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As discussed in our August 2025 Update, a key proposal under the RIS involves adjusting current EU client categorisation rules by lowering the threshold at which a client can “opt up” from retail to professional client status. The updated framework will allow more retail investors to be treated as professional clients, through individuals fulfilling at least two out of the following three criteria:

• carrying out either 15 significant transactions over the past three years, 30 transactions over the previous year, or 10 transactions over €30,000 in unlisted companies over the past five years (the existing criterion currently stipulates carrying out 10 transactions per quarter over the previous four quarters);
• a portfolio size exceeding €250,000 on average over the past three years (currently €500,000 at the moment of the individual’s request); and
• working and carrying out related activities in the financial sector for at least one year or providing proof of education or training in these activities and an ability to evaluate risk (currently, this criterion requires one year in a professional position in the financial sector).

See also item 1 (UK — Client Categorisation) above to compare the EU approach with what is being proposed in the UK by the FCA.

10.  EU — Anti-Money Laundering

On 4 December 2025, the Commission updated its list of high-risk jurisdictions, which contains jurisdictions that present strategic deficiencies in their national anti-money laundering and counter-terrorist financing regimes. EU entities subject to the anti-money laundering framework are required to apply enhanced measures in transactions involving listed jurisdictions.

The amendments include both additions (including the British Virgin Islands (BVI)) and removals (including South Africa and Nigeria). Due to the addition of the BVI to the list, from April 2026 (when AIFMD 2.0 becomes law in EU member states), BVI AIFs (and AIFs managed by BVI AIFMs) will not be able to be marketed into the EU (for further details, see our external paper, A U.S. Fund Sponsor’s Perspective on AIFMD 2.0).

11.  EU — EMIR

ESMA’s statement on EMIR 3 reporting obligations

On 11 December 2025, ESMA published a statement on the upcoming reporting obligations that are to be introduced by amendments to EMIR under Regulation (EU) 2024/2987 (EMIR 3) (as discussed in further detail in our December 2024 Update).

Specifically, ESMA clarifies its approach to the Active Account Requirement (AAR), which entered into force in June 2025 under EMIR 3. The AAR requires EU counterparties to maintain at least one active clearing account with an EU-authorised CCP and use it to clear a representative portion of their trades. The Commission adopted a Delegated Regulation in October 2025 containing RTS specifying conditions relating to the AAR, including reporting requirements. ESMA expects that entities subject to the AAR should make their first reporting submission by July 2026, including any backlog data to demonstrate compliance with the AAR looking back to June 2025.

In addition, counterparties subject to the new reporting obligation in relation to their clearing obligation at a recognised third-country CCP are expected to report to their supervising authorities annually. ESMA recognises that until the related RTS and implementing technical standards are published, there could be inconsistencies in reporting practices. As such, the first reporting cycle is expected to take place only after the publication of such standards, in 2026.

12.  EU — MiFID II/MiFIR

Commission consults on MiFID II research provisions amendments

On 4 December 2025, the Commission published a consultation on a Delegated Directive amending the MiFID II Delegated Directive (EU) 2017/593 regarding the conditions for the provision of third-party execution and research services to investment firms providing portfolio management or other investment/ancillary services.

The amendments require firms to inform clients about how firms pay for execution services and research, and they seek to offer firms more flexibility in the way they organise payment for such services. For example, the amendments aim to remove restrictive requirements to bundle payments for research and execution services relating to small and medium-sized enterprises (SMEs), by introducing flexibility on payment methods and removing the requirement to separate payments where it is too cumbersome.

The consultation closed on 1 January 2026.

ESMA publishes manual on pre- and post-trade transparency under MiFID II/MiFIR

On 19 December 2025, ESMA published its updated manual (the Manual) on post-trade transparency under MiFID II and MiFIR. The Manual replaces ESMA’s previous manual on post-trade transparency and follows ESMA’s 2025 review of the RTS under MiFID II and MiFIR RTS. It functions as Level 3 guidance to clarify the practical implementation of obligations relating to post-trade transparency rules and promote common practices.

Key new sections in the Manual deal with (i) pre-trade transparency for equity instruments and (ii) input/output data reported to or transmitted by CTPs.

ESMA releases final report on equity transparency requirements for derivatives

On 15 December 2025, ESMA published its final report on three RTS relating to transparency for derivatives, package orders, and input and output data for the OTC derivatives consolidated tape under amendments to MiFIR made by Regulation (EU) 2024/791 (the MiFIR Review).

ESMA’s report sets out final draft RTS relating to the following:

• Transparency requirements for derivatives. These RTS amend Commission Delegated Regulation (EU) 2017/583 (RTS 2) and cover the new transparency and deferral regime for exchange-traded derivatives and OTC derivatives under the MiFIR Review.
• Treatment of package orders. These RTS set out amendments to the RTS pertaining to the treatment of package orders, reflecting the new scope of derivatives and the liquidity determination.
• Input and output data. These RTS amend RTS 2 as regards CTPs’ input and output data, reflecting ESMA’s new mandate to develop draft RTS that prescribe data quality requirements for prospective CTPs.

The final draft RTS are now under the consideration of the Commission to determine whether they are to be adopted.

13.  EU — Securitisation

Council and EP adopt negotiation mandate for the securitisation framework

On 12 December 2025, the Council published the texts of two compromise proposals, following the EP’s publication on 11 December 2025 of draft reports on corresponding topics, each in response to the Commission’s proposals in relation to securitisation:

• Council Proposal 16740/25 on the Commission’s proposal to amend the Securitisation Regulation as regards creating a specific framework for simple, transparent, and standardised (STS) securitisation (following the EP’s corresponding draft report 2025/0826).
• Council Proposal 16741/25 on the Commission’s proposal to amend the CRR as regards prudential requirements for credit institutions relating to requirements for securitisation exposures (following the EP’s corresponding draft report 2025/0825).

The review of the EU framework is being undertaken with the view to amend the prudential and regulatory rules affecting the securitisation market to help the market to reach its potential and contribute to the EU’s competitiveness. In particular, it is intended to help funnel investment into a broader range of real-economy activities, such as SMEs and infrastructure projects.

Securitisation Regulation

Both the Council and the EP broadly support recalibrating the EU securitisation framework to revive issuance and investor participation given the contraction of the European securitisation market following the 2008 financial crisis. They agree on introducing a more proportionate and risk-sensitive regime for STS securitisations, including easing due diligence requirements for repeat transactions and streamlining disclosure obligations, particularly for private securitisations.

The EP also proposes a narrower definition of “public securitisation,” tied primarily to the prospectus regime, and pushes for more meaningful relief for institutional investors, including simplified due diligence for repeat issuances and greater reliance on third-party verification of STS transactions. It also seeks to limit the supervisory burden on competent authorities and soften the sanctioning regime for buy-side due diligence breaches. The Council compromise suggests stronger supervisory oversight at transaction level and a more conservative approach to enforcement and transparency, reflecting member state concerns about systemic risk and supervisory capacity.

CRR

Both institutions agree on the need to recalibrate securitisation capital requirements to improve risk sensitivity and address long-standing concerns that EU securitisations are over-penalised relative to their historical performance. There is broad alignment on lowering risk-weight floors for senior tranches and simplifying the framework for recognising significant risk transfer, including replacing rigid mechanical tests with a more principles-based approach.

The EP proposes deeper reductions and additional caps on risk-weight floors, seeks to avoid differential treatment between originators and investors, and favours earlier and more stable classification of senior tranches to limit capital volatility over the life of a transaction. The Council mandate is more cautious, preserving higher minimum floors, maintaining distinctions between transaction types and investor roles, and embedding greater discretion for supervisors.

Please refer to our December 2025 Update for the European Central Bank’s opinions on the Commission’s proposed amendments.

In addition, please see our Sidley Update Proposed Reform of EU Securitization Regulation — Implications for U.S. Securitizations for further background.

14. EU — ESMA General Updates

ESMA revises guidelines on liquidity management tools under AIFMD and UCITS

On 18 December 2025, ESMA published its final report on amended guidelines on liquidity management tools (LMTs) applicable to EU UCITS management companies and AIFMs of open-ended AIFs. The amendments update ESMA’s existing LMT guidelines to reflect changes introduced by the revised AIFMD and UCITS frameworks, with the aim of strengthening supervisory convergence and enhancing fund liquidity risk management across the EU.

The amended guidelines clarify ESMA’s expectations on the design, calibration, activation, and governance of LMTs, in particular how fund managers should select LMTs in light of their investment strategies. They do not introduce binding new rules but are likely to influence supervisory scrutiny and set a higher benchmark for governance, documentation, and operational readiness. Investment managers may wish to review their liquidity risk frameworks, fund documentation, and internal escalation processes to ensure alignment with ESMA’s clarified expectations, especially where funds are exposed to liquidity stress or market volatility.

ESMA selects EuroCTP to be the first CTP for shares and exchange-traded funds

On 19 December 2025, ESMA announced that it has selected EuroCTP as the first CTP for shares and exchange-traded funds in the EU, following a successful assessment under MiFIR. Once authorised, EuroCTP (a Netherlands-based joint venture owned by 15 European exchange groups) will operate the equity CTP for five years under ESMA’s direct supervision. ESMA has described this as a step to enhance post-trade transparency and the attractiveness of EU equity markets.

15.  EU — ESG

EU institutions reach provisional agreement on CSRD and CS3D simplification

On 9 December 2025, the Council and the EP reached a provisional political agreement on the Commission’s Omnibus proposal to reduce the scope of Directive (EU) 2022/2464 on Corporate Sustainability Reporting (CSRD) and Directive (EU) 2024/1760 on Corporate Sustainability Due Diligence (CS3D). For further background, see our Sidley Update EU Omnibus Package: EU Adopts “Stop-the-Clock” Directive and Begins ESRS Simplification Process.

The provisional agreement covers the following:

• CSRD. Under the provisional agreement, the scope of the CSRD will be reduced. Listed SMEs and financial holding undertakings will be removed from scope, with the EU company employee threshold raised to 1,000 and a new €450 million net annual turnover threshold being introduced. ‘Wave one’ companies that would be required to comply from FY 2024 can benefit from a transitional exemption if they fall out of scope of the CSRD for 2025 and 2026.
• CS3D. The threshold requirements for CS3D to apply to EU companies are increased to over 5,000 employees and a net annual turnover of more than €1.5 billion. Additionally, identification of potential and actual adverse impacts in due diligence will be limited to a general scoping exercise, requiring companies to focus on impacts that are the most likely to occur (or that involve direct business partners). Companies should use “reasonably available information” in the process to shift the burden of receiving requests from smaller companies. There will also be no requirement for companies to adopt a transition plan for climate change mitigation and no EU-wide civil liability mechanism, whilst fines will be capped at 3% of global turnover. Transposition has also been postponed to 2028, meaning companies will have to comply with the new measures by July 2029.

On 16 December 2025, the EP formally adopted its first reading position on the Commission’s proposals. The Council must formally adopt the Directive before it can be published in the Official Journal of the EU.

ESMA releases research on guidelines on ESG or sustainability-related fund names

On 17 December 2025, ESMA released its risk analysis research assessing the impact of the fund-naming guidelines on ESG and sustainability-related terms (the Guidelines) that it published in May 2024 (see our June 2024 Update for further details). Overall, ESMA notes that the Guidelines have improved consistency in the use of ESG terms and enhanced investor protection by reducing greenwashing risk.

ESMA’s research material comprised nearly 1,000 shareholder notifications in reaction to the Guidelines from the 25 largest EU-based asset managers. The study found that 64% of the funds mentioned in the notifications changed their name, most often to avoid using ESG terminology, and 56% updated their investment policies to strengthen their sustainability focus. The research found that funds with higher fossil fuel exposures were more likely to remove ESG terms from their names. ESMA also found that funds with ESG terms in their names reduced their portfolio shares of fossil fuel holdings more than other funds.

Commission publishes Notice on application of sustainable finance framework and CS3D to defence sector

On 30 December 2025, the Commission published Commission Notice C/2025/4950 (the Notice) providing guidance on the application of the EU sustainable finance framework to the defence sector. This follows the Commission’s announcement in March 2025 of a plan to boost EU defence capabilities in response to escalating international security threats.

The Notice is intended to address perceived uncertainty in the market and discourage the blanket exclusion of defence-related investments on sustainability grounds, clarifying that the EU sustainable finance framework neither prohibits investment in the defence sector nor imposes any general financing restrictions. Defence investments, like those in any other sector, must be assessed on a case-by-case basis.

The Notice covers various parts of the EU sustainable finance framework, including CS3D, CSRD, MiFID II sustainability preferences, Regulation (EU) 2019/2088 on sustainability-related disclosures in financial services (the SFDR), and Regulation (EU) 2020/852 establishing a framework to facilitate sustainable investment (the EU Taxonomy):

• SFDR. From an SFDR perspective, the Commission highlights that investments in defence companies are not presumed to have adverse sustainability impacts solely due to their sectoral classification. Financial market participants should assess relevant principal adverse impact (PAI) indicators (particularly those relating to human rights compliance and exposure to controversial weapons) by reference to applicable export controls, international humanitarian law, and companies’ internal compliance/due diligence frameworks. For example, as narrowly defined under Commission Delegated Regulation (EU) 2022/1288 supplementing SFDR, the scope of “controversial weapons” is limited to anti-personnel mines, cluster munitions, and chemical and biological weapons.
• EU Taxonomy. In relation to the EU Taxonomy, the Notice confirms that defence companies may claim alignment for eligible horizontal activities (such as energy efficiency, clean transport, or infrastructure investments), provided that minimum safeguards are met. The absence to date of defence-specific activities from the EU Taxonomy does not negate the sector’s environmental or social sustainability performance.
• MiFID II. The Commission also clarifies the sector’s interaction with MiFID II sustainability preferences, noting that investment products with exposure to defence companies should not be excluded from distribution to clients with sustainability preferences solely on that basis. Rather, firms must consider minimum safeguards, “do no significant harm” principles, and relevant PAIs.
• CS3D. The Notice confirms that defence companies fall within the scope of the CS3D on the same basis as other sectors, subject to a targeted exclusion for downstream activities relating to military or dual-use products once export authorisation has been granted. The Commission reiterates that the defence sector may, following careful assessment, contribute to social sustainability objectives including peace and security and should not be treated as a de facto non-sustainable sector under EU sustainable finance rules.

16.  EU — Crypotoassets/MiCA

Consortium of major European banks to launch new euro-pegged stablecoin in H2 2026

On 2 December 2025, a consortium of 10 major European banks announced the formation of a Netherlands-registered company, Qivalis, to launch a stablecoin pegged to the euro in H2 2026. This is intended to counter U.S. dominance in digital payments. Qivalis is distinguished from existing euro-pegged stablecoins by being an institutionally anchored option, unlike its predecessors’ fintech consortium origins. As of the date of this Update, Qivalis is in the process of applying for an Electronic Money Institution licence from the Dutch central bank.

ESRB Secretariat highlights the challenges digital assets pose to the EU financial system

On 3 December 2025, the Head of the European Systemic Risk Board (ESRB) Secretariat, Francesco Mazzaferro, gave a speech on the risk that digital assets pose to the competitiveness and integrity of the EU financial system. Drawing attention to an urgent recommendation by the ESRB focusing on third-country multi-issuer stablecoin schemes, he warned that allowing stablecoins issued outside the EU to be freely fungible with those issued in the EU could lead to severe liquidity and systemic-risk problems if many holders were to simultaneously redeem the tokens they hold. Mazzaferro also discussed tokenisation, highlighting its potential to bring efficiency and lower costs through standardised interoperable systems while ensuring that the concentration of multiple market functions into a single intermediary risks creating conflicts of interest and deepening system vulnerability.

ESMA updates list of MiCA grandfathering periods

On 1 December 2025, ESMA published an updated list of grandfathering periods for each member state under Article 143 of MiCA. The grandfathering periods allow firms currently compliant with national pre-MiCA cryptoasset regimes to continue providing cryptoasset services pending full MiCA authorisation. Spain was the only Member State to extend its grandfathering period from 12 to 18 months (i.e., until 30 June 2026), significantly mitigating the cliff edge risk potentially affecting firms operating in Spain that were not yet MiCA-compliant at the end of 2025.

17. International — Financial Stability Board

FSB report on the growth of the non-bank sector

On 16 December 2025, the Financial Stability Board (FSB) released its annual report noting that the non-bank sector (including investment funds, trust companies, hedge funds, and money market funds) grew at double the pace of the banking sector, reaching US$256.8 trillion in total global financial assets. In particular, the FSB notes that the section of non-bank financial institutions involved in credit intermediation activities that pose bank-like financial stability risks increased by 12% to US$76.3 trillion, whilst vulnerability metrics (including credit intermediation, maturity/liquidity transformation, and leverage) remained broadly stable.

However, the report highlights the limitations in data for private credit. As such, the FSB will focus on assessing the potential impact of private credit on financial stability in the year ahead.