Recent regulatory developments of interest to financial institutions and markets. Includes updates relating to Brexit, EMIR and more.
- UK SFTR: FCA draft application forms for TR registration
- Brexit: Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment etc and Transitional Provision) (EU Exit) Regulations 2020
- EMIR Refit: ESRB opinion on post-trade risk reduction services
- EMIR: ESRB opinion on clearing solutions for pension scheme arrangements
- Algorithmic trading standards: FMSB consultation
- CCP auctions: CPMI-IOSCO report
UK SFTR: FCA draft application forms for TR registration
The UK Financial Conduct Authority (FCA) has published the following draft forms relating to the Brexit conversion and registration regimes for trade repositories (TRs) under the retained EU law version of the Regulation on reporting and transparency of securities financing transactions (UK SFTR):
- registration form, together with accompanying notes – TRs intending to apply for registration by the FCA under the UK SFTR should complete this form; and
- conversion form – TRs wishing to convert their current European Securities and Markets Authority (ESMA)-registered status into FCA registration should complete this form.
Brexit: Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment etc and Transitional Provision) (EU Exit) Regulations 2020
The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment etc and Transitional Provision) (EU Exit) Regulations 2020 (SI 2020/646) have been published, together with an explanatory memorandum. The Regulations address certain failures of retained EU law to operate effectively and other deficiencies arising from the UK's withdrawal from the EU. They have been made following the amendment of the European Market Infrastructure Regulation (EMIR) by EMIR 2.2.
Some provisions came into force on 25 June 2020. The remaining provisions come into force at the end of the Brexit transition period.
EMIR Refit: ESRB opinion on post-trade risk reduction services
The European Systemic Risk Board (ESRB) has published an opinion on ESMA's consultation on post-trade risk reduction (PTRR) services under Regulation (EU) 2019/834 amending EMIR (EMIR Refit).
The new Article 85(3a) of EMIR mandates ESMA, in cooperation with the ESRB, to provide a report to the European Commission about whether trades that directly result from PTRR services, including portfolio compression, should be exempted from the clearing obligation in Article 4(1) of EMIR. To assist in in this, ESMA published a consultation in March 2020. The ESRB is responding to this consultation.
The ESRB concludes that, while the use of PTRR services in non-centrally cleared over-the-counter (OTC) markets can help to reduce aggregate risk exposures, exempting their use from the clearing obligation may introduce the risk of regulatory arbitrage and circumvention. Therefore, exemptions from the clearing obligation should be subject to appropriate conditions to ensure that they are granted only when they bring clear financial stability benefits while also reducing the risk of misuse. It states that the following conditions, outlined in the ESMA consultation paper, appear particularly necessary:
- the exemption should be limited to PTRR services which demonstrably reduce risk. The ESRB suggests that ESMA considers adequate metrics for this assessment;
- the exemption should be limited to multilateral portfolio compression and to other specific types of PTRR services insofar as the systemic risk reduction benefits could be of a magnitude sufficient to justify it;
- the exemption should be limited to market risk neutral, non-price forming transactions which must not offer a means to take on new market trading positions, but rather only to reduce risks;
- the exemption should be limited exclusively to non-centrally cleared transactions to minimise the risk of it being used as a technique to circumvent the clearing obligation by creating a loophole to reverse cleared trades; and
- PTRR services providers should be subject to proportionate regulatory requirements to ensure that they act independently and according to established rules and parameters which have been reviewed by a competent authority, in particular to avoid any use that aims to circumvent the clearing obligation.
EMIR: ESRB opinion on clearing solutions for pension scheme arrangements
The ESRB has also published an opinion on ESMA's first report for consultation on clearing solutions for pension scheme arrangements (PSAs) under EMIR, published in April 2020.
One of the amendments to EMIR under EMIR Refit was a further extension of the exemption from the clearing obligation for PSAs. The extension was introduced because of the challenges that PSAs would face to provide cash for the variation margin calls related to their cleared derivative contracts. ESMA's report was the first step in it fulfilling its obligation under the EMIR Refit Regulation to provide a report, in cooperation with the ESRB, to the European Commission on the progress made towards clearing solutions for PSAs.
The ESRB focuses on the likelihood of PSAs accessing central counterparties (CCPs) as direct members, increased risk for CCPs in intermediating repos and solutions involving central bank access.
The ESRB concludes that the best way to remove obstacles for PSAs is to promote indirect clearing. It notes that the issues faced by PSAs are in the large part not specific to PSAs, being instead common to all less sophisticated or simply less active entities engaged in clearing, such as investment funds or insurance companies. These entities do not, however, enjoy similarly preferential treatment under the EMIR framework. Instead, they overcome these problems by relying on the services provided by the clearing members, among other things. The ESRB believes that these services could be adapted to cater for the specificities of PSA needs. "For this to happen, the regulatory requirement to centrally clear must finally come into force."
Algorithmic trading standards: FMSB consultation
The FICC Markets Standards Board (FMSB) has published for consultation a transparency draft of a statement of good practice on algorithmic trading in the wholesale fixed income, commodity and currency (FICC) markets. The statement is intended to enhance the integrity and effective functioning of FICC markets by promoting good conduct and governance practices for participants engaged in algorithmic trading or operating trading venues that allow or enable algorithmic trading across all FICC asset classes and markets.
The consultation ends on 21 August 2020 and the final version of the statement will be published shortly after.
CCP auctions: CPMI-IOSCO report
The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) have published a report on issues for CCPs to consider relating to default management auction processes and to identify practices that a CCP could consider in its development of, and improvements to, default management auction rules, governance arrangements and procedures to address these issues. The report builds on a June 2019 CPMI-IOSCO discussion paper on CCP default management auctions.
The report is accompanied by a cover note, which sets out a number of areas that CPMI and IOSCO have identified for further industry work.