INVESTMENT FIRMS QUARTERLY LEGAL AND REGULATORY UPDATE
Markets in Financial Instruments Directive ("MiFID")
(i) ESMA peer review report on MiFID suitability requirements
On 7 April 2016, the European Securities and Markets Authority ("ESMA") published a summary of the key findings of its recent peer review regarding compliance with the MiFID suitability requirements (the "Report").
The peer review took the form of a self-assessment questionnaire for all Competent Authorities ("CAs"). CAs had 1 year to complete the review, with the review period running from 1 January 2013 to 31 December 2014.
The purpose of the questionnaire was to capture the possible different ways CAs determine when investment advice is provided and how they consistently supervise and enforce the relevant suitability requirements. The Annex to the report provides a detailed summary of all replies received from the various CAs.
Overall, ESMA found that while most CAs have a good understanding of the investment advice market in their jurisdictions and regularly review the distribution methods and business models of investment firms, there is scope to adopt more proactive supervisory approaches and strengthen enforcement activities.
ESMA found that:
- CAs have a good understanding of the types of distribution methods used in their jurisdictions and where the boundary between investment advice and information lies. However, limited supervision was performed to verify whether clients are receiving investment advice in practice or have the perception that they are receiving advice;
- Most CAs do not perform supervision which is targeted at the particular behaviour of a firm or group of firms as part of a specific suitability project;
- Most CAs stated they used a wide range of tools to monitor the main aspects of advice suitability but only a limited number of regulators provided specific information on the tools they use to supervise compliance with the suitability requirements;
- Enforcement action, such as imposing fines or placing restrictions on firms' activities, was rarely taken. Many CAs considered their supervisory approach alone was sufficient to address issues; and
- In many cases, CAs could improve how they publicly communicate with stakeholders on their supervision and enforcement activities and findings.
A copy of the Report is available here:
(ii) ESMA publishes and updates Q&A relating to the provision of contracts for dfferences ("CFDs") and other speculative products to retail investors under MiFID
On 8 April 2016, ESMA published a new questions and answers document relating to the provision of CFDs and other speculative products to retail investors under MiFID (the "Q&A").
The purpose of the Q&A is to promote common supervisory approaches and practices in the application of MiFID and its implementing measures to certain key aspects that are relevant when CFDs and other speculative products are marketed and sold to retail clients. It does this by providing responses to questions identified by CAs in relation to practical aspects of the day-to-day supervision of firms involved in offering these products. The Q&As are targeted at CAs. However, the answers are also intended to help firms by providing clarity on MiFID rules. The Q&A has been produced with reference to the current (i.e. MiFID I) legislative framework that is currently in application. However, it should be noted that the principles and requirements underpinning the content of the Q&A will remain unchanged once the MiFID II package, which overall strengthens the protections for investors, enters into application.
For a copy of the Q&A in full see:
(iii) ESMA updates document on waivers from MiFID pre-trade transparency requirements (June 2016)
On 20 June 2016, ESMA published an updated version of the waiver document (the "Waiver Document") that sets out its assessment of applications for waivers from pretrade transparency requirements under MiFID.
The Waiver Document is aimed at competent authorities under MiFID to ensure that, in their supervisory activities, their actions converge with the opinions provided by ESMA. The examples are also intended to provide clarity for firms on the MiFID requirements for pretrade transparency.
In the updated Waiver Document there is a new ESMA opinion relating to large-in-scale waivers. The new opinion, which is written in red, provides an example of functionalities that satisfy the MiFID criteria
A copy of the Waiver Document is available at the following link:
(iv) ESMA publishes statement on MiFID practices for firms selling financial instruments subject to the BRRD resolution
On 2 June 2016, ESMA issued a statement (the "Statement") to all credit institutions and investment firms, clarifying how these entities should apply the relevant MiFID requirements governing the distribution of financial instruments (which are "bail-in-able" under the Bank Recovery and Resolution Directive 2014/59/EU ("BRRD") resolution regime) to clients, both on an advised and non-advised basis, as well as in the context of portfolio management.
In the Statement, ESMA outlines its concerns that, following the implementation of the BRRD, firms are likely to issue a significant amount of potentially loss-bearing instruments to fulfil their obligations and that investors, particularly retail investors, may be unaware of the risks they may face when buying such instruments.
ESMA noted that aside from the general duties of conduct, MiFID contains several provisions which apply to firms when selling or advising on the sale of financial instruments, including those subject to the resolution regime, or providing portfolio management, namely:
- Provision of information to clients;
- Provision of investment advice;
- Suitability and appropriateness; and
- Conflicts of interest.
A copy of the Statement can be found here:
Markets in Financial Instruments Directive II ("MiFID II")
(i) ESMA risk assessment on temporary exclusion of exchange-traded derivatives from Articles 35 and 36 of MiFIR
On 4 April 2016, ESMA published its risk assessment on the temporary exclusion of exchange-traded derivatives ("ETDs") from Articles 35 and 36 of the Markets in Financial Instruments Regulation ("MiFIR").
Article 35 of MiFIR requires CCPs to provide access to trading venues on a nondiscriminatory basis to clear transactions executed on different trading venues. Article 36 of MiFIR requires trading venues to provide access on a non-discriminatory basis, including trade feeds, to CCPs that wish to clear transactions executed on these trading venues. Under Article 52(12) of MiFIR, the European Commission is required to report to the European Parliament and the Council of the EU on assessments of the need to temporarily exclude ETDs that require open and non-discriminatory access to CCPs and trading venues from the scope of Articles 35 and 36 of MiFIR.
The report prepared by the European Commission will be based on a risk assessment carried out by ESMA and had to be submitted by 3 July 2016. Depending on its conclusions, the European Commission may adopt a delegated act to exempt ETDs from the scope of Articles 35 and 36 of MiFIR for up to 30 months following the date MiFIR enters into force.
Articles 35 and 36 of MiFIR establish that CAs may only grant access to a particular CCP or trading venue where granting access would not: 1) require an interoperability agreement for ETDs, or 2) threaten the smooth and orderly functioning of the market, in particular due to liquidity fragmentation, or would not adversely affect systemic risk.
In its risk assessment, ESMA provides an overview of the market for ETDs and of existing access arrangements in the EEA including any potential benefits and risks stemming from open access provisions for ETDs. It concludes that the possible risks stemming from access related to ETDs are already appropriately covered in Article 35 and 36 of MiFIR and the draft RTS on access to CCPs and trading venues and consequently does not recommend that ETDs should be temporarily exempted from the scope of Articles 35 and 36.
ESMA's full risk assessment can be found here:
(ii) European Commission publishes Delegated Regulation under MiFID II as regards organisational requirements and operating conditions for investment firms
On 25 April 2016, the European Commission adopted a Delegated Regulation (C(2016) 2398 final) (and Annexes) supplementing the MiFID II Directive as regards organisational requirements and operating conditions for investment firms and defined terms (the "Delegated Regulation").
The Delegated Regulation aims at specifying, in particular, the rules relating to exemptions, the organisational requirements for investment firms, data reporting services providers, conduct of business obligations in the provision of investment services, order execution rules, client order handling, small and medium-sized enterprises ("SME") growth markets, thresholds above which the position reporting obligations apply and the criteria under which the operations of a trading venue in a host Member State could be considered as of substantial importance for the functioning of the securities markets and the protection of the investors.
The Delegated Regulation is based on final technical advice on the MiFID II Directive that ESMA provided to the European Commission in December 2014 (the Council of the EU has decided not to object). The European Parliament will now consider the Delegated Regulation and – if cleared without objection – the Delegated Regulation will enter into force 20 days after its publication in the Official Journal of the EU, applying from the date that the MiFID II Directive applies (3 January 2018).
A copy of the Delegated Regulation can be found at:
(iii) European Commission adopts Delegated Regulation for determination of market material in terms of liquidity relating to trading halt notifications
On 26 May 2016, the European Commission adopted a Delegated Regulation (C(2016) 3020 final) supplementing the MiFID II Directive with regard to RTS for the determination of a material market in terms of liquidity relating to notifications of a temporary halt in trading (the "Delegated Regulation").
Under Article 48(5) of MiFID II, Member States must require a regulated market to be able to halt or constrain trading if there is a significant price movement in a financial instrument on that market or a related market during a short period and, in exceptional cases, to be able to cancel, vary or correct any transaction that took place. The parameters used for deciding to halt trading and any material changes to those parameters must be reported to the competent authority, which in turn must report them to ESMA. This requirement is extended to multilateral trading facilities ("MTFs") and organised trading facilities ("OTFs") by virtue of Article 18(5) of MiFID II.
In this context, Article 48(12)(d) of MiFID II Directive requires ESMA to develop draft RTS further specifying the determination of where a regulated market is material in terms of liquidity in a given instrument for that market. The draft RTS were submitted to the European Commission on 28 September 2015.
If the Delegated Regulation is adopted by the European Parliament without objection (the Council of the EU has already decided not to object to it), it will enter into force 20 days after publication in the Official Journal of the EU and it will apply from the date appearing in the second sub-paragraph of Article 93(1) of MiFID II (3 January 2018).
A copy of the Delegated Regulation can be found at:
(iv) European Commission adopts Delegated Regulation on RTS criteria for determining whether derivatives subject to clearing obligation should be subject to trading obligation
On 26 May 2016, the European Commission adopted a Delegated Regulation (C(2016) 2710 final) supplementing MiFIR with regard to RTS on criteria for determining whether derivatives subject to the clearing obligation should be subject to the trading obligation (the "Delegated Regulation").
MiFIR lays down a trading obligation applicable to non-intra group transactions in sufficiently liquid contracts when traded by counterparties subject to clearing under EMIR. The application of the trading obligation is defined under Article 32 of MiFIR, which outlines the process for deciding which derivatives should be declared subject to mandatory trading.
Once a class of derivatives has been mandated as subject to the clearing obligation under EMIR, ESMA must determine whether those derivatives (or a subset of such) should be subject to the trading obligation, meaning they can only be traded on a regulated market, MTF or OTF. Whether or not a class of derivatives subject to the clearing obligation should also be made subject to the trading obligation will be determined by the venue test (the class of derivatives must be admitted to trading or traded on at least one admissible trading venue) and the liquidity test (whether the derivatives are "sufficiently liquid") and there is sufficient third party buying and selling interest.
The Delegated Regulation provides clarity in the determination of a class/subset of class of derivatives that is sufficiently liquid. Article 2 specifies the criteria with respect to the average frequency of trades, Article 2 sets out the average size of trades, Article 4 details the number and type of active market participants and Article 5 notes the average size of spreads. Together, these indicate the level of third-party buying and selling interest, laid out in Article 1.
The Delegated Regulation is subject to consideration by the European Parliament and the Council of the European Union. Once final, the adopted RTS will apply directly across the EU from the date that MiFID II applies (3 January 2018).
To view the Delegated Regulation on the draft RTS in full see:
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