European regulation update: market infrastructure
Focus on the latest European regulatory developments
Focus on the latest European regulatory developments
On 22 March 2017, the European Securities and Markets Authority (ESMA) published the statement of its Chair Steven Maijoor at the European Parliament (EP)ECON Committee hearing on the European Commission (EC) legislative proposal on Central Counterparties Recovery and Resolution (CCP R&R). In his statement, Mr Maijoor highlighted that the legislative proposal is overall balanced, proportionate, and consistent with other existing relevant European Union (EU) legislation, and highlighted a number of suggestions on three aspects of the proposal, namely recovery planning, resolution tools, and governance of the resolution process.
On 5 April 2017, ESMA has published an opinion on the EC proposal for the Regulation on the recovery and resolution of central counterparties. The opinion addresses in particular the consequences of the proposal for ESMA as an institution. The opinion calls for tighter convergence requirements regarding national recovery plans. It also suggests a more effective mediation mechanism and reminds the EC to consider including a budgetary impact assessment for ESMA.
On 2 May 2017, the Presidency of the EU Council published a compromise text on the proposal for a regulation on a framework for the recovery and resolution of CCP).
On 13 June 2017, the EC published a proposal amending EMIR and the EU regulation on the European Supervisory Authorities (ESAs) and complements the pre-existing proposal on Central Counterparty Recovery and Resolution. The EC sets out a new approach to CCP supervision, which includes the creation of a dedicated mechanism for CCPs within ESMA, intended to consolidate CCP supervision both in the EU and third-countries. In particular the third country provisions within EMIR are adapted so as to allow for more rigorous supervision of third-country CCPs deemed systemically relevant. The obligations include full, central bank certified compliance with EU prudential requirements and supervisory on-sight access for ESMA. In an accompanying statement, Commission Vice-President in Charge of Financial Services, Valdis-Dombrovskis, confirmed that CCPs not deemed systemically relevant could continue to operate under the current third country regime.
On 23 March 2017, ESMA published final reports on two sets of guidelines under CSDR relating to access by a central securities depository (CSD) to a CCP's transaction feeds and rules for CSD participant default. ESMA's guidelines on CSDs' access to CCPs' or trading venues' transaction feeds set out the conditions under which access could be refused, especially as this type of access is not covered under MiFIR.
Under the CSDR, CSDs are left to define rules and procedures in order to address the insolvency of one or several of their participants. ESMA's guidelines on CSD participant default specify how such rules and procedures should be defined. The two sets of guidelines will be translated into the official EU languages and the final texts published on the ESMA website. The deadline for compliance notifications from national competent authorities will be two months after the publication of the translations.
On 31 March 2017, ESMA published an updated question and answer (Q&A) document on the implementation of CSDR. The document has been updated to include new Q&As on organisational requirements, protection of securities of participants and those of their clients, and the provision of banking-type ancillary services.
On 1 June 2017, ESMA has published two sets of guidelines and reporting templates CSD. The guidelines describe the process of collecting, processing and aggregating, as well as scope, of data used for determining the indicators specifying the most relevant currencies in which settlement takes place and the substantial importance of a CSD for a host Member State. Also corresponding template documents are provided for CSDs reporting to their national supervisors.
On 2 June 2017, ESMA published updated Q&A on the implementation of CSDR. The document has been updated to include new Q&As on certain aspects of the regime applying to central securities depositories (CSDs), including CSDs’ investment policy, access to CSDs and conditions for providing services in another Member State.
On 8 June 2017, ESMA published the official translations of two sets of guidelines on the implementation of CSDR addressing central securities depositories' (CSDs') access to CCPs and rules for participant default. ESMA's guidelines on CSD access to CCP or trading venues' transaction feeds set out the conditions under which access could be refused, especially as this type of access is not covered under MiFIR.
Under the CSDR, CSDs are left to define rules and procedures in order to address the insolvency of one or several of their participants. ESMA's guidelines on CSD participant default specify how such rules and procedures should be defined. The guidelines will apply from 9 August 2017.
On 2 March 2017, the EC has adopted a delegated act amending the list of third country central banks and debt management offices (DMOs) to which EMIR shall not apply. More specifically, it adds the following jurisdictions to this list: Australia, Canada, Hong Kong, Mexico, Singapore, and Switzerland. The delegated act will be subject to a scrutiny period in the European Parliament and the Council.
On 6 March 2017, the EC made public a report supporting its Delegated Act (DA) extending the list of third country central banks (CBs) and DMOs exempted from the Regulation on OTC derivatives, central counterparties and trade repositories (EMIR). The DA added Australia, Canada, Hong Kong, Mexico, Singapore, and Switzerland to the list of exempted jurisdictions
On 31 March 2017, the Commission Delegated Regulation (EU) 2017/610 extending the transitional relief for pension scheme arrangements from central clearing for their OTC derivative transactions has been published in the Official Journal. The existing exemption has been further extended until 16 August 2018. The Regulation entered into force on 1 April 2017.
At the same date, ESMA has updated its list of recognised central counterparties (CCPs) to include six non-EU CCPs. ESMA has recognised the following entities: Dubai Commodities Clearing Corporation (DCCC), Clearing Corporation of India Ltd (CCIL), Nasdaq Dubai Ltd, Japan Commodity Clearing House Co., Ltd (JCCH), BM&FBovespa S.A. for Brazil and Nodal Clearing LLC for the USA.
On 3 April 2017, ESMA published an update of its questions and answers (Q&A) document on the implementation of EMIR. Following the publication of revised technical standards on reporting under Article 9 of EMIR, ESMA has included updated versions of some Q&As, indicating that they will become applicable from 1 November 2017 together with the technical standards. The document also includes an updated Q&A on the obligation to report outstanding trades following the entry into force of EMIR (‘backloading’).
Alongside the Q&A, ESMA published an updated version of its validation rules for reports submitted under the revised technical standards. These updated rules will also apply from 1 November 2017.
On 4 April 2017, ESMA has published responses received to the consultation on draft guidelines on the transfer of data between trade repositories (TRs) authorised in the EU under EMIR. ESMA will aim to finalise and publish the final guidelines by the third quarter of 2017.
On 18 April 2017, ESMA has signed a memorandum of understanding (MoU) on CCPs with the Reserve Bank of New Zealand and the Financial Markets Authority of New Zealand. The MoU establishes cooperation arrangements regarding CCPs which are established and authorised or recognised in New Zealand, and which have applied for legal recognition under EMIR. The MoU is effective since 28 February 2017.
On 21 April 2017, the European Systemic Risk Board (ESRB) published a paper on the EU Commission's proposal to revise EMIR. The paper is intended to highlight some issues which the ESRB deems important but does not include specific proposals. Overall the ESRB supports the Commission's assessment that no fundamental change to the EMIR core requirements are needed at this time, although certain improvements may be possible.
On 29 April 2017, a Commission Delegated Regulation (2017/751) amending Delegated Regulations under EMIR as regards the deadline for compliance with clearing obligations for certain counterparties dealing with OTC derivatives has been published in the Official Journal. Commission Delegated Regulations (EU) 2015/2205, (EU) 2016/592 and (EU) 2016/1178 determine four categories of counterparties for the purposes of setting out the dates on which their respective clearing obligations take effect.
Counterparties are categorised according to their level of legal and operational capacity and by their trading activity in relation to OTC derivatives. In order to ensure a timely and orderly application of the clearing obligation, staggered phase-in periods were applied to those different categories of counterparties. Following the submission of draft regulatory technical standards (RTS) by ESMA to the Commission, Delegated Regulation 2017/751 amends the specified regulations with regard to the application date for Category 3 counterparties.
The Delegated Regulation entered into force on 19 May 2017.
On 4 May 2017, the EC published a proposal on targeted reforms to EMIR, which are intended to improve the functioning of the derivatives market in the EU and provide simpler and more proportionate rules for OTC derivatives. Overall, the Commission has concluded that the framework functions well and the proposal is intended to make amendments in a limited number of areas while maintaining all key elements of the framework. The legislative proposal follows the Commission's decision to include a review of EMIR in its Regulatory Fitness and Performance Programme (REFIT) in 2016.
In particular, the Commission proposes:
Alongside the proposal, the Commission has also adopted a communication setting out its intention to present further legislative proposals to address other issues in derivatives clearing by summer 2017. This further proposal aims to enhance the common supervisory arrangements for CCPs in relation to, among other things, enhanced supervision at EU level and/or location requirements.
The communication deals with challenges for critical financial market infrastructures and further development of the Capital Markets Union (CMU). Among the challenges foreseen by the Commission is the UK's forthcoming withdrawal from the EU and, in particular, the communication highlights euro-denominated interest rate derivative clearing in the UK and clearing of derivatives denominated in other Member States' currencies as being transactions that directly impact the responsibilities of relevant EU and Member States' institutions and authorities.
On 1 June 2017, ESMA launched a public consultation seeking input on proposed guidelines under EMIR. The guidelines aim to specify the measures and organisational arrangements CCPs should put in place in order to identify, disclose and account for conflicts of interest with clearing members, clients or CCP's own parent undertaking or subsidiary. The consultation will close on 24 August 2017.
On 28 February 2017, ESMA published a report on final draft regulatory technical standards (RTS) regarding the treatment of package orders under MiFIR Paragraph 6 of Article 9, which was added to MiFIR by the MiFIR Amending Regulation (2016/1033). Based on feedback from its consultation on draft RTS in November 2016, ESMA revised the RTS considerably to narrow the scope of package orders that qualify as having a liquid market as a whole. ESMA intends to monitor the trading activity in packages closely and may consider amendments to the RTS in the medium term.
On 24 March 2017, the EU Parliament published correspondence between members of the ECON and the EC on MiFID 2. In particular, the EU Commission Vice President for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union, Valdis Dombrovskis, has responded to a letter from the EU Parliament's negotiating team on MiFID 2, following communications from ESMA, which raised concerns in relation to the possible establishment of networks of systematic internalisers (SIs) operating broker crossing networks.
In a letter dated 24 February 2017, the Parliament's negotiating team highlighted that it shares ESMA's concern that certain investment firms may be setting up interconnected SIs to bring together third party buying and selling interests via matched principal trading, or other types of back-to-back transactions, which may potentially circumvent obligations under MiFID 2 or go against the spirit of the legislation. As such, the letter requested that the Commission examine the issue and consider whether action should be taken.
The Vice President's response, dated 16 March 2017 and published on 23 March 2017, sets out the results of a preliminary investigation. The letter proposes that the Commission engage in a dialogue with ESMA and NCAs to determine the jurisdictions in which the alleged broker crossing networks could potentially be established and then engage with the relevant authorities on how to address the establishment of such networks within the MiFID 2 rules.
On 31 Mars 2017, the Official Journal of the European Union has published the full list of technical standards under MiIFID 2 and MiFIR. The publication marks the final step in the legislative procedure for the new rules, with the vast majority of them set to apply from beginning of 2018.
On 4 April 2017, ESMA updated its Q&A document on the implementation of investor protection topics under the MiFID 2 framework. The updated document includes 10 new Q&As aimed at providing clarification on post sale reporting, information on charges and costs, best execution, and research and suitability amongst other topics.
On 5 April 2017, ESMA published updated Q&As on MiFID 2 and MiFIR market structures topics, commodity derivatives topics and transparency topics.
On market structure issues, 22 new Q&As have been published, which are intended to clarify certain regulatory provisions in relation to:
The updated Q&As on commodity derivatives set out four new answers, dated 29 March 2017, on position limits. The Q&As on transparency topics have been updated with two new sections on general transparency topics and equity transparency.
Publication of the Q&As follows updates to ESMA's Q&As on investor protection topics on 4 April 2017. ESMA intends to review its Q&As on a regular basis and issue updates when new questions are received.
On 6 April 2017, ESMA issued its final report on the guidelines regarding the calibration of circuit breakers and the publication of the trading halts under MiFID 2. The guidelines provide further detail on the parameters that trading venues should consider for the calibration of their circuit breakers, and establish that trading venues should immediately make public the activation of a trading halt, the type of trading halt, the trading phase in which it was triggered, the eventual extension and the end of the halt.
On 18 May 2017, ESMA published a follow-up report to its 2014 peer review on MiFID conduct of business rules relating to fair, clear and not-misleading information. In 2014, ESMA identified that NCAs from ten jurisdictions were not fully applying certain criteria considered essential for effectively ensuring the application of the MiFID rules.
In its follow-up, ESMA concluded that six of the ten NCAs have addressed all of the deficiencies identified. For the remaining four NCAs, in Cyprus, Denmark, Estonia and Greece, one or more deficiencies remain but ESMA is confident that they will be addressed as soon as possible and, at the latest, by the date of the MiFID 2 regime applying.
On 22 May 2017, ESMA published an opinion clarifying the concept of 'traded on a trading venue' (TOTV) in respect of over-the-counter (OTC) derivatives under MiFID 2 and MiFIR. The concept of TOTV is particularly relevant for:
The opinion sets out which transactions in derivatives concluded outside of trading venues are subject to transaction reporting and transparency requirements, and specifies that only OTC-derivatives sharing the same reference data details as the derivatives traded on a trading venue should be considered to be TOTV, and therefore subject to the transparency and reporting requirements of MiFIR.
On 8 March 2017, the EU Commission (EC) adopted amended regulatory technical standards (RTS) on key information documents (KIDs) under PRIIPs Regulation. This follows the EU Parliament's decision in September 2016 to reject the original RTS adopted by the Commission in June 2016 and to return them to the Commission for revision.
The Commission's amendments concern multi-option PRIIPs, performance scenarios, comprehension alert and presentation of administrative costs in relation to biometric components of insurance-based investment products.
On the 9 March 2017, Sven Giegold, Member of the Economic and Monetary Affairs Committee (ECON) of the European Parliament, has launched a consultation on the procedures to assess and disclose whether a PRIIP targets specific environmental, societal and governance (ESG) objectives. The consultation closed on 31 March 2017.
On 12 April 2017, a Commission Delegated Regulation (EU) 2017/653 has been published in the Official Journal on key information documents for PRIIPs laying down regulatory technical standards with regard to the presentation, content, review and revision of KIDs and the conditions for fulfilling the requirement to provide such documents. The Delegated Regulation entered into force on 2 May 2017 and will apply from 1 January 2018.