UK/EU Investment Management Update (August 2021)

1. ESG — EU SFDR
2. ESG — UK FCA
3. UK Investment Firm Prudential Regime (IFPR)
4. New EU Cross-Border Distribution of Funds Directive and Regulation
5. FCA Business Plan 2021/2022
6. UK MiFID II
7. UK Overseas Framework
8. UK PRIIPs Regulation
9. EU PRIIPs Regulation
10. SPACs
11. EU EMIR
12. ESMA Q&As
13. EU Short Selling Regulation
14. EU Enforcement Actions
15. EU Securitisation Regulation
16. EU Central Securities Depositories Regulation
17. LIBOR Transition
18. Diversity and Inclusion

1. ESG — EU SFDR

European Commission publishes Q&As on application of the SFDR

On 26 July 2021, the European Commission (the Commission) published its long-awaited answers to questions posed by the European Supervisory Authorities (ESAs) concerning a number of legal uncertainties relating to the application of the EU Sustainable Finance Disclosure Regulation (SFDR), including the application of the SFDR to non-EU alternative investment fund managers (AIFMs) marketing alternative investment funds (AIFs) in the European Economic Area (EEA), pursuant to applicable national private placement regimes, and the meaning of “promotion” in the context of products promoting environmental or social characteristics. For more information on the Commission’s Q&As on the SFDR, see our Update EU Sustainable Finance Disclosure Regulation: European Commission Q&As and Implications for Non-EU Fund Managers.

Commission confirms delay to application date of SFDR regulatory technical standards

On 23 July 2021, the Commission published a letter (dated 8 July 2021) addressed to the European Parliament and the European Council confirming that the regulatory technical standards (RTS) required under the SFDR could not be adopted by the Commission within the requisite three-month period, given their length and technical detail.

The SFDR mandates the development of 13 RTS on ESG disclosures under Articles 2a, 4(6) and (7), 8(3), 9(5), 10(2), and 11(4) of the SFDR, which were expected to apply from 1 January 2022.

The Commission confirmed that due to the length and technical detail of the RTS, the late submissions of draft RTS to the Commission (it has received seven of the 13 mandated draft RTS from the ESAs), and the envisaged amendments to existing draft RTS, it deemed necessary to delay the date of application of the SFDR RTS by six months to 1 July 2022.

The delay follows a January 2021 letter from the Joint Committee of the ESAs raising concerns about the application of the SFDR, as noted in our March 2021 Update.

Commission adopts delegated regulation for sustainability disclosures under EU Taxonomy Regulation

On 6 July 2021, the Commission adopted a delegated regulation (DR) that supplements the disclosure obligations contained in Article 8 Taxonomy Regulation, specifying the content, methodology, and presentation of information that certain large financial and non-financial undertakings must disclose concerning their environmentally sustainable economic activities.

As noted in our June 2021 Update, Article 8(1) Taxonomy Regulation requires financial or non-financial undertakings in scope of the Non-Financial Reporting Directive (NFRD) to publicly disclose information on how and to what extent their activities are associated with environmentally sustainable economic activities. For the scope of the NFRD, please see our May 2021 Update.

The final DR includes several amendments following the consultation process noted in our June 2021 Update. Whereas the draft DR would have applied fully from 1 January 2023 (with certain elements and qualitative reporting coming into effect 1 January 2022), the final version of the DR delayed the full taxonomy reporting for financial undertakings (i.e., broadly, EU asset managers, credit institutions, and insurance undertakings) until 1 January 2024. This reflects the fact that financial undertakings will need to rely on the disclosures of underlying companies for required data, and these disclosures will not be available until 2023.

The DR is expected to apply from 1 January 2022.

The DR will be of interest to EU and non-EU investment managers who are “financial market participants” under the SFDR, given that some of those managers may need to collect data from certain large undertakings for the purposes of complying with their own disclosure obligations under the SFDR.

2. ESG — UK FCA

FCA publishes letter to chairs of authorised fund managers containing guiding principles on ESG and sustainable investment funds

On 19 July 2021, the UK Financial Conduct Authority (FCA) published a “Dear Chair” letter to chairs of authorised fund managers (AFMs) in relation to the FCA’s expectations on the design, delivery, and disclosures of ESG and sustainable investment funds.

The FCA notes that it has received numerous applications for authorisation of investment funds with an ESG or sustainability focus that have been poorly drafted, fall below the FCA’s expectations, and contain claims that do not hold up to scrutiny.

The FCA emphasises that it expects clear and accurate ongoing disclosures to consumers where ESG-related claims are made and wants to see funds deliver on their stated objectives and/or strategy. In that regard, the FCA has published a set of guiding principles to explain its expectations in this area. The FCA notes that the guiding principles complement other regulatory initiatives, such as the SFDR, to which some UK-authorised firms may be subject in relation to their cross-border business in the EU.

The guiding principles comprise an overarching principle and three supporting principles that focus respectively on “design,” “delivery,” and “disclosure.” Each principle is accompanied by a set of “key considerations,” which add clarity. The overarching principle of the guidelines is consistency: If a fund has an ESG or sustainability focus, this should be reflected consistently in its design, delivery, and disclosures; in particular, in its name, stated objectives, holdings, and documented investment policy and strategy.

3. UK Investment Firm Prudential Regime (IFPR)

FCA policy statement PS21/9 on implementation of IFPR

The IFPR is expected to come into force on 1 January 2022. It will apply to FCA MiFID investment firms and UK AIFMs with MiFID “top-up” permissions.

On 26 July 2021, the FCA published its second policy statement on the IFPR (PS21/9) in response to the second of its three consultations on the IFPR (CP21/7).

CP21/7 consulted on, among other areas, (i) own funds requirements; (ii) remuneration; (iii) basic liquid assets requirements; and (iv) the internal capital adequacy and risk assessment (ICARA) process. For more information on CP21/7, see our Update UK Investment Firm Prudential Regime — FCA’s Second Consultation — Implications for Investment Managers. For a summary of the FCA’s first policy statement on the UK IFPR (PS21/6), see our July 2021 Update.

PS21/9 contains consolidated near-final rules for both PS21/6 and PS21/9, allowing firms to have the key IFPR material in one location. The near-final rules reflect the overall position that the FCA has adopted across the first two consultations; the FCA has indicated it does not expect to make any changes to these rules before they become final.

In general, the FCA has implemented the rules as consulted on. PS21/9 addresses issues raised by respondents and, in particular, provides clarification in a number of areas including the following:

• Definitions of DTF and SNI firm
  • The FCA has amended the definition of the “daily trading flow” K-factor (DTF), such that DTF now also applies to firms that trade in their own name on an agency basis (as opposed only to those that trade for their own account). The FCA notes that a transaction a firm has executed would generally fall to be considered under either the “client orders handled” K-factor (COH) or DTF – COH if in the name of the client, and DTF if in the name of the firm (for its own account or on behalf of a client).
  • The FCA has also amended the definition of a small and non-interconnected (SNI) firm, by introducing an additional threshold that firms would need to satisfy to qualify as a SNI firm; any firm that has a non-zero value of average DTF will not qualify as a SNI firm.
• CPMI firms
  • The transitional provisions relating to the fixed overheads requirement (FOR) and K-factor requirement (KFR) have been extended to cover collective portfolio management investment firms (CPMIs — i.e., AIFMs with MiFID “top-up” permissions).
  • An additional transitional provision for the permanent minimum requirement (PMR) for CPMIs has also been introduced, allowing CPMI firms with a current base funds requirement of €125,000 to gradually increase their PMR to £150,000 over a five-year period.
• K-AUM. The FCA has provided additional guidance on how to calculate assets under management (AUM) for “investment advice of an ongoing nature.” The FCA has also clarified how intra-group amounts are treated for the purposes of calculating consolidated AUM, COH, and DTF.
• Remuneration
  • The FCA has clarified that the IFPR remuneration code applies to each performance period, instead of “performance years,” in response to feedback that some firms use performance periods shorter than one year. As such, firms with quarterly performance periods will apply the new remuneration code from the beginning of their next performance period beginning on or after 1 January 2022.
  • The FCA has also confirmed that the extended remuneration requirements do not apply on a consolidated basis. This means that an entity within a consolidation group is subject to the pay-out process rules only if it exceeds, and not solely because another entity in the group exceeds, relevant thresholds (broadly, balance sheet assets of more than £300 million).
• Transitional relief for ICARA. The FCA has confirmed that it does not intend to introduce transitional provisions for the ICARA process, following concerns from industry, reasoning that “the lack of transitional provisions for the ICARA is consistent with the transitional provisions for MIFIDPRU4 own funds requirements, as all firms must meet the Threshold Conditions at all times regardless of other rules which may apply to them.”

The FCA published its third and final consultation paper on the IFPR on 6 August 2021, addressing the final technical issues under the IFPR.

4. New EU Cross-Border Distribution of Funds Directive and Regulation

ESMA’s guidelines for funds’ marketing communications to apply from February 2022

On 2 August 2021, the European Securities and Markets Authority (ESMA) published the finalised guidelines on marketing communications under the new EU Cross-Border Distribution of Funds Regulation on its website in all EU official languages, with the effect that the guidelines will apply from February 2022 (i.e., six months after the date of publication on ESMA’s website).

As noted in our Update EU AIFMD — New Rules on the Cross-Border Distribution of Funds From August 2021 — Implications for Non-EU Managers, the guidelines apply broadly to EU AIFMs and Undertakings for Collective Investment in Transferable Securities (UCITS) management companies that are conducting marketing communication with investors or potential investors in UCITS or AIFs. It is unclear at this stage whether non-EU AIFMs conducting marketing communication with EU-based investors would be required to comply with the guidelines.

The guidelines set prescriptive content and formatting requirements for a notably extensive range of marketing communications and require, amongst other things, that all marketing communications be identifiable as such and contain fair, clear, and not misleading information, regardless of the target investors.

5. FCA Business Plan 2021/2022

FCA publishes its 2021/2022 business plan – key points for asset managers

On 15 July 2021, the FCA published its annual report and accounts for 2020/21, setting out how the FCA has delivered on the objectives and priorities set out in its Business Plan 2020/21 and how it has responded to the coronavirus pandemic. The FCA also published its 2021/22 business plan (the Business Plan) and a speech from CEO Nikhil Rathi, setting out how it intends to become more innovative, assertive, and adaptive.

The Business Plan sets out the FCA’s areas of priority for the coming year, which in the context of the wholesale markets include:

• supporting environmental goals by adapting the regulatory framework to facilitate a market-based transition to net-zero carbon emissions;
• improving asset management and non-bank finance by increasing supervision of greenwashing, continuing to identify funds that are outliers and considering amendments to the regulatory framework for money market funds;
• continuing to develop plans to improve markets while maintaining high standards following the UK’s exit from the EU, such as finalising the listing rules for special purpose acquisition companies (SPACs) in Q3 2021 and working with HM Treasury to simplify the pre- and post-trade transparency rules in securities and derivatives markets, as well as the commodity derivatives position limits regime inherited from MiFID II;
• establishing the right framework for long-term asset funds;
• tackling market abuse and financial crime, including continuing to allocate significant resources to monitor transactions in financial instruments; and
• supporting the transition from sterling London Inter-bank Offered Rate (LIBOR) to risk-free rates.

Overall, there is a clear indication that in keeping with its intention to become more assertive, the FCA will pursue a more aggressive policy towards enforcement.

6. UK MiFID II

FCA publishes statement on supervision of MiFID commodity position limits

On 9 July 2021, the FCA published a statement on its supervision of commodity derivative positions.

This statement follows the FCA’s supervisory statement of December 2020, setting out its approach to the operation of the UK MiFID markets regime following the end of the EU withdrawal transition period (covered in our January 2021 Update) and HM Treasury’s Wholesale Markets Review (the Review), which is consulting on proposed changes to the scope of the MiFID commodity position limits regime in the UK.

The FCA notes that it supports the Review’s proposed changes, which would limit the scope of position limits to agricultural contracts and physically settled contracts. As such, the FCA has announced that while the Review is ongoing, it will not take supervisory or enforcement action in relation to commodity derivative positions that exceed position limits on cash-settled commodity derivative contracts, unless the underlying is an agricultural commodity.

More information on the Review can be found in our July 2021 Update.

7. UK Overseas Framework

HM Treasury publishes response to call for evidence on the UK’s overseas framework

On 22 July 2021, HM Treasury published a summary of the responses to its call for evidence on the overseas framework. The call for evidence sought feedback on the future of overseas access to the UK’s markets following Brexit. See our January 2021 Update for further details on the call for evidence.

The key themes that emerged from the respondents were:

• Overseas persons exclusion (OPE). Respondents supported the continued existence of the OPE, but also called for clarification of the scope of regulated activities covered by the OPE.
• UK MiFIR Title VIII equivalence. Respondents saw benefit in the UK maintaining the equivalence provisions in Article 47 UK MiFIR; however, they expressed concern about the overlap with the OPE and the potential for equivalent firms to be subject to greater regulatory burdens.
• Recognised overseas investment exchanges (ROIEs). Respondents requested a clearer application process and, in particular, clarification on whether multilateral trading facilities are eligible to apply for ROIE status.
• Financial Promotion Order. Respondents called for a review of the threshold for high net worth individuals and scope to allow a wider range of financial promotions to be made into the UK by overseas firms not authorised in the UK.

The UK government will consult on proposed changes to the UK’s regime for overseas firms in Q4 2021. The consultation will seek to clarify the overseas regulatory perimeter and will consider making changes to the OPE and ROIE regimes.

8. UK PRIIPs Regulation

FCA consults on targeted amendments to address concerns with UK PRIIPs disclosure regime

On 20 July 2021, the FCA published a consultation paper on amendments to the UK packaged retail and insurance based investment products (PRIIPs) disclosure regime, which seek to clarify the scope of PRIIPs, misleading performance scenarios and summary risk indicators, and elements of the transaction costs calculation methodology.

In particular, the FCA proposes the following changes:

• The introduction of rules to clarify the scope of the UK PRIIPs Regulation in relation to corporate bonds, clarifying that certain common features of these instruments (such as a degree of variability or uncertainty to the overall return to investors) do not make such instruments PRIIPs.
• The introduction of interpretative guidance to clarify what it means for a PRIIP to be “made available” to retail investors in the UK, such concept being a trigger for the requirement to produce and prepare a key information document (KID). In this regard, the FCA notes it will not consider a PRIIP as being “made available” to a retail investor where the following conditions, which it considers reflect good market practice, are met:
  • the marketing materials for the PRIIP make clear that the offering is only to professional clients or eligible counterparties and thus not intended for retail investors;
  • the marketing and distribution strategy for the PRIIP is in fact targeted at professional and eligible counterparty clients and not retail clients; and
  • the PRIIP is issued at a minimum denomination value of £100,000 or under (or equivalent sum in foreign currency).
• Making amendments to the PRIIPs RTS to adjust the slippage methodology when calculating transaction costs and to change certain requirements in the KID requirements (i.e., replacing the presentation of performance scenarios with a requirement for narrative information and addressing the potential for some PRIIPs to be assigned inappropriately low summary risk indicators).

Although UK UCITS schemes fall within the definition of a PRIIP, there is an applicable exemption which means that the amendments outlined above will not immediately apply to them. UK UCITS schemes will need to continue to apply the existing KID requirements in the UCITS Directive, as it continues to apply in the UK by virtue of the European Union (Withdrawal) Act 2018, until 31 December 2026, following the five-year extension to the exemption announced by HM Treasury in June 2021 (as noted in our July 2021 Update).

9. EU PRIIPs Regulation

European Commission publishes draft regulation extending exemption for UCITS from PRIIPs KID requirements

On 15 July 2021, the Commission published a draft regulation for consultation, extending the exemption from the KID requirement under the EU PRIIPs Regulation for six months.

As discussed in our July 2021 Update, Article 32 PRIIPs Regulation provides for a transitional arrangement whereby UCITS management companies, among others, are temporarily exempted from the requirement to provide retail investors with a KID. This arrangement currently applies until 31 December 2021. The draft regulation extends the transitional arrangement to 30 June 2022.

European Commission call for advice on EU PRIIPs Regulation

On 27 July 2021, the Commission invited the Joint Committee of the ESAs to provide advice on certain areas concerning the EU PRIIPs Regulation. The request covers assessments and surveys on, amongst other things, the use of the PRIIPs KID across the EU and the practical applications of the rules in the EU PRIIPs Regulation. In particular, the Commission has requested practical evidence on the amount and nature of costs per PRIIP to various market participants of complying with the requirements of the EU PRIIPs Regulation, including the costs of manufacturing, reviewing, revising, and publishing PRIIPs KIDs.

The response to the call for advice will inform the Commission’s new strategy for retail investment products in Europe, which it intends to publish in the first half of 2022. The deadline for the Joint Committee to provide its report is 30 April 2022.

10. SPACs

FCA publishes policy statement on proposed changes to listing rules that apply to SPACs

On 27 July 2021, the FCA published a policy statement containing the finalised rules and changes to aspects of the UK listing rules that apply to SPACs, following its consultation on the same in April 2021. See our May 2021 Update for further details on the consultation.

In summary, the FCA consulted on removing the presumption of suspension for SPACs that meet certain criteria. This would remove potential barriers to listing by providing an alternative approach for SPACs that would otherwise be required to provide detailed information about a proposed target to the market to avoid being suspended.

In response to the consultation, the FCA has made a limited number of changes to its original proposals. Notably, the threshold amount for an initial listing has been reduced from £200 million to £100 million. The new rules also allow for an extension of the proposed two-year time-limited operating period by six months without the need for shareholder approval.

The new rules and guidance come into force on 10 August 2021.

ESMA publishes guidance on SPAC disclosure and investor protection requirements

On 15 July 2021, ESMA issued a public statement (the Statement) aimed at promoting coordinated action among national competent authorities (NCAs) with respect to the scrutiny of the disclosure included in prospectuses relating to SPACs approved in accordance with the EU Prospectus Regulation.

ESMA sets out its expectations on how issuers should satisfy the specific disclosure requirements of the EU Prospectus Regulation to ensure SPAC prospectuses are readily comparable, despite the significant complexity and diversity of SPAC transactions. ESMA expects SPAC prospectuses to include, among other things:

• detailed information about the investment policy/strategy;
• conflict of interest disclosures;
• information on major shareholders; and
• information on the future remuneration/shareholdings of sponsors and their possible role after the acquisition of the target.

Due to the complexity of SPACs, ESMA considers that they are not necessarily appropriate for retail investors. Indeed, ESMA notes that manufacturers and distributors of SPAC shares and warrants must carefully scrutinise such products in their respective product approval process in order to assess whether retail clients should be excluded from the positive target market or even included in the negative target market.

The Statement is addressed to NCAs, though ESMA notes that SPAC issuers and the manufacturers and distributors of SPAC shares and warrants should take its content into account.

The consultation closes on 14 October 2021.

11. EU EMIR

ESMA consults on EMIR reporting guidelines

On 13 July 2021, ESMA published a consultation paper on its draft guidelines for derivatives reporting under EMIR. The draft guidelines cover a wide set of topics relating to reporting, data quality and data access under the EMIR Refit Regulation.

The draft guidelines will apply to NCAs and financial and non-financial counterparties that trade in derivatives.

The deadline for responses to the consultation is 30 September 2021, and ESMA will consider such responses with a view to finalising the draft guidelines and publishing a final report in Q4 2021/Q1 2022.

For further information on EMIR Refit, see our Update EMIR REFIT: Impact on Asset Managers.

12. ESMA Q&As

ESMA publishes updated Q&As on AIFMD, UCITS, MiFIR data reporting, the Prospectus Regulation, and BMR

ESMA published updated Q&A documents in respect of the AIFMD, UCITS Directive, the Prospectus Regulation, and the Benchmark Regulation on 16 July 2021, and in respect of MiFIR data reporting, on 19 July 2021.

In particular, ESMA has added new Q&As on its guidelines on performance fees in UCITS and certain types of AIFs where an authorised AIFM or management company has delegated the portfolio management function to different delegated portfolio managers, and where a new AIF or UCITS or a new compartment or share class in an existing AIF or UCITS is created.

Additionally, ESMA has updated its answers in the MiFIR data reporting Q&A in relation to the relevant legal entity identifier code to be used in field 5 (issuer or operator of the trading venue identifier) of RTS 23 and related regulatory and implementing technical standards under Article 4 Market Abuse Regulation.

13. EU Short Selling Regulation

European Commission consults on draft delegated regulation amending notification threshold under the Short Selling Regulation

On 15 July 2021, the Commission published a consultation paper on a draft delegated regulation amending the Short Selling Regulation (SSR).

As noted in our June 2021 Update, ESMA published an opinion in May 2021 recommending that the threshold for the notification of net short positions in shares should be reduced from 0.2% to 0.1%. ESMA reduced the reporting threshold to 0.1% on 16 March 2020 in response to the COVID-19 pandemic. The 0.1% threshold applied from 16 March 2020 to 19 March 2021, as noted in our April 2021 Update; from 19 March 2021 the threshold reverted to and has been held at 0.2%.

Comments can be made on the draft delegated regulation until 12 August 2021, and it will come into force 20 days after its publication in the EU Official Journal.

ESMA publishes updated net short position notification thresholds for sovereign issuers

On 2 August 2021, ESMA published an updated table of reporting thresholds for net short position in sovereign debt.

Under the SSR, ESMA is required to publish a list of the thresholds applicable to the sovereign issuers for the purpose of the notification to competent authorities of significant net short position in sovereign debt.

14. EU Enforcement Actions

ESMA publishes reports on use of sanctions under EMIR, MiFID II, and AIFMD

On 8, 19, and 20 July 2021, ESMA published its annual reports on the use of sanctions by NCAs under EMIR, MiFID II, and the AIFMD, respectively.

EMIR

In its third annual report on the penalties imposed by NCAs under Articles 4 (clearing obligation), 9 (the reporting obligation), 10 (non-financial counterparties), and 11 (risk mitigation techniques) of EMIR, ESMA finds:

• an increase in the use of EMIR data for supervisory purposes;
• greater clarity on which counterparties are subject to the clearing obligation as a result of the expanded clearing threshold notification mechanism introduced under EMIR Refit;
• some challenges in looking at group activities; and
• a potential need for further supervisory convergence among EU NCAs in relation to third country entities trading contracts with substantial effect in the EU to ensure NCAs have put in place strategies to detect potential clearing evasion.

MiFID II

In its third report on sanctions and measures imposed under MiFID II, ESMA reports that NCA activity increased in 2020 in terms of both the number of instances and the amount of fines levied as compared with 2019. In 2020, NCAs imposed a total of 613 sanctions, with a total value of €8.4 million, whereas in 2019 NCAs imposed 371 sanctions with a value of €1.8 million. Additionally, in 2020 23 out of 30 EU/EEA member states imposed sanctions, an increase from only 15 in 2019.

ESMA notes that the figures in the report should be read carefully as some differences persist regarding how some sanctions and measures are distinguished and identified for the purposes of reporting to ESMA.

AIFMD

In its second report on sanctions and measures imposed under the AIFMD, ESMA reports that 17 NCAs imposed 131 penalties and/or measures in 2020, up from 87 in 2019. However, the total amount of financial penalties decreased to €3.4 million from €9 million in 2019.

In light of 13 NCAs not imposing any sanctions during the 2020 period, ESMA notes that sanctioning powers are not equally used among NCAs and commits to working to promote convergence in the use of sanctioning powers by NCAs across the EU.

15. EU Securitisation Regulation

European Commission consults on the functioning of the EU securitisation framework

On 23 July 2021, the Commission published a consultation on the functioning of the EU securitisation framework. The EU securitisation framework includes the EU Securitisation Regulation, which sets out the general framework, as well as the framework for simple, transparent and standardised securitisations; it also includes the prudential requirements for securitisation positions contained in the Capital Requirements Regulation and Solvency II.

The consultation takes the form of multiple-choice questions and covers 15 topics. Of particular relevance to investment managers are the questions related to AIFMs. The Commission invites respondents to consider whether the AIFMD should be amended to clarify that non-EU AIFMs should comply with the due diligence obligations set out in Article 17 AIFMD and Article 5 EU Securitisation Regulation with respect to AIFs that they manage and/or market in the EU. This follows the ESAs’ joint opinion on the jurisdictional scope of non-EU party obligations, which we covered in our April 2021 Update.

The consultation also asks whether there should be clarification in the EU Securitisation Regulation that sub-threshold AIFs fall within the definition of “institutional investor,” and are therefore subject to Article 5 due diligence obligations.

The consultation is open for comments until 17 September 2021.

16. EU Central Securities Depositories Regulation

Joint trade association letter to European Commission on EU Central Securities Depositories Regulation settlement discipline implementation

On 14 July 2021, a group of trade associations including, among others, AIMA, ISDA and AFME (the Joint Trade Associations), sent a letter to the Commission in relation to the review of the EU Central Securities Depositories Regulation (CSDR) and the implementation of the settlement discipline regime under the CSDR, which is currently due to enter into force by 1 February 2022.

The Joint Trade Associations request ESMA and the Commission to take action to ensure that the mandatory buy-in rules for non-CCP transactions are not subject to application on 1 February 2022, when the relevant RTS is set to enter into force, and to provide clarity to market participants on the matter on an urgent basis.

The Joint Trade Associations note that the mandatory buy-in rules, as drafted, would lead to reduced market liquidity and would disproportionately increase costs for issuers and investors. Additionally, noting the Commission’s Report on the CSDR in which the Commission considered amending the CSDR, the Joint Trade Associations comment that it would be inefficient to enforce the current rules only to revise them shortly after implementation. The Joint Trade Associations also note that there are a substantial number of open questions on the CSDR that require clarification prior to the current implementation date to allow market participants to fully prepare.

17. LIBOR Transition

FCA consults on LIBOR transition and UK MiFIR derivatives trading obligation

On 14 July 2021, the FCA published a consultation paper on LIBOR transition and the derivatives trading obligation (DTO) under UK MiFIR.

The DTO requires financial and certain non-financial counterparties to conclude transactions in standardised OTC derivatives on regulated trading venues only. The current classes of derivatives subject to the DTO are swaps referencing USD LIBOR, GBP LIBOR, and the Euro Interbank Offer Rate, and index credit default swaps for contracts with standardised terms.

The FCA intends to exclude OTC derivatives based on benchmark rates that are being discontinued (such as GBP LIBOR) from the DTO to ensure its scope remains relevant. Additionally, the FCA notes that the DTO should extend to derivatives based on the replacement relevant risk-free rates.

Indeed, since the FCA’s liquidity analysis shows that the overnight indexed swaps (OIS) referencing the sterling overnight index average (SONIA) is sufficiently liquid to impose a DTO, the FCA proposes to remove derivatives referencing GBP LIBOR under the current DTO and replace them with OIS referencing SONIA. In contrast, as OIS referencing the Euro short-term rate is not yet sufficiently liquid, the FCA intends to monitor market developments and liquidity over the coming months.

ESMA publishes consultation on derivatives clearing and trading obligations under EMIR and MiFIR in view of benchmarks transition

On 9 July 2021, ESMA published a consultation paper on amendments to the draft RTS for the clearing obligation (CO) and the DTO under EMIR and MiFIR, respectively. ESMA’s proposed amendments are intended to adjust the scope of the CO and the DTO to accommodate the benchmark transition for OTC derivatives away from the Euro Overnight Index Average (EONIA) and LIBOR and on to new risk-free rates.

The consultation closes on 2 September 2021, and ESMA expects to submit its final report to the Commission in autumn 2021. Given that new OTC derivative contracts are expected to no longer reference EONIA or LIBOR from 3 January 2022, ESMA is aiming to ensure that the scope of derivatives classes subject to the CO and the DTO reflects the transition to the new alternative rates at the beginning of 2022.

18. Diversity and Inclusion

FCA, Prudential Regulation Authority, and Bank of England set out plan to improve diversity and inclusion in the financial services sector

On 7 July 2021, the FCA, Prudential Regulation Authority, and Bank of England (the Regulators) published a discussion paper on their plans to improve diversity and inclusion in financial services.

The discussion paper aims to engage financial firms and other stakeholders in a discussion on how the Regulators can accelerate the pace of meaningful change and what role the Regulators can most usefully play to support this change. To that end, the Regulators emphasise the importance of measuring progress and necessity of good data and reporting to improve progress on diversity and inclusion.

The Regulators also outline different policy initiatives they consider can drive and support change. These initiatives generally build on existing requirements, and the Regulators note that some of their proposals are better suited to larger firms and that they are conscious of the need for proportionality.

The Regulators will launch a one-off pilot survey later in 2021 to help to develop the proposals set out in the discussion paper and test how firms can provide data with a view to considering regular reporting in the future.

The deadline for responses to the discussion paper is 30 September 2021. The feedback and data received will be used to develop detailed proposals, with a joint consultation planned for Q1 2022, followed by a policy statement in Q3 2022.

Separately, on 28 July 2021, the FCA published a consultation paper containing proposals to improve transparency for investors on the diversity of listed company boards and their executive management teams, including a requirement for listed companies to publish annually a “comply or explain statement” on their achievement of certain proposed targets for gender and ethnic minority representation on their boards.

Finally, in its 2021/2022 business plan published 15 July 2021, the FCA has highlighted improving diversity and inclusion as among the most important cross-market issues it intends to focus on in the coming year (along with ESG and financial resilience).