European Securities and Markets Authority (“ESMA”)

ESMA Publishes Consultation Papers on Technical Standards Implementing the Securitisation Regulation

The European Securities and Markets Authority (ESMA) recently published three consultation papers on technical standards that implement the Securitisation Regulation (“SR“).

The SR is a European initiative designed to create a framework for simple, transparent and standardised (“STS“) securitisation. As part of the SR, certain information must be reported about securitisations to repositories, including the securitisation structure itself, its cash flow and information on underlying risks and exposures.

Where STS status is sought for a securitisation, it must fulfil further criteria, as well as notify ESMA as to how these criteria have been fulfilled. The consultation papers seek relevant stakeholder views on, amongst other points:

  • Application requirements for any non-securitisation (i.e. third party) entities that seek authorisation to be providers of STS verification services;
  • The general format and content of underlying exposures and investor report templates (that must aim to meet the SR’s reporting requirements); and
  • The general content of the notification that must be sent to ESMA to establish a securitisation’s STS status.

ESMA will use the feedback from the consultation (which is open until March 19, 2018) to finalise its draft technical standards. ESMA will publish its final report in July 2018 (for STS notification and non-securitisation entity application requirements) and will publish ancillary elements by the end of 2018 (for reporting requirements and operational standards).

Please find the ESMA press release here, and the SR webpage here.

ESMA Publishes Consultation Paper Containing Draft Guidelines on Anti-Procyclicality Margin Measures for Central Counterparties (CCPs)

On January 8, 2018, the European Securities and Markets Authority (“ESMA“) published a consultation paper containing draft guidelines on anti-procyclicality margin measures for central counterparties (“CCPs“) (ESMA70-151-1013).

Actions by CCPs such as margin calls and ‘haircutting’ collateral are known to have procyclical effects. Under Article 41 of the European Market Infrastructure Regulation (“EMIR“), CCPs are required to monitor and, where necessary, revise margin levels to reflect market conditions. Under Article 28 of Commission Delegated Regulation (EU) No 153/2013 (which itself contains various regulatory technical standards (“RTS“) on requirements for CCPs), CCPs must adopt (at least) one of three anti-procyclicality (“APC“) margin measures to address the above issues.

The draft guidelines seek to clarify how EMIR is applied within the context of the procyclicality of margins. They aim to achieve a consistent application of Article 41 EMIR and Article 28 of the RTS, and cover how margin procyclicality is monitored, how APC margin measures are implemented, and help govern disclosures that are intended to facilitate margin predictability.

The deadline for responses on the draft guidelines is February 28, 2018, and  ESMA expects to publish the final guidelines by the first half of 2018.

To view the draft guidelines, please click here.


ESMA Signs Memorandum of Understanding on CCPs with New Zealand Regulators Under EMIR


On April 18, 2017, the European Securities and Markets Authority (“ESMA“) published a memorandum of understanding that it has entered into with the Reserve Bank of New Zealand and the Financial Markets Authority of New Zealand under Article 25 of the European Market Infrastructure Regulation (“EMIR“).

Article 25(2)(c) of EMIR requires the establishment of cooperation arrangements as a precondition for ESMA to recognize central counterparties (“CCPs“) established in New Zealand to provide clearing services to clearing members or trading venues established in the EU. The memorandum of understanding is designed to:

  • Ensure the fulfillment of the conditions set out in Article 25(2)(c) of EMIR.
  • Provide ESMA with adequate tools to monitor the ongoing compliance by the relevant CCPs with the recognition conditions set out in Article 25 of EMIR.

The memorandum of understanding is effective as of February 28, 2017, which is the date it was signed by the relevant authorities.

European Commission Responds to ECON Concerns About MiFID II Systematic Internalizers Operating Broker Crossing Networks


The European and Monetary Affairs Committee (ECON) has published correspondence between the European Parliament’s negotiating team for the Markets in Financial Instruments Directive (“MiFID“) II package of measures and Vice-President Valdis Dombrovskis about concerns relating to the potential establishment of networks of systematic internalizers (“SIs“) and of other liquidity providers that might circumvent certain MiFID II obligations, in particular concerning the trading of shares.

In a letter dated February 24, 2017, the negotiating team refers to the European Securities and Markets Authority’s (“ESMA“) letter from February 1 to Olivier Guersent, Director General, Financial Services and Capital Markets Union. The negotiating team and ESMA share the same concern that certain investment firms may be setting up interconnected SIs to cross third-party buying and selling interests via matched principal trading or other types of back-to-back transactions. The negotiating team has asked the European Commission to examine whether these practices comply with the letter and spirit of the MiFID II framework.

Mr. Dombrovskis responded in a letter dated March 16, 2017, setting out the conclusions of an initial investigation into the issue. He explained that a group of exchange operators are concerned about attempts to establish broker crossing networks in which both SIs and high frequency trading (HFT) firms interact in a manner that market operators describe as multilateral. Market operators are concerned that such networks may not be considered a multilateral trading system by all competent authorities, and so some variants of broker crossing networks may not be required to be authorized as multilateral trading facilities (“MTFs“). On the other hand, investment firms argue that the establishment of electronic links between SIs and other liquidity providers would not amount to the creation of an MTF. Market operators have requested that guidance be issued to the effect that such networks involving the rapid exchange of order information between participating SIs is an MTF and should be authorized as such.

The European Commission proposes to engage in a dialogue with ESMA and competent national regulators to determine the jurisdictions that the alleged broker crossing networks could potentially be established in. The European Commission will then engage with the relevant authorities on how to address the establishment of such networks within the MiFID II rules.

ESMA Guidelines for Assessment of Knowledge and Competence Under MiFID II

On December 18, the European Securities and Markets Authority (“ESMA”) published a final report on guidelines for the assessment of knowledge and competence under the MiFID II Directive (2014/65/EU) (“Directive”).

Article 25(1) of the Directive requires investment firms to ensure that persons giving investment advice or providing information about financial instruments, investment services or ancillary services to clients on behalf of the firm possess the necessary knowledge and competence to fulfil their obligations under the Directive.

ESMA Publishes 2016 Work Program

On October 7, 2015, the European Securities and Markets Authority (ESMA) published its 2016 work program.

The key priorities for 2016 will be:

  • Supervisory Convergence: ESMA’s focus will shift increasingly from rulemaking to implementation, and enforcement of common EU rules will be a core focus;
  • The Markets in Financial Instruments Regulation (MiFID II and MiFIR): this will continue to dominate ESMA’s work in 2016 but focus will increasingly be on implementation guidelines and Q&A; and
  • Data collection and management: ESMA will continue to develop systems to support activities on supervision, risk monitoring and the single rulebook, as well as working to meet the legal requirements for data collection and reporting set out in MiDIF II and MiFIR.

ESMA Consults on Remaining MiFID II Draft ITS

On August 31, 2015, the European Securities and Markets Authority (ESMA) published a consultation paper on the remaining draft implementing technical standards (ITS) under the MiFID II Directive (2014/65/EU) and the Markets in Financial Instruments Regulation (Regulation 600/2014) (MiFIR).

The consultation will close on October 31, 2015, and focuses on three key areas: the timing and format of publications and communications in case of suspension and removal of financial instruments from trading on trading venues; notification and provision of information for data reporting services providers; and weekly aggregated position reports for commodity derivatives, emission allowances and derivatives thereof to deliver transparency and support monitoring of the new position limits regime.

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.

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.

ESMA’s New Q and A Responses on the Application of AIFMD and Consultation on New Guidelines

The European Securities and Markets Authority (ESMA) has published updated questions and answers on the application of the Alternative Investment Fund Managers Directive (AIFMD), which includes updated and new questions and answers on reporting to national authorities and the calculation of the total value of assets under management (AUM). In the same week, it has launched a consultation on proposed guidelines on sound remuneration policies under AIFMD and the UCITS V Directive (the latest changes to the Undertakings for Collective Investments in Transferable Securities Directive).

UCITS V includes rules that UCITS must comply with when establishing and applying a remuneration policy for certain staff categories and the proposed UCITS Remuneration Guidelines further clarify the Directive’s provisions. The proposed Guidelines aim to ensure a convergent application of the remuneration provisions and will provide guidance on issues such as proportionality, governance of remunerations, requirements on risk alignment and disclosure. The consultation paper also proposes a revision of the AIFMD Remuneration Guidelines by clarifying that, in a group context, non-AIFM sectoral prudential supervisors of group entities may deem certain staff of an AIFM in that group to be identified staff for the purpose of their sectoral remuneration rules.

ESMA will consider the feedback received to the consultation and is aiming to finalize and publish the UCITS Remuneration Guidelines and a final report by Q1 2016, ahead of the transposition deadline for the UCITS V Directive (March 18, 2016). It is expected that the final report will also include the revision of the AFIMD Remuneration Guidelines.