News

Securities and markets regulatory news, 19 April 2021

FIG Bulletin

19 April 2021

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

UK SFTR: FCA update on reporting LEIs

The Financial Conduct Authority (FCA) has updated its webpage on the retained EU law version of the Regulation on reporting and transparency of securities financing transactions (SFT) (UK SFTR) in relation to reporting legal entity identifiers (LEIs) of non-EEA third country issuers under the UK SFTR.

Under Article 4 of the UK SFTR, reporting counterparties must use LEIs to identify entities when submitting transaction reports under the UK SFTR. In January 2020, the European Securities and Markets Authority (ESMA) granted 12 months of forbearance from the entry into force of EU SFTR reporting requirements in relation to the reporting of LEIs of non-EEA third country issuers under the reporting technical standard. Although the industry has made progress in encouraging more widespread LEI coverage among non-EEA third country issuers, the FCA recognises that there are still many non-EEA third country issuers without an LEI.

To reduce market disruption, the FCA is extending the period during which reports under the UK SFTR without the LEI of a non-EEA third country issuer will be accepted until at least 13 April 2022. In the meantime, it expects reporting counterparties to continue engaging with non-EEA third country issuers to acquire an LEI. The FCA also expects reporting counterparties to report an LEI for non-EEA third country issuers where available.

SFTR: ESMA update on reporting LEIs

The ESMA has published an updated statement on the implementation of LEI requirements for third-country issuers under the reporting regime set out in the EU SFTR. In the updated statement, ESMA notes that the start of SFTR reporting was delayed by three months to 13 July 2020 due to the COVID-19 pandemic. ESMA has been monitoring the evolution of the reporting of LEI issuer details. It has concluded that, currently, less than 16% of all open SFTs miss an issuer LEI, compared to 26% in September 2020. However, from an individual securities perspective, more than 75% lack an LEI of the third-country issuer in the SFT reports.

Given the still unsatisfactory level of LEI coverage on a global scale, ESMA acknowledges the potential reporting implementation issue regarding SFTs entered into by EU investors for securities of third-country issuers. ESMA expects competent authorities to continue to not prioritise their supervisory actions in relation to reporting of LEIs of third-country issuers. It has issued the updated statement to ensure coordinated supervisory actions are taken in response to the issues concerning the application of the SFTR, particularly the requirements regarding third-country issuer LEI reporting.

On third-country issuer LEI reporting, ESMA extends the position set out in the January 2020 version of the statement until 10 October 2022 at the latest. During this period, ESMA expects that:

trade repositories will not reject SFT reports of securities without a third-country issuer LEI that are lent, borrowed or provided as collateral in an SFT; and
counterparties and other entities participating in SFTs, such as agent lenders and tri-party agents, that lend, borrow or use as collateral securities issued by third-country entities that do not have an LEI will liaise with third-country issuers to ensure they are aware of the requirements under the SFTR.

ESMA will continue to engage with third-country competent authorities to make them aware of the SFTR LEI reporting requirement and solicit a broader coverage of LEIs in third countries. It will give advance notice to market participants before 10 October 2022 regarding its position on third-country issuer LEI reporting.

SFTR: ESMA updates Q&As on data reporting

ESMA has updated its Q&As on complying with reporting requirements under the SFTR. The Q&As have been updated to simplify reporting of SFTs when an external portfolio manager is used (section 2, question 9).

EMIR and SFTR: ESMA final report and guidelines on TRs' reporting obligations

ESMA has published its final report and guidelines on the reporting of periodic information and material changes by trade repositories (TRs) to ESMA. The guidelines aim to increase the transparency of TRs supervised by ESMA under the EU Regulation on OTC derivatives, central counterparties (CCPs) and trade repositories (EMIR) and the SFTR. In particular, they clarify the format and frequency of the different categories of information which ESMA expects to receive. The guidelines will also streamline TR processes and ensure the accuracy of information used for the calculation of TR supervisory fees.

The guidelines will apply from 30 June 2021. All periodic information items that have annual frequency and a reporting deadline of 31 January should, in the first year, be submitted by 30 June 2021.

EMIR: European Commission report on possible exemption of post-trade risk reduction services from clearing

The European Commission has published a report addressed to the European Parliament and the Council of the EU, on whether certain trades should be exempted from the clearing obligation for OTC derivatives under the EMIR. Article 85(3)(c) of EMIR requires the Commission to report on whether trades that directly result from post-trade risk reduction (PTRR) services should be exempt from the clearing obligation referred to in Article 4(1) of EMIR.

The Commission explains that there is no harmonised or widespread definition of PTRR services. However, there are some common features that would allow PTRR services to be described, in a non-exhaustive way, as procedures or mechanisms by which counterparties reduce one or more types of risks of a portfolio, keeping their market exposure neutral and with the intervention of a PTRR service provider as a third party.

The Commission's report takes into account input received from ESMA in a November 2020 report, which focused on the PTRR services of portfolio compression and portfolio rebalancing. The Commission considers that, generally, certain OTC derivatives should only be exempted from the clearing obligation where the risks of granting an exemption are smaller than the risks of keeping the position as it is currently. It notes that ESMA has undertaken an extensive and thorough analysis of PTRR services. However, the Commission believes that important open questions remain. In particular, some of the aspects of the ESMA report require further quantitative assessment and analysis before the Commission can make a more informed decision on any potential proposal for legislative change. The Commission lists the issues that need further consideration, which include considering how different types of PTRR could be defined more concretely, and the materiality of the risk of circumventing the clearing obligation.

The Commission notes that further work on these issues, and more quantitative evidence, would enable a more comprehensive assessment of the issues. It considers that this could feed into the general EMIR assessment report that should be submitted to the Parliament and the Council by 18 June 2024.

EMIR: ESMA final report on RTS relating to changes to CCPs' activities and models

Following an earlier consultation, ESMA has published a final report on the following draft regulatory technical standards (RTS) relating to CCPs required by EMIR, as amended by EMIR 2.2:

RTS specifying the conditions under which additional services or activities to which a CCP wishes to extend its business are not covered by the initial authorisation and therefore require an extension of authorisation, and also specifying the procedure for consulting the college established under Article 18 of EMIR on whether or not those conditions are met (Article 15(3) of EMIR); and
RTS specifying the conditions under which changes to a CCP's models and parameters are significant and therefore require validation by the relevant national competent authority and ESMA (Article 49(5) of EMIR).

ESMA has submitted the draft RTS to the European Commission. Following their endorsement, they are then subject to non-objection by the European Parliament and the Council of the EU.

MiFID: ESMA review report on functioning of OTFs

ESMA has published a "MiFID II Review Report" on the functioning of organised trading facilities (OTFs) under Article 90(1)(a) the Markets in Financial Instruments Directive (MiFID). The report contains recommendations and possible amendments to MiFID and the Markets in Financial Instruments Regulation (MiFIR) with a view to reducing the level of complexity for market participants and making the legal framework more effective.

The main focus of the report was to analyse the definition of OTFs taking a specific look at the definition of a multilateral system and the trading venue perimeter. The report also looks at the number of OTFs authorised in the EU and their market share, examines how OTFs apply discretion and reviews their use of matched principal trading (MPT).

While some proposals can be implemented by ESMA directly by publishing ESMA guidance, other recommendations are addressed to the European Commission. In this context, ESMA puts forward a two-step approach aimed at clarifying the trading venue perimeter. More specifically, ESMA proposes to the European Commission to move Article 1(7) from MiFID to MiFIR, and that ESMA publishes an opinion clarifying the boundaries of trading venues' authorisation.

In addition, ESMA recommends that the Commission adds a definition of bulletin boards to MiFID and aligns the provisions regarding the prohibition of the use of MPT among multilateral trading facilities (MTFs) and regulated markets.

The report has been submitted to the European Commission for consideration.

MiFID: ESMA updates Q&As on market structures

ESMA has published updated versions of its Q&As on market structures under MiFID and MiFIR. The updated Q&As reflect changes introduced by ESMA to a Q&A on tick sizes to reflect the amendment introduced in Article 49(1) of MiFID that excludes large-in-scale transactions from the mandatory tick size regime (section 4, question 6).

MiFID: ESMA final report on EU SME growth markets

ESMA has published its final report on the functioning of the regime for SME growth markets under MiFID/MiFIR. The final report contains recommendations and possible amendments to the MiFID framework which are needed to improve the attractiveness of the SME growth markets regime.

The report has been submitted to the European Commission.

EMIR: European Commission Implementing Decision on equivalence of US DCMs

European Commission Implementing Decision (EU) 2021/583), which amends the Annex to Implementing Decision (EU) 2016/1073 on the equivalence of US designated contract markets (DCMs) in accordance with EMIR, has been published in the Official Journal of the European Union (OJ).

Implementing Decision (EU) 2016/1073 was published in July 2016. In the Decision, the European Commission determined that the legal and supervisory framework applicable to DCMs in the US under the regulatory oversight of the Commodity Futures Trading Commission (CFTC) ensures that DCMs comply with the legally binding requirements that are equivalent to those that apply to regulated markets as defined in Title III of MiFID.

Since the adoption of Implementing Decision (EU) 2016/1073, a number of additional DCMs established in the US have obtained authorisation from the CFTC to trade in derivatives. Also, some DCMs referred to in the Annex to Implementing Decision (EU) 2016/1073 are no longer authorised or have amended their names. The Annex of Implementing Decision (EU) 2016/1073 is therefore amended accordingly.

Implementing Decision (EU) 2021/583 came into force on 15 April 2021.

EU CCP supervision: ESMA 2020 annual peer review

ESMA has published a report on the outcome of its 2020 annual peer review of EU CCP supervision, as required under Article 24a(7)(a) of EMIR. The focus of the 2020 peer review was CCPs' compliance with the EMIR requirements on liquidity stress testing. In particular, the review assessed the effectiveness of supervisory practices put in place by NCAs to assess compliance with the provisions of Article 44 of EMIR (liquidity risk controls) and relevant provisions in Commission Delegated Regulation (EU) 153/2013, which contains RTS on requirements for CCPs.

ESMA states that the overall outcome of the peer review is satisfactory. However, it also found that the assessment of some areas of liquidity stress testing were not always performed or being evidenced sufficiently. NCAs should make sure that the settlements of obligations of defaulting clearing members are reflected in full in the liquidity stress testing framework.

The report contains specific best practices that emerged from the review of NCAs' supervisory approaches with respect to the assessment of liquidity stress testing. ESMA also proposes considerations that it believes may enhance supervisory practices in this area.

ESMA intends to follow up on the report's findings to identify, where relevant, the most appropriate tools to further enhance supervisory convergence with respect to the considerations included in the report.

COVID-19: Amendments to Securitisation Regulation and CRR

As part of the European Commission's Capital Markets Recovery Package, the following EU Regulations were published in the OJ on 6 April 2021:

Regulation (EU) 2021/557 amending Securitisation Regulation (EU) (2017/2402) laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised (STS) securitisation to help the recovery from the CODID-19 crisis; and
Regulation (EU) 2021/558 amending the Capital Requirements Regulation (EU) No 575/2013 (CRR) as regards adjustments to the securitisation framework to support the economic recovery in response to the COVID-19 crisis.

Both Regulations came into force 9 April 2021.

STS synthetic securitisation notifications: ESMA interim templates

Following the aforementioned amendment to the Securitisation Regulation, ESMA has published interim templates which allow originators to notify ESMA of synthetic securitisations that meet the STS criteria.

ESMA explains that, until the date of the application of the RTS specifying the content and the format of STS notifications for synthetic securitisations, originators can make the necessary information available to ESMA in writing during the interim period. The interim STS synthetic notification templates can be used by on a voluntary basis by originators to ensure consistency across all STS notifications.

CRAs: ESMA letter to ESRB on credit ratings

ESMA has published a letter sent to the European Systemic Risk Board (ESRB) on the procyclical impact of downgraded corporate bonds on markets and entities across the financial system. ESMA's letter responds to a letter (dated 1 October 2020) received by it from the ESRB and follows-up an initial response. In its latest letter, ESMA focuses on the transparency of credit rating agency (CRA) methodologies and contractual references to credit ratings. Among other things, ESMA sets out preliminary observations on the definition of ratings, the rating "through-the-cycle" concept and the timely incorporation of information in credit ratings by CRAs.

Global securities financing data collection and aggregation: FSB FAQs

The Financial Stability Board (FSB) has published FAQs on global securities financing data collection and aggregation. The FSB will update the FAQs as market practices evolve.

SFTs, such as securities lending and repurchase agreements, play a crucial role in supporting price discovery and secondary market liquidity for a wide variety of securities. However, such transactions can also be used to take on leverage and can lead to maturity and liquidity mismatched exposures. They can therefore pose risks to financial stability. Considering this, the FSB published policy recommendations to address financial stability risks in SFTs in August 2013. In November 2015, it developed standards and processes for collecting and aggregating global data on SFTs (SFT Data Standards). To facilitate national implementation of the SFT Data Standards, the FSB published reporting guidelines in March 2018.

Drawing on the practical experience of FSB member jurisdictions in implementing the SFT Data Standards, as well as of the Bank for International Settlements, the FSB has published the FAQs to promote a common approach and to further help national implementation of the SFT Data Standards.

Continuity of access to FMIs for firms in resolution: FSB survey on questionnaire

The FSB has published an online survey seeking feedback on stakeholders' experience of using its questionnaire on the continuity of access to financial market infrastructures (FMIs) for firms in resolution. The FSB published the questionnaire in August 2020 and aims to gather feedback from FMIs, firms subject to a resolution planning requirement and bank resolution authorities.

Responses to the survey will inform the revision of the questionnaire by FSB member authorities. The survey closes on 3 May 2021.

FX Global Code and disclosure templates: GFXC consultation

The Global Foreign Exchange Committee (GFXC) has published a press release seeking feedback on proposed amendments to the FX Global Code of Conduct and draft disclosure templates. It has also published a webpage on the request for feedback. Details of the GFXC's proposals are set out in the following documents:

Attachment A: anonymous trading. The GFXC is proposing guidance on best practice concerning data policies, tag management, credit policies and the identification of code signatories;
Attachment B: proposals for enhancing transparency to execution algorithms and supporting transaction cost analysis (TCA) and an example TCA template. Among other things, the GFXC is seeking views on proposals for a TCA data analysis template to support analysis by users of algorithms and an FX algo due diligence template to assist in the disclosure of relevant information to users;
Attachment C: disclosures. Among other things, the GFXC is seeking views on disclosure cover sheets for liquidity providers and FX venues that are intended to help market participants navigate disclosures documents; and
Attachment D: FX settlement risk. The GFXC's proposals are intended to strengthen the Code’s guidance on the management of settlement risk, particularly concerning the use of paymentâ€versusâ€payment (PVP) settlement mechanisms where they are available.

The GFXC has also published a cover note to the request for feedback, which groups together all the questions set out in the individual attachments and the proposed amendments to the Code.

The deadline for responses is 7 May 2021. The GFXC intends to finalise the proposals for approval at its June 2021 meeting and to publish an updated version of the Code shortly afterwards.