Welcome to Legal Shorts, a short briefing on some of the week’s developments in the financial services industry.
If you would like to discuss any of the points we raise below, please contact me or one of our other lawyers.
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MiFID II Event
Claire Cummings will be speaking at a panel session hosted by HFM on the impact of MiFID II on dark pool trading. The discussion will take place in London on 23 November 2017. If you would like more details about the event, please e-mail Claire at: email@example.com.
MiFID II: ESMA clarifies trading obligation for shares
ESMA has clarified the application of the trading obligation for shares to trade certain instruments on-venue under MiFID II. The trading obligation requires investment firms to ensure that trades that they undertake in shares take place on a regulated market, MTF, systematic internaliser, or equivalent third country venue. Where there is a chain of transmission of orders concerning those shares, all EU investment firms that are part of the chain (either initiating the orders or acting as brokers) should ensure that the ultimate execution of the orders complies with the requirements under Article 23(1) of MiFIR.
MiFID II: ESMA consults on SIs’ quote obligations
ESMA is consulting on amendments to Delegated Regulation (EU) 2017/587 (RTS 1) to clarify that systematic internalisers' (SI) quotes should reflect the price increments applicable to EU trading venues. ESMA has come to the conclusion that the concept of "prices reflecting prevailing market conditions" might need further clarification. In particular, that SIs' quotes should, under certain circumstances, reflect the same minimum price increments as orders and quotes submitted to trading venues trading in the same financial instrument. ESMA believes that in order to ensure that SIs' quotes adequately reflect prevailing market conditions it may be necessary to link them to the minimum tick sizes applicable to trading venues. The consultation paper sets out ESMA's proposal for amending RTS 1 to reflect this. Comments are invited by 25 January 2018.
MiFID II: FCA publishes MiFID 2 Guide Instrument
The FCA has made changes made to the FCA Handbook under the MiFID 2 Guide Instrument 2017 (FCA 2017/63), which constitutes a new Regulatory Guide. The MiFID 2 Guide (M2G) will sit on the FCA Handbook website, but will not form part of the Handbook. The M2G is intended to help users of the Handbook navigate the complexities of MiFID II. The instrument also adds a new definition for M2G to the Handbook Glossary. The instrument comes into force on 3 January 2018.
MiFID II: ESMA updates various Q&As
ESMA has updated a number of its Q&As on MiFID II on the following topics: (i) investor protection, with new Q&As covering record keeping, post-sale reporting and inducements. These Q&As were last updated in October 2017; (ii) commodity derivatives, with new answers relating to position limits, ancillary activities and position reporting (see section 4); (iii) data reporting under MiFIR, with new answers relating to transaction reporting for primary issuances, corporate events, portfolio management and swaps related to indices; (iv) market structures and transparency, with new Q&As covering DEA and algorithmic trading, tick size regime, multilateral and bilateral systems, transparency topics, equity transparency, non-equity transparency, pre-trade transparency waivers, SI regime, data reporting services providers and third country issues. ESMA last updated these Q&As in October 2017.
The FCA has published a recent speech on effective compliance with the Market Abuse Regulation (MAR). Points of interest in the speech include: (i) the FCA now expects firms to be compliant with all of MAR's requirements; (ii) the FCA has also adapted its organisational structures, to ensure it looks for an appropriately broad range of market behaviours. While it will always focus on insider dealing, whether in individual instruments and cross-market, the FCA has significantly bolstered its resources allocated to market manipulation; (iii) the evidence from suspicious transaction and order report (STOR) submissions is that they are dominated by equity insider dealing, which represents more than 70% of all submissions received by the FCA; and (iv) ignorance of the requirements of MAR, or the absence of intent to commit market abuse, are not a defence to breaches of MAR. Market participants should therefore take all necessary steps to understand their obligations under MAR and ensure that they conduct themselves appropriately.
EC consults on encouraging sustainable investments
The European Commission has published a consultation on institutional investors and asset managers' duties regarding sustainability in order to assess whether and how a clarification of the duties of institutional investors and asset managers in terms of sustainability could contribute to a more efficient allocation of capital, and to sustainable and inclusive growth. The EU's commitment to incorporating sustainability elements into EU financial services policies is part of the CMU. Market practices indicate that institutional investors and asset managers generally understand these duties as requiring a focus on maximising short-term financial returns and disregard long-term effects on performance due to sustainability factors and risks. This can lead to misallocation of capital and might give rise to concerns about financial stability. Comments are invited by 22 January 2018.
FCA warns of risks of cryptocurrency CFDs and binary options
The FCA has published consumer warnings regarding the risks of investing in cryptocurrency CFDs and binary options. The FCA considers that CFDs with cryptocurrencies (i.e. virtual currencies such as Bitcoin or Ethereum) as the underlying investment are extremely high-risk, speculative products. The FCA has concerns about them, including because of the potential for price volatility, leverage, charges and funding costs, and price transparency. The FCA has concerns about binary options, including because of the potential for trading losses, difficulties in making informed decisions, conflicts of interest and fraud, albeit that firms offering binary options will fall within scope of MiFID II from 3 January 2018.
ESMA statements on ICO risks
ESMA has issued two statements on initial coin offerings (ICOs), due to their recent rapid growth. In its statement to firms, ESMA notes that where ICOs qualify as financial instruments, it is likely that the firms involved in ICOs will be conducting regulated investment activities, in which case they need to comply with the relevant legislation, including: (i) the Prospectus Directive; (ii) MiFID in relation to various activities and services, such as placing, dealing in or advising on financial instruments; (iii) the AIFMD, where the ICO scheme qualifies as an AIF; and MLD4. ESMA’s second statement for investors warns them that ICOs are very risky and highly speculative investments and that, depending on how they are structured, ICOs may fall outside of the scope of EU law and regulations, in which case investors cannot benefit from the protection that these laws and regulations.
The EU Council has decided not to object to the following Delegated Regulations supplementing the Benchmarks Regulation (BMR): (i) the Delegated Regulation supplementing the BMR with regard to specifying how the nominal amount of financial instruments other than derivatives, the notional amount of derivatives and the net asset value of investment funds are to be assessed; (ii) the Delegated Regulation regarding the establishment of the conditions to assess the impact resulting from the cessation of or change to existing benchmarks; and (iii) the Delegated Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds. The Delegated Regulations will come into force twenty days after their publication in the Official Journal of the EU.
GFXC updates FX global code principles
The Global Foreign Exchange Committee has determined to update principle 17 of the FX global code, which was launched in May 2017. This follows the publication in May 2017 of a request for feedback on "last look" practices in the FX market. The code defines "last look" as "a practice utilised in electronic trading activities whereby a market participant receiving a trade request has a final opportunity to accept or reject the request against its quoted price". Principle 17 provides guidance aimed at encouraging improved transparency and controls surrounding the use of last look. The GFXC has agreed that principle 17 should: (i) indicate that market participants should not undertake trading activity that uses the information from the client's trade request during the last look window; and (ii) clarify the conditions under which certain trading arrangements (often referred to as "cover and deal") may be distinguished from the last look guidance. The GFXC will publish the updated version of principle 17 by the end of 2017.
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17 November 2017