INVESTMENT SERVICES & CAPITAL MARKETS
ESMA consults on proposals for a review of the MIFID II best execution reporting regime
On 24 September 2021, ESMA launched a consultation on proposals for improvements to the MiFID II framework on best execution reports. These proposals aim at ensuring effective and consistent regulation and supervision and enhancing investor protection.
ESMA’s proposals include technical changes to:
- the reporting obligations for execution venues:
- aimed at simplifying the reporting requirements by reducing the granularity and volume of data to be reported; and
- moving to a set of seven indicators aimed at disclosing meaningful information to help firms to assess venues’ execution quality; and
- the reporting requirements for firms: focusing mainly on clarifying the requirements for firms that transmit client orders or decisions to deal to third parties for execution.
In addition, it proposes amendments to the relevant provisions of the MiFID II legislative framework to enable these technical changes to come into effect in the future.
The consultation closes on 23 December 2021. However, since ESMA’s technical proposals can only be implemented after the relevant provisions of MiFID II have been amended, the outcome of this consultation will not lead to any immediate change of the existing RTSs 27 and 28 which currently regulate best execution reporting by execution venues and investment firms.
ESMA publishes MIFID II review report on algorithmic trading
On 29 September 2021, ESMA published the MiFID II/MiFIR review report on algorithmic trading. The Final Report concludes that no fundamental issues have emerged with respect to the MiFID II algorithmic trading regime which has overall delivered on its objectives. ESMA nevertheless makes in the report some recommendations which aim at both simplifying the regime and making it more efficient.
The report therefore includes some proposals to the European Commission on targeted Level 1 amendments.
The report also identifies issues which will be followed up by ESMA via amendments to ESMA technical standards or additional guidance on a number of topics.
- the concepts of “algorithmic trading” and “Direct Electronic Access”;
- the authorisation regime for EU and non-EU algorithmic trading firms (including HFT (high frequency trading) firms) deploying their strategies on EU trading venues;
- the organisational requirements for investment firms, including the notification and testing requirements of algorithmic traders to competent authorities; and, the self-assessment exercises to be performed by investment firms;
- organisational requirements for trading venues, including the self-assessment exercises to be performed by trading venues, circuit breakers, the fee structures, order to trade ratios; and market outages; and
- a review of MiFID II provisions which are indirectly relating to algorithmic trading activities (e.g. tick size and market making).
The report also addresses recent market developments by including topics such as speedbumps and the sequencing between public vs. private transaction confirmation feed by trading venues.
This report will be submitted to the European Commission and is expected to be taken into consideration for further legislative proposals on the MiFID II regime. Regarding Level 2 provisions, the amendments of existing technical standards discussed in the report will be subject to specific consultations to be published shortly.
New Q&As on MiFID II and MiFIR transparency topics
On 30 September 2021, ESMA published new Q&As on MiFID II and MiFIR transparency topics. There is a new Q&A on non-equity transparency on completion of the “IR Term of contract” and ESMA has also modified a Q&A on equity transparency and the temporary parameters that should be applied until the transparency parameters are published by ESMA or the relevant non-delegating national competent authority.
Third-countries co-operation arrangements under MAR
On 14 September 2021, the Commission adopted a Delegated Regulation and Annex containing regulatory technical standards (RTS) on co-operation arrangements with third-countries under Article 26(3) of the Market Abuse Regulation (596/2014) (MAR).
The Annex contains a template for co-operation arrangements regarding the exchange of information between EU Member States national competent authorities with authorities in third-countries, and the enforcement of obligations arising under MAR in third-countries. The template contains different sections that describe the scope of the co-operation, the content of the assistance to be provided, a description of the procedure as well as a description of the rules on confidentiality and the uses of information.
The Council of the EU and the European Parliament will now scrutinise the Delegated Regulation.
ESMA consults on the review of the Short Selling Regulation
On 24 September 2021, ESMA launches a consultation paper (CP) on the review of the Short Selling Regulation (SSR). This CP will primarily be of interest to issuers of financial instruments admitted to trading or traded on a trading venue, investment firms, market makers, primary dealers, persons who engage in short sales or transactions resulting in net short positions.
The CP sets out suggestions for operational improvements and policy clarifications on:
- the calculation of net short positions, the prohibition of uncovered short selling and the locate rule under which short selling trades can take place;
- the mechanism for transparency of net short positions and the proposal to publish aggregated net short positions per issuer based on all individual positions and the scope of the exemptions for shares that are more heavily traded in a third country; and
- the introduction of a centralised notification and publication system to reduce reporting burdens, increase cost efficiency and foster ESMA’s monitoring capacity and coordination powers in case of potential threats at EU level.
The CP also contains an empirical analysis of the impact of the short selling bans adopted after the COVID-19 outbreak, with reference to the effect of the bans on liquidity and volatility, concluding that current intervention powers remain a useful tool in case of developments impacting the resiliency of financial markets.
EC adopts Delegated Regulation amending net short positions notification threshold under SSR
On 27 September 2021, the Commission adopted a Delegated Regulation amending the Short Selling Regulation (SSR) as regards the adjustment of the relevant threshold for the notification of significant net short positions in shares.
The Delegated Regulation adjusts the relevant threshold for the notification to competent authorities of significant net short positions in shares set out in Article 5 (2) of the SSR from 0.2 % to 0.1 % (and each 0.1 % above that).
The Delegated Regulation will enter into force 20 days after publication in the Official Journal.
The consultation closes on 19 November 2021. ESMA will consider the responses it receives to this consultation paper and expects to publish a final report by the end of Q1 2022.
ESMA recommends to European Commission to delay buy-in rules
On 24 September 2021, ESMA wrote to the European Commission regarding the implementation of the Central Securities Depositories Regulation (CSDR), urging it to consider a delay of the mandatory buy-in regime.
As the final Commission legislative proposal for the review of CSDR, possibly including changes to the buy-in regime, is not expected before the end of this year, ESMA is in favour of delaying the entry into force of the buy-in requirements – scheduled on 1 February 2022 – while applying the other settlement discipline requirements, such as settlement fails reporting and cash penalties regime, as planned.
ESMA therefore considers it crucial that the Commission and the co-legislators clarify their political intentions around the review of the settlement discipline regime and consider whether to postpone the buy-in regime implementation as soon as possible.
ESMA guidelines on settlement fails reporting under Article 7 of CSDR
On 24 September 2021, ESMA finalised its guidelines on the scope and exchange of information between ESMA and competent authorities regarding settlement fails, based on the reports submitted by CSDs (central securities depositaries).
The purpose of these guidelines is to establish consistent, efficient and effective supervisory practices within the European system of financial supervision and to ensure common, uniform and consistent application of Article 7(1) of CSDR as well as Articles 14 and 39 of the regulatory technical standards (RTS) on settlement discipline, including the exchange of information between ESMA and the competent authorities regarding settlement fails, and the content of such reporting.
Under Article 7(1) of the CSDR, for each securities settlement system it operates, a CSD must establish a system that monitors settlement fails of transactions in financial instruments. It must provide regular reports to the competent authority and relevant authorities, on the number and details of settlement fails and any other relevant information, including the measures envisaged by CSDs and their participants to improve settlement efficiency. The competent authorities must share any relevant information on settlement fails with ESMA.
The guidelines apply from the date of entry into force of the RTS on settlement discipline.
ESMA fines UnaVista trade repository €238,500 FOR EMIR data failures
On 23 September 2021, ESMA announced it had fined trade repository UnaVista Limited €238,500 for eight breaches under EMIR.
The breaches relate to failures in ensuring the integrity of data and providing direct and immediate access to regulators. The breaches, committed between 2016 and 2018, were found to have resulted from negligence on the part of UnaVista.
UnaVista failed to ensure the integrity of the data reported to it due to various data processing incidents, including:
- incorrect field ordering logic;
- incorrect mapping rules; and
- crossed date boundaries.
- Direct and immediate access
The trade repository also failed to provide direct and immediate access to regulators by:
- generating incorrect or unreliable reports for regulators, due to incorrect field ordering logic, incorrect mapping rules and crossed date boundaries; and
- not providing regulators with direct and immediate access to trade state reports and historic trade state reports, due to missed data exports and to non-existent functionality respectively.
In calculating the fine, ESMA considered both aggravating and mitigating factors provided for in EMIR and the common root causes for some of the infringements were taken into account.
ESMA publishes new Q&As
On 30 September 2021, ESMA published new Q&As on EMIR implementation. A new Q&A has been added in the section on trade repositories on the timing of valuation updates under Article 9 of EMIR and ESMA has amended the answer to question 40 on LEI changes due to mergers and acquisitions
MiFID II and EMIR
ESMA speech on its priorities for derivatives
On 28 September 2021, ESMA published a speech by Natasha Cazenave, ESMA Executive Director, on its priorities for derivatives.
Ms Cazenave focused on two elements. Firstly, ESMA’s recommendations for the review of the MiFID II/MiFIR framework. Ms Cazenave refered to the need for “less complexity, more effectiveness” and comments that removing complexity from the legal framework while ensuring that the rules remain effective should be a guiding principle for the upcoming MiFIR review. ESMA’s recommendations include: (i) a broader review of the legislative framework, less focused on the establishment of a consolidated tape; (ii) a substantially simplified and streamlined waiver and deferral regime which maintains the protection of large orders and trades particularly in less liquid asset classes; and (iii) to recalibrate the transparency regime for commodity derivatives to better reflect market reality.
Secondly, ESMA’s work on accompanying the transition to risk free rates in the context of the EMIR clearing obligation and the MiFIR derivatives trading obligation. ESMA received broad support for its analytical approach in its consultation this summer. ESMA received two sets of opposing feedback with respect to USD classes and the timing of the application of the amended obligations. Some respondents were in favour of introducing USD Secured Overnight Financing Rate Data classes now, while others were asking to reconsider these classes later, and in any case to provide long phase-ins to adapt to these changes.
ESMA expects to submit its final proposals this autumn, after having assessed the development of trading and clearing activity since the consultation was published. In relation to the UK, Ms Cazenave refered to the clear communications from the Commission on the need for EU counterparties to reduce reliance on UK CCPs. Ms Cazenave also noted that regulatory divergence between the EU and the UK, had started to emerge, including around MiFID II and cautions that its potential impact will need to be carefully considered.
ESMA publishes new Q&As
On 30 September 2021, ESMA published new Q&As on SFTR data reporting. A new Q&A has been added on LEI changes due to mergers and acquisitions.
ESAs highlight risks in phasing out of crisis measures and call on financial institutions to adapt to increasing cyber risks
On 8 September 2021, the three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) issued their second joint risk assessment report for 2021. The report highlights the increasing vulnerabilities across the financial sector, the rise seen in terms of cyber risk and the materialisation of event-driven risks.
As the recovery begins, the appropriate phasing out of exceptional crisis measures plays a key role. Despite the positive outlook, the expectations for economic recovery remain uncertain and uneven across member states. Vulnerabilities in the financial sector are increasing, not least because of side effects of the crisis measures, such as increasing debt levels and upward pressure on asset prices. Expectations of inflation- and yield growth, as well as increased investor risk-taking and financial interconnectedness issues, might put additional pressure on the financial system.
The financial sector is also increasingly exposed to cyber risk. The financial sector has been hit by cyber-attacks more often than other sectors, while across the digital economy, cyber-criminals are developing new techniques to exploit vulnerabilities. Financial institutions will have to rapidly adapt their technical infrastructure in response to the pandemic, and the crisis has acted as a catalyst for digital transformation more generally.
Finally, the materialisation of event-driven risks (such as GameStop, Archegos, Greensill), as well as rising prices and volumes traded on crypto-assets, raise questions about increased risk-taking behaviour and possible market exuberance.
Concerns about the sustainability of current market valuations remain, and current trends need to show resilience over an extended period of time for a more positive risk assessment.
In light of the above-mentioned risks and uncertainties, the ESAs advise national competent authorities, financial institutions and market participants to take the following policy actions:
- financial institutions and supervisors should continue to be prepared for a possible deterioration of asset quality in the financial sector, notwithstanding the improved economic outlook;
- as the economic environment gradually improves, the focus should shift to allow a proper assessment of the consequences of the pandemic on banks’ lending books, and banks should adequately manage the transition towards the recovery phase;
- disorderly increases in yields and sudden reversals of risk premia should be closely monitored in terms of their impacts for financial institutions as well as for investors;
- financial institutions and supervisors should continue to carefully manage their ICT (information and communication technology) and cyber risks.
Alternative Investment Funds (AIFs) and UCITS
ESMA speech on investment funds’ costs and performance, distribution of retail investment products and ESG disclosures
On 17 September 2021, Natasha Cazenave, ESMA Executive Director, delivered a speech on retail investors’ challenges, and what investor protection safeguards should accompany increased retail participation in capital markets.
The speech focused on:
- the impact of costs on investors’ participation
- the issues related to retail investment products’ distribution
- the challenges from an investor protection perspective of the growing demand for products marketed as sustainable or deemed to incorporate ESG factors.
To address these topics, ESMA is currently coordinating a Common Supervisory Action (CSA) on costs and fees in UCITS funds across Europe, to assess the compliance of supervised entities with a number of provisions in the UCITS framework.
Regarding the digital distribution of investment products, ESMA plans to publish a call for evidence to gather information which may contribute to shape the policy advice that will be shared with the Commission.
Finally, ESMA, EIOPA and the EBA are working on a second set of rules relating to taxonomy-specific product disclosures under the Taxonomy Regulation ((EU) 2019/2088). ESMA is also prioritising the prevention of greenwashing, and pledged to work with national competent authorities to identify ways to enhance supervisory convergence, and effective means to limit the risk of greenwashing.
European Commission adopted Delegated Regulation amending PRIIPs KID RTS
On 7 September 2021, the European Commission adopted a delegated regulation (and Annex) amending the regulatory technical standards (RTS) laid down in Commission Delegated Regulation (EU) 2017/653 which considers key information documents (KID) for packaged retail and insurance-based investment products.
The RTS are amended in relation to (amongst other things), the underpinning methodology and presentation of performance scenarios, the presentation of costs and the methodology for the calculation of summary cost indicators, the presentation and content of information on past performance and the presentation of costs by PRIIPs offering a range of investment options.
The delegated regulation is now subject to scrutiny by the European Parliament and the Council of the EU and is scheduled to apply from 1 July 2022.
ESMA updated Guidelines on written agreements between members of CCP colleges
On 1 September 2021, Circular 467 was issued by the CySEC, to inform the Regulated Entities of the updated ESMA Guidelines on written agreements between members of CCP colleges. In particular, the Guidelines’ aim is to propose a standard written agreement to ensure the timely establishment and smooth functioning of a CCP college.
CySEC incorporated the Guidelines into its supervisory practices and written agreements for the establishment and functioning of a CCP college.
The Guidelines apply from 1 July 2021.
Directive for the prevention and suppression of money laundering and terrorist financing (Register of Crypto Asset Service Providers) (Amending) of 2021
On 13 September, CySEC made public on its website the amending Directive for the prevention and suppression of money laundering and terrorist financing regarding the Register of Crypto Asset Service Providers (the “Directive”).The Directive provides further clarity on territorial and procedural issues related to the registration and operating conditions of Crypto Asset Services Providers (“CASPs”).
Policy Statement (PS-01-2021) on the registration and operations of Crypto-Asset Services Providers
On 13 September 2021, CySEC published a detailed Policy Statement (PS-01-2021) on the registration process and operations of Crypto Asset Service Providers (“CASPs”) to outline its approach on the principles for CASPs under the amended Prevention and Suppression of Money Laundering and Terrorist Financing Law of 2007, as those have been further elaborated by means of the Directive for the prevention and suppression of money laundering and terrorist financing (Register of Crypto Asset Service Providers)of 2021. With this Policy Statement, CySEC sets out its ongoing expectations that CASPs need to comply at all times.
In the Policy Statement CySEC has expressed it intention to “ring-fence” investment services firms from crypto-assets activities to avoid spill-over risks. In light to its ring-fencing view, CySEC calls the limited number of investment firms that were permitted to provide crypto-assets under the extraordinary circumstances of the section 5(5)(b) of the Investment Services Law, to formulate and submit to CySEC by the end of 2021 an action plan for phasing out their crypto-assets’ activities, up until the end of 2022;and if the respective group wishes so, to establish a different entity in order to seek registration as a CASP. In the meantime, those investment firms shall also apply to register as CASPs.
Without prejudice to its risk-fencing view, CySEC will review applications by the investment firms that wish to start engaging in crypto-assets’ activities on their own merit, considering the specificities entailed.
Guidelines on enforcement of financial information
On 29 September 2021, C468 was issued by the CySEC to inform the issuers whose securities are admitted to trading on a regulated market, that it has adopted the revised ESMA Guidelines on enforcement of financial information (the “Guidelines”).
The revised sections of the Guidelines will be effective on 1 January 2022, unless enforcers decide to implement the changes earlier.
CySEC incorporated the Guidelines in its supervisory practice for the examination of the financial information of issuers for compliance with the reporting framework provided by the Transparency Requirements (Securities Admitted to Trading on a Regulated Market) Law of 2007, as amended.
ESMA Guidelines on the MiFID II/MiFIR obligations on market data (ESMA70-156-4263)
The Guidelines apply in relation to market data that the Regulated Entities need to make public for the purpose of the pre-trade and post-trade transparency regime pursuant to the MiFID II/MiFIR.
CySEC adopted the Guidelines by incorporating them into its supervisory practices and regulatory approach and urges Regulated Entities to take the necessary action in order to ensure their compliance with the Guidelines.
The Guidelines will apply from 1 January 2022.