Securities and markets regulatory news, 17 May 2021

FIG Bulletin

Recent UK and EU regulatory developments of interest to financial institutions and markets. Also check our Financial institutions general regulatory news of broader application in the Related Materials links.

Contents

Draft Financial Markets and Insolvency (Transitional Provision) (EU Exit) (Amendment) Regulations 2021

A draft version of the Financial Markets and Insolvency (Transitional Provision) (EU Exit) (Amendment) Regulations 2021 (2021 Regulations) have been laid before Parliament, together with a draft explanatory memorandum. The purpose of the 2021 Regulations is to amend a temporary designation regime (TDR) created by the Financial Markets and Insolvency (Amendment and Transitional Provision) (EU Exit) Regulations 2019 (SI 2019/341), which relates to the Financial Markets and Insolvency (Settlement Finality) Regulations 1999 (SI 1999/2979).

The amendment relates to the Financial Markets and Insolvency (Settlement Finality) Regulations 1999 (SI 1999/2979) (SFRs). Temporary designation is being extended by a further two years in a case where a system operator notified the designating authority before IP completion day but does not make an application under section 3(1) of the SFRs within the six month period that began on IP completion day.

Instead of immediately losing settlement finality protections under the TDR, systems will retain protections for a period of 30 months following the end of the transition period. This ensures that UK firms using EEA systems, but who fail to apply for designation under the UK SFRs, will have sufficient time to find alternative providers should those systems choose to stop providing services to UK firms.

The 2021 Regulations will come into force on the day after the day on which they are made.

Capital Requirements Regulation (Amendment) (EU Exit) Regulations 2021

The Capital Requirements Regulation (Amendment) (EU Exit) Regulations 2021 (SI 2021/558) have been published, together with an explanatory memorandum. These Regulations amend the UK Capital Requirements Regulation (UK CRR) to provide that exemptions for commodities dealers will continue to apply until 1 January 2022.

The Regulations will come into force on 1 June 2021.

Greenhouse Gas Emissions Trading Scheme Auctioning (Amendment) Regulations 2021

The Greenhouse Gas Emissions Trading Scheme Auctioning (Amendment) Regulations 2021 (SI 2021/561) (Amending Regulations) have been published, together with an explanatory memorandum. The Regulations amend the Greenhouse Gas Emissions Trading Scheme Auctioning Regulations 2021 (SI 2021/484) (Auctioning Regulations), which provide for the auctioning of allowances created for the purposes of the UK Emissions Trading Scheme. The Amending Regulations clarify the criteria applicable to representatives of those eligible to apply to bid for allowances under the Auctioning Regulations and to correct a number of other minor errors.

The Amending Regulations were made on 10 May 2021 and come into force on 19 May 2021.

UK ETS: Government publishes guidance on supply of allowances

The Department for Business, Energy and Industrial Strategy (BEIS) has published guidance on the supply of allowances in the UK Emissions Trading Scheme (UK ETS). The UK ETS was launched on 1 January 2021 to replace the UK's participation in the EU Emissions Trading System (EU ETS), following the post-Brexit transition period.

UK MiFIR: HM Treasury to remove open access regime for ETDs

HM Treasury has updated its webpage on the open access regime for exchange traded derivatives (ETDs) to announce the outcome of its review of the regime to assess its suitability for the UK markets at the end of the Brexit transition period.

HM Treasury has concluded that the regime, which was originally designed to improve cross-border capital markets in the EU, is not suitable in a UK-only context. The Government therefore intends to remove the regime permanently when parliamentary time allows. The Treasury states that the decision has no bearing on the UK's continued support for the open access regimes in equity and OTC derivatives markets, which will continue to operate as normal.

LIBOR transition: FCA and BoE encourage switch to SONIA in sterling exchange traded derivatives market

The UK Financial Conduct Authority (FCA) and the Bank of England (BoE) have published a joint statement announcing that they encourage market users and liquidity providers in the sterling exchange traded derivatives market to switch the default traded instrument to SONIA instead of LIBOR from 17 June 2021. This is to facilitate a further shift in market liquidity towards SONIA.

UK MiFIR: FCA annual transparency calculations for non-equity instruments for 2021/22

The FCA has updated its Statement on the operation of the MiFID markets regime webpage announcing that it has made available its annual transparency calculations for UK non-equity instruments which will apply from 1 June 2021. The FCA has also published updated data relating to:

These results cover the 2021 annual bonds threshold assessment, the May 2021 quarterly bonds liquidity determination and the 2021 annual derivatives threshold and liquidity assessment. The calculations are available through the FCA's Financial Instrument Transparency Reference System (FCA FITRS).

Special purpose acquisition vehicles: FCA CP21/10

The FCA has published a consultation paper, CP21/10, on proposed changes to the Listing Rules for certain special purpose acquisition companies (SPAC). Briefly, the FCA proposes to remove the presumption that it will suspend the listing of a SPAC when the SPAC identifies a potential acquisition target, where the SPAC is able to demonstrate the higher levels of investor protection that have been developed in certain overseas jurisdictions. The FCA seeks feedback on these criteria.

The short consultation ends on 28 May 2021. The FCA intends to introduce amendments by summer 2021.

For more information, read our separate briefing: FCA consults on SPACs.

MiFID: ESMA updated opinion on calculating market size of ancillary activity

The European Securities and Markets Authority (ESMA) has published an updated opinion on ancillary activity calculations under the Markets in Financial Instruments Directive (MiFID).

Article 2(1)(j) of the MiFID II Directive provides an exemption from its scope for persons dealing on own account or providing investment services in specific cases, including where their activity is an ancillary activity to their main business (provided certain conditions are met). Commission Delegated Regulation (EU) 2017/592 further specifies the criteria for establishing when an activity is to be considered as ancillary for this purpose. In particular, it lays down rules for calculating the overall market trading activity, which ultimately determines whether an activity is ancillary and, consequently, whether a market participant falls within the scope of MiFID.

In the updated opinion, ESMA provides the estimation of the market size of various commodity derivatives, including metals, oil and coal, as well as emission allowances for 2020. ESMA has prepared the estimations based on data collected from trading venues and data reported to trade repositories under the European Market Infrastructure Regulation (EMIR).

MiFIR RTS 2: ESMA consultation

ESMA is consulting on its annual review of the regulatory technical standards (RTS) supplementing MiFIR set out in Commission Delegated Regulation (EU) 2017/583 (RTS 2).

The phasing-in of the MiFIR transparency regime for non-equity instruments is being undertaken in four stages, set out Article 17 of RTS 2. This phasing-in relates to both the determination of the liquidity status of bonds (based on the average daily number of trades) and the level of the pre-trade size specific to the instrument (SSTI) threshold for bonds and most derivatives (based on trade percentiles). Article 17(4) of RTS 2 requires ESMA to submit to the European Commission an annual assessment of the operation of the thresholds for the liquidity determination of bonds and the trade percentiles determining the pre-trade SSTI-threshold until the final stage of the phase-in has been reached. In its first annual assessment, published in September 2020, ESMA concluded that the move to stage 2 for the pre-trade SSTI threshold for bonds was appropriate but that a move to stage 2 would be premature for non-equity instruments other than bonds.

In the consultation paper, ESMA seeks views on proposals:

  • to move to stage 3 for the determination of the liquidity assessment of bonds;
  • not to move to stage 2 for the determination of the pre-trade SSTI thresholds for all non-equity instruments except bonds; and
  • to move to stage 3 for the determination of the pre-trade SSTI thresholds for bonds, except for exchange traded commodities and exchange traded notes.

Annex 3 to the consultation paper sets out the text of a draft Delegated Regulation containing amendments to RTS 2 reflecting these proposals.

The consultation period ends on 11 June 2021. ESMA expects to publish a final report and submit, if necessary, draft technical standards to the Commission for endorsement in July 2021.

EMIR: Delegated Regulation on procedure for penalties imposed on trade repositories

Commission Delegated Regulation (EU) 2021/732 has been published in the Official Journal of the European Union (OJ). The Delegated Regulation amends Delegated Regulation EU 667/2014 with regard to the content of the file to be submitted by the investigation officer to ESMA, the right to be heard in relation to interim decisions and the lodging of fines and periodic penalty payments.

Delegated Regulation (EU) 667/2014 supplements EMIR with regard to rules of procedure for penalties imposed on trade repositories (TRs) by ESMA, including rules on the right of defence. Delegated Regulation (EU) 2021/732 amends Delegated Regulation 667/2014 to adapt the existing rules of procedure to take account of changes introduced by the EMIR Refit Regulation.

The Delegated Regulation entered into force and applied from 7 May 2021.

EMIR: Delegated Regulation on rules of procedure for penalties imposed on third-country CCPs

Delegated Regulation (EU) 2021/731 has been published in the OJ. The Delegated Regulation supplements EMIR with regard to rules of procedure for penalties imposed by ESMA on third-country central counterparties (CCPs) or related third parties.

Article 25i(7) of EMIR empowers the European Commission to adopt delegated acts to specify further the rules of procedures for the power of ESMA to impose penalties, including provisions on the rights of the defence, temporal provisions, and the collection of fines or periodic penalty payments, and the limitation periods for the imposition and enforcements of penalties.

The Delegated Regulation entered into force and applied from 7 May 2021.

BMR: European Commission adopts draft RTS on benchmark methodology, mandatory administration and changes to compliance statement

The European Commission has adopted the following three draft Delegated Regulations supplementing the Benchmarks Regulation (BMR), as amended by the European System of Financial Supervision (ESFS) Omnibus Regulation:

  • Draft Delegated Regulation, which supplements the BMR with regard to RTS specifying the conditions to ensure that the methodology for determining a benchmark complies with the quality requirements (that is, it is robust and reliable). Article 12(4) of the BMR empowers the Commission to further specify the conditions to ensure that the benchmark methodology preserves the integrity of the benchmark itself;
  • Draft Delegated Regulation, which supplements the BMR with regard to RTS specifying the criteria for the competent authorities' compliance assessment regarding the mandatory administration of a critical benchmark. Article 21(5) of the BMR empowers the Commission to further specify the criteria for assessing the mandatory administration or suspension of a critical benchmark;
  • Draft Delegated Regulation, which supplements the BMR with regard to RTS specifying the criteria under which competent authorities may require changes to the compliance statement of non-significant benchmarks. Article 26(6) of the BMR empowers the Commission to further specify the criteria on which competent authorities may require changes to the compliance statement published and maintained by an administrator of a non-significant benchmark.

The Council of the EU and the European Parliament will now scrutinise the draft Delegated Regulations. The Delegated Regulations will enter into force on the twentieth day following the date of their publication in the OJ and they will apply from 1 January 2022.

BMR: European Commission adopts draft RTS on benchmark manipulation and administrator governance arrangements

The European Commission has adopted the following two draft Delegated Regulations supplementing the BMR:

  • Draft Delegated Regulation, which supplements the BMR with regard to RTS specifying the characteristics of the systems and controls for identifying and reporting any conduct that may involve manipulation or attempted manipulation of a benchmark; and
  • Draft Delegated Regulation, which supplements the BMR with regard to RTS specifying the requirements to ensure that an administrator's governance arrangements are sufficiently robust.

The Council of the EU and the European Parliament will now scrutinise the draft Delegated Regulations. The Delegated Regulations will enter into force on the twentieth day following that of its publication in the OJ and they will apply from 1 January 2022.

Business continuity plans for trading venues and intermediaries: IOSCO thematic review report

The International Organization of Securities Commissions (IOSCO) has published a final report on its thematic review of business continuity plans (BCPs) for trading venues and intermediaries.

IOSCO published two reports in 2015 highlighting the importance of BCPs for trading venues and market intermediaries. These set out (respectively) two recommendations and two standards (Recommendations and Standards) for securities regulators. It has now completed a thematic review on the extent to which participating IOSCO member jurisdictions have implemented regulatory measures consistent with those recommendations and standards. The final report sets out the findings from that review.

IOSCO found that 13 participating jurisdictions were fully consistent with the Recommendations and Standards. However, there were some gaps or shortcomings of different degrees of materiality in the other 20 participating jurisdictions for one or more of the recommendations or standards.

The two Recommendations state that regulators should require trading venues to have mechanisms to help ensure the resiliency, reliability and integrity (including security) of critical systems and to establish, maintain and implement a BCP. The two Standards state that regulators should require intermediaries to create and maintain a written BCP that identifies procedures for an emergency or significant business disruption and to update their BCP if there is any material change to operations, structure, business or location. They should also carry out an annual review of their BCP to check if any modifications are needed.

IOSCO found that regulatory frameworks of some jurisdictions did not ensure that relevant provisions for critical systems extend to outsourced functions. It also found that regulations in some participating jurisdictions did not require intermediaries to conduct a regular review of BCP arrangements or update BCPs in response to material business changes.

IOSCO recommends that members include in their regulatory frameworks the necessary powers for regulators to:

  • set and enforce requirements for trading venues and intermediaries when they establish, maintain and update BCPs;
  • ensure the regulatory frameworks require enterprise-wide BCPs and not only disaster recovery or contingency measures for IT systems; and
  • provide sufficient clarity on governance and accountability for boards or senior management in respect of critical systems.

IOSCO states that it will be looking separately at operational risk as part of its work to examine risks exacerbated by the COVID-19 pandemic relating to remote working and operational resilience.

FICC markets: FMSB standard for executing large trades

The FICC Markets Standards Board (FMSB) has published a standard setting out the expected behaviours for participants executing large trades (as defined in the standard) in the wholesale fixed income, commodity and currency (FICC) markets. The standard, which contains ten core principles, is intended, among other things, to reduce information asymmetries between dealers and clients in relation to the execution of large trades and to enhance the understanding of clients as to the method of execution and potential impact of large trades on the market and the price the client receives. It also clarifies and codifies the principles governing the pre-hedging of large trades, building on the FX Global Code (FXGC) and extending principles compatible with the FXGC to the fixed income and commodities markets.

The standard applies to all participants in the wholesale FICC markets in Europe, subject to any applicable local regulatory restrictions. The application of the core principles differs depending on whether a market participant is acting as an agent or a principal.

FX Global Code: GFXC consults on guidance papers on use of pre-hedging and last look

The Global Foreign Exchange Committee (GFXC) has published a "request for feedback" on draft guidance papers for the use of "pre-hedging" and "last look" within foreign exchange markets. It has also published a webpage on the request for feedback. The GFXC is seeking feedback on whether the guidance and recommendations within the draft papers appropriately cover the issues relevant to Principles 11 (pre-hedging) and 17 (last look) of the Foreign Exchange (FX) Global Code. When finalised, the guidance papers will not become part of the FX Global Code but are intended to be read alongside it.

The deadline for comments is 31 May 2021.

REMIT: ACER updates guidance

The Agency for the Co-operation of Energy Regulators (ACER) has published an updated 5th edition of its guidance on the application of the Regulation on wholesale energy market integrity and transparency (REMIT). The updated version clarifies some elements in the description of the behaviour of capacity withholding.

REMIT: ACER updates transaction reporting guidance and FAQs

ACER has updated the following guidance and FAQs relating to transaction reporting and data reporting under the REMIT:

Harmonisation of critical OTC derivatives data elements: LEI ROC consults on changes to technical guidance

The Legal Entity Identifier Regulatory Oversight Committee (LEI ROC) has published a consultative document on revisions to the technical guidance on the harmonisation of critical OTC derivatives data elements. The changes are not intended to change the substance of the data elements in the guidance and LEI ROC's proposals are highlighted in track-changes in the consultation, with the titles of revised data elements highlighted in yellow in the table of contents.

The deadline for responses is 26 May 2021.

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Authored by Yvonne Clapham

 

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