What is the damage a British exit from the EU might do to the plan for a capital markets' union?
On June 23 2016 the UK electorate voted to leave the EU. It is our understanding that an agreement will need to be found between the UK and the Council of the European Union with the consent of the European Parliament.
Much financial regulation currently applicable in the UK derives from EU legislation. The EU treaties state that all EU legislation and corresponding governance mechanisms remain in place until an agreement is found or until two years after the notification by the UK. Esma will continue to work closely with the UK Financial Conduct Authority to enhance investor protection and ensure financial stability and orderly functioning financial markets.
Post-Brexit uncertainty aside, following the Mifid II delay, there has been some speculation in the market that some of the more onerous requirements will be revised. Is that being considered?
Changing any of the requirements at Mifid II level 1 – by which I mean the framework Directive and Regulation – is, of course, entirely in the hands of the co-legislators but as far as we are aware, the changes at level 1 which have been agreed in the context of the discussions of delaying the date when Mifid II comes into force from January 2017 to January 2018, have been limited.
The Commission has asked us to make some changes to three of our Mifid II technical standards – the level 2 rules – which we originally submitted to the Commission in September 2015; the standards covering non-equity transparency, position limits for commodity derivatives and the ancillary activity exemption which is about how to quantify whether a non-financial firm is doing so much activity in the area of commodity derivatives it should in fact be authorised as a financial firm.
The intention behind some of those requested amendments, for instance those concerning bond market transparency, is to apply a more cautious approach in the early days of Mifid II going live. We recently published our Opinions in respect of those amendments and so now we are hoping for a swift adoption of all Mifid II implementing measures by the co-legislators. I do not consider other revisions of requirements likely at this time though the European Parliament and Council still have an objection period on the Commission's delegated acts and Esma's technical standards.
What is your position on the claims that the large amount of post-crisis regulation is having a negative impact on growth, as well as drying up the secondary bond market?
Although it's nearly 10 years since the financial crisis, the shock waves from it are still affecting us in a number of ways. We are still in a period of low, even negative interest rates, for example, and a number of countries' economies remain fragile so it is difficult to attribute a lack of liquidity to one cause such as post-crisis regulation.
More specifically when we talk about liquidity in secondary bond markets, liquidity varies depending on types of bonds. Corporate bonds are a particularly illiquid segment of that market as, speaking in very broad terms, there is a brief period of trading around the time of issue followed by the occasional spike of activity when the market is galvanised into action by an event or announcement.
Sovereign bonds on the other hand, tend to be more liquid. It's true that some post-crisis regulation has made it more costly to conduct market-making activity, for example by increasing the capital requirements for this type of activity for banks. But a great deal of the regulation also aims at improving liquidity and ultimately the economy.
Bond markets play an important role in EU capital markets, helping to finance the economy. If you look at data over the last five years especially, you can see that the volume of debt securities issued by non-financial firms increased in the eurozone which helped compensate, to some extent, for the near stagnation of bank funding. This development is partly the result of unique circumstances related to challenges in the banking sector and the very low interest rate environment. However, it is important that this bigger role played currently by bond markets becomes a permanent feature and is supported with policy measures where needed.
This is recognised in the Commission's Capital Markets Union initiative which Esma fully supports. We should also recognise that Mifid II also foresees a more important role for bond markets. I believe that protecting the liquidity of the bond market is of paramount importance and transparency requirements should be calibrated carefully. Transparency applied indiscriminately to illiquid instruments can be damaging, resulting in difficulties in executing trades and the further thinning of already thin markets. However, I am not aware of any liquid market which is not also reasonably transparent.
Some in the market have raised concerns over compliance with the Market Abuse Regulation (MAR) while they wait for Mifid II's technical standards, causing a 'wait and see' approach to compliance. What would you suggest institutions do in the meantime?
The co-legislators who recently agreed to postpone the date of application of Mifid II/R have not also considered postponing the application of MAR, except for the specific case of the provision of reference data on financial instruments to Esma and the subsequent publication. I understand that stakeholders are concerned about the fact that the Mifid and MAR RTS are not yet finalised, making it more difficult to prepare. In that context I should mention that Esma has recently issued a communication to the market clarifying the reporting of reference data under MAR.
Also on instrument reference data and related data standards, the question seems to imply that pending the Mifid TS being applicable, the market does not have the information available. In practice, this is not true. The absence of the instruments list published by Esma does not mean that the information about the financial instruments in scope of MAR cannot be obtained; it is just that information is fragmented currently.
Furthermore, it should be noted that on July 3 2016, MAR will start applying however, until MiFD II/R applies in January 2018, instruments traded on OTFs as well as emission allowances will not be covered in the scope of the financial instruments subject to MAR.
There has also been some confusion over MAR's requirements on investment recommendations. What does Esma consider an investment recommendation?
The definition of investment recommendation is laid down in Level 1 of MAR which means Esma cannot interpret or redefine it. Neither can we limit the scope through our standards and other tools such as guidelines and Q&As. Market participants should look carefully at the definition of investment recommendation laid down in Level 1 and at the criteria included in light of the specificities of their activities in order to determine whether or not a communication may represent an investment recommendation.
Esma is currently contemplating issuing Q&As to provide more clarity on the MAR investment recommendation requirements. However, the Q&As will not be ready before July 3 2016, the date of entry into application of MAR.
You have recently said that more onerous data obligations are here to stay, but that Esma would aim to improve and streamline them. How will it go about this?
Reporting is often seen as a burden by firms; however, regulators across the EU have put significant efforts into harmonising reporting regimes to the extent it is feasible under the individual sectoral legislation.
The development of any reporting regime is primarily influenced and driven by the purpose of that reporting and intended subsequent data use by regulators. Different scopes, purposes and timings of the introduction of various regimes determine the extent of their compatibility and predefine the level of harmonisation that is feasible to achieve during the implementation.
While the alignment of different regimes is the desired outcome, when developing regulatory and implementing technical standards, certain fundamental differences eg mechanics of reporting, granularity of data and reporting parties should be accounted for when developing the relevant technical standards.
Therefore, while there might be common fields required under different regimes, the overall purpose and thus structure of reports will differ due to the inherent differences of the regimes themselves. This is a significant challenge for alignment, though not impossible to overcome. In practice, Esma addresses such challenges in two complementing ways:
- consistency of definition and alignment of representation of data fields common across the regimes; and
- standardisation of the messages reporting framework across various regulations.
For the past three years, Esma has focused on achieving these two goals to the extent that it is possible.
Amid the talk of regulatory convergence and harmonisation, one area deemed particularly difficult is insolvency law, which differs wildly across member states. How would you say a lack of harmonisation affects European markets? What areas of insolvency law do you think would be more easily harmonised than others?
SMEs are the lifeblood of the European economy and increasing the supply of market capital to SMEs is one of the core objectives of CMU. When it comes to investing, particularly on a cross border basis, the labyrinth of national insolvency laws can be very problematic, especially when we talk about investing in SMEs. Investors need predictability as regards the risks they are taking and the potential returns on any investment. They are more likely to shy away from the opaque and the unknown.
Small companies seeking to access capital markets often have a lower profile than listed blue chips and therefore the risk premium attaching to any investment in such companies can be more difficult to price, and can cause real difficulties when raising capital.
While we recognise that insolvency law is intrinsically linked with company law, and difficult to harmonise, any increase in clarity and certainty would be welcomed by investors and could facilitate a greater flow of capital to these companies. The Commission are currently consulting on the issue of insolvency and we very much look forward to seeking the proposal that will follow the analysis of the consultation responses.
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