Securities and markets regulatory news, March 2020 #3

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Recent regulatory developments of interest to financial institutions and markets.

Contents

  • Draft Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment etc and Transitional Provision) (EU Exit) Regulations 2020
  • COVID-19: FCA confirms approach to supervising MiFIR tick-size regime for systematic internalisers
  • COVID-19: ESMA guidance on financial reporting deadlines
  • COVID-19: ESMA statement on calculating expected credit losses in accordance with IFRS 9
  • COVID-19: ESMA and FCA revise supervisory approach to SFTR reporting obligations
  • EMIR Refit Regulation: ESMA consults on post-trade risk reduction services
  • EMIR Refit Regulation: ESMA consults on draft technical standards relating to trade repositories
  • EMIR: RTS specifying criteria for arrangements to mitigate CCP credit risk associated with covered bonds and securitisations
  • EMIR: Delegated Regulation amending RTS on risk mitigation techniques on uncleared OTC derivatives in context of STS securitisations
  • T2-T2S consolidation project: ECB press release
  • COVID-19: trade associations request delay to initial margin deadlines
  • GFXC statement on FX market conditions
  • Investor protection in Islamic capital markets: IFSB consults on draft standard

Draft Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment etc and Transitional Provision) (EU Exit) Regulations 2020

A draft version of the Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment etc and Transitional Provision) (EU Exit) Regulations 2020 has been published, together with an explanatory memorandum.

The Regulations, which have been laid before Parliament, address certain deficiencies in retained EU law in the European Market Infrastructure Regulation (EMIR), as amended by EMIR 2.2, and related UK legislation, to ensure the UK continues to have an effective regulatory framework for third-country central counterparties (CCPs) once it has left the EU.

Among other things, the Regulations expand the UK's existing CCP supervisory framework to cover third-country CCPs to ensure that the BoE is able to undertake the necessary supervisory responsibilities required under the EMIR framework. They also update existing legislation to ensure that the BoE can assess third-country CCP applications in line with the EMIR 2.2 provisions before the end of the Brexit transition period.

Most of the provisions of the Regulations come into force on the day after the day on which the Regulations are made. However, Part 4 and some provisions in Part 2 come into force on IP completion day, which means these provisions will come into force at the end of the Brexit transition period.

COVID-19: FCA confirms approach to supervising MiFIR tick-size regime for systematic internalisers

On 23 March 2020, the Financial Conduct Authority (FCA) confirmed that it supports the European Securities and Markets Authority's (ESMA's) statement of 20 March 2020 on its approach to the tick-size regime for systematic internalisers under the Markets in Financial Instruments Regulation (MiFIR) and the Investment Firms Regulation (IFR) in light of COVID-19 (reported in this bulletin last week).

The FCA confirms that it:

  • will not prioritise supervision of the new requirements at this time;
  • expects firms to focus on minimising the potential for operational disruption; and
  • will keep the situation, and its position, under review.

COVID-19: ESMA guidance on financial reporting deadlines

On 27 March 2020, ESMA issued a public statement on the implications of COVID-19 on the deadlines for publishing financial reports which apply to listed issuers under the Transparency Directive.

ESMA acknowledges the difficulties encountered by issuers in preparing financial reports and the challenges faced by auditors in carrying out timely audits of accounts due to the COVID-19 pandemic.

ESMA recommends national competent authorities (NCAs) apply forbearance powers towards issuers who need to delay publication of financial reports beyond the statutory deadline. At the same time, ESMA emphasises that issuers should keep their investors informed of the expected publication delay and that requirements under the Market Abuse Regulation still apply.

ESMA, together with NCAs, will continue to monitor the situation and re-assess the need to extend the forbearance period.

COVID-19: ESMA statement on calculating expected credit losses in accordance with IFRS 9

On 25 March 2020, ESMA published a statement (ESMA32-63-951) on the implications of COVID-19 on calculating expected credit losses in accordance with International Financial Reporting Standard 9 (IFRS 9).

ESMA has issued the statement to promote consistent application of IFRS in the EU and avoid divergence in practice on the application of IFRS 9 in the specific context of COVID-19. In particular, the statement addresses the accounting implications of the measures taken or proposed by national governments and EU bodies to address the adverse systemic economic impact of COVID-19.

ESMA notes that issuers may be providing measures on a voluntary basis to borrowers in the context of COVID-19. These may take the form of renegotiations, rollovers or rescheduling of cash-flows that may or may not have an impact on the net present value of the cash-flows.

ESMA advises issuers to carefully consider the related impact on financial reporting, in particular with respect to the IFRS 9 requirements. In ESMA's view, the principles-based nature of IFRS 9 includes sufficient flexibility to faithfully reflect the specific circumstances of the COVID-19 outbreak and the associated public policy measures. The statement addresses:

  • accounting for the modifications resulting from the introduction of the support measures;
  • assessment of significant increase in credit risk (SICR);
  • Expected Credit Loss (ECL) estimation;
  • public guarantees on issuers’ exposures; and
  • transparency.

For further information on the audit of financial statements in the context of COVID-19, ESMA refers to the recent statement published by the Committee of European Auditing Oversight Bodies (CEAOB).

ESMA's statement addresses solely financial reporting aspects. It has co-ordinated with the European Banking Authority (EBA), which has issued a statement on the prudential framework in light of the COVID-19 measures. ESMA advises that both statements are consistent as regards to financial reporting.

COVID-19: ESMA and FCA revise supervisory approach to SFTR reporting obligations

On 26 March 2020, ESMA published a revised version of its statement on a coordinated supervisory approach to the application of the Securities Finance Transactions Regulation (SFTR). ESMA has updated the statement in response to feedback from financial market participants and stakeholders.

The revised statement clarifies that securities finance transactions (SFTs) concluded between 13 April 2020 and 13 July 2020 and SFTs subject to backloading under the SFTR also fall within the issues that competent authorities are not expected to prioritise in their supervisory actions. This applies to actions in respect of counterparties, entities responsible for reporting and investment firms in respect of their reporting obligations under the SFTR or MiFIR and to generally apply their risk-based approach in the exercise of supervisory powers in their day-to-day enforcement of applicable legislation in this area in a proportionate manner.

The FCA has updated its webpage on the SFTR to confirm that it has also updated its approach to supervisory reporting to align with ESMA's revised approach. The FCA confirms that it will not prioritise supervision relating to the reporting of SFTs for firms to which the backloading requirement specified in Article 4(1)(a) applies.

EMIR Refit Regulation: ESMA consults on post-trade risk reduction services

Further to a mandate in EMIR (define), ESMA has published a consultation paper seeking input on whether any trades that directly result from post-trade risk reduction services (PTRR services), including portfolio compression, should be exempted from the clearing obligation referred to in Article 4(1) of EMIR.

In particular, ESMA seeks views of stakeholders on the different types of PTRR services being offered, their purpose and whether there is a need for the new trades that these may generate to be exempted from the EMIR clearing obligation, and if such an exemption could lead to the risk of some counterparties circumventing the clearing obligation.

The consultation closes on 15 June 2020. ESMA will consider the feedback it receives in Q2 2020 and is aiming to publish a final report to the Commission in mid-2020.

EMIR Refit Regulation: ESMA consults on draft technical standards relating to trade repositories

ESMA has published a consultation paper on reporting, data quality, data access and registration of trade repositories (TRs) under the EMIR Refit Regulation. In accordance with mandates in the EMIR Refit Regulation, ESMA has developed and is consulting on the following draft, and amended, technical standards:

  • draft regulatory technical standards (RTS) on details of the reports to be reported to TRs under EMIR;
  • draft implementing technical standards (ITS) on standards, formats, frequency and methods and arrangements for reporting to TRs under EMIR;
  • amendments to Delegated Regulation (EU) No 150/2013 as regards regulatory technical standards specifying the details of the application for registration as a trade repository under EMIR;
  • draft ITS on registration and extension of registration of TRs under EMIR;
  • draft RTS on procedures for ensuring data quality; and
  • draft RTS on operational standards for aggregation and comparison of data and on terms and conditions for granting access to data.

The consultation ends on 19 June 2020. ESMA will publish a final report and submit the draft technical standards to the European Commission for endorsement in Q4 2020.

EMIR: RTS specifying criteria for arrangements to mitigate CCP credit risk associated with covered bonds and securitisations

Commission Delegated Regulation (EU) 2020/447 supplementing EMIR with regard to RTS on the specification of criteria for establishing the arrangements to adequately mitigate counterparty (CCP) credit risk associated with covered bonds and securitisations and amending Delegated Regulations (EU) 2015/2205 and (EU) 2016/1178 has been published in the Official Journal of the EU (OJ).

Article 1 and 2 of the Delegated Regulation set out the clearing exemption conditions for OTC derivative contracts that are concluded by covered bond entities in connection with a covered bond and by securitisation special purpose entities (SSPE) in connection with a securitisation.

Article 3 and 4 of the Delegated Regulation respectively amend Commission Delegated Regulation (EU) 2015/2205 and Commission Delegated Regulation (EU) 2016/1178 to take account of the new drafting of Article 4 of EMIR, which includes two of the clearing exemption conditions for covered bonds included in these Delegated Regulations.

The Delegated Regulation will enter into force and apply on 16 April 2020.

EMIR: Delegated Regulation amending RTS on risk mitigation techniques on uncleared OTC derivatives in context of STS securitisations

Commission Delegated Regulation (EU) 2020/448 amending Commission Delegated Regulation (EU) 2016/2251, which contains RTS supplementing EMIR on risk mitigation techniques for OTC derivative contracts, in connection with certain simple, transparent and standardised securitisations (STSs) for hedging purposes, has been published in the OJ.

The Delegated Regulation provides that securitisation special purpose entities (SSPEs), for OTC derivatives in connection with securitisations that meet the requirements to be classified as STS, will be exempted from posting and collecting initial margins and from posting variation margins.

The Delegated Regulation will enter into force and apply on 16 April 2020.

T2-T2S consolidation project: ECB press release

The ECB has published a press release on the T2-T2S consolidation project. The T2-T2S consolidation project is a Eurosystem project to consolidate TARGET2 (T2) and TARGET2-Securities (T2S) in terms of both technical and functional aspects. The aim is to meet challenging market demands by replacing T2 with a new real-time gross settlement (RTGS) system that will offer enhanced and modernised services. The messaging standard ISO 20022 will be used. Also, liquidity management will be optimised across all TARGET services. The new consolidation platform will be launched in November 2021.

The ECB explains that SWIFT intends to delay the original November 2021 migration date to ISO 20022 for cross-border payments by one year, to the end of 2022. However, this will not affect the launch date of the new RTGS system, which is being developed and rolled out as part of the T2-T2S consolidation project and is scheduled to go live in November 2021.

The ISO 20022 standard is available for financial entities to use for enhanced payment services. T2S and TARGET Instant Payment Settlement (TIPS) also support ISO 20022. Its adoption for T2 high-value payments is in progress as the EU banking sector prepares for user testing to begin. This is scheduled for March 2021.

The European Banking Authority (EBA) notes, however, that the possible delay in migrating to ISO 20022 for cross-border payments would impact the plans to adopt ISO 20022 for correspondent banking business as EU banks would need to adapt their strategies. In the interim period between November 2021 and the end of 2022, they would have to maintain their capability to send SWIFT Message Type (MT) payments and reporting messages, in addition to the new ISO 20022 infrastructure. Although T2 will support enhanced ISO 20022 payment messages from November 2021, EU banks would need to implement a market practice for payments in T2 that have a cross-border dimension.

The ECB recognises that using both legacy and new messaging standards for a period of time would delay the benefits of fully-fledged ISO 20022 messages. As a result, it encourages EU banks to discuss with SWIFT how to manage the proposed phasing effectively, and how to ensure a safe transition of their correspondent banking business after the new T2-T2S consolidated platform goes live.

COVID-19: trade associations request delay to initial margin deadlines

On 26 March 2020, the International Swaps and Derivatives Association (ISDA) submitted a letter, on behalf of multiple trade associations, to the Basel Committee on Banking Supervision (BCBS), the International Organization of Securities Commissions (IOSCO) and global regulators, asking for a delay to the deadlines for the implementation of the final phases of initial margin phase-in, to allow market participants to focus their resources on ensuring continued access to the derivatives market during the COVID-19 pandemic.

GFXC statement on FX market conditions

The Global Foreign Exchange Committee (GFXC) has published a statement on conditions in the foreign exchange (FX) market. In the statement, the GFXC notes that, given the intense volatility seen in global financial markets during March 2020, FX market participants may execute larger than usual FX volumes during end-of-month benchmark fixings. In addition, FX market participants may face more operational constraints reflecting lockdown in some financial centres. In light of these possible developments, there may be significant volatility and price movements during FX fixings in the coming days.

To reduce the potential impact of this volatility on market functioning, and market participants' execution outcomes, the GFXC encourages FX market participants to:

  • give appropriate consideration to market conditions and the potential impact of their transactions and orders (see Principle 12 of the FX Global Code);
  • be aware of the risks associated with the transactions they request and undertake, clearly understand how orders will be handled and transacted, and handle orders with fairness and transparency (see Principle 9 of the FX Global Code); and
  • price transactions in a manner that is transparent and consistent with the risk borne in accepting such transactions, exercise particular care and attention when handling orders that have the potential to have sizable market impact, and ensure adherence to internal guidelines and procedures for collecting and handling executing orders (see Principle 10 of the FX Global Code).

The GFXC also encourages market participants to be aware of how their actions can ensure the FX market remains robust, open, fair and appropriately transparent so that market participants are able to confidently and effectively transact at prices that reflect available market information and in a manner that conforms to acceptable standards of behaviour.

Investor protection in Islamic capital markets: IFSB consults on draft standard

The Islamic Finance Standards Board (IFSB) is consulting on an exposure draft of a standard on guiding principles for investor protection in Islamic capital markets.

The standard covers a wide range of areas and is intended to apply to Islamic capital market products (including sukuk, Islamic collective investment schemes (ICIS) and Shari'ah-compliant equities), as well as market intermediaries operating in the Islamic capital markets, particularly those interfacing with clients.

The consultation period ends on 24 May 2020.

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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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