Markets View – January 2024

Welcome to the first Markets View of 2024! We hope you've had a great start to the year. To help dispel any possible trace of January blues, in this edition we delve into some of the latest developments affecting MiFID, CSDR and REMIT. Please don't hesitate to reach out if you have any feedback.

MiFID3: No Stay of Execution (Reports)

As you may know, as part of a review of EU MiFID/MiFIR, final agreed reforms to MiFIR and MiFID were published at the end of 2023. These still need to be formally adopted by the EU legislative bodies, but it is widely expected that these reforms will be passed with little or no further change. Amongst those reforms is the removal of the obligation on firms to publish best execution reports (also known as "RTS 28" reports) by 30 April each year. This is good news for the industry. Unfortunately, however, this change will not come into effect before 30 April 2024 -- meaning that firms will still be subject to the obligation to publish an RTS 28 report for 2024.

In response, a number of trade bodies have written letters to ESMA, the EU regulatory body, asking it to provide "no action" guidance to national regulators. This guidance would recommend that national regulators take no enforcement action against firms who do not publish RTS 28 reports for 2024. So far, ESMA does not appear to be fully aligned with the trade bodies on this point. We understand that it has responded to at least some of these letters stating that the case for regulatory relief is not obvious and that it proposes to discuss the point further with national regulators. Given this apparent impasse, we are aware that on 17 January a number of trade bodies issued a joint cross-industry letter to ESMA (and also BaFin, AMF, CONSOB and CNMV) to re-iterate the need for "no action" guidance.

So, as it currently stands, unless or until ESMA issues "no action" guidance, firms under the RTS 28 regime will still be required to publish their annual best execution report by 30 April 2024, as usual. We are following these developments closely and will be providing updates accordingly.

Smile and Waive: FCA to Diverge from MiFID2 Transparency Rules for Bonds & Derivatives

Meanwhile, looking now at the UK MiFID regime, the FCA continues to work on addressing the numerous issues identified in the course of the Wholesale Markets Review, which began back in 2021. A recent component, and a further step down the path of UK-EU regulatory divergence, is CP23/32 which the FCA published on 20 December 2023. In this consultation, the FCA outlines its various reservations regarding the current transparency regime and sets out some new proposals. Some of its key findings are that the existing regime is:

• Too broad: Transparency rules currently apply to exchange-based and OTC trading of any bonds/derivatives admitted to trading or traded on a trading venue. The FCA wants to trim this considerably and focus energies on areas that need it most: so, for example, for investment firms dealing OTC, the transparency regime will only bite on trading in sovereign bonds, corporate bonds and certain derivatives ('Category 1' instruments). Meanwhile, pre-trade requirements will be removed altogether for request-for-quote and voice trading systems.

• Too complex and procrustean: The way transparency currently works is based on a maze of waivers, deferrals and procrustean exemptions. The proposals look to cut through this. Trading venues will still have to provide pre- and post-trade transparency for Category 1 instruments and for all other bonds and derivatives ('Category 2' instruments), but for Category 2 instruments they will be empowered to calibrate transparency requirements to their markets, subject to certain new standards and criteria (RIEs in particular will come in for FCA scrutiny on this). Meanwhile, existing waivers based on 'size specific to the instrument' (SSTI) and 'lack of a liquid market' will get the chop.

• Too painful for SIs: Systematic Internalisers get snared by the transparency regime when their dealing activities get big enough to trip them into the regime. This presents a problem for some firms who find themselves needing to run repeated calculations based on quantitative criteria to work out whether their dealing is sufficiently frequent, systematic and substantial to bring them into the regime. The FCA's plan is for a new definition based on qualitative criteria (we say 'new', but actually this is closer to the old-school MiFID1 concept) along with new PERG guidance.

Comments on the consultation are due by 06 March 2024, following which a new chapter of the FCA Handbook will be created (MAR11) -- transferring the transparency regime from provisions currently set out in UK MiFIR, the MiFID Org Regulation and RTS2. An implementation period of one year is proposed, and the new regime is then to be reviewed after six months of operation.

CSDR Refit: Penalty Corner

This year will mark a whole decade of the Central Securities Depositories Regulation (CSDR) being in force, doing its useful work to align transaction settlement periods and practices across the EU. However, after all this time it's receiving an update in the form of the brand new CSDR Refit, the bulk of which just came into force, on 16 January 2024.

CSDR Refit contains several measures, but the one that has elicited by far the greatest debate concerns the highly controversial introduction of a mandatory buy-in process in the event of settlement fails. Many readers will recall this has been a 'sword of Damocles' issue for the industry for several years. It first featured in an ESMA draft RTS back in early 2016, made its way into the settlement discipline RTS in 2018 but was persistently (and effectively) resisted by the industry. However, it has now been retained in the final text of CSDR Refit, albeit de-prioritised as a potential settlement discipline mechanism. Under the new rules, mandatory buy-ins will only be brought into force via an implementing act, and only if:

• the cash penalty mechanism has not resulted in long-term reduction of settlement fails; and
• the level of settlement fails likely has a negative effect on the financial stability of the EU.

With mandatory buy-ins becoming a measure of last resort, there is increased focus on other measures to address settlement fails, such as cash penalties. To that end, you may have spotted that ESMA has published a Consultation on the CSDR penalty mechanism, under which CSDs must collect penalties from failing members of their settlement systems. The consultation sets out ESMA's proposals on various technical aspects regarding the calculation of cash penalties, and seeks feedback to inform ESMA's report to the Commission, which is due by the end of September.

The New REMIT: Prepare to Designate

You may recall that in our last Markets View we discussed the Commission's proposal to amend the Regulation on Wholesale Energy Market Integrity and Transparency (REMIT). Well, we now have the approved Final Text of the new proposals.

For any third country firms caught by EU REMIT, the key item to note is the amendment to Article 9. As we previously commented, the original proposal to amend REMIT included a new requirement for third country market participants to 'declare an office' in a Member State where they are active. This then got modified to 'designate a representative' in a Member State, following lobbying including an FIA Letter back in October. The good news is that the Final Text retains the 'designate' approach, while clarifying that the market participant must:

• designate the representative by a written mandate with authority to act on their behalf;

• mandate the representative on all issues necessary for complying with regulatory decisions/requests under REMIT, and empower them to comply therewith; and

• notify the representative's contact details to ACER and the relevant national regulatory authority.

Importantly, the Final Text also sets a deadline for making such designation, which falls 6 months after the amending regulation enters into force. That's potentially not too far away: the Final Text just needs final sign off from the EU Parliament and Council before it will be published in the Official Journal, with the revised Article 9 (as drafted) entering into force 20 days later.