European Union: Investment Firms - Quarterly Legal And Regulatory Update 1st October - 31st December 2020

1. MIFID II – EUROPEAN DEVELOPMENTS

1.1 ESMA updates Q&As on Investor Protection and Intermediaries Topics

During the period 1 October 2020 to 31 December 2020, the European Securities and Markets Authority (ESMA) published an updated version of its questions and answers publication "on MiFID II and MiFIR investor protection and intermediaries topics" (Q&As on Investor Protection and Intermediaries Topics). The updates made to the Q&As on Investor Protection and Intermediaries Topics are set out below:

• Question ID: Part 16 Product governance – Questions 2 (updated on 6 November 2020) this question asks how should firms manufacturing financial instruments ensure that these financial instruments' costs and charges are compatible with the needs, objectives and characteristics of the target market under Article 9(12)(a) of the MiFID II Delegated Directive (2017/593/EU) (MiFID II Delegated Directive);
• Question ID: Part 16 Product governance – Questions 3 (updated on 6 November 2020) this question asks how should firms manufacturing financial instruments ensure that costs and charges do not undermine the financial instrument's return expectations, as required by Article 9(12)(b) of the MiFID II Delegated Directive;
• Question ID: Part 16 Product governance – Questions 4 (updated on 6 November 2020) this question asks how should firms manufacturing financial instruments ensure that the charging structure of the financial instrument is appropriately transparent for the target market, such as that it does not disguise charges or is too complex to understand as required by Article 9(12)(c) of the MiFID II Delegated Directive; and
• Question ID: Part 9 Information on costs and charges – Question 33 (new question on 21 December 2020) this question asks how firms can present ex-post costs and charges information to clients in a fair, clear and not misleading manner.

A copy of the Q&As on Investor Protection and Intermediaries Topics can be accessed here

1.2 ESMA updates statements on the impact of Brexit on MiFID II Directive, MiFIR and the Benchmarks Regulation

On 1 October 2020, ESMA updated two statements on its approach to the application of key provisions of the Markets in Financial Instruments Directive (2014/65/EU) (MiFID II Directive or MiFID II) and the Markets in Financial Instruments Regulation (600/2014) (MiFIR) and the Benchmark Regulation (EU) 2016/1011 (Benchmarks Regulation or BMR) which reflects ESMA's approach. As the United Kingdom (UK) has agreed a deal with the European Union (EU) in relation to Brexit, these statements will be updated in due course.

The statements are set out below:

• Statement (ESMA80-187-610) on the consequences of Brexit for the ESMA register for benchmark administrators and third-country benchmarks under the BMR; and
• Statement (ESMA70-155-10962) on its approach under MiFID II to the C(6) carve-out, the ESMA opinions on third-country trading venues for the purpose of post-trade transparency, and the position limits regime and post-trade transparency for over the counter (OTC) transactions. The statement also covers the implementing technical standards on main indices and recognised exchanges under the Capital Requirement Regulation (575/2013) (CRR).

The statement on the impact of Brexit on the application of MiFID II Directive and MiFIR can be accessed here and the statement on the impact of Brexit on the BMR can be accessed here.

1.3 ESMA publishes statement on trading obligation for shares following transition period

On 26 October 2020, ESMA published a statement on the impact of the end of the transition period on 31 December 2020 on the trading obligation for shares. The statement reminds market participants of the application of the EU trading obligation for shares (STO) as of 1 January 2021, after the end of the transition period.

The statement clarifies that in the absence of an equivalence decision in respect of the UK by the European Commission (Commission), the potential adverse effects of the application of the STO after the end of the transition period are expected to be the same as in the nodeal Brexit scenario considered in guidance published by ESMA in May 2019.

The statement confirms that:

• after the end of the transition period, ESMA will assume that all EU shares (i.e. International Securities Identification Number (ISIN) with an EU/EEA ISIN), will be within the scope of the EU STO. GB ISINs will be outside the scope of the EU STO;
• on the assumption that trading of shares with an EEA ISIN on a UK trading venue in GB by EU investment firms occurs on a nonsystematic, ad-hoc, irregular and infrequent basis, it is expected that those trades will not be subject to the EU STO, in accordance with Article 23 of MiFIR; and
• ESMA has sought to minimise disruption and to avoid overlapping STO obligations and their potentially adverse effects for market participants, bearing in mind the legal requirements of Article 23 MiFIR. The approach put forward by ESMA will effectively avoid such overlaps if the UK adopts an approach that does not include EEA ISINs under the UK STO. ESMA, however, notes that the scope of the UK STO after the end of the transition period remains unclear at this stage.

The ESMA statement is available here.

The Financial Conduct Authority in the UK (FCA) has confirmed that UK market participants will continue to be able to access any EU trading venue and systematic internaliser after the Expiry of the Transition Period provided that the venue has ensured that it has the relevant regulatory permissions.

1.4 ESMA updates Opinions on Third-Country Venues

On 6 November 2020, ESMA updated its Guidance on the Annex to the ESMA Opinion determining third-country trading venues for the purpose of transparency under MiFIR. The Guidance has been updated to include information on cases where market identifier codes (MIC) are not populated. The updated Guidance can be accessed here.

On 27 October 2020, ESMA updated the list of third-country venues in respect of its:

• Opinion determining third-country trading venues for the purpose of transparency under MiFID II and MiFIR; and
• Opinion determining third-country trading venues for the purpose of position limits under the MiFID II Directive.

The purpose of the update is to add the UK to the Annex of each Opinion, following a positive assessment by ESMA of UK venues against the criteria of each Opinion.

As a result, from 1 January 2021:

• EU investment firms will not be required to make transactions public in the EU via an EU Approved Publications Arrangements (APAs) if they are executed on one of the UK trading venues on the transparency list; and
• Commodity derivative contracts traded on UK trading venues on the position limits list will not be considered as economically equivalent over-the-counter (EEOTC) contracts for the EU position limit regime.

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