INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS
Derivatives regulation – International Organization of Securities Commissions publishes speech – 17 May 2021
The International Organization of Securities Commissions (IOSCO) has published a speech by its CEO, Ashley Alder, on global issues relating to derivatives regulation. Points of interest include:
- Central counterparty (CPP)/margining practices. IOSCO has joined the Committee on Payments and Market infrastructures (CPMI) and the Basel Committee on Banking Supervision (BCBS) to examine the dynamics of margin calls in derivatives markets during the market turmoil in spring 2020. The aim is to get a clearer picture of transparency, predictability and volatility across different markets, jurisdictions and margining models, including any changes in the amount of margin and the timing of such changes.
- CCP resolution. There remain unresolved questions on CCP resolution, including whose resources should be used to support this, and in what proportion, as well as whether the CCP rule books provide sufficient incentives for all stakeholders to facilitate an orderly resolution. Mr Alder notes he is working with the chairs of the Financial Stability Board (FSB), CPMI and the FSB Resolution Steering Group to tackle these issues.
- Archegos and financial stability. The Archegos incident (where Archegos Capital defaulted on its total return swap margin calls, triggering a multi-billion dollar sell-off and losses at a number of prime brokers) raised questions about the scope and efficacy of some post-crisis reforms to the derivatives market.
- Trade repositories (TRs). The Archegos incident also provided a good opportunity to assess the degree to which TRs are achieving their original objectives. Mr Alder notes that TRs should provide a good outlook into a firm’s exposures to multiple prime brokers and the associated aggregate leverage and concentration profiles of those exposures. IOSCO intends to do more work to ensure that potential red flags are more apparent to regulators ex-ante.
Finally, Mr Alder highlighted IOSCO and the FSB’s work to address potential resilience shortfalls in non-bank financial intermediation. He explains that currently the most advanced workstream is exploring policy options to address potential vulnerabilities in money market funds that could affect financial stability. He states that IOSCO and the FSB plan to consult on this over the next few months.
Speech by IOSCO CEO, Ashley Alder: A global perspective on derivatives regulation
EUROPEAN SECURITIES AND MARKETS AUTHORITY
Short Selling Regulation – ESMA publishes opinion recommending permanent lowering of reporting threshold for net short positions – 20 May 2021
The European Securities and Markets Authority (ESMA) has published an opinion recommending that the threshold for the notification of net short positions in shares set out in Article 5(2) of the Short Selling Regulation ((EU) 236/2012) (SSR) is permanently reduced.
Article 5(2) of the SSR sets the notification threshold of net short positions at 0.2% of the issued share capital of a company with shares admitted to trading on a trading venue, and each 0.1% above that. Under Article 5(3) of the SSR ESMA may issue an opinion to the European Commission on adjusting the threshold, taking account of the developments in financial markets.
ESMA lowered the notification threshold to 0.1% on a temporary basis in March 2020, and subsequent evidence gathered showed that reporting at this lower level resulted in a substantial amount of additional and essential information being made available to national competent authorities (NCAs). ESMA states that this additional transparency allowed the NCAs to conduct better market oversight.
In light of this evidence and given the uncertainty of the current financial market conditions, ESMA recommends that the threshold be permanently reduced to 0.1%. As this is an urgent matter, ESMA has decided that it would be disproportionate to consult publicly on this change, and proposes the Commission adopt the relevant delegated act under Article 5(4) of the SSR as soon as possible.
ESMA Opinion for the adjustment of the threshold for the notification of net short positions in shares set out in Article 5(2) of the Short Selling Regulation ((EU) 236/2012)
Press release
European Securities and Markets Authority – Natasha Cazenave appointed as Executive Director – 20 May 2021
The European Securities and Markets Authority (ESMA) has published a press release announcing it has appointed Natasha Cazenave as its new Executive Director. Ms Cazenave will take up her position on 1 June 2021 and will replace Verena Ross, who has been in the post for the past ten years. The appointment is for a five-year term, renewable once.
Ms Cazenave is currently Deputy Secretary General and Head of the Policy and International Affairs Directorate at the Autorité des Marchés Financiers (AMF).
Press Release: ESMA appoints Natasha Cazenave as Executive Director
AFME, ICMA, ISDA, ISLA AND THE FIA
UK Securities Financing Transaction Regulation – Trade associations publish information statement – 20 May 2021
The Association for Financial Markets in Europe (AFME), the International Capital Market Association (ICMA), the International Swaps and Derivatives Association (ISDA), the International Securities Lending Association (ISLA) and the Futures Industry Association (FIA) have published an information statement to assist market participants in complying with Article 15 of the UK version of the Regulation on reporting and transparency of securities financing transactions ((EU) 2015/2365) (UK SFTR).
Before counterparties to securities financing transactions are permitted to reuse assets, Article 15 requires them to disclose the risks of granting consent to a right of use of collateral and of concluding a title transfer collateral arrangement. The information statement aims to help users to fulfil this requirement by informing counterparties of the risks and consequences involved in consenting to a right of use of collateral provided under a security collateral arrangement or of concluding a title transfer collateral arrangement.
Information statement in accordance with Article 15 of the UK Securities Financing Transactions Regulation
INTERNATIONAL CAPITAL MARKETS ASSOCIATION
Sustainable finance taxonomies – International Capital Markets Association publishes overview and recommendations – 18 May 2021
The International Capital Markets Association (ICMA) has published an overview of taxonomies for sustainable finance and recommendations for success criteria for future taxonomies.
The paper compares the main features and methodologies of official taxonomies from the EU, China and other national authorities, as well as influential market-based systems including the Green Bond Principles’ project categories. It summarises the various approaches that have been taken as well as the different objectives that are being pursued.
The aim of the paper is to help market participants and service providers better understand and use existing taxonomies. It also aims to provide the official sector with proposed success criteria to benchmark current and future taxonomy initiatives. To be successful, the paper recommends that future taxonomies should be:
- targeted in their purpose and objectives;
- additional in relation to existing international frameworks;
- usable by the market for all intended purposes;
- open and compatible with complementary approaches and initiatives; and
- transition-enabled, incorporating trajectories and pathways.
Report: Overview and Recommendations for Sustainable Finance Taxonomies
Press Release: ICMA publishes overview of ‘taxonomies’ for sustainable finance and recommends success criteria
BANK OF ENGLAND
LIBOR – Working Group on Sterling Risk-Free Reference Rates recommends successor rate – 19 May 2021
The Working Group on Sterling Risk-Free Reference Rates (the Working Group) has recommended the use of overnight SONIA, compounded in arrears, as the successor rate to GBP LIBOR for the purposes of the operation of fallbacks in bond documentation.
In February and March 2021, the Working Group carried out a consultation on a successor rate to GBP LIBOR in legacy bonds referencing GBP LIBOR (Consultation). The responses to the Consultation confirmed that it would be helpful for the Working Group to make a recommendation on the successor rate to GBP LIBOR for fallbacks in bond documentation that envisage the selection of a recommended successor rate. The responses also indicated a strong consensus in favour of overnight SONIA, compounded in arrears. The Working Group has therefore reflected this feedback in its recommendation.
The Working Group’s recommended successor rate is intended solely for bond documentation referencing GBP LIBOR that contains contractual fallbacks which result in the selection of a recommended successor rate as a fallback. Where relevant, regard should also be had to the Working Group’s recommendation in September 2020 of a credit adjustment spread methodology when calculating the credit adjustment spread which should then be applied to the recommended successor rate for contractual fallbacks in cash market products referencing GBP LIBOR.
Recommendation
Webpage
FINANCIAL CONDUCT AUTHORITY
Benchmarks Regulation – FCA publishes consultation paper on use of new powers to support wind down of critical benchmarks – 20 May 2021
The FCA has published a consultation paper (CP21/15) on its proposed policy framework for exercising two of its new powers under the Benchmarks Regulation (EU) 2016/1011 (BMR), which will be introduced by the Financial Services Act 2021. These powers relate to the use of critical benchmarks that are being wound down, including LIBOR.
The FCA has already established its policy framework for how it would exercise its new powers to require continued publication of critical benchmarks using a changed methodology, and when it could access those powers. Soon it aims to consult on using those powers to implement a ‘synthetic LIBOR’ rate for some sterling and yen LIBOR settings. These synthetic rates would no longer be ‘representative’ under the terms of the BMR. Where a synthetic LIBOR rate is implemented, the FCA will also need to determine who is permitted to use it. This is because a permanently non-representative benchmark would be prohibited under the BMR, but the FCA can permit some or all legacy use to continue.
The consultation sets out the factors the FCA thinks are relevant in deciding what legacy use of a permanently non-representative benchmark, such as any synthetic LIBOR, it will permit to continue. The FCA reminds market participants that any permitted use of synthetic LIBOR would not be a permanent solution, so parties will need to continue their efforts to amend their contracts. The consultation also sets out the FCA’s proposed approach to using its power to prohibit new use of a critical benchmark which is ending. This is separate to the legacy use power set out above and will be relevant to US dollar LIBOR, given most settings will continue in their current form until mid-2023.
The consultation closes on 17 June 2021. Following this, the FCA intends to publish a Statement of Policy and feedback statement.
Consultation paper: Benchmarks Regulation – how we propose to use our powers over use of critical benchmarks (CP21/15)
Webpage
Press release
ICE BENCHMARK ADMINISTRATION
Benchmark transition – ICE Benchmark Administration launches GBP SONIA spread-adjusted ICE Swap Rate ‘beta’ settings – 17 May 2021
ICE Benchmark Administration (ICE) has launched GBP SONIA Spread-Adjusted ICE Swap Rate ‘beta’ settings. ICE is publishing these daily for an initial testing period, and the settings are designed to support the market in transitioning non-linear derivatives, structured products and cash market instruments that currently reference the GBP LIBOR ICE Swap Rate.
The ‘beta’ settings are published for tenors ranging from one to 30 years and are determined in line with the methodology proposed by the Working Group on Sterling Risk-Free Reference Rates in its paper, ‘Transition in Sterling Non-Linear Derivatives referencing GBP LIBOR ICE Swap Rate’.
The settings are being published for information and illustration purposes in order to enable stakeholders to evaluate the rates and provide feedback. The settings are not intended for, and ICE expressly prohibits their use for, any other purpose, including as a reference, index or benchmark in financial instruments, financial contracts or investment funds. ICE intends to announce in due course when the GBP SONIA Spread-Adjusted ICE Swap Rate settings will be made available for use in financial instruments.
Press Release: ICE Benchmark Administration launches GBP SONIA Spread-Adjusted ICE Swap Rate ‘beta’ settings
Working Group on Sterling Risk-Free Reference Rates paper: Transition in Sterling Non-Linear Derivatives referencing GBP LIBOR ICE Swap Rate
