Securities and Markets

Issue 1098 / 25 February 2021

European Commission

MiFID II – European Commission outlines next steps for review23 February 2021

The European Commission has published a speech given by Mairead McGuinness (European Commissioner for Financial Services, Financial Stability and Capital Markets Union (CMU)) which, among other things, outlines the next steps of the Commission’s review of the MiFID II Directive (2014/65/EU) and the Markets in Financial Instruments Regulation (600/2014) (MiFIR).

Ms McGuinness explains that the Commission intends to adopt a legislative proposal relating to the review of MiFID II at the end of 2021. She also indicated that the proposal may address the following issues:

  • strengthening transparency requirements – there has been a decline in the volume of trading in shares executed on transparent regulated exchanges and an increase in usage of more opaque alternative venues, such as trading through banks’ internal books;
  • consolidated tape – the Commission intends to establish the right conditions for a consolidated tape that collects and aggregates indispensable trade transparency data reported by all EU executive venues in equity and corporate bonds; and
  • retail investment and investor protection – the Commission thinks there may be merit in looking at the investor’s journey from beginning to end with the aim of ensuring that retail investors seize the investment potential of the internal market.

Speech by Mairead McGuinness covering the next steps for MiFID II/MiFIR review

European Securities and Markets Authority

GameStop share trading – ESMA publishes statement on regulatory implications – 23 February 2021  

The European Securities and Markets Authority (ESMA) has published an introductory statement made by Steven Maijoor to the European Parliament’s Economic and Monetary Affairs Committee (ECON) on the recent developments around trading in GameStop shares and related phenomena.

The statement details the events in the second half of January where shares of firms such as US videogame retailer, GameStop, and US movie theatre company, AMC Entertainment, were heavily promoted by certain internet sites and on social media, which encouraged huge purchases by retail investors using leverage, catalysing forced buying from short sellers and underwriters of options. As of result of these events, GameStop and AMC share prices surged by 1,745% and 839% respectively in January 2021, with consequential growth in their market capitalisation and their share trading volumes.

Whilst stating that the likelihood of similar events happening in the EU appears limited, Mr Maijoor highlights that the observed extreme price volatility combined with the broad participation of retail investors raises investor protection concerns. The statement emphasises the importance of financial education as a means to attaining better outcomes for retail investors.

The speech also highlights several areas of concern, which include:

  • Online brokers’ business models: Mr Maijoor observes that online brokers such as RobinHood have grown in popularity, and have led to an increase in retail trading. He calls for further investigation of the role of these brokers, and he suggests that specific aspects of the business models of these online brokers may incentivise the adoption of risky short-term trading strategies by retail investors, which raises concerns about the transparency of the brokers’ fee structures.
  • Zero commission trading: Mr Maijoor highlights that zero-commission trading needs to be looked at in more detail as ‘payments for order flow’ from third parties such as market makers may substitute commissions that are otherwise paid by clients, creating conflicts of interest and resulting in less transparency for retail clients. He recommends that the practice of payment for order flow should be carefully assessed against the Markets in Financial Instruments Directive (2014/65/EU) (MiFID II) requirements on conflicts of interest, best execution and inducements.
  • Market abuse: Mr Maijoor explains that while a simple intention to buy the shares of an issuer on which large short sale positions are established does not constitute market abuse, coordinated strategies to buy in certain conditions and at a certain point in time with the objective to inflate the share’s price could constitute market manipulation. He further notes that posting false or misleading information about an issuer or financial instrument on social media may also represent market manipulation.

The statement emphasises that ESMA will continue to monitor developments in this area and may take further action where appropriate.

Introductory statement by Steven Maijoor       

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MiFIR – ESMA publishes annual report on application of waivers and deferrals for non-equity instruments24 February 2021

The European Securities and Markets Authority (ESMA) has published its annual report on the application of waivers and deferrals for non-equity instruments under the Markets in Financial Instruments Regulation (600/2014) (MiFIR).

The report analyses waivers for non-equity instruments for which it issued an opinion to the relevant national competent authority (NCA) between 1 January and 31 December 2019. The report also contains an overview of the deferrals regime for non-equity instruments applied indifferent EU Member States.

Among other things, ESMA found that the Netherlands submitted the largest number of notifications for pre-trade transparency waivers in 2019. This reflected the establishment of subsidiaries of trading venues operating in the UK in the Netherlands as a consequence of Brexit.

ESMA will publish the next annual report in the second half of 2021, covering the analysis of the application of the waivers and deferrals regimes in 2020.

ESMA annual report on the application of waivers and deferrals for non-equity instruments

Press release

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BMR – ESMA consults on methodology to calculate a benchmark in exceptional circumstances25 February 2021

The European Securities and Markets Authority (ESMA) has published a consultation on draft guidelines detailing the obligations applicable to administrators that use a methodology to calculate a benchmark in exceptional circumstances under the Benchmarks Regulation (EU) 2016/1011 (BMR).

In the accompanying press release, ESMA observes that during exceptional circumstances such as the COVID-10 pandemic, administrators can use an alternative methodology to calculate a benchmark, and that this methodology should be made publicly available.

In light of this, the consultation paper seeks input on clarifications and specifications regarding the adjustments of benchmarks in exceptional circumstances in relation to three areas:

  • transparency of methodology;
  • oversight function; and
  • record keeping requirements.

The draft guidelines, which are in section V of the consultation paper, also ensure that benchmarks administrators have in place a transparent framework when consulting on material changes to the methodology in a short time period.

The draft guidelines further amend the guidelines on non-significant benchmarks with regard to the key elements of the methodology and the oversight function, first published in December 2018.

The consultation closes on 30 April 2021, and final guidelines are expected in Q3 2021.

Consultation paper

Response form

Press release

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EMIR – ESMA publishes final report on guidelines for consistency of CCP SREPs 24 February 2021

ESMA has published its final report on guidelines to clarify common procedures and methodologies for the supervisory review and evaluation process (SREP) of central counterparties (CCPs) by their national competent authorities (NCAs). The guidelines were consulted on in October 2020 and aim to ensure consistency in format, frequency and depth of CCP SREPs. They cover review and evaluations of:

  • capital and organisational requirements;
  • business continuity;
  • conduct of business;
  • prudential requirements; and
  • interoperability arrangements.

The guidelines can be found in Annex I to the report and will apply from the date that they are published on ESMA’s website. NCAs will then have two months to notify ESM whether they comply or intend to comply with the guidelines.

ESMA final report on guidelines on common procedures and methodologies on SREP of CCPs

Press release

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Crowdfunding – ESMA publishes Q&As25 February 2021

The European Securities and Markets Authority (ESMA) has published its first set of Q&As relating to the Regulation of European crowdfunding service providers for business ((EU) 2020/1503) (Crowdfunding Regulation).

The Q&As aim to promote a convergent application of the provisions of the Crowdfunding Regulation and to provide responses to possible questions posed by the general public market participants and competent authorities. This first set of Q&As clarify the use of special purpose vehicles (SPVs), addressing the following topics:

  • the circumstances and conditions in which an SPV can be created for the provision of crowdfunding services;
  • the types of instrument that can be offered to investors via an SPV;
  • whether an SPV can give exposure to more than one underlying asset;
  • the type of underlying asset an SPV can give exposure to; and
  • when an asset should be deemed to be illiquid or indivisible within the meaning of the Crowdfunding Regulation.

ESMA will continue to develop the Q&As going forward.

ESMA Q&As on Crowdfunding Regulation

Press release

HM Treasury 

CCPs – HM Treasury consults on expanded resolution regime24 February 2021

HM Treasury has published a consultation paper on an expanded resolution regime for central counterparties (CCPs). The UK’s current resolution regime for CCPs is set out in the Banking Act 2009 in the form of a modified version of the special resolution regime (SRR) for banks. This regime pre-dates international standards for the resolution of CCPs set out in the Financial Stability Board’s (FSB) key attributes for effective resolution regimes for financial institutions.

HM Treasury is consulting on plans to revise and expand the UK CCP resolution regime to bring it in line with these standards. This will involve giving the Bank of England additional powers to mitigate the risk and impact of a CCP failure and the subsequent risks to financial stability and public funds.

These new powers would enable the Bank to take full control of a CCP when necessary and use a number of tools without reliance on the CCP’s rulebook, meaning that the Bank could take faster and more extensive action to stabilise a CCP. These powers would also limit risks to public funds by ensuring CCPs and clearing members ultimately bear the losses arising from a CCP failure, rather than taxpayers, whilst still stabilising the CCP, preventing contagion and providing reassurance to the market.

Chapter 2 of the consultation paper set out a summary of the proposed new regime, which HM Treasury states is not significantly different from the EU CCP Recovery and Resolution Regulation ((EU) 2021/23) which was published in the Official Journal of the EU in January 2021.

The consultation is open until 28 May 2021, and HM Treasury will legislate to establish the expanded regime when parliamentary time allows. 

HM Treasury consultation on expanding the resolution regimes for CCPs

Webpage

Working Group on Sterling Risk-Free Reference Rates

Derivatives – Working Group publishes paper on ending new use of GBP LIBOR24 February 2021

The Working Group on Sterling Risk-Free Reference Rates (Working Group) has published a paper aimed at supporting market participants in meeting its quarterly 2021 milestones for ending new use of GBP LIBOR in derivatives.  The Working Group has also published an updated version of its priorities and roadmap document.

The Working Group’s milestones include the need to cease initiation of new:

  • GBP LIBOR-linked linear derivatives expiring after the end of 2021, by the end of March 2021;
  • GBP LIBOR-linked non-linear derivatives and exchange-traded futures and options expiring after the end of 2021, by the end of June 2021; and
  • cross-currency derivatives (with a LIBOR-linked sterling leg) expiring after the end of 2021, between the start of April and the end of September 2021.

The Working Group states that any new GBP LIBOR-linked derivatives entered into after the relevant milestones and expiring after the end of 2021 should be based on SONIA.

The paper does, however, set out five limited circumstances in which it might be appropriate to enter into new GBP LIBOR-linked derivatives beyond these recommended milestones. Examples of these exceptional circumstances include certain GBP LIBOR hedging transactions, market making in support of a client activity related to existing GBP LIBOR contracts, and novations of GBP LIBOR transactions.

Working Group paper on ending new use of GBP LIBOR-linked derivatives

Updated roadmap and priorities document

Updated Webpage