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.
UK Regulator Publishes Application Requirements for EEA Market Operators Seeking Recognition
The Financial Conduct Authority has published a direction on how EEA market operators can apply for recognition as an overseas investment exchange in preparation for Brexit. EEA market operators operating a regulated market, a multilateral trading facility or an organised trading facility currently use passports granted under the revised Markets in Financial Instruments Directive to give their U.K.-based members access to their markets. Once the U.K. has left the EU, those passports will no longer be valid and the U.K. Government does not intend to establish a temporary permissions regime in the event of a "no deal" outcome to the EU-U.K. Brexit negotiations or without an agreed implementation period. EEA market operators that engage in regulated activities when providing their U.K. members with access to their markets will need to apply for ROIE status, unless they can rely on the U.K.'s overseas persons exclusion. The FCA's direction sets out the FCA's expectations for EEA market operators.
View the FCA's statement.
View the FCA's Direction.
Working Group Recommends Replacement of EONIA With New Euro Short-Term Rate
The European Central Bank has announced its recommendation of the Euro short-term rate - ESTER - as a euro risk-free rate by a private sector working group. The group also recommends that ESTER replaces the Euro overnight index average, EONIA, because EONIA no longer complies with the EU Benchmark Regulation and will be restricted from January 1, 2020. The recommendations of the working group are not legally binding.
According to the ECB, ESTER will also provide a basis for developing fallbacks for contracts referencing the EURIBOR because the reformed ESTER methodology will be assessed for compliance with the Benchmark Regulation in 2019. ESTER reflects wholesale Euro unsecured overnight borrowing costs of Euro area banks and will be produced by ECB by October 2019, at the latest.
EU Delegated Regulation on Settlement Discipline Published
A Commission Delegated Regulation on settlement discipline has been published in the Official Journal of the European Union. The Delegated Regulation sets out Regulatory Technical Standards on settlement discipline as required under the Central Securities Depository Regulation. The RTS cover measures for preventing settlement fails through automated matching, a hold and release mechanism and partial settlement. The RTS also provide measures for monitoring and addressing settlement fails, such as a mechanism for cash penalties and a buy-in process. The RTS will apply directly across the EU from September 14, 2020.
View the RTS.
Global Recommendations for Trading Venues to Manage Extreme Volatility
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.
UK Legislation Published for a Post-Brexit Recognition Regime for CCPs
A draft of the Central Counterparties (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018 has been laid before Parliament. The finalized Regulations will come into force partly on the day after the day they are made and fully on the day the U.K. withdraws from the EU.
The draft Regulations have been prepared using the power under the European Union (Withdrawal) Act 2018 to address failures of retained EU law to operate effectively or other deficiencies arising from the withdrawal of the U.K. from the EU. These draft Regulations deal with "onshoring" certain aspects of the European Market Infrastructure Regulation that relate to the regulatory framework for CCPs. The Bank of England wrote to non-U.K. CCPs in December 2017, outlining how it envisaged that non-U.K. CCPs will be recognized to provide services in the U.K. once the U.K. has withdrawn from the EU. Recognized status under EMIR enables third-country CCPs to provide clearing services to clearing members or trading venues established in the EU. The BoE explained in its letter that U.K. domestic law requirements for the recognition of non-U.K. CCPs would be substantially the same as the current requirements under EMIR, although references to international MoUs being in place would change, such that these must be established between third countries and relevant U.K. authorities.
UK Plans Temporary Designation Regime for Settlement Finality Designation Post-Brexit
The U.K. Government has announced that it intends to legislate to ensure, after U.K. withdrawal from the EU, the continuation of U.K. settlement finality protections currently provided under the Settlement Finality Directive and implemented in the U.K. by the Financial Markets and Insolvency (Settlement Finality) Regulations 1999. The SFRs establish various insolvency carve-outs for designated market infrastructure systems and also legislate for finality of transactions within such systems. However, only EU systems are in scope.
The SFD requires Member States to notify the European Securities and Markets Authority with information concerning the national systems (and the respective system operators) they have designated to be included within the scope of the SFD protections. Member States must also designate the national authorities that must be notified when insolvency proceedings are opened against a participant or a system operator. Under the protections afforded by the SFD, transfer orders which enter into designated systems within certain deadlines are guaranteed to be finally settled, regardless of whether the sending participant has become insolvent or transfer orders have been revoked in the meantime. Under the SFD, each Member State automatically recognizes systems that have been designated by other Member States.
UK Working Group Outlines Risk Mitigation Considerations for Bond Market Participants During Transition From LIBOR
The U.K. Working Group on Sterling Risk-Free Reference Rates has published a paper to raise awareness among market participants of some of the current market uncertainties surrounding issuance of long-dated bonds referencing LIBOR. The Working Group is tasked with helping to bring about broad-based transition to the Sterling Overnight Index Average rate by end-2021 across Sterling bond, loan and derivative markets. SONIA has been selected as the preferred alternative risk-free rate for Sterling and, among other work, the Working Group is in the process of developing market conventions for SONIA-linked bonds. A key milestone for the Working Group will be its publication, later in 2018, of best practice for referencing SONIA in bond markets.
In the paper, the Working Group outlines some of the risks faced by bond market participants who are continuing to issue, offer and purchase new Sterling bonds referencing LIBOR, in particular where those bonds are long-dated. "Long-dated" refers to bonds set to mature beyond the end of 2021, when banks' commitments to submit data for purposes of LIBOR are due to end. The Working Group suggests certain steps market participants could take to mitigate some of the risks arising where LIBOR continues to be referenced in new Sterling bonds issued in the interim period before market conventions and infrastructure for referencing alternatives to LIBOR are fully developed.
View the paper.
Bank of England Confirms its Renewed Real-Time Gross Settlement System Can Interface With DLT
The Bank of England has published the outcomes from a "Proof of Concept" it ran to understand how its renewed Real-Time Gross Settlement service could be capable of supporting settlement in systems operating on innovative payment technologies, such as those built on Distributed Ledger Technology. The BoE has operated the RTGS service since 1996 to provide a safe and reliable means of settling high-value cash payments in real time in sterling central bank money. The BoE published a blueprint for renewal of the RTGS in May 2017, setting out how it proposed to overhaul the system to ensure higher resilience, broader access, wider interoperability, improved user functionality and strengthened end-to-end risk management of the high-value payment system.
UK Brings First Service Provider to Payment Systems Within Special Administration Regime
The Financial Market Infrastructure Administration (Designation of VocaLink) Order 2018 has been laid before Parliament. The Order relates to the special administration regime for operators of financial market infrastructures, which came into force on July 13, 2018. Relevant FMIs are operators of recognized payment systems, excluding recognized CCPs (which are already subject to the Banking Act resolution regime in the U.K.) and recognized central securities depositories operating a securities settlement system. However, HM Treasury is able to designate certain service providers to FMIs as infrastructure companies and so bring them within the FMI administration regime.
The Order designates VocaLink as an infrastructure company in connection with its provision of services to the operators of Faster Payments Service, Bacs and LINK. HM Treasury judges that an interruption in VocaLink's services to these operators of payment services would have a serious adverse effect on their operation.
The Order comes into force on August 9, 2018.
View the Order (SI 2018/858).
View the explanatory memorandum.
Bank of England Consults on Term SONIA Reference Rates
The Bank of England's Working Group on Risk-Free Reference Rates has launched a consultation on term reference rates for the Sterling Overnight Index Average.
The Working Group is tasked with facilitating the transition across sterling bond, loan and derivatives markets from the use of sterling LIBOR to the use of SONIA. The Working Group notes that SONIA is an overnight rate, while LIBOR is commonly referenced in longer tenors of three or six months. Some end-users in loan and debt capital markets have reported that term rates are essential for their business needs.
The consultation focuses on how a term SONIA reference rate (TSRR) can be constructed to facilitate sterling LIBOR transition in markets where term rates better suit users' needs. The Working Group seeks feedback on how the development of TSRRs could be catalyzed. The Working Group notes that the International Swaps and Derivatives Association is simultaneously consulting on preventing derivatives market disruption in the event a key IBOR is discontinued and that the Financial Stability Board has also recently stressed the importance to financial stability of transitioning most derivatives to robust overnight risk-free rates.
Comments on the consultation are invited by September 30, 2018. The Working Group anticipates that a number of steps would be required to produce robust and reliable TSRRs by the second half of 2019.
View the consultation paper.
View details of the ISDA consultation on IBOR fallbacks for OTC derivatives contracts.
View details of the Financial Stability Board's position paper.
European Commission Adopts Regulatory Technical Standards Under the EU Benchmarks Regulation
The European Commission has adopted a series of Commission Delegated Regulations comprising all of the Regulatory Technical Standards to supplement the EU Benchmarks Regulation. The Benchmark Regulation, which took effect across the EU in January 2018, sets out the authorization and registration requirements for benchmark administrators, including third-country entities, and the requirements for governance and control of administrators. It provides for different categories of benchmarks depending on the risks involved, imposes additional requirements on benchmarks considered to be "critical" and gives powers to national regulators to mandate, under certain conditions, contributions to or the administration of critical benchmarks. The RTS outline the behaviors and standards expected of administrators of and contributors to benchmarks. The RTS adopted by the Commission are based on draft RTS prepared by the European Securities and Markets Authority in March 2017.
The European Parliament and the Council of the European Union will now have three months in which to raise any objections to the Delegated Regulations. The Delegated Regulations will take effect 20 days after their publication in the Official Journal of the European Union.
Financial Stability Board Welcomes ISDA Consultation on Fall Backs Risk-Free Rates for Derivatives
The Financial Stability Board has published a statement welcoming the consultation by the International Swaps and Derivatives Association on fall backs based on overnight risk-free rates for certain derivative contracts. The statement has been issued to provide market participants with the FSB's views ahead of the consultation by ISDA. The FSB's view is that overnight RFRs are more robust than interbank or term rates because they are based on active and liquid underlying markets. Overnight RFRs are considered by the FSB to be a better choice than term rates for markets where participants do not need forward-looking term rates. The FSB stated that for those markets where the IBOR may cease, citing the example of LIBOR, a transition to new reference rates will be crucial. The FSB acknowledges the work to reform some IBORS excluding LIBOR. It is therefore unclear whether the FSB has factored in the recently announced changes to LIBOR methodology in making this assessment and reaching these conclusions.
International Swaps and Derivatives Association Consults on Fall Backs Based on Overnight Risk-Free Rates for Certain Derivatives
The International Swaps and Derivatives Association has launched a consultation in which it proposes to amend its standard documentation to implement fall-backs based on alternative risk-free rates for certain key Interbank Offered Rates - GBP LIBOR, CHF LIBOR, JPY LIBOR, TIBOR, Euroyen TIBOR and BBSW. ISDA states that the back-ups will apply if the relevant IBOR is permanently discontinued, based on defined triggers.
ISDA is seeking feedback on the approach to address certain technical issues arising from the necessary adjustments that will apply to the RFRs if the fall backs are triggered.
ISDA intends to consult on the technical issues for these changes for derivatives referencing USD LIBOR, EUR LIBOR and EURIBOR at a later date. It requests preliminary feedback on the technical issues associated with fall-backs for these benchmarks in this consultation.
Responses to the consultation should be submitted by October 12, 2018. ISDA will determine which approach to adopt based on the feedback and will publish the final approach for review and comment before implementing any changes to the ISDA standard documentation.
The FSB issued a statement on the same day welcoming ISDA's consultation and encouraging market participants to respond to the proposals.
View ISDA's consultation.
View details of the FSB's statement.
UK Regulators Seek Views on Improving Operational Resilience of Firms and Financial Market Infrastructures
The Bank of England, the U.K. Prudential Regulation Authority and the U.K. Financial Conduct Authority have published a joint discussion paper entitled "Building the UK financial sector’s operational resilience." The Discussion Paper is aimed at opening a dialogue with the financial services industry on achieving what the Authorities view as a "step change" in the operational resilience of firms and Financial Market Infrastructures and at generating debate about the expectations regulators and the wider public might have of the operational resilience of financial services institutions.
While the existing regulatory framework already supports operational resilience, the BoE, PRA and FCA are together considering the extent to which they might supplement existing policies, to improve the resilience of the financial system as a whole and increase the focus on operational resilience within firms and FMIs.
UK Payments Regulators Announce Full Consolidation of UK Retail Payment Systems
The Payment Systems Regulator and the New Payment System Operator have issued press releases confirming that the consolidation of U.K. retail payment systems is now complete. Consolidation of the three U.K. payment systems was one of the recommendations made in the Payments Strategy Forum's November 2016 report, which set out a wide-ranging strategy for reforming the U.K. retail payments industry.
The NPSO assumed responsibility for Bacs Payment Schemes Limited and Faster Payments Scheme Ltd on May 1, 2018. The NPSO's press release confirms that, as of July 1, 2018, the Cheque and Credit Clearing Company Limited has become a subsidiary of the NPSO and the NPSO has assumed responsibility for oversight of running and managing the cheque paper and cheque image clearing systems. All payments will continue to be processed through the cheque clearing systems. The NPSO has also acquired UK Payments Administration Ltd, which is the service company responsible for providing people, facilities and business services to the U.K. payments industry.
European Money Markets Institute Confirms Certain Changes for Euribor
The European Money Markets Institute has published a feedback summary report on its March 2018 consultation on a hybrid determination methodology for the Euro Interbank Offered Rate (Euribor). EMMI is the administrator for Euribor, a major euro interest reference rate for unsecured interbank short-term lending and borrowing. Euribor was classed as a critical benchmark of systemic importance for financial stability by the European Commission in 2016.
EMMI consulted on: (i) introducing a three-level "hybrid" methodology for calculating Euribor; (ii) producing an overnight tenor for Euribor following the implementation of the hybrid methodology; (iii) discontinuing the calculation of three of the eight tenors; (iv) clarifying Euribor's underlying interest; (v) ceasing the publication of individual Panel Banks' submissions; and (vi) simplifying the publication process.
European Securities and Markets Authority Issues Opinion on CCP Liquidity Risk Assessment
The European Securities and Markets Authority has published an Opinion on the liquidity risk assessment that a CCP must undertake under the European Market Infrastructure Regulation. The Opinion is addressed to national regulators that supervise CCPs.
EMIR requires a CCP to measure its potential liquidity needs on a daily basis and to ensure that it has access at all times to adequate liquidity to perform its services and activities. A CCP must, therefore, ensure it has access to credit lines or other arrangements with liquidity providers in case the financial resources at its disposal are not immediately available. In measuring its liquidity needs, a CCP is required to take into account the liquidity risk generated by the default of at least the two clearing members to which it has its largest exposures (the liquidity risk "Cover-2" test). EMIR and related delegated legislation provide detail on how a CCP should assess the liquidity risk arising from each of its relationships with its clearing members and its liquidity providers.
European Central Bank Consults on Assessing Potential Successors to the EONIA Benchmark
The European Central Bank has published a consultation on behalf of the Working Group on Euro Risk-Free Rates. The ECB provides the secretariat for this Working Group. The Working Group is tasked, among other things, with identifying and recommending alternatives to Euro lending benchmark rates, namely EURIBOR and EONIA.
The administrator of EONIA announced in February 2018 that, due to prolonged structural change in the underlying interbank lending market that uses EONIA as a benchmark, EONIA's compliance with the EU Benchmarks Regulation by January 2020 "cannot be warranted" and that the ongoing review of EONIA would therefore be discontinued. The consultation invites comments on three euro risk-free rates that could potentially replace EONIA. These are:
- The euro short-term rate (ESTER), a new wholesale unsecured overnight bank borrowing rate that the ECB proposes to launch before 2020;
- GC Pooling Deferred, a one-day secured, centrally cleared, general collateral repo rate, which is produced by STOXX, a wholly-owned subsidiary of Deutsche Börse Group; and
- RepoFunds Rate, a one-day secured, centrally cleared, combined general and specific collateral repo rate, which is produced by NEX Data Services Limited, a wholly owned subsidiary of NEX Group plc, soon to be acquired by CME Group.
Bank of England Finalizes Fee-Levying Regime for Financial Market Infrastructures
The Bank of England has published a Policy Statement outlining the fees it intends to levy on Financial Market Infrastructures, namely CCPs, central securities depositaries, recognised payment systems and specified service providers to recognised payment systems.
The BoE is empowered under the Banking Act 2009 to levy fees on FMIs but has not so far exercised its power to do so. The BoE has instead funded its supervision of FMIs through the Cash Ratio Deposit scheme. The Policy Statement follows a recommendation in February 2017 from the BoE's independent evaluation office that the BoE review its approach to funding FMI supervision and consider whether levying fees on supervised FMIs would be appropriate. The BoE consulted in August 2017 on proposals to introduce a new funding structure for FMI supervision. A further joint consultation was launched by the BoE and HM Treasury in March 2018 on the detail of the proposed fee-levying regime and the proposed fees for the 2018/19 fee year. The rationale for introducing an FMI fee-levying regime is to allocate the costs of FMI supervision to those entities that directly benefit from the BoE's supervision.
European Money Markets Institute Announces Cessation of Three Euribor Tenors
The European Money Markets Institute has announced the planned cessation of three of the current tenors for the Euro Interbank Offered Rate (Euribor). EMMI is the administrator for Euribor, a major euro interest reference rate for unsecured interbank short-term lending and borrowing. Euribor was classed as a critical benchmark of systemic importance for financial stability by the European Commission in 2016.
EMMI published a consultation paper in March 2018 seeking views from stakeholders on a proposed hybrid determination methodology for Euribor that will transition Euribor away from a quote-based to a transaction-based methodology. As part of that consultation, EMMI sought feedback on whether to discontinue the calculation and publication of three of the eight tenors it publishes, due to low levels of activity underpinning the markets those tenors represent. The majority of respondents to the consultation supported the discontinuation of the two week, two month and nine month tenors and consequently EMMI will proceed with its proposal.
Bank of England Consults on Phased Move to Global Messaging Standards for UK Payment Systems
The Bank of England has published a consultation on adopting ISO 20022, the global messaging standard for payments which was first introduced in 2004 by the International Organization of Securities Commissions. Ten jurisdictions have already implemented the standard and another nine are intending to implement it by 2023, including the U.S., Canada, Singapore and the Eurozone. The consultation has been prepared in conjunction with the U.K. New Payment System Operator and the U.K. Payment Services Regulator.
It is intended that ISO 20022 will be adopted across the U.K.'s three main interbank payment systems, namely CHAPS, BACS and Faster Payments. The BoE took over responsibility for the operation of the CHAPS system in November 2017 and the NPSO is responsible for the operation of BACS and Faster Payments. The fact that the three payment systems currently all have different information requirements, methodologies, formats, standards and rulebooks means that it can be difficult and expensive to move customers' payments between the systems and costly for new entrants wishing to participate in payment systems. Moving to ISO 20022 will address these and related issues.
European Securities and Markets Authority Finalizes Guidelines on Anti-Procyclicality Margin Measures for CCPs
The European Securities and Markets Authority has published a Final Report, setting out Guidelines for national regulators of CCPs on the application of rules under the European Market Infrastructure Regulation that require CCPs to adopt anti-procyclicality margin measures.
EMIR requires CCPs to impose, call and collect margins to limit their credit exposures from clearing members. A CCP must also regularly monitor and, if necessary, revise the level of its margins to reflect current market conditions taking into account any potentially procyclical effects of those revisions. Procyclicality of margin is the term used to describe the fact that margin requirements for the same portfolio are higher in times of market stress and lower in calm conditions. Regulatory Technical Standards under EMIR set out requirements for CCPs to use at least one of three options to limit procyclicality to the extent that the financial soundness of the CCP is not negatively affected. This has been controversial, since U.S. regulators impose no such requirements in practice on U.S. CCPs, leading to more expensive margin requirements in Europe. The Guidelines seek to clarify and ensure consistent application of the requirements across the EU.
EURIBOR Administrator Starts 3-Month Testing Phase for Hybrid Methodology
The European Money Markets Institute has announced the start of the testing phase for a new hybrid methodology it proposes to introduce to determine Euribor. The testing phase will run from May 2, 2018 to July 31, 2018.
EMMI launched a consultation on the introduction of the hybrid methodology and on some related issues in March 2018. That consultation closes on May 15, 2018 and EMMI intends to publish a summary of responses in June 2018.
The testing phase will involve EMMI conducting data analysis and assessing the methodology's parameters. EMMI hopes to gain a better understanding of panel banks' overall contribution patterns and how they make submissions using Level 3 of three-level "hybrid" methodology. Based on the results, EMMI will launch a second consultation in Q3 2018.
It is intended that the new hybrid methodology will be launched by Q4 2019 at the latest, in line with the transitional period provided by the EU Benchmarks Regulation.
View the EMMI announcement.
View details of the March 2018 consultation.
Clarification on Scope of EMIR Obligations for Public Entity Clearing Members Needed
The Chair of the European Securities and Markets Authority, Steven Maijoor, has written to the European Commission recommending that clarification of certain provisions of the European Market Infrastructure Regulation should be made during the current revision of EMIR. EMIR requires clearing members of CCPs to provide initial margin and default fund contributions. ESMA has noticed that CCPs across the EU, as well as their national regulators, are adopting different approaches to these requirements for public entities. Some CCPs and national regulators exempt public entity clearing members from the requirement to provide initial margin and default fund contributions while others grant no exemptions.
ESMA requests the Commission to consider whether the scope of EMIR needs to be clarified and whether a specific amendment could be made to EMIR during the current review process.
The European Commission published legislative proposals to amend EMIR in May - the technical revisions in so-called EMIR 2.1 - and June 2017 - the Brexit-driven CCP "location policy" or so-called EMIR 2.2, which attempts to force the relocation of UK CCPs to the Eurozone. The legislative procedures to finalize those changes are ongoing.
View the letter.
View the Commission's technical amendments legislative proposal.
View the Commission's location policy legislative proposal.
Bank of England Confirms Implementation of SONIA reforms
The Bank of England has confirmed that it has implemented its reforms to the SONIA interest rate benchmark. SONIA, the Sterling Overnight Index Average Rate, which has been administered since April 2016 by the BoE, is the existing unsecured reference rate for the sterling Overnight Indexed Swap market.
The BOE announced in October 2017 that the methodology for calculating SONIA would move from being based on a market for brokered deposits (which has limited transaction volumes) to a methodology involving a volume-weighted trimmed mean. The BOE has also separately published the key features and policies for SONIA, which summarize how SONIA is calculated and administered, including the governance arrangements. The BoE intends to publish an assessment of the benchmark's compliance with the International Organization of Securities Commissions' Principles for Financial Benchmarks in Summer 2018.
View the BoE press release.
View the SONIA key features and policies document.
European Central Bank Consults on Cyber Resilience Oversight Expectations for Eurozone Financial Market Infrastructures
The European Central Bank has launched a consultation on draft "cyber resilience oversight expectations" for financial market infrastructures.
The CROE use, as a basis, the Guidance on Cyber Resilience for Financial Market Infrastructures that was published jointly in June 2016 by the Committee on Payments and Market Infrastructures and the Board of the International Organization of Securities Commissions. FMIs were required to implement immediately that Guidance, which was supplemental to the Principles for Financial Market Infrastructures published in 2012 by IOSCO and the Committee on Payment and Settlement Systems. The PFMIs were adopted by the Governing Council of the ECB in June 2013. In developing the CROE, the ECB also took into account existing international guidance documents, in particular the Cyber Security Framework published by the U.S. National Institute of Standards and Technology, the ISO/IEC 27002 good practice standard for information security, the COBIT 5 framework for the governance and management of enterprise IT, the Information Security Forum's Standard of Good Practice for Information Security and the U.S. Federal Financial Institutions Examination Council's Cybersecurity Assessment Tools.
International Standard Setters Publish Framework for Supervisory Stress Testing of Multiple CCPs
The Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions have published a Framework for the supervisory stress testing of CCPs, following a joint consultation launched in June 2017.
In April 2015 the CPMI and IOSCO were asked by the G20 to develop, in conjunction with the Financial Stability Board and the Basel Committee on Banking Supervision, a "CCP workplan" for identifying and addressing remaining gaps and potential financial stability risks related to CCPs that are systemic across multiple jurisdictions and for helping to enhance their resolvability.
European Money Markets Institute Consults on Hybrid Methodology for Euribor
The European Money Markets Institute has published a consultation paper seeking views from stakeholders on a hybrid determination methodology for the Euro Interbank Offered Rate (Euribor). EMMI is the administrator for Euribor, a major euro interest reference rate for unsecured interbank short-term lending and borrowing. Euribor was classed as a critical benchmark of systemic importance for financial stability by the European Commission in 2016.
Euribor is currently determined using a survey approach entailing the collection of quotes from contributing panel banks active in the euro money markets, supplemented by expert judgement. In line with the Financial Stability Board's 2014 report, "Reforming Major Interest Rate Benchmarks", EMMI has been working towards a methodology which will strengthen Euribor by underpinning it, to the greatest extent possible, with real transaction data. In 2016, EMMI proposed a new determination methodology for Euribor that was fully anchored in real transactions. However, viability testing of the proposed methodology revealed that a seamless transition from a quote-based to a fully transaction-based methodology was not feasible.
EMMI is now proposing a three-level "hybrid" methodology, under which the calculation of Euribor at particular defined tenors is supported by euro money market transaction data from contributing panel banks whenever available and relies on other related market pricing sources or banks' own appreciation of their funding costs when necessary.
Consultation on Proposed EU Technical Standards for Securitization Repositories
The European Securities and Markets Authority has published two consultation papers relating to the regulation of EU securitization repositories under the Securitization Regulation (also known as the STS Regulation). The first consultation paper proposes draft technical standards on applications for registration of a securitization repository and draft Guidelines on data portability between securitization repositories. The second consultation paper consults on draft advice to the European Commission on supervisory fees payable by securitization repositories.
The Securitization Regulation requires, among other things, securitization special purpose entities, originators and sponsors of a securitization to make certain information available via a securitization repository to holders of a securitization position, to national regulators and, upon request, to potential investors. ESMA will register and supervise securitization repositories, as it does trade repositories under the European Market Infrastructure Regulation and the Securities Financing Transactions Regulation. Unlike EMIR and SFTR, the Securitization Regulation does not contemplate non-EU firms as securitization repositories.
UK Financial Conduct Authority Outlines its Policy for Compelling Banks to Contribute to LIBOR
The U.K. Financial Conduct Authority has published a policy statement explaining the methodology the FCA would expect to use if it needed to compel banks to contribute to LIBOR (the London Interbank Offered Rate). LIBOR, which is administered by ICE Benchmark Administration, is a long-established and systemically important benchmark that underpins transactions in many different markets globally. The FCA’s powers to compel contributions to LIBOR under the Financial Services and Markets Act 2000 have been superseded by similar powers under the EU Benchmarks Regulation, which came into effect on January 1, 2018. LIBOR has been designated a critical benchmark under the Benchmarks Regulation.
The FCA published a consultation paper in June 2017 on how its compulsion powers would need to be amended to align it with the Benchmarks Regulation. Since that consultation, the FCA has announced that all 20 panel banks that currently submit to LIBOR have agreed to continue to do so until the end of 2021. The FCA envisages that, by that time, sufficient progress will have been made on the evolution of LIBOR and transition to alternative benchmarks (which will be based on actual transactions) that the FCA may never need to use its compulsion powers.
View the policy statement (FCA PS18/5).
European Central Bank Confirms Collective Agreement Between TARGET2 Participants
The European Central Bank has confirmed that a collective agreement signed between the central banks operating TARGET2 component systems and the central securities depositories operating on the TARGET2-Securities platform can enter into force. The provisions of the Collective Agreement will take effect on March 20, 2018. The Collective Agreement provides a definition of a “common moment of entry” for payments and securities transfer orders that are matched in the systems of the signatories to the agreement. This common moment of entry will either be the moment at which a transfer order has been declared compliant with the technical rules of T2S by either the T2S platform or, if the CSD is operating a separate matching component, by the CSD. Defining the common moment of entry makes it possible to establish the point at which securities transactions become irrevocable and accordingly will provide certainty regarding the treatment of outstanding transactions if a participant becomes insolvent.
International Standards Body Proposes Recommendations for Trading Venues on Managing Extreme Market Volatility
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.
UK Benchmarks Legislation Amended
The Financial Services and Markets Act 2000 (Benchmarks) (Amendment) Regulations 2018 have been published to correct a drafting issue in the Financial Services and Markets Act 2000 (Benchmarks) Regulations 2018, which are due to implement parts of the EU Benchmarks Regulation with effect from February 27, 2018.
Under the U.K. Benchmarks Regulations, which were laid before Parliament on February 5, 2018, transitional provisions will apply until revoked on May 1, 2020. The transitional provisions include a provision that applies to existing benchmark administrators only in respect of benchmarks they were administering on or before June 30, 2016. The effect of the transitional provision is that these existing benchmark administrators will not need to obtain regulatory permission under the Financial Services and Markets Act.
The newly published Amendment Regulations amend the U.K. Benchmarks Regulations to ensure that the transitional provision applies to existing benchmark administrators in relation to benchmarks administered before, on and after June 30, 2016. These benchmarks administrators will also be able to rely on the transitional provision in respect of new benchmarks during the transitional period.
The Amendment Regulations take effect on February 26, 2018.
View the Amendment Regulations (S.I. 2018/204).
View the explanatory memorandum.
View details of the U.K. Benchmark Regulations.
Bank of England Consults on Incident Reporting Rule for CCPs
The Bank of England has published a consultation paper on a new rule to formalize the supervisory expectation that CCPs will report any incidents relating to their information technology systems to the BoE. The BoE's move from a supervisory expectation to a rule will align its requirements with the UK's approach to implementing the Cyber Security Directive. Under that Directive, CCPs are classed as operators of essential services and must take measures to manage risks to their network and information systems as well as notify their regulator of incidents which have a significant impact on the continuity of the services they provide.
The consultation paper states that the BoE encourages other financial market infrastructures to follow the rule. However, it will not be a binding requirement for them.
The consultation closes on April 3, 2018. The rule is expected to come into effect by May 9, 2018, which is the date by which Member States must implement the Cyber Security Directive.
View the consultation paper.
European Securities and Markets Authority Outlines 2018 Work Programme for Credit Rating Agencies, Trade Repositories and Monitoring of Non-EU CCPs
The European Securities and Markets Authority has published a document combining its 2017 Annual Report and 2018 Work Programme in relation to Trade Repositories, Credit Rating Agencies and third-country Central Counterparties.
ESMA is the single direct supervisor of Credit Rating Agencies and Trade Repositories in the European Union. It also has direct responsibilities regarding the registration, supervision and recognition of TRs based outside the EU. The 2017 Annual Report highlights its direct supervisory activities and key achievements in 2017 in respect of eight registered TRs, 26 registered CRAs and four certified CRAs. ESMA recognised 10 third-country CCPs in 2017 and conducted monitoring of the activities and services provided by those third-country CCPs in the EU.
ESMA has conducted a supervisory risk assessment regarding CRAs and TRs in the EU. The 2018 Work Programme sets out the supervisory priorities for the year ahead that ESMA has identified for CRAs and TRs and also highlights issues affecting both CRAs and TRs where ESMA will be conducting further work. These areas include Brexit, fees charged by CRAs/TRs, internal control frameworks, cloud computing and guidelines for periodic information.
European Securities and Markets Authority Outlines 2018 Plans for EU Supervisory Convergence
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.
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).
European Securities and Markets Authority Issues Final Guidelines on CCP Conflicts Management
The European Securities and Markets Authority has published a Final Report setting out Guidelines for compliance, by central counterparties authorized under the European Market Infrastructure Regulation, with their obligations to manage conflicts of interest under EMIR and related Regulatory Technical Standards. ESMA was not directly mandated by provisions in EMIR to prepare the Guidelines. Instead, ESMA has prepared the Guidelines pursuant to the wider mandate in its founding regulation to ensure common, uniform and consistent application of the relevant provisions of EMIR and the RTS.
The Final Report summarises the feedback ESMA received to its consultation on draft Guidelines, which ran between June 1, 2017 and August 24, 2017, and sets out the final form of the Guidelines. After clarifying the concept of conflicts of interest in the context of a CCP's commercial relationships, the Guidelines summarize the organisational arrangements CCPs should have in place, along with additional measures that apply in a group context. Finally the Guidelines specify a procedure for conflicts of interest management.
The Guidelines apply to all EU national regulators that supervise CCPs, and will take effect on April 7, 2018. This date is also the deadline for national regulators to inform ESMA whether they comply or intend to comply with the Guidelines, with reasons for non-compliance. All CCPs must report to their national regulator on their compliance with the Guidelines.
EU Authorities Appoint Industry Working Group on Euro Risk-Free Rates
Following the November 2017 call for expressions of interest, the European Commission, the European Central Bank, the European Securities and Markets Authority and the Belgian Financial Services and Markets Authority announced the composition of a new working group on euro risk-free rates (that is, excluding bank credit risk). The working group will consist of 21 banks, which will be the voting members, and five non-voting industry associations (the European Money Markets Institute, the European Fund and Asset Management Association, the International Capital Market Association, the International Swaps and Derivative Association and the Loan Market Association). The European Investment Bank has also been invited to join the working group. The Commission, ECB, ESMA and FSMA will participate as observers. The working group is charged with identifying and recommending alternatives to the benchmark rates currently used in the EU – the EURIBOR and EONIA. The choice of alternative reference rates for the euro is expected by the end of 2018. The working group must also develop best practices for contract robustness and an adoption plan for the new reference rates, including any transitional plan for legacy contracts referencing the existing benchmarks.
View the working group information.
View the working group terms of reference.
UK Benchmarks Legislation Published
The Financial Services and Markets Act 2000 (Benchmarks) Regulations 2018 have been laid before Parliament and will come into force mainly on February 27, 2018. Certain provisions will come into force on July 1, 2018 and transitional provisions apply until revoked on May 1, 2020.
The UK already has a fairly comprehensive regime for benchmark regulation. The new UK Regulations make the necessary changes to UK primary and secondary legislation to align it with the EU Benchmarks Regulation, which introduces a common framework and consistent approach to benchmark regulation across the EU and which has been directly applicable throughout the EU since January 1, 2018. The UK Regulations appoint the Financial Conduct Authority as "competent authority" for the purposes of the EU Benchmarks Regulation.
UK Financial Conduct Authority Consults on Benchmarks Enforcement Powers
The UK Financial Conduct Authority has published a consultation setting out proposed changes to its Decision Procedure and Penalties manual and its Enforcement Guide. The amendments to DEPP and EG reflect changes introduced by the EU Benchmarks Regulation, which took effect on January 1, 2018. The Benchmarks Regulation has been implemented in the UK by the Financial Services and Markets Act 2000 (Benchmarks) Regulations 2018, which will make the necessary changes to the UK statutory framework when they come into force mainly on February 27, 2018.
EONIA Review Shelved
The administrator of the Euro OverNight Index Average, the European Money Markets Institute, has announced its decision not to pursue a thorough review of the EONIA benchmark.
EONIA represents the weighted average of all overnight unsecured lending transactions in the interbank market undertaken in the European Union and European Free Trade Association countries. EMMI, which also administers Euribor, had been engaged in a review program since December 2015 with the objective of enhancing EONIA's governance and operation to align it with the requirements of the EU Benchmarks Regulation, which took effect on January 1, 2018.
Results of EU-Wide CCP Stress Test 2017 Published
The European Securities and Markets Authority has published a report setting out the results of its second EU-wide CCP stress test exercise. The European Market Infrastructure Regulation requires ESMA to conduct the exercise at least once per year to assess the resilience and safety of EU CCPs. The second stress test tested the resilience of 16 European CCPs, with approximately 900 clearing members EU-wide.
The 2017 stress test builds on the first stress test conducted in 2016, which only examined counterparty credit risk. The second stress test included liquidity risks and examined whether CCPs would meet their liquidity needs under different stress scenarios. ESMA has published some Q&A to accompany the report.
View the ESMA report.
View the ESMA Q&A.
EU Secondary Legislation under the Benchmark Regulation Published
Four Commission Delegated Regulations supplementing the Benchmark Regulation have been published in the Official Journal of the European Union. The Benchmark Regulation regulates the provision of benchmarks, contributions of data to a benchmark and the use of benchmarks within the EU. It sets out the authorization and registration requirements for benchmark administrators, including third country entities, and stipulates requirements for governance and control of administrators. The Benchmark Regulation establishes different rules for different categories of benchmarks, depending on the risks involved, and imposes additional requirements on benchmarks considered to be critical. It also sets out the powers of national regulators to mandate, under certain conditions, contributions to or the administration of a critical benchmark.
European Securities and Markets Authority Has Concerns on Fees Charged by Credit Rating Agencies and Trade Repositories
The European Securities and Markets Authority has published a Thematic Report, following its supervisory review of the current fee structures in the credit rating and trade repository industries. The CRA Regulation requires CRAs to ensure that fees for the credit rating and ancillary services are not discriminatory and are based on actual costs. Similarly, the European Market Infrastructure Regulation requires TRs to provide non-discriminatory access and charge publicly disclosed and cost-related fees.
ESMA has compiled its Thematic Report using information from publicly available resources, periodical submissions to ESMA and dedicated requests for information from supervised entities. It has also used information gained from users of CRA and TR services. The Thematic Report identifies three areas in which CRAs and TRs need to improve their fee practices and to which ESMA proposes to give supervisory priority. These are: transparency and disclosure, the fee-setting process and interaction with entities related to CRAs and TRs.
The Thematic Report is accompanied by factsheets summarizing ESMA's findings on TRs' and CRAs' fees.
View the Thematic Report.
View Factsheet on Trade Repositories' Fees.
View Factsheet on CRAs' Fees.
Proposed EU Guidelines on CCP Requirement for Anti-Procyclicality Margin Measures
The European Securities and Markets Authority is consulting on proposed guidelines for national regulators of CCPs on the application of the rules requiring CCPs to adopt anti-procyclicality margin measures.
The European Market Infrastructure Regulation requires CCPs to impose, call and collect margins to limit its credit exposures from clearing members. A CCP must also regularly monitor and, if necessary, revise the level of its margins to reflect current market conditions taking into account any potentially procyclical effects of those revisions. The Regulatory Technical Standards on requirements for CCPs provides that CCPs must use at least one of three options to limit procyclicality to the extent that the financial soundness of the CCP is not negatively affected.
During the EMIR Review, ESMA highlighted that the implementation of these requirements differs across CCPs and that the effectiveness and supervision of these measures could be improved. The draft guidelines seek to clarify and ensure consistent application of the requirements across the EU.
LIBOR Categorized as a Critical Benchmark under EU Legislation
A Commission Implementing Regulation amending the list of critical benchmarks used in financial markets under the Benchmark Regulation has been published in the Official Journal of the European Union. The amending Regulation adds the London Interbank Offered Rate - LIBOR - to the list of critical benchmarks.
The Benchmark Regulation provides for different categories of benchmarks depending on the risks involved, imposing additional requirements on benchmarks considered to be critical, including the power of national regulators to mandate, under certain conditions, contributions to or the administration of a critical benchmark.
For the most part, the Benchmark Regulation applied from January 1, 2018. Certain provisions, giving powers to the European Securities and Markets Authority to prepare draft technical standards and to the Commission to adopt delegated legislation, applied from June 30, 2016. The original Implementing Regulation, which entered into force on August 13, 2016, listed the Euro Interbank Offered Rate as the first critical benchmark. The amending Implementing Regulation entered into force on December 29, 2017.
View the amending Implementing Regulation.
UK Financial Conduct Authority Publishes Near-Final Rules for Implementation of the EU Benchmarks Regulation
The UK Financial Conduct Authority has published a Policy Statement setting out responses to its earlier consultation in June 2017 on proposed Handbook changes to ensure that the Handbook is consistent with the provisions of the EU Benchmarks Regulation, which takes effect on January 1, 2018. The Policy Statement includes further clarifications, in particular on the treatment of commodity benchmarks, on one-off application fees and annual periodic fees and on other Handbook rules and guidance that the FCA will apply in addition to the BMR.
The Policy Statement includes the final form of the legal instrument which contains the Handbook changes. The FCA will make the Handbook changes once it has the necessary regulatory authority under proposed changes to UK secondary legislation.
The Handbook changes will affect benchmark administrators and also firms that are already supervised under EU financial services legislation and that either use or contribute input data to benchmarks.
View the Policy Statement (PS17/28).
UK Government Makes Orders De-recognising CHAPS and Amending Designation of Cheque & Credit
HM Treasury has made two Orders which take effect from December 20, 2017.
The first Order amends the designation Order in force since April 2015 designating Cheque & Credit as a regulated payment system. The changes relate to the specification of the arrangements constituting Cheque & Credit, allowing for development in the Cheque & Credit Rules relating to the processing of the images of cheques and other paper instruments. The Order also makes references to participants as well as members of Cheque & Credit.
The second Order revokes the recognition order of January 5, 2010 specifying CHAPS as a recognized payment system under the Banking Act 2009.
View the Order amending the designation of Cheque & Credit.
View the Order for de-recognition of CHAPS.
LIBOR Benchmark Confirmed until 2021
The Financial Conduct Authority has confirmed that the 20 panel banks for the LIBOR benchmark have agreed to support LIBOR until at least 2021. The announcement follows the statement by the FCA's Chief Executive, Andrew Bailey, earlier this year that the future of LIBOR could not be guaranteed because the underlying markets (the markets for unsecured wholesale term lending to banks) are no longer sufficiently active. Work around moving from LIBOR to alternative reference rates is underway. For example, the Bank of England announced in October this year that the implementation date for the reformed Sterling Overnight Index Average Interest Rate Benchmark, known as SONIA, would be April 18, 2018. The BoE took over as administrator of SONIA in April 2016. The transition to the reformed SONIA is set for April 2018.
View the FCA's statement.
View Andrew Bailey's speech.
Court of Justice of the European Union Ruling on Scope of a Regulated Market Under MiFID
The Court of Justice of the European Union has given a preliminary ruling on the meaning and scope of "regulated market" under the Markets in Financial Instruments Directive following a referral by the Dutch Administrative Court of Appeal for Trade and Industry. A regulated market is defined in MiFID I as "a multilateral system operated and/or managed by a market operator, which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments - in the system and in accordance with its non-discretionary rules - in a way that results in a contract, in respect of the financial instruments admitted to trading under its rules and/or systems, and which is authorised and functions regularly and in accordance with the provisions of Title IIII". The definition is unchanged in MiFID II which will replace MiFID I from January 3, 2018.