Global Regulatory Brief: Trading and markets, July edition
The Global Regulatory Brief provides monthly insights on the latest risk and regulatory developments. This brief was written by Bloomberg’s Regulatory Affairs Specialists.
Trading and markets regulatory developments
Global financial market structure continues to evolve as regulators seek to improve transparency, openness and usefulness of existing regimes. In India, new rules now allow banks to offer certain derivative contracts to resident Indians to develop the onshore market for these instruments. In Europe, progress is being made on a set of rule changes designed to improve European equity markets and European lawmakers have reached a provisional agreement on plans to establish a single point of access for public information on finance and sustainability. The UK markets regulator is soliciting initial views on potential changes to make the prospectus regime more forward-looking and the US has published a round-up of regulatory actions that administrative agencies plan to take in relation to securities and derivatives markets.
EU member states agree position on the Listings Act
EU member states meeting in the Council of the EU have agreed their negotiating position on proposals that seek to improve the attractiveness of European public capital markets and facilitate better access to capital, particularly for smaller firms (SMEs). The Listings Act is an important part of the EU Capital Markets Union (CMU) project and will introduce changes to the Prospectus Regulation, Market Abuse Regulation (MAR) and the Markets in Financial Instruments Regulation and Directive (MiFIR-D II). Among other changes, the Listings Act is expected to introduce changes to the research unbundling rules that require asset managers to pay for research directly. It will be subject to the final negotiations whether the market capitalization threshold at which the unbundling rules apply is raised, or whether firms are simply allowed to rebundle payments provided they are sufficiently transparent with their clients.
The Council is now ready to begin final negotiations once the European Parliament arrives at its own negotiating position later this year. The European Parliament’s Committee on Economic and Monetary Affairs (ECON) has published a draft report that will now be subject to debate by the Parliament.
RBI permits banks to offer non-deliverable FX derivatives to resident Indians
The Reserve Bank of India (RBI) has issued new rules that allow banks to offer non-deliverable foreign exchange (FX) derivatives contracts (NDDCs) involving the rupee to resident Indians. For context, an NDDC is an OTC FX derivative contract in which there is no delivery of the notional amount of the underlying currencies of the contract and which is cash settled. Since June 2020, banks in Gujarat International Finance Tec (GIFT) City have been allowed to trade these derivatives, but only with foreign entities and between themselves. To develop the onshore NDDC market, the RBI is permitting banks operating from GIFT City the ability to offer NDDCs to non-retail residents for hedging purposes. These transactions must be cash-settled in Indian rupees (INR). For contracts with those outside of India, the settlement can be in INR or any foreign currency. For contracts with a person resident outside India, the settlement can be either in Indian rupees or any foreign currency. This policy change is intended to bolster Indian markets by improving price discovery, boosting offshore volumes to the country, reducing arbitrage between the offshore and onshore markets, and helping to manage INR volatility.
UK FCA seeks views on a potential new prospectus regime
The UK Financial Conduct Authority (FCA) has published four papers as it seeks to engage with industry on possible revisions to the UK’s public offering and admission to the trading regime. Under the Financial Services and Markets Bill (FSMB), the FCA will have greater discretion on whether and how to set requirements for a prospectus for issuers seeking admission to trading and is looking for ways to include more forward-looking information in prospectuses. The papers set out and seek views on how the FCA may use its rule-making powers to improve admission to trading on a regulated market (Paper 1), further issuances of equity on regulated markets (Paper 2), the use of forward-looking statements by issuers (Paper 3), and the regime for non-equity securities (Paper 4). Written responses are due by September 29, 2023 and the FCA intends to consult on specific rules in 2024.
European lawmakers reach provisional agreement on European Single Access Point
European co-legislators reached a provisional agreement on proposals to establish the European Single Access Point (ESAP). This is intended to provide centralized access to publicly available information relevant to financial services and sustainability. The intention is to create a platform that makes the process of finding and comparing investment products and companies easier. There will not be any additional reporting requirements on European companies because ESAP will provide access to information already made public in accordance with existing European legislation. ESAP is expected to be available from summer 2027 and gradually phased in over the course of four years. The first phase will include information under the Short Selling Regulation, Prospectus Regulation and Transparency Directive while phase two will include sustainability-related disclosures in the financial services sector, the Credit Rating Agencies Regulation and the Benchmark Regulation. The third and final phase will cover information from approximately 20 pieces of legislation, including the capital requirement regulation, MiFIR, and the EU green bonds regulation.
The ESAP proposal still needs to go through a technical review and translation before formal adoption later this year.
European markets regulator calls for greater transparency in OTC derivatives markets
Executive Director at the European Securities and Markets Authority (ESMA) Verena Ross has publicly written to the European Commission regarding the current lack of transparency in the EU for OTC derivatives, notably single-name credit default swaps (CDS). ESMA is strongly in support of strengthening the trade transparency requirements in MiFIR, particularly as recent events have revealed the high degree of uncertainty and speculation as to the actual trading activity and its drivers. While MiFIR introduced trade transparency requirements for OTC derivatives, including single-name CDS, the actual transparency provided on trading activity in these instruments remains limited, for two main reasons:
- Ambiguity on the scope of OTC derivatives covered by the provisions, which led in practice to only a few transactions in OTC derivatives being subject to the transparency regime in the first place; and
- A very complex deferral regime with most transactions being published only with a significant delay.
ESMA notes that this contrasts with the approach of the US which provides for a post-trade transparency regime covering a very broad scope of OTC derivatives and with most transactions published close to real-time while providing for volume-masking for large transactions. ESMA encourages co-legislators to use the ongoing MiFIR review to strengthen the transparency regime applicable to standardized OTC-derivatives, by broadening the scope of instruments subject to the requirements and providing for more real-time transparency, and a streamlined deferral regime. ESMA also notes that global coordination in CDS markets is an international priority with IOSCO starting to look closer at transparency in the CDS market.
US SEC announces Spring 2023 regulatory agenda
The Office of Information and Regulatory Affairs released the Spring 2023 Unified Agenda of Regulatory and Deregulatory Actions. The report, which includes contributions from the SEC and CFTC, among others, lists short- and long-term regulatory actions that administrative agencies plan to take, along with a summary of the time table for various stages of rule proposals.
US SEC reopens comment period for position reporting of large security-based swap positions
The SEC reopened the comment period for its proposed rule for position reporting of large security-based swap positions that exceed certain thresholds, and the staff of the Commission’s Division of Economic Risk Analysis released a memorandum that provides supplemental data and analysis regarding the proposed reporting thresholds in the equity security-based swap market. The public comment period will be open until Aug. 21, 2023 or until 30 days after the publication of the reopening release in the Federal Register, whichever is later.
European markets regulator publishes Opinion on market outages
The European Securities and Markets Authority (ESMA) has published its final report and opinion on market outages under MiFID II. The final report sets out ESMA’s response to feedback and the opinion establishes ESMA’s expectations on how National Competent Authorities (NCAs) should ensure trading venues have appropriate communication protocols in place, how trading venues should ensure the market is provided with an official closing price, and which arrangements can mitigate the impact of an outage on the closing auction. The opinion also provides considerations on non-equity instruments, particularly derivatives. While ESMA recognizes that trading venues have become increasingly resilient in the past few years, outages are likely to continue occurring and it is important to provide guidance on how outages should be managed. ESMA expects NCAs to ensure that trading venues have appropriate outage plans in place.
CFTC approves final governance rule, two proposals, and other business at the Commission open meeting
At its open meeting on June 7, the CFTC approved: (1) a final rule on governance requirements for derivative clearing organizations (DCO); (2) a proposed rule concerning recovery and orderly wind-down plans for systemically important derivatives clearing organizations and DCOs that elect to be subject to the provisions in Subpart C of part 39 of the Commission’s regulations; (3) a proposed rule to revise the CFTC’s regulation for large trader position reporting for futures and options, which has a 60 day comment period after publication in the Federal Register; and (4) a proposed comparability determination to solicit public comment on an application requesting capital comparability determination by nonbank swap dealers domiciled in the French Republic and Federal Republic of Germany and subject to capital and financial reporting requirements of the European Union.
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