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Securities and markets regulatory news, 8 February 2021

FIG Bulletin

08 February 2021

Recent regulatory developments of interest to financial institutions and markets. Also check our Related Materials links.

Reciprocal UK-Swiss share trading obligation equivalence

HM Treasury has announced that reciprocal arrangements between the UK and Switzerland concerning the share trading obligation (STO) have entered into force, following the removal of restrictions on UK trading venues by the Swiss authorities. The Swiss Financial Market Supervisory Authority (FINMA) has also published confirmation and guidance on its decision.

UK MiFID markets regime: FCA update on trading Swiss shares

The UK Financial Conduct Authority (FCA) has updated its webpage on the operation of the MiFID markets regime following the end of the transition period to give information about the trading of Swiss shares.

The FCA explains that it will soon be possible for UK firms to meet their obligations under the share trading obligation on Swiss exchanges, and for UK trading venues to be able to offer trading in Swiss shares. It confirms how aspects of UK markets regulation will apply to Swiss shares that resume trading on UK trading venues.

For the purposes of calibrating the pre and post-trade transparency regime, the FCA advises that Swiss shares that resume trading on UK trading venues will be treated as if they are being traded on a UK trading venue for the first time. An estimate will be made of the relevant parameters based on the characteristics of the shares to apply from their first day of trading. These estimates will then be updated after six weeks based on data from the first four weeks of trading in the UK.

The FCA explains that the same logic as for transparency parameters will apply for tick sizes, with an initial estimate updated after six weeks by a calculation based on data for the first four weeks of trading in the UK. These figures may result in different tick sizes than currently apply for trading of these instruments on exchanges in Switzerland. UK trading venues will be allowed to use the minimum tick size that applies in Switzerland where that is smaller than the minimum tick size based on the figures for the average daily number of transactions (ADNTE) that the FCA publishes through its Financial Instruments Transparency System (FITRS).

EU MiFID: ESMA updates Q&As on market structures and transparency

The European Securities and Markets Authority (ESMA) has updated its Q&As on market structures topics under the Markets in Financial Instruments Directive (MiFID) and the Markets in Financial Instruments Regulation (MiFIR). The updated Q&As cover the following topics:

the classification of Direct Electronic Access (DEA) trades (section 3, question 32);
matched principal trading by investment firms (section 5.3, question 32).

EU MiFID: ESMA consults on draft guidelines on aspects of appropriateness and execution-only

ESMA is consulting on draft guidelines on certain aspects of the MiFID appropriateness and execution-only requirements. The purpose of the draft guidelines is to enhance clarity and foster convergence in the application of certain aspects of the appropriateness and execution-only requirements. This consultation builds on relevant parts from ESMA's Guidelines on certain aspects of the MiFID II suitability requirements, while adjusting them to the appropriateness and execution-only framework. In addition, it considers the results of supervisory activities conducted by national competent authorities (NCAs) on the application of the appropriateness and execution-only requirements, in particular resulting from the 2019 common supervisory action (CSA) on appropriateness.

The consultation closes on 29 April 2021. ESMA will consider the feedback received and expects to publish the final report and guidelines in Q3 2021.

EU MiFID product governance rules: ESMA launches common supervisory action

ESMA has announced the launch of a common supervisory action (CSA) with NCAs on the application of product governance rules under the EU MiFID. The CSA will be conducted during 2021. It will allow ESMA and the NCAs to assess the progress made by manufacturers and distributors of financial products in the application of these requirements. ESMA believes this initiative, and the related sharing of practices across NCAs, will help ensure the consistent implementation and application of the MiFID product governance rules, and enhance investor protection.

EU MiFIR: ESMA 2020 annual report on application of waivers and deferrals for equity and equity-like instruments

ESMA has published its annual report on the application of waivers and deferrals for equity and equity-like instruments under the EU MiFIR. Under Articles 4(4), 7(1), 9(2) and 11(1) of MiFIR, ESMA is required to monitor the application of pre-trade transparency waivers and deterred trade-publication. As part of this mandate, it submits an annual report to the European Commission on how equity and non-equity waivers and deferrals regimes are applied in practice.

EU BMR: Council of the EU adopts Regulation amending BMR to address benchmark cessation risks and exempt certain third-country FX benchmarks

The Council of the EU has announced that it has adopted its position at first reading on the proposed Regulation amending the Benchmarks Regulation (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 Council has also published the adopted text of the amending Regulation.

The Council explains that the amendments have been made against the background of an expected phasing-out of the London Inter-Bank Offered Rate (LIBOR) by the end of 2021. The aim of the new rules is to reduce legal uncertainty and avoid risks to financial stability by making sure that a statutory replacement rate can be put in place by the time a systemically-important benchmark is no longer in use.

The new rules also cover the replacement of a benchmark designated as critical in one member state, through national legislation. In addition, the amendments to the BMR extend the transition period for the use of third-country benchmarks until the new rules governing the use of such benchmarks are applied.

EU-supervised entities will be able to use third-country benchmarks until the end of 2023. The Council explains that the European Commission may further extend this period until the end of 2025 in a delegated act to be adopted by 15 June 2023, if it provides evidence that this is necessary in a report to be presented by that time.

The Council advises that the text of the adopted Regulation will be signed on 10 February 2021 and is expected to be published in the Official Journal of the European Union (OJ) on 12 February 2021. It will enter into force and apply from the following day.

EU BMR: ESMA final report on technical advice on fees for benchmark administrators

ESMA has published a final report on technical advice to the European Commission on supervisory fees for benchmark administrators under the BMR. The technical advice focuses on the supervisory fees to be paid by benchmark administrators that will be supervised by ESMA from 1 January 2022. The fees will be collected from administrators of critical benchmarks and those of third-country benchmarks that are subject to the EU recognition regime.

The final report takes account of the feedback received, including the fact that the transitional period for third-country administrators has been postponed until 31 December 2023.

EU ESG ratings and assessment tools: ESMA outlines potential legal framework

On 29 January 2021, ESMA published a letter it has sent to the European Commission sharing its views on the main challenges in the area of environmental, social and governance (ESG) ratings and assessment tools. The letter builds on ESMA's response to the Commission's July 2020 consultation on a renewed sustainable finance strategy.

The market for ESG ratings and other assessment tools is currently unregulated and unsupervised. ESMA explains that this gives rise to increased risks of greenwashing, capital misallocation and products mis-selling when combined with increasing regulatory demands for consideration of ESG information. To address these issues, ESMA outlines a potential future legal framework which is described in the letter.

ESMA states that it is ready to support possible future, direct supervisory responsibilities in this area.

EU CRAs: ESMA consults on technical advice on fees

ESMA has published a consultation paper on technical advice on fees for credit rating agencies (CRAs).

Commission Delegated Regulation (EU) 272/2012 (Fees Regulation) sets out details of the fees that ESMA can charge for the certification of CRAs and the ongoing supervision of certified CRAs. In July 2020, the Commission sent a letter (set out in Annex II to the consultation paper), requesting ESMA to provide technical advice for a review of the Fees Regulation. In particular, the Commission asked ESMA to ensure that the advice reflected ESMA's experience of applying the Fees Regulation in practice and ensured consistency with the equivalent delegated regulations on fees for trade repositories (TRs).

In the consultation paper, ESMA seeks views on proposed amendments to the Fees Regulation, as well as to the general budgetary approach and fee collection process.

The deadline for responses is 15 March 2021. ESMA intends to submit its final technical advice to the Commission by 31 June 2021.