Global Foreign Exchange Committee Tightens Code of Conduct

Central bankers and industry participants made their strongest statement yet against the use of last look, the practice in currency trading that allows dealers to back out of losing trades. Government officials and traders who comprise the Global Foreign Exchange Committee changed the FX Global Code to indicate that no one should “undertake trading activity that utilizes information from the client’s trade request during the last-look window.” This statement strengthens guidelines issued in May, which did not settle the debate over the lightning-rod issue. The GFXC is revising the code to outline the conditions under which what’s known as “cover and deal” may be distinguished. Respondents to a consultation had argued that such trading arrangements are an important feature of the foreign exchange market and so should be named as an exception to the ruling. The group will also consider disclosures about last look on anonymous electronic trading platforms.

ESMA Revises Procedures for Trading Halts under MiFID II

The European Securities and Markets Authority (ESMA) has published a revised procedure and template to be used by national competent authorities (NCAs) for the purpose of reporting the parameters used by trading venues under their jurisdiction for halting trading in accordance with Article 48(5) of MiFID II. The reporting template has been amended with the main objective to reduce, to the extent possible, fields with free text and replace those fields with hard-coded input. This is to facilitate extraction, computation and ultimately the analysis of the files. ESMA understands that certain trading venues may already have started to calibrate the reporting of their parameters based on the July 2017 template. ESMA therefore considers it appropriate to publish, together with the revised template, a revised procedure postponing by six months the delivery of the first report to ESMA. The first reports were meant to be received by ESMA by end of January 2018 and the revised instructions now clarify that this report should be sent to ESMA by end of June 2018.

Thomson Reuters Clients Given Access to Moscow Exchange FX Trading

On December 20, 2017, clients of Thomson Reuters were given access to aggregate quotes of the Moscow Exchange FX Market via Thomson Reuters’ FX Trading platform. The new functionality will allow users to see quotes of Moscow Exchange, Thomson Reuters Matching, Orderbook and counterparty banks’ liquidity on one desktop and trade at the best available prices, also by executing trades on the Exchange directly via the FX Trading platform. Project partner Raiffeisen Bank provides Thomson Reuters clients with technical and legal access to MOEX liquidity.

EU Commission Temporarily Recognizes Equivalence of Swiss Regulatory Unit

On December 21, the EU Commission decided to recognize the equivalence of the Swiss legal and supervisory framework for trading venues with that of the EU for a temporary period of one year. The decision allows European securities traders access to the Swiss market even after the new European financial market rules enter into force in January 2018. As a result, European securities traders will be permitted to trade Swiss equities on the Swiss domestic market in the coming year as well. MiFID II and its related regulation MiFIR enter into force on 3 January 2018. Article 23 of MiFIR requires European investment firms to trade shares on a trading venue within the EU or a third-country trading venue assessed as equivalent. This requirement applies to all shares admitted to trading in the EU, which affects most of Swiss equities traded on the SIX Swiss Exchange.

ESMA issues statement on LEIs under MiFIR

ESMA has issued a statement to support the smooth introduction of legal entity identifiers under MiFIR, providing firms and trading venues with temporary arrangements for a six-month period.

MiFIR obliges EU investment firms to identify their clients that are ‘legal persons’ with LEIs for the purpose of MiFID II transaction reporting. Trading venues equally are obliged to identify each issuer of a financial instrument traded on their systems with an LEI code when making daily data submission to the Financial Instruments Reference data System (FIRDS).

ESMA and national competent authorities have become aware in recent weeks that not all investment firms will succeed in obtaining the necessary LEI codes for clients ahead of the entry into force of MiFID II and MiFIR on 3 January 2018. The same may be the case for trading venues’ non-EU issuers whose financial instruments are traded on European trading venues.

In its statement, ESMA says it will allow, for a temporary period of six months, that:

  • Investment firms may provide a service triggering the obligation to submit a transaction report to the client, from which it did not previously obtain an LEI code, under the condition that before providing such service the investment firm obtains the necessary documentation from this client to apply for an LEI code on his behalf. The investment firm will need to immediately apply for the issuance of the LEI on behalf of the client. Once the relevant LEI has been obtained, the investment firm should submit its transaction report.
  • Trading venues report their own LEI codes instead of LEI codes of non-EU issuers currently not having their own LEI codes.

ESMA and NCAs acknowledge that obtaining an LEI on a client’s behalf by an investment firm may lead to delays in submitting complete and accurate transaction reports within the prescribed timeline. For this reason, the practice set out above will be accepted only on a temporary basis and NCAs will closely monitor the timelines, accuracy and completeness of the submitted transaction reports.

The regulatory authorities also reiterate that investment firms are expected to ensure full compliance with the MiFIR requirement for the identification of clients that are legal persons using LEIs, given the relevance and importance of these data for regulatory supervision purposes.

The UK’s Financial Conduct Authority responded to the ESMA statement stating that it recognises the importance of LEIs to deliver safer and cleaner markets, but also the need that ESMA has identified for a smooth introduction to the new regime.

Euronext Approved for APA and ARM under MiFID II

Euronext announced its approval by the French regulator, Autorité des Marchés Financiers (AMF), to provide Approved Publication Arrangement (APA) and Approved Reporting Mechanism (ARM) services to investment firms in Europe, from the introduction of MiFID II on January 3, 2018. In July 2017, Euronext announced the enhancement of its Trade Publication and Transactions Reporting Services to meet the new obligations specified under MiFID II. The services will cover an expanded range of cash, commodity and derivatives markets under the scope of MiFID II, including non-Euronext products. Euronext’s ARM service will connect to a range of European National Competent Authorities, including AMF, AFM, FCA, FSMA, CMVM and more.

France to Allow Blockchain for Trading Unlisted Securities

Last Friday the French government opened the way for trading unlisted securities using blockchain digital ledgers with the adoption of new rules aimed at improving Paris’ image as a center for financial innovation. The new rules mean that banks and fintech companies can set up blockchain platforms where unlisted securities can trade instantly, cutting out middlemen like brokers and custodian banks. Securities listed on financial exchanges will still be required to pass through custodians and clearing houses. Eager to attract business from London after Brexit, the French government has already introduced measures to make Paris a more attractive financial center ranging from payroll tax cuts to a labor reform and promises to set up more international schools. Financial institutions have been ramping up their investments in blockchain technology in the hope that it can help reduce the complexity and cost of some of their burdensome back office processes. 

Canadian and Australian Regulators Sign Co-operation Agreement

The securities regulatory authorities in Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Québec and Saskatchewan announced a co-operation agreement with the Australian Securities and Investments Commission (ASIC). This agreement will allow the participating jurisdictions and the ASIC to exchange information on fintech trends and development, and efficiently refer innovative businesses seeking to enter the others’ markets.

EU Clears Deal on U.S. Stock Exchanges Removing Major MiFID II Hurdle

The European Commission decided last Wednesday to allow European investors to continue trading in shares listed in several stock exchanges in the United States, Australia and Hong Kong after new EU market rules come into force in January. The move solves one major headache for equity investors who, without such a decision, could have been cut off from more liquid U.S. markets when the EU’s new financial markets regulations, known as MiFID II, go into effect on January 3rd. According to a story in Reuters news, the decision to grant equivalence to several U.S. trading venues was delayed after some EU states pushed for excluding most U.S. dark pools. The EU recognizes that rules of foreign jurisdictions have the same objectives as EU provisions, granting foreign operators access to its markets and vice-versa. The commission’s decision concerns more than twenty exchanges in the United States, including Nasdaq and the New York Stock Exchange, and more than thirty U.S. dark pools. The commission had initially proposed to grant equivalence to more than eighty alternative exchanges. The Stock Exchange of Hong Kong and Australia’s ASX and Chi-X Australia Pty were also deemed equivalent. Under the adopted decision, European “investment firms can continue to access the liquidity in dual listed shares outside the EU” in the authorized trading venues, the commission stated. Similar decisions for stock exchanges in other foreign countries are still under consideration. 

International Regulatory Organizations Conduct Surveys on Centrally Cleared OTC Derivative Trades

The Financial Stability Board (FSB), the Basel Committee on Banking Supervision (BCBS), the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) have launched surveys as part of their joint work to review the effects on incentives to centrally clear over-the-counter (OTC) derivatives trades following the implementation of the G20 regulatory reforms. Financial and non-financial firms that are participants in derivatives markets are encouraged to complete the surveys. The work will be undertaken by the FSB-BCBS-CPMI-IOSCO Derivatives Assessment Team (DAT) and the BCBS. The DAT study is being carried out under the FSB’s framework for post-implementation evaluation of effects of the G20 financial regulatory reforms. The study began in July 2017 and the final report is expected to be completed in late 2018. To support their work, the DAT and BCBS have prepared qualitative surveys to be completed by different participants in central clearing, i.e. central counterparties, clearing members and indirect clearers/clients. The survey covers areas such as the effects of G20 reforms on derivatives markets, client clearing service provision, and other market structure issues and observations. The survey results will also be used by the BCBS to perform its own review of the impact the Basel III leverage ratio has on banks’ provision of clearing services and any consequent impact on the resilience of central clearing.