The European Commission published three separate letters rejecting European Securities and Markets Authority draft technical standards and requesting amendments in accordance with the Markets in Financial Instruments Directive II. The first letter concerns draft regulatory technical standards on transparency requirements in respect of bonds, structured finance products, emission allowances and derivatives. The draft RTS submitted by ESMA lays down the criteria for whether bonds and structured finance products are considered to be liquid and further sets out the parameters and methods for the calculation of those thresholds above which waivers or deferrals may be granted. The Commission largely agreed with the approach taken by ESMA in drafting the standards, however, it stated that the definition of liquidity and the factors for determining the waiver threshold should be reviewed with a more cautious approach. The Commission concluded that it would not endorse the draft RTS until the approach to defining a liquid market for bonds is further aligned with the approach for all other non-equity instruments.
The second letter concerns ESMAs draft RTS on the criteria to establish when an activity is considered to be ancillary to the main business. MiFID II exempts persons dealing on own account or providing investment services to clients in commodity, derivatives provided that, amongst other things, it is an activity that is ancillary to their main business and that the main business is not the provision of investment services or banking services. The RTS lays down two tests which are required to be met in order for an activity to be considered ancillary, the market share test and the main business test. The Commission’ rejected the draft RTS because ESMAs proposal for the main business test on the basis of total turnover as a proxy to commercial activity could result in an overly restrictive application of the test. The Commission concluded that the proposed ESMA trading ratio for determining an appropriate test for all cases and for all groups potentially affected by the ancillary activities test is not appropriate. The Commission suggested that the proposed main business test should be broadened to include a wider range of factors when determining the extent to which activities constitute a minority of activities at a group level.
The third letter concerns ESMAs draft RTS on the application of position limits to commodity derivatives under MiFID II. The draft RTS provides the methodology for the calculation of position limits with the aim of establishing a harmonized position limit regime for derivatives traded on trading venues and their economically equivalent OTC contracts. The Commission concluded that it will not adopt the RTS unless the methodology is amended to take into account the distinction between different commodity derivatives, as some commodity derivatives have very few participants and are illiquid, while others, in contrast, are very liquid.
The Commission is of the view that the methodology currently proposed needs to take greater account of the specifics of each type of underlying commodity. The Commission states that amendments are required to ensure the proposed rules meet the objective of preventing market abuse, supporting orderly pricing and settlement conditions and promoting the integrity of the market. The Commission concluded that it will not adopt the RTS unless the methodology is amended to take into account its requests.
View the first letter – transparency requirements.
View the second letter – activity ancillary to main business.
View the third letter – position limits for commodity derivatives.
