Securities and Markets

Issue 1136 / 18 November 2021

International Organization of Securities Commissions

Commodity derivatives markets - IOSCO publishes Consultation Report on regulation and supervision - 15 November 2021

The International Organization of Securities Commissions (IOSCO) has published a Consultation Report on revising its principles for the regulation and supervision of commodity derivatives markets (CR05/21). The principles were first published in 2011 and aim to ensure that such markets facilitate price discovery and hedging, while remaining free from manipulation and abusive practices.

The updated principles reflect developments including new regulatory reforms, the growing reliance on electronic trading and data, emerging new technologies and products, and unexpected disruptions beyond market dynamics. IOSCO has also considered the importance of mitigating the impacts of unexpected external events, such as spikes in oil prices or COVID-19, on commodity derivatives markets.

IOSCO is seeking feedback on whether the revised principles reflect the changes, trends and activities in the commodity derivatives markets since 2011.

The consultation closes on 17 January 2022.

Consultation report: Principles for the Regulation and Supervision of Commodity Derivatives Markets

Press release

European Securities and Markets Authority

LIBOR - ESMA publishes letter to European Commission - 16 November 2021

The European Securities and Markets Authority (ESMA) has published a letter from the Working Group on Euro risk-free rates (RFRWG) to the European Commission, dated 15 November, regarding the potential designation of statutory replacement rates for the sterling London Inter-Bank Offered Rate (GBP LIBOR) and the Japanese yen London Inter-Bank Offered Rate (JPY LIBOR). The letter follows the outcome of the Task Force discussion on ‘tough legacy’ contracts (those for which active transition or inclusion of fallbacks will not be possible by the end of 2021). The Task Force was convened following a RFRWG meeting held on 1 July 2021.

The letter follows the UK authorities’ announcement that they will mandate the ICE Benchmark Administration (IBA) to continue publishing GBP LIBOR and JYP LIBOR beyond the end of 2021 under a revised ‘synthetic’ methodology. These rates will have limited publication to one year, with an annual review for synthetic GBP LIBOR for up to ten years.

The letter indicates the Task Force’s view, which is supported by the RFRWG, that the EU’s approach to tough legacy contracts should align with that taken by the UK and it should adopt specific legislation to provide legal certainty in relation to contracts linked to synthetic LIBOR. The Task Force acknowledges that this approach will create challenges within the legal framework of the EU Benchmark Regulation ((EU) 2016/1011) (BMR) but will provide a consistent approach for all tough legacy contracts.

The letter requests consideration of the Task Force’s proposal by, and welcomes further discussion on it with, the Commission.

Letter from the Chairman of the EUR Risk Free Rates Working Group to the European Commission


LIBOR - ESMA publishes Final Report - 18 November 2021

ESMA has published a Final Report (ESMA70-156-4953) on draft Regulatory Technical Standards (RTS) on clearing and derivative trading obligations in anticipation of the transition from the Euro Overnight Index Average (EONIA) and the London Inter-Bank Offered Rate (LIBOR) to new Risk-Free Rates (RFRs). The draft RTS amend the RTS on the clearing obligation and the derivative trading obligation that ESMA developed under Article 5(2) of the European Market Infrastructure Regulation ((EU) 648/2012) (EMIR) on over-the-counter (OTC) derivatives, central counterparties and trade repositories, and under Article 32 of the Markets in Financial Instruments Regulation ((EU) 600/2014) (MiFIR).

The Final Report follows ESMA’s Consultation Paper (ESMA70-156-4236), published in July 2021, and proposes three amendments:

  • removal of the interest rate derivatives classes referencing GBP and USD LIBOR from both the clearing obligation and derivative trading obligation;
  • removal of the interest rate derivatives classes referencing the Euro Overnight Index Average (EONIA) and JYP LIBOR from the clearing obligation; and
  • introduction of interest rates derivatives classes referencing the Euro Short Term Rate (€STER), the Sterling Overnight Index Average (SONIA) and the Secured Overnight Financing Rate (SOFR) to the clearing obligation.

ESMA will continue to monitor benchmark transition in the OTC interest rate derivatives market and indicates it may need to review the scope of the clearing obligation and/or the derivatives trading obligation in the future.

The draft RTS have been submitted to the European Commission for endorsement in the form of Commission Delegated Regulations. Following a non-objection review by the European Parliament and Council of the EU, they will enter into force after publication in the Official Journal of the European Union. ESMA’s proposal is for the changes to apply from 3 January 2022, or 20 days after publication, whichever is the latest.

ESMA Final Report: On draft RTS on the clearing and derivative trading obligations in view of the benchmark transition to risk free rates (ESMA70-156-4953)

Press release


CCP Recovery and Resolution Regulation - ESMA publishes six Consultation Papers - 18 November 2021

ESMA has published six Consultation Papers reflecting mandates introduced by the Regulation on the recovery and resolution of central counterparties (CCPs) ((EU) 2021/23) (CCP Recovery and Resolution Regulation or CCPRRR).

Four of the Consultation Papers contain draft Regulatory Technical Standards (RTS), and two contain draft Guidelines. They are intended to be a step towards ensuring consistency across EU CCP resolution regimes in line with the highest international standards.

The Consultation Papers on draft RTS cover the areas of:

  • resolution colleges;
  • the valuation of CCPs’ assets and liabilities in resolution;
  • the safeguards for clients and indirect clients; and    
  • the content of resolution plans.        

The Consultation Papers on the draft Guidelines cover the areas of:

  • the valuation in termination of contracts; and
  • the application of the circumstances under which a CCP is deemed to be failing or likely to fail.

The closing date for responses is 24 January 2022. ESMA will organise a public hearing before then, with registrations opening in December 2021. ESMA aims to publish the final reports by Q2 2022.

ESMA consultation on draft RTS: resolution colleges (ESMA70-151-3428)

ESMA consultation on draft RTS: content of CCP resolution plans (ESMA91-372-1469)

ESMA consultation on draft RTS: valuations (ESMA70-151-3384)

ESMA consultation on draft RTS: safeguards for clients and indirect clients (ESMA70-151-3239)

ESMA consultation on draft Guidelines: applications of the circumstances under which a CCP is deemed to be failing or likely to fail (ESMA91-372-1495)

ESMA consultation on draft Guidelines: methodology for position allocation tool valuation (ESMA70-151-3396)

Press release

UK Parliament

Critical Benchmarks (References and Administrators’ Liability) Bill - House of Lords publishes updated explanatory notes - 17 November 2021

The House of Lords has published an updated version of the explanatory notes to the Critical Benchmarks (References and Administrators’ Liability) Bill (the Bill). The Bill was introduced to the House of Lords and had its first reading on 9 September 2021.

The explanatory notes now include an additional section relating to fast-track legislation. The section states that the government intends to ask Parliament to expedite the parliamentary progress of the Bill, in order for it to obtain Royal Assent before the end of 2021. At this point, the FCA will exercise its powers under the UK Benchmarks Regulation (UK BMR) to provide for the continuity of certain LIBOR contracts which rely on a synthetic methodology.

The Bill addresses the residual risk of legal uncertainty in relation to such contracts and grants immunity from claims for damages to the administrator of a critical benchmark that is designated as unrepresentative under Article 23A of UK BMR, where the administrator acts in accordance with specific requirements imposed upon it by the FCA.

Explanatory notes: Critical Benchmarks (References and Administrators’ Liability) Bill

Financial Conduct Authority

Market Conduct - FCA publishes Primary Market Bulletin No. 36 and Primary Market Technical Note15 November 2021

The FCA has published its Primary Market Bulletin No. 36. which sets out information on the FCA's disclosure expectations and supervisory strategy in relation to the Task Force on Climate-related Financial Disclosures (TCFD) aligned climate-related disclosure requirements for premium listed commercial companies in Listing Rule 9.8.6R(8) and, subject to the making of final rules, for certain standard listed companies in the proposed new Listing Rule 14.3.27R.

Guidance relating to the FCA's disclosure expectations relating to these requirements is set out in a new technical note (Primary Markets/TN/802.1 TCFD aligned disclosure requirements for listed companies) in respect of which the FCA is seeking feedback. The technical note includes, among other things, details of the FCA's expectations where a listed company has not included climate-related financial disclosures consistent with all TCFD recommendations and recommended disclosures in either its annual financial report or in another document.

FCA Primary Market Bulletin No. 36

FCA Primary Market Technical Note: TCFD aligned climate-related disclosure requirements for listed companies


Market conduct - FCA publishes Market Watch issue 68 - 16 November 2021

The FCA has published issue 68 of Market Watch, its newsletter on market conduct and transaction reporting issues. The new issue focuses on web-based trading platforms and highlights the FCA’s concerns regarding gaps in users’ surveillance of web-based platform activity. It covers matters on monitoring gaps in fixed income and rates markets, including:

  • market abuse surveillance: the FCA is concerned that users of web-based platforms may not be able to monitor all of their orders to detect potential market abuse, in line with Article 16(2) of the UK Market Abuse Regulation (UK MAR);
  • data challenges: most users report initial challenges in obtaining useable data in a format suitable for surveillance;
  • compliance awareness: there is disparity in the knowledge of users’ compliance and/or surveillance teams, with many failing to ensure that order and trade data are captured for surveillance purposes. The FCA also highlights disparity in the steps users take where they have identified a gap in data capture;
  • market abuse risk assessments: assessments often fail to include business entered on web-based platforms, particularly orders which are deleted or otherwise do not result in a trade;
  • record keeping: users failing to capture all trade and order data will not be meeting Article 25(1) of UK Markets in Financial Instruments Regulation (UK MiFIR), which requires investment firms to keep data relating to all orders and transactions for five years. Failure to capture and record this data may also affect the FCA’s ability to monitor the market;
  • onboarding governance: the FCA has observed firms using web-based trading platforms before completing formal new business procedures. Formal procedures and good governance for onboarding new platforms will allow firms to capture and monitor all relevant trade and order data;
  • firm rationales for failings: the FCA will continue to observe firms using questionable rationales to justify potential failings to meet their obligations under UK MAR. Where the PRA has not published enforcement action on particular failings, firms should not assume the PRA will not take appropriate enforcement action; and
  • operators of web-based platforms: operators of trading venues are reminded of their obligations to undertake effective monitoring to prevent, identify and report potential market abuse, and of their order data recording obligations under Article 25 of UK MiFIR.

The FCA will also continue to visit firms and venues to assess their suspicious transaction and order reporting (STOR) frameworks.

Newsletter: Market Watch 68


LIBOR - FCA publishes statement on legacy use of synthetic LIBOR rates and no new use of US dollar LIBOR, together with draft Notices and Feedback Statement FS21/11 - 16 November 2021

The FCA has confirmed in a statement that it will allow the temporary use of the one, three and six-month sterling and Japanese yen London Inter-Bank Offered Rate (LIBOR) rates on a ‘synthetic’ basis in all legacy LIBOR contracts, other than cleared derivatives, that have not been changed at or ahead of the end of 31 December 2021. The FCA’s permission will be for one year from 1 January 2022 with power to extend it for up to 10 years. The regulator has also confirmed that the use of USD LIBOR will not be allowed in most new contracts written after 31 December 2021. This follows the FCA’s consultation on these proposals (CP21/29), which closed on 20 October 2021.

CP21/29 also confirmed that the FCA will require ICE Benchmark Administration (IBA) to continue publication of the same sterling and Japanese LIBOR rate settings using a synthetic methodology for the duration of 2022, under its powers in Article 23D(2) of the UK Benchmarks Regulation (UK BMR). The FCA consulted on this point, and the synthetic methodology, in its Consultation Paper CP21/19, which it proposed should be the forward-looking term version of the relevant risk-free rates, Sterling Overnight Indexed Average (SONIA) and Tenge Overnight Index Average (TONIA), plus the International Swaps and Derivatives Association (ISDA) credit spread adjustment.

The regulator has now published Feedback Statement FS 21/11, which confirms large-scale support for these proposals. In response to consultation feedback, it has made one change to its proposed approach: adjusting its proposed methodology for each of the three Japanese yen LIBOR settings to account for day count differences between Japanese yen LIBOR and Tokyo Term Risk Free Rate (TORF).

Alongside FS21/11, the FCA has published:

  • a draft notice under Article 21A of the UK BMR, confirming that the use of USD LIBOR will not be allowed in most new contracts written after 31 December 2021;
  • a draft notice under Article 23C of the UK BMR, setting out permitted legacy use of LIBOR by supervised entities;
  • a notice under Annex IV of the UK BMR of proposed modifications to the UK BMR and its relevant delegated regulations;
  • a press release, stating that the FCA has notified lenders who are replacing LIBOR with an alternative rate in their contracts that they must treat customers fairly; and
  • an updated Q&A, setting out information for borrowers on mortgage interest rates and LIBOR.

FCA statement on legacy use of synthetic LIBOR rates and no new use of US dollar LIBOR


LIBOR Notice: Article 21A Benchmarks Regulation

LIBOR Notice: Article 23C Benchmarks Regulation

LIBOR Notice: Annex 4 Benchmarks Regulation

Feedback statement: Article 23D BMR Decision for 6 sterling and yen LIBOR versions (FS21/11)

Feedback statement (FS21/11) webpage

Updated Q&A: Mortgage interest rates and LIBOR: information for borrowers

Financial Conduct Authority and Financial Reporting Council

Structured reporting - FCA and FRC publish joint Dear CEO letter - 16 November

The FCA and the Financial Reporting Council (FRC) have published a joint ‘Dear CEO’ Letter from Clare Cole, FCA Director of Market Oversight, and Mark Babington, FRC Executive Director of Regulatory Standards.

The letter highlights the requirements for certain companies to produce their 2021 annual financial reports in a structured XHTML web browser format, under the Disclosure Guidance and Transparency Rule (DTR) 4.1.14R. It also sets out the FCA and FRC’s expectations on quality, which include that:

  • issuers are expected to devote the same level of care and attention to the annual financial report in XHTML as they do to its production in PDF or printed form;
  • issuers are strongly encouraged to take advantage of the opportunity to file in the new electronic format voluntarily to help ensure that they are familiar with the requirements and the submission process before the requirements become mandatory. Issuers that have already filed their annual financial reports in a non-structured format may file a structured version separately, and at a later date, but must ensure that the underlying information within the reports is identical; and
  • issuers may want to consider the key issues identified in the FRC’s review of filings by issuers who have filed in the new format voluntarily in advance of the effective date of the new rules.

The FRC and the FCA will consider jointly the quality and usability of the reports in the first year of mandatory adoption, and a follow-up to the FRC review of best practices will be published in 2022. The letter makes clear than both bodies will consider further actions if their expectations on quality are not met.

‘Dear CEO’ Letter from FCA Director of Market Oversight, Clare Cole, and FRC Executive Director of Regulatory Standards, Mark Babington

Press release

See the Banking and Finance section for an item on the notification of securitisation transactions.