Securities and markets regulatory news, March 2021 # 5

Hogan Lovells

Hogan Lovells

Recent regulatory developments of interest to financial institutions and markets. This week reports on UK and EU developments relating to MiFID/MiFIR, EMIR, SFTR and BMR. Also check our Financial institutions general regulatory news of broader application in the Related Materials links.


  • UK MiFIR: FCA update on use of TTP to modify DTO
  • RTS 27 reports and 10% depreciation notifications: FCA supervisory flexibility
  • EU EMIR and SFTR: European Commission adopts Delegated Regulation on fees charged to TRs for 2021
  • EU EMIR and SFTR: ESMA consults on simplification and harmonisation of TR fees
  • EU EMIR: Joint ESA Q&As on exchange of collateral
  • Risks associated with CCPs: ESMA speech
  • MiFID: ESMA statement on supervisory approach to position limits for commodity derivatives
  • EU BMR: ESMA updates statement on impact of Brexit

UK MiFIR: FCA update on use of TTP to modify DTO

The Financial Conduct Authority (FCA) has published an update on the use of its temporary transitional power (TTP) to modify the UK's derivatives trading obligation (DTO). The FCA previously published a December 2020 statement in which it said that it would keep its use of the TTP under review and consider, by 31 March 2021, whether market or regulatory developments warrant a review of its approach. The FCA has not observed market or regulatory developments in Q1 2021 that justify a change in its approach. Therefore, it will continue to use the TTP to modify the application of the DTO as previously set out.

The FCA will continue to monitor market and regulatory developments, and will review its approach if necessary. If it does see a case for a change, it will provide enough notice to market participants so that any changes can be implemented smoothly.

As specified in the December statement, the FCA expects firms and other regulated persons to be able to demonstrate compliance with the UK DTO.

RTS 27 reports and 10% depreciation notifications: FCA supervisory flexibility

The FCA has published a statement announcing a further extension to a temporary COVID-19 measure applying supervisory flexibility over 10% depreciation notifications. The temporary measure will be extended until the end of 2021 while the FCA consults on changes to the notification requirement. It intends to consult on the changes in spring 2021. The requirements apply to firms that provide portfolio management services or hold retail client accounts that include positions in leveraged financial instruments or contingent liability transactions.

The FCA also announces that it is establishing temporary measures relating to RTS 27 (Delegated Regulation (EU) 2017/575) reports on execution quality. It explains that since the next set of RTS 27 reports will be based on pre-Brexit data, the information they contain is likely to be of limited use for market participants and may even be misleading. In addition, it is currently preparing a consultation on the RTS 27 reporting obligation, with a view to abolishing it, due to doubts about the value of these reports compared with the burden of producing them. On this basis, the FCA states that it will not take action against firms who do not produce RTS 27 reports for the rest of 2021. It expects to have finalised its policy consideration of the future of these reports by the end of 2021.

EU EMIR and SFTR: European Commission adopts Delegated Regulation on fees charged to TRs for 2021

The European Commission has adopted a Delegated Regulation amending Delegated Regulations (EU) 1003/2013 and (EU) 2019/360 as regards the annual supervisory fees charged by the European Securities and Markets Authority (ESMA) to trade repositories (TRs) for 2021. Delegated Regulations (EU) 1003/2013 and (EU) 2019/360 set out the methodology for the fees paid to ESMA by TRs for the purposes of Article 72(3) of the European Market Infrastructure Regulation (EMIR) and Article 11(2) of the Regulation on reporting and transparency of securities financing transactions (SFTR) respectively.

The amendments to these Regulations reflect the effect of two UK TRs transferring part of their services and activities to the EU to be able to continue providing services and activities to counterparties established in the EU. As the new EU TRs effectively started their activity in the EU in January 2021, their level of activity in 2020 was almost non-existent and consequently their annual supervisory fee for 2021 would be negligible, although their activities are likely to be significant.

The Delegated Regulation changes the reference period for the calculation of the applicable turnover of TRs from 2020 to January to June 2021. This will have the effect of ensuring that the annual supervisory fees for 2021 for these TRs will be calculated based on their applicable turnover during the first half of 2021.

The next step is for the Council of the EU and the European Parliament to consider the draft Delegated Regulation. If neither the Council nor the Parliament object, it will be published in the Official Journal of the European Union and will enter into force the day after its publication.

EU EMIR and SFTR: ESMA consults on simplification and harmonisation of TR fees

ESMA has published a consultation paper on technical advice to the European Commission on the simplification and harmonisation of fees to TRs under EMIR and the SFTR. It follows a formal request from the Commission in July 2020 to provide technical advice to review the following Commission Delegated Regulations:

  • Commission Delegated Regulation (EU) 272/2012 (relating to credit rating agencies (CRAs));
  • Commission Delegated Regulation (EU) 1003/2013 (relating to trade repositories under EMIR); and
  • Commission Delegated Regulation (EU) 2019/360 (relating to trade repositories under the SFTR).

ESMA proposes to align the structure for the fees for registration and extension of registration under EMIR with the structure under the SFTR. It considers two approaches, one keeps two layers of TRs, simplifying the categories into lower and higher expected turnover TRs. The alternative approach would impose a single fixed fee.

ESMA also proposes to simplify method of determining the turnover of TRs for the purposes of calculation of the annual supervisory fees by including only revenues and excluding activity figures. In addition, it has specifically defined the calculation of lower fees in the case of extension of registration under SFTR, or where there is a concurrent application under both regimes. Finally, ESMA proposes a simplification of the calculation of fees for recognition of third-country TRs and the different payment conditions, by setting a single deadline for payment of 31 March.

The consultation closes on 24 April 2021. ESMA will submit this final report to the Commission by the end of Q2 or beginning of Q3 of 2021.

EU EMIR: Joint ESA Q&As on exchange of collateral

The European Supervisory Authorities (ESAs) have published joint Q&As on bilateral margin requirements under EMIR. They have been developed under the ESA's joint mandate under Article 11(15) of EMIR to define bilateral margin requirements.

Risks associated with CCPs: ESMA speech

ESMA has published a speech by Klaus Löber, chair of ESMA's CCP Supervisory Committee, which includes a discussion of evolving risks in the context of central clearing. Mr Löber highlights a number of key risks relating to central counterparties (CCPs), including the following:

  • the temporary recognition of the UK CCPs as third-country CCPs has resulted in two systemically important CCPs operating from outside the EU's jurisdiction. ESMA's CCP Supervisory Committee is tasked with (among other things) analysing potential risks, dependencies and stability implications that result from this situation. By mid-2022, the committee will assess whether the services provided by the two CCPs designated as tier 2 CCPs, or some of them, are of a systemic nature that is too substantial to be safely provided from abroad;
  • during the COVID-19 pandemic, CCPs have adapted to new working conditions and adjusted their business continuity procedures, which operational resilience of information and communication technology (ICT) systems have been key in supporting. The CCP Supervisory Committee is going to review supervisory activities in respect of CCPs' operational and cyber resilience from a supervisory convergence perspective, with a view to identifying and promoting best practices in this field; and
  • Mr Löber believes that environmental risks are becoming an increasingly pressing concern. Environment-driven disruptions can affect a CCP in a number of ways. For example, they can directly impact market prices of assets it clears, in particular commodity prices, or they could directly or indirectly impact on a CCP's business continuity following operational disruptions. There is also transition risk, consisting of the risk of a sharp change in asset prices following a technological or regulatory change. Business risk and legal risk are also relevant in this context. Mr Löber notes that the recent review of the ESMA Regulation, combined with EMIR 2.2, have mandated ESMA to include scenarios reflecting the risks stemming from adverse environmental developments in its CCP stress tests. As a first step, the CCP Supervisory Committee is considering internally environmental risk scenarios relevant to CCPs.

MiFID: ESMA statement on supervisory approach to position limits for commodity derivatives

ESMA has published a statement relating to its supervisory approach to position limits for commodity derivatives under the Markets in Financial Instruments Directive (MiFID).

ESMA notes that the Directive amending MiFID to help the EU's economic recovery from the COVID-19 pandemic ((EU) 2021/338) will substantially reduce the scope of commodity derivatives that are subject to position limits. These provisions will start to apply early in 2022. Given the delay in the application of the relaxation of these rules, ESMA states that it sees merit in already having in place a more favourable environment for the development of non-significant commodity derivatives that will no longer be subject to position limits in early 2022.

Although it cannot disapply EU law, ESMA believes that it is necessary to take into account the upcoming rule changes, as well as the impact of position limits on the development of new and less liquid commodity derivatives, the role of liquidity providers in developing those derivatives and the competitive environment in which EU commodity derivatives markets operate. It therefore expects national competent authorities (NCAs) to not prioritise their supervisory actions towards:

  • entities holding positions in commodity derivatives, other than agricultural commodity derivatives, with a net open interest below 300,000 lots; and
  • positions that are objectively measurable as resulting from transactions entered into to fulfil obligations to provide liquidity on a trading venue as referred to in point (c) of the fourth subparagraph of Article 2(4) of MiFID.

EU BMR: ESMA updates statement on impact of Brexit

ESMA has published an updated statement on the application of key provisions in the Benchmarks Regulation (EU BMR) in light of Brexit. The update specifies the EU's regulatory approach towards UK-based third-country benchmarks as well as UK endorsed and recognised benchmarks.

Following the end of the Brexit transition period, UK-based administrators that were initially included in the ESMA register of administrators and third-country benchmarks were deleted as the EU BMR no longer applies to UK-based benchmark administrators. They now qualify as third-country administrators.

However, due to the fact that the EU BMR transitional period, as defined in Article 51(5)4 of the EU BMR, has been extended to 31 December 2023 (by Regulation (EU) 2021/168), the change in the ESMA register does not yet have an effect on the ability of EU supervised entities to use the benchmarks provided by any third-country administrators, including UK ones. This means that, during the EU BMR transitional period, third-country benchmarks can still be used by supervised entities in the EU if the benchmark is already used in the EU as a reference for financial instruments, financial contracts, or for measuring the performance of an investment fund. Therefore, until 31 December 2023, EU supervised entities can use third-country UK-based benchmarks even if they are not included in the ESMA register.

In the absence of an equivalence decision by the European Commission, UK-based administrators have until the end of the extended EU BMR transitional period to apply for recognition or endorsement in the EU for the benchmarks provided by UK-based administrators to be included in the ESMA register again.

The extended EU BMR transitional period also applies to UK-recognised or endorsed third-country benchmarks which were deleted from the ESMA register at the end of the Brexit transition period.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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