UK EMIR: BoE consults on modifications to DTO to reflect interest rate benchmark reform
The Bank of England (BoE) has published a consultation paper setting out its proposal to modify the scope of contracts that are subject to the derivatives clearing obligation (DTO) under the retained EU law version of the European Market Infrastructure Regulation (UK EMIR) to reflect the ongoing reforms to interest rate benchmarks.
In brief, as a consequence of the anticipated changes in market activity resulting from interest rate benchmark reform, the BoE intends to remove contracts that reference benchmarks that are being discontinued and to replace them with Overnight Index Swaps (OIS), with the same range of maturities, which reference the replacement near risk-free reference rate (RFR) benchmarks selected for each currency.
The proposals would result in changes to the onshored version of Commission Delegated Regulation (EU) 2015/2205 supplementing EMIR with regard to regulatory technical standards on the clearing obligation (Binding Technical Standards (BTS) 2015/2205). The Appendix to the consultation contains a draft version of the Technical Standards (Clearing Obligation) Instrument 2021, which amends BTS 2015/2205.
The consultation closes to responses on 14 July 2021. Following consideration of any responses, the BoE will submit the proposed technical standards to HM Treasury for approval. Following approval, the BoE intends to make and publish the final version of the amending technical standards instrument in autumn 2021.
The BoE will keep the scope of the clearing obligation under review, including by monitoring developments in ongoing transitions in the JPY and USD interest rate derivatives markets.
UK BMR: FCA consults on use of new powers to support orderly wind down of critical benchmarks
The Financial Conduct Authority (FCA) has published a consultation paper, CP21/15, on its proposed policy framework for exercising two of its new powers under the UK Benchmarks Regulation (UK BMR) which will be introduced by the Financial Services Act 2021. These powers relate to the use of critical benchmarks that are being wound down, such as LIBOR. The two powers on which the FCA is consulting in CP21/15 are:
- legacy use power (under new Article 23C(2) of the UK BMR): this power enables the FCA to permit some or all "legacy" use of a critical benchmark that has been designated as an "Article 23A benchmark" because it has become permanently unrepresentative of the market it is intended to measure; and
- new use restriction power (under new Article 21A of the UK BMR): this power gives the FCA the ability to prohibit some or all new use of a critical benchmark when it has been notified by its administrator that it will cease to be provided.
CP21/15 closes to responses on 17 June 2021. Having considered the feedback received, the FCA will publish a policy statement and feedback statement in Q3 2021.
Alongside CP21/15, the FCA has published an updated version of its overview document on the UK BMR and amendments under the Financial Services Act 2021.
Cryptoassets and DLT: TheCityUK report
TheCityUK has published a report, Cryptoassets: Shaping UK regulation for innovation and global leadership, in which it aims to provide an overview of existing types of cryptoassets, how they are categorised in the UK, the key policy issues which should be considered when designing the regulatory perimeter in relation to cryptoassets and distributed ledger technology (DLT), and a proposed policy approach for the UK government.
UK SFTR: Trade associations' information statement
The Association for Financial Markets in Europe, the International Capital Market Association, the International Swaps and Derivatives Association, the International Securities Lending Association and the Futures Industry Association have published an information statement to assist market participants in complying with article 15 of the UK version of the Regulation on reporting and transparency of securities financing transactions (UK SFTR).
Before counterparties to securities financing transactions are permitted to reuse or rehypothecate assets, article 15 of the UK SFTR requires a counterparty to disclose the risks of granting consent to a right of use of collateral and of concluding a title transfer collateral arrangement.
The information statement aims to help users to fulfil this requirement by informing counterparties of the risks and consequences that may be involved in consenting to a right of use of collateral provided under a security collateral arrangement or of concluding a title transfer collateral arrangement.
EMIR and SFTR: Delegated Regulation on fees charged to TRs in 2021
Commission Delegated Regulation (EU) 2021/822, which amends Delegated Regulations (EU) 1003/2013 and (EU) 2019/360 as regards the annual supervisory fees charged by the European Securities and Markets Authority (ESMA) to trade repositories (TRs) for 2021, has been published in the Official Journal of the EU and enters into force on 26 May 2021.
Delegated Regulations (EU) 1003/2013 and (EU) 2019/360 set out the methodology for the fees paid to ESMA by TRs for the purposes of Article 72(3) of EMIR and Article 11(2) of the EU Regulation on reporting and transparency of securities financing transactions (SFTR) respectively.
The amendments to these Regulations reflect the effect of two UK TRs transferring part of their services and activities to the EU to be able to continue providing services and activities to counterparties established in the EU. As the new EU TRs effectively started their activity in the EU in January 2021, their level of activity in 2020 was almost non-existent and consequently their annual supervisory fee for 2021 would be negligible, although their activities are likely to be significant.
The Delegated Regulation (EU) 2021/822 changes the reference period for the calculation of the applicable turnover of TRs from 2020 to January to June 2021. This will have the effect of ensuring that the annual supervisory fees for 2021 for these TRs will be calculated on the basis of their applicable turnover during the first half of 2021.
EMIR and SFTR: ESMA consultations on data transfer guidelines
ESMA is consulting on amendments to its current guidelines on data transfer between TRs under EMIR, and on new guidelines establishing a framework for data transfer of SFTs between TRs under the SFTR. Both the new Data Transfer Guidelines under SFTR and the proposed changes to those under EMIR aim to:
- enhance the quality of data available to authorities, including the aggregations carried out by TRs, even when the TR participant changes the TR to which it reports and irrespective of the reason for such a change;
- ensure that the competitive multiple-TR environment is guaranteed, and that TR participants can benefit from competing offers; and
- safeguard a consistent and harmonised way to transfer records from one TR to another supporting the continuity of reporting and reconciliation in all cases including the withdrawal of a TR registration.
The consultation closes on 27 August 2021. ESMA will consider the responses to this consultation and aims to publish a final report by Q1 2022.
EMIR and SFTR: ESMA final report and guidelines on calculating positions in SFTs by TRs
ESMA has published its final report giving feedback on its prior consultation and final guidelines on the calculating positions in securities financing transactions (SFTs) by TRs under the SFTR. The purpose of the guidelines is to ensure that a uniform methodology is used under EMIR and the SFTR, while considering the specificities of SFT reporting. In particular, the guidelines clarify how to comply with:
- Article 12(2) of the SFTR, which requires TRs to collect and maintain details of SFTs;
- Article 80(4) of EMIR, as referred to in 5(2) of SFTR, which sets out a general requirement for TRs to calculate positions; and
- Article 5 of RTS on data aggregation, which specifically requires TRs to calculate positions in SFTs in a harmonised and consistent manner.
The guidelines will apply from 31 January 2022.
MiFID II recovery package: ESMA consults on commodity derivatives technical standards
ESMA is consulting on draft technical standards for commodity derivatives as part of the post-COVID-19 Markets in Financial Instruments Directive (MiFID) II recovery package. The consultation paper seeks stakeholders' views on the regulatory technical standards (RTS) that ESMA is required to develop under the MiFID II Amending Directive ((EU) 2021/338).
The MiFID II Amending Directive introduces significant changes to the MiFID II commodity framework, including to the position limit regime. ESMA's proposals relating to the application of position limits to commodity derivatives focus on:
- developing procedures for financial entities undertaking hedging activities and for liquidity providers to apply for an exemption from position limits; and
- suggesting other technical adjustments to improve the application of the position limit regime in practice.
In addition, the consultation paper also contains ESMA's proposals for technical standards on position management controls.
The consultation closes on 23 July 2021. ESMA intends to finalise the draft technical standards and submit a final report to the European Commission for endorsement by November 2021.
CRA Regulation: ESMA consults on guidelines on disclosure requirements for initial reviews and preliminary ratings
ESMA has published a consultation paper on guidelines on disclosure requirements for initial reviews and preliminary ratings under the Credit Rating Agencies Regulation (CRA Regulation).
The CRA Regulation includes a number of provisions that are designed to provide greater clarity to market participants as to whether entities or debt instruments have been subject to an initial review or a preliminary rating by CRAs before receiving a credit rating. The aim of these provisions is to mitigate against the effects of "ratings shopping".
ESMA has engaged with CRAs over a number of years to assess current market practices around initial reviews and preliminary ratings with the aim of identifying possible inconsistencies in CRAs' practices and defining necessary steps to address these inconsistencies.
This consultation proposes guidance to address the existing inconsistencies in the interpretation of the relevant provisions and, by extension, reduce (to the extent possible under the existing CRA Regulation provisions) the risks posed by rating shopping.
The proposed guidelines have three sections which aim to clarify ESMA's views on:
- how the term "initial review and preliminary rating" should be understood for the purposes of the CRA Regulation's public disclosure requirements;
- the content and timing of CRAs' public disclosures for interactions that meet the standard of "initial review and preliminary rating"; and
- the steps to ensure these public disclosures are more accessible for investors and the market.
The consultation closes on 4 August 2021. ESMA will consider the responses it receives in Q3 2021 and expects to publish a final report by the end of Q4 2021. The draft guidelines are stated to apply from 1 July 2022.
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Authored by Yvonne Clapham