This article highlights developments in MiFID II, market abuse, the EMIR derivatives regime and new Swiss regulation.
MiFID II delayed and CRR commodity dealers exemption extended
The MiFID II rollercoaster has taken another turn, with implementation likely to be delayed by one year, to January 2018. Publication of regulations setting out details of the new regime seems unlikely until Q1 2016.
The EU’s mammoth post-crisis legislation extending and reforming the regulation of investment firms, services and markets in Europe, was originally due to come into effect on 3 January 2017. However, the detailed “Level II” rules are not yet final and there seems insufficient time to complete the logistical steps necessary for implementation, including building the IT and other infrastructure that will give it life.
In mid-November 2015, the European Securities and Markets Authority (ESMA) and the European Commission (the Commission) announced a potential delay to European Parliament (EP) members. Within three weeks, and after initial opposition and scepticism, the EP’s MiFID II negotiating team accepted the delay, on condition that the Commission:
- Reports regularly to the EP on implementation progress.
- Finalises the Level II legislation as soon as possible, and “taking utmost account of our remarks on their content”.
Most of those “remarks” concern commodities. The EP team wants numerous changes to the proposed position limit arrangements and criteria for the ancillary activity exemption whereby certain commodity firms may escape authorisation. We understand that the Commission is seeking to respond, for example by reintroducing the concept of a capital employed criterion to help determine whether a firm’s speculative derivatives activity is ancillary.
Meanwhile the European Banking Authority (EBA) and ESMA have provided initial advice on capital regimes for non-systemic, non “bank-like” investment firms, recommending that a specific regime be developed and implemented by 2020 and that until then, the current exemption from the large exposures and capital adequacy provisions of the Capital Requirements Regulation (CRR) be extended.
Full collateralisation of bank guarantees for wholesale energy derivatives
EMIR generally requires non-financial counterparties, which includes most commodity traders, whose collateral requirements at an EU central counterparty (CCP) are met by a commercial bank guarantee to collateralise that guarantee fully. From 15 March 2016, that requirement will be extended to cover cleared gas and power derivatives.
Market Abuse Regulation
The UK legislation, rules and guidance governing market abuse will look very different if HM Treasury and the Financial Conduct Authority (FCA) adopt the changes they have proposed in order to implement the EU’s 2014 Market Abuse Regulation (MAR), which will apply from 3 July 2016.
MAR will replace the 2003 Market Abuse Directive, extending and strengthening the rules against insider dealing and market manipulation. More products, namely financial instruments, will be covered, including commodity derivatives, whether traded on exchange, through broker platforms or multilateral trading facilities, or OTC.
The range of OTC commodity derivatives captured will be further extended on 3 January 2017, the current date for MiFID II to become effective, though that is likely to be delayed as mentioned above. However, certain conduct in or impacting spot commodity markets will be caught from July 2016.
Note that MAR applies to market participants whether or not authorised under MiFID or MiFID II. This includes non-EU parties dealing in financial instruments traded on an EU venue, even if the dealing takes place OTC or outside the EU.
As an EU regulation, MAR applies directly and imposes requirements on member states in respect of administrative, investigatory and enforcement powers, and the types and scale of sanctions. In addition, a number of current UK provisions will become redundant and HM Treasury is consulting on regulations that will repeal the substantive offences in the civil market abuse regime and the FCA’s power to issue the Code of Market Conduct. It also proposes changes to other legislation, including the money laundering disclosure provisions.
The Code of Market Conduct, relied upon heavily by market participants in interpreting the current regime, will transform into a much slimmer chapter containing non-binding guidance on the MAR regime. The FCA will provide pointers to relevant provisions of MAR and retain non-exhaustive examples of market abuse and lists of factors relevant to determining whether behaviour may constitute market abuse - to the extent that such examples or factors remain compatible with MAR. Some further guidance in the form of FAQs is expected from ESMA before MAR takes effect in July 2016.
Next steps in Swiss regulation of derivatives
The Swiss Financial Market Infrastructure Act (FMIA) adopted in June 2015 will come into force on 1 January 2016, although the reforms in respect of derivatives, broadly similar to those found in EMIR and MiFID II, will not take effect until later. Detailed ordinances must be finalised on matters such as derivatives reporting, clearing, and the application of risk mitigation techniques. The position limits and obligation to trade certain derivatives on regulated venues will not apply until later, at least until the EU and other jurisdictions adopt equivalent requirements.