Brexit: ESMA to recognise three UK CCPS from 1 January 2021
The European Securities and Markets Authority (ESMA) has announced that three central counterparties (CCPs) established in the UK will be recognised as third-country CCPs (TC-CCPs) eligible to provide their services in the EU after the end of the Brexit transition period. The three UK CCPs are ICE Clear Europe Ltd, LCH Ltd and LME Clear Ltd.
ESMA explains that three Delegated Acts on tiering, comparable compliance and fees supplementing the European Market Infrastructure Regulation (EMIR) were published in the Official Journal of the EU (OJ) on 21 September 2020. Also, the European Commission adopted, in the context of the end of the transition period under the withdrawal agreement between the EU and the UK, an equivalence decision determining for a limited period of time, that the regulatory and supervisory framework applicable to CCPs established in the UK is equivalent.
Following the UK CCPs submitting their applications to be recognised as TC-CCPs under EMIR, ESMA conducted the tiering and recognition assessments. It subsequently adopted the following tiering decisions:
- LME Clear Ltd has been assessed as a Tier 1 CCP;
- ICE Clear Ltd as a Tier 2 CCP; and
- LCH Ltd as a Tier 2 CCP.
In addition, after considering the conditions for recognition under Article 25 of EMIR, ESMA adopted decisions to recognise the three UK CCPs as TC-CCPs under EMIR. In line with the equivalence decision, the recognition decisions will only take effect on the day following the end of the transition period and continue to apply while the equivalence decision remains in force, which is for 18 months until 30 June 2022.
The Bank of England (BoE) has published a statement welcoming the announcement. In the statement the BoE confirms that, as part of the recognition process, it has agreed an updated memorandum of understanding (MoU) with ESMA regarding cooperation and information sharing arrangements with respect to CCPs. The MoU takes effect from 1 January 2021.
Brexit: ESMA updates statements on impact on BMR, MiFID and MiFIR
ESMA has updated the following public statements:
- statement on the impact of Brexit on the Benchmark Regulation (BMR), in particular on the consequences for the ESMA register for benchmark administrators and third-country benchmarks under the BMR; and
- statement on the impact of Brexit on the application of the Markets in Financial Instruments Directive (MiFID) and the Markets in Financial Instruments Regulation (MiFIR). The statement covers ESMA’s approach under MiFID to the C(6) carve-out, the ESMA opinions on third-country trading venues for the purpose of post-trade transparency, and the position limits regime and post-trade transparency for OTC transactions. It also covers the implementing technical standards on main indices and recognised exchanges under the Capital Requirement Regulation (CRR). The statement updates the ones issued by ESMA in March and October 2019.
EMIR 2.2: House of Commons European Scrutiny Committee letter to HM Treasury
The House of Commons European Scrutiny Committee has published a letter it has sent to John Glen, Economic Secretary to HM Treasury, relating to EU supervision of central counterparties (CCPs) under EMIR 2.2.
The letter indicates that the Committee remains concerned about the demands for regulatory alignment that EMIR 2.2 implies in return for market access, as well as the explicit EU objective of increasing its domestic clearing capacity for derivatives at the expense of the UK. The committee therefore raises questions regarding the impact of EMIR 2.2, relating to:
- supervisory cooperation between the BoE and ESMA;
- comparable compliance for "tier 2" non-EU CCPs; and
- the EU’s proposed Recovery and Resolution Regulation for CCPs.
The committee requests a response by 16 October 2020.
LIBOR transition: FCA survey on switch to SONIA in interest rate swap market
The BoE has published the results of a survey of the FCA’s engagement with interest rate swap liquidity providers and interdealer brokers to determine their support for a change in the quoting conventions of sterling interest rate swaps in the interdealer market.
A survey of liquidity providers identified strong support for a change in the interdealer quoting convention that would see SONIA rather than LIBOR become the default price from 27 October 2020, subject to prevailing market conditions at that time. The survey also showed a large majority supported a move away from the use of GBP LIBOR forward rate agreements to use of single period swaps which benefit from greater compatibility with the anticipated ISDA IBOR fallbacks protocol.
This proposal has also been endorsed by the RFRWG and has been included as an update to its roadmap for transition in sterling markets.
The FCA and the BoE therefore support and encourage all participants in these interdealer markets to take the steps necessary to prepare for and implement these changes to market conventions.
A previously planned initiative to accelerate a change in quoting conventions, which was due to have taken place in March 2020, was disrupted by the impact of COVID-19. In the period leading up to 27 October, the FCA and the Bank of England will engage with market participants to determine whether market conditions allow the switch to proceed smoothly in October.
MiFID and MiFIR third-country firm regimes: ESMA final draft technical standards
ESMA has published a final report, containing draft regulatory and implementing technical standards (RTS and ITS) relating to the provision of investment services and activities in the EU by third-country firms under MiFID and MiFIR.
The draft RTS and ITS have been published following changes to the MiFID and MiFIR regimes introduced by the Investment Firms Regulation (IFR) and the Investment Firms Directive (IFD). The changes include new reporting requirements from third-country firms to ESMA on an annual basis in accordance with Article 46 of MiFIR, and the possibility for ESMA to ask third-country firms to provide data relating to all orders and transactions in the EU. New annual reporting requirements from branches of third-country firms to national competent authorities have also been introduced.
ESMA consulted on the technical standards in January 2020. Annex III to the report provides a summary of feedback to the consultation paper and ESMA's response.
The draft RTS and ITS have been submitted to the European Commission for adoption.
MiFIR: guidance on Annex to ESMA opinion determining third-country trading venues for purpose of transparency
ESMA has published guidance on the Annex to its opinion determining third-country trading venues for the purpose of transparency under MiFIR. The Annex (linked to in the opinion and the guidance) includes the list of venues which meet the relevant criteria defined in the opinion.
MiFIR: ESMA review consultation on reference data and transaction reporting obligations
ESMA is consulting on the MiFIR review report (required under Article 26(10) of MiFIR) on the obligations to report transactions and reference data. The consultation covers the following areas:
- topics related to the functioning of Article 26 of MiFIR on the transaction reporting regime; and
- topics related to the functioning of Article 27 of MiFIR on the supply of financial instruments reference data and article 4 of the Market Abuse Regulation (MAR) on the notifications and list of financial instruments, which ESMA considers closely-linked to the other topics being considered.
The consultation ends on 20 November 2020. ESMA intends to submit its final review report to the Commission in Q1 2021.
MiFID: ESMA review consultation on the functioning of OTFs
ESMA has published a consultation paper on the functioning of organised trading facilities (OTF) under Article 90(1)(a) of MiFID. Article 90(1)(a) requires the European Commission to present a report to the European Parliament and the Council of the EU on the functioning of OTFs after consulting with ESMA.
Section 3 of the paper contains analysis of trading on OTFs, including details about the volumes traded on OTFs since the application of MiFID II, with a focus on OTF trading in bonds and derivatives.
The paper also examines the definition of an OTF, particularly focusing on the definition of a multilateral system. There is some analysis about the boundaries of trading venue authorisation and OTFs' use of discretion. Matched principal trading is described, including presentation of evidence about how OTFs make use of it.
ESMA asks a number of questions in the paper and sets out a number of proposals on which it is consulting. The consultation closes on 25 November 2020. ESMA expects to publish a final report for submission to the Commission by March 2021.
MiFIR: ESMA review report on transparency regime for non-equity instruments
ESMA has published its review report on the transparency regime for non-equity instruments and the trading obligations for derivatives under MiFIR. Publication of the report satisfies ESMA's mandates under Articles 52(1) to (3) and 52(6) of MiFIR, and Article 17 of Commission Delegated Regulation (EU) 2017/583. A summary of the responses ESMA received to its preceding consultation is set out in Annex II to the report.
ESMA makes a number of recommendations for amending the regime in its report. It invites the Commission to translate its recommendations into legislative proposals where necessary. For Level 2 changes, ESMA intends to publish amendments to the RTS in due course.
MiFIR: ESMA updates Q&As on data reporting
ESMA has updated its Q&As on data reporting under MiFIR. The Q&As have been updated to include:
- a new Q&A clarifying which legal entity identifier should be used to identify the "issuer" when reporting reference data on funds to the Financial Instruments Reference Data System (FIRDS) under Article 4 of MAR and Article 27 of MiFIR. Due to higher operational complexities related to changed reporting practices in some jurisdictions, this Q&A should be implemented six months after its publication;
- an amendment to an existing Q&A to provide clarifications in relation to the reporting requirements under Article 26 of MiFIR and RTS 22. The Q&A provides an additional reporting scenario where an investment firm executes a transaction through an execution algorithm using the membership of its client to execute the order in the market; and
- an amended Q&A relating to national client identifiers for natural persons, clarifying how different national identifiers specified in Annex II of RTS 22 are represented. The amendment also provides clarification on the requirements for Swedish national client identifiers.
CRA Regulation: ESMA final guidelines on internal controls for CRAs
ESMA has published a report on guidelines on internal controls for credit rating agencies (CRAs). The guidelines set out ESMA's expectations on the characteristics and components of an effective internal control structure within a CRA as required under Article 6 of the CRA Regulation.
The guidelines will apply from 1 July 2021.
EMIR: ESMA updates Q&As
ESMA has updated its Q&As on the implementation of EMIR. It has updated the trade repository Q&A 1(c) to clarify that the counterparties should use the underlying to determine the asset class of total return swaps when reporting under EMIR. It has also added two new Q&As to:
- clarify that the reporting of the field reference entity for credit derivatives can be made with a country code only in the case where the reference entity is a supranational, a sovereign or a municipality; and
- indicate how the field execution timestamp, effective date, maturity date and settlement date should be reported for Forward Rate Agreement derivatives.
EMIR: European Commission report on clearing solutions for pension scheme arrangements
The European Commission has published a report on clearing solutions for pension scheme arrangements (PSAs) under EMIR. Its comments include the following:
- PSAs have already started clearing some derivatives voluntarily. The key issue that remains to be solved is that of cash variation margin in times of stressed market conditions;
- facilitated access models have been developed over recent years to explore a potentially viable avenue for PSAs' central clearing. The Commission understands that this option is already being used by a few PSAs. It intends to explore this further, including its cost for PSAs. The fact that more than one CCP is adopting such a model seems to be a positive development; and
- some aspects of banking regulation should be further assessed, including whether the recent changes in the leverage ratio calculations have helped. Also, ways of securing liquidity facilities to PSAs in times of stress should be explored.
The Commission refers to the results of the public consultation on clearing solutions for PSAs launched by ESMA in April 2020. It believes these should provide further insight into recent market developments and possibly further quantitative data, which it will examine carefully. The Commission states that its analysis of these issues over the next months will inform its decision on the PSA's exemption.
BMR: ESMA final report on draft RTS
ESMA has published a final report on draft RTS supplementing the BMR, reflecting mandates introduced by amendments to the BMR made by the European System of Financial Supervision Omnibus Regulation. The draft RTS contain additional detailed rules to implement the EU regulatory framework aimed at ensuring the accuracy and integrity of benchmarks across the EU.
ESMA consulted on the draft RTS in March 2020. Feedback to the consultation is set out, together with ESMA's approach, in each relevant section.
By 1 October 2020, ESMA will submit the draft RTS to the European Commission for endorsement.
BMR: ESMA consultation on fees for benchmark administrators
Following a formal request from the European Commission to provide technical advice on the issue, ESMA has published a consultation paper on fees for benchmark administrators under the BMR.
ESMA is designated as the competent authority of administrators of critical benchmarks under Article 20(1) and of third country administrators recognised under Article 32 of the BMR. These new supervisory responsibilities start on 1 January 2022.
The consultation paper sets out ESMA's proposed technical advice on supervisory fees to be paid to ESMA.
The consultation closes on 6 November 2020. ESMA intends to publish a final report and submit the technical advice to the Commission by 31 January 2020.
MAR: ESMA review report
Delayed due to COVID-19, ESMA has published its final review report on MAR. ESMA consulted on its report in October 2019 and the final report builds on the extensive feedback received from market participants. ESMA has also integrated the advice received from its Securities and Markets Stakeholder Group.
ESMA's conclusion is that, overall, MAR has worked well in practice and is fit for purpose. Consultation respondents focused on specific amendments and clarifications rather than a major overhaul of the legislative framework. Therefore, in the final report, ESMA sets out proposals for targeted amendments to MAR. It also suggests providing additional guidance in a number of areas. Highlights are listed in ESMA’s press release.
ESMA has submitted the final report to the European Commission and it is expected to feed into the Commission's MAR review report, which is required under Article 38 of MAR. ESMA is ready to provide further technical assistance to develop the legislative amendments suggested in the final report.
Withholding tax reclaim schemes: ESMA final report
ESMA has published a final report on Cum/Ex, Cum/Cum and withholding tax reclaim schemes (together, WHT schemes). In the report, ESMA presents the findings of its formal inquiry into WHT schemes, building on its July 2019 report in which it set out its preliminary findings on WHT schemes. Among other things, ESMA:
- outlines the general functioning of dividend arbitrages and WHT schemes;
- describes the experiences of national competent authorities (NCAs) regarding their market surveillance activities and any specific analysis carried out at national level to assess the presence and the impact of WHT schemes in their jurisdiction;
- collects information from NCAs on the status of current criminal investigations across the EU; and
- considers WHT schemes from the perspective of regulated firms' obligations under the MiFID legal framework. Particular reference is made to the obligation for investment firms to ensure they act honestly, fairly and professionally and in a manner that promotes the integrity of the market and also to the requirements on the suitability of their management bodies, whose members are required to act with integrity.
ESMA has concluded that WHT schemes are primarily a tax-related issue, meaning a response should be mainly sought within the boundaries of the tax legislative and supervisory framework. As part of its inquiry, ESMA has identified a number of measures adopted by various member states to limit the risk of WHT schemes being pursued.
In its report, ESMA recommends legislative change to remove the legal limitations on NCAs exchanging information acquired from other NCAs with tax authorities. Additionally, it considers a common legal basis should be developed to ensure a consistent and convergent approach on the exchange of information directly acquired by NCAs in their supervisory activity with tax authorities.
ESMA has also identified best practices taken from the experience of those NCAs that, because of an extended remit under national legislation, carry out supervisory activity for WHT schemes.
ESMA will submit the report to the European Parliament.
ESMA has also considered whether any potential solution to contribute to the detection and prosecution of WHT schemes could be achieved through an amendment to MAR. It included the outcome of this analysis in a dedicated section in its final MAR review report, reported above.
OTC derivatives identifiers: LEI ROC appointed as governance body
The Financial Stability Board (FSB) has confirmed that the Legal Entity Identifier Regulatory Oversight Committee (LEI ROC) will be the International Governance Body (IGB) for the globally harmonised identifiers used to track OTC derivatives transactions.
The FSB explains that the ROC, which is already the governance body of the Global LEI System, will be responsible for the governance of the Unique Product Identifier (UPI), the Unique Transaction Identifier (UTI), and the Critical Data Elements (CDE). The UPI will identify the products reported to trade repositories consistently across FSB jurisdictions, the UTI will identify individual transactions reported to trade repositories and allow authorities to follow their modifications during their lifecycle, and the CDE will capture other important characteristics of the transactions.
The ROC will also be responsible for oversight of the UPI service provider designated by the FSB, The Derivatives Service Bureau.
This transfer of all governance and oversight responsibilities to the ROC will be effective from 1 October 2020.
REMIT and wholesale energy trading: ACER establishing expert group
The Agency for the Cooperation of Energy Regulators (ACER) has published an open letter announcing that it is setting up a new consultative expert group on matters related to the Regulation on wholesale energy market integrity and transparency (REMIT) and on energy trading in general. ACER invites applications for membership to the group by 28 October 2020.
Annexes to the open letter give the terms of reference for the expert group and its rules of procedure.
ISDA IBOR Fallback Rate Adjustments FAQs updated
The International Swaps and Derivatives Association (ISDA) has published an updated version of its IBOR Fallback Rate Adjustments FAQs, which address issues arising from key adjustments that market participants will need to make if fallbacks to risk-free rates are to take effect in contracts that were originally negotiated to reference the inter-bank offer rates.
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Authored by Yvonne Clapham