The “buy now, pay later” offers in particular were a thorn in the side of many consumer protection organisations because of the threat of “unnoticed” financial overstretching of buyers.
The following measures and obligations apply under the new directive to protect consumers:
- Pre-contractual information obligations will be tightened to inform consumers even more comprehensively about the relevant contractual conditions
- The introduction of interest rate caps
- Duties of good conduct for the lender, particularly for fair contractual conditions
- Mandatory assessment of the consumer’s creditworthiness to ensure they can repay the loan
- Guidelines on advertising for consumer loans: all advertising must include a statement that taking out a loan is subject to a fee. Misleading advertising statements are prohibited.
The Consumer Credit Directive must be transposed into national law by EU Member States within two years (by November 2025). The regulations can then be expected to apply starting November 2026. A draft law for national implementation in Germany is not yet available.
Reactions and Criticism
The level of protection for consumer loans is thus adjusted to match the level of protection for residential property loans. However, comparability is very limited if a purchase on account for €30 can fall under the stricter regulations. This was precisely what consumer protection organisations were calling for as the burden on consumers often leads to financial overload in the total amount because of many smaller purchases. Nevertheless, the administrative burden for a creditworthiness check alone for loans of less than €200 is unequally high. A lower limit here would have been desirable for the credit industry.
While consumer advocates welcome the new regulations because of their broad scope of application and the fixed introduction of interest rate caps, the directive has been strongly criticized by the banking industry. Considerable interests and legitimate concerns of banks and merchants have been largely ignored. For example, credit and payment institutions fear considerable additional work and costs, especially because of the mandatory creditworthiness checks that are required for even the smallest loans. Due to the very different payment habits and circumstances of EU consumers and, therefore, very different national interests, it remains to be seen how differently the directive will be transposed into national law, which is likely to lead to additional implementation and administrative costs for players in the individual EU Member States.
Navigating EU Sanctions: How Investment Funds and Corporates Can Meet the ‘Best Efforts’ Standard
By Renate Prinz on 02. December, 2024
Co-Authors: | |
With the introduction of the 14th sanctions package, entities established in the European Union are required to ‘undertake their best efforts to ensure’ that non-EU subsidiaries they own or control do not undermine EU Regulation 833/2014 imposing EU sanctions against Russia, or EU Regulation 765/2006 imposing EU sanctions against Belarus. This obligation stretches to EU citizens, including those located outside the European Union, who control corporate and fund structures around the world.
The term ‘best efforts’ is not explicitly defined within the EU regulations. On November 22, 2024, the European Commission issued guidance on how to comply with this obligation in its Frequently Asked Questions on Russia sanctions (FAQ). The clarifications, however, largely reiterate obligations set out in the Preamble to the EU Regulation 2024/1745 which introduced the ‘best efforts’ requirement in June 2024.
In this alert, we summarize the key features of this provision, with a focus on how investment funds and other global corporates can meet the ‘best efforts’ standard. In response to the Commission’s overriding emphasis on awareness of one’s operations, existing structures and ongoing activities should be reviewed, and robust sanctions compliance policies should be put into place to efficiently navigate the increasingly turbulent EU sanctions landscape.
Origins of the ‘Best Efforts’ Obligation
The roots of the ‘best efforts’ obligation lie in the lack of consensus among EU Member States on how to address Russia and Belarus sanctions circumvention. Initially, the proposed obligation was designed to hold EU companies fully responsible for any undermining of EU Russia and Belarus sanctions by their non-EU subsidiaries. However, this proposal has been watered down due to pressure from certain Member States arguing that the wording was too extensive and onerous.
The ‘best efforts’ requirement under the EU Russia and Belarus sanctions regimes applies to EU companies and EU nationals in respect of companies they own (i.e., in which hold 50% or more of the proprietary rights or have a majority interest) or control (i.e., they have the right to appoint or remove a majority of the board, the right to use assets of that company, or the right to manage it or exercise a dominant influence over it) outside the European Union.
Implementation Guidance
In its recently issued FAQ, the European Commission emphasizes the need for EU companies and their management to be aware of the activities conducted by the non-EU entities they own or control and the risks related to such activities.
While the determination on whether the business has actually exercised its ‘best efforts’ in ensuring that its non-EU subsidiaries comply with EU sanctions will depend on the nature, size and risk profile of the business, the Commission clarified that ‘best efforts’ may include:
- the implementation of internal compliance programs;
- systematic sharing of corporate compliance standards;
- sending internal newsletters and sanctions advisories;
- setting up mandatory reporting on sanctions breaches; and/or
- organising mandatory sanctions trainings.
According to the FAQ, any of the following may amount to a breach of this obligation:
- knowledge of activities undermining EU sanctions;
- failure to block transactions undermining EU sanctions; and/or
- failure to carry out appropriate due diligence regarding activities of non-EU subsidiaries which resulted in undermining EU sanctions.
In this respect, the German Central Bank also confirmed that this obligation should be seen as satisfied when coherent and consistent mechanisms are implemented by EU entities allowing them to ensure that non-EU subsidiaries adhere to the EU sanctions.
Additionally, as clarified in the FAQ, the only valid defence to failure to comply with the ‘best efforts’ obligation is if the EU company no longer controls the non-EU subsidiary due to external reasons such as, for example, nationalization or compulsory administration. The European Commission expressly stated that liability will not be mitigated in the event that control over the subsidiary is lost due to the EU entity’s own actions, for instance, due to its previous risk-prone decisions to operate in Russia or Belarus. Likewise, EU parent companies or their employees’ decisions to recuse themselves from any Russia and Belarus related business of their subsidiaries would undermine the ‘best efforts’ obligation.
Compliance with the ‘Best Efforts’ Obligation by EU Investment Funds
The European fund industry will be affected by the ‘best efforts’ obligation on multiple levels. All regulated EU investment vehicles such as collective investment undertakings (CIUs) managed by undertakings for collective investment in transferable securities (UCITS), or alternative investment funds (AIFs), managed by alternative investment fund managers (AIFMs) must comply with this requirement in respect of all non-EU entities that they own or control within their structures. Additionally, the obligation may apply to Limited Partners (LPs) who own the entities. The Ultimate Beneficial Owners (UBOs) of both LPs and fund managers, as relevant, who hold EU passports may also be held personally liable in case of breach.
As a result, EU funds and corporates, irrespective of geographic markets or the sectors they operate in, should carefully assess their roles and determine who exactly has the responsibility to ensure the compliance of non-EU entities with EU Russia and Belarus sanctions, and decide on how compliance can practically be assured within the specific corporate structure. As a follow-up, if any exposure to Russia or Belarus is identified, stand-alone group sanctions policies should be put in place in line with the ‘best efforts’ requirement. It is no longer sufficient for the fund to impose a general ban on activities or investments touching upon Russia or Belarus. The fund and the involved parties, including any EU holding companies and concerned UBOs who are EU nationals, are now required to actively ensure that all umbrella entities (owned or controlled by them) are not involved in any activities that would be prohibited under EU Russia and Belarus sanctions.
Identifying prohibited activities may not be an easy task. In addition to prohibitions on the export of numerous types of goods or services to Russia or Belarus from non-EU entities, certain imports from Russia or Belarus, including non-EU intragroup trade, may also be restricted. In relation to fund managers, prohibited activities could include, for instance, the purchase, sale, provision of investment services, or dealing with transferable securities and money-market instruments issued by Russian or Belarussian companies subject to EU sanctions. In practice, trading in securities issued by these companies may be restricted, regardless of whether the trading is made through a non-EU entity or occurs on non-EU primary or secondary markets. The same may apply to trading in units or shares of CIUs, regardless of their denomination, particularly if they provide exposure to securities issued by Russian or Belarussian entities.
In the FAQ, the Commission has followed teleological interpretation of the prohibitions and insists on primarily taking into account the goal of particular sanctions (e.g., to weaken Russia’s economic base and curtail its ability to wage war), instead of the literal wording of the underlying prohibition. It remains to be seen if this approach will be shared by EU national authorities and courts. As clarified by the European Commission, the mere fact that an EU company (or an EU citizen who controls it) is aware that a non-EU subsidiary is involved in activities undermining EU Russia or Belarus sanctions is sufficient to conclude that the EU company did not comply with its ‘best efforts’ obligation. Therefore, EU funds who fail understand Russia / Belarus sanctions related risks and put in place comprehensive sanctions policies extending to their non-EU subsidiaries could find themselves exposed to potential liability.
The penalties for sanctions violations are set out in EU Directive 2024/1226 on sanctions criminalization and include prison sentence of at least 5 years (in the case of natural persons) and a maximum fine of at least 5% of worldwide turnover (in the case of companies), although EU Member States may impose even higher penalties at their discretion. Alongside increasing enforcement risk from EU Member States which have begun focusing on non-EU activities, funds and corporates will be also faced with meticulous scrutiny by EU banks and financial institutions. In fact, it is market practice for EU lenders to require extensive warranties on absolute compliance with EU sanctions (including compliance with the ‘best efforts’ obligation) and for lenders to periodically request EU funds and corporates to explain how such compliance has been put in place.
US Exposure and Risk
EU investment funds should also monitor the activities of their US subsidiaries to the extent that there is any Russia or Belarus exposure. EU and US sanctions are not entirely aligned when it comes to restricted products or activities directed to Russia or Belarus, and this gap may widen if new trade policies are adopted by the US in the near future.
Currently, the United States does not have any blocking regulations that prevent its companies from complying with EU-imposed sanctions (such as EU Regulation 2271/96 which has countered certain US sanctions since its implementation in 1996), and we can only speculate on how the new US administration will respond to this situation. However, it is clear that any prudent EU fund operating globally would start preparing their sanctions policies now to enable quick and efficient navigation of potentially conflicting US and EU sanctions.
The DORA Deadline – How to prepare, and how to use legal AI for DORA contract review
By Renate Prinz on 15. November, 2024
Financial Services (FS) firms need to comply with the EU’s new Digital Operational Resilience Regulation (DORA) until January 17, 2025. Compliance isn’t optional, it’s the law.
In this webinar, we spoke about what DORA meant for clients and how to use legal AI for contract review and remediation.
The following topics were discussed:
- What DORA is and who it applies to
- What Financial Services firms need to do before January 2025
- What contract review and remediation work needs to be done
- How McDermott uses legal AI with BRYTER Extract for DORA contract review and remediation.
You can find a recording of the webinar here:
DORA Check
By Renate Prinz on 31. October, 2024
Digital threats and cyberattacks are increasing every year. In 2023, digital threats caused damages of more than €200 billion in Germany, of which 72% resulted from cyberattacks (source: Bitkom, study on economic protection 2023). To counter the threat to the system-critical financial sector, the EU has decided to implement a uniform, high level of security. The Digital Operational Resilience Act (DORA) is the answer.
The regulation on digital operational resilience is intended to reduce the risks arising from the ever-increasing dependence on information and communication technology in the financial sector. In particular, DORA is expected to reduce the risk of severe operational disruption arising from digital threats and cyberattacks, by focusing on the entire value chain. Notably, DORA subjects IT service providers to direct financial supervision – for the first time. DORA will apply to companies in the financial sector and their IT service providers from January 17, 2025 . It’s crucial for every company to check whether DORA applies to them and what measures need to be taken now, including reviewing outsourcing contracts for DORA compliance and internal IT infrastructure.
McDermott developed DORA Check to provide a first overview of the regulation to keep users informed about the legal essentials of DORA.
Click here to access the tool.
DORA takes effect: Digital resilience and cybersecurity in the EU
By Renate Prinz on 29. October, 2024
McDermott Will & Emery’s financial regulatory partner Renate Prinz authored in Finextra that explored what DORA (the EU’s Digital Operational Resilience Act) entails, what its contents and objectives are, and what relevant companies need to do now to be DORA compliant next year. Here you can read the full article.
What To Expect From The EU’s New PSD3, PSR AND FIDA Regulations
By Annabelle Rau | Renate Prinz on 08. November, 2023
Posted In EU
The Payment Services Directive II (PSD2) has changed the payment services industry in Europe. However, many details remain open and impractical and the implementation of the directive and the administrative practices of local financial supervisory authorities differ greatly in some cases. A reform is now pending with PSD3, which aims for a higher degree of harmonization and will bring with it many new requirements for payment service providers.What are the most important changes and challenges facing the industry? How can payment service providers prepare? Read the article by Renate Prinz and Annabelle Rau to find out how the planned PSD 3 directive, the Payment Services Regulation (PSR) and the Framework Regulation on Access to Financial Data (FIDA) could change the landscape of payment services.
Click here for the full article.
