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01.09.2016 | KPMG Law Insights

Derivatives – Insights – Derivatives | Edition No. 5/2016

Dear Readers,

From this edition on Insights-Derivatives appears in a new design. Apart from that, we will continue to keep you informed on regulatory developments affecting the derivatives markets.

The European Securities and Markets Authority (ESMA) made further progress on Level 2 measures, i.e. Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS), under a number of European Union regulations.

In this context, draft RTS / ITS on the registration and extension of trade repositories under the Securities Financing Transactions Regulation (SFTR) were published. Furthermore, draft RTS under the Benchmarks Regulation were opened for further consultation.

As regards the Markets in Financial Instruments Regulation (MiFIR), ESMA published a discussion paper on the trading obligation, which is linked to the clearing obligation under the European Markets Infrastructure Regulation (EMIR).

Sincerely yours,

Andreas Prescher

ESMA published Consultation Paper on SFTR and EMIR

The European Securities and Markets Authority (ESMA) made further progress on the Level 2 measures under the Securities Financing Transactions Regulation (SFTR) and the European Markets Infrastructure Regulation (EMIR). A relevant Consultation Paper on draft Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS) was published on September 30, 2016.

In terms of drafting RTS and ITS for SFTR, ESMA leverages substantially on EMIR’s key aspects. In particular, the Consultation Paper includes draft RTS and ITS on the registration and extension of trade repositories (TR) under SFTR. Simultaneously, it provides for a consolidated text of RTS on TR registration under EMIR, which amends the existing RTS. Furthermore, the Consultation Paper includes draft RTS on the definition of data access levels under SFTR and draft amendments to the already existing RTS under EMIR.

The Consultation Paper also includes (i) draft ITS on format and frequency of the reports to TRs; (ii) draft RTS on the details of reports to be provided, as well as (iii) draft RTS on public data, details of securities financing transactions, operational standards for data collection, data aggregation and comparison.

The consultation is open for contributions of market participants until 30 November 2016. ESMA aims at a submission of its final report with draft RTS and ITS to the European Commission by the end of the first quarter in 2017.

ESMA’s Consultation Paper

ESMA progressed on RTS under the Benchmarks Regulation

The European Securities and Markets Authority (ESMA) published on 29 September 2016 a Consultation Paper on draft Regulatory Technical Standards (RTS) under the Benchmarks Regulation.

In the preceding Discussion Paper, ESMA consulted on the definition of benchmarks, requirements for the benchmark input data, governance and control requirements for supervised benchmark contributors as well as transparency requirements regarding the benchmark methodology (see our previous Insights-Derivatives newsletter).

After having received stakeholders’ feedback, ESMA drafted RTS specifying, in particular, the following:

  • Procedures, characteristics and positioning of oversight function;
  • Appropriateness and verifiability of input data;
  • Transparency of methodology;
  • Specifications of elements of the code of conduct for contributors;
  • Governance and control requirements for supervised contributors;
  • Specification of qualitative criteria for significant benchmarks;
  • Template for compliance statement for significant / non-significant benchmarks;
  • Contents of benchmark statement;
  • Information to be provided in applications for authorization and registration; and

Form and content for the application for recognition by third country administrators. Stakeholders are invited to submit their comments on the draft RTS until 2 December 2016. ESMA plans to submit the final RTS to the European Commission before 1 April 2017.

ESMA’s Consultation Paper

ESMA updated list of third country CCPs

On 28 September 2016 the European Securities and Markets Authority (ESMA) published an updated list of Central Counterparties (CCPs) in third countries which are recognized to offer services and activities in the European Union in accordance with the European Markets Infrastructure Regulation (EMIR).

In particular, ICE Clear Credit LLC and Minneapolis Grain Exchange, Inc. were authorized to extend their activities and services in the European Union.

Updated list of third country CCPs

ESMA clarified transaction reporting under MiFID II / MiFIR

The European Securities and Markets Authority (ESMA) published on 10 October 2016 Final guidelines on transaction reporting, order record keeping and clock synchronization as well as the Final Report on the feedback to the previous consultation.

The guidelines specify general principles in the application of transaction reporting, order keeping and clock synchronization. The guidelines also provide clarifications regarding certain reporting and record keeping scenarios for various financial instruments. The main focus appears to be on derivatives given that these financial instruments have a more complex reporting pattern.

In addition, ESMA published on 26 October 2016 several technical reporting instructions and XML schemas under its Financial Instruments Reference Data System (FIRDS). FIRDS provides relevant market participants with assistance in transaction reporting. In particular, ESMA published instructions regarding MiFIR transaction reporting, FIRDS reference data reporting, double volume cap reporting, FIRDS transparency reporting and Double volume cap XML schema.

ESMA published Discussion Paper on trading obligation

On 20 September 2016, the European Securities and Markets Authority (ESMA) published a discussion paper regarding the trading obligation under the Markets in Financial Instruments Regulation (MiFIR). The trading obligation under MiFIR is closely linked to the clearing obligation under the European Markets Infrastructure Regulation (EMIR).

According to Art. 32 MiFIR, ESMA has to specify which classes of derivatives declared subject to the clearing obligation under EMIR or relevant subsets thereof shall be traded on trading venues. In this regard, MiFIR defines two factors to determine whether a class of derivatives should be subject to the trading obligation:

The venue test: the class of derivatives must be admitted to trading or traded on at least one admissible trading venue; and
The liquidity test: whether the derivatives are sufficiently liquid and there is sufficient third party buying and selling interest.
These factors are further specified in draft RTS 4 as of 26 May 2016. In addition to these “abstract” requirements, the current Discussion Paper provides ESMA’s preliminary analysis of some classes of derivatives that could become subject to the trading obligation.

Stakeholders can comment on the Discussion Paper until 21 November 2016. Following the discussion, publication of a consultation paper is expected for the first quarter of 2017.

ESMA’s Discussion Paper

BdB published final draft of the collateral annex on the variation margin and additional agreement under EMIR

On 4 October 2016, the Federal Association of German Banks (Bundesverband deutscher Banken, BdB) published its final draft of the collateral annex regarding the variation margin and the additional agreement under the European Markets Infrastructure Regulation (EMIR) to the German Master Agreement for Financial Derivatives Transactions.

The draft is based, inter alia, on the final draft of the Regulatory Technical Standards (RTS) on the collateral requirements under EMIR. Accordingly, the BdB clarifies that the draft is subject to further modifications in accordance with the final RTS on the collateral requirements under EMIR, or in case that competent authorities publish any interpretation decision on the subject-matter.

Final draft of the collateral annex and the additional agreement

(only available in German language)

ESAs rejected amendments from EC to RTS on bilateral margining

On 9 September 2016, the three European Supervisory Authorities (ESAs), i.e. the European Securities and Markets Authority (ESMA), the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA), published an Opinion addressed to the European Commission (EC) regarding the proposed amendments to the final draft Regulatory Technical Standards (RTS) on risk mitigation techniques for OTC derivatives not cleared by a Central Counterparty (CCP) under the European Markets Infrastructure Regulation (EMIR).

The draft RTS have been developed on the basis of Art. 11 (15) EMIR, which establishes provisions aimed at increasing the safety and transparency of the OTC derivatives markets in the European Union. The draft RTS were submitted to the EC by the ESAs on 8 March 2016 for endorsement. The ESAs object to some of the amendments proposed by the EC.

In particular, the ESAs reject the proposal to remove concentration limits on initial margins for pension schemes. Regarding the thresholds in the RTS, according to the ESAs both legacy and new contracts should be considered in the calculation of the threshold against non-netting jurisdictions. Moreover, it should be clarified that non-centrally cleared derivatives concluded by CCPs are not covered by the RTS. Further clarity should also be provided regarding the application of the RTS to transactions concluded with third country CCPs, in particular non-financial CCPs.

Opinion of the ESAs

ESMA updated Q&A on MiFID II and MiFIR transparency topics

The European Securities and Markets Authority (ESMA) updated on 4 November 2016 its Questions and Answers (Q&A) on transparency topics under MiFID II and MiFIR.
The update provides clarifications on the schedule for the initial implementation of the systematic internaliser regime.
Further information

Q&A on MiFID II / MiFIR transparency topics

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