Shearman & Sterling LLP | Financial Regulatory Developments Focus
Financial Regulatory Developments Focus
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The following posts provide a snapshot of the principal U.S., European and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructures, asset managers and corporates.

  • European Supervisory Authorities Report on Automation in Financial Advice
    09/05/2018

    The Joint Committee of the European Supervisory Authorities has published a joint report on automation in financial advice. The Report follows the ESA's 2015 joint discussion paper and follow-up report in 2016. The Report provides a summary of recent sectoral work by the ESAs in this area and the main findings of a survey with national regulators on the evolution of automation in financial advice in the securities, banking and insurance sectors. The ESAs observed that automated services are more often offered through partnerships between established financial intermediaries and FinTech firms than by FinTech firms alone. The ESAs also found that automation in financial advice has grown slowly and that the number of firms and customers involved is still limited. As a result, the ESAs do not consider that any of the previously identified risks have materialized and therefore that further action is unnecessary at this stage. The ESAs will conduct a new monitoring exercise if and when market developments and risks merit the work.

    View the report.
    TOPICS: MiFID IIFinTech
  • European Commission Communication on Proposed Amendments to Technical Standards on Systematic Internalisers' Quote Rules
    09/03/2018

    The European Commission has published a Communication (dated August 10, 2018) on proposed amendments by the European Securities and Markets Authority to a Regulatory Technical Standard, known as "RTS1," supplementing the Markets in Financial Instruments Regulation.

    Under MiFIR, Systematic Internalisers must make public firm quotes in equity instruments. The quotes must: (i) be at least equivalent of 10% of the standard market size for the quoted instrument; (ii) include both a bid and offer price; and (iii) reflect the prevailing market conditions for that instrument. RTS 1 specifies the concept of "prices reflecting prevailing market conditions" as being "close in price, at the time of publication, to quotes of equivalent sizes for the same financial instrument on the most relevant market in terms of liquidity." ESMA submitted final draft amendments to RTS 1 in March 2018, which provided that, where a financial instrument is subject to the "minimum tick size" regime, the quotes of an SI can only adequately reflect prevailing market conditions when those quotes reflect the minimum price increments ("tick sizes") quoted by EU trading venues trading the instrument.

    Read more.
    TOPIC: MiFID II
  • European Securities and Markets Authority Intends to Extend Product Intervention Measures for Binary Options for a Further Three Months
    08/24/2018

    The European Securities and Markets Authority has announced its intention to adopt a Decision to extend the prohibition on the marketing, distribution and sale of binary options to retail investors for a further three-month period from October 2, 2018. ESMA has previously adopted intervention measures for binary options, with the current Decision set to expire on October 1, 2018.

    ESMA has power under the Markets in Financial Instruments Regulation to impose prohibitions or restrictions on certain financial instruments, financial activities or practices. This may be done when, among other conditions, the exercise of ESMA's power addresses a significant investor protection concern in the Union. Product intervention measures imposed by ESMA under MiFIR must be reviewed at appropriate intervals and at least every three months. If a measure is not renewed after three months, it will expire. In reviewing the current Decision, ESMA has agreed to exclude from the scope of product intervention certain types of binary option that are less likely to lead to a significant investor protection concern.

    Read more.
  • EU and UK Authorities Clarify Trading Obligation Expectations for Pension Schemes
    08/08/2018

    The European Securities and Markets Authority has published a further statement on the transitional exemption from the clearing obligation for pension scheme arrangements under the European Market Infrastructure Regulation and delegated regulations. Transitional provisions provide for PSAs to be exempt from the clearing obligation until August 16, 2018. There is no provision in EMIR that would allow for a further extension of this exemption period. It is proposed that this exemption will be further extended under the proposal to amend EMIR, known as EMIR Refit. ESMA issued a statement on July 3, 2018 stating that national regulators are expected not to prioritize "their supervisory actions towards entities that are expected to be exempted again in a relatively short period of time and to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in a proportionate manner."

    This new statement clarifies that ESMA does not expect national regulators to focus on any non-compliance by PSAs with the related trading obligation under the Markets in Financial Instruments Regulation. Financial counterparties that are exempt from the clearing obligation under EMIR are also exempt from the trading obligation under MiFIR. It is likely that the clearing obligation exemption will expire before it is extended under EMIR Refit and therefore the trading obligation exemption would also lapse.

    Read more.
    TOPICS: DerivativesMiFID II
  • UK Conduct Regulator Reminds Firms of Obligations on Selling High-Risk Products to Retail Clients
    08/01/2018

    The U.K. Financial Conduct Authority has issued a statement on selling high-risk speculative investments to retail clients following the European Securities and Markets Authority's product intervention on contracts for difference products.

    ESMA issued decisions in March and June 2018 to temporarily prohibit the marketing, distribution or sale of binary options and to impose restrictions on the marketing, distribution or sale of CFDs to retail clients. In the CFD decision, ESMA had clarified that turbo certificates were outside the scope of the CFD restrictions. However, in its recently updated Q&A on its product intervention, ESMA acknowledges that turbo certificates have comparable features to CFDs, such as leverage.

    Read more.
  • Global Recommendations for Trading Venues to Manage Extreme Volatility
    08/01/2018

    The International Organization of Securities Commissions has published a report on mechanisms used by trading venues to manage extreme volatility and preserve orderly trading. Following its consultation earlier this year, IOSCO is making eight recommendations for trading venues and their regulators to consider when implementing, operating and monitoring volatility control mechanisms to preserve orderly trading.

    Read more.
  • UK Financial Conduct Authority Proposes Changes to Rules Governing Peer-to-Peer Lending Platforms
    07/27/2018

    The Financial Conduct Authority has launched a consultation on new rules for loan-based crowdfunding platforms, also known as peer-to-peer lending platforms. The FCA implemented rules regulating FCA-authorized firms operating investment-based and loan-based crowdfunding platforms on April 1, 2014. Investment-based crowdfunding is governed by the Markets in Financial Instruments package and the Alternative Investment Fund Managers Directive, as transposed into U.K. law. The regime for P2P lending is a national one and is less detailed and prescriptive.

    The FCA began a post-implementation review of the crowdfunding sector and the applicable regimes in 2016. In the post-implementation review, the FCA identified that harm may be caused to investors as a result of poor business practices and due to the business models that some platforms have adopted. The consultation paper summarizes the FCA's findings from that review and sets out the FCA's proposals to change certain rules and guidance.

    Read more.
  • UK Conduct Regulator Publishes Interim Report on Investment Platforms Market Study
    07/16/2018

    The U.K. Financial Conduct Authority has published an Interim report as part of its market study to ascertain whether competition between investment platforms is working in the interests of consumers. The FCA launched the investment platforms market study in July 2017 after potential competition issues in the sector were highlighted in the course of its asset management market study, on which it issued its final report in June 2017.

    The FCA has been assessing competition in the sector by exploring a range of areas, namely: barriers to entry and expansion; business models; platform profitability; the impact of financial advisers; and consumer preferences and behaviour. Noting the increasing vertical integration in the sector, the FCA has also been examining commercial relationships between platforms, asset managers, discretionary investment managers and financial advisers.

    The FCA has found that the market appears largely to be working well for both advised and non-advised consumers and that customer satisfaction is currently high. However, the FCA has found that there are some customers for whom the market is not working as well as it should. The interim report highlights the issues the FCA has identified and consults on proposed remedies. The report is supported by eight annexes covering elements of the FCA's research and findings so far.

    Read more.
    TOPICS: CompetitionFundsMiFID II
  • EU Proposals to Amend MiFID II's Tick Size Regime
    07/13/2018

    The European Securities and Markets Authority has launched a consultation on proposed amendments to the Regulatory Technical Standards (Commission Delegated Regulation (EU) 2017/588, also known as RTS 11) providing for the tick size regime under the Markets in Financial Instruments package, known as MiFID II. The tick size regime subjects orders in shares and depositary receipts to minimum tick sizes that are determined according to both the: (i) average daily number of transactions on the most relevant market in terms of liquidity; and (ii) price of the order. RTS 11 calibrates the minimum tick size based on the most liquid market in the EU, without any consideration being given to the liquidity on non-EU trading venues. The result is that EU trading venues have experienced a drop in market share in third-country financial instruments since January 3, 2018 when MiFID II came into effect. The trading venues have highlighted that the decrease in market share is because the RTS 11 methodology requires them to have in place larger price increments than those of their third-country competitor trading venues.

    Read more.
    TOPIC: MiFID II
  • FICC Markets Standards Board Consults on Statement of Good Practice on Algorithmic Trading
    07/11/2018

    The FICC Markets Standards Board has launched a consultation on a transparency draft of a Statement of Good Practice on algorithmic trading in the wholesale fixed income, commodity and currency markets. The draft SGP forms part of the FMSB's work to build up a body of Standards and Statements of Good Practice to improve conduct and raise standards in the wholesale FICC markets. The FMSB Standards and SGPs do not impose legal or regulatory obligations on FMSB members, nor do they take the place of regulation. Instead, an SGP is intended to be considered to the extent it is possible to follow it in compliance with applicable laws.

    For the purposes of the consultation paper, "algorithmic trading" is defined as trading in instruments where a computer algorithm, with limited or no human intervention, automatically determines individual parameters of orders, such as whether to initiate the order, the timing, price or quantity of the order or how to manage the order after its submission.

    Read more.
  • UK Regulations Implementing Parts of the Prospectus Regulation Published
    06/29/2018

    The Financial Services and Markets Act 2000 (Prospectus and Markets in Financial Instruments) Regulations 2018, dated June 27, 2018, have been laid before Parliament. The U.K. Regulations will come into force on July 21, 2018, implementing parts of the Prospectus Regulation that will apply from that date. The Prospectus Regulation will replace the existing Prospectus Directive and sets out the requirements for a prospectus to be published when securities are offered to the public or admitted to trading on a regulated market. The Prospectus Regulation aims to simplify the rules and administrative obligations for companies wishing to issue shares or debt on the market and reducing the costs of preparing a prospectus, thus fostering cross-border investments in the single market, while at the same time still enabling investors to make informed investment decisions. The remainder of its provisions take effect on July 21, 2019.

    U.K. law is not needed to transpose the Prospectus Regulation, which will be directly applicable across the EU. However, certain U.K. legislation will need to be amended to ensure that there is no conflict of laws. The U.K. Regulations amend the Financial Services and Markets Act by increasing the threshold, from €5 million to €8 million, for which a prospectus is required for an offer of securities to the public within the U.K. The U.K. Regulations also amend the U.K. legislation that implemented the Markets in Financial Instruments Directive, including by correcting the definition of a MiFID investment firm.

    View the U.K. Regulations (S.I. 2018/786).

    View the explanatory memorandum.
    TOPICS: MiFID IISecurities
  • European Banking Authority Proposes Updated Guidelines on Outsourcing by Financial Institutions
    06/22/2018

    The European Banking Authority has launched a consultation on draft Guidelines on outsourcing arrangements. The proposed Guidelines are intended to update and replace the outsourcing guidelines issued in 2006 (by the EBA's predecessor, the Committee of European Banking Supervisors) that applied to outsourcing by credit institutions. The proposed Guidelines will have a wider scope, applying to all financial institutions that are within the scope of the EBA's mandate, namely credit institutions and investment firms subject to the Capital Requirements Directive, payment institutions and electronic money institutions. The proposed Guidelines also integrate the recommendation on outsourcing to cloud service providers that was published by the EBA in December 2017.

    The proposed Guidelines set out a definition of outsourcing in line with delegated legislation under the revised Markets in Financial Instruments Directive. They cover: (i) proportionality and group application; (ii) the nature of outsourcing arrangements; (iii) the applicable governance framework; (iv) the outsourcing process; and (v) guidelines on outsourcing addressed to competent authorities. A separate Annex provides an illustrative template that could be used for complying with the requirement in the proposed Guidelines to maintain a register of all outsourcing arrangements at institution and group level where applicable.

    Read more.
  • European Commission Clarifies Ancillary Activity Exemption Under MiFID II
    06/22/2018

    The European Commission has published a letter, dated May 31, 2018, from the President of the European Commission, Valdis Dombrovskis, to Steven Maijoor, Chair of the European Securities and Markets Authority, following ESMA's request in April for clarification on how to interpret the ancillary activity exemption under the revised Markets in Financial Instruments Directive.

    MiFID II exempts non-financial entities that deal on own account, or provide investment services to clients, in commodity derivatives from having to obtain authorization as an investment firm under MiFID II provided that, among other things, this activity is ancillary to their main business. The wording of both MiFID II and related Regulatory Technical Standards suggests that the tests for whether an activity is ancillary to the main business should be carried out at the level of the entity's group. However, ESMA stated in its letter to the Commission that some drafting amendments that were introduced by the Commission have led to uncertainty as to whether the tests should be carried out at the level of the entity rather than at group level.

    The Commission has confirmed that MiFID II requires that the ancillary activities test needs to be calculated by each entity within a group that engages in either of the two relevant MiFID activities for which the exemption is available. In consequence, the ancillary activities test must be calculated as many times as necessary for each separate entity which trades in commodity derivatives within a group.

    View the letter to ESMA.

    View ESMA's request for clarification.
    TOPIC: MiFID II
  • European Securities and Markets Authority and UK Financial Conduct Authority End Concessionary Period for Legal Entity Identifier Requirements
    06/20/2018

    The European Securities and Markets Authority has published a statement on the requirements under the Markets in Financial Instruments Regulation for a Legal Entity Identifier. In response to concerns that institutions would not all be able to obtain LEI codes in time for MiFIR's effective date, January 3, 2018, ESMA had issued a statement in December 2017 providing temporary concessions for a period of six months. Those temporary concessions permitted investment firms to provide a service triggering the obligation to submit a transaction report to a client from which they had not obtained an LEI code, provided that, before providing the service, they obtain the necessary documentation from the client to apply for an LEI code on the client's behalf. Trading venues were also permitted to report their own LEI codes instead of LEI codes of non-EU issuers while reaching out to those non-EU issuers.

    Read more.
    TOPIC: MiFID II
  • UK Prudential Regulator Confirms Algorithmic Trading Expectations
    06/15/2018

    Following its consultation in February 2018, the Prudential Regulation Authority has published a Policy Statement and final new Supervisory Statement on Algorithmic Trading. The Supervisory Statement sets out the PRA's supervisory expectations of firms in relation to their algorithmic trading activities and covers: (i) governance; (ii) a firm's algorithmic approval process; (iii) testing and deployment; (iv) inventories and documentation; and (v) risk management and other systems and controls functions.

    The Supervisory Statement applies to firms that engage in algorithmic trading and that are subject to the PRA's rules on algorithmic trading as well as the Regulatory Technical Standards on the organizational requirements of investment firms engaged in algorithmic trading (Commission Delegated Regulation (EU) 2017/589) under the Markets in Financial Instruments package. The Supervisory Statement applies to all of a firm's algorithmic trading activities, including those related to unregulated financial instruments.

    Read more.
    TOPIC: MiFID II
  • European Securities and Markets Authority Extends Product Intervention Measures for Contracts for Difference and Binary Options for a Further Three Months
    06/01/2018

    The European Securities and Markets Authority has adopted two Decisions on the provision of Contracts for Difference and binary options to retail investors. The effect of the Decisions is to prohibit the marketing, distribution and sale of binary options to retail investors and to impose a number of restrictions on the marketing, distribution and sale of Contracts for Difference to retail investors. Both CFDs and binary options are considered to have given rise to significant investor protection concerns, due to their complexity, the lack of transparent information at the point of sale, the risk of significant loss for investors and the deployment of aggressive marketing techniques by providers and distributors of the products.

    Read more.
  • EU Authorities Highlight Importance of Bail-In Risk Disclosures for Retail Investors in Bank Debt Liabilities
    05/30/2018

    The European Banking Authority and the European Securities and Markets Authority have published a joint statement on the treatment of retail holdings of debt financial instruments under the EU Bank Recovery and Resolution Directive and the revised Markets in Financial Instruments Directive. The EBA and ESMA highlight that care is needed when bail-in is implemented in relation to debt liabilities held by retail customers. There have been a number of mis-selling cases as a result of firms not complying with the investor protection requirements at the point of sale of banks' debt liabilities to retail investors.

    The EBA and ESMA emphasize that to ensure that debt instruments are distributed to clients for whom they are suitable, firms must properly implement the MiFID II investor protection requirements. Those requirements oblige firms to, among other things, act honestly, fairly, professionally and in the best interests of clients, disclose certain information to potential and existing clients and conduct suitability assessments. In addition, the product governance framework requires manufacturers and distributors of financial products to act in the client's best interests at all stages of the life-cycle of products or services. In particular, firms must identify the target market for complex products to a greater level of detail than other products. Instruments subject to bail-in must be classified as complex products.

    Read more.
  • European Securities and Markets Authority Issues Final Guidelines on MiFID II Suitability
    05/28/2018

    The European Securities and Markets Authority has published a Final Report setting out finalized Guidelines on aspects of the suitability requirements under the revised Markets in Financial Instruments Directive. ESMA consulted previously on a draft version of the Guidelines between July and October 2017.

    The finalized Guidelines largely confirm ESMA's previous 2012 guidelines on MiFID I, but have a broader scope and ESMA has added clarifications and refinements where necessary.

    Read more.
    TOPIC: MiFID II
  • European Commission Proposes Legislative Package on Sustainable Finance
    05/24/2018

    The European Commission has published a package of legislative reforms on sustainable finance. The aim of the package of reforms, which form part of the Commission's broader Capital Markets Union initiative, is to ensure that environmental, social and governance considerations are consistently integrated into the investment and advisory process across sectors. The proposed measures comprise:

    (i) a proposed Regulation on the establishment of a framework to facilitate sustainable investment. This will establish an EU-wide classification system for environmentally sustainable economic activities and ensure that investment strategies are oriented towards economic activities that genuinely contribute to achieving environmental objectives. The proposed Regulation will empower the European Commission to adopt delegated acts to specify technical screening criteria to assess the contribution of a given economic activity to a particular environmental objective as substantial. A list of six environmental objectives is set out in the proposed regulation, namely: climate change mitigation; climate change adaptation; sustainable use and protection of water and marine resources; transition to a circular economy, waste prevention and recycling; pollution prevention and control; and protection of healthy ecosystems (which includes biodiversity conservation).

    Read more.
  • European Commission Proposes Legislation to Promote SME Growth Markets
    05/24/2018

    The European Commission has published a proposal for a Regulation to amend the Market Abuse Regulation and the new Prospectus Regulation. The aim of the proposed Regulation is to promote the use of SME Growth Markets by making technical adjustments to the MAR and the new PR to make the regulatory framework applying to listed Small and Medium-sized Enterprises more proportionate and to foster the liquidity of equity instruments listed on SME Growth Markets, while maintaining a high level of investor protection and market integrity. The proposed Regulation is in line with the objectives of the EU Capital Markets Union of reducing the overreliance on bank funding and diversifying market-based sources of financing for European companies.

    SME Growth Markets are a new sub-category of multilateral trading facility introduced by the revised Markets in Financial Instruments Directive in January 2018. Companies listed on an SME Growth Market are required to comply with MAR and the PR and are impacted by some aspects of MiFID II. The adjustments in the proposal for a Regulation are designed to lower the administrative burden and costs for issuers on SME Growth Markets stemming from compliance with MAR and the PR and to address regulatory shortcomings in MAR that can affect the liquidity of SME financial instruments. The European Commission has also published a separate proposal for a regulation amending delegated legislation under MiFID II to address regulatory barriers to the take-up of the SME Growth Markets.

    Read more.
  • European Commission Proposes MiFID II Amendments to Promote SME Growth Markets
    05/24/2018

    The European Commission has published for consultation a draft Delegated Regulation on registration conditions to promote the use of SME Growth Markets for the purposes of the revised Markets in Financial Instruments Directive. MiFID II introduced SME Growth Markets as a new sub-category of multilateral trading facility in January 2018 to facilitate access to capital for Small and Medium-sized Enterprises. The proposed delegated regulation will amend existing delegated legislation under MiFID II to address regulatory barriers to the take-up of SME Growth Markets. The European Commission has also published separately a legislative proposal to make adjustments to the Market Abuse Regulation and the Prospectus Regulation is to promote the use of SME Growth Markets.

    Read more.
    TOPICS: MiFID IISecurities
  • European Securities and Markets Authority Seeks Clarity on the Ancillary Activity Exemption under MiFID II
    04/09/2018

    The European Securities and Markets Authority has published a letter from its Chair, Steven Maijoor, to the European Commission seeking clarification on how to interpret the ancillary activity exemption under the revised Markets in Financial Instruments Directive.

    MiFID II exempts non-financial entities that deal on own account, or provide investment services to clients, in commodity derivatives from having to obtain authorization as an investment firm under MiFID II provided that, among other things, this activity is ancillary to their main business. The provisions of MiFID II are supplemented by a Commission Delegated Regulation setting out the Regulatory Technical Standard on the criteria to establish when an activity is considered to be ancillary to the main business. The wording of both MiFID II and the RTS suggest that the tests for whether activity is ancillary should be carried out at the level of the entity's group. However, some drafting amendments that were introduced by the Commission have led to uncertainty as to whether the tests should be carried out at the level of the entity rather than at group level.

    ESMA states that it would not be appropriate for it to address this uncertainty through its usual Questions and Answers and invites the Commission to provide further guidance on the interpretation and implementation of the ancillary activity criteria, in particular on the level at which the tests should be applied.

    View the ESMA letter.

    View the Commission Delegated Regulation (2017/592).
    TOPICS: DerivativesMiFID II
  • UK Financial Conduct Authority Publishes its 2018/19 Business Plan
    04/09/2018

    The Financial Conduct Authority has published its Business Plan for 2018/19 which sets out its key priorities for the coming year. The FCA confirms that it will continue to focus on issues relating to the U.K.'s withdrawal from the EU by working with the Government, ensuring appropriate transition measures for EEA firms, working towards operational readiness and cooperating at international level.

    The FCA divides the remainder of its priorities into cross-sector priorities and sector priorities. There are seven cross-sector priorities: firms' culture and governance; financial crime and anti-money laundering; data security, resilience and outsourcing; innovation, big data, technology and competition; treatment of existing customers; long-term savings, pensions and intergenerational differences; and high-cost credit. There are seven sector priority areas: wholesale financial markets; investment management; retail lending; pensions and retirement income; retail investments; retail banking; and general insurance and protection. The FCA also published Sector Views for each of these sectors which provide an FCA view of how each sector was performing as of mid-2017.

    Read more
  • UK Financial Conduct Authority Confirms Regulatory Status of Cryptocurrency Derivatives
    04/06/2018

    The Financial Conduct Authority has published a statement confirming the regulatory requirements applicable to firms engaged in cryptocurrency derivatives. The FCA does not regulate cryptocurrencies, provided that they do not form part of other regulated services or products. However, the FCA states that cryptocurrency derivatives may be categorized as financial instruments under the revised Markets in Financial Instruments Directive II and that firms carrying out regulated activities in cryptocurrency derivatives should comply with the FCA's Handbook rules as well as the directly applicable EU provisions. The FCA points out that dealing in, arranging transactions in, advising on or providing other services that are regulated activities in relation to derivatives that reference cryptocurrencies or tokens issued through an Initial Coin Offering will require FCA authorization.

    View the FCA's statement.
  • International Standards Body Recommendations for Secondary Corporate Bond Market Transparency and Regulatory Reporting
    04/05/2018

    The International Organization of Securities Commissions has published a final report on regulatory reporting and public transparency in the secondary corporate bond markets. The report discusses the importance to robust capital markets of making information accessible to regulators and the public via regulatory reporting requirements and pre- and post-trade transparency requirements respectively. The report discusses the approach taken in various jurisdictions to impose these requirements before setting out seven recommendations for national regulators.

    The recommendations update IOSCO's 2004 report, "Transparency of Corporate Bond Markets," which discussed the then-existing transparency arrangements for corporate bond markets, as well as the regulatory regimes that were in place in member jurisdictions and set out Core Measures for national regulators to consider to ensure adequate transparency and regulatory reporting arrangements. The recommendations also take into account IOSCO's 2017 report, "Examination of the Liquidity of the Secondary Corporate Bond Markets," which set out the findings of an evidence-based examination of the state of secondary corporate bond markets from 2004 until approximately 2015 and provided a detailed overview and discussion of the markets and how they had evolved since 2004.

    Read more.
    TOPICS: MiFID IISecurities
  • European Securities and Markets Authority Confirms Product Intervention for Contracts for Difference and Binary Options
    03/27/2018

    The European Securities and Markets Authority has confirmed that it will use its product intervention powers under the Markets in Financial Instruments Regulation to prohibit the marketing, distribution and sale of binary options to retail investors. It will also impose a number of restrictions on the marketing, distribution and sale of Contracts for Difference to retail investors. Both CFDs and binary options have given rise to significant investor protection concerns, due to their complexity, the lack of transparent information at the point of sale, the risk of significant loss for investors and the deployment of aggressive marketing techniques by providers and distributors of the products.

    Read more.
  • Final Draft EU Technical Standards Amending Systematic Internalisers' Quote Rules
    03/26/2018

    The European Securities and Markets Authority has published a final report and final draft amending Regulatory Technical Standards to amend the RTS on the equity transparency obligations of trading venues and investment firms (Commission Delegated Regulation (EU) 2017/587, known as RTS 1). The Markets for Financial Instruments Regulation requires Systematic Internalisers to make public firm quotes in equity instruments. The quotes must: (i) be at least equivalent of 10% of the standard market size for the quoted instrument; (ii) include both a bid and offer price; and (iii) reflect the prevailing market conditions for that instrument. RTS 1 specifies the concept of "prices reflecting prevailing market conditions" as being "close in price, at the time of publication, to quotes of equivalent sizes for the same financial instrument on the most relevant market in terms of liquidity".

    ESMA considers that this concept needs to be further elaborated and consulted on proposed amendments last year. ESMA has not made any changes to its proposal.  The final draft amending RTS provide that the quotes of an SI can only adequately reflect prevailing market conditions when the quotes reflect the minimum price increments ('tick sizes') quoted for a financial instrument on a trading venue.

    Read more
    TOPIC: MiFID II
  • European Securities and Markets Authority Issues Opinion on Application of MiFIR Trading Obligation to Package Orders
    03/21/2018

    The European Securities and Markets Authority has published an Opinion on the treatment of package orders in the context of the trading obligation for derivatives under the Markets in Financial Instruments Regulation. The trading obligation requires that the trading of certain derivatives must take place on a regulated market, multilateral trading facility, organised trading facility or on an equivalent third-country trading venue.

    Package orders are used by investment firms and their clients to conduct trades for risk management and hedging purposes. They are composed of two or more financial instruments that are priced as a single unit. The execution of each component is simultaneous and contingent upon on the execution of all the other components. Under MiFIR, the trading obligation is designed to apply at instrument level, not package level – the obligation attaches to the components of a package, but not to the package as a whole. Difficulties may arise where a package order contains a mixture of instruments, where some are subject to the trading obligation while others are not. ESMA considers that the components of a package need to be executed on a trading venue only where it is feasible to do so without creating undue operational or execution risk.

    Read more.
    TOPICS: DerivativesMiFID II
  • European Commission Proposed Legislation to Regulate Cross-Border Crowdfunding Service Providers
    03/08/2018

    The European Commission has published a proposed Regulation on European Crowdfunding Service Providers for Business. The proposed ECSP Regulation is part of the EU Capital Markets Union initiative and the Commission's FinTech Action Plan. It aims to increase access to finance through crowdfunding for innovative companies, start-ups and SMEs.

    The Commission is seeking to introduce an "EU label for crowdfunding service providers" which would be authorized and supervised by the European Securities and Markets Authority and able to passport their services across the EU. Currently, different EU Member States apply different levels of regulatory requirements to CSPs. Some Member States require CSPs to comply with onerous obligations under the Markets in Financial Instruments package, some apply more lenient regimes, while others allow CSPs to benefit from exemptions and remain unregulated. The Commission's view is that this divergence hampers the potential scaling-up of crowdfunding activity, because CSPs need to comply with different legal and regulatory requirements and adjust their business models accordingly if they want to provide services in more than one EU Member State. The Commission is not proposing that current national frameworks be repealed. Instead, those frameworks can continue to exist, which will allow CSPs to choose to either provide or continue providing services on a domestic basis under national laws or to provide services under the proposed ECSP Regulation. However, the Commission is proposing that the MiFID II Directive be amended to exclude CSPs from its obligations.

    Read more
  • European Commission Calls for Acceleration of Completion of the Capital Markets Union
    03/08/2018

    The European Commission has published a Communication on completing the Capital Markets Union by 2019. The Communication confirms the Commissions commitment to completing the CMU by mid-2019 and announces the publication of the FinTech Action Plan, including a proposed Regulation on Crowdfunding, and the Sustainable Finance Action Plan. Legislative proposals on covered bonds, the cross-border distribution of collective investment funds and the law applicable to third-party effects of assignment are expected to be published on March 12, 2018. In May 2018, the Commission intends to publish a proposed Directive on credit servicers, credit purchasers and the recovery of collateral as well as impact assessments on the SME listing regime and the resolution of investment disputes.

    The Commission states that completion of the CMU is more urgent due to the impending exit by the UK from the EU because the UK is currently the EUs largest financial centre. The Commission notes that an effective CMU will need to "open-up markets to give better access to finance for EU businesses and more and innovative investment opportunities for savers." 

    Read more
  • European Securities and Markets Authority Releases Double Volume Cap Data for Dark Pool Trading
    03/07/2018

    The European Securities and Markets Authority has published on its website trading volumes and calculations for the purposes of the Double Volume Cap under the Markets in Financial Instruments Directive and the Markets in Financial Instruments Regulation. The published data covers the periods January 1, 2017 to December 31, 2017 and February 1, 2017 to January 31, 2018.

    The DVC has been introduced under MiFIR as a measure to limit the amount of dark pool trading, which can harm price formation in equity markets. The DVC places a cap on the volume of equities trading using two of the available waivers from the pre-trade transparency obligations of the MiFIR, namely the negotiated transaction waiver and the reference price waiver. The double cap comprises a per-venue cap of 4% of the total volume of trading in a particular financial instrument on all EU trading venues across over the previous 12 months and an EU-wide cap of 8%. ESMA is required to publish reports on the volume of trades that have relied on the waivers.  National regulators must suspend, for six months, trading under the waivers that exceeds either of the caps.

    The publication of the data follows a delay announced by ESMA in January 2018 due to issues with the quality and completeness of data that had been submitted.

    View the ESMA press release.
    TOPICS: MiFID IISecurities
  • International Standards Body Proposes Recommendations for Trading Venues on Managing Extreme Market Volatility
    03/07/2018

    The International Organization of Securities Commissions has launched a consultation on proposed recommendations for trading venues and their regulators to consider when implementing, operating and monitoring volatility control mechanisms to preserve orderly trading. The consultation supports IOSCO’s objective of ensuring that markets are fair, efficient and transparent and focuses on automatic volatility interruptions and mechanisms to halt trading or reject orders.

    Read more.
  • UK Regulators Highlight Expectations and Consult on Algorithmic Trading Supervision
    02/12/2018

    The UK Financial Conduct Authority and Prudential Regulation Authority have published co-ordinated papers on their expectations around firms' use of algorithmic trading strategies in wholesale markets. Firms have had to comply, since January 3, 2018, with new requirements introduced by the revised Markets in Financial Instruments Directive and related Regulatory Technical Standards. The FCA's paper sets out the applicable regulatory requirements and provides examples of good and poor practice for firms regulated by the FCA. Firms that are dual-regulated by the FCA and the PRA should also review the PRA paper, which takes the form of a formal consultation on a proposed Supervisory Statement, covering the PRA's expectations regarding firms' governance and risk management. The PRA consultation runs until May 7, 2018.

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    TOPIC: MiFID II
  • European Securities and Markets Authority Outlines 2018 Plans for EU Supervisory Convergence
    02/07/2018


    The European Securities and Markets Authority has published its Supervisory Convergence Work Programme for 2018. It highlights a total of five key priorities for its work on supervisory convergence in 2018, comprised of three ongoing priorities (application of the revised Markets in Financial Instruments framework, data quality and investor protection) and two new priorities (Brexit and financial innovation).

    In addition to the key priorities, the 2018 programme also sets out ESMA key objectives and main planned outputs in relation to a number of thematic and cross-cutting issues, including: investor protection and intermediaries; secondary markets; investment management; market integrity (including market abuse and benchmarks); post-trading (including CCPs, securities financing and settlement); corporate finance (in particular the new prospectus regime); corporate reporting; market data; financial innovation; IT infrastructure; and peer reviews.

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  • European Securities and Markets Authority Considers Product Intervention for Contracts for Difference and Binary Options
    01/18/2018

    The European Securities and Markets Authority has issued a call for evidence on the possible use of its product intervention powers under the Markets in Financial Instruments Regulation to impose restrictions and/or prohibitions on the marketing, distribution and sale of contracts for difference and binary options to retail investors.

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  • Final EU Regulations on the Scope of the Consolidated Tape for Non-Equity Financial Instruments
    01/17/2018

    A Commission Delegated Regulation amending the Regulatory Technical Standards on authorization, organizational requirements and the publication of transactions for data reporting services providers under the revised Markets in Financial Instruments Directive has been published in the Official Journal of the European Union.

    MiFID II requires consolidated tape providers to collect post-trade information published by trading venues and approved publication arrangements and to consolidate this into a continuous live data stream made available to the public, both for equity instruments and non-equity products.

    The amending Regulation adds provisions to the existing RTS to set out the scope of the consolidated tape for non-equity products (i.e., bonds, structured finance products, emission allowances and derivatives). In particular, the amending Regulation:

    •  permits non-equity CTPs to specialize in one or more asset classes to increase the likelihood of a viable business case for non-equity consolidated tape provision;

    •  specifies the APAs and trading venues that have to be included in the non-equity consolidated tape, based on the required consolidated tape coverage ratio of 80% of all transactions published in an asset class in the EU; and

    •  requires CTPs to reach minimum coverage ratios by January 1, 2019.

    The amending Regulation applied from January 3, 2018. However, the provisions relating to CTPs will apply from September 3, 2019. The amending Regulation does not differ substantively from the final draft RTS submitted to the European Commission on March 31, 2017.

    View the amending Regulation.
    TOPIC: MiFID II
  • UK Financial Conduct Authority Highlights Firms' Failings in Providing and Distributing Contracts for Difference
    01/10/2018

    The Financial Conduct Authority has published a "Dear CEO" letter that was sent to firms that offer contracts for difference products to retail customers on either an advisory or discretionary portfolio management basis (including pursuant to limited power of attorney). The "Dear CEO" letter follows a review conducted by the FCA which assessed internal processes, policies, controls and oversight arrangements at a sample of 19 providers and 15 distributors of CFD products to retail customers. The "Dear CEO" letter identifies a number of areas of concern: target market identification and alignment of the target market to the characteristics of the product; communication, oversight and challenge; the process for taking on new distributors; management of conflicts of interest; the use of management information and key performance indicators; client categorisation; and remuneration arrangements.

    The FCA considers that there is a high risk that firms across the sector are not meeting its rules and expectations when providing and distributing CFDs and that consumers are likely to experience poor outcomes unless these poor practices are addressed. The letter highlights the need for firms overall to improve a number of oversight and control arrangements to reach the standard required by FCA rules and guidance. The FCA will conduct further work on CFDs and firms may be asked to take part in a follow-up review to assess how they have responded to the feedback in the Dear CEO letter. The FCA will also be assessing firms' compliance with the new Product Intervention and Product Governance sourcebook, which came into effect on January 3, 2018, implementing as rules the product governance requirements of the revised Markets in Financial Instruments Directive.

    View the "Dear CEO" letter.
  • European Securities and Markets Authority Announces Delay to Publication of Double Volume Cap Data
    01/09/2018

    The European Securities and Markets Authority has announced that it will delay the publication of data for January 2018 on the double volume cap mechanism introduced by the Markets in Financial Instruments Regulation from January 3, 2018. The DVC mechanism introduced by MiFIR seeks to ensure that dark pool trading using waivers from pre-trade transparency requirements does not unduly harm price formation. It does so by capping the amount of trading for orders placed in systems which are based on a trading methodology using the reference price waiver and certain transactions using the negotiated price waiver.

    ESMA expects to work with national regulators and trading venues to address issues it has identified with the quality and completeness of the data it has so far received from trading venues. It hopes to publish the data in March 2018.

    View the press release.
    TOPIC: MiFID II
  • EU Trading Venues and CCPs Exempted from the Open Access Requirements for Exchange-Traded Derivatives
    01/09/2018

    The European Securities and Markets Authority has published a list of trading venues exempt from the open access requirements of the Markets in Financial Instruments Regulation under transitional arrangements for exchange-traded derivatives under the "de minimis" principle. Various national regulators have also delayed the coming into effect of the open access requirements of MiFID II for clearing houses.

    MiFIR requires a trading venue to provide open and non-discriminatory access to a CCP so that a CCP can clear trades concluded on a trading venue of their choice, which will in turn allow the members of a trading venue to select the CCP they wish to use for clearing. There is a reciprocal requirement on CCPs to provide open and non-discriminatory access to a trading venue that wishes to clear financial instruments through a particular CCP. These provisions are controversial since they mean that valuable intellectual property and IT systems developed by exchanges effectively must be made available to competitors or new market entrants. It has been argued that the open access requirements make the EU unattractive as a location for exchange businesses due to commercial disadvantages that result for those exchanges which have successfully invested in innovation.

    MiFIR provides for a transitional opt-out from the open access requirements for trading venues and clearing houses in relation to ETDs provided that certain criteria are met. ESMA's list specifies four trading venues from Spain, Poland, Norway and Greece that have had their application for exemption approved and one from Sweden whose approval is pending. The four trading venues - MEFF Sociedad Rectora del Mercado de Productos Derivados S.A.U., Giełda Papierów Wartościowych w Warszawie S.A., Oslo Børs ASA and Athens Exchange S.A. - are exempt from the MiFIR open access requirements until July 3, 2020.

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    TOPIC: MiFID II
  • EU Derivatives Trading Obligation Enters Into Force
    12/22/2017

    A Commission Delegated Regulation on the derivatives trading obligation under the Markets in Financial Instruments Regulation has been published in the Official Journal of the European Union.

    The trading obligation is applicable to classes of derivatives that: (i) have been declared subject to the clearing obligation under the European Market Infrastructure Regulation, (ii) are admitted to trading or traded on at least one EU trading venue (a regulated market, multilateral trading facility, organized trading facility or a third country equivalent trading venue) and (iii) are sufficiently liquid. The trading obligation applies to financial counterparties and to non-financial counterparties. Where a class of derivatives is determined to be subject to the MiFIR trading obligation, such derivative may only be traded on a third country trading venues if it has been determined to be equivalent by the European Commission.

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    TOPICS: DerivativesMiFID II
  • European Securities and Markets Authority Issues Statement on Introduction of the Legal Entity Identifier Requirements Under the Markets in Financial Instruments Regulation
    12/20/2017

    The European Securities and Markets Authority has published a statement in response to indications that not all investment firms will succeed in obtaining Legal Entity Identifier codes from all their clients that are legal persons ahead January 3, 2018 when the Markets in Financial Instrument Regulation takes effect. There is also concern that trading venues may not obtain LEI codes for non-EU issuers in time.

    Under MiFIR, investment firms are required to identify all clients that are legal persons with an LEI code. An investment firm is acquired to obtain the LEI code of a client prior to providing any service that triggers the obligation to submit a transaction report for a transaction entered into on behalf of a client who is eligible for the LEI code. Trading venues must also identify each issuer of a financial instrument traded on their systems with an LEI code when making daily submissions to the Financial Instruments Reference Data System.

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    TOPIC: MiFID II
  • European Implementing Technical Standards for Passporting Under the Revised Markets in Financial Instruments Directive Published
    12/20/2017

    Commission Implementing Regulation (EU) 2017/2382 has been published in the Official Journal of the European Union and will take effect on January 3, 2018.

    The Implementing Regulation contains Implementing Technical Standards on the standard forms and templates that should be used for notifications and the procedures for the transmission of information when investment firms, market operators operating a multilateral trading facility or organised trading facility, and, where required by the revised Markets in Financial Instruments Directive, credit institutions, want passport investment services or perform activities in another Member State.

    View the Implementing Regulation.
    TOPIC: MiFID II
  • European Commission Declares Stock Exchanges in Switzerland Equivalent for the Purposes of the Shares Trading Obligation Under MiFID II
    12/20/2017

    The European Commission has adopted an Implementing Decision declaring the two Swiss stock exchanges equivalent for the purpose of the shares trading obligation under the Markets in Financial Instruments Regulation. MiFIR requires EU investment firms to ensure that the trades they undertake in shares admitted to trading on a regulated market or traded on a trading venue take place on a regulated market, multilateral trading facility, systematic internaliser or equivalent third-country trading venue.

    The legal and supervisory framework of SIX Swiss Exchange AG and BX Swiss AG have been assesses as equivalent to the requirements of MiFIR, the revised Markets in Financial Instruments Directive, the Market Abuse Regulation and the Transparency Directive.

    Read more.
    TOPIC: MiFID II
  • European Securities and Markets Authority Updates its Procedure and Template for Reporting of Circuit Breakers’ Parameters by National Regulators
    12/19/2017

    The European Securities and Markets Authority has published a revised procedure and a harmonized template to be used by national regulators in reporting to ESMA the parameters to halt or constrain trading used by the trading venues under their jurisdiction. The revised Markets in Financial Instruments Directive places obligations on national regulators to require a regulated market in their jurisdiction to be able to temporarily halt or constrain trading if there is significant price movement in a financial instrument on that market or a related market during a short period and, in exceptional cases, to be able to cancel, vary or correct any transaction. The regulated market must report the parameters for halting trading and any material changes to those parameters to the national regulator and the national regulator must in turn report them to ESMA.

    The ESMA procedure and template is designed to establish a common format for national regulators to use for the reports they make to ESMA. However, national regulators can, if they wish, require trading venues to report to them the parameters using a different and/or more granular format.

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    TOPIC: MiFID II
  • European Commission Consults on Improving the SME Markets
    12/18/2017

    The European Commission has published a consultation paper in which it seeks views on the main challenges for SME-dedicated markets and possible changes to EU legislation that might help build the EU high-growth SME markets. The consultation paper follows previous consultations and papers relating to the Capital Markets Union Action Plan.

    The consultation focuses on SME Growth Markets, a new type of trading venue introduced under the Markets in Financial Instruments package. The consultation paper is split into two sections, the first of which considers the main drivers behind the downward trend of SME initial public offerings and bond issuances. The second section considers specific regulatory barriers to SME markets, small issuers and the local ecosystems surrounding SME markets. In particular, the Commission is seeking views on the MiFID II provisions which set the scope of SME Growth Markets, the market requirements for SME issuers to be assisted by a key adviser, delisting rules on SME Growth Markets and transfer of listings. 

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  • European Securities and Markets Authority Issues Revised Guidance on Post-Trade Transparency and Position Limits When Transacting on Non-EU Trading Venues
    12/15/2017

    The European Securities and Markets Authority has published two revised Opinions providing further guidance on the post-trade transparency and position limits requirements relating to transactions on non-EU trading venues under the revised Markets in Financial Instruments Directive and the Markets in Financial Instruments Regulation. ESMA first published the Opinions in May 2017.

    The first Opinion sets out ESMA's view on determining third-country trading venues for the purpose of transparency under MiFIR. MiFIR requires EU investment firms to make information on transactions in financial instruments traded on a trading venue public. Details of actual transactions must be made public as close to real time as possible – for equities, within one minute of trading, and for non-equities, within 15 minutes (reducing to five minutes in 2020). The Opinion sets out ESMA's view of which transactions between EU and non-EU firms, and which transactions conducted on third-country trading venues should be subject to these post-trade transparency requirements. The Opinion provides objective criteria for identifying those third-country venues that have similar post-trade transparency requirements as EU trading venues. Trades on third-county venues that satisfy the criteria will not need to be made transparent post-trade.

    Read more.
    TOPICS: DerivativesMiFID II
  • EU Clamps Down on Systematic Internalisers Operating Broker-Crossing Networks under MiFID II
    12/13/2017

    An amending Delegated Regulation has been published in the Official Journal of the European Union which closes a loophole in the Markets in Financial Instruments Directive provisions relating to systematic internalisers. In February this year, the European Securities and Markets Authority highlighted the possibility that investment firms operating broker-crossing networks might try to circumvent the MiFID II requirements by setting up networks of connected SIs which would allow SIs to cross third party buying and selling interests via matched principal trading or other types of back-to-back transactions.

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    TOPIC: MiFID II
  • European Commission Declares Trading Venues in Australia, Hong Kong and USA Equivalent Under the Revised Markets in Financial Instruments Directive

    12/13/2017


    The European Commission has adopted Implementing Decisions for equivalence of the legal and supervisory framework of Australia, Hong Kong and the USA for national securities exchanges and alternative trading systems in accordance with the revised Markets in Financial Instruments Directive.
     

    MiFID II requires EU investment firms to ensure that the trades they undertake in shares admitted to trading on regulated markets, or traded on trading venues should take place on regulated markets, multilateral trading facilities or systematic internalisers, or third-country trading venues assessed by the European Commission as equivalent. These latest three equivalence decisions by the European Commission will allow investment firms to comply with MiFID II when shares are traded on trading venues in these three countries.
     

    View Implementing Decision for Australia.
     

    View Implementing Decision for Hong Kong.
     

    View Implementing Decision for USA.

    TOPIC: MiFID II
  • Final UK Domestic Legislation Published Implementing the Revised Markets in Financial Instruments Directive
    12/13/2017

    The Financial Services and Markets Act 2000 (Markets in Financial Instruments) (No. 2) Regulations 2017 have been published, and will take effect mainly from January 3, 2018. Some technical provisions will come into force a day earlier, on January 2, 2018, for the purpose of making corrections to other legislation in advance of the implementation date for the revised Markets in Financial Instruments Directive.

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    TOPIC: MiFID II
  • UK Financial Conduct Authority Publishes Measures to Improve the UK Financial Advice Market
    12/08/2017

    The Financial Conduct Authority has published a Policy Statement setting out new Handbook rules and guidance to implement some of the recommendations arising from the Financial Advice Market Review launched by the FCA jointly with HM Treasury in August 2015.

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