MiFID II: FCA Publishes Regulatory Forbearance on the 10 Percent Depreciation Rule

On October 1, The European Securities and Markets Authority (ESMA) issued a statement relative to its approach to the application of the Markets in Financial Instruments Directive (MiFID) and Markets in Financial Instruments Regulation (MiFIR) following the end of the Transition Period on December 31 provided for in the Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union (EU) and the European Atomic Energy Community (Withdrawal Agreement).

The following aspects of MiFID II are covered in the statement:

• The MiFID II “C(6) carve-out”: The derivative contracts eligible to the exemption include those relating to electricity or natural gas produced, traded or delivered in the EU and relating to the transportation of electricity or natural gas in the EU, irrespective of where those derivatives are traded. Derivatives must also be traded on an Organized Trading Facility (OTF) and physically settled. A wholesale energy product would not be traded on an EU OTF after the end of the transition period may become a financial instrument under Section C(6) if traded on an EU-regulated market or multilateral trading facility or traded on an EU, or may also become a financial instrument under Section C(7) if, among other things, it has the “characteristics of other derivative financial instruments” as further defined in Article 7 of Commission Delegated Regulation 2017/565.

• ESMA opinions on post-trade transparency and position limits: In effect from January 1, 2021, trading venues established in the UK will no longer be considered EU trading venues and concluded on UK trading venues would be considered OTC-transactions and subject to post-trade transparency requirements. UK commodity derivatives traded on trading venues could be considered as Economically Equivalent OTC (EEOTC) Contracts for the EU position limit regime. ESMA intends to perform assessments of UK venues and identified venues would be added to the respective lists of positively assessed third-country venues, provided that they meet all the relevant criteria, and EU investment firms would not be required to make transactions public in the EU via an EU APA if they are executed on a UK trading venue that has been positively assessed. Commodity derivative contracts traded on those trading venues would not be considered as EEOTC contracts for the EU position limit regime. ESMA reiterates the technical nature of the assessment, which is independent from and not related to the European Commission’s decisions on equivalence.

• Post-trade transparency for OTC transactions between EU investment firms and UK counterparties: The obligations under Articles 20 and 21 of MiFIR for EU investment firms to publish transactions in instruments that are traded on a trading venue (TOTV) via an APA apply also to OTC-transactions involving an EU investment firm and a counterparty established in a third-country. Following the end of the transition period, UK investment firms will no longer be considered EU investment firms but will fall into the category of counterparties established in a third country. EU investment firms are required to make public transactions concluded OTC with UK counterparties via an APA established in the EU, ensuring all transactions, where at least one counterparty is an EU investment firm, will be made post-trade transparent in the EU.

• The Capital Requirements Regulation (CRR): Implementing technical standards (ITS) on main indices and recognized exchanges: CRR tasks ESMA with defining the concepts of “main indices” and “recognized exchanges” in the specification of eligible collateral. These concepts are key for the calculation of credit risk by credit institutions and investment firms for which the CRR applies. ESMA recently consulted on a potential amendment of the CRR ITS to reflect market changes over the past years and Brexit. A recent amendment to the CRR provides for the possibility to include third-country trading venues in the list of recognized exchanges subject to an equivalence decision of the Commission. However, following the end of the transition period and in the absence of such an equivalence decision, UK exchanges would no longer be included in the list of recognized exchanges. The Final Report on the amendment to the CRR ITS was submitted to the Commission on December 11, 2019, which detailed two scenarios depending on the Brexit outcome. The first version of the ITS included UK exchanges and covers the scenario of the Commission adopting.

ESMA’s statement on MiFID II/MiFIR Brexit dated March 7, 2019 is available, here.

ESMA’s update on the UK’s withdrawal from the EU -October 7, 2019 is available, here.

ESMA’s lists of third-country venues, is available here.

MiFID II: ESMA Publishes Final Report on Third-Country Firm Regime

On September 28, the European Securities and Markets Authority (ESMA) published its final report (Final Report), accompanied by draft regulatory and implementing technical standards (RTS and ITS) on the provision of investment services and activities in the European Union (EU) by third-country firms under the Markets in Financial Instruments Directive (MiFID II) (600/2014) and the associated Markets in Financial Instruments Regulation (MiFIR).

The draft RTS and ITS have been submitted to the European Commission for purposes of implementing certain changes to the MiFID II and MiFIR regimes introduced by the recently-adopted Investment Firms Regulation and the Investment Firms Directive. Such changes include an annual reporting requirement for third-country firms to ESMA, the discretion for ESMA to request third-party country firms to provide data relating to all orders and transactions in the EU and annual reporting requirements for branches of third-country firms.

ESMA consulted on the technical standards in January. Annex III of the Final Report provides a summary of feedback to the consultation paper, in addition to ESMA’s response.

The Final Report is available here.

ESMA’s prior consultation on the MiFID II third-country firm regime is available here.