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Article (17/276)
European regulation update: market infrastructure
European regulation update: market infrastructure

European regulation update: market infrastructure


Focus on the latest European regulatory developments as of  February 2018

MiFID II (Markets in Financial Instruments Directive)

New rules from the European directive 2014/65/UE known as “MiFID II”, came into effect on 3 January 2018. The rules aim at making financial markets more robust and transparent by setting up a new legal framework designed to better regulate trading activities and increase investor protection. Protecting investors is a significant concern for the new regime. Until now, the cost of financial research was not valued as such but included in transaction fees and broker commissions. It will now be the subject to separate billing. Market participants will have to set a research budget. They will be able to absorb the added costs onto their balance sheets or pass them on to each investment fund under their management.

However, many elements of the new legal framework are still lacking (such as guidelines relative to suitability requirements and recognition of the “equivalence” status for certain third country markets) and will be gradually incorporated in coming months. Overall, both the regulators and the financial industry are doing their best to apply the new regulations in full. In areas where it is not yet possible, , a pragmatic approach is favoured, focusing on guaranteeing investor protection and market integrity.

Guaranteeing trading of financial products on regulated venues

The aim is to close loopholes in the structure of the financial markets. Organised trading facilities or OTF, now co-exist with existing trading platforms such as regulated markets. These new trading platforms were created to capture a maximum of unregulated trades, especially in the areas of derivative products and the sovereign debt market.

Increased transparency

The regulation strengthens transparency obligations applicable prior to and after trading in financial instruments. Market participants must publish information relative to the prices of financial instruments. These transparency requirements are then applied depending on the type of financial instrument.

Limiting speculation on commodities

Speculation on commodities can cause rises in the price of basic necessities (such as agricultural products). The new regulations intend to restrict this financial practice by introducing a harmonised European system which sets limits for positions held in commodities derivatives instruments. National authorities can also limit the volume of a position that market participants may hold concerning commodities derivatives instruments.

Adapting the regulation to new technologies

The new regulation implements control procedures for very high speed electronic trading activities, such as high-frequency trading (a type of trading that uses computer programmes to perform trade at high speed using rapidly updated financial data). The potential risk of increased use of technologies is reduced by a combination of rules aimed at guaranteeing that these trading techniques do not disrupt markets.

Strengthening investor protection

Investment firms must act in the best interests of their clients when they provide investment services. These firms should safeguard their clients’ assets or ensure that the products they are considering launching meet investors’ needs. From now on, investors will also receive more information on the products and services that are proposed or sold to them. In addition, investment firms must make sure that they do not remunerate or assess the performances of their staff in a way that is contrary to the interests of their clients, such as setting remuneration or performance targets that encourage staff to recommend or to sell a given financial instrument over another one that better meets the client’s needs.

Delegated acts

In April 2016, the European Commission adopted a delegated directive concerning the aspects of investor protection:

  • Safeguarding client financial instruments and funds
  • Product governance (ensuring that companies that produce and distribute financial instruments and structured deposits act in the best interest of their clients)
  • Monetary and non-financial benefits

It also adopted a delegated regulation concerning organisational requirements and operating conditions for investment firms.

The EU regulation 2016/824 defines the technical execution standards for the description of the functioning of multilateral trading facilities and organised trading facilities as well as notification to the European Securities and Markets Authority (ESMA).

EMIR REFIT (European Market Infrastructures Regulation)

On 20 December 2017, the COREPER adopted the Council’s general guidelines for revision of the EMIR regulation (REFIT). The Council approved virtually the entire initial proposal made by the European Commission with the exception of reporting to central securities depositories. The Council slightly modified the Commission’s proposal on the protection of the margins filed by clearing members to central counterparties (CCPs), including in the event of a collective action against the CCP.

Concerning the European Parliament, reporter Werner Langen (EPP) is due to present his report to the ECON committee soon. The ECON committee will have until 24 March to fine-tune its report.

On 31 January 2017, the European Parliament’s ECON Committee has published a draft report on the porposal for a regulation on a framework for the recovery and resolution of CCPs. The revision proposal notably plans to give ESMA significant supervisory powers for CCPs. The case is subject to sharp political pressure stemming from Brexit negotiations. It could also be slowed by the reform of the European Supervisory Authorities (ESAs), launched by the Commission in September 2017. The majority of Member States are reticent to make progress in the EMIR reform as long as the general reform of the ESAs has not been completed.

To read more: the Collateral Challenge - Europe edition

CSDR Regulation (CSDR)

EU regulation no. 909/2014 on improving securities settlement in the European Union and on central securities depositories, or “CSDR”, is one of the key regulations adopted since the financial crisis in 2008.

The CSDR regulation establishes uniform requirements in terms of the settlement of financial instruments in the European Union as well as rules concerning the organisation of central securities depositories (CSD) and the conduct of their activities, in order to foster safe and efficient settlement. It applies to to all CSD activities as well as to the settlement of operations for all financial instruments.

This regulation plans for:

  • Shorter settlement periods - in general, settlement should take place on the second business day following the trade at the latestThe obligation for any issues of EU transferable securities which are admitted to trading or traded on trading venues to be represented in book-entry form in a CSD.
  • Settlement discipline measuresgoverning the functioning of CSDs with a system of mandatory cash penalties and ‘buy-ins’ for settlement fails

On 10 March 2017, the majority of the CSDR implementing measures were published in the EU’s Official Journal. The package of technical standards includes Commission Delegated Regulation (EU) 2017/389 on the parameters for the calculation of cash penalties for settlement fails and the operations of CSDs in host Member States. It also includes Regulatory Technical Standards (RTS) on prudential requirements for  CSDs and designated credit institutions offering banking-type ancillary services. An RTS on authorisation, supervisory and operational requirements for CSDs is also included.

Finally, the legislative packet is completed by an RTS on the reporting of internalised settlement (Commission Delegated Regulation (EU) 2017/393). Theses standards further specify the content of the quarterly reporting that establishments practicing internalised settlement. As of 10 March 2019, establishments practicing internalised settlement will have to provide aggregated reportings on settlement instructions (especially detailed information on the aggregated volume and value of settlement instructions)) that are settled outside the Securities Settlement System managed by the CSD.

One exception remains, the RTS on settlement discipline. This should be implemented slightly later in 2019 and should set out the market discipline rules that the CSDs should respect in order to prevent, monitor and deter settlement fails by their members.

Commission Delegated Regulation (EU) 2017/389

Commission Delegated Regulation (EU) 2017/390

Commission Delegated Regulation (EU) 2017/391

Commission Delegated Regulation (EU) 2017/392

Commission Implementing Regulation (EU) 2017/393

Commission Implementing Regulation (EU) 2017/394

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