Securities and Markets

Issue 1137 / 25 November 2021

Overview

  • MiFID recovery package - ESMA publishes final report on draft RTS for new commodity derivatives framework
  • Establishment of a consolidated tape - Commission adopts proposals to amend MiFID II Directive and MiFIR
  • UK EMIR - Bank of England and FCA publish joint consultation paper (CP21/31)

Headlines

  1. International Organization of Securities Commissions
    1. ESG ratings and data products providers - IOSCO publishes final report - 23 November 2021
  2. Financial Stability Board
    1. LIBOR cessation - FSB publishes statement urging engagement and transition - 22 November 2021
  3. European Systemic Risk Board
    1. Margin calls - ESRB publishes compliance report - 22 November 2022
  4. European Securities and Markets Authority
    1. CCP investment practices for highly liquid financial instruments and money market funds - ESMA publishes consultation paper - 19 November 2021
    2. Emissions allowances and derivatives thereof - ESMA publishes preliminary report - 19 November 2019
    3. BMR, CSDR, EMIR, ECSPR, MiFIR and the Securitisation Regulation - ESMA updates Q&As - 19 November 2021
    4. MiFID recovery package - ESMA publishes final report on draft RTS for new commodity derivativesframework - 22 November 2021
    5. EMIR - ESMA publishes discussion paper on clearing thresholds - 22 November 2021
    6. MAR - ESMA publishes annual report on administrative and criminal sanctions - 23 November 2021
  5. European Commission
    1. Establishment of a consolidated tape - Commission adopts proposals to amend MiFID II Directive and MiFIR - 25 November 2021
    2. European single access point - European Commission adopts legislative proposal - 25 November 2021
  6. Bank of England and Financial Conduct Authority
    1. UK EMIR - Bank of England and FCA publish joint consultationpaper (CP21/31) - 25 November 2021
  7. Financial Conduct Authority
    1. Assessment of securitisation repositories - FCA publishes statement​​​​​​​- 19 November 2021
    2. Code recognition scheme - FCA recognises updated FX Global Code and the Global Precious Metals Code- 19 November 2021
    3. UK IFPR - FCA publishes additional MIFIDPRU application forms - 19 November 2021

International Organization of Securities Commissions

ESG ratings and data products providers - IOSCO publishes final report - 23 November 2021

The International Organization of Securities Commissions (IOSCO) has published its final report (FR09/21) on environmental, social and governance (ESG) ratings and data products providers. This follows IOSCO’s consultation report (CR02/21) on the same matter, published in July 2021.  A summary of responses has been included as Annex 3 to the report. Overall, respondents were supportive of IOSCO’s work and broadly in agreement with its proposed recommendations.

The final report sets out ten recommendations in Annex 2. These relate to, among other matters: (i) increasing transparency around the use of methodologies; (ii) ensuring procedures for managing conflicts of interest are appropriate; (iii) and improving communication channels between providers and the entities covered by their ESG ratings or data products without undermining their impartiality. 

IOSCO Final Report: Environmental, Social and Governance (ESG) Ratings and Data Products Providers (FR09/21)

Press release

Financial Stability Board

LIBOR cessation - FSB publishes statement urging engagement and transition - 22 November 2021

The Financial Stability Board (FSB) has published a statement on LIBOR cessation, noting that most LIBOR panels will cease at the end of 2021, save for certain US dollar (USD) settings. In the FSB’s view, the continued reliance of global markets on LIBOR poses a risk to financial stability. Whilst significant progress has been made to transition to risk-free rates (RFRs), swift action is required to ensure the timelines set out by the FSB in its June 2021 roadmap are met. The FSB is particularly concerned by the widespread use of USD LIBOR in emerging markets and developing economies (EMDEs) and therefore considers engagement with EMDEs a critical part of global LIBOR transition.

The FSB encourages market participants to transition to overnight RFRs or, where necessary, RFR-derived term rates. Whilst it acknowledges that regulators, including in the UK and Japan, have taken steps to facilitate the publication of ‘synthetic’ LIBOR rates, it emphasises that active transition is the best way to promote control and certainty and, unlike synthetic LIBOR, provides a permanent solution.

The FSB will continue to monitor the steps taken to complete LIBOR transition over the coming months. In mid-2022, it will conduct a review of three remaining issues: (i) reduction of the stock of legacy contracts using synthetic LIBOR; (ii) any continued issuance of USD LIBOR contracts post-31 December 2021; and (iii) the size of legacy contracts referencing USD LIBOR due to mature after that rate’s cessation in June 2023.

FSB Statement to Support Preparations for LIBOR Cessation

Webpage

Press release

European Systemic Risk Board

Margin calls - ESRB publishes compliance report - 22 November 2022

The European Systemic Risk Board (ESRB) has published a compliance report (ESRB/2020/6) on its recommendation to address the liquidity risks arising from margin calls.

Despite a relatively high degree of compliance with the recommendation, the compliance report highlights several issues where further analytical and policy work may be warranted. In the area of central clearing, these issues relate to:

  • the evaluation of the performance of anti-procyclical (APC) tools used by CCPs to determine their initial margins;
  • the use of specific APC tools in client clearing, which seems to be lacking;
  • the inclusion in the liquidity risk stress test scenarios of any two entities (not only clearing members, as strictly prescribed by the current regulatory framework) to which a CCP has liquidity exposure; and
  • a reluctance to implement the pass-through of intraday variation margins.

ESRB Compliance Report: Recommendation of the European Systemic Risk Board of 25 May 2020 on liquidity risks arising from margin calls (ESRB/2020/6) – Recommendations A, B(2), B(3), B(4) and C

European Securities and Markets Authority

CCP investment practices for highly liquid financial instruments and money market funds - ESMA publishes consultation paper - 19 November 2021

The European Securities and Markets Authority (ESMA) has published a consultation paper (ESMA91-372-1593) examining the potential extension of the list of financial instruments eligible for investments by central counterparties (CCPs) under the European Market Infrastructure Regulation (EMIR) ((EU) 648/2012), including EU Money Market Funds (MMFs). 

Under current circumstances and given expected future regulatory reform under the Money Market Funds Regulation ((EU) 2017/1131) (MMFR), ESMA does not believe that there are sufficient grounds to recommend an extension of the list of financial instruments for CCP investments to MMFs at this stage.

ESMA will consider the responses it receives to this consultation paper and expects to publish a final report during the spring of 2022.

ESMA Consultation Paper: Report on highly liquid financial instruments with regards to the investment policy of central counterparties (EMIR Article 85(3a(e))) (ESMA91-372-1593)

Press release

Emissions allowances and derivatives thereof - ESMA publishes preliminary report - 19 November 2019

ESMA has published a preliminary report (ESMA70-445-7) (dated 15 November 2021) on the trading of emission allowances (EUAs) and derivatives in the EU carbon market. The report responds to a request made by the European Commission (Commission) to ESMA in its Communication on Energy Prices, ‘Tackling rising energy prices: a toolbox for action and support’, published on 13 October 2021.

The report makes a number of preliminary observations of recent market developments in the carbon market, which are broadly in line with its expected functioning. ESMA intends to conduct an in-depth analysis of the market based on data available by virtue of the application of the Markets in Financial Instruments Directive (MiFID II) (2014/65/EU) and European Market Infrastructure Regulation (EMIR) ((EU) 648/2012). The Commission will then assess whether regulatory action is required.

ESMA will produce a report analysing the trading of EUAs by early 2022.

ESMA Preliminary Report: Emission Allowances and derivatives thereof (ESMA70-445-7)

Press release

BMR, CSDR, EMIR, ECSPR, MiFIR and the Securitisation Regulation - ESMA updates Q&As - 19 November 2021

ESMA has updated its Q&As on the following:

  • the Benchmarks Regulation ((EU) 2016/1011) (BMR): on the disclosure requirements in Section 3 of Annex I of the benchmark statement, and environmental, social and governance (ESG) factors and ESG objectives;
  • the Central Securities Depositories Regulation (909/2014) (CSDR): on partial settlement functionality;
  • the European Market Infrastructure Regulation on over-the-counter (OTC) derivatives, central counterparties (CCPs) and trade repositories ((EU) 648/2012) (EMIR): on the calculation of positions for the clearing thresholds under Articles 4a and 10 of EMIR, as amended by Regulation 2019/83,; and the hedging definition under Article 10(3) of EMIR;
  • the European crowdfunding service providers for business ((EU) 2020/1503) (ECSPR): on (i) the transitional period; (ii) provisions of crowdfunding services and organisation and operational requirements; and (iii) investor protection provisions;
  • the Markets in Financial Instruments Directive (MiFID II) (2014/65/EU) and the Markets in Financial Instruments Regulation ((EU) 600/2014) (MiFIR): on the application of product governance requirements to bonds embedding a make-whole clause; and
  • the Securitisation Regulation ((EU 2017/2402): on (i) individual fields in disclosure templates; (ii) trigger measurements in investment reports; and (iii) completing synthetic coverage information.

Updated Q&As on BMR (ESMA70-145-114)

Updated Q&As on CSDR (ESMA70-708036281-2)

Updated Q&As on EMIR (ESMA70-1861941480-52)

Updated Q&As on ECSPR (ESMA35-42-1088)

Updated Q&As on MiFID II and MIFIR (ESMA35-43-349)

Updated Q&As on Securitisation Regulation (ESMA33-128-563)

Press release

MiFID recovery package - ESMA publishes final report on draft RTS for new commodity derivatives framework - 22 November 2021

ESMA has published its final report (ESMA70-156-4710) on draft regulatory technical standards (RTS) and draft implementing technical standards (ITS) for commodity derivatives under the Markets in Financial Instruments Directive Amending Directive ((EU) 2021/338) (MiFID II Amending Directive). The key changes relate to the ancillary activity test and to the scope of application of position limits. ​​​​​​​

The final report follows ESMA’s May 2021 consultation on the matter (ESMA70-156-4067), as previously reported in this Bulletin. In short, ESMA has proposed, in the annexes to the report:

  • draft RTS 21a laying down rules for the calculation of the net positon held by a person in a commodity derivative, the methodology for calculating the position limits on the size of that position and the procedures for applying for exemptions to position limits. This would repeal existing Commission Delegated Regulation (EU) 2017/591 (RTS 21);
  • draft RTS on specifying the content of position management controls by trading venues positions management; and
  • draft ITS amending Commission Implementing Regulation (EU) 2017/1093 laying down ITS with regard to the format of position reports by investment firms and market operators.

The draft RTS and ITS have been submitted to the European Commission for endorsement. The revised MiFID II regime for commodity derivatives will apply at the end of February 2022.

ESMA Final Report: Technical standards for commodity derivatives

Press release​​​​​​​

EMIR - ESMA publishes discussion paper on clearing thresholds - 22 November 2021

ESMA published a discussion paper (ESMA70-156-5010) that reviews the clearing thresholds under the European Market Infrastructure Regulation ((EU) 648/2012) (EMIR). The review is required by the EMIR Refit Regulation ((EU) 2019/834).

The discussion paper: (i) maps the population that is currently subject to mandatory clearing to assess if the clearing thresholds are fit for purpose following the changes introduced by EMIR; and (ii) assesses whether a revision of these thresholds would be beneficial to tackle the systemic risk associated with over-the-counter (OTC) derivative trading activity, while preserving the clearing obligation as one of the pillars for financial stability in OTC derivative markets.

ESMA concludes that a slight adjustment of the current clearing thresholds would not have a significant impact on the population of counterparties captured by the thresholds.

Feedback to the discussion paper is requested by 19 January 2022 and will be taken into account when ESMA prepares its follow-up report.

ESMA Discussion Paper: Review of the clearing thresholds under EMIR (ESMA70-156-5010)

Press release​​​​​​​

MAR - ESMA publishes annual report on administrative and criminal sanctions - 23 November 2021

ESMA has published its annual report (dated 20 October 2021) (ESMA70-156-4673) on administrative and criminal sanctions and other administrative measures imposed under the Market Abuse Regulation (596/2014/EU) (MAR) during 2020.

National competent authorities (NCAs) and other authorities imposed a total of EUR 17.5 million in fines related to 541 administrative and criminal actions under MAR. Overall, financial penalties were significantly lower than the previous year and the imposition of criminal sanctions also decreased.

ESMA Report: Administrative and criminal sanctions and other administrative measures imposed under the Market Abuse Regulation in 2020 (ESMA70-156-4673)

Press release

European Commission

Establishment of a consolidated tape - Commission adopts proposals to amend MiFID II Directive and MiFIR - 25 November 2021

The European Commission (Commission) has adopted proposals to amend Directive 2014/65/EU (MiFID II Directive) (COM(2021) 726 final) and Regulation (EU) 600/2014 (MiFIR) (COM(2021) 727 final) to reflect the establishment of a consolidated tape. The proposals are part of a wider EU effort to further integrate capital markets.

An accompanying factsheet notes that, at present, data on transactions in financial instruments in the EU is scattered across around numerous platforms. This fragmentation means that only the most sophisticated investors have access to a consolidated data set. The proposals aim to level the playing field by establishing a centralised data base, known as the ‘European consolidated tape’ (ECT), to provide, for equity and equity-like financial instruments, a comprehensive view on the prices and volume of securities traded across the EU’s trading venues. The Commission hopes that the proposals will also tackle liquidity and trade execution risk, both of which result from a lack of correct and current information.

Under the Commission’s proposals, execution platforms across the EU will be required to contribute directly trading data to the ECT. Data standards will be harmonised to ensure the data is usable and comparable. The European Securities and Markets Authority (ESMA) will nominate an existing consolidated tape provider to publish the information as close to real time as possible.

The proposals will now be discussed by the European Parliament and the Council.

Proposal for a Directive of the European Parliament and of the Council amending Directive 2014/65/EU on markets in financial instruments (COM(2021) 726 final)

Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 600/2014 as regards enhancing market data transparency, removing obstacles to the emergence of a consolidated tape, optimising the trading obligations and prohibiting receiving payments for forwarding client orders (COM(2021) 727 final)

Consolidated tape factsheet

Webpage

Press release​​​​​​​

European single access point - European Commission adopts legislative proposal - 25 November 2021

The Commission has adopted a legislative proposal (COM(2021) 723 final) for a Regulation establishing a European single access point (ESAP), providing centralised access to publicly available information of relevance to financial services, capital markets and sustainability. It aims to reduce barriers to access to information by digital means, increasing the flows of information within the EU, including across borders. It also aims to foster the digital use and re-use of information.

The proposal is part of a package, also comprising: (i) a proposal for a Directive amending certain Directives as regards the establishment and functioning of the ESAP (COM(2021) 724 final); and (ii) a proposal for a Regulation amending certain Regulations as regards the establishment and functioning of the ESAP (COM(2021) 725 final).

Article 1 of the proposed Regulation mandates the European Securities and Markets Authority (ESMA) to establish the ESAP by 31 December 2024. If approved, the Commission will review the functioning and effectiveness of the ESAP five years following the entry into force of the proposed Regulation.

Separately, the Commission has also published a report on the legislative proposals (COM(2021) 723-724-725 final), an impact assessment (SWD(2021) 344 final) and an executive summary of the impact assessment (SWD(2021) 345 final).

The Council of the European Union and the European Parliament will now consider the Proposal. If approved, the Regulation will enter into force on the 20th day following its publication in the Official Journal of the European Union.

European Commission: Proposal for a Regulation of the European Parliament and of the Council establishing a European single access point providing centralised access to publicly available information of relevance to financial services, capital markets and sustainability

Webpage: Impact assessment (SWD(2021) 344 final)

Webpage: Impact assessment: executive summary (SWD(2021) 345 final)

European Commission: Proposal for a Regulation of the European Parliament and of the Council amending certain Regulations as regards the establishment and functioning of the European single access point (COM(2021) 725 final)

Webpage: COM(2021) 725 final

European Commission: Proposal for a Directive of the European Parliament and of the Council amending certain Directives as regards the establishment and functioning of the European single access point (COM(2021) 724 final

Bank of England and Financial Conduct Authority

UK EMIR - Bank of England and FCA publish joint consultation paper (CP21/31) - 25 November 2021

The Bank of England (Bank) and the FCA have published a joint consultation paper (CP21/31) detailing their proposals on changes to reporting requirements, procedures for data quality and registration of trade repositories (TRs) under the retained EU law version of the European Market Infrastructure Regulation (648/2012/EU) (UK EMIR). The Bank and the FCA are jointly consulting as they share supervisory responsibilities for the reporting requirements under Article 9 of UK EMIR. Separately, the FCA is also proposing new targeted requirements TRs.

The consultation paper sets out the Bank and FCA’s joint proposals, which include:

  • amending the table of reportable fields in the relevant technical standards under UK EMIR to align with international guidance issued by the Committee on Payments and Market Infrastructures and International Organization of Securities Commissions (CPMI-IOSCO);
  • introducing notifications and reconciliation processes for counterparties;
  • introducing specific requirements for the mandatory delegated reporting requirements under UK EMIR in the relevant technical standards;
  • requiring counterparties to use standardised XML schemas when submitting details of their derivatives to a TR; and
  • introducing specific requirements for the use of global identifiers.

Separately, the FCA is proposing amendments to the registration process for TRs to streamline the process for those already registered or recognised under the Securities Financing Transactions Regulation ((EU) 2015/2365) (UK SFTR). The FCA also proposes to (i) incorporate the payment of registration fees to align the registration process under UK EMIR and UK SFTR and (ii) impose new requirements on TRs to improve data quality and promote the consistency of reporting.

The joint consultation closes on 17 February 2021. Following consideration of responses, the Bank and the FCA will submit the updated technical standards to HM Treasury for approval under section 138R of FSMA. If approved, the Bank and the FCA will publish a policy statement, alongside any supporting materials. The new UK EMIR rules with new requirements for TRs will also be published in the FCA Handbook.

Bank of England and FCA Consultation Paper: Changes to reporting requirements, procedures for data quality and registration of Trade Repositories under UK EMIR (CP 21/31)

Bank of England webpage

FCA webpage

Financial Conduct Authority

Assessment of securitisation repositories - FCA publishes statement ​​​​​​​- 19 November 2021

The FCA has published a statement announcing that it “has assessed completeness and now reached the examination stage in the assessment process of applications received from Securitisation Repositories (SRs)” under the retained EU law version of the Securitisation Regulation ((EU) 2017/2402) (UK Securitisation Regulation).

The requirement to report public securitisations within the scope of the UK Securitisation Regulation to a SR that is registered and supervised by the FCA will apply as soon as one SR is registered. The FCA will inform market participants as soon as the registration of the first SR is completed.

FCA Statement: FCA enters examination stage in the registration of first UK securitisation repositories​​​​​​​

Code recognition scheme - FCA recognises updated FX Global Code and the Global Precious Metals Code - 19 November 2021

The FCA has announced that it is recognising the updated FX Global Code (maintained and updated by the Global Foreign Exchange Committee) and the Global Precious Metals Code (maintained and updated by the London Bullion Market Association) (together, the Codes) under its code recognition scheme. The scheme is a process for recognising industry codes for unregulated financial markets and activities. Behaviour that is in line with an FCA recognised code will tend to indicate a person subject to the senior managers and certification regime is meeting their obligation to observe ‘proper standards of market conduct’ in relation to unregulated markets.

The FCA has highlighted that the following practices are not consistent with the Codes:

  • ‘last look practices’ that incorporate a delay additional to what is required to complete price and validity checks; and
  • pre-hedging practices where firms do not communicate their practices to clients in a manner that allows clients to understand the potential impact on the execution of their order. This includes practices where firms do not have appropriate controls to monitor conflicts of interest or limit access to confidential information.

More broadly, the FCA stressed that signatories to the Codes must make clear and transparent disclosures to market users to explain how their orders will be handled.

The recognition of the Codes will last initially until 22 November 2024.

FCA: Statement: FCA confirms recognition of the updated FX Global Code and the Global Precious Metals Code

Updated webpage: Recognised industry codes

Updated FX Global Code

Global Precious Metals Code​​​​​​​

UK IFPR - FCA publishes additional MIFIDPRU application forms - 19 November 2021

The FCA has made available an additional nine MIFIDPRU (the Prudential sourcebook for MiFID (Markets in Financial Instruments Directive (204/39/EC)) Investment Firms) forms under the UK Investment Firms Prudential Regime (IFPR). 

The IFPR will come into force on 1 January 2022.

Application under MIFIDPRU 2.3.1R to be exempt from disclosure requirements in MIFIDPRU 8 (disclosure by investment firms) for small and non-interconnected (SNI) firms in consolidated insurance groups

Application under MIFIDPRU 3.3.2R for permission to include interim or year-end profits as common equity tier 1 (CET1) capital before the firm has taken a formal decision confirming the final profit and loss for the year

Application under MIFIDPRU 3.6.2.R for permission to reduce own funds investments where neither condition in MIFIDPRU 3.6.3R applies

Application under MIFIDPRU 4.5.9R for permission to rebase fixed overhead requirement to a lower amount where a firm or group’s projected relevant expenditure decreases by a material amount.

Application under MIFIDPRU 4.11.9R for permission to exclude positions taken to hedge against the adverse effect of the exchange rate on own funds or an item deducted from capital from net open currency positions for the purpose of Article 352 of the retained EU law version of the Capital Requirements Regulation (575/2013) (UK CRR).

Application for a permission under MIFIDPRU for which there is no dedicated application form

Application under MIFIDPRU 4.12.4R for permission to use an advanced internal market risk model.

Application under MIFIDPRU 4.12.6R for permission to make a material change or a material extension to the use of an advanced internal market risk model.

Application under MIFIDPRU 4.12.66R for permission to use sensitivity models to calculate interest rate risk on derivative instruments in accordance with Article 331(1) of the retained EU law version of the Capital Requirements Regulation (575/2013) (UK CRR).

See also the Banking and Finance section for an item on a speech relating to the future of UK financial services delivered by the economic secretary, John Glen MP in which Mr Glen referred to changes arising from the Wholesale Markets Review.