CBI Markets Update, Issue 12 2021

On 10 September 2021, the CBI issued its latest markets update, Issue 12 2021. In domestic news, Issue 12 2021 focuses on two CBI publications, the forty-first edition of the CBI AIFMD Q&A and the thirty-third edition of the CBI UCITS Q&A. Internationally, Issue 12 2021 covers, among other topics, the European Supervisory Authorities highlighting risks in phasing out of crisis measures and calling on financial institutions to adapt to increasing cyber risks, the European Securities and Markets Authority (ESMA) announcing a hearing on EMIR Reporting Guidelines and ESMA consulting on suitability assessments of DRSP Management Body Members.


ESMA sees risk of market corrections in uneven recovery

On 1 September 2021 ESMA published its second trends, risks and vulnerabilities report of 2021. The report highlights the continued rise in valuations across asset classes in an environment of economic recovery and low interest rates, the increased risk taking of investors and the materialisation of event risks such as GameStop, Archegos and Greensill.

ESMA continues to see elevated risks and fragile fundamentals, with an outlook for continued high risk and uncertainty over the sustainability of corporate and public debt as well as rising inflation expectations. Current market trends need to show their resilience over an extended period of time to allow for a more positive risk assessment. The extent to which these risks will materialise will critically depend on market expectations on the continuation of monetary and fiscal policy support, as well as on the pace of the economic recovery and on inflation expectations.

European Commission gearing up for issuing €250 billion of NextGenerationEU green bonds

On 7 September 2021, the European Commission adopted an independently evaluated Green Bond framework, thus taking a step forward towards the issuance of up to €250bn green bonds, or 30% of NextGenerationEU's total issuance. The Commission will soon proceed with the first green bond issuance using the syndicated issuance format in the month of October, subject to market conditions.

The adopted framework provides investors in these bonds with confidence that the funds mobilised will be allocated to green projects and that the Commission will report on its environmental impact.

List of third-country markets considered as equivalent to a regulated market in the Union for the purposes of the definition of OTC derivatives

On 14 September, ESMA released a table of markets established in a third country and which are considered as equivalent to a regulated market in the European Union in accordance with Article 2a of EMIR (Regulation (EU) No 648/2012) and for the purposes of Article 2(7) of this regulation. The equivalent markets are in third-countries such as the United States, Australia, Canada, Japan and Singapore.

ESMA consults on proposals for a review of the MiFID II best execution reporting regime

On 24 September, ESMA launched a consultation on proposals for improvements to the MiFID II framework on best execution reports. These proposals aim at ensuring effective and consistent regulation and supervision and enhancing investor protection.

ESMA’s proposals include technical changes to:

  • the reporting obligations for execution venues:
    • aimed at simplifying the reporting requirements by reducing the granularity and volume of data to be reported
    • moving to a set of seven indicators aimed at disclosing meaningful information to help firms to assess venues’ execution quality
  • the reporting requirements for firms: focusing mainly on clarifying the requirements for firms that transmit client orders or decisions to deal to third parties for execution

In addition, it proposes amendments to the relevant provisions of the MiFID II legislative framework to enable these technical changes to come into effect in the future. Stakeholders are invited to provide their responses by 23 December 2021.

ESMA consults on the review of the Short Selling Regulation

On 24 September 2021, ESMA launched a consultation paper on the review of the Short Selling Regulation. The consultation paper sets out suggestions for operational improvements and policy clarifications on:

  • the calculation of net short positions, the prohibition of uncovered short selling and the locate rule under which short selling trades can take place
  • the mechanism for transparency of net short positions and the proposal to publish aggregated net short positions per issuer based on all individual positions and the scope of the exemptions for shares that are more heavily traded in a third country
  • the introduction of a centralised notification and publication system to reduce reporting burdens, increase cost efficiency and foster ESMA’s monitoring capacity and coordination powers in case of potential threats at EU level

The consultation paper also contains an empirical analysis of the impact of the short selling bans adopted after the COVID-19 outbreak, with reference to the effect of the bans on liquidity and volatility. ESMA will consider the responses it receives to this consultation paper by 19 November 2021 and expects to publish a final report by the end of Q1 2022.

ESMA publishes final report on guidelines on methodology, oversight function and record keeping under the Benchmarks Regulation

On 24 September 2021, ESMA published its final report and guidelines on methodology, oversight function and record keeping under the Benchmarks Regulation ((EU) 2016/1011).

The guidelines aim to provide guidance to financial market participants and competent authorities on the application of the requirements relating to the use of a methodology for calculating a benchmark as well as related record keeping and oversight function requirements.

The guidelines will apply from 31 May 2022.

ESMA recommends European Commission to delay buy-in rules

On 24 September 2021, ESMA wrote to the European Commission regarding the implementation of the Central Securities Depositories Regulation (CSDR), urging it to consider a delay of the mandatory buy-in regime. ESMA is in favour of delaying the entry into force of the buy-in requirements (scheduled for 1 February 2022) while applying the other settlement discipline requirements, such as settlement fails reporting and cash penalties regime, as planned.

The final Commission legislative proposal for the review of CSDR, possibly including changes to the buy-in regime, is not expected before the end of this year.

Keynote speech Natasha Cazenave - FIA IDX conference - ESMA’s priorities for derivatives (ESMA70-156-4871)

On 27 September, Natasha Cazenave, ESMA Executive Director gave the keynote FIA IDX keynote speech on ESMA’s priorities for derivatives. Ms Cazenave focused on two particular elements:

  • ESMA’s recommendations for the review of the MiFID II/MiFIR framework
  • ESMA’s work on accompanying the transition to risk free rates in the context of the EMIR clearing obligation and the MiFIR derivatives trading obligation

A major recommendation was to replace the current patchwork for supplementary deferrals granted at national level by a harmonised EU approach which would allow market participants to mask the volume of a transaction for a period of two weeks before fully disclosing the transaction. The ESMA review of the transparency regime also highlighted major data quality deficiencies.

Ms Cazenave stated that regulators across various jurisdictions, including ESMA as part of a joint communication for the EU, have been clarifying their expectations that counterparties should transition to the new benchmarks and stop trading derivatives referencing the old benchmarks, i.e. EONIA and LIBOR, including USD LIBOR, as soon as possible and at the latest by the end of the year.

ESMA publishes MiFID II review report on algorithmic trading

On 29 September 2021, ESMA published the MiFID II/MiFIR review report on algorithmic trading. The final report concludes that no fundamental issues have emerged with respect to the MiFID II algorithmic trading regime which has overall delivered on its objectives. The report also addresses recent market developments by including topics such as speedbumps and the sequencing between public vs. private transaction confirmation feed by trading venues. The report identifies issues which will be followed up by ESMA via amendments to ESMA technical standards or additional guidance on a number of topics including;

  • the concepts of “algorithmic trading” and “Direct Electronic Access”
  • the authorisation regime for EU and non-EU algorithmic trading firms (including high frequency trading (HFT) firms) deploying their strategies on EU trading venues
  • the organisational requirements for investment firms, including the notification and testing requirements of algorithmic traders to competent authorities and the self-assessment exercises to be performed by investment firms
  • organisational requirements for trading venues, including the self-assessment exercises to be performed by trading venues, circuit breakers, the fee structures, order to trade ratios, and market outages
  • a review of MiFID II provisions which are indirectly relating to algorithmic trading activities (e.g. tick size and market making)

ESMA calls for legislative changes to improve access to and use of credit ratings

On 30 September 2021, ESMA published an opinion on how access to and use of credit ratings can be improved in the EU. In the opinion ESMA highlights the difficulties experienced by users of credit ratings and recommends that the legislators amend the CRA Regulation or take alternative legislative action to address these. The opinion is the culmination of ESMA’s work on fees charged by CRAs and accessibility and use of credit ratings. It draws on the findings of ESMA’s 2018 Thematic Report, 2019 Follow-up Report and 2020 Call for Evidence. ESMA concludes that legislative changes are needed to improve access to and use of credit ratings and highlights that these could be implemented through changes to the CRA Regulation or through the adoption of alternative legislation.