ESMA Consults on Reporting Guidelines for SFTR
On 27th May, the European Securities and Markets Authority (ESMA) launched a consultation on SFTR reporting draft Guidelines. These Guidelines will supplement the reporting RTS/ITS, and serve to clarify certain technical/procedural aspects of the reporting regime. ESMA is planning to finalise the Guidelines in Q4 2019, taking on board elements of feedback received, meaning the Guidelines would be completed before the first phase of reporting in April 2020.
ESMA Guidelines are not legally binding, but need to be applied on a ‘comply or explain’ basis by National Competent Authorities and firms. This de facto means ESMA Guidelines have a similar effect to binding RTS/ITS, unless a competent authority explicitly refuses to apply the Guidelines in their regulatory/supervisory mandate. ESMA does not need a mandate from primary legislation to develop Guidelines, another crucial difference with RTS/ITS, so these particular set of Guidelines are drafted at ESMA’s own initiative and discretion.
The Guidelines aim to provide clarity on practical aspects such as how the reports have to be structured, and where they need to be sent, including:
- identification of a number of transactions that do not fall under the definition of SFTs, and provides further clarity on which transactions needs to be reported;
- details on the population of reporting fields for different types of SFTs;
- clarification regarding the approach used to link SFT collateral with SFT loans;
- the population of reporting fields for margin data;
- the population of reporting fields for reuse, reinvestment and funding sources data;
- the consultation provides guidance on the management by counterparties of feedback from TRs, namely in the case of: rejection of reported data; and reconciliation breaks; and
- the provision of data access to authorities by TRs.
Stakeholders are invited to respond to the consultation by 29 July 2019.
FCA comments on ESMA update on share trading obligations
On 29 May 2019 ESMA published a statement on the revised scope of the EU’s share trading obligation (STO) under a no-deal scenario, following their initial announcement on 19 March 2019. According to ESMA, the revised approach would mean that EU banks and investment firms will be able to trade all UK shares in the UK, where for most the primary centre of liquidity exists.
However, applying the EU STO to all shares issued by firms incorporated in the EU (EU ISINs) would still cause disruption to investors, some issuers and other market participants, leading to fragmentation of markets and liquidity in both the EU and UK. A number of shares with EU-27 ISINs have both a listing, as well as their main or only significant centre of market liquidity, on UK markets. The FCA stated that in its view (i) the ISIN that a share carries does not and should not determine the scope of the STO as some shares have their main or only centre of market liquidity outside the country in which the issuer is incorporated; and (ii) this approach would place restrictions on a company’s access to investors and freedom to choose where they seek a listing on a public stock market.
The FCA continued that the risk of disruption from potentially conflicting EU27 and UK STOs is not mitigated by the revised ESMA approach given that article 23 of the onshored MIFIR implies overlapping obligations for firms. Consistent with the FCA’s objectives and the principle of best execution, it hopes to ensure that markets in these shares currently available to both UK and EU investors in London would not be damaged.
In the absence of reciprocal equivalence, applying both UK and EU STOs in a way that maintains the status quo for a limited period of time after exit remains an alternative way of mitigating disruption whilst longer term solutions are found. The FCA commented that it stands ready to use the extra time available due to the delay to the UK’s withdrawal to engage constructively with ESMA and other European authorities to achieve either of these outcomes.
In addition, absent a determination of equivalence, the FCA stated that it will engage with market participants and trading venues about the steps that may be needed to protect the integrity of markets in the UK and to ensure that participants in the UK can continue to achieve high standards of execution for their clients, including when trading EU-27 shares, and that the MiFID II calibrations, which were designed for a pan European market of 28 countries, remain appropriate in a fragmented market.
The FCA concluded that it will continue to consider its approach to the implementation of any STO that is needed in a hard exit.
EMIR Refit Regulation published in Official Journal of the EU (OJ)
On 28 May 2019, Regulation (EU) 2019/834 amending EMIR (the Regulation on OTC derivative transactions, central counterparties (CCPs) and trade repositories (648/2012)) has been published in the OJ. The Council of the EU adopted the proposed Regulation on 14 May 2019 and the European Parliament adopted it in April 2019. The Regulation comes into force on 17 June 2019.
The EMIR Refit Regulation makes a number of amendments to EMIR mainly to simplify certain requirements and reduce disproportional costs for smaller counterparties to OTC derivatives trades. Save for certain provisions listed in Article 2, the EMIR Refit Regulation will apply from the date of its entry into force.
You can access the whole text by clicking here: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2019.141.01.0042.01.ENG&toc=OJ:L:2019:141:TOC
EC adopts Delegated Regulation on regulatory technical standards (RTS) on homogeneity of underlying exposures in securitisation
On 28 May 2019, the EC adopted a Delegated Regulation relating to RTS on the homogeneity of the underlying exposures in securitisation. Homogeneity of the underlying exposures is one of the requirements for simple, transparent and standardised (STS) securitisation, which is eligible for more risk-sensitive risk weights, under the new EU securitisation framework.
The application of the homogeneity requirement, together with other STS requirements, is a prerequisite for a more risk sensitive regulatory treatment of the securitisation, as established in the EU securitisation framework. The overarching objective of the homogeneity requirement is, in accordance with the Securitisation Regulation, to enable the investor to assess the underlying risks of the pool of the underlying exposures on the basis of common methodologies and parameters. The Delegated Act establishes a set of four conditions for the underlying exposures to be considered homogeneous:
- they have been underwritten according to similar underwriting standards;
- they are serviced according to similar servicing procedures;
- they fall within the same asset type; and
- for a majority of asset types, they need to be homogeneous with reference to at least one homogeneity factor.
The Delegated Regulation also specifies asset types prevalent in the securitisation market and lists homogeneity factors that should be considered for those asset types.
You can access the whole text by clicking here: http://ec.europa.eu/transparency/regdoc/rep/3/2019/EN/C-2019-3785-F1-EN-MAIN-PART-1.PDF
Financial Stability Board (FSB) thematic review report on implementation of legal entity identifier
On 28 May 2019, the FSB published a thematic review report on the implementation of the legal entity identifier (LEI) following the launch of the review in August 2018.
The FSB found that although progress has been made, the LEI has far to go to meet the G20’s objective of encouraging global adoption of the LEI to support authorities and market participants in identifying and managing financial risks. The FSB stated that coverage is too low outside securities and derivatives markets to effectively support new industry or regulatory uses. Also, LEI adoption remains uneven across jurisdictions and increased efforts should be made both at national and international levels to promote LEI adoption and enhance the benefits to authorities and market participants from its use by addressing identified obstacles. The FSB stated that obstacles include the current business model, which does not clearly align the current benefits and costs of LEI use for participants, a lack of LEI coverage for so-called “level 2” (relationship) data, and insufficient links with other (in particular, business registry) identifiers.
In the light of its findings, the FSB sets out four sets of recommendations to address the issues identified in the peer review and promote broader LEI adoption. The recommendations, which vary according to whom they are addressed, are as follows:
- FSB member jurisdictions – recommendations include following-up on guidance that strongly encourages authorities to require the use of LEIs for the identification of legal entities in the data reported to trade repositories for OTC derivatives, and exploring ways to promote further LEI adoption.
- the FSB itself – it intends to explore the potential role of the LEI in its work and work with standard-setting and industry bodies to facilitate enhanced adoption of the LEI.
- relevant standard-setting bodies and international organisations – they should review and consider ways to embed or enhance references to the LEI in their work to facilitate the implementation of relevant LEI uses for authorities and market participants.
the LEI Regulatory Oversight Committee (LEIROC) and the Global LEI Foundation (GLEIF) – among other things, LEIROC and GLEIF should consider enhancements to the LEI business model to lower the cost and administrative burden for entities acquiring and maintaining an LEI, consider data quality process enhancements to increase the reliability of the LEI data and enhance the scope and usability of Level 2 (relationship) data.
FCA Call for Input: Cross-Sector Sandbox
On 29 May 2019 the FCA published a call for input on a cross-sector sandbox. The call for input follows a study carried out by the FCA into how a cross-sector sandbox involving multiple regulatory agencies could be established. It sees the sandbox as a mechanism for regulatory collaboration to address some of the issues arising from emerging technologies. During the study, the FCA engaged with a number of firms and regulators (such as the Civil Aviation Authority (CAA), Gambling Commission, Information Commissioner’s Office (ICO), Ofcom, Ofgem and the PRA) to ascertain if there could be a need for a cross-sectoral sandbox.
The call for input gives an overview of why the FCA carried out the study and discusses what a sandbox is and explains the opportunities and challenges a cross-sectoral sandbox could pose for firms and regulators. The FCA stated that it believes that there is a need for a cross-sector sandbox or similar mechanism. It explains that emerging technologies such as artificial intelligence and distributed ledger technology are changing business models, encouraging established firms in one sector to diversify into different markets, and all sectors becoming increasingly reliant on big data. Regulators need to adapt to these changing market conditions, which requires collaboration. The FCA suggests that a cross-sector sandbox could be a new way of collaborative working for regulators.
The FCA states that there are some challenges with a cross-sector sandbox, including lack of proven demand, misunderstanding about the purpose of the sandbox and firms not improving their own in-house knowledge. However, it believes these challenges can be mitigated, for example, by creating eligibility criteria that require firms to show a need for testing to ensure that only those innovative ideas that would benefit from a sandbox test would be accepted and ensuring that firms do due diligence before any test by demonstrating that they understand the regulatory framework in which they operate.
In order to assist participants, the FCA lists a number of questions to help discussion of the issues it raises, including, by way of example, the following:
Q1: Are there any instances where a cross-sandbox would have been useful for you?
Q2: Are there specific regulators which you would like to see working more closely together?
Q3: Looking forward, can you foresee any instances where a cross-sector sandbox would be helpful for you?
Q4: Would you use a cross-sector sandbox and if so, which would be the regulators of most interest to you?
The FCA has requested views by 30 August 2019. Queries and comments can be sent to CrossSectorSandbox@fca.org.uk.
Claire practises financial services law with a focus on regulatory issues, cryptocurrencies and tokens, trading and brokerage documentation and advising both existing and start-up funds and fund managers.
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