In our October edition, (http://www.hfw.com/Commodities-Bulletin-October-2014) we reported on recent developments in relation to MiFID and REMIT. In this issue, our regulatory update focuses on current initiatives aimed at addressing various market abuse issues.

Fair and Effective Markets Review

In the UK, there have been two significant developments in the “Fair and Effective Financial Markets Review” (FEMR). This is a joint review of wholesale fixed income, currency and commodity (FICC) markets (including derivatives and benchmarks), by HM Treasury, the Bank of England and the Financial Conduct Authority.

In October 2014, HM Treasury consulted on proposals to bring seven additional UK-based FICC benchmarks into the regulatory and criminal framework originally put in place to regulate LIBOR. As recommended by the FEMR, the proposed new benchmarks include the ICE Brent Futures contract, the London Gold Fix and the LBMA Silver Price as well as various interest rate and currency benchmarks. These proposals may be implemented by the end of December 2014.

On 27 October 2014, the FEMR launched a consultation examining what is required to reinforce market confidence and to assess:

  • The areas where fairness and effectiveness are currently deficient.
  • The extent to which regulatory, organisational and technological change, since the financial crisis and ongoing, is likely to address these deficiencies.
  • What further steps are needed to help ensure fair and effective FICC markets (and what “fair and effective” means in those markets).

The consultation is open until 30 January 2015. The FEMR aims to make its recommendations by June 2015.

Benchmarks

There has been significant progress towards the adoption of the EU Benchmarks Regulation, proposed by the EU Commission in Autumn 2013.

The Regulation would regulate providers of benchmarks and, to a limited extent, contributors of data and users. It would affect benchmarks used in financial instruments/contracts traded on a trading venue and purely OTC-traded derivatives. It is possible that ultimately, purely OTC-traded derivatives will be excluded but that is not yet clear. The Regulation would apply to any index by which an amount payable under a financial instrument or financial contract (a loan, for example) is determined or by which the performance of an investment fund is valued.

Benchmark providers (administrators) established in the EU will require authorisation and the Commission proposed that users be permitted to use only regulated benchmarks or those subject to an equivalent non-EU regime. The proposed Regulation includes additional provisions for so called “critical benchmarks” (generally, this includes those benchmarks which reference financial instruments with a value of over €500 billion) and would impose mandatory contribution for “critical benchmarks” in the event of insufficient data inputs.

In early December 2014, the Italian Presidency of the Council pushed for agreement of a text based on recent discussions, but Member States objected on various grounds. Latvia takes up the Presidency in January 2015 and will continue negotiations to finalise a Member State position. Then, subject to the European Parliament having by then agreed its position, trilogue negotiations (among the Council, Parliament and Commission) to finalise the regulation can begin.

The European Parliament is considering the proposal from scratch. Its ECON Committee has focused on several controversial issues, including:

  • Greater distinction between commodity and financial benchmarks – detailed requirements might be specified in subsequent, delegated regulations.
  • Basing the “critical benchmarks” definition on qualitative as well as quantitative criteria.
  • Basing the “critical benchmarks” definition on qualitative as well as quantitative criteria.
  • Proportionality in terms of the scope and substantive requirements of the Regulation, which might impose more stringent requirements on critical benchmarks.
  • Alternatives to the strict third country equivalence regime proposed by the Commission (considered impractical given how few equivalent (or near equivalent) regimes have been adopted or proposed elsewhere).

Market abuse

The European Securities and Markets Authority (ESMA) is reviewing responses to two recently-closed consultations concerning implementation of the EU Market Abuse Regulation of April 2014 (MAR).

One consultation focused on proposed technical advice to the Commission on possible delegated acts: the topics included procedures to enable reporting of breaches (or suspected breaches) of MAR indicators and specification of indicators of market manipulation.

The other consultation sought feedback on draft technical standards developed by ESMA for adoption as regulations by the Commission. The areas addressed in this second consultation included:

  • Accepted Market Practices (AMPs): MAR provides a safe harbour from its market manipulation prohibition orders in relation to transactions and conduct carried out for legitimate reasons in conformity with AMPs.
  • Standards for the arrangements required by trading venues and regulated firms to prevent and detect abuse and to report suspicious orders and transactions.

ESMA is now expected to finalise the draft technical advice and standards for submission to the European Commission by March and July 2015 respectively.

In 2015, ESMA is expected to consult on proposed guidelines, including as to what constitutes inside information in the context of commodity derivatives.