Financial Stability Board
LIBOR transition - FSB publishes statement on smooth and timely transition - 2 June 2021
The Financial Stability Board (FSB) has published several statements in support of a smooth and timely transition away from LIBOR by the end of 2021. The statements include:
- an updated global transition roadmap that summarises the high-level steps financial and non-financial firms will need to take now and over the course of 2021 to complete their transition;
- a paper reviewing overnight risk-free rates and term rates, building on the concept that the tools necessary to complete the transition are currently available;
- a statement on the use of ISDA spread adjustments in cash products to support the transition, particularly in loan markets. This remains an area of concern given that significant new lending is still linked to LIBOR; and
- a statement encouraging national regulatory authorities to set globally consistent expectations that regulated entities should cease the new use of USD LIBOR in line with the relevant timelines for that currency, regardless of where those trades are booked.
The FSB also welcomes the statement published by the International Organization of Securities Commissions on benchmark transition, which reiterates the importance of ensuring a smooth and timely transition away from LIBOR (see also item 12.1 below). In light of the limited time available, the FSB also strongly urges market participants to act now to complete the steps set out in its global transition roadmap. The FSB intends to publish its next full report on progress in November 2021.
Press release: FSB issues statements to support a smooth transition away from LIBOR by end 2021
Statement: Smooth and timely transition away from LIBOR
Updated Global Transition Roadmap for LIBOR
Report: Interest rate benchmark reform – overnight risk-free rates and term rates
Statement: FSB OSSG Supports Use of the ISDA Spread Adjustments in Cash Products
International Organization of Securities Commissions
LIBOR transition - IOSCO publishes statement - 2 June 2021
The International Organization of Securities Commissions (IOSCO) has published a statement on benchmark transition, reiterating the importance of ensuring a smooth and timely transition from LIBOR. IOSCO notes that the transition remains a significant regulatory priority and will require market participants to take steps to stop the issuance of new products linked to LIBOR. For this reason, IOSCO explains that the use of LIBOR rates in new contracts should be ceased as soon as practicable, and no later than the timelines set out by national regulatory authorities and/or national working groups in the relevant currencies.
In addition and in light of the significant use of USD LIBOR globally, IOSCO is aware of the importance of reinforcing the transition message and timeline on a global scale. Therefore it is encouraging all global market participants to discontinue any new use of USD LIBOR-linked contracts as soon as practicable and by no later than the end of 2021, in order to avoid the safety and soundness risks associated with continued use.
In line with its communication and outreach program launched in 2019, IOSCO also intends to continue its efforts to inform relevant stakeholders on the alternative rates that comply with the IOSCO Principles on Financial Benchmarks.
Statement: LIBOR transition
European Commission
MiFID II - European Commission publishes draft Delegated Regulation for consultation - 27 May 2021
The European Commission has published for consultation a draft Delegated Regulation supplementing the Markets in Financial Instruments Directive (2014/65/EU) (MiFID II) by specifying the criteria for establishing when an activity can be considered to be ancillary to a firm’s main business at group level.
Article 2(1)(j) of MiFID II exempts a firm from the regulated activities of dealing on own account and providing investment services in relation to commodity derivatives, provided these activities are ancillary to that firm’s, or its group’s, main business, and the main business is not the provision of investment services.
The Commission has the power under Article 2(4) of MiFID II to adopt regulatory technical standards (RTS) specifying the criteria for establishing when an activity is to be considered ancillary to the main business of a group. Directive (EU) 2021/338, which amends MiFID II to help the EU’s economic recovery from COVID-19 (the MiFID II Amending Directive), revisited the ancillary activity exemption and empowered the Commission to adopt a delegated regulation to replace Delegated Regulation 2017/592 (RTS 20).
Proposed changes to the exemption are the deletion of the overall market size test in Article 2 of RTS 20 and the introduction of a new de minimis threshold test. The amended text does not change the established calculation methodology of the trading test and capital employed test in RTS 20, except in relation to the level of the corresponding threshold as set out in the MiFID II Amending Directive.
The consultation closes on 24 June 2021.
Draft Delegated Regulation (EU) …/… of XXX supplementing the Markets in Financial Instruments Directive (2014/65/EU) by specifying the criteria for establishing when an activity is to be considered to be ancillary to the main business at group level
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EMIR - European Commission adopts Delegated Regulation specifying commercial terms for clearing services for OTC derivatives - 2 June 2021
The European Commission has adopted a Delegated Regulation specifying the conditions under which commercial terms for clearing services for over-the-counter (OTC) derivatives are to be considered to be fair, reasonable, non-discriminatory and transparent (FRANDT). To facilitate access to clearing for clients, especially those that have a limited volume of activity in the OTC derivatives market, clearing members and clients which provide clearing services must provide those services on FRANDT terms as required under Article 4(3a) of the European Market Infrastructure Regulation (648/2012/EU) (EMIR), as amended by the EMIR Refit Regulation ((EU) 2019/834).
The Delegated Regulation, which specifies the conditions under which commercial terms are to be considered to be FRANDT, aims to:
- increase transparency of the on-boarding process and of prices and other commercial terms on offer;
- ensure that commercial terms are related to costs and risks; prices, fees and discounts are based on objective criteria; and that fees passed on to clients are transparent;
- increase transparency of commercial terms in general and specifically the conditions for acceptance of clearing orders, the suspension of clearing services and close-out of client positions; and
- ensure that notice periods for the termination of clearing services or material changes to commercial terms are fair and provide clients with sufficient time to find another clearing service provider if this is needed.
The Delegated Regulation will now be subject to the scrutiny of the European Parliament and Council of the EU. It will apply in relation to new clients six months from its entry into force. Commercial terms in contracts with existing clients must be brought in line with the requirements laid down in the Delegated Regulation within 12 months from its entry into force.
Commission Delegated Regulation (EU) of XXX supplementing the European Market Infrastructure Regulation (648/2012/EU) by specifying the conditions under which the commercial terms for clearing services for OTC derivatives are to be considered to be fair, reasonable, non-discriminatory and transparent
Annex
Press release
European Securities and Markets Authority
EMIR and SFTR - ESMA publishes consultation paper on Guidelines for data transfer between trade repositories - 28 May 2021
The European Securities and Markets Authority (ESMA) has published a consultation paper on proposed amendments to its Guidelines on data transfer between trade repositories under the European Market Infrastructure Regulation (648/2012/EU) (EMIR) (the EMIR Guidelines) and new proposed Guidelines on the same topic under the Securities Financing Transactions Regulation ((EU) 2015/2365) (SFTR) (the SFTR Guidelines). The amendments to the EMIR Guidelines seek to maintain regulatory authorities’ access to historical data, ensure a high degree of data quality and a competitive trade repository environment. The SFTR Guidelines are intended to establish a data transfer framework in relation to securities financing transactions. Both sets of Guidelines aim to:
- enhance the quality of data available to regulatory authorities, including the aggregations carried out by trade repositories, including where the participant changes the trade repository to which it reports and irrespective of the reason for that change;
- ensure that a competitive multiple-trade repository environment is guaranteed, and that trade repository participants can benefit from competing offers; and
- safeguard a consistent and harmonised way to transfer records from one trade repository to another and support the continuity of reporting and reconciliation, including where a trade repository registration is withdrawn.
The consultation closes on 27 August 2021. Following this, ESMA intends to consider the responses with a view to finalising both sets of proposed Guidelines and aims to publish a final report by Q1 2022.
Consultation paper: Guidelines on transfer of data between trade repositories under EMIR and SFTR (ESMA74-362-1941)
Webpage
Response form
Press release
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Benchmark administrators - ESMA publishes supervisory briefing - 28 May 2021
ESMA has published a supervisory briefing ‘Benchmark administrators’ presence in their member states of location and outsourcing’ (ESMA81-393-98). ESMA explains that the supervisory briefing is designed to provide guidance to national competent authorities (NCAs) in respect of the presence of a benchmark administrator in its member state of location and the outsourcing of functions, relevant services or activities, in the provision of a benchmark, under the EU Benchmarks Regulation ((EU) 2016/1011) (EU BMR)).
The purpose of the supervisory guidance is to ensure a consistent application of the EU BMR across the EU. It also provides guidance on how NCAs should effectively supervise benchmark administrators that are part of a group that may include or have links with non-EU entities; on the authorisation and registration processes in their member states; and on appropriate outsourcing arrangements, in particular where the service provider is located outside the EU.
Supervisory Briefing: Benchmark administrators’ presence in their Member States of location and outsourcing (ESMA81-393-98)
CSDR; MiFIR; Securitisation Regulation; BMR; EMIR; SFTR; MiFID II; UCITS and AIFMD - ESMA updates Q&As - 28 May 2021
ESMA has updated its Q&As in relation to the following legislation:
- Markets in Financial Instruments Directive (2014/65/EU) (MiFID II) and Markets in Financial Instruments Regulation (600/2014/EU) (MiFIR): ESMA has added a new Q&A in relation to investor protection and information on costs and charges;
- MiFIR: ESMA has added Q&A 18, which relates to data reporting reference rates not included in Regulatory Technical Standards (RTS) 23 (supply of financial instruments reference data) and RTS 22 (reporting of transactions to competent authorities);
- Undertakings for the Collective Investment in Transferable Securities Directive (2009/65/EC) (UCITS): ESMA has added two new Q&As relating to the performance reference period for the benchmark model and the performance reference period in case of funds’ mergers;
- Alternative Investment Fund Managers Directive (2011/61/EU): ESMA has updated Q&As on: (i) reporting to national competent authorities under Articles 3, 24 and 42 of the AIFMD; and (ii) its guidelines on performance fees in UCITS and certain types of alternative investment funds, which came into effect on 5 January 2021;
- European Market Infrastructure Regulation (648/2012/EU) (EMIR)): ESMA has amended two Q&As in the trade repositories section relating to access to data by regulatory authorities and the reporting of reference rates not included in Commission Implementing Regulation (EU) 2017/105, as well as adding a new Q&A on the reporting of the field ‘delivery type’ for credit derivatives;
- Securities Financing Transactions Regulation ((EU) 2015/2365) (SFTR): ESMA has added a new Q&A relating to reporting changes to the reference rate in a securities financing transaction;
- Benchmarks Regulation ((EU) 2016/1011) (BMR): ESMA has updated the Q&As to include a new section on EU climate transition benchmarks, EU Paris-aligned benchmarks and sustainability-related disclosures for benchmarks;
- Central Securities Depository Regulation (909/2014/EU) (CSDR): ESMA has added a Q&A in Part III (Settlement Discipline) relating to the scope of cash penalties; and
- Securitisation Regulation ((EU) 2017/2402): as well as modifying some existing questions, ESMA has updated the Q&As to address new technical questions.
Press release
Updated Q&As: MiFID II and MiFIR investor protection topics (ESMA35-43-349)
Updated Q&As: MiFIR data reporting (ESMA70-1861941480-56)
Updated Q&As: AIFMD (ESMA34-32-352)
Updated Q&As: Application of the UCITS Directive (ESMA34-43-392)
Updated Q&As: EMIR implementation (ESMA70-1861941480-52)
Updated Q&As: SFTR data reporting (ESMA74-362-893)
Updated Q&As: Benchmarks Regulation (ESMA70-145-114)
Updated Q&As: Securitisation Regulation (ESMA33-128-563)
Updated Q&As: CSDR (ESMA70-708036281-2)
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EU Investment Firms Regulation - ESMA and EBA publish provisional list of instruments and funds for smallest investment firms - 31 May 2021
ESMA and the European Banking Authority (EBA) have published a provisional list of additional instruments and funds that national competent authorities (NCAs) may allow some of the smallest investment firms to use as own funds under Article 9(4) of the Investment Firms Regulation ((EU) 2019/2033) (IFR).
The aim of the list is to provide guidance to investment firms and competent authorities ahead of the application of the IFR requirements on 26 June 2021. It is based on information received from NCAs from across the EU and includes instruments and funds that may be used as own funds in addition to the instruments included in the Common Equity Tier 1 list published by the EBA in accordance with the Capital Requirements Regulation (575/2013/EU). Going forward, instruments and funds of investment firms are to be allocated either to this list or the existing Common Equity Tier 1 list, depending on their nature.
The EBA and ESMA intend to assess the terms and conditions of all instruments and funds on the provisional list against regulatory provisions at a later stage, and then aim to update, maintain and publish the list on a regular basis.
Press release: ESMA and EBA publish provisional list of instruments and funds for the smallest investment firms under the Investment Firms Regulation
Provisional list of instruments and funds
EBA press release
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MiFID II/MiFIR - ESMA publishes final report and guidelines on market data obligations - 1 June 2021
ESMA has published its final report (ESMA70-156-4305) containing guidelines on obligations relating to market data under the Markets in Financial Instruments Directive (2014/65/EU) (MiFID II) and the Markets in Financial Instruments Regulation (600/2014/EU) (MiFIR).
The aim of the guidelines is to ensure better and uniform application of the provisions in Articles 13, 15(1) and 18(8) of MiFIR and Articles 64(1) and (2) of MiFID II by providing clarity for market participants. The guidelines set out the requirements to publish market data on a reasonable commercial basis and to make market data available free of charge 15 minutes after publication. They apply to national competent authorities, trading venues, approved publication arrangements, consolidated tape providers and systematic internalisers.
The guidelines apply from 1 January 2022 to allow for implementation by market participants. They will be translated into EU official languages in due course.
Final report: Guidelines on the MiFID II/MiFIR obligations on market data (ESMA70-156-4305)
Press release
HM Treasury
PRIIPs - HM Treasury announces extension of exemption for UCITS funds - 1 June 2021
HM Treasury has announced that the current exemption for Undertakings for the Collective Investment in Transferable Securities (UCITS) funds from the requirements of the retained EU law version of the Packaged Retail and Insurance-based Investment Products Regulation (1286/2014/EU) (UK PRIIPs Regulation) will be extended by five years to 31 December 2026.
UCITS funds are currently exempted from the requirements of the UK PRIIPs Regulation. This means that, instead of producing a key information document (KID), UCITS funds providers must produce a key investor information document (KIID), as required under the UCITS Directive (2009/65/EC). This exemption currently expires on 31 December 2021 and HM Treasury intends to legislate to extend this exemption to 31 December 2026. The legislation will be made under the power granted to HM Treasury under the Financial Services Act 2021 to extend the exemption by five years, if required.
The announcement is being made to provide certainty for the industry and investors in relation to the disclosures that UCITS funds providers will have to make to retail investors beyond the end of 2021. Depending on the findings of HM Treasury’s review of the UK retail disclosure regime, changes to the UK PRIIPs Regulation may be made, or a successor regulation may be introduced, sooner than 2026.
Press release: HM Treasury to extend PRIIPs exemption for UCITS funds for five years
Financial Conduct Authority
Market conduct - FCA publishes Market Watch issue 67 - 28 May 2021
The FCA has published issue 67 of Market Watch, its newsletter on market conduct and transaction reporting issues. The new issue focuses on how the FCA uses orderbook data to conduct surveillance to identify suspected market manipulation and its supervision of, and communication with, firms on this. It covers matters including:
- Identifying equity manipulation: the FCA uses suspicious transaction and order reports, and other notifications about suspected market abuse, under Article 16 of the UK Market Abuse Regulation (UK MAR), as well as undertaking its own surveillance of market activity. Firms and trading venues are requested to: (i) check that their systems used for short and long client codes are adequate so that incorrect data is not stored; and (ii) maintain good records of their orderbook data. The FCA may make information requests for orderbook data and it assesses firms’ systems and controls to ensure that they have effective surveillance arrangements in place;
- Algorithm design: the FCA’s internal surveillance algorithms identified an algorithmic trading firm that raised potential concerns about the impact that the algorithms responsible for executing the firm’s different trading strategies were having on the market. As a result, the firm adjusted the relevant algorithm and its control framework to help avoid the firm’s activity having an undue influence on the market; and
- Staff conduct: the FCA’s internal surveillance algorithms identified a small number of instances of potential spoofing by a trader at a firm. As a result of enquiries, the firm introduced additional market abuse training for all its trading staff and enhanced its surveillance capabilities to help better identify this activity.
Newsletter: Market Watch 67
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Cryptoasset firms - FCA extends Temporary Registration Regime - 3 June 2021
The FCA has announced that it has extended the temporary registration regime (TRR) for certain existing cryptoasset firms that have applied for registration under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692) (MLRs).
The TRR was established in 2020 to allow existing cryptoasset firms that applied for registration before 16 December 2020 and whose applications are still being assessed, to continue trading. The TRR was due to expire on 9 July 2021, but has now been extended to 31 March 2022.
The FCA explained that a high number of businesses are not meeting the required standards under the MLRs, which has resulted in an unprecedented number of firms withdrawing their applications. The extension is designed to enable cryptoasset firms to continue to carry on business while the FCA proceeds with its assessments.
The FCA highlights that anti-money laundering and counter terrorist financing legislation is aimed at protecting against the transfer and disguise of funds from criminal activity, or funding of terrorist groups. The regulator makes clear that while this is not the only element it will assess in relation to registration applications, it will only register a firm where it is confident that the firm has processes in place to identify and prevent this activity.
Press release: Temporary Registration Regime extended for cryptoasset businesses
International Regulatory Strategy Group
EU Taxonomy - IRSG publishes paper on UK application - 28 May 2021
The International Regulatory Strategy Group (IRSG) has published a paper setting out recommendations for reviewing the EU taxonomy for application in the UK.
While recognising some of the limitations of the EU’s approach, the IRSG endorses the UK government’s approach in the short-term to remain aligned with the principles of the EU taxonomy. It also supports the government’s establishment of the UK Green Technical Advisory Group, a group of experts that will be tasked with reviewing EU taxonomy metrics and ensuring these are aligned with the UK market. It notes that initially adopting the EU taxonomy should minimise the compliance burden on UK firms, while maximising the pool of investors they can attract and, therefore, helping to position the UK at the forefront of the green transition.
In the paper, the IRSG considers the purpose and usability of the EU taxonomy, as well as practical challenges arising from the need to implement a version which reflects the needs and specificities of the UK economy. It advocates a guiding principle in the development of the UK’s approach that criteria are science-based and pragmatic in ensuring that climate science can be translated into an actionable framework for companies of all sizes to engage with.
Given the implementation of the taxonomy will be a long-term project, the IRSG intends to publish a second paper which will focus on the medium-term challenges of dealing with some of the limitations of the EU taxonomy, including the limited concept of transition and the complex compliance burden for firms.
The IRSG is urging the government to accelerate progress on this work with a view to providing significant clarity to UK issuers and financial market participants, preferably in advance of the UN climate change conference in November 2021. The IRSG also urges the government to set out a clear roadmap of how it envisages the UK taxonomy will apply to companies and financial intermediaries in the UK and consider a phased implementation period that could be tied to the rollout of mandatory Task Force on Climate-related Financial Disclosures (TCFD) reporting.
IRSG Paper: Recommendations for reviewing the EU Taxonomy for UK application
Press release
Fixed Income, Currencies and Commodities Markets Standards Board
Annual Report - FMSB outlines areas of focus for 2021 - 2 June 2021
The Fixed Income, Currencies and Commodities (FICC) Markets Standards Board (FMSB) has published its annual report for 2020. Together with a summary of progress and activities, the report outlines the FMSB’s areas of focus and planned work for 2021, with three key priority areas:
- Prioritising topics for future focus: the FMSB intends to address topics where it can deliver the most impactful outcomes for FICC market participants and wants to have a transparent, structured, member-driven approach to identifying, initiating and prioritising work on new publications, with a balanced focus on existing topics and new emerging issues and opportunities;
- Improving delivery: the FMSB intends to increase pace and efficiency while maintaining the quality and impact of its publications, which includes having better engagement with UK authorities and strengthening member engagement; and
- Extending the FMSB’s reach: the FMSB intends to widen its field of influence across products, markets, regions and types of participants, as well as to increase buy-side engagement and deepen its impact in the UK market.
In addition, the report refers to the significant amount of work that FMSB has undertaken and is currently progressing. This includes: work on LIBOR benchmark reform and setting out expected behaviours of market participants when using or issuing term SONIA products; finalising publications on FICC market structure and the impact of regulatory and technological change on the fairness and effectiveness of wholesale markets; and work on identifying and capturing risks arising from remote working, focusing on areas that affect the fairness and effectiveness of wholesale FICC markets.
FMSB Annual Report 2020
Press release
