ESMA Update on Waivers From MiFID Pre-Trade Transparency Requirements: August 2015

On August 26, 2015, the European Securities and Markets Authority (ESMA) published an updated version (dated August 21, 2015) of the waiver document (ESMA/2011/241g) that sets out its assessment of applications for waivers from pre-trade transparency requirements under the Markets in Financial Instruments Directive (2004/39/EC) (MiFID).

The waiver document is aimed at competent authorities under MiFID to ensure that, in their supervisory activities, their actions converge with the opinions provided by ESMA. The examples are also intended to provide clarity on the MiFID requirements for pre-trade transparency.

In the updated waiver document there is one new ESMA opinion that relates to the submission of large-in-scale orders with two different price limits. The new opinion is written in red.

European Commission adopts Delegated Regulation on RTS on Risk Concentration and Intra-Group Transactions Under FICOD

On August 21, 2015, the European Commission published the text of the Delegated Regulation it has adopted on regulatory technical standards (RTS) on risk concentration and intra-group transactions under Article 21a(1a) of the Financial Conglomerates Directive (2002/87/EC) (FICOD).

The draft RTS aim clarify which risk concentration and intra-group transactions at the level of the financial conglomerate should be considered “significant” under Articles 7(2) and 8(2) of FICOD.

The next step will be for the Council of the EU and the European Parliament to consider the Delegated Regulation.

ESCB Reports on the Access of CCPs to Central Bank Liquidity Facilities under EMIR

On August 25, 2015, the European Central Bank (ECB) published a report by the European System of Central Banks (ESCB) on the need for any measure to facilitate the access of central counterparties (CCPs) to central bank liquidity facilities under EMIR (the Regulation on over the counter derivative transactions, CCPs and trade repositories) (Regulation 648/2012).

The ESCB considers that the current legal framework that allocates competence to define the conditions for access to central bank facilities to the ESCB under EU law is adequate for ensuring effective CCP access to central bank facilities where the affected central banks deem this appropriate in accordance with their mandates.

CPMI and IOSCO Consult on Harmonizing Unique Transaction Identifier

On August 19, 2015, the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) issued a consultative report on harmonization of the unique transaction identifier (UTI).

The report is the CPMI-IOSCO Harmonization Group’s initial response to its mandate from the Financial Stability Board (FSB) to address the harmonization of the UTI by producing guidance in this area. The group’s objective is to produce clear guidance as to the UTI definition, format and usage that meets the needs of UTI users, is global in scale, and is “jurisdiction agnostic”. This will enable the consistent global aggregation of over-the-counter (OTC) derivatives transaction data.

The key points considered in the report include:

  • The OTC derivatives transactions that should be assigned a UTI.
  • The entity or entities that should be responsible for generating UTIs in practice.
  • What the structure and format of a UTI should be.
  • The steps that would help to ensure that UTIs generated under the new guidance are distinct (to the extent necessary to achieve aggregation) from those UTIs generated under existing regimes.

The G20 leaders agreed in 2009 that OTC derivatives contracts should be reported to trade repositories (TRs) as part of their commitment to reform OTC derivatives markets by improving transparency, mitigating systemic risk and protecting against market abuse. Aggregation of the data reported across TRs is necessary to help ensure that authorities are able to obtain a comprehensive view of the OTC derivatives market and activity.

European Commission Call For Advice From EBA on Net Stable Funding Requirements and Leverage Ratio

On August 19, 2015, the European Banking Authority (EBA) published a call for advice (dated 26 June 2015) it has received from the European Commission on the EBA’s reports on net stable funding requirements (NSFR) and leverage ratio (LR) required under the Capital Requirements Regulation (Regulation 575/2013) (CRR).

The purpose of these reports is to assist the Commission in its own work preparing reports on the NSFR and the LR, and potentially legislative proposals, for the European Parliament and the Council of the EU.

In the call for advice, the Commission seeks the EBA’s technical advice on specific issues relating to:

  • Proportionality. The Commission asks the EBA to consider simplified LR and NSFR reporting requirements and different NSFR calibrations for certain firms.
  • Scope of application. The Commission asks the EBA to consider whether certain types of credit institution should be fully excluded from the LR and NSFR.
  • Impact of the NSFR on certain markets and activities. The Commission asks the EBA to examine the impact of the NSFR on issues including bank lending, the volume and liquidity of financial markets and business models.

ESMA Reports to European Commission on Functioning of EMIR Framework

On August 13, 2015, the European Securities and Markets Authority (ESMA) published four reports on how the EMIR (the Regulation on over the counter derivative transactions, central counterparties and trade repositories) (Regulation 648/2012)) framework has been functioning and providing input to the European Commission’s EMIR review.

The first three reports set out below are required under Article 85(1) of EMIR and the fourth responds to the Commission’s EMIR review.

1)    Review of the use of over-the-counter (OTC) derivatives by non-financial counterparties (ESMA/2015/1251)

This report provides an overview of non-financial counterparties (NFCs) and issues relating to their classification, together with an analysis of the systemic importance of transactions carried out by NFCs in OTC derivatives markets. ESMA concludes that, when compared to financial counterparties, the systemic relevance of NFCs appears limited, although they are significant players in the commodity OTC derivatives market and to a lesser extent in the foreign exchange OTC derivatives market. ESMA’s main proposals relate to a better and simpler identification of NFCs and a simplification of the framework applicable to NFCs. This would be achieved, for example, by removing the hedging criteria when assessing the systemic importance of NFCs to ensure that the entities that come above the clearing threshold are the ones which actually pose the most significant risks to the system. ESMA believes its proposals will greatly simplify the process and reduce the compliance costs for the majority of small and medium NFCs, which pose limited systemic risk.

2)    Review of the efficiency of margining requirements to limit pro-cyclicality (ESMA/2015/1252)

This report analyses the relevant regulatory provisions and discusses their efficiency in limiting pro-cyclical effects on margin requirements and collateral used to cover margin requirements. ESMA recommends further specifying the rules for implementing the counter-cyclical tools adopted by central counterparties (CCPs) for margins and collateral, including regular testing and transparent results.

3)    Review of the segregation and portability requirements (ESMA/2015/1253)

This report relates to the application of the segregation requirements set out in Article 39 of EMIR. It summarises the provisions relating to segregation and portability and provides a recap of the establishment and evolution of CCPs in the EU during EMIR implementation. ESMA suggests that clarifications and more granular requirements on segregation and portability could be introduced by regulatory technical standards. It also proposes to monitor the implementation of different types of account models to assess and ensure that the expected benefits materialise and to track undue constraints. Finally, the report addresses the evolution of CCPs’ policies on collateral margining and securing requirements and their adaptation to the specific activities and risk profiles of their users.

4)    ESMA input as part of the Commission consultation on the EMIR review (ESMA/2015/1254)

This report provides input to assist the Commission in its review beyond the three reports required under Article 85(1) of EMIR. Among other things, the report:

  • flags issues relating to scope and definitions, and addresses in particular the case of municipalities and regional governments;
  • describes the rigidity of the clearing obligation procedure and consequences of its lack of flexibility, indicating changes to improve it;
  • raises issues with intragroup exemptions and the need for more clarity;
  • raises concerns about the trade reporting requirements and makes a number of proposals, including how to adapt better the process to the variety of counterparties that need to report;
  • flags the limitations of the recognition process for third-country CCPs; and
  • suggests some amendments to address issues relating to the requirements for trade repositories.

EBA Final Guidelines on Passport Notifications for Mortgage Credit Intermediaries

On August 11, 2015, the European Banking Authority (EBA) published its final guidelines (EBA/GL/2015/19) on passport notifications for mortgage credit intermediaries under the Mortgage Credit Directive (2014/17/EU) (MCD).

The guidelines specify the information that firms seeking to passport under the MCD should provide to competent authorities in their passport notifications and include templates for the notification forms that firms should complete for these purposes. The guidelines also contain guidance on the transmission of information about passport notifications to competent authorities in host member states and on the information about passporting firms that competent authorities should make publicly available.

The EBA consulted on the guidelines in June 2015.

The guidelines apply from March 21, 2016, the transposition date for the MCD, with the exception of certain information requirements for competent authorities that apply from the day after the date the guidelines are published in the official languages of the EU.

ESMA Final Report on Technical Advice on Delegated Acts Required Under the CSDR

On August 5, 2015, the European Securities and Markets Authority (ESMA) published its final report (ESMA/2015/1219) setting out technical advice to the European Commission on delegated acts required by the Regulation on improving securities settlement and regulating central securities depositories (CSDs) (Regulation 909/2014) (CSDR).

The final report sets out ESMA’s technical advice on the content of the delegated acts required by two CSDR provisions:

  • Penalties for settlement failure.
  • The substantial importance of a CSD.

Penalties for settlement failures. ESMA’s advice covers:

  1. The parameters for calculating the cash penalty that a CSD will normally charge for settlement fails (that is, the basic amount of a cash penalty).
  2. The circumstances that may justify an increase of the basic amount of the cash penalty and the parameters for the calculation of such an increase, where applicable under an automated system.
  3. The circumstances that may justify a reduction of the basic amount of the cash penalty and the parameters for the calculation of such a reduction where applicable under an automated system.
  4. How to adapt the parameters for the calculation of cash penalties in the context of a chain of interdependent transactions and whether there are cases where this would not be possible (for example, the chain would not be visible).

The substantial importance of a CSD. ESMA addresses:

  1. Initial recording of securities in a book-entry system (notary service).
  2. Providing and maintaining securities accounts at the top tier level (central maintenance service).
  3. Operating a securities settlement system (settlement service).
  4. The above three core services in the cases of market consolidation affecting host member states and branching into host member states.

ESMA believes that it may be necessary to establish a mechanism for the collection, processing and aggregation of the data necessary for the calculation of the indicators for determining substantial importance, given the importance of the use of consistent data, and is looking at the most appropriate way to establish such a mechanism.

IOSCO Report on Post-Trade Transparency in Credit Default Swaps Market

On August 10, 2015, the International Organization of Securities Commissions (IOSCO) published its final report on “post-trade transparency” in the credit default swaps (CDS) market (FR17/2015).

The term post-trade transparency refers to a regulatory system that mandates disclosure of information, widely accessible to the public, about the price and volume of each relevant transaction. The term does not refer to regulatory structures that allow for voluntary or selective disclosure of data.

The report analyses the potential impact of mandatory post-trade transparency in the CDS market. The analysis is based on a review of relevant works of international bodies and academic literature, an examination of publicly available transaction-level post-trade data about CDS, a survey of market participants and other market observers regarding their use of certain publicly available post-trade data and its perceived impact on the market.

IOSCO concludes that the data does not suggest that the introduction of mandatory post-trade transparency had a substantial effect on market risk exposure or market activity in the CDS market. In addition, IOSCO has identified certain potential benefits and costs to mandatory post-trade transparency, as set out in part VI of the report.

In the light of the potential costs and benefits, IOSCO believes that greater post-trade transparency in the CDS market, including making the price and volume of individual transactions publicly available, would be valuable to market participants and other market observers. Member jurisdictions are encouraged to take steps towards enhancing post-trade transparency in the CDS market in its jurisdiction. To assist, part VII of the report includes recommendations that IOSCO jurisdictions may wish to consider.

In an accompanying press release IOSCO notes that additional data from jurisdictions with mandatory post-trade transparency will enable further studies of the impact of post-trade transparency in the CDS market and other OTC derivatives markets.

EBA Releases Key Information on EU G-SIIs

On July 28, the European Banking Authority (EBA) published a chart setting out the key metrics used to identify global systemically important institutions (G-SIIs) in the EU. The chart contains information on the size, interconnectedness, substitutability, complexity and cross-jurisdictional activity of the 37 EU institutions whose leverage ratio exposure measure exceeded EUR 200 billion in 2014. Under the CRD IV Directive, additional capital buffers apply to firms that are systemically important. Identification of G-SIIs is the responsibility of national competent authorities and took place for the first time in January 2015.

ESRB Reports on EMIR

The European Systemic Risk Board (ESRB) has published two reports relating to EMIR (the Regulation on OTC derivative transactions, central counterparties and trade repositories) to assist the European Commission in fulfilling its obligation under Article 85 of EMIR to review and provide a report on the Regulation.

1.  Margining Requirements

The ESRB explains in its report that although Article 85 of EMIR refers specifically to margining requirements, given the significant economic features in common between margins and the determination of haircuts, the report also considers haircut requirements and focuses on margins and haircut settings for central counterparties (CCPs), as the regulatory technical standards on bilateral margin requirements have not yet been endorsed. The ESRB proposes a further review of EMIR in 2018, specifically on the use of margining and haircuts to address and prevent systemic risks.

2.  Issues to be considered other than efficiency of margining requirements

In its second report, the ESRB recommends that the Commission considers the following additional topics when preparing its report to the European Parliament and Council of the EU:

  • A swift process for the removal or suspension of mandatory clearing obligations.
  • The evaluation of systemic risks for mandatory clearing purposes.
  • Replenishment of default funds and the skin-in-the-game design.
  • Transparency requirements consistent with guidance developed at the international level.
  • Publication of a list of approved interoperability arrangements by the European Securities and Markets Authority (ESMA).
  • Access to trade repository data.

ESMA Consults on Draft RTS under ELTIF Regulation

On July 31, the European Securities and Markets Authority (ESMA) published a consultation paper on draft regulatory technical standards (RTS) under the Regulation on European Long-Term Investment Funds (ELTIF Regulation).

In accordance with the ELTIF Regulation, ESMA is consulting on draft RTS to determine the criteria for establishing the following:

  • Circumstances in which the use of financial derivative instruments solely serves hedging purposes.
  • Circumstances in which the life of an ELTIF is considered sufficient in length.
  • Criteria to be used for certain elements of the itemised schedule for the orderly disposal of the ELTIF assets.
  • Costs disclosure.
  • Facilities available to retail investors.

The deadline for responses to the consultation is October 14, 2015.