The last regulatory round-up of the year sees a flurry of activity in Europe around the Central Securities Depositories Regulation (CSDR) and sustainable finance. In the US, the Securities and Exchange Commission tightens up the rules around Treasury clearing for cash and repo. Globally, the International Organisation for Securities Commissions (IOSCO) has published a report on how trading venues can shore up their resilience in the wake of market outages.
- SEC signs off US Treasury clearing for cash and repo
- CFTC proposes operational resilience rule for futures brokers and swap dealers
- ADGM FSRA finalises revisions to its fees framework
- ESMA consults on potential CSDR penalty changes
- Joint ICMA response to the European Commission’s targeted consultation on the SFDR
- ESMA finalises technical standards under the revised ELTIF regulation
- AFME responds to ESMA consultation on shortening settlement cycles in the EU
- IOSCO seeks feedback on how to improve trading venues’ resilience in case of market outages
Americas
SEC signs off US Treasury clearing for cash and repo
The US Securities and Exchange Commission (SEC) has adopted a rule designed to reduce risk in the US Treasury market by ensuring that more trades are covered by clearing houses.
The reforms will impact all repo and reverse repo agreements collateralised by US Treasury securities entered into by a member of the covered clearing agency, unless the counterparty is a state or local government or another clearing organisation or the repo is an inter-affiliate transaction, all purchase and sale transactions entered into by a member of the clearing agency that is an interdealer broker; and all purchase and sale transactions entered into between a clearing agency member and either a registered broker dealer, a government securities broker, a government securities dealer.
SEC chair, Gary Gensler, said clearing houses are “vital” to capital markets. “Standing in the middle of the securities markets, clearinghouses are the buyer to every seller and the seller to every buyer,” Gensler said in a statement.
The regulator said that while central clearing does not eliminate all risk, it does lower it, firstly by sitting in the middle and reducing all the risks among and between counterparties. They also provide multi-party netting, which helps lower the overall margin (collateral) needed to be posted in the system. Further, central clearing reduces risks through the robust rules of the clearinghouses themselves, including for the collection of initial and variation margin.
CFTC proposes operational resilience rule for futures brokers and swap dealers
The US Commodity Futures Trading Commission has proposed a rule that would require futures commission merchants, swap dealers and major swap participants to establish an “operational resilience framework”.
The proposal would require firms to “identify, monitor, manage and assess risks” in three areas: information and technology security; third-party relationships; and emergencies and other significant disruptions. The proposal also would include requirements related to governance, training, testing and recordkeeping.
EMEA
ADGM FSRA finalises revisions to its fees framework
The Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) has announced revisions to its fees framework.
The revised fees framework has been finalised following a public consultation in October 2023 and is designed to more accurately reflect the work of the FSRA. The changes, which will come into effect in January 2024, include: promoting and enhancing the integrity of the financial system in ADGM; promoting the safety and soundness of Authorised Firms; and securing an appropriate degree of protection for users and prospective users of ADGM.
Alongside these revisions, the FSRA has consolidated the categories of controlled functions and recognised functions. The consolidation is aligned with best practices whereby appointments to all critical roles within an authorised firm are subject to approval by the relevant regulator.
ESMA consults on potential CSDR penalty changes
The European Securities and Markets Authority (ESMA) has published a consultation paper seeking input on amendments to the Central Securities Depositories Regulation (CSDR) penalty regime.
The amendments in the Technical Advice to the European Commission paper could see cash penalties increase in accordance with the length of the settlement fail. “The effect of cash
penalties on settlement rates on the EU capital market are currently being assessed,” ESMA noted in the paper.
The consultation, which runs until 29 February 2024, is looking to collect evidence and data on the effectiveness of the current penalty mechanism in discouraging settlement fails and incentivising their rapid resolution.
Additionally, feedback is being sought on: alternative parameters, when the official interest rate for overnight credit charged by the central bank issuing the settlement currency, is not available; the treatment of historical reference data for the calculation of late matching fail penalties; and alternative methods for calculating cash penalties, including progressive penalty rates.
Joint ICMA response to the European Commission’s targeted consultation on the SFDR
The International Capital Market Association (ICMA) has submitted its response to the European Commission’s targeted consultation on the Sustainable Finance Disclosure Regulation (SFDR).
The response, on behalf of ICMA and its constituents, especially by the Asset Management and Investors Council (AMIC) and the Executive Committee of the Principles, outlines concerns the group has regarding current requirements and potential disclosures.
The ICMA said that while the SFDR’s adoption has been positive, it currently fails to fulfil its primary objective of investor protection and helping sufficiently channel capital towards sustainability.
Additionally, while the Commission and ESAs have recently provided various guidance on addressing inconsistencies between different pieces of legislation, there is still a need for further improvement and clarity.
Going forward, the disclosure requirements and templates should be shortened, streamlined, clarified, made proportionate and focused on most material issues, ICMA said.
The group’s members also strongly support an EU official categorisation system, but hold different views on how to achieve this. In any case, introduction of labels based on investment objectives and intentions should, to the extent possible, leverage the existing requirements and processes that have been resource intensive to implement.
ESMA finalises technical standards under revised ELTIF regulation
The European Securities and Markets Authority (ESMA), published the final report setting out the draft Regulatory Technical Standards (RTS) for the European Long-Term Investment Fund (ELTIF) regulation.
The draft regulatory technical standards (RTS) cover: the circumstances in which the life of a European long-term investment fund (ELTIF) is considered compatible with the life cycles of each of the individual assets, as well as different features of the redemption policy of the ELTIF; the circumstances for the use of the matching mechanism; and the costs disclosure.
The RST final report delineates the specific rules that are to be applied providing a detailed framework for aspects such as minimum holding period and maximum redemption frequency, choice of liquidity management tools, notice period and maximum percentage of liquid assets that can be redeemed.
ESMA has considered the feedback received from 23 stakeholders that responded to the last public consultation and agreed amendments.
ESMA suggests allowing the ELTIF manager to select the minimum holding period that is best adjusted to an individual ELTIF, based on criteria set in the RTS, and upon justifications to the competent authority.
ESMA proposes to include a common standard (maximum quarterly redemption frequency), while allowing the ELTIF manager to deviate from it, upon justifications to the competent authority.
ESMA suggested the mandatory implementation of at least one anti-dilution mechanism (in addition to notice period), and redemption gates, while allowing the ELTIF manager to deviate from it, in specific circumstances, and upon justifications to the competent authority.
In addition to applying minimum percentages of liquid assets, depending on the length of the notice period, different percentages of maximum amount of liquid assets that can be redeemed are also applied.
AFME responds to ESMA consultation on shortening settlement cycles in the EU
The Association for Financial Markets in Europe (AFME) has responded to ESMA’s call for evidence on shortening the settlement cycle in the European Union.
Pete Tomlinson, director of post trade at AFME, said: “AFME welcomes the opportunity to respond to this important consultation. Moving to a T+1 settlement cycle will be a complex and demanding undertaking for the entire industry, so it is important that feedback is carefully considered before next steps are decided.”
“Any move to a T+1 settlement cycle must be effected in a way that does not introduce new risks, damage the existing efficiency, liquidity and functioning of EU capital markets, create barriers to investing in the region’s securities markets, or diminish access to capital markets for issuers.”
“If a decision to move to T+1 is made, it will be necessary to define an appropriate timetable that generates industry momentum and provides clarity to market participants.”
AFME said it fully supports ESMA’s conclusion that any decision to shorten the settlement cycle in the EU should be based on a proper cost-benefit analysis, considering not only the impact on post-trade processes, but also potential broader market impacts on trading and liquidity and the competitiveness of EU markets.
The group also said that any move to a default T+1 settlement cycle must be conducted in a way that does not introduce new risks, damage the existing efficiency and functioning of EU capital markets, create barriers to investing in the region’s securities markets, or diminish access to capital markets for issuers, which would be contrary to the CMU objectives.
AFME called for a coordinated approach across Europe, including EEA countries, Switzerland and the UK.
World
IOSCO seeks feedback on how to improve trading venues’ resilience in case of market outages
The International Organisation for Securities Commissions (IOSCO), has published its Consultation Report on Market Outages.
Operational resilience remains a key global priority for securities regulators, as the resilience of trading venues is vital for the smooth operation of global capital markets.
Building on previous IOSCO reports and new information gathered through a members’
survey, this consultation report identifies key findings from recent market outages and puts
forward five good practices for trading venues to consider improving market-wide resilience
during an outage.
The five recommendations are: Establish and publish an outage plan with clearly defined roles and responsibilities; implement a communication plan, which provides, through an appropriate communication channel, initial notice of the outage, and, thereafter, with regular updates on the status of the outage and the recovery pathway; communicate information relevant to the reopening of trading in a timely and simultaneous manner to all market participants, providing clarity on the status of their orders and ensuring they receive an adequate period of notice before the resumption of trading; ensure the processes and procedures that trading venues will follow to operate a closing auction and/or to establish alternative closing prices are published in the outage plan and communicated to all market participants during an outage; and conduct and share with the relevant regulators a lessons-learnt exercise of the market outage and adopt a post-outage plan, with clearly defined timelines and allocation of responsibilities for remediation, designed to reduce the likelihood of future incidents and to improve the ability of the trading venue to effectively respond to outages.
