News

Securities and markets regulatory news, 7 December 2020

FIG Bulletin

07 December 2020

Recent regulatory developments of interest to financial institutions and markets. Includes updates from the UK FCA, the European Supervisory Authorities and IOSCO, among others. Also check our Related Materials links.

make transitional and savings provisions concerning trade repositories in relation to of the Regulation on reporting and transparency of securities financing transactions (SFTR) and securitisation repositories in relation to the Securitisation Regulation;
amend cross-references in primary and secondary legislation; and
make miscellaneous amendments to Brexit statutory instruments and retained direct EU legislation relating to financial services and capital markets.

Different Parts of the Regulations will come into force at different times as set out in regulation 1 (either on the day after the day on which they are made, IP completion day or immediately before IP completion day).

UK securitisation repositories: FCA application form

The UK Financial Conduct Authority (FCA) has updated its webpage on securitisation repositories (SRs) under the Securitisation Regulation to add a link to the application form for registration as a UK SR. Firms wishing to apply to become a UK SR must complete this application form and email it to a specified email address at the FCA, together with any related queries regarding their application.

The FCA reminds firms that, to be authorised as a UK SR, they must meet the conditions set out in article 10 of the UK Securitisation Regulation. Firms must be able to evidence that they have the necessary competence to carry out the collecting and maintaining of securitisation records.

Recognition of non-UK CSDs before and after Brexit transition period: BoE update

The Bank of England (BoE) has updated its webpage on the effect of Brexit on financial market infrastructure (FMI) supervision with information relating to the recognition of non-UK central securities depositories (CSDs).

The Equivalence Determinations for Financial Services (Amendment etc) (EU Exit) Regulations 2020 (SI 2020/1055) came into force on 30 September 2020. Under this legislation, if HM Treasury makes any equivalence decisions relating to the EEA during the Brexit transition period, EEA CSDs will be able to apply to the BoE for recognition before the end of the transition period. In any event, a formal recognition application must be submitted within six months from the end of the transition period.

As equivalence decisions relating to each EEA state were made by HM Treasury on 9 November 2020, the BoE has published a letter sent to EEA CSDs notifying them of the actions they need to take. Among other things, the letter refers to guidance that sets out the manner in which recognition applications may be made and the information that must accompany them.

The BoE explains that the procedure for other non-UK (excluding EEA) CSDs remains unchanged and no equivalence decisions will be made by HM Treasury until after the end of the transition period. As the end of transition period is approaching, the BoE has also published a letter sent to non-EEA CSDs to remind them of the action they need to take to prepare for the end of transition period.

The BoE has published an interim list (dated 22 October 2020) of third-country CSDs that intend to provide CSD services in the UK using transitional provisions. This list will be updated periodically and the final list will be published on the BoE website at the end of the transition period.

Receiving UK settlement finality protection after Brexit transition period: BoE update

The BoE has also updated its webpage on the effect of Brexit on FMI supervision with information relating to applying to receive UK settlement finality protection.

In its update, the BoE refers to the Financial Markets and Insolvency (Settlement Finality) Regulations 1999 (SI 1999/2979) (UK SFRs). These set out how overseas central counterparties (CCPs), CSDs and payment systems can receive settlement finality designation within the UK.

To maintain continued UK settlement finality protection while the designation process is underway, the UK's Temporary Designation Regime (TDR) will be in operation at 11pm on 31 December 2020. Systems that have submitted a valid notification will be in the TDR. The temporary designation lasts for a period of three years beginning on the day after the end of the Brexit transition period. The conditions of the TDR require that a system must apply for "steady state" settlement finality designation within six months from the day after the end of the transition period.

The BoE has published a letter sent to systems in the TDR reminding them of the actions they need to take to prepare for the end of the transition period. The letter provides details of how to apply for "steady state" designation, and refers to guidance for non-UK systems on designation applications. The BoE previously advised that it does not intend to charge fees to non-UK law FMIs for UK settlement finality designation.

The BoE has also published an interim list (dated 22 October 2020) of EEA systems whose operators have notified the BoE for such systems to receive settlement finality protection under the TDR. The final list will be published on the BoE website at the end of the transition period. Operators of EEA systems who have not done so can continue to notify their intent to enter the temporary settlement finality designation before the end of the transition period.

MiFIR share trading obligation: FCA draft transitional direction

The FCA has published a draft transitional direction, together with an explanatory note, for the share trading obligation (STO) under the Markets in Financial Instruments Regulation (MiFIR). The FCA has also updated its statement on the STO to include a link to the draft transitional direction.

The FCA is using its temporary transitional power (TTP) to allow firms to continue trading all shares on EU trading venues and systematic internalisers (SIs) where they choose to do so, and where the regulatory status of those venues and SIs permits such activity. This is to mitigate the disruption that the FCA considers might arise from compliance with onshored obligations, in particular the obligations in article 23(1) of MiFIR, during the period after the end of the transition period.

The direction will take effect from the end of the transition period and may be varied or revoked.

UK EMIR: FCA update on clearing threshold and intragroup exemption notifications

The FCA has updated its EMIR news webpage with details about the retained EU law version of the European Market Infrastructure Regulation (EMIR) (UK EMIR). The FCA explains that, when UK EMIR enters into force at the end of the transition period, UK financial counterparties (FCs) and non-financial counterparties (NFCs) must notify the FCA if they exceed the clearing thresholds under Article 4. The first clearing threshold notification needs to be completed by 17 June 2021.

All UK FCs and NFCs subject to the clearing obligation must submit a first notification, regardless of whether they choose to calculate their positions. This also applies to a UK FC or NFC which was subject to the clearing obligation before the UK EMIR regime came into force. The FCA highlights how counterparties need to determine their aggregate group, month-end, and average position of OTC derivatives in each asset class for the previous 12 months and compare them with the clearing thresholds as prescribed by UK EMIR.

Following the first notification, if a counterparty chooses to calculate positions in OTC derivatives, it should perform this calculation every 12 months. There is no requirement to notify the FCA if there's no change to the result of the subsequent calculations. A counterparty must always notify the FCA if the result of the calculation in OTC derivatives means that it no longer exceeds the clearing threshold in Article 4 of UK EMIR.

The FCA also provides information about intragroup exemptions following HM Treasury publishing a statement about equivalence in November 2020. UK firms that currently benefit from intragroup exemptions from the clearing obligation and margin requirements for uncleared derivative transactions with their EU group entities covered by the equivalence decision must:

notify the FCA of the entity pairs to which the equivalence direction applies; and
confirm whether there have been any other changes to the conditions under which the original intragroup derogation was granted.

Notifications must be submitted by 1 February 2021 to continue benefitting from existing exemptions.

UK benchmarks register: FCA update

The FCA has published an update on the UK benchmarks register. In preparation for the end of the Brexit transition period on 31 December 2020, the FCA has developed a UK benchmarks register to replace the ESMA benchmarks register for UK supervised users, and UK and third country-based benchmark administrators that want their benchmarks to be used in the UK.

The UK benchmarks register will be accessible from 11.00 pm on 31 December 2020, in the "Other registers" section of the Financial Services Register. It will have a search facility to help locate a specific administrator or benchmark. It will also be possible to download details of third country benchmarks as .csv documents.

The UK benchmarks register will comprise the following two sections:

the benchmark administrator register: a public record of all benchmark administrators that are authorised, registered or recognised by the FCA, or that benefit from an equivalence decision adopted by the UK; and
the third country benchmarks register: a public record of all benchmarks provided by third country benchmark administrators that are recognised by the FCA, endorsed by a UK-authorised or registered benchmark administrator (or other supervised entity) for use in the UK, or provided by benchmark administrators that have notified the FCA they benefit from an equivalence decision adopted by the UK.

The FCA notes that, in relation to third country benchmarks, the UK government previously extended the transitional period from the end of 2019 to the end of 2022. The government now intends, under the Financial Services Bill 2019-21, to further extend this transitional period, from 31 December 2022 to 31 December 2025. As a result, third country administrators that want to continue using their benchmarks in the UK after 31 December 2025 must apply to the FCA for approval, through equivalence, recognition or endorsement, before this date.

Non-linear derivatives transition to SONIA: Sterling Working Group paper

The Working Group on Sterling Risk-Free Reference Rates has published a paper examining how the non-linear derivatives market could potentially be structured using compounded in arrears SONIA. The paper covers a range of products and is intended to help the non-linear derivatives market meet the Working Group’s target milestone for participants to cease initiating new GBP LIBOR-linked non-linear derivatives by the end of Q3 2021.

Supervision of FMIs: BoE Annual Report

The BoE has published the 2020 Annual Report on its supervision of FMIs, covering the period from 15 February 2019 to 3 December 2020. Among other things, in the report the BoE outlines its future priorities in the context of FMI supervision.

The BoE will continue to promote FMIs' financial and operational resilience. The impact of COVID-19 on financial markets and FMIs' operating environment is expected to remain the BoE's immediate supervisory priority. Over a longer period, it has additional priorities to enhance its framework for FMI supervision, including continuing to develop the approach to supervising operational resilience, publishing further information on central counterparty (CCP) supervisory stress testing, and further developing the UK CCP resolution regime. In addition, the BoE continues to consider that there is a strong case for introducing a senior managers and certification regime for FMIs.

The BoE is examining the procyclicality of margin calls and the resilience of non-bank liquidity when faced with margin calls. It is carrying out further analysis to ensure that CCPs' margining practices are not excessively procyclical and assess the extent to which non-banks are able to anticipate margin calls as part of their liquidity risk management.

Innovation in payments will remain a key area of focus. The BoE will continue its work to ensure that technological change at FMIs, including the next generation of payments infrastructure, is designed and implemented in a way that promotes the resilience of individual FMIs and the broader financial system. It will also continue to work with international counterparts to ensure that international standards reflect innovation in the payments landscape and to develop principles for the regulatory response to stablecoins.

The BoE will also develop an approach to recognition and supervision of incoming CCPs.

Post-transitional period: FCA Primary Market Bulletin 32

The FCA has published Primary Market Bulletin 32, in which it reminds issuers, investors and other market participants of certain changes that will take effect when onshored legislation enters into force at the end of the Brexit transition period. These include developments relating to the Market Abuse Regulation (MAR) and the Prospectus Regulation. It also provides an update on the FCA's work to implement some aspects of the onshored legislation.

BMR: Delegated Regulations on sustainable finance issues

The following Delegated Regulations supplementing the Benchmarks Regulation (BMR) on sustainable finance issues have been published in the Official Journal of the EU:

The Delegated Regulations enter into force and apply on 23 December 2020.

Proposed Regulation amending BMR: political agreement

The European Parliament has published a press release announcing that it and the Council of the EU have reached political agreement on the proposed Regulation amending the BMR as regards the exemption of certain third-country foreign exchange (FX) benchmarks and the designation of replacement benchmarks for certain benchmarks in cessation. The European Commission has welcomed the agreement.

The agreed amendments empower the Commission to designate a replacement benchmark that covers all references to a widely used reference rate that is phased out, such as LIBOR, when this is necessary to avoid disruption of the financial markets in the EU. The Commission explains that with regards to other interbank lending (IBOR) rates, it is still in market participants' best interests to actively prepare for the transition to alternative reference rates. This will provide the greatest degree of control over the fate of contracts if a reference rate ceases to be published.

The Parliament and the Council have also agreed to postpone the entry into application of the rules on third-country benchmarks until 31 December 2023, with the possibility of an extension by the Commission. The Commission explains that this means that EU benchmark users will continue to have access to these benchmarks.

The next step is for the Parliament to formally approve the proposed Regulation.

Market data in secondary markets for equity securities: IOSCO consultation

The International Organization of Securities Commissions (IOSCO) has published a consultation report on market data in the secondary equity markets. The consultation report outlines several issues relating to market data in equity markets and seeks industry views on both the issues and possible solutions. The issues highlighted include:

what market data is necessary to facilitate trading in today’s markets (that is, what is considered "core" market data for use by market participants, including investors);
fair, equitable and timely access to market data;
fees for market data, and how these fees are determined and charged to subscribers;
the need for and extent of data consolidation; and
how other products or services that relate to accessing market data are provided by trading venues or other regulated data providers (RDPs), and the fees associated with such products and services.

IOSCO considers the consultation report will provide a useful source of information for jurisdictions considering their approach and access to market data. Based on an analysis of the responses received, IOSCO will consider whether any policy work is required.

The consultation ends on 26 February 2021.

Implementation of OTC derivatives reforms: FSB 2020 progress report

The Financial Stability Board (FSB) has published a report reviewing progress made, since its 2019 report, by standard-setting bodies, national and regional authorities and market participants towards meeting the G20 commitments for reforms to global OTC derivatives markets. The report also contains an overview of the response by jurisdictions to the impact of COVID-19 on the OTC derivatives markets.