1. MIFID II
1.1 ESMA and EBA revise guidelines on assessment of suitability of management body members
On 2 July 2021, the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) published a final report on their joint Guidelines relating to the assessment of suitability by institutions and competent authorities in accordance with Directive 2013/36/EU (CRD IV Directive) and Directive 2014/65/EU (MiFID II). The Guidelines have been updated to include the changes introduced by Directive 2019/878/EU (CRD V Directive).
Under the Guidelines, all institutions must assess the members of the management body and those institutions that are subject to the CRD IV Directive must also assess all key function holders that have a significant influence over the direction of the institution under the overall responsibility of the management body. Competent authorities are also required to assess the members of the management body for all institutions and have further assessment obligations for significant CRD institutions.
The Guidelines have been updated specifically as regards to:
- the requirement for institutions to identify the member of the management board who is responsible for the implementation of the laws, regulations and administrative provisions necessary to comply with Directive (EU) 2015/849 (Fourth Money Laundering Directive);
- providing a framework for assessing time commitments expected of members of the management body and specify how the number of directorships is to be counted. This is to ensure that institutions manage these risks and for management bodies to give adequate time to properly perform their functions;
- determining how diversity is to be taken into account in the process for selecting members of the management body. In particular, the Guidelines aim to ensure there is a gender balance among members of the management body; and
- providing that institutions should establish training policies and provide adequate supports (both financially and from human resources) to devote to inductions and trainings within the institution.
The Guidelines will apply from 31 December 2021.
The final report can be accessed here.
1.2 ESMA consults on MiFIR transparency requirements for equity and non-equity instruments
On 9 July 2021, ESMA launched a consultation paper on the review of the regulatory technical standards for Commission Delegated Regulation (EU) 2017/587 (RTS 1) relating to equity instruments and Commission Delegated Regulation (EU) 2017/583 (RTS 2) relating to non-equity instruments in respect of the transparency requirements under Regulation (EU) No 600/2014 (MiFIR). The consultation paper (CP) presents ESMA's proposals for amending RTS 1 and RTS 2 which do not require MiFIR Level 1 amendments.
In respect of RTS 1, the CP proposes to increase the pre- and post-trade large in scale (LIS)-thresholds for exchange traded funds (ETFs), to develop a more consistent and clearer approach on non-price forming transactions and to strengthen the pre-trade transparency requirements by introducing tailored requirements for frequent batch auction (FBA) and hybrid systems, as well as specifying fields to be populated when disclosing pre-trade transparency information.
In respect of RTS 2, ESMA proposed a number of parallel changes to those proposed for RTS 1. It also proposes to obtain feedback from stakeholders on the potential review of the calibration of non-equity instruments other than commodity derivatives. For commodity derivatives, the proposed changes cover three dimensions: (i) the way in which the contracts are aggregated into sub-classes, ensuring that contracts with different liquidity profiles are not bundled together; (ii) improvements to the identification of liquid instruments; and (iii) the calculation of the liquidity thresholds (LIS and SSTI) ensuring that the most liquid contracts have larger thresholds than less liquid ones.
The consultation period will close on 1 October 2021.
The consultation paper can be accessed here.
1.3 ESMA warns firms and investors about risks arising from payment for order flow and from certain practices by "zerocommission brokers"
On 13 July 2021, ESMA issued a public statement reminding firms that the receipt of payment for order flow (PFOF) raises significant concerns for MiFID II investor protection obligations.
PFOF is the practice of brokers receiving payments from third parties for directing client order flow to them as execution venues. ESMA is of the view that, in most cases, it is unlikely that the receipt of PFOF by firms from third parties would be compatible with MiFID II. In addition, ESMA also addresses specific concerns regarding certain practices by zero-commission brokers.
ESMA has requested that National Competent Authorities (NCAs) prioritise firms engaging in PFOF in their supervisory activities for 2021 and 2022, particularly in those Member States where PFOF has been observed.
The public statement highlights that PFOF causes a conflict of interest between the firm and its clients as it incentivises the firm to choose the third party offering the highest payment rather than choosing the offering resulting in the best possible outcome for its clients. For the execution of retail clients' orders, this best possible outcome is to be determined in terms of total consideration, representing the price of the financial instruments and the costs relating to execution. Firms will need to regularly assess whether the execution venues included in their order execution policy provide for the best possible result for the client or whether they need to make changes to their execution arrangement. ESMA also reminds firms that PFOF received from third parties when executing client orders constitutes an inducement received from third parties in connection with the investment service provided to the clients.
Firms must assess whether they are able to comply with MiFID II requirements on best execution, conflicts of interest, inducement and cost transparency where they engage in PFOF.
The public statement can be accessed here.
1.4 ESMA publishes public statement on its supervisory approach on the MiFIR open access provisions for ETDs
On 13 July 2021, ESMA published a public statement on its supervisory approach on the MiFIR open access provisions for exchange traded derivatives (ETDs). Articles 35 and 36 of MiFIR establish provisions on non-discriminatory and open access to trading venues and central counterparties (CCPs) for transferable securities, money market instruments and ETDs.
NCAs are permitted to temporarily exempt trading venues and CCPs from the MiFIR access provisions for ETDs under Article 54(2) of MiFIR. A number of these exemptions had been granted by NCAs for the transitional period which expired on 3 July 2021.
ESMA is aware that co-legislators have given strong indications of their intention to extend the transitional period. The Council has put forward its General Approach on the European Commission's proposal for a Regulation on a pilot regime for market infrastructures based on distributed ledger technology (the DLT Pilot Regime) including a draft amendment of Article 54(2) of MiFIR to allow for a further extension of the transitional period by two years to 3 July 2023. ESMA appreciates that although the DLT Pilot Regime is not yet concluded, the co-legislators of the proposal appear to have identical positions on the proposed extension of the transitional period such that it will likely succeed in being established.
ESMA considers the likely upcoming legislative change on MiFIR open access provisions for ETDs and the administrative burden in processing potential access requests as the basis for expecting that NCAs should not prioritise actions in relation to the provisions in Articles 35 and 36 of MiFIR with respect to trading venues and CCPs that benefitted from transitional arrangements under Article 54(2) of MiFIR as far as ETDs are concerned.
The public statement can be accessed here.
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