Hogan Lovells

Recent regulatory developments of interest to financial institutions and markets. Includes updates relating to the UK FCA Dear CEO letter on TTCAs, European Commission and ESMA updates, and more.


  • Title transfer collateral arrangements: FCA Dear CEO letter
  • BMR: European Commission proposal to address LIBOR cessation risks
  • COVID-19: ESMA extends lower short position reporting threshold
  • COVID-19: ESMA draft RTS further postpone CSDR settlement discipline
  • MiFID and MiFIR: ESMA guidance on third-country trading venues and transparency
  • T2-T2S consolidation project: ECB extends project timeline

Title transfer collateral arrangements: FCA Dear CEO letter

The UK Financial Conduct Authority (FCA) has published a Dear CEO letter to firms acting as brokers in wholesale financial markets, who currently, or may in the future, offer services (including clearing broker and prime broker services) involving holding clients' cash or securities as collateral.

The FCA notes it is common market practice to enter into title transfer collateral arrangements (TTCA) with clients over that collateral, allowing firms to use the cash or securities to secure obligations owed to them by their clients. Outside such arrangements, cash and securities given to the firm when providing investment services to a client are likely to be client money or custody assets under the Client Assets sourcebook (CASS). In all cases, firms must ensure compliance with any applicable CASS rules, including obligations relating to the use of TTCAs and the correct application of the exclusions in CASS for TTCAs.

The FCA has recently identified examples of inappropriate use of TTCAs by firms, amounting to failures of compliance with the CASS rules. Additionally, it has seen examples of the same types of firms incorrectly classifying financial transactions as falling within the prudential matched principal exemption. This means that they are holding lower financial resources than may be required and also acting outside the limitations of their regulatory permissions.

The protection of client money and custody assets is a long-standing priority for the FCA. It is particularly important during the COVID-19 pandemic, given the increased risk of client defaults and firm failures.

Firms with business models using TTCAs to hold collateral for leveraged client trading are reminded that it is their responsibility to ensure they have the correct regulatory permissions for the activities they undertake. This includes considering whether they can genuinely rely on the matched principal exemption for prudential categorisation purposes.

Firms are asked to review the use of TTCAs in their business and confirm to the FCA, by 4 August 2020, that the senior manager with responsibility for client assets, or alternatively the senior manager responsible for compliance, has considered the issues in the appendix to the letter and will bring any issues to the attention of its board. If any rule breaches are identified in relation to a firm's use of TTCAs or regulatory permissions, immediate steps should be taken to rectify them and the FCA should be notified accordingly.


BMR: European Commission proposal to address LIBOR cessation risks

The European Commission has adopted a legislative proposal for a regulation amending the Benchmarks Regulation (BMR) as regards the exemption of certain third country foreign exchange benchmarks and the designation of replacement benchmarks for certain benchmarks in cessation. The proposal's aim is to ensure that when a widely used benchmark is phased out, as is currently the case with LIBOR, it does not cause disruptions to the economy and harm EU financial stability.

The Commission has also published related Q&A, an impact assessment report and an executive summary.


COVID-19: ESMA extends lower short position reporting threshold

On 30 July 2020, Decision (EU) 2020/1123 of the European Securities and Markets Authority (ESMA) was published in the Official Journal of the EU (OJ). The decision renews ESMA's decision to temporarily require the holders of net short positions in shares traded on an EU regulated market to notify the relevant national competent authority if the position reaches or exceeds 0.1% of the issued share capital. In accordance with Article 28(10) of the Short Selling Regulation, ESMA is required to review the requirement, which was first imposed in March 2020, at appropriate intervals and at least every three months.

The decision entered into force on 17 June 2020 and applies for a period of three months (that is, until 17 September 2020).


COVID-19: ESMA draft RTS further postpone CSDR settlement discipline

On 28 July 2020, ESMA announced that, in light of COVID-19, it is working on draft regulatory technical standards (RTS) to further delay the entry into force of the settlement discipline regime under the Central Securities Depositories Regulation (CSDR) until 1 February 2022.

In response to a request to ESMA by the European Commission following representations from stakeholders, the RTS will postpone the date of entry into force of Delegated Regulation (EU) 2018/1229 (RTS on settlement discipline) until 1 February 2021.

ESMA aims to publish the final report on further postponing the date of entry into force of the RTS by September 2020. Following the endorsement of the RTS by the Commission, the Commission Delegated Regulation will then be subject to the non-objection of the European Parliament and of the Council of the EU.


MiFID and MiFIR: ESMA guidance on third-country trading venues and transparency

ESMA has announced that it has updated information about transparency opinions for third-country trading venues (TCTVs) under the Markets in Financial Instruments Directive (MiFID) and the Markets in Financial Instruments Regulation (MiFIR).

ESMA has made available:

  • guidance on the implementation of the list of trading venues. The guidance provides additional information about trading venues with positive assessments and partially positive assessments. It also explains how to populate the venue of execution in post-trade reports and sets out guidance relating to specific fields; and
  • an updated Annex to ESMA's June 2020 opinion determining TCTVs for the purpose of transparency under MiFIR.

An ESMA webpage contains links to all of the transparency opinions and annexes and explains that ESMA remains open to assessing additional TCTVs.


T2-T2S consolidation project: ECB extends project timeline

The European Central Bank (ECB) has published a press release on the T2-T2S consolidation project.

The timeline for launching the project has been extended by one year and is now scheduled to go live in November 2022. This is due to issues with market participants being ready for the project because of the COVID-19 pandemic and the rescheduling of global migration of cross-border payments to ISO 20022.

The Eurosystem Collateral Management System (ECMS) is also being delayed from November 2022 to at least June 2023.

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.

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