Capital markets

Update (MiFID II and MiFIR) of ESMA's Interactive Single Rulebook

On March 13, 2019, ESMA updated its Interactive Single Rulebook to incorporate MiFID II Level 2 and 3 measures (including RTS, delegated acts, opinion and Q&A).

In general, this online tool provides a complete overview and easy access to all level 2 and 3 measures adopted in relation to a level 1 text.

To date, the available texts are MiFID II, MiFIR, UCITS and CRAR (Credit Rating Agencies Regulation), further updates are obviously planned for the coming months.

Methodological framework for the 3rd Stress Test of EU CCPs by ESMA

On April 3, 2019, ESMA published the methodological framework for its third stress test of EU CCPs. In accordance with the provisions of the EMIR Regulation, ESMA's mission is to initiate and coordinate this type of exercise in order to assess the resilience and security of European CCPs in the face of adverse market developments and to identify any shortcomings.

For this third test, ESMA added a new element concerning concentration risk (in addition to the usual credit and liquidity risk assessments). This new component will be used to assess the impact of the costs of liquidating concentrated positions.

The new stress test includes

  • credit-stress: which assesses the adequacy of CCP resources to absorb losses under a combination of market price shocks and default scenarios of clearing members;
  • liquidity-stress: which assesses the adequacy of CCPs' "liquid" resources in a combination of market price shocks, member / liquidity provider default scenarios and additional liquidity stress assumptions;
  • concentration risk: which assesses the impact of liquidation costs related to concentrated positions; and
  • reverse credit-stress: which increases the number of defaulting entities and the intensity of shocks to identify the level at which resources are exhausted.

ESMA will also conduct additional analyses on the degree of interdependence of CCPs, concentration risks related to credit and liquidity exposures and the analysis of clearing members' defaults.

The General Counsel of the ESRB (European Systemic Risk Board) approved the case of the "crisis" scenario provided for in this stress test and forwarded it to ESMA.

The ECB, in close collaboration with the ESRB and ESMA, has developed and calibrated the so-called "crisis" scenario of triggering one or more sources of systemic risk for the EU financial system, as identified by the ESRB.

The purpose of these resilience tests is not to assess CCPs' compliance with regulatory requirements, but to assess their resilience to macroeconomic scenarios that may have an EU-wide impact.

This third-generation stress test will cover the 16 CCPs authorised in the EU. For the three British CCPs (LCH Ltd, ICE Clear Europe Ltd and LME Clear Ltd), ESMA will include them in its exercise, unless there is a no-deal Brexit.

ESMA statement on the clearing obligation of the EMIR REFIT Regulation

On March 28, 2019, ESMA addressed all financial and non-financial counterparties subject to the EMIR Regulation. It specifies when they must determine whether they are subject to the clearing obligation under the new EMIR REFIT regime and also when they must inform ESMA and their relevant competent authority that they are indeed subject to the clearing obligations, i.e. the day on which the Regulation enters into force.

The new regime introduced by the EMIR REFIT Regulation allows financial or non-financial counterparties to determine whether they are subject to clearing obligations according to the asset classes concerned by calculating their threshold crossing on the basis of their cumulative average month-end position over the last 12 months. This calculation is optional.

When they choose not to carry out the calculation or when the result of this calculation exceeds the clearing thresholds, these financial or non-financial counterparties are required to immediately inform ESMA and the relevant competent authority. They then become subject to the clearing obligation for OTC derivatives contracts entered into or novated, four months after this notification. However, there are some nuances for these two regimes:

  • on the scope: when non-financial counterparties perform the calculation, they are only subject to the clearing obligation for OTC derivative contracts relating to asset classes for which the result of the calculation exceeds the clearing thresholds (unlike the rule applicable to financial counterparties of: breach one, clear them all);
  • on the calculation basis: financial counterparties should only include derivatives that do not contribute to reducing risk.

However, the EMIR REFIT Regulation will apply as soon as it enters into force without delay. As a result, financial and non-financial counterparties with positions in OTC derivative contracts who choose to calculate their cumulative average month-end position for the last 12 months will have to determine the result of this calculation on the day of entry into force. They are therefore already expected to collect all the necessary data.

In addition, it also means that all financial and non-financial counterparties that do not opt for the calculation (or if the result of this calculation is higher than one of the clearing thresholds) must immediately notify ESMA and the relevant competent authority as soon as the Regulation enters into force.

Squeeze-outs and independent appraisal: the AMF is reflecting on possible changes and has announced the creation of a working group

On March 26, 2019, as part of the PACTE bill, the AMF decided to initiate a review of possible changes in practices and regulations relating to squeeze-outs and independent appraisal, with the aim of better protecting minority shareholders.

As it stands, the bill provides for the possibility of implementing a mandatory squeeze-out following a public offer, provided that minority shareholders do not hold more than 10% of the capital and voting rights, compared with 5% currently. In this context, the AMF wanted to reflect on the means that could be implemented to ensure better protection for minority shareholders. This reflection is extended to independent appraisal, historically linked to the squeeze-out, and follows on from the work carried out in 2005 by the working group then chaired by Jean-Michel Naulot, on strengthening independent financial valuation in the context of public offerings and mergers of listed companies.

For this reason, the AMF has announced the creation of a working group to consider ways to improve the practices and regulations applicable to squeeze-outs and independent appraisals. The following themes in particular are at the heart of the group's work:

  • the financial conditions under which the squeeze-out is to be carried out and the terms of the AMF's supervision of these conditions; and
  • the work carried out by the independent expert: control by the target company's corporate bodies, conditions of appointment of the expert, remuneration, duration of the assignment, interactions with stakeholders, etc.

The group should report its recommendations on regulatory developments and professional practices by the end of the first half of the year.

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