May 2022 Regulatory Roundup

MiFID/MiFIR

ESMA publishes complementary annual transparency calculations

On 8 April 2022, ESMA began to make available the results of the annual transparency calculations for equity and equity-like instruments. These transparency parameters apply no later than 14 April 2022 and until 31 March 2023. From 1 April 2023 the next annual transparency calculations for equity and equity-like instruments will become applicable.

The additional list of assessed equity and equity-like instruments will be available through FITRS in the XML (with publication date from 8 April) and through the register web interface.

ESMA guidelines on MIFID II appropriateness and execution-only requirements

On 12 April 2022, ESMA published the official translations of its guidelines on certain aspects of the MIFID II appropriateness and execution-only requirements.

The guidelines will apply from 12 October 2022, six months following the publication of the official translations.

ESMA responds to European Commission consultation on option to enhance the suitability and appropriateness assessments

On 19 April 2022, ESMA published its letter to the European Commission dated 13 April 2022 responding to the Commission consultation on option to enhance the suitability and appropriateness assessments.   

ESMA is fully supportive of the European Commission’s objective to take a holistic view of investor protection rules and to make the EU an even safer place for individuals to save and invest long-term and therefore to increase participation of retail investors in capital markets. However, ESMA brings to the European Commission’s attention the following points:

• The proposal to apply a unique and standardised retail investor assessment regime that no longer differentiates among the various investment services might raise questions of whether a ‘one size fits all’ approach can effectively serve all different types of retail investors and situations. The design of a new standardised regime would need to fully take into account the needs of the different kinds of investors and safeguard the principle of proportionality;
• The proposals would have a significant impact on the current model for the provision of services. If the new framework were to be adopted, sufficient guidance and information would need to be provided to clients to help them understand the implications of the regime change and sufficient time should be given to firms for the implementation of the new rules which would seem to require significant IT changes to existing systems;
• ESMA is fully supportive of the aim to increase competition amongst intermediaries and to allow investors to easily switch between or use multiple brokers/financial intermediaries. ESMA notes that the proposals imply a willingness of retail clients to fully share their personal investor data (in the context of an open finance framework). The results of supervisory experience and the recent ESMA Call for evidence show however some resistance from clients to share personal information such as investment history/transaction data and suitability profiles due to different factors, including cultural ones, lack of trust and fear of cyber risks. ESMA believes that such concerns should be taken into account in order for any such initiative to be successful. Furthermore, if the European Commission proceeds with its proposal, GDPR implications should be further assessed;
• The proposals appear to target the distribution of shares, bonds and funds and also other types of instruments such as insurance-based investment products with the purpose of increasing the level of intelligibility and comparability of investments and limiting risks of mis-selling or ill-advised investments by an enhanced suitability and appropriateness assessment. In this respect, ESMA fully supports the intention of aligning the requirements for the distribution of investment products that currently fall within different regimes (MIFID and IDD) as long as such alignment does not lead to any reduction of the existing investor protection safeguards in either regime. ESMA notes that if MIFID and Insurance Distribution Directive instruments were to be assessed jointly for the purpose of the suitability assessment, it would be essential to also ensure alignment of other relevant requirements (for example on the disclosure of information on costs and charges; reporting requirements on the depreciation of the client’s portfolio, where applicable) as it would be very confusing to clients, and also could be operationally difficult for firms, if different parts of the client’s portfolio (managed under a unique asset allocation) were subject to different disclosure and reporting requirements;
• ESMA notes that, in its consultation the European Commission does not mention knowledge and experience among information to be collected from clients. This information is important in assessing accurately clients’ profiles. ESMA therefore expects that knowledge and experience is included in the key components of a standardised personal investment plan.

ESMA makes recommendations to improve investor protection

On 29 April 2022, ESMA advised the European Commission on certain aspects relating to retail investor protection. In the advice ESMA puts forward proposals that will make it easier for investors to get the key information they need to take well-informed investment decisions, whilst also protecting them from aggressive marketing techniques and detrimental practices.

The proposals put forward aim at maintaining a high level of investor protection, while ensuring that retail investors can benefit from digitalisation opportunities.  The recommendations relate to, among others:

• requiring machine readability of disclosure documents to facilitate the development of searchable databases available to the public;
• addressing information overload by proposing to define what is vital information and by using digital techniques such as layering of information;
• development of a standard EU format of information on costs and charges and aligning the disclosures under MIFID and the PRIIPs KID;
• possibility for National Competent Authorities and ESMA to impose on firms the use of risk warnings for specific financial instruments;
• addressing aggressive marketing communications; and
• addressing issues related to misleading marketing campaigns on social media and the use of online engagement practices, such as the use of gamification techniques by firms or third parties.

In addition, ESMA also supports the Commission’s proposal to prohibit the receipt of PFOF (payment for order flow) to adequately address the serious investor protection risks arising from this practice.

The advice has been submitted to the European Commission.

ESMA publishes the annual transparency calculations for non-equity instruments and the quarterly systematic internaliser calculations

On 29 April 2022, ESMA made available the results of the annual transparency calculations for non-equity instruments other than bonds and the quarterly systematic internaliser calculations.

The results of the annual transparency calculations for non-equity instruments will apply from 1 June 2022. The calculations include the liquidity assessment and the determination of the pre- and post-trade size specific to the instruments and large in scale thresholds.

The results for the liquid sub-classes have been published in Excel format in the Annual transparency calculations for non-equity instruments register. Those results on a per class basis are also available in XML format (see here) and related instructions on their download can be found in the Transparency System downloading instructions.

ESMA publishes annual bond transparency calculations, systematic internalisers calculations and new bond liquidity data

On 30 April 2022, ESMA made available:

• the annual transparency calculations of the large in scale (LIS) and size specific to the instruments (SSTI) thresholds for bonds;
• systematic internaliser calculations for equity, equity-like instruments and bonds; and
• new data for bonds subject to the pre- and post-trade requirements of MIFID II and MIFIR.

ESMA published the results of the annual transparency calculations of the large in scale (LIS) and size specific to the instruments (SSTI) thresholds for bonds.  The results are published on a per bond-type basis in excel format in the Annual transparency calculations for non-equity instruments register. The results on a per ISIN basis will be published through the Financial Instruments Transparency System (FITRS) in the XML files (link available here) and through the Register web interface (link available here).

ESMA has published data for the systematic internaliser calculations for equity, equity-like instruments and bonds.

ESMA started to make available the latest quarterly liquidity assessment for bonds available for trading on EU trading venues. For this period, there are currently 745 liquid bonds subject to MIFID II transparency requirements.  Additional data and corrections submitted to ESMA may result in further updates within each quarter, published in ESMA’s Financial Instruments Transparency System (FITRS), which shall be applicable the day following publication.  The scope of assessed bonds decreased for this publication as a result of a change in reporting practice from a trading venue in the United Kingdom. This change does not affect the quality of the calculations on the bonds that are publishe.  The full list of assessed bonds will be available through FITRS in the XML files (link available here) and through the Register web interface (link available here).

ESMA publishes the annual LIS and SSTI calculations for bonds and the quarterly bond liquidity assessment

On 3 May 2022, ESMA published the annual LIS (Large in scale) and SSTI (Size specific to instrument) calculations for bonds and the quarterly bond liquidity assessment as communicated on 21 April 2022. These calculations include the determination of the SSTI and LIS thresholds for bonds (except ETCs and ETNs). Those results on a per class basis are also available in XML format (see here) and related instructions on their download can be found in the Transparency System downloading instructions. The full list of assessed bonds will be available through FITRS in the XML files with publication date from 3 May 2022 (see here) and through the Register web interface (see here).

Market Abuse

Translations of ESMA Market Abuse Regulation guidelines on delay of disclosure of inside information and interactions with prudential supervision

On 13 April 2022, ESMA published the official translations of its revised guidelines on delay in the disclosure of inside information and interactions with prudential supervision under the Market Abuse Regulation.

The guidelines: (i) provide a non-exhaustive and indicative list of legitimate interests of the issuers that are likely to be prejudiced by immediate disclosure of inside information and situations in which delay of disclosure is likely to mislead the public; and (ii) provide clarifications concerning the existence of inside information in relation to Pillar 2 Capital Requirements and Pillar 2 Capital Guidance.

The revised guidelines will apply from 13 June 2022, two months from the date of publication of the translations.

Short Selling Regulation

ESMA final report on review of the Short Selling Regulation

On 4 April 2022, ESMA finalised its report on its review of the Short Selling Regulation (SSR).

The report focuses on three main areas: (i) an empirical analysis of the impacts of the short selling bans adopted during the COVID-19 crisis. ESMA proposes amendments to the current legislative provisions which govern emergency measures (i.e. long term bans, short term bans and ESMA powers to issue emergency measures). Such amendments aim to clarify the interpretation of certain provisions and overall ensuring that the procedure for the issuance of short and long-term bans is sufficiently flexible for relevant competent authorities to tackle emergency situations; (ii) a review of the current framework for the calculation of net short positions (NSPs), the so-called “locate rule” and the list of exempted shares. ESMA, in light of the episodes of high volatility which took place in the US markets and elsewhere in respect of the so-called “meme stocks”, has considered the possibility of similar phenomena developing in European markets and has re-assessed in light of such occurrences the relevant SSR provisions. ESMA proposes to enhance the existing rules about uncovered short sales by introducing record keeping requirements and a degree of harmonisation of sanctions; and (iii) a review of the framework for transparency and publication of NSPs, also in light of recent market turmoil events and proposes the introduction of a centralised system for publication and disclosure to the public of NSPs. ESMA has submitted the report to the European Commission and is ready to provide technical guidance should the European Commission decide to proceed with a review of the SSR.