June 2021 Regulatory Roundup

MIFID/MIFIR

ESMA publishes final report on the MIFID/MIFIR obligations on market data
On 1 June 2021, ESMA published its Final Report on Guidelines on the MiFIDII/MiFIR obligations on market data.

The Final Report sets out guidelines on the requirements to publish market data on a reasonable commercial basis and to make market data available free of charge 15 minutes after publication.

The Guidelines, by providing clarity for market participants, will ensure better and uniform application of these MiFID II/MiFIR obligations. The guidelines apply to national competent authorities, trading venues, approved publication arrangements, consolidated tape providers and systematic internalisers.

The application date for the Guidelines is set on 1 January 2022 to allow for an adequate period of implementation by market participants. The Guidelines will first be translated into all EU official languages. Then the regular comply or explain procedure will be carried out ahead of full application of the Guidelines.

European Commission consults on draft delegated act supplementing MIFID II specifying criteria for establishing when an activity is ancillary
On 27 May 2021, the European Commission published for consultation a draft delegated act supplementing MiFID II by specifying the criteria for establishing when an activity is to be considered to be ancillary to the main business at group level.

MiFID II exempts persons dealing on own account, or providing investment services to clients, in commodity derivatives, emission allowances or derivatives thereof, provided this is an ancillary activity to their main business on a group basis and the main business is not the provision of investment services within the meaning of MiFID II or banking activities under Capital Requirements Directive IV (the Ancillary Activity Exemption).

Directive (EU) 2021/338 revisited the Ancillary Activity Exemption and empowered the Commission to adopt a Delegated Regulation to replace Commission Delegated Regulation 2017/592 (RTS 20). The Commission explains that this draft delegated act is based on the provisions of the current RTS 20. The changes triggered by the amended Ancillary Activity Exemption are the deletion of the Overall Market Size Test of Article 2 of RTS 20 and the introduction of the new De-Minimis Threshold Test. The deadline for comments is 24 June 2021.

ESMA proposes lowering the reporting threshold for net short positions to 0.1% on a permanent basis
On 20 May 2021, ESMA published an opinion recommending that the European Commission permanently lower the threshold to notify net short positions on shares to national competent authorities (NCAs) from 0.2% to 0.1%.

ESMA has examined the evidence gathered after its successive emergency decisions, beginning in March 2020, which lowered, for the first time, the notification threshold to 0.1% on a temporary basis.

The analysis showed that a substantial amount of additional and essential information became available to NCAs due to the reporting of net short positions at the level of 0.1%. This additional transparency to NCAs of the real level of net short positions established in the market translates into an improved ability by NCAs to conduct market oversight. ESMA therefore considers it essential to lower the reporting threshold to 0.1% on a permanent basis.

Considering the continued uncertainty of the current financial market conditions – which do not justify the adoption of emergency measures by ESMA under Article 28 of Short Selling Regulation (SSR) but require nevertheless the availability of relevant information to promptly identify and react quickly to any threats to orderly markets, markets integrity or financial stability – ESMA proposes to the European Commission to adopt the relevant delegated act pursuant to Article 5(4) of SSR as soon as possible.

ESMA consults on annual review of MIFIR RTS 2
On 12 May 2021, ESMA published a consultation paper seeking input from market participants on its MIFIDII/MIFIR annual review report under Commission Delegated Regulation (EU) 2017/583 (RTS 2).

ESMA notes that the consultation provides for the annual assessment of the operation of the thresholds for the liquidity determination of bonds and the trade percentiles determining the pre-trade size specific to the instrument-threshold which is currently subject to a four-stage phase-in regime under RTS 2. The consultation proposes to: (i) move to stage 3 for the liquidity assessment of bonds; (ii) move to stage 3 for the size specific to the instrument (SSTI) percentile of bonds; and (iii) not to move to stage 2 for the SSTI percentile of non-equity instruments other than bonds.

ESMA states that these proposals are designed to increase the transparency available to market participants in the bond market. ESMA will consider the feedback and expects to publish a final report and submit, if necessary, regulatory technical standards to the European Commission for endorsement in July 2021 – following such endorsement, the RTS are then subject to a non-objection procedure by the European Parliament and the Council of the EU. The deadline for comments is 11 June 2021.

ESMA issues latest double volume cap data
On 7 May 2021, ESMA updated its public register with the latest set of double volume cap (DVC) data under MiFID II.

The updates include DVC data and calculations for the period 1 April 2020 to 31 March 2021 as well as updates to already published DVC periods.

The number of new breaches is 78: 67 equities for the 8% cap, applicable to all trading venues, and 11 equities for the 4% cap, that applies to individual trading venues. Trading under the waivers for all new instruments in breach of the DVC thresholds should be suspended from 12 May 2021 to 11 November 2021. The instruments for which caps already existed from previous periods will continue to be suspended.

In addition, ESMA highlights that none of the previously identified breaches of the caps proved to be incorrect thus no previously identified suspensions of trading under the waivers had to be lifted.

As of 7 May 2021, there is a total of 250 instruments suspended.

ESMA updated opinion on ancillary activity calculations under MIFID II
On 6 May 2021, ESMA updated its opinion on ancillary activity calculations under MiFID II. The opinion provides the estimation of the market size of commodity derivatives and emission allowances for 2020.

Market participants, under MiFID II are required to measure their own activity against total market sizes in commodity derivatives in order to assess whether they exceed the ancillary activity thresholds in MiFID II and consequently would have to apply for authorisation as an investment firm. ESMA has prepared these estimations based on data reported to the ESMA FITRS system as well as data reported to trade repositories under EMIR.

Securities Financing Transactions Regulation (SFTR)

ESMA final report on guidelines on the calculation of positions in Securities Financing Transactions (SFTs) by Trade Repositories (TRs) under the SFTR
On 20 May 2021, ESMA published its final report on its guidelines on the calculation of positions in SFTs by TRs under the SFTR.

ESMA notes that the guidelines aim to ensure consistency of position calculation across TRs, with regard to the: (i) time of calculations; (ii) scope of the data used in calculations; (iii) data preparation;  (iv) recordkeeping of data; and (v) calculation methodologies.

The guidelines contain relevant clarifications to TRs as to: (a) the calculations carried out by TRs and the format of provision of access to data pursuant to Article 80(4) of EMIR as referred to in Article 5(2) of SFTR and detailed under Article 5 of RTS on data aggregation; and (b) the level of access to positions provided by TRs to the entities included in Article 12(2) of SFTR with access to positions in line with Article 3 of RTS on data access.

The guidelines will apply from 31 January 2022.

EMIR and SFTR

ESMA consults on guidelines for data transfer between trade repositories under EMIR and SFTR
On 28 May 2021, ESMA launched a consultation on amendments to its Guidelines on data transfer between Trade Repositories (TRs) under EMIR, as well as on Guidelines regarding data transfer between TRs under SFTR.

The new set of Guidelines establishes the framework for data transfer of Securities Financing Transactions (SFTs) between TRs under SFTR.

The Consultation Paper also proposes changes to the current Guidelines on data transfer between TRs under EMIR, with a view to maintaining access to historical data for regulatory authorities and ensuring a high degree of data quality as well as a competitive TR environment.

Both the new Data Transfer Guidelines under SFTR and the proposed changes to those under EMIR aim to:

• enhance the quality of data available to authorities, including the aggregations carried out by TRs, even when the TR participant changes the TR to which it reports and irrespective of the reason for such a change.
• ensure that the competitive multiple-TR environment is guaranteed, and that TR participants can benefit from competing offers; and
• safeguard a consistent and harmonised way to transfer records from one TR to another supporting the continuity of reporting and reconciliation in all cases including the withdrawal of a TR registration.

The closing date for responses is 27 August 2021. ESMA will consider the responses to this consultation with a view to finalising the proposed Guidelines and will publish a final report by Q1 2022.

Delegated Regulation supplementing EMIR and SFTR on fees charged to Trade Repositories in 2021 published

On 25 May 2021, Commission Delegated Regulation (EU) 2021/822, amending Delegated Regulations (EU) 1003/2013 and (EU) 2019/360 as regards the annual supervisory fees charged by ESMA to trade repositories(TRs) for 2021, was published in the Official Journal.

The text explains that fees paid to ESMA by TRs are calculated using a methodology established in Delegated Regulations (EU) No 1003/2013 and (EU) 2019/360 – the reference period for the applicable turnover in those Delegated Regulations is the year previous to the year in which the revenues are paid. Following the UK’s withdrawal from the EU, two TRs established in the UK transferred part of their services and activities to the EU to be able to continue providing their services and activities to counterparties established in the EU. The new EU TRs effectively started their activity in the EU in January 2021, their level of activity in 2020 being almost non-existent, meaning that their annual supervisory fee for 2021 would be negligible, although their activities are likely to be significant. To ensure that they pay a fee which is proportionate to their actual turnover in the EU, their annual supervisory fee for 2021 should be calculated on the basis of their applicable turnover during the first half of 2021. Thus, the Delegated Regulation changes the reference period for the calculation of annual fees paid by trade repositories to ESMA in 2021.

The Delegated Regulation entered into force on 26 May 2021.

Central Securities Depositary Regulation

ESMA letter provides proposals for the European Commission’s review of the CSDR
On 26 May 2021, ESMA published a letter (dated 20 May 2021) addressed to Mairead McGuinness, European Commissioner, on the review of the CSDR (Regulation on improving securities settlement in the European Union and on central securities depositories).

The letter highlights ESMA’s views on a number of key points that should be addressed in the review, and brings forward proposals on the following topics:

1. status of TARGET2-Securities (T2S) – ESMA believes that it is no longer appropriate to entirely exclude this systemic settlement platform completely from the CSDR’s scope;
2. arrangement for the supervision/oversight of T2S – ESMA considers that the CSDR should be amended to ensure the legislative framework provides for a co-operative arrangement for the supervision and oversight of T2S, with clear roles for the participating authorities, taking the form of a college of supervisors;
3. third-country CSD (TC-CSD) recognition regime – ESMA supports an enhanced regime that requires TC-CSDs to notify ESMA regarding services provided in the EEA and broadens the scope of the TC-CSD recognition regime by also covering the provision of settlement services in the EEA; and
4. the frequency of ESMA reports to the European Commission on CSDR implementation – ESMA highlights the need to recalibrate the frequency of the reports, and introduces a proposal on reducing the frequency of the reports under Article 74 of CSDR is included in the Annex.

Credit Rating Agencies Regulation

ESMA consults on disclosure requirements for initial reviews and preliminary ratings
On 26 May 2021, ESMA published a consultation paper on disclosure requirements for initial reviews and preliminary ratings. ESMA explains that the Credit Rating Agencies Regulation (CRAR) includes a number of provisions that are designed to provide greater clarity to market participants as to whether entities or debt instruments have been subject to an initial review or a preliminary rating by CRAs before receiving a credit rating – the objective of the provisions is to mitigate against the effects of ratings shopping (when an issuer engages with a number of credit rating agencies with a view to selecting only those credit rating agencies that will provide the most favourable assessment for the entity or debt instrument) through greater transparency.

ESMA notes that the purpose of the consultation is to propose guidance that will address inconsistencies in the interpretation of these provisions, and it contains the following proposals that aim to clarify: (i) how the term “initial review and preliminary rating” should be understood for the purposes of the CRAR’s public disclosure requirements; (ii) the content and timing of CRAs public disclosures for interactions that meet the standard of “initial review and preliminary rating”; and (iii) the steps to ensure that these public disclosures are more accessible for investors and the market.

ESMA will consider the responses it receives in Q3 and expects to publish a final report by the end of Q4. The deadline for comments is 4 August 2021.

EURIBOR

ECB’s Working Group paper on Euro Risk-Free Rates recommendations on EURIBOR fallbacks
On 11 May 2021, the European central Bank’s Working Group on Euro Risk-Free Rates published a paper containing its recommendations on EURIBOR fallbacks, discussing a variety of options relating to the introduction of fallback trigger events and fallback rates for contracts and financial instruments referencing EURIBOR.

The paper includes a recommendation for an €STR-based (Euro short term rate) EURIBOR fallback rate for specific use cases, including: (i) corporate lending products; (ii) retail mortgages, consumer loans and loans to SMEs; (iii) current accounts; (iv) trade finance; (v) export and emerging markets finance products; (vi) debt securities; (vii) securitisations; (viii) transfer pricing models; and (ix) investment funds.

Prospectus Regulation

ESMA updates Q&As on Prospectus Regulation
On 5 May 2021, ESMA updated its Q&As on the Prospectus Regulation. It includes three new Q&As providing clarification as to: (i) the application of Article 4(1) of the Credit Rating Agency Regulation to credit rating disclosure in prospectuses; (ii) how to determine home Member State in the context of global depository receipts over shares; and (iii) the publication of supplements to prospectuses when new audited annual financial information is published by a non-equity issuer.

Legal Entity Identifiers

LEI Regulatory Oversight Committee consults on revised technical guidance on harmonisation of critical OTC derivatives data elements
On 5 May 2021, the Legal Entity Identifier (LEI) Regulatory Oversight Committee (ROC) issued a consultation on revisions to the technical guidance on the harmonisation of critical OTC derivatives data elements (CDE technical guidance).

The ROC proposes corrections that are deemed necessary to facilitate the jurisdictional implementation of the CDE Technical Guidance. The proposed amendments do not change the substance of the data elements, but rather are introduced to: (i) eliminate factual errors and typos; (ii) align the format specifications with the ISO 20022 standard; and (iii) better clarify the content of the elements by avoiding ambiguities. Consequently, these amendments are deemed necessary to further improve the standardisation and understanding of the data.

The deadline for comments was 26 May 2021.

New Q&As

On 28 May 2021, ESMA updated its Questions and Answers on the following topics:

• AIFMD
• UCITS
• EMIR implementation
• MiFID II and MiFIR Investor Protection topics
• MiFIR data reporting topics
• SFTR reporting
• CSDR
• Sustainability-related disclosures for benchmarks

European Supervisory Authorities

ESMA responds to European Commission consultation on the ESAs
On 26 May 2021, ESMA published its response to the European Commission’s targeted consultation on the functioning of the European Supervisory Authorities (ESAs).

The response reflects the views of the Board of Supervisors on some existing issues and limitations that could be addressed in the ESMA Regulation, and other relevant EU financial services legislation. This is based on ESMA’s experience in recent years, as well as its more limited experience on the use of the new tools and given to it in the last review of the ESAs, which was concluded in 2019. The recommendations focus on:

• reinforcing ESMA’s approach to supervisory convergence;
• considering the merits of EU level direct supervision;
• building ESMA’s data capabilities;
• ensuring the single rulebook remains fit-for-purpose; and
• alleviating funding issues.

The recommendations put forward aim to support the objectives of the Capital Markets Union and further promote and facilitate supervisory convergence across Member States.

Digital finance

ESMA launches call for evidence on digital finance
On 25 May 2021, ESMA published a call for evidence on digital finance. The call for evidence aims to gather relevant information on particular issues including value chains, platforms and groups’ provision of financial and non-financial services.  The feedback will contribute to ESMA’s technical advice to the European Commission.

Digital transformation and the application of innovative technologies in the EU financial sector bring a host of opportunities, including better financial services to a wider range of businesses and investors, possibly at a lower cost.

These changes are not free of risks, for example in relation to cyber security, data management, concentration risk and competition. They also raise specific regulatory and supervisory challenges, including because of their global and cross-sectoral nature. ESMA’s advice to the European Commission will assist them to address these challenges and propose, where relevant, changes to the existing legislative framework by mid-2022.

ESMA is requesting information on three topics:

• more fragmented or non-integrated value chains, arising as a result of financial firms increasingly relying on third parties for the delivery of their services and of technology companies entering financial services;
• digital platforms and bundling of financial services; and
• mixed activity groups providing both financial and non-financial services.

The call for evidence is open until 1 August 2021 and seeks feedback from all interested stakeholders. In particular, the call for evidence is of interest to

1. financial firms relying on third-parties, in particular technology firms, to fulfil critical or important functions;
2. third-parties, in particular technology firms, on which financial firms rely to fulfil critical or important functions;
3. technology firms providing financial services, either directly or through partnerships with financial firms;
4. platforms marketing or providing access to different financial services;
5. mixed activity groups combining financial and non-financial activities; and
6. investors.

ESMA will consider the information received through this call for evidence when drafting its advice to the European Commission. ESMA, together with the other European Supervisory Authorities, will deliver a report to the European Commission by 31 January 2022.