MiFID3 View - June 2022

Below is our June edition of MiFID3 View. In case you have missed our earlier MiFID3 View publications you can find them here. There have been some notable developments and deadlines approaching in the MiFID3 space and in this month's publication we highlight ESG changes to MiFID, the FCA's Regulatory Grid, DLT Pilot regime, ESMA's Trading Perimeter Opinion, an update on CRD VI and more.

Sustainability and MiFID - Are you ready?

The deadline of 2 August 2022, when the Delegated Regulation integrating sustainability factors, sustainability risk and sustainability preferencesinto firms' organisational requirements comes into effect is fast approaching. This is still a key focus for many clients and there is much concern in the market around how to implement these requirements where there is a lack of sustainable product data.  This is largely due to the fact the detailed reporting requirements under SFDR, the Taxonomy Regulation and Non-Financial Reporting Directive only comes into effect from the end of this year and early next year. We also face the current gap with ESMA's final suitability guidelines (which will be updated to cover sustainability preferences) yet to be published and given that the consultation period ended in April, it is likely they will only be published just before or after the August 2022 deadline. Whilst firms should continue to push ahead with their compliance arrangements, training and processes they will also need to be flexible and agile in navigating these changes as further supporting guidance develops. 

A question we have been exploring for several clients is whether UK firms are caught by these obligations when dealing with their EU Clients operating under a cross border license or under the TPR. In our view, there may be circumstances where UK firms could be subject to these obligations, but this will depend on where the EU clients are based and how firms are providing such services. This should be considered on a case-by-case basis with each jurisdiction. We would be happy to assist with any such questions so do reach out to our MiFID3 Teamif you need.

Finally, you may have seen that ESMA published its planned consultation papers for 2022, and has indicated that it plans to consult on the sustainability changes to the product governance guidelines in Q3 2022. As you know the sustainability changes to the MIFID product governance arrangements are due to be implemented by 22 November - see our summary here. Given the timing of ESMA's consultation paper it is likely final guidelines will only be published just before or after the November deadline.

In some exciting news we will this month launch our first edition of ESG View, which will provide monthly highlights of legislative and industry developments in "environment" "sustainability" and "governance". As a subscriber to MiFID3 View you will automatically receive our first publication so look out for it in the coming weeks. 

DLT Pilot Regime launched

On 2 June, Regulation (EU) 2022/858 on the pilot regime for market infrastructures based on distributed ledger technology (DLT) was published in the Official Journal. The DLT Pilot Regime has been introduced as part of the EU 's Digital Finance Package and is intended to sit alongside the EU's proposals on Markets in Crypto Assets Regulation (MiCA) and the Digital Operational Resilience Act (DORA). The DLT pilot regime adopts a sandbox approach to create certain exemptions from requirements under MiFID and the CSDR. This is intended to act as a testing environment allowing the EU legislators to gather data on the operation of the regime whilst encouraging the market to be able to develop solutions to the trading and settlement of crypto assets.  Some of the key features of the regime are:

• Restrictions on DLT Financial Instruments - The DLT Pilot regime provides the framework for the trading and settlement of transactions in crypto assets that qualify as financial instruments under MiFID2 which are issued, transferred and stored on a distributed ledger. Crypto assets that do not qualify as MiFID financial instruments such as stablecoins and utility tokens will be regulated under MiCA. Under the regime, limits are placed on DLT financial instruments that can be admitted to trading and settled and places an overall market cap on new DLT instruments.
• 6 years permission - Permissions and exemptions to operate a DLT are to be granted on a temporary basis, for a period of up to six years from the date on which the specific permission was granted and should be valid only for the duration of the pilot regime.
• Exemptions - The DLT Pilot offers the ability for operators (once permission is granted) to request exemptions from the current regulatory regime, which include exemptions from intermediation, transaction reporting and CSD settlement requirements.

Most of the provisions of the DLT Pilot Regime shall apply from 23 March 2023. In 2026, ESMA and the European Commission will be required to report on the regime and decisions to amend the regime will be made. Organisations considering operating under the DLT Pilot, as well as market participants that plan to use DLT market infrastructures should now be taking steps to prepare for the launch of the regime and conducting impact assessments and implementation plans.

ESMA Opinion on Trading Venue Perimeter

You will recall back in January 2022, ESMA published its consultation paper on its opinion clarifying the definition of multilateral systems and the trading venue perimeter with the aim of providing further guidance to market participants and clarifying when authorisation thresholds are triggered. The consultation closed at the end of April, and industry has expressed real concerns that ESMA's opinion has gone beyond what is needed to address the perceived regulatory gaps and risks divergence with items being discussed in the MiFID3 legislative package. Simmons & Simmons held the pen for AFME's Fixed Income and Equities response and pointed out that ESMA's opinion deviates from Level 1 MiFID/MiFIR and ESMA's current Q&A's, and if adopted in its current form, would limit options for execution and stifle competition, digital progress and best execution for end investors. This runs counter to the Capital Markets Union ambitions and the focus on end investor participation in markets. These concerns were echoed by many other respondents, and it is hoped ESMA, considers these issues raised when it publishes its final report Q3 2022. The outcome could be relevant to many of our clients with single dealer platforms developed by third party IT providers or with more than one liquidity provider (including one to many platforms) as ESMA takes a very expansive approach.It could drive innovation outside the EU to more favourable jurisdictions.

EU RTS 28 Reporting here to stay...for now..

Whist RTS 27 and 28 reporting is fast becoming a thing of the past for UK firms, EU firms are still subject to RTS 28 reporting requirements and ESMA's final report published last month on best execution reporting suggests that regime will remain. ESMA's report is a follow-up to its September 2021 consultation on the RTS 27 and 28 framework. Whilst ESMA recognises the shortcomings of the current regime and even industry requests to remove RTS 28 reporting altogether it concludes with its view to retain the regime with the following suggested improvements:

• Enhancing RTS 28 by proposing to delete the obligation to report, as part of the list of top five venues used by a firm, the percentage of the executed orders that were passive and aggressive orders, as this information provided only little added value in the reporting framework.
• Facilitating the use of RTS 28 reports, by requiring firms to publish the reports' on a standalone basis and freely accessible in a simple CSV format to facilitate end-users' access and comparison of data.

Whilst ESMA's report will not lead to any immediate change to the regime, it has been sent to the European Commission to support the Commission's own analysis and any further proposals for reform.

CRD VI and Third Country Access

You will recall back in October last year, as part of the EU's Banking Package 2021, the European Commission put forward a new proposed Capital Requirements Directive ("CRD 6"), along with a proposed Capital Requirements Regulation ("CRR 3").On 28 April, the European Central Bank published an Opinion (dated 27 April) on, amongst other things, the scope of article 21c within CRD 6.Whilst the Opinion requests clarification on some areas of scope of proposed art 21c, including the activities caught by it, the Opinion broadly agrees with the concept of art 21c. If effected as currently proposed, art 21c would prevent banks and "large" investment firms with head offices outside the EU (third country firms) from providing certain services in or into the EU on a cross-border basis. Instead, such third country firms would be required to provide those services via a branch or subsidiary established in each EU member state in which they wished to provide those services, except where relying on limited reverse solicitation scenarios.  The exact scope of third country firms and services caught under the proposals remains unclear in the current drafting. The current drafting also contains no transitional provisions, no reciprocity/equivalence recognition regimes and only a limited exemption of reverse enquiry. We are aware of lobbying by industry on these points. The final CRD 6 proposals are not expected to be agreed until later in 2022. We are closely tracking these developments and have published a useful summaryof the current status of the regime should you wish to know more.

Italy implements EU 'Quick Fix'

CONSOB has finalised (Modifiche al Regolamento Intermediari: documento di consultazione (17 febbraio 2022) - Dettaglio News (consob.it) its amendments to Regulation No. 20307 of 2020 (Intermediaries Regulation) as part of its implementation of the EU's MiFID2 Quick Fix reforms. The final rules include changes to:

• Disclosures of costs and fees relating to financial instruments and investment services;
• Suitability assessments for portfolio managers and investment advisors;
• Rules on reporting requirements; and
• Rules applicable to dealings with eligible counterparties.

These changes came into effect 31 March 2022 and the final rules show that Italy has adopted the EU's Quick Fix package without any divergence or gold-plating.

Let's turn to the UK

FCA blueprint has been published!

Many rely on the FCA's regulatory initiatives grid to provide a quick snapshot and update on where we are with key UK legislation coming into play. We waited patiently last month and the FCA finally published its grid on 25 May. A key development on the horizon that was highlighted is the Financial Services and Markets Bill, that was announced in the Queen's Speech at the beginning of May.  The Bill is hailed to "strengthen the United Kingdom's financial services industry, ensuring that it continues to act in the interest of all people and communities" and proposes to take the opportunities of Brexit to establish a coherent, agile and competitive UK market. To effect these aims the Bill promises some sweeping changes and proposes to:

• implement the changes arising out of the Wholesale Markets Review. Among the changes are the removal of the share trading obligation and the double volume cap, changes to the derivatives trading obligation, taking OTC derivatives that are economically equivalent to exchange traded commodity derivatives out of the position limits regime, and the establishment of a consolidated tape.
• implement the outcomes of the Future Regulatory Framework Review, including adding new secondary objectives for the PRA and the FCA on growth and international competitiveness.
• amend the crypto asset regulatory framework to support the safe adoption of crypto assets, including regulating stable coins, where used as a means of payment.
• reform the rules that regulate the UK's capital markets, protect access to cash, introduce new consumer protections and harness innovation.

The Bill is likely to be introduced to Parliament before the end of the summer 2022, and we will be watching developments here closely.

Other key milestones highlighted in the FCA's Regulatory Grid include:

• Wholesale Markets Review - FCA consultations to be published in Q2 2022 on equity markets and the trading venue perimeter.

• UK Green Taxonomy - The first two technical screening criteria (Climate Change Adaption, Climate Change Mitigation) to be finalised end-2022. The remaining four to be finalised end-2023 (date under review).

• SDR Labels and Investment Product Labels - FCA to publish consultation paper -July 2022.

• Review of Appointed Representative Regime - FCA Policy Statement planned for Q3 2022.

• Review of Overseas Framework - HM Treasury still not committed to timing of publication of Consultation Paper.

• Consumer Duty- Policy Statement with final rules and guidance - Q3 2022. Proposed implementation period ends, and rules and guidance come into force - Q2 2023.

FCA Handbook Notice 99 - A tidy up

Slightly under the radar, last month the FCA published Handbook Notice 99. The notice describes the following changes to the FCA Handbook and other instruments made by the FCA Board on 16 May 2022 and 26 May 2022:

• Conduct of Business Sourcebook (Amendment) Instrument 2022 (FCA 2022/24). This instrument amends COBS 18 Annex 1 to mirror the MiFID 'Quick Fix' changes already made in COBS 2.3A which extended the list of acceptable minor non-monetary benefits (AMNB), which an investment manager can receive for free or on a bundled basis to include research on certain SMEs, FICC research, and research from independent research providers.  The instrument corrects the FCA's earlier oversight which had excluded collective portfolio managers (CPMs) from benefitting from the revised regime and the amendments to COBS 18 Annex 1 now applies the expanded list of AMNB to UCITS management companies, full-scope UK Alternative Investment Fund Managers (AIFM), small, authorised UK AIFMs and residual Collective Investment Scheme operators and incoming EEA AIFM branches. These changed came into force on 27 May 2022.

• Perimeter Guidance (Commodity Derivatives Exemption) Instrument 2022 (FCA 2022/17) and Technical Standards (Markets in Financial Instruments) (Ancillary Exemption) Instrument 2022 (FCA 2022/18). We reported in our last MiFID3 View that whilst it awaited the outcome of its consultation paper CP 22/4 the FCA had issued an interim announcement that commodity firms can rely on Article 72J of the RAO which enables firms seeking to rely on the UK ancillary activities exemption to carry on their business without obtaining authorisation if there is no data from a regulator to enable them to perform the 'market share test'.  The notice has now codified the FCA's decision which came into force on 27 May 2022. The changes are aligned with the proposals as consulted on in CP22/4, apart from revising a discrepancy identified between the numerator and denominator in the calculation periods used for the purposes of relying on the main business test.

• Conduct of Business Sourcebook (Mifid Org Regulation Amendment) Instrument 2022 (FCA 2022/23). This instrument amends the Conduct of Business sourcebook (COBS) to reflect the revisions made by the - UK MiFID 'Quick Fix- including changes to the definitions of "durable medium" and "website conditions". 

As always if you have any questions on the above developments then please do not hesitate to reach out to our dedicated MiFID3 Team.