ISDA 2020 IBOR Fallbacks Protocol
The International Swaps and Derivatives Association, Inc. (ISDA) has published the ISDA 2020 IBOR Fallbacks Protocol. Our separate client alert, ISDA 2020 IBOR Fallbacks Protocol: What you need to know, sets out key issues counterparties may wish to consider.
Brexit: FCA webpage on market making exemptions
In the context of firms preparing for Brexit, the UK Financial Conduct Authority (FCA) has published a new webpage on market making exemptions. It reminds firms that intend to use market making exemptions from January 2021 that they need to notify the FCA before the end of the transition period on 31 December 2020 and signposts for firms additional information resources.
The FCA explains that, under the onshored UK Short Selling Regulation (UK SSR), any firm wishing to use the exemption for transactions due to market making activities will be required to join a UK trading venue and notify the FCA of their intention to use the market maker exemption in writing 30 days ahead of their intended use. Notices of intention given to the FCA before the end of the transition period will remain valid.
Accordingly, firms that have already notified the FCA of an intention to use the market maker exemption and remain members of a UK trading venue will be able to continue using the exemption after the transition period comes to an end only for instruments traded on UK trading venues. However, notifications made to the FCA for instruments traded in the EU will no longer be valid.
To be able to use the UK SSR market maker exemption from the end of the transition period, EEA market makers that are not already members of a UK trading venue will need to become members of a UK trading venue and, at least 30 days before the end of the transition period, provide the FCA with a notification or a copy of any notification made to another competent authority.
Brexit: FCA webpage on net short positions reporting
Also in the context of firms preparing for Brexit, the FCA has published a new webpage on net short positions reporting on which it sets out what firms that report net short positions need to do during and after the transition period.
During the transition period, the FCA expects holders of net short positions to continue to report to it at the existing reporting thresholds. Under the UK SSR, position holders will be required to report their net short positions in shares at the 0.20% threshold. The reporting thresholds for UK sovereign debt and uncovered positions in UK sovereign credit default swaps will remain the same. The amount of the outstanding UK sovereign debt will be updated quarterly by the FCA on the FCA's website. To determine whether a position in shares should be notified to the FCA, position holders will have to consult the FCA FIRDS (Financial Instruments Reference Data System) for a particular share and also the UK List of exempted shares to see if that share is exempt. The UK List of exempted shares will be published on the FCA website from 1 January 2021. If a share is not exempt, position holders should send their notification to the FCA. If position holders have reasons to believe that the information on the FCA pages is not updated or correct, they should notify the FCA.
The webpage gives further information on the UK list of exempted shares and electronic submissions.
EMIR SI: FCA updates process for existing intragroup exemptions from margin between UK and third country group entities
The FCA has updated its webpage on the European Market Infrastructure Regulation (EMIR). The FCA explains that, on 15 October 2020, the Treasury published a draft statutory instrument and explanatory memorandum detailing amendments to the Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019 (EMIR SI). This included provisions relating to the transitional regime for intragroup exemptions from the clearing obligation and margin requirements for non-centrally cleared derivatives.
The FCA explains that these changes confirm that UK firms that currently benefit from intragroup exemptions from clearing with their EU or third country group entities, and from margin exemptions with their EU group entities, may continue to benefit from those exemptions from 1 January 2021. This is until the defined "relevant day" and in accordance with the conditions of the transitional regime for intragroup exemptions in the EMIR SI. There is no requirement for firms to re-apply to the FCA.
However, under the EU regime, intragroup exemptions from margin granted to UK firms with their third country group entities where no equivalence has been determined, expired in January 2020. Since then, the FCA has permitted these exemptions on a supervisory basis.
The intention was for EU regulatory technical standards on margin to legislate an extension of the derogation to 21 December 2020. However, these changes have not been made. Consequently, all intragroup exemptions granted to UK firms on this basis require a proper foundation, and firms will be required to re-apply for those exemptions to benefit from the transitional regime in the EMIR SI.
To avoid an unnecessary administrative burden on firms, the FCA is adopting a streamlined process for firms required to apply for these new exemptions. The process is set out in an instrument it has published (which may be further amended) which affected firms should read.
The FCA also clarifies that all the existing intragroup exemptions from clearing and margin for UK to UK group entities, and existing intragroup exemptions from margin for UK to third country equivalent group entities (US-CFTC and Japan), will continue as planned under the transitional and other provisions of the EU Withdrawal Act 2018.
COVID-19: European Commission adopts Delegated Regulation further postponing entry into force date of Delegated Regulation under CSDR containing RTS on settlement discipline
The European Commission has adopted a Delegated Regulation amending Delegated Regulation (EU) 2018/1229 supplementing the Central Securities Depositories Regulation (CSDR) with regard to regulatory technical standards (RTS) on settlement discipline.
Delegated Regulation (EU) 2018/1229 was due to enter into force on 1 February 2021, but in August 2020, the European Securities and Markets Authority (ESMA) published and submitted to the Commission a final report, containing draft RTS, proposing a postponement of this entry into force date due to the impact of COVID-19.
The next step will be for the Council of the EU and the European Parliament to consider the Delegated Regulation. If neither the Council nor the Parliament object to the Delegated Regulation, it will be published in the Official Journal of the EU and will enter into force three days after its publication.
CSDR: ESMA report on internalised settlement
ESMA has published a final report to the European Commission on internalised settlement under the Central Securities Depositories Regulation (CSDR).
Article 74 of the CSDR requires ESMA, in cooperation with the European Banking Authority (EBA) and relevant authorities, to submit annual reports to the Commission providing assessments of trends and potential risks, and, where necessary, recommendations of preventative or remedial action in respect of certain areas covered by the CSDR. Article 74(1)(c) requires ESMA to cover internalised settlement by assessing the extent of settlement activity in the EEA that does not take place through a securities settlement system (SSS), based on the data reported by settlement internalisers under Article 9 of the CSDR.
The report analyses the trends and potential risks related to internalised settlement, as well as the process for internalised settlement reporting under CSDR.
Brexit: ESMA updates statement on credit ratings from UK
Following ESMA's previous statements of 9 November 2018 and 15 March 2019, it has published further statement on the endorsement of credit ratings from the UK. ESMA confirms that EU credit rating agencies (CRAs) will be able to endorse credit ratings elaborated in the UK after the end of the transition period.
An EU CRA must notify ESMA of its intention to endorse credit ratings from a UK-based CRA. As of 27 October 2020, all UK-based CRAs (except The Economist Intelligence Unit Ltd) have taken steps to ensure that an EU CRA is willing and able to endorse its credit ratings after the end of the transition period. Although ESMA can confirm that the necessary conditions for endorsement are currently met, the decision to endorse some, or all, of the credit ratings issued by UK-based CRAs lies exclusively with EU CRAs.
Brexit: ESMA adds UK venues to opinions on transparency and position limits for third-country trading venues under MiFID
ESMA has updated the list of third-country venues, in the context of the opinions on post-trade transparency and position limits under the Markets in Financial Instruments Directive (MiFID) and the Markets in Financial Instruments Regulation (MiFIR), to add UK venues.
ESMA assessed UK venues against the criteria of the opinions related to the transparency and the position limits provisions following its statement on the impact of Brexit on the application of MiFID II and MiFIR, which was published on 1 October 2020. The UK venues have received a positive assessment and have been added to the annex to the opinion related to post-trade transparency and the annex to the opinion related to position limits.
Consequently, from 1 January 2021:
- EU investment firms will not be required to make transactions public in the EU via an EU-approved publication arrangement if they are executed on one of the UK trading venues on the transparency list; and
- commodity derivative contracts traded on UK trading venues on the position limits list will not be considered as economically equivalent over-the-counter contracts for the EU position limit regime.
ESMA has also updated its related guidance on the annex to ESMA's opinion determining third-country trading venues for the purpose of transparency under MiFIR. This is to take into account feedback received from market participants on the identification of bonds and US treasuries, as well as on the treatment of venues without a market identifier code. To provide enough time to market participants to implement the changes to the guidance, the date of application of the transparency list is 10 November 2020.
EMIR: ESMA postpones application of new validation rules
ESMA has postponed the application date of the updated EMIR validation rules from 1 February 2021 to 8 March 2021. ESMA explains that the amended rules for reporting derivatives trades under EMIR, which it published in September 2020, will apply five weeks later than originally planned due to technical issues relating to their implementation in the light of the UK's withdrawal from the EU.
Brexit: ESMA statement on trading obligation for shares under MiFIR
ESMA has published a statement to remind market participants of the impact of the end of the Brexit transition period on 31 December 2020 on the trading obligation for shares (STO) under Article 23 of MiFIR.
ESMA explains that, in the absence of an equivalence decision in respect of the UK by the European Commission, the potential adverse effects of the application of the STO after the end of the transition period are expected to be the same as in the no-deal Brexit scenario considered by ESMA in May 2019. This includes the risk of disruption that conflicting EU and UK STOs may potentially create, in particular for UK branches of EU investment firms and for EU branches of UK investment firms. ESMA's May 2019 guidance therefore remains relevant.
The statement also confirms:
- once the transition period has ended, ESMA assumes that all EU shares will be within the scope of the EU STO (that is, ISINs starting with a country code corresponding to an EU member state and, in addition, shares with an ISIN from Iceland, Liechtenstein and Norway). GB ISINs will be outside the scope of the EU STO;
- the trading of shares with an EEA ISIN on a UK trading venue in GBP by EU investment firms occurs on a non-systematic, ad-hoc, irregular and infrequent basis. Therefore, it is expected that those trades will not be subject to the EU STO, in accordance with Article 23 of MiFIR. In a related press release, ESMA explains that it is aiming to minimise disruption and to avoid overlapping STO obligations and their potentially adverse effects for market participants. The approach put forward by ESMA will effectively avoid such overlaps if the UK adopts an approach that does not include EEA ISINs under the UK STO. ESMA however notes that the scope of the UK STO after the end of the transition period remains unclear at this stage; and
- the application of the STO to shares with a different ISIN should continue to be determined taking into account the previous ESMA guidance published in November 2017.
MAR: ESMA final report on amendments for promotion of the use of SME growth markets
Following an earlier consultation, ESMA has published a final report on amendments to the Market Abuse Regulation (MAR) for the promotion of the use of SME growth markets. These amendments focus on draft regulatory technical standards (RTS) on liquidity contracts and draft implementing technical standards (ITS) on insider lists for SME growth markets and largely reflect the original proposals included in the consultation paper.
ESMA states that it has submitted the proposed regulations to the Commission for endorsement but notes that, although Article 1 (Amendments to Regulation (EU) No 596/2014) of the SME Growth Market Regulation applies as of 1 January 2021, it is unlikely that the instruments will be adopted by then.
As to the other aspects of the consultation paper, ESMA expects to submit its report to the Commission in relation to the functioning of the SME growth markets regime by the end of 2020.
EMIR: ESMA consults on guidelines for consistency of supervisory reviews and evaluation processes of CCPs
ESMA has published a consultation paper on draft guidelines to clarify common procedures and methodologies for the supervisory review and evaluation process of central counterparties (CCPs) by their national competent authorities.
Article 21(6) of EMIR addresses the consistency of national competent authority supervisory reviews and evaluation processes for CCPs, and requires ESMA to draw up guidelines for national competent authorities to specify, in a manner that is appropriate to the size, structure and internal organisation of CCPs, and the nature, scope and complexity of their activities, the common procedures and methodologies for the supervisory review and evaluation process.
The consultation closes on 16 November 2020. ESMA will consider the feedback it receives to the consultation and aims to finalise the guidelines by Q1 2021.
SFTR: ESMA Q&As on data reporting
ESMA has published a set of Q&As designed to provide greater clarity to market participants on how to comply with their reporting requirements under the Regulation on reporting and transparency of securities financing transactions (SFTR).
The Q&As cover the following five topics arising from Article 4 of the SFTR:
- frequency of reports;
- reporting of settlement fails;
- reporting of repos initially colletaralised on a per-transaction basis and subsequently on a net-exposure basis;
- reporting of trading venue for cleared and non-cleared securities financing transaction; and
- reporting of cash collateral for margin lending.
ESMA will update and expand the Q&As as and when it deems it appropriate.
Download the full regulatory news bulletin
Authored by Yvonne Clapham