Securities and markets regulatory news, 2 August 2021

FIG Bulletin

Recent UK and EU regulatory developments of interest to financial institutions and markets, including updates on MiFIR, MiFID, CSDR, BMR and CRA Regulation. Also check our supplementary Financial institutions general regulatory news of broader application in the Related Materials links.


SMCR for FMIs: HM Treasury consultation

HM Treasury has published a consultation paper proposing a Senior Managers and Certification Regime (SMCR or SM&CR) for financial market infrastructures (FMIs). The consultation closes on 22 October 2021. HM Treasury intends to legislate for the new regime when parliamentary time allows.

Read more in our separate briefing: SMCR for Financial Market Infrastructures: HM Treasury Consultation.

LIBOR cross-currency swaps market participants: FCA and BoE encourage switch to RFRs

The Financial Conduct Authority (FCA) and Bank of England (BoE) have published a statement encouraging liquidity providers in the LIBOR cross-currency swaps market to adopt new quoting conventions for interdealer trading based on risk-free rates (RFRs) instead of LIBOR from 21 September 2021. This is to facilitate a further shift in market liquidity toward RFRs, bringing benefits for a wide range of users as they move away from LIBOR.

An FCA survey of UK market participants identified strong support for a change in the interdealer quoting convention, which would see RFRs rather than LIBOR become the default price from 21 September 2021. Therefore, the FCA and BoE encourage participants to take necessary steps to implement these changes to market conventions.

In the period leading up to 21 September 2021, the FCA and the BoE will continue to engage with market participants and international authorities to determine whether market conditions allow the switch to proceed.

The European Securities and Markets Authority (ESMA) has also published a document setting out recommendations from the Working Group on Euro Risk-Free Rates on the switch to risk-free rates in the interdealer market.

LR and DTR: FCA CP21/24 on diversity on boards and executive committees

The FCA has published a consultation paper, CP21/24, on proposals to amend the Listing Rules (LR) and the Disclosure Guidance and Transparency Rules (DTR) in relation to diversity on boards and executive committees. Among other things, the FCA is proposing to change the LR to require companies to disclose annually on a comply or explain basis whether they meet specific board diversity targets and to publish diversity data on their boards and executive management.

The consultation closes on 22 October 2021. Subject to consultation feedback and FCA Board approval, the FCA aims to make the final rules by late 2021.

LR: FCA PS21/10 on SPACs

The FCA has published a policy statement, PS21/10, on its proposed changes to the LR for certain special purpose acquisition companies, along with its final amendments to the LR and the final text of its amendments to its technical note, Cash shells and special purpose acquisition companies (SPACs) (UKLA/TN/420.2).

The new rules and guidance come into force on 10 August 2021.

EU securitisation framework: European Commission consultation

The European Commission published a targeted consultation on the functioning of the EU securitisation framework. The consultation forms parts of the Commission's efforts to complete a comprehensive review of the EU securitisation framework in accordance with the its action plan on the Capital Markets Union, published in September 2020 and coincides with the report it is due to submit on the functioning of certain topics by 1 January 2022 under Article 46 of the Securitisation Regulation.

The consultation closes on 17 September 2021.

MiFID: ESMA report on common supervisory action on suitability rules

ESMA has published a statement presenting the results of the 2020 common supervisory action (CSA) with national competent authorities (NCAs) relating to the suitability requirements under the Markets in Financial Instruments Directive (MiFID). The CSA has shown an adequate level of firms' compliance with key elements of suitability requirements, for example, firms' understanding of products and clients and the processes and procedures to ensure the suitability of investments. However, ESMA has identified areas for improvement.

Therefore, in 2021/22, ESMA plans on updating its guidelines on suitability to address some areas where a lack of convergence has emerged or/and to further clarify some of the new MiFID II requirements. It may also complement the guidelines with examples of good and poor practices. ESMA states that the review of the guidelines will also aim to align the suitability guidelines with its draft guidelines on appropriateness and execution-only and the MiFID II Delegated Regulation on sustainable finance.

MiFID: ESMA report on sanctions and measures imposed

ESMA has published a report on sanctions and measures imposed under MiFID II in 2020. In the report, ESMA sets out an overview of the sanctions and measures imposed by NCAs under the MiFID framework as required under Article 71(4) of MiFID.

MiFID: ESMA consults on draft guidelines on certain aspects of remuneration requirements

ESMA is consulting on draft guidelines on certain aspects of the remuneration requirements under MiFID. The purpose of the draft guidelines is to enhance clarity and foster convergence in the implementation of certain aspects of the MiFID II remuneration requirements. ESMA considers that the implementation of the guidelines should strengthen investor protection, which is one of its key objectives.

ESMA proposes that the new remuneration guidelines will replace its existing 2013 guidelines.  The consultation paper builds on the text of the 2013 guidelines, which ESMA has substantially confirmed (albeit clarified, refined and supplemented where necessary). To avoid any unnecessary repetitions, ESMA has deleted those of the 2013 guidelines that have been incorporated directly into the MiFID framework or that have become unnecessary. The paper also takes account of new requirements under MiFID II and the results of supervisory activities conducted by NCAs on the topic.

The consultation closes on 19 October 2021. ESMA will consider the responses it receives and expects to publish the final report and guidelines by the end of Q1 2022.

MiFID: European Commission adopts Delegated Regulation specifying criteria for ancillary activity test

The European Commission has adopted a Delegated Regulation, supplementing MiFID by specifying the criteria for establishing when an activity is to be considered to be ancillary to the main business at group level.

Article 2(1)(j) of the MiFID II Directive exempts persons dealing on own account, or providing investment services to clients, in commodity derivatives, emission allowances or related derivatives, provided this is an ancillary activity to their main business on a group basis and the main business is not the provision of investment services.

The Commission adopted Delegated Regulation (EU) 2017/592 (RTS 20) specifying the criteria for establishing when an activity is to be considered ancillary to the main business of a group. However, the MiFID Quick Fix Directive amended the ancillary activity exemption and empowered the Commission to adopt a Delegated Regulation to replace RTS 20.

The Council of the EU and the European Parliament will now scrutinise the Delegated Regulation.

MiFIR: ESMA updates MiFIR data reporting Q&As

ESMA has updated its Q&As on data reporting under the Markets in Financial Instruments Regulation (MiFIR). ESMA has amended its answer to Q&As 5 and 6, which relate to legal entity identifier (LEI) reporting in RTS 23 and related regulatory technical standards (RTS) and implementing technical standards (ITS) under Article 4 of the Market Abuse Regulation (MAR).

MiFIR: ESMA annual report on RTS 2

ESMA has published its annual report following a review of the RTS supplementing MiFIR, set out in Commission Delegated Regulation (EU) 2017/583 (RTS 2). The report covers the mandate under Article 17 of RTS 2. This requires ESMA to analyse whether it is appropriate to move to the following stage in terms of transparency with regard to the average daily number of trades threshold used for the quarterly liquidity assessment of bonds, and the trade percentile used for determining the pre-trade size specific to the instrument (SSTI) thresholds.

Considering the limited transparency in the bond market, ESMA confirms in its report the proposal to move to stage three for the liquidity criterion "average daily number of trades" and the SSTI threshold for bonds, and not to move to stage two for the SSTI threshold for other non-equity instruments. The proposals to move to stage three are expected to improve the currently limited pre- and post-trade transparency available to market participants in the bond market.

In light of the assessment undertaken and the conclusions reached, ESMA has prepared an amended version of the applicable RTS as foreseen in RTS 2. The report will be submitted to the European Commission and the amended RTS are expected to be adopted and published in the Official Journal of the EU.

CSDR: ESMA report to European Commission on provision of banking-type ancillary services

ESMA has published a report to the European Commission providing suggestions for enhancing the authorisation process for central securities depositories (CSDs) to provide banking-type ancillary services under the Central Securities Depositories Regulation (CSDR). ESMA was asked to provide an assessment of the conditions under which banking-type ancillary services can be provided under CSDR in the context of the Commission's targeted review of CSDR, which it launched in 2020.

ESMA proposes that the Commission considers, in the context of the CSDR targeted review: allowing banking CSDs to provide banking-type ancillary services to non-banking CSDs, modifying the approach to access to commercial banks and imposing less stringent requirements to non-banking CSDs offering only settlement in foreign currencies as banking-type services.

BMR: ESMA updates Q&As

ESMA updated its Q&As on the Benchmarks Regulation (BMR) on 16 and 29 July 2020. It has updated the document to:

  • include a new Q&A on the disclosure requirements that an administrator of an EU Climate Transition Benchmark or an EU Paris-aligned Benchmark should comply with; and
  • add a new Q&A 4.7 clarifying that no BMR provision specifies that only public authorities located in the EU may be excluded from the BMR's scope of application. Accordingly, supervised entities in the EU can continue to use benchmarks provided by public authorities located in third countries after the end of the transitional period applicable to third country benchmarks where those public authorities meet the definition in article 3(1)(29) of the BMR and comply with the conditions set out in Article 2(2)(b) of the BMR. This answer was provided by the European Commission.

CRA Regulation: ESMA updates Q&As

ESMA has updated its Q&As on the implementation of the Regulation on Credit Rating Agencies (CRA Regulation), inserting a new Part VII to provide clarification on the interactions between CRA Regulation and MAR (Q&As 13 to 15).

REMIT: ACER updates guidance and Q&A

The Agency for the Cooperation of Energy Regulators (ACER) has published the 6th edition of its guidance on the application of the Regulation on wholesale energy market integrity and transparency (REMIT). ACER has made significant changes to the guidance to take into account:

  • the expected market developments resulting from the implementation of the European Green Deal; and
  • the experience gained so far, including the feedback received from national regulatory authorities, market participants and other stakeholders.

The structure of the guidance has been fully revised to make it more intuitive. ACER has also included additional content on the scope of REMIT (in a new chapter 2) and on the core prohibitions on insider trading and market manipulation (in a new chapter 6), which are laid down in Articles 3 and 5 of REMIT.

ACER has also published an updated version (25th edition) of its Q&As on REMIT.

Fallbacks for LIBOR ICE Swap Rates: ISDA results of consultation

The International Swaps and Derivatives Association (ISDA) has announced the results of its consultation on implementing fallbacks for GBP LIBOR ICE Swap Rate (GBP LIBOR ISR) and USD LIBOR ICE Swap Rate (USD LIBOR ISR), both published by ICE Benchmark Administration. The results of the June consultation indicated a significant majority of respondents agreed with the fallback provisions set out in the ISDA draft amendments attached to the June consultation (June draft amendments). The June draft amendments reflect:

  • for GBP LIBOR ISR, a SONIA ISR, as suggested in February 2021 by the Working Group on Sterling Risk-Free Reference Rates; and
  • for USD LIBOR ISR, a spread-adjusted Secured Overnight Financing Rate (SOFR) Swap Rate, as suggested in March 2021 by the Alternative Reference Rate Committee.

The respondents to the June consultation satisfied the criteria ISDA had specified for it to publish:

  • a supplement to the 2006 ISDA Definitions to help parties to legacy derivative contracts incorporate the GBP LIBOR ISR fallback provisions or the USD LIBOR ISR fallback provisions into their agreements; and
  • template language that counterparties may use to negotiate bilateral amendments into legacy transactions.

ISDA will begin finalising the June draft amendments to implement fallbacks for GBP LIBOR ISR as soon as possible and will finalise amendments to implement fallbacks for USD LIBOR ISR once a SOFR swap rate is published that can be referenced in financial instruments. A report analysing the June consultation results will be available in the future from ISDA.

ESG ratings and data products providers: IOSCO consults on recommendations

On 26 July 2021, the International Organization of Securities Commissions (IOSCO) published a consultation report on a set of proposed recommendations regarding environmental, social and governance (ESG) ratings and data providers. IOSCO states that the report aims to assist its members in understanding the implications of the activities of ESG ratings and data providers and in establishing frameworks to mitigate risks stemming from these activities. IOSCO proposes a set of recommendations to mitigate these risks and address some of the challenges faced by users of products and services from ESG ratings and data providers, and the companies that are the subject of these ESG ratings and data products.

The consultation closes on 6 September 2021.

FMIs and business continuity planning: CPMI and IOSCO report

The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) have published a report on implementation monitoring of the Principles for financial market infrastructures (PFMI), looking specifically at business continuity planning. This report is a "level 3" peer review examining the consistency in the outcomes of the implementation of the PFMI and implementation of the responsibilities by authorities.

A sample of 38 FMIs from 29 jurisdictions participated in the assessment. The assessment identified one serious issue of concern and one issue of concern which could be subject to future analysis. All FMIs (including those not part of the sample), as well as their supervisors, regulators and overseers, should consider whether any issues of concern identified in this report are relevant to them.

Use of Term SONIA reference rates: FMSB final Standard

The FICC Markets Standards Board (FMSB) has announced the publication of the finalised version of  Standard on use of Term SONIA reference rates. The finalised version is based on a transparency draft issued in March 2021. Certain minor changes have been made to the final standard in response to comments received since the publication of the transparency draft.

The Standard, which applies to Sterling fixed income and wholesale lending products, has been developed to help market participants decide when they should adopt Term SONIA. SONIA is the Sterling Overnight Index Average, as published by the Bank of England, and Term SONIA refers to forward-looking benchmarks.

The FMSB explains that the UK authorities and the Working Group on Sterling Risk-Free Reference Rates have made clear they expect the use of such forward-looking benchmarks to be relatively limited. Instead, the expectation is that Sterling fixed income and wholesale lending markets should predominantly transition to SONIA compounded in arrears as part of the move away from LIBOR.

However, there will be some circumstances where the use of a rate compounded in arrears is not appropriate or operationally achievable. This Standard has therefore been developed with the aim of identifying where there may be robust rationales for using Term SONIA and sets out certain expected behaviours of market participants.

This Standard applies to participants in the Sterling fixed income and wholesale lending markets, including Sterling legs of multi-currency products.


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Authored by Yvonne Clapham


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