Hogan Lovells

Recent UK and EU regulatory developments of interest to financial institutions and markets, including updates on UK MiFIR, EU MAR, SSR, EMIR, MiFIR and MiFID. Also check our supplementary Financial institutions general regulatory news of broader application in the Related Materials links.

Contents

  • Benchmarks (Provision of Information and Documents) Regulations 2021
  • UK EMIR: FCA update on reporting LIBOR transition modifications
  • UK MiFIR: FCA statement on supervision of commodity position limits
  • UK MiFIR: FCA consults on LIBOR transition and derivatives trading obligation
  • UK MiFIR: FCA update on data reporting and LIBOR transition
  • BMR: LIBOR removed from list of critical benchmarks
  • Regulation on pilot regime for market infrastructures based on DLT: ECON adopts report
  • SSR: European Commission consults on draft Delegated Regulation amending notification threshold
  • MAR: ESMA consults on amendments to guidelines on delayed disclosure of inside information
  • EMIR: ESMA methodology for assessing third-country CCPs
  • EMIR: ESMA annual report on supervisory measures and penalties
  • EMIR: ESMA consults on draft guidelines for derivatives reporting
  • EMIR and SFTR: ESMA final report on simplification and harmonisation of TR fees
  • EMIR and MiFIR: ESMA consults on clearing and derivative trading obligations in light of benchmark transition
  • MiFID: ESMA statement on payment for order flow and zero-commission brokers
  • MiFIR: ESMA statement on supervisory approach to open access provisions for ETDs
  • MiFIR: ESMA consults on transparency requirements for equity and non-equity instruments
  • Crowdfunding Regulation: ESMA letter raises timing and interpretation concerns
  • CCP Recovery and Resolution Regulation: ESMA consults on RTS and guidelines
  • FX Global Code: GFXC updates Code, publishes new templates for disclosures and guidance on pre-hedging

Benchmarks (Provision of Information and Documents) Regulations 2021

The Benchmarks (Provision of Information and Documents) Regulations 2021 (SI 2021/812) have been published, together with an explanatory memorandum. The Regulations came into force on 9 July 2021. They make provision in respect of a notice or permission given by the Financial Conduct Authority (FCA) to a benchmark administrator under Articles 22A, 22B, 23A and 23D of the UK Benchmarks Regulation (UK BMR) where the FCA is considering whether to wind down a critical benchmark.

These Articles were inserted into the UK BMR by way of the Financial Services Act 2021. They form part of a suite of amendments to the UK BMR that give the FCA additional powers to manage an orderly wind-down of a critical benchmark. The Regulations will be used for the wind-down of LIBOR. However, they apply to any critical benchmark regulated under the UK BMR. They may also apply where the FCA decides not to wind down a critical benchmark.

UK EMIR: FCA update on reporting LIBOR transition modifications

Following its March 2021 statement on its webpage for "UK EMIR news" clarifying that an amendment to a reference rate or applying a fallback in place of LIBOR would constitute a modification that is reportable under UK EMIR, the FCA has added to the webpage follow-up guidance on how it expects this modification to be reported under Article 9 of the retained EU law version of the European Market Infrastructure Regulation (UK EMIR).

The FCA's advice covers:

  • reporting of fallbacks in accordance with the ISDA protocol;
  • reporting of bespoke fallbacks; and
  • reporting where a reference rate is otherwise amended.

The FCA reiterates the statement it made in its March 2021 update that, while it expects firms to make the necessary preparations to ensure the relevant UK EMIR reports are updated in a timely manner, it will apply its supervisory powers for this requirement in a proportionate and risk-based manner.

UK MiFIR: FCA statement on supervision of commodity position limits

The FCA has published a statement on supervision of commodity position limits.

The FCA refers to its December 2020 supervisory statement, which included a change in its approach to commodity derivative position limits in the light of potential constraints on market functioning during the COVID-19 pandemic because of inflexibilities in the commodity derivatives position limits regime. The FCA confirms that its policy remains that it does not intend to take supervisory or enforcement action for positions that exceed limits where the position is held by a liquidity provider to fulfil its obligations on a trading venue.

The FCA refers to HM Treasury's wholesale markets review consultation which includes proposals on reforming the Markets in Financial Instruments Directive (MiFID) commodity derivatives position limits regime to limit the scope of the position limits to agricultural contracts and physically settled contracts. The FCA supports these proposals, and has decided that, while changes to the scope of the regime is being considered, it will not take supervisory or enforcement action in relation to commodity derivative positions that exceed position limits on cash-settled commodity derivative contracts, unless the underlying is an agricultural commodity. However, it will keep this position under review, and reconsider if there are indications of market abuse.

The FCA clarifies that its existing supervisory and enforcement approach relating to position limits remains for physically deliverable and agricultural commodity derivative contracts. In addition, its approach does not affect the responsibilities of members or participants of a trading venue under the position management rules of that venue, or the FCA's expectation that firms trading or arranging trades in commodity derivatives comply with their other market conduct obligations.

UK MiFIR: FCA consults on LIBOR transition and derivatives trading obligation

The FCA has published a consultation paper , CP21/22, on LIBOR transition and the derivatives trading obligation (DTO).

The DTO, which is set out in Article 28 of the UK Markets in Financial Instruments Regulation (UK MiFIR), requires financial and certain non-financial counterparties to conclude transactions in standardised and liquid over-the-counter (OTC) derivatives only on regulated trading venues. Article 32 of UK MiFIR specifies that derivatives that are subject to the DTO must be subject to the derivatives clearing obligation (DCO) under UK EMIR, admitted to trading on at least one regulated trading venue and be sufficiently liquid to trade only on those venues.

The FCA intends to amend the UK regulatory technical standards (RTS) on the trading obligation for certain derivatives (DTO RTS), which are set out in the onshored version of Commission Delegated Regulation (EU) 2017/2417, to remove derivatives referencing GBP LIBOR from the current DTO and replace them with overnight indexed swaps (OIS) referencing SONIA. The FCA's liquidity analysis indicates that SONIA OIS as a class of OTC derivatives is sufficiently liquid to impose a DTO.

The FCA's proposals follow on from the Bank of England's (BoE) May 2021 consultation paper on changes to the DCO, which will remove contracts referencing GBP LIBOR from the DCO's scope, replacing them with contracts referencing SONIA.

The FCA intends to monitor market developments and liquidity in OIS referencing €STR and SOFR over the coming months. Its view is that OIS referencing €STR do not yet display the same level of liquidity of EURIBOR or other products currently subject to the DTO and OIS referencing SOFR may also not yet meet relevant criteria to be sufficiently liquid.

The instrument making the proposed amendments to the DTO RTS, the Technical Standards (Markets in Financial Instruments Regulation) (Derivatives Trading Obligation) Instrument 2021, is set out in Appendix 1 to CP21/22. The FCA intends for it to enter into force on 20 December 2021.

The deadline for responses is 25 August 2021. The FCA intends to publish a policy statement in late Q3 or early Q4 2021.

UK MiFIR: FCA update on data reporting and LIBOR transition

The FCA published a new webpage aiming to clarify expectations for investment firms and trading venues submitting UK MiFIR transaction reports and instrument reference in relation to LIBOR transition. On its webpage, the FCA responds to the following two questions:

  • Should a transaction report be submitted when the reference rate for a previously reported contract changes from LIBOR to an alternative rate (whether as a result of the application of a fallback or otherwise)?

The FCA states that, where the only amendment to the contract is the reference rate and associated spread, a new transaction report should not be submitted. Where other amendments are made to the contract that result in a reportable transaction, such as a change in notional, a new transaction report should be submitted in accordance with applicable requirements (described briefly on the webpage).

  • Are trading venues required to amend financial instrument reference data when the reference rate for an instrument changes from LIBOR to an alternative rate (whether as a result of the application of a fallback or otherwise)?

The FCA advises that where the change in reference rate would result in a new ISIN being generated on request, trading venues should request the new ISIN, terminate the existing instrument and submit financial instrument reference data for the new instrument in accordance with the UK onshored Delegated Regulation (EU) 2017/585 (RTS 23). However, if the change would not cause a new ISIN to be generated, and no other changes are being made to the instrument that would result in a new ISIN being generated, no action is required by trading venues.

BMR: LIBOR removed from list of critical benchmarks

European Commission Implementing Regulation (EU) 2021/1122 amending Implementing Regulation (EU) 2016/1368 adding the Norwegian Interbank Offered Rate to and removing LIBOR from the list of critical benchmarks used in financial markets established pursuant to the EU Benchmarks Regulation (BMR) has been published in the Official Journal of the EU.

The Implementing Regulation will enter into force on 10 July 2021.

Regulation on pilot regime for market infrastructures based on DLT: ECON adopts report

The European Parliament's Economic and Monetary Affairs Committee (ECON) has announced that it has adopted a report on the proposed Regulation on a pilot regime for market infrastructures based on distributed ledger technology (DLT). The announcement highlights details on financial instruments eligible for the pilot.

The pilot is part of the European Commission's Digital Finance Strategy.

SSR: European Commission consults on draft Delegated Regulation amending notification threshold

The European Commission is consulting on a draft Delegated Regulation amending the EU Short Selling Regulation (SSR) as regards the adjustment of the relevant threshold for the notification of significant net short positions in shares under Article 5(2) of the SSR. The aim of the draft Delegated Regulation is to adjust the relevant threshold for the notification to competent authorities of significant net short positions in shares set out in Article 5(2) of the SSR from 0.2% to 0.1% (and each 0.1% above that).

Comments can be made on the draft Delegated Regulation until 12 August 2021.

MAR: ESMA consults on amendments to guidelines on delayed disclosure of inside information

The European Securities and Markets Authority (ESMA) has published a consultation paper on the review of its guidelines on delayed disclosure of inside information under the EU Market Abuse Regulation (MAR) in relation to its interaction with prudential supervision.

ESMA explains that, under MAR, issuers can delay the disclosure of inside information where immediate disclosure is likely to prejudice an issuer's legitimate interest, the delay of disclosure is not likely to mislead the public and confidentiality is ensured. ESMA's MAR guidelines include a list of legitimate interests of issuers that are likely to be prejudiced by immediate disclosure of inside information. The purpose of this consultation is to build and expand on these guidelines, in the context of the interaction between the MAR transparency obligations vis-à-vis inside information and the prudential supervisory framework.

ESMA proposes to amend the current guidelines by:

  • clarifying that, in case of redemptions, reductions and repurchases of own funds, pending the prudential supervisor's authorisation, the institution has a legitimate interest to delay disclosure of inside information until authorisation is granted;
  • clarifying that in case of draft Supervisory Review and Evaluation Process (SREP) decisions and related preliminary information, the institution has a legitimate interest in delaying disclosure of inside information until that information becomes final; and
  • adding a separate section to clarify that Pillar 2 Capital Requirements and Pillar 2 Capital Guidance contained in the SREP under the Capital Requirements Regulation (CRR) and Directive (CRD) package, are likely to meet the definition of inside information under MAR and, therefore, would need to be disclosed as soon as possible, once final.

The consultation closes on 27 August 2021. ESMA will consider the responses it receives to the consultation and expects to publish a final report including its amended MAR guidelines at the end of 2021.

EMIR: ESMA methodology for assessing third-country CCPs

ESMA has published a methodology for assessing, under Article 25(2c) of EMIR, whether a third country central counterparty (CCP) or some of its clearing services are of such substantial systemic importance that the third country CCP should not be recognised to provide certain clearing services or activities in the EU.

EMIR: ESMA annual report on supervisory measures and penalties

ESMA has published its annual report on the supervisory measures and penalties that national competent authorities have imposed under Articles 4, 9, 10 and 11 of EMIR.

EMIR: ESMA consults on draft guidelines for derivatives reporting

ESMA is consulting on draft guidelines for reporting trades in derivatives under Article 9 of EMIR and on obligations for trade repositories (TRs) under Articles 78 and 81. The draft guidelines cover a wide set of topics relating to reporting, data quality and data access under the EMIR Refit Regulation. ESMA has also published validation rules that clarify dependencies between data fields and their applicability in the different use cases.

The consultation closes on 30 September 2021.

EMIR and SFTR: ESMA final report on simplification and harmonisation of TR fees

ESMA published its final report on technical advice to the European Commission on the simplification and harmonisation of fees to trade repositories (TRs) under EMIR and the EU Regulation on reporting and transparency of securities financing transactions (SFTR). In light of its advice, ESMA expects the Commission to amend the following Delegated Regulations on fees for TRs:

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

EMIR and MiFIR: ESMA consults on clearing and derivative trading obligations in light of benchmark transition

ESMA has published a consultation paper proposing draft RTS that would amend the RTS on the clearing obligation (CO) and on the derivative trading obligation (DTO) under Article 5(2) of EMIR and Article 32 of MiFIR respectively. ESMA's proposals would amend the scope of the CO and the DTO to accompany the benchmark transition for OTC derivatives away from EONIA and LIBOR and on to new Risk-Free Rates (RFR).

It explains that, following benchmark reform, EONIA and LIBOR will cease at the end of 2021. The exception to this is USD LIBOR, which is scheduled to continue until June 2023 (although ESMA points out that various communications have been made with a view to stopping USD LIBOR from being used as a reference rate in new contracts as soon as possible and at latest by 31 December 2021). ESMA refers to the international efforts from regulators and market participants to replace these benchmarks and transition to new RFRs in a number of currencies. For the OTC derivative market, this means that new derivative contracts are expected to no longer reference EONIA or LIBOR from 3 January 2022, whereas derivatives referencing RFRs such as €STR in EUR, SONIA in GBP or SOFR in USD are being traded and cleared.

Three Commission Delegated Regulations on the CO and one on the DTO mandate a range of interest rate and credit derivative classes to be cleared, and for a subset of these, to also be traded on venue. ESMA recognises that, in light of transition to RFRs, the scope of the CO and the DTO for the classes and currencies impacted by these changes needs reviewing (that is, interest rate derivative classes in EUR, GBP, JPY and USD). The draft RTS include proposed amendments to reflect the changes deriving from this transition.

ESMA will consult the European Systemic Risk Board on the draft RTS on the CO. It has discussed the proposals with a number of relevant authorities from third countries to facilitate international convergence as far as possible.

The consultation closes on 2 September 2021. ESMA expects to submit its final report to the European Commission in autumn 2021 and aims to ensure that the scope of derivatives classes subject to the CO and the DTO reflects the transition to the new alternative rates at the beginning of 2022.

MiFID: ESMA statement on payment for order flow and zero-commission brokers

ESMA has published a statement warning firms and investors on risks arising from payment for order flow (PFOF) and from certain practices by "zero-commission brokers".

PFOF is the practice of brokers receiving payments from third parties for directing client order flow to them as execution venues. Zero-commission brokers are firms that charge no explicit commissions for the execution of client orders and market their services as bearing no costs for investors. ESMA states that these firms often receive PFOF from third parties, which may compensate for the lack of direct commissions charged to clients.

ESMA's view is that in most cases it is unlikely that PFOF could be compatible with the Markets in Financial Instruments Directive (MiFID) and related legislation, explaining its concerns in greater detail in the statement.

ESMA requests national competent authorities (NCAs) to prioritise PFOF in their supervisory activities for 2021 or early 2022. These supervisory activities should assess the actual impact of PFOF on firms' compliance with best execution, conflicts of interest and inducements requirements, including whether firms receiving PFOF are able to demonstrate that they consistently achieved the best possible result for retail clients when executing their orders.

MiFIR: ESMA statement on supervisory approach to open access provisions for ETDs

ESMA has published a statement on its supervisory approach to the provisions on non-discriminatory and open access to trading venues and CCPs for transferable securities, money market instruments and exchange traded derivatives (ETDs) under Articles 35 and 36 of the EU Markets in Financial Instruments Regulation (MiFIR).

ESMA explains that Article 54(2) of MiFIR enables NCAs to temporarily exempt trading venues and CCPs from the MiFIR access provisions for ETDs. NCAs had granted a number of exemptions under this provision, which expired on 3 July 2021. It notes that co-legislators have strongly indicated their intention to extend the transitional period for ETDs. The Council of the EU has suggested in its General Approach on the European Commission's proposal for a Regulation on a pilot regime for market infrastructures based on distributed ledger technology (known as the DLT pilot regime) amending Article 54(2) of MiFIR to extend the transitional period by two years to 3 July 2023. ESMA also understands that the European Parliament has indicated support for extending the transitional period by two years. ESMA believes that, although the legislative procedure in relation to the proposal for a Regulation on a DLT pilot regime is not yet concluded, both co-legislators seem to hold identical positions on an extension of the transitional period, which suggests that the extension will in all likelihood be established.

ESMA considers that it is important to consider this likely upcoming legislative change when applying the MiFIR open access provisions for ETDs. It is also mindful of the administrative burden in processing potential access requests that would, in the light of the expected extended transitional period, not result in effective access arrangements.

On this basis, ESMA states that it expects NCAs not to prioritise actions in relation to the provisions in Articles 35 and 36 of MiFIR with respect to trading venues and CCPs that benefitted from transitional arrangements under Article 54(2) of MiFIR in respect of ETDs.

MiFIR: ESMA consults on transparency requirements for equity and non-equity instruments

ESMA is consulting on the review of transparency requirements for equity and non-equity instruments under Commission Delegated Regulation (EU) 2017/587 (RTS 1) and Commission Delegated Regulation (EU) 2017/583 (RTS 2), both made under MiFIR.

The consultation reflects the findings and recommendations of various MiFID review reports published by ESMA in 2019 and 2020, as well as feedback received from stakeholders. The proposals include:

  • providing more clarity on non-price forming transactions and the reporting of such transactions which will help obtain a better picture of the actual split between lit and OTC trading;
  • a recalibration of the regime for commodity derivatives ensuring better tailored transparency requirements for this class of derivatives;
  • providing further clarity on the reporting fields for post-trade transparency and the reporting of reference data with the overall objective of improving the quality of post-trade transparency data;
  • providing clarification on the pre-trade transparency requirements for new types of trading systems, i.e. frequent batch auctions and hybrid systems; and
  • increasing the pre- and post-trade large in scale thresholds for the trading of ETFs to achieve a more meaningful level of transparency in the ETF market.

The consultation closes on 1 October 2021. ESMA will analyse the feedback in Q4 2021 and aims to publish a final report and submit draft RTS to the European Commission for endorsement in Q1 2022.

Crowdfunding Regulation: ESMA letter raises timing and interpretation concerns

ESMA has published a letter it sent to the European Commission, on the Regulation on European crowdfunding service providers for business (Crowdfunding Regulation). In the letter, ESMA sets out some important interpretation issues that have emerged from its interaction with NCAs and market participants. The issues are summarised in an Annex to the letter. ESMA considers it would be highly beneficial to NCAs and market participants if the Commission clarified these uncertainties.

ESMA also highlights concerns, shared by NCAs, about potential issues relating to the date of application of the Crowdfunding Regulation as well as the expected date of application of the delegated and implementing acts to be adopted by the Commission under the Crowdfunding Regulation.

It is due to submit most of its technical standards to the Commission on the date the Crowdfunding Regulation will apply (that is, 10 November 2021). Notwithstanding the significant number of mandates, ESMA will endeavour to submit its technical standards before this date, including some or all of the draft technical standards it is due to submit by May 2022. However, ESMA believes it is already unavoidable that the full endorsement process will not be concluded before 10 November 2021. As a result, the Crowdfunding Regulation will begin to apply significantly before the application of the technical standards the Commission should adopt. ESMA is concerned about harmonisation and level playing field issues among member states during the interim period between the date the Crowdfunding Regulation applies and the date the technical standards apply. It believes that this is also likely to make the authorisation process more complex for both NCAs and applicants.

ESMA points out that slightly delaying the Crowdfunding Regulation application date would enable a more orderly and harmonised application of the regime.

CCP Recovery and Resolution Regulation: ESMA consults on RTS and guidelines

ESMA has published consultation papers on the following RTS and guidelines mandated under the Regulation on the recovery and resolution of CCPs (CCP Recovery and Resolution Regulation or CCPRRR):

The deadline for responding to all the consultations is 20 September 2021. ESMA will consider the feedback received to the consultation in Q3 2021 and expects to publish reports containing final versions of the guidelines and the draft RTS by Q4 2021/Q1 2022.

FX Global Code: GFXC updates Code, publishes new templates for disclosures and guidance on pre-hedging

The Global Foreign Exchange Committee (GFXC) has published an updated version of its FX Global Code, following a three-year review of the Code. It has also published:

Eleven of the Code's 55 principles have been amended. The changes from the 2018 version are highlighted in the appendix to the GFXC's review outcomes paper. The revisions are designed to strengthen the Code's guidance on anonymous trading, algorithmic trading and transaction cost analysis, disclosures and settlement risk.

The GFXC has indicated that standardised Disclosure Cover Sheets for liquidity providers and for FX e-trading platforms will be made available by the GFXC in August, alongside the publication of a guidance paper on last look.

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