Over the last few years, firms have implemented major regulatory changes in the capital markets, driven mainly by MiFID II and MiFIR.
Regulators are now beginning to refine the framework as the impact of the legislation becomes clearer.
Reporting under MiFID II/MiFIR enabled ESMA to publish its first annual statistical report (PDF 1.7 MB) of the European securities markets. European securities are traded on 430 trading venues: 135 regulated markets, 223 multilateral trading facilities and 72 organised trading facilities. In addition, there were 216 systematic internalisers (SIs), with an increase of 47 SIs since the beginning of 2019. The report focuses on 2019 but includes a section on the COVID-19 impact on the securities markets, which shows a rapid decline in March but a strong rebound since then.
Capital Markets Recovery Package
In December 2020, the EU co-legislators provisionally agreed the final form of the Capital Markets Recovery Package proposed by the Commission in July 2020. This was billed as adjusting the legislation to allow capital markets to assist in the recovery of the European economy from the impact of the pandemic. It includes changes to the Prospectus Regulation, the securitisation framework and MiFID II.
Changes to the Prospectus Regulation will make it easier for companies to raise capital. Until end-2022, a new, shorter prospectus - the EU recovery prospectus - will be available for increases of up to 150% of outstanding capital within a period of 12 months, i.e. secondary issuances. To ensure adequate investor protection, the prospectus minimum information requirements have been fine-tuned.
To free up bank capital for further lending and to allow a broader range of investors to fund the economic recovery, the existing EU framework for simple, transparent and standardised (STS) securitisations will be extended to cover synthetic securitisations by amending the Securitisation Regulation and Capital Requirements Regulation. This will allow banks to transfer the credit risk of a set of loans (e.g. large corporate loans) to the non-bank financial sector. Given the risks that can be created by securitisation, EBA will closely monitor the STS market to ensure there is not excessive leveraging of banks.
The Recovery Package also introduces certain changes ahead of the wider MiFID II review in Q3 2021.
Some of the changes are intended to remove inefficiencies, especially reporting requirements that wholesale market participants have long claimed they do not need or use. The requirement to provide prescribed costs and charges information to professional clients and eligible counterparties will be removed, but they must still be provided information on investment advice and portfolio management. Also, retail clients will be able receive cost and charges information in digital format. Eligible counterparties will no longer receive, and professional clients can opt out of, the best execution reports produced quarterly by investment firms, as prescribed in RTS 27, for at least the next two years while the Commission reviews the need for this report.
The product governance regime has been simplified, with all financial instruments exclusively distributed to eligible counterparties now excluded from the requirements. For professional and retail clients, certain product governance requirements will no longer apply to corporate bonds with “make-whole clauses”.
In an effort to help small and mid-cap companies raise investment, the package allows “re-bundling” of equity research on firms with a market capitalisation below EUR 1 billion (USD 1.2 billion) or to be offered for free to a firm's trading clients. This is contrary to ESMA's initial evidence (PDF 2.6 MB) that the unbundling provisions in MiFID II have not disproportionately impacted SMEs, but reflects the view of some national regulators, such as the French AMF.
To encourage the further development of a euro-denominated EU commodity derivatives market, the Recovery Package introduces a new definition for agricultural commodity derivatives, to which the current strict regime will still apply. The regime will be amended so that less-sensitive contracts will be subject to lighter regulation.
Meanwhile, as reported in the October edition, ESMA continues to review other parts of MiFID II. It launched a consultation on algorithmic trading in December 2020, seeking views on the authorisation regime and crisis-related issues such as circuit breakers and speedbumps.
Central Securities Depositories Regulation (CSDR) Review
The Commission is consulting on whether changes can be made to CSDR to improve its effectiveness. In particular, the Commission asks whether revision of the settlement discipline part of the regime is necessary. Implementation of the regime has already been delayed twice and market participants have long argued that the mandatory buy-in requirements are unnecessary and create market inefficiency. The Commission is also asking whether changes to the rules could help facilitate the use of new technology such as distributed ledger technology (DLT) and the development of a more integrated post-trading landscape in the EU, a key part of the Capital Markets Union Action Plan.
Data: Cost and Access
IOSCO's consultation (PDF 137 KB), released in December, highlights that the debates on the cost of and access to market data, and the need for consolidated market data, are not only European debates. Several other jurisdictions, including Australia and the US, are contemplating whether regulatory changes are necessary. IOSCO intends that its consultation will provide useful information for jurisdictions considering their supervisory and regulatory approach.
Firms can expect to see increasing regulation of market data.
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