Securities and markets regulatory news, 15 March 2021

Contents:

• Download the full regulatory bulletin

• UK Emissions Trading Scheme: Revised draft Recognised Auction Platforms (Amendment and Miscellaneous Provisions) Regulations 2021

• UK Emissions Trading Scheme: FCA CP21/6 on regulating bidding for emissions allowances

• UK MiFIR: FCA annual transparency calculations for equity and equity-like instruments

• UK EMIR: PRA and FCA consult on amending BTS on margin requirements for non-centrally cleared derivatives

• UK EMIR and UK SFTR: FCA approach to reporting references to LIBOR in OTC derivatives contracts and securities financing transactions

• EU CSDR review: European Commission roadmap

• EU EMIR: European Commission consults on Delegated Regulation supplementing EMIR on FRANDT commercial terms for clearing services for OTC derivatives

UK Emissions Trading Scheme: Revised draft Recognised Auction Platforms (Amendment and Miscellaneous Provisions) Regulations 2021

A revised draft version of the Recognised Auction Platforms (Amendment and Miscellaneous Provisions) Regulations 2021 has been published, together with a revised draft explanatory memorandum. These revised drafts replace those published on 12 February 2021.

The draft Regulations are made under section 8 of the European Union (Withdrawal) Act 2018. They are part of the process for creating a UK Emissions Trading Scheme (ETS) and accompanying emission allowance market. They amend financial services law to reflect the fact that the UK is no longer part of the EU ETS but has now established the UK ETS.

The draft Regulations state that they will come into force the day after they are made. Their operation is dependent on the Greenhouse Gas Emissions Trading Scheme Auctioning Regulations 2021, which were laid before Parliament in draft on 11 February 2021.

UK Emissions Trading Scheme: FCA CP21/6 on regulating bidding for emissions allowances

The Financial Conduct Authority (FCA) has published a consultation paper, CP21/6, on its proposals to regulate bidding for emissions allowances on the UK auction platform under the UK ETS.

The FCA is consulting on:

• the draft UK Emission Trading Scheme Instrument 2021, which proposes amendments to various FCA Handbook modules which are essentially the reinstatement of material that was deleted at the end of the Brexit transition period and necessary consequential amendments. It is also making certain changes so that the Handbook requirements apply appropriately to the UK ETS rather than the EU ETS; and
• the draft Technical Standards (Market Abuse Regulation) (UK Emissions Trading Scheme) Instrument 2021, which proposes consequential changes to certain technical standards under the UK Market Abuse Regulation.

The consultation closes on 6 April 2021 so that the FCA's rules are in place before the first UK ETS auction is held, which should be no later than Q2 2021.

UK MiFIR: FCA annual transparency calculations for equity and equity-like instruments

The FCA has published its annual transparency calculations for UK equity and equity-like financial instruments that will apply from 1 April 2021. These calculations are available through the FCA FITRS (Financial Instrument Transparency Reference System), the FCA's transparency calculations publications database.

The calculations include:

• the liquidity assessment;
• the determination of the most relevant market in terms of liquidity (MRM);
• the determination of the average daily turnover (ADT) relevant for the determination of the pre-trade and post-trade large in scale (LIS) thresholds;
• the determination of the average value of the transactions (AVT) and the related the standard market size (SMS); and
• the determination of the average daily number of transactions (ADNTE) on the most relevant market in terms of liquidity relevant for the determination of the tick-size regime.

The FCA explains that it is publishing the SMS of equity instruments for the purposes of the pre-trade transparency regime for systematic internalisers. This differs from the approach set out in the statement of policy on the FCA's power to suspend the use of pre-trade transparency waivers for a trading venue under the double volume cap (DVC) mechanism. This is because the FCA now has the capability to publish calculations.

The FCA has assessed that there are 497 liquid shares, and 341 liquid equity-like instruments (such as exchange traded funds), depositary receipts and certificates other than shares.

The FCA expects market participants to monitor the release of the transparency calculations for equity and equity-like instruments daily, to obtain the calculations for newly traded instruments.

UK EMIR: PRA and FCA consult on amending BTS on margin requirements for non-centrally cleared derivatives

The Prudential Regulation Authority and the FCA have published a  joint consultation paper (PRA CP6/21, FCA CP21/7) on margin requirements for non-centrally cleared derivatives, amending the binding technical standards (BTS) in the UK onshored version of Commission Delegated Regulation (EU) 2016/2251 supplementing the European Market Infrastructure Regulation (EMIR).

In the consultation paper, the regulators set out proposals to establish or extend exemptions for some products subject to bilateral margining requirements, as well as proposals to align implementation phases and thresholds of the initial margin (IM) requirements to the standards of the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO). In particular, the proposed amendments would:

• change the implementation dates and thresholds for the phase-in of IM requirements;
• require the exchange of variation margin for physically settled foreign exchange forwards and swaps to specified counterparties only; and
• extend the temporary exemption for single-stock equity options and index options until 4 January 2024.

Since the EU BTS were finalised in 2016, the European Supervisory Authorities have proposed several amendments to address emerging issues. However, formal adoption has lagged and remains outstanding. This delay has left a gap between the adopted regulation and practice. The regulators have been operating in practice based on the pending but unadopted amended BTS. The proposals set out in the consultation paper aim to maintain current market practice and give firms legal clarity on these margin requirements.

The regulators plan to use their making and amendment powers under Article 11(15) of UK EMIR and Section 138P of the Financial Services and Markets Act 2000.

Comments can be made on the proposals until 19 May 2021. After considering any responses, the regulators will submit the updated BTS to HM Treasury for approval. Assuming HM Treasury provides approval, the regulators will make and publish the BTS for their respective firms. The changes to the BTS will be effective on publication of the final technical standards instruments, which is planned for 1 July 2021.

UK EMIR and UK SFTR: FCA approach to reporting references to LIBOR in OTC derivatives contracts and securities financing transactions

The FCA has updated its website to outline its expectations on the approach firms should take to reporting references to LIBOR in OTC derivative contracts under Article 9 of UK EMIR and in securities financing transactions (SFTs) under Article 4 of the retained EU law version of the Regulation on reporting and transparency of securities financing transactions (UK SFTR).

Under UK EMIR and UK SFTR, counterparties (and, in the case of UK EMIR, central counterparties), must report any modification of a derivative contract or an SFT they have concluded to a registered or recognised trade repository no later than the working day following the modification of the contract or transaction.

The FCA explains that if the terms of a derivative contract or securities financing transaction say that, either immediately or at some other point in time, an alternative rate applies in the place of LIBOR, this would bring about a modification that is reportable under UK EMIR or UK SFTR respectively. The FCA expects the modification to be reported at the time that the alternative rate takes effect. In the case of OTC derivatives, the FCA emphasises that this applies to all agreed terms that result in an alternative rate applying in place of LIBOR, including fallbacks agreed on a bespoke basis and fallbacks that take effect as a result of ISDA's 2020 IBOR Fallbacks documents.

The FCA clarifies that it is of the view that amending a reference rate or adding a fallback would not trigger the application of margin or clearing requirements under UK EMIR, where this amendment relates to the treatment of legacy LIBOR trades. However, for UK EMIR reporting, it is essential that the UK EMIR trade data accurately reflects the details of the trade.

While the FCA expects firms to make necessary preparations to ensure the relevant reports are updated in a timely manner, it states that it will take a proportionate and risk-based approach to applying its supervisory powers for these requirements.

EU CSDR review: European Commission roadmap

The European Commission has published an impact inception assessment (roadmap) on a review of how the EU rules on central securities depositories (CSDs) are working under the EU Central Securities Depositories Regulation (CSDR).  

Comments can be made on the roadmap until 5 April 2021. The roadmap indicates that a legislative proposal may be adopted in the fourth quarter of 2021, although the related webpage indicates that a proposed regulation is planned for the first quarter of 2022. The Commission notes that subsequent revision of the relevant technical standards by the European Securities and Markets Authority may be necessary.

EU EMIR: European Commission consults on Delegated Regulation supplementing EMIR on FRANDT commercial terms for clearing services for OTC derivatives

The European Commission has published for consultation a draft Delegated Regulation supplementing EMIR by specifying the conditions under which the commercial terms for clearing services for OTC derivatives are to be considered to be fair, reasonable, non-discriminatory and transparent (FRANDT).

The EMIR Refit Regulation amended EMIR to introduce an obligation on clearing service providers to provide those services under FRANDT commercial terms. The requirement to apply FRANDT terms will apply from 18 June 2021. Under Article 82 of EMIR, the Commission is empowered to adopt a delegated act specifying the conditions under which commercial terms for clearing services of clearing service providers are FRANDT.

Article 2 of the draft Delegated Regulation states that the commercial terms for clearing services provided by clearing service providers will be considered to be FRANDT where they meet the requirements laid down in the Annex to the draft Delegated Regulation.

The consultation closes on 7 April 2021. The Commission will consider the consultation responses received when it finalises the draft Delegated Regulation.

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Authored by Yvonne Clapham