This article was written by Joe McHale and Christian Benson, Regulatory Affairs Specialists at Bloomberg.
Ahead of the EU Commission’s review of the Markets in Financial Instruments Directive (MiFID) II framework this autumn, regulators are having a range of discussions with stakeholders to ensure that its proposals can solve as many pain-points for the industry as is possible. The review is intended to redress various shortcomings of the existing regime such as the complex transparency requirement and the poor quality of market data.
In response to the pandemic-induced market stress in March and April last year, the “quick fix” changes to MiFID II were published in the Official Journal of the EU this February. Member states will be required to apply most of them within 12 months, though the suspension of best execution reports under RTS 27 is already in effect. The changes introduce a degree of proportionality to requirements concerning reporting, product governance, research unbundling and the commodity derivatives regime to provide some relief from regulatory burdens for the benefit of market participants.
In March the European Securities and Markets Authority (ESMA) took steps toward levelling the playing field when it comes to transaction reporting requirements for MiFID investment firms and firms licensed under the Alternative Investment Fund Managers Directive (AIFMD).
Under proposed recommendations, ESMA plans to close the current imbalance in reporting requirements for AIFMD firm and MiFID firms. More details are expected to be published in the EU Commission’s legislative review of the AIFMD later in the year.
Market data is proving itself as a hot topic for regulators, with ESMA publishing final market data guidelines under MiFID II in May. These guidelines seek to ensure a more harmonized and consistent application of the rules across Member States by tightening requirements to provide market data on a reasonable commercial basis and to provide delayed market data free of charge, and will apply from 1 January 2022.
Since the initial implementation of MiFID II, European regulators have wasted little time consulting widely on a range of issues around the regime. In addition to a series of technical changes and quick fixes, these efforts have prepared the ground for a broader review of MiFID II due at the end of the year. The existing transparency requirements will be a key area of focus for the EU Commission, in addition to other areas such as investor protection, particularly in the context of the retail market and the seemingly never-ending issues of trading data and facilitating the creation of a consolidated tape.
The now live prospect of a European consolidated tape is a key element of the push to bring the European trading market in line with the US, which benefits from a consolidated stream of core market data. The EU Commission has recently confirmed that it is drafting a proposal for a tape covering equities, bonds and exchange-traded funds as well as certain derivatives. This comes off the back of high-level EU engagement with willing and technologically capable market participants. In late July, ESMA first published the total number and volume of transactions relating to non-equity instruments to assist potential consolidated tape providers with the requirement to represent at least 80% of both the total number of transactions and the total volume of transactions. This data will be updated on a biannual basis going forward, and signals the EU's intention to turn policy intentions into an industry reality.
Policymakers are rethinking the existing framework that has closed off the commercial opportunities for potential tape providers through a system of raised costs of authorization coupled with revenue restrictions. Senior EU officials believe it is possible that a beta version could be ready for testing as early as 2023.
Just as the EU is looking to harmonize its rules governing market data, it is also planning to take a more consistent approach to its ’rules of engagement’ with market participants from outside the bloc. EU Financial Services Commissioner Mairead McGuinness announced in May that the EU would clarify rules on when asset managers outside the EU can choose assets for investment funds in the bloc ahead the review of AIFMD expected later in the year. Potential EU changes to fund portfolio management 'delegation' requirements as well as a refusal to recognize the UK as equivalent are viewed by many in the UK as an effort to side-line London's role in European capital markets post Brexit.
There is also work going on to reform Europe’s post-trade framework particularly in respect to the Central Securities Depositories Regulation (CSDR), with the EU releasing a report in June examining industry feedback to earlier consultations and exploring various proposals. While the CSDR is thought to be boosting settlement efficiency in the EU - and therefore working as intended - there are industry complaints around certain aspects such as the mandatory buy-in regime, currently scheduled to apply from February 2022. The report indicates that the EU Commission will consider proposing amendments to CSDR later in the year to make the system more proportionate. A legislative review of CSDR is currently scheduled for Q4 2021, and this will be subject to an impact assessment. It is still up in the air whether ESMA will further delay the start of mandatory buy-ins beyond February 2022.
While the EU gets ready for a series of reforms, the UK is exploring how it can best use its new-found regulatory freedoms to ensure that inherited EU legislation is better tailored to the UK market while maintaining and improving standards and safety. An important milestone was marked in April when the Financial Services Act became law, a key first step in the transfer of powers to shape financial services regulation from Brussels to Britain. Regulators have stressed however that there will be instances where rules will be toughened up relative to the EU and that the industry should not expect the ‘regulatory bonfire’ that had been promised by certain politicians.
On its post-trade regime, the UK confirmed in June last year that it would not implement the CSDR settlement discipline framework. Instead, UK firms should continue to apply the existing industry-led framework. Future changes will be developed in partnership with the industry, and sufficient time will be provided to prepare for the implementation of any new future regime.
Ahead of HM Treasury’s wider wholesale market reform process, the FCA has wasted little time in exploring a series of more technical fixes to the UK MiFID regime. In April the financial supervisor issued a series of proposals to relax the research unbundling rules to improve small-cap liquidity, bring down compliance costs and stimulate the UK’s investment research market.
While the proposals do not equal a complete overhaul, they do introduce some proportionality to the existing rules governing research.
The consultation also contained proposals to permanently delete the best execution requirements for investment firms and execution venues under RTS 27/28. A final policy statement is expected by the end of the year.
Following a review into the suitability of the open access regime for UK markets in the post-Brexit era, the UK announced in early May that it would remove the regime for exchange traded derivatives. This will come into force when parliamentary time allows, and it is important to note that UK continues to support the open access regimes in equity and OTC derivatives markets.
On the broader look and feel of UK capital markets, the UK Listing Review was published in March and this contained a series of recommendations to enhance the UK’s primary listings markets and make the UK more internationally competitive. The FCA is exploring some of the more technical recommendations such as dual class share structures, SPACs and free floats as the UK sharpens its regulatory weapons in the battle for global listings and capital raising.
One of the most significant regulatory developments since the UK formally left the EU has been the recent publication of HM Treasury’s Wholesale Markets Review (WMR), which aims to create a simpler and less prescriptive regime in a cost-effective and industry-friendly way. The consultation covers a wide range of areas including trading venue reform, systematic internalizers and the removal of the share trading obligation and the double volume cap.
The WMR also includes proposals to recalibrate the transparency regime for fixed income and derivatives markets and promises a fundamental review of the commodities trading regime. Finally, it is made clear that the UK is keen to establish a market-led consolidated tape to boost the standardization and accessibility of market data in the UK. The consultation period ends in September 2021 and rather than being a one-off project, the WMR is best thought of as only the beginning of a lengthy process of regulatory reform in the UK.
Having fed into HM Treasury’s WMR, the FCA has released proposals to modify the scope of the DTO to account for the LIBOR transition and is expected to publish a separate consultation on technical changes to market requirements in the FCA Handbook.
The FCA is also expected to issue further consultations on the more technical aspects of the UK’s MiFID regime. It is understood that it will consult on the scope of the derivatives trading obligation (DTO) in the context of the LIBOR transition as well as a separate consultation on technical changes to market requirements in the FCA Handbook. In addition, the WMR outlined areas such as post-trade transparency, transaction reporting and the consolidated tape where the FCA will be picking up the baton by conducting a more technical review in due course.
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