ESMA

ESMA Publishes two Decisions on MiFID II Assessments of Third Country Trading Venues

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ESMA published the two decisions of its board of supervisors on October 11 (both dated September 26, 2018). The following decisions were made on the delegation to the ESMA chair of assessments of third-country trading venues and related to:

  • A decision on the assessment for the purposes of Articles 20 and 21 of the Markets in Financial Instruments Regulation (Regulation 600/2014) (“MiFIR“) (ESMA70-155-5775).
  • A decision on the assessment for the purposes of Article 57(4) of the MiFID II Directive (2014/65/EU) (ESMA70-155-5905).

The decisions were regarding the treatment of transactions executed by EU investment firms on third-country trading venues, for post-trade transparency under MiFIR, and the treatment of positions held in contracts traded on those venues for the position limit regime under the MiFID II Directive. ESMA published opinions in December 2017 specifying that, subject to third-country trading venues meeting a set of criteria, investment firms trading on those trading venues are not required to make transactions public in the EU via an approved publication arrangement (“APA“).

In the decisions, the board of supervisors delegates responsibility for non-controversial assessments of third-country trading venues for these purposes to the ESMA chair. The decisions specify the criteria that the chair will use when assessing whether to consider a third-country entity as a trading venue for the purposes of Articles 20 and 21 of MiFIR or Article 57(4) of the MiFID II Directive. The board of supervisors retains its powers to perform controversial assessments of third-country trading venues.

FCA Releases Statement on Speculative Investments

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Following the publication of product intervention measures by ESMA in relation to contracts for difference (“CFDs“) earlier this year, the Financial Conduct Authority (“FCA“) has provided a statement in relation to high risk investments and retail clients.

The FCA noted in its statement that it would work with European regulators (including ESMA) to observe the alternative speculative product market, in particular where retail clients are involved, in order to ensure ESMA’s measures are not being avoided by replacing CFDs with other similar products.

The FCA stated that firms “should pay particular attention to the leverage made available to retail clients and consider whether the product is offered on terms that act in the best interests of the client”.

The full statement is available here.

EC Seeks Guidance on Sustainable Finance

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The European Commission (“EC“) published an open letter to EIOPA and ESMA on August 1, 2018. The letter sought technical advice in relation to sustainable finance, in particular technical advice relating to legislation.

The letter, the full version of which is available here, outlines that the European Commission adopted a package of measures on sustainable finance on May 24, 2018, however they are seeking advice in relation to the possible amendment of legislation such as UCITS, MiFID II and Solvency II.

The aim of the letter, and the possible changes proposed therein, is to incorporate sustainability risks in the decisions taken and processes applied by financial market participants.

The letter asks that EIOPA and ESMA provide their insight by April 30, 2019.

ESMA Launches Interactive Single Rulebook

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On February 14, 2018, the European Securities and Markets Authority (“ESMA“) launched a new interactive single rulebook to help facilitate the consistent application of the EU single rulebook in the securities markets area.

In a related press release, available here, ESMA explains that this new interactive tool will provide market participants and other interested stakeholders with a comprehensive overview of and easy access to all level 2 and level 3 measures adopted in relation to a level 1 text. This includes all relevant delegated and implementing acts adopted by the European Commission (including regulatory technical standards and implementing technical standards developed by ESMA and endorsed by the Commission), as well as guidelines, opinions and Q&As issued by ESMA. The interactive single rulebook is described as a “documentation tool,” and users are reminded that they should refer to the Official Journal of the EU for the authentic version of EU legislation. ESMA is committed to developing the online tool in its 2018 work program.

ESMA Call for Evidence on Potential Product Intervention Measures on CFDs and Binary Options to Protect Retail Clients

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On January 18, 2018, European Securities and Markets Authority (“ESMA”) published a call for evidence (“CfE”) on potential product intervention measures on contracts for differences (“CFDs”) and binary options in order to protect retail clients (ESMA35-43-904).

In December 2017, ESMA published a statement explaining it was considering the possible use of its product intervention powers under Article 40 of the Markets in Financial Instruments Regulation (Regulation 600/2014) (MiFIR) to address investor protection concerns arising out of the marketing, distribution and sale of CFDs and binary options to retail investors. It is now seeking feedback from stakeholders on the impact of certain potential measures.

In relation to CFDs, ESMA is considering implementing the following:

  • A standardized risk warning by CFD providers in any communication to, or published information accessible by, a retail client relating to the marketing, distribution or sale of a CFD. At present, ESMA’s preferred option is that this standardized warning would indicate the percentage range of retail investor accounts having losses.
  • Leverage limits on the opening of a position by a retail client that would apply to any payment made to a product provider for the purpose of entering into a CFD, excluding any commission and transaction fees owed to the provider. They would range from 30:1 to 5:1 depending on the different classes of underlying assets.
  • A margin closeout rule on a position-by-position basis. This would standardize the percentage of margin at which providers are required to close out a retail client’s open CFD. The aim is that clients are routinely protected from losing more than they have invested in a consistent manner across providers.
  • Negative balance protection on a per-account basis, to provide an overall guaranteed limit on retail client losses.
  • A restriction on incentivization of trading provided directly or indirectly by a CFD provider, such as providing retail clients with a payment (other than a realized profit on any CFD provided) or a non-monetary benefit in relation to the marketing, sale or distribution of a CFD.

ESMA is currently considering how CFDs on cryptocurrencies fit within the MiFID II regulatory framework as financial instruments. It is seeking views on this and asks whether it should introduce specific restrictions concerning CFDs in cryptocurrencies.

ESMA is also considering a prohibition on the marketing, distribution and sale to retail clients of binary options. This is on the basis that the risks relating to binary options are due to inherent product features that are unlikely to be sufficiently addressed through product restrictions.

The CfE closes to responses on February 5, 2018.

ESMA Provides Further Information on Transitional Transparency Calculations

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ESMA has recently provided a number of updates to its frequently asked questions as well as a press release in relation to the transitional transparency calculations (“TTCs“) which are relevant to MiFid II and MiFIR. The TTCs are required for equity and bond instruments under the aforementioned regulations.

ESMA has referred market participants to these updated FAQs, noting that the updates generally relate to the classification of instruments, whilst also including amendments and updates to some of the data referenced within the FAQs.

ESMA Publishes Report on Short Selling Regulation

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A final report was published by ESMA on December 21, 2017, which contained further technical advice on the Short Selling Regulation. In relation to a number of topics which had been flagged as potentially controversial, the report, which was based on feedback received from market participants, proposes a number of amendments with an aim to improve coherency and efficiency. The key areas which are focused on within the report are the exemption for market making activities, bans on short-term short-selling and transparency of short positions which are held by market participants. The full report is available here.

ESMA Publishes Two Revised Opinions on Transaction on Third-Country Trading Venues

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On December 15, 2017, European Securities and Markets Authority (“ESMA“) published two revised opinions on third-country trading venues for post-trade transparency and position limits requirements under MiFID II. The revised opinions are:

These revise the original opinions issued in May 2017. The opinions addressed the treatment of transactions executed by EU investment firms on third-country trading venues as well as the treatment of positions held in contracts traded on those venues for the position limit regime under the MiFID II Directive.

These opinions stated that, provided that third-country trading venues meet a set of criteria, investment firms trading on those trading venues are not required to make transactions public in the EU via an approved publication arrangement (APA). Likewise, commodity derivatives contracts traded on those trading venues are not considered as economically equivalent over-the-counter (“EEOTC“) contracts for the purpose of the position limit regime.

When publishing these opinions, in its press release, ESMA explained that after the original publication of its opinions in May 2017, it had received requests to assess over 200 third-country trading venues. ESMA stated that it will not be able to assess all of these trading venues prior to the application of MiFID II (January 3, 2018) and highlighted the importance that all third-country trading venues are treated the same in order to maintain a level playing field.

Consequently, the opinions state that pending an ESMA assessment of these third-country trading venues, transactions on third-country trading venues do not need to be made post-trade transparent and positions held in those third-country venue contracts are not considered to be EEOTC contracts.

ESMA Updates MiFIR Data Reporting Q&As

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The European Securities and Markets Authority (“ESMA“) published an updated version on November 14, 2017, of its Q&As on data reporting under the Markets in Financial Instruments Regulation (Regulation 600/2014) (“MiFIR“).

The updated version includes new answers (in section 15: transaction reporting) relating to:

  • Portfolio management
  • Swaps related to indices
  • Transaction reporting for primary issuances
  • Corporate events