Financial Services SpeedRead: 16 March 2021

No updates for this fortnight's edition of the FSS.

1. ESMA confirms decision on reporting of net short position of 0.1% and above will expire

On 15 March, ESMA confirmed it would not be renewing its decision to require notification to NCAs from holders of net short positions in shares traded on a EU regulated market where the position reaches, exceeds or falls below 0.1%. ESMA confirms that the measure, which has applied since 16 March 2020, will expire on 19 March 2021. Any outstanding net short position between 0.1% and 0.2% will not have to be reported. The EFTA Surveillance Authority has also decided not to renew their current measure applicable to EEA EFTA States' markets, that will therefore also expire on 19 March 2021. This contrasts with the UK position where the initial notification threshold for the reporting of net short positions to the FCA was lowered from 0.2 percent to 0.1 per cent.

2. European Commission publishes a consultation on the supervisory convergence and the single rule book

On 12 March, the European Commission issued a targeted consultation on supervisory convergence and the single rulebook. The European single rulebook seeks to reduce differences between national laws and the consultation will consider supervisory practices among national supervisors, supervisory convergence and how the EU's single rulebook works in practice. The consultation will also elicit views on certain aspects of the update to the regulatory framework for the European Supervisory Authorities published in the EU Official Journal in 2019. Feedback from the consultation will inform a report reviewing the ESAs (as set out in the September 2020 Capital Markets Union Action Plan).

Areas covered by the consultation include the following:

• impact of technical standards, guidelines and recommendations on further harmonising the single rulebook;
• the effectiveness and efficiency of the process for developing draft technical standards;
• areas where maximum harmonisation, or a higher degree of harmonisation should be promoted; and
• areas where national rules going beyond the minimum requirements of a Directive harm the aims of the single market.

3. FCA and PRA consult on amendments to UK Margin Rules under UK EMIR

On 9 March 2021, the FCA and the PRA launched a joint consultation (the Consultation) on proposed amendments to the margin requirements applicable to non-cleared derivatives under EU Regulation 648/2012 (EU EMIR) and EU Delegated Regulation 2016/2251 (the EU Margin Rules) as each has effect in domestic law (UK EMIR and the UK Margin Rules, respectively). The proposed amendments mirror certain of the recent changes to the EU Margin Rules, which are covered our previous briefing. For more information on the FCA/PRA Consultation please review our briefing.

4. FCA publishes annual transparency calculations for equity and equity-like instruments for 2021/22

On 9 March 2021, the FCA announced that it has made available its annual transparency calculations for UK equity and equity-like financial instruments that will take effect from 1 April 2021.

The FCA is required to publish annual equity transparency calculations by UK MiFIR. The calculations are available through the FCA's Financial Instrument Transparency Reference System (FITRS).
The calculations include:

• the liquidity assessment;
• the determination of the most relevant market in terms of liquidity (MRM);
• the determination of the average daily turnover (ADT) relevant for the determination of the pre-trade and post-trade large in scale (LIS) thresholds;
• the determination of the average value of the transactions (AVT) and the related the standard market size (SMS); and
• the determination of the average daily number of transactions (ADNTE) on the most relevant market in terms of liquidity relevant for the determination of the tick-size regime.

Based on its calculations, the FCA has assessed 497 shares and 341 equity-like instruments (a category that includes Exchange Traded Funds, depositary receipts and certificates) as having a liquid market.

Notably, the FCA states that it has published the SMS of equity instruments for the purposes of the pre-trade transparency regime for SIs. This differs from the approach previously set out in the FCA's Statements of Policy because the FCA now has the capability to publish calculations.

5. FCA announces the date for the end of LIBOR

On 5 March 2021, the FCA announced the dates that the panel bank submissions for all LIBOR settings will cease, after which representative LIBOR rates will no longer be available.

The FCA has confirmed that all LIBOR settings will either cease to be provided by any administrator or no longer be representative:

• immediately after 31 December 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings; and
• immediately after 30 June 2023, in the case of the remaining US dollar settings.

According to the FCA, it is taking steps to help reduce disruption in cases where existing LIBOR contracts are particularly difficult to amend ahead of the LIBOR panels ceasing, often known as the ‘tough legacy’.

For more information on the announcement, please see our briefing here.

6. FCA updates it Statement of Policy on suspending the use of pre-trade transparency waivers

On 4 March, the FCA updated its Statement of Policy concerning the use of its temporary power under UK MiFIR, which permits it to apply the Double Volume Cap mechanism (DVC). The DVC is a mechanism which protects the price formation process in equity instruments by limiting the level of dark trading on trading venues (i.e. trading without pre-trade transparency).

Under the DVC, if the proportion of trading for an individual equity, taking place under a waiver, exceeds certain thresholds, then the use of those waivers is suspended for 6 months. UK MiFIR gives the FCA the power to make and renew suspensions of waivers under the DVC without undertaking and publishing the calculations of whether trading has exceeded the requisite thresholds. The FCA may suspend the use of a waiver for up to six months and may renew a suspension where it feels that the circumstances which led it to impose the suspension of a waiver continue to exist.

In December 2020, the FCA announced that it would not automatically apply the DVC to UK equities and confirms that it is extending this to all equities.

In the revised Statement of Policy, the FCA sets out that it is willing to use its temporary powers flexibly and amend its approach to the DVC if another jurisdiction makes an equivalence decision in respect of the UK.

7. ESMA publishes disclosure requirements under the Prospectus Regulation

On 4 March 2021, ESMA published guidelines on the disclosure requirements under the Prospectus Regulation. The guidelines apply to Member State competent authorities and market participants. According to ESMA, these guidelines are intended to establish consistent, efficient and effective supervisory practices among Member State competent authorities when assessing the completeness, comprehensibility and consistency of information in prospectuses and ensure uniform and consistent application of the disclosure requirements.

ESMA recommends that issuers involve financial reporting experts to ensure that the financial information in the prospectus satisfy the requirements set out in the guidelines, as well as the general obligation to ensure that the prospectus contains the information necessary for investors to make an informed assessment of the assets, liabilities, profits, losses, financial position, and prospects of the issuer and of any guarantor.

The guidelines apply from two months after the date of their publication on ESMA’s website.

8. HM Treasury publishes UK Listing Review

On 3 March 2021, HM Treasury published findings from the UK Listing Review chaired by Lord Hill which forms part of the Chancellor's plan to strengthen the UKs position as a leading financial centre and attract successful new businesses to list their companies and grow in the UK.

On the same day, the FCA published a statement stating that it welcomes Lord Hill's Listing Review report, as the FCA supports high regulatory standards in the UK, alongside ensuring that capital markets are dynamic and effective for issuers and investors. The FCA stated that it will consider

Lord Hill's recommendations, act quickly, and will aim to publish a consultation paper by the summer.

The Review's key recommendations include:

• updating listing rules to allow dual class share structures in the London Stock Exchange’s (LSE) premium listing segment. The review suggests this will give directors (in particular, founders) enhanced voting rights on certain decisions, with safeguards to maintain high corporate governance standards;
• reducing free float requirements – the amount of a company’s shares that are in public hands - from 25% to 15% and allow companies to use other measures to demonstrate liquidity;
• an annual report on the state of the City, and its competitive position, delivered to Parliament by the Chancellor;
• rebranding and repositioning the LSE’s standard listing segment and aim to increase its appeal to companies of all sizes and types;
• a fundamental review of the prospectus regime which aims to differentiate the treatment of admission to a regulated market and offers to the public; and
• liberalising the rules regarding special purpose acquisition companies (SPACs), with appropriate safeguards for investors.

No updates for this fortnight's edition of the FSS.

No updates for this fortnight's edition of the FSS.

9. House of Commons Library Research publishes briefing on "Executive accountability in financial services: the Senior Managers and Certification Regime"

On 15 March, the House of Commons issued a research briefing titled: "Executive accountability in financial services: the Senior Managers and Certification Regime". The report looks at origins of the regime and its impact on financial services firms. The report notes that, four years since the regime was introduced, regulators have only managed to bring one enforcement proceeding against an individual for breach of the rules. The report notes that this has led to questions as to the efficacy of the regime.

10. FCA publishes speech by Mark Steward on locking down market abuse

On 8 March, Mark Steward, Executive Director of Enforcement and Market Oversight, delivered a speech on market abuse. We provide a summary of the key areas covered below.

• Volume and STORs: Mr Steward notes that STORs across all asset classes have returned to expected levels and that they remain of high quality. Mr Steward also states that improvements in market data processing capabilities mean that the FCA is not now wholly dependent on STORs.
• Market Monitoring, Short Positions etc.: Mr Steward confirms that the FCA has increased proactive market monitoring and argues that the FCA's new short position reporting mechanism has assisted in identifying delayed notifications, as well as other issues. Mr Steward refers to developments involving GameStop and comments that the UK had not seen short positions of a similar volume as in US markets. He notes the strength of UK regime which he considers helps prevent issues such as naked shorting and illegal practices in general.
• Cleanliness: Mr Steward refers to the new market cleanliness measure (the Potentially Anomalous Trading Ratio (PATR)) introduced by the FCA in September 2020 and states that unlike other measures, this measure focuses on the underlying trading behaviour around specified price sensitive announcements and analyses whether they are anomalous. Mr Steward states that PATR recorded a figure of 6.7 percent anomalous trades for 2019 across around 958 price sensitive announcements.
• Enforcement: Mr Steward refers to recent enforcement cases, including a number of insider dealings proceedings.

11. FCA fines and prohibits trader for market abuse

On 4 March 2021, the FCA announced that it had found that an experienced trader engaged in market abuse by executing trades with himself in the share McKay Securities Plc (McKay).

This practice known as ‘wash trading’ involved the trader intentionally placing buy orders in McKay shares that traded with his existing sell orders (and vice versa). In total, the trader executed 129 wash trades during the period 18 July 2018 to 22 May 2019. The trader entered orders into the market in such a way as to try and avoid anyone detecting that he was wash trading.

Through his wash trading the trader gave false and misleading signals to the market as to demand for and supply of McKay shares. His actions resulted in other market participants seeing what they believed to be legitimate trades in McKay occurring. In addition, the wash trades artificially inflated end of day trading volumes reported to the market. According to the FCA, the trader was aware of the risk that his actions might constitute market manipulation but recklessly went ahead with those actions anyway. The FCA described the trader's "manipulative trading" as serious and described wash trading as "a form of manipulation which undermines market efficiency and integrity."

The FCA fined the trader £52,500 for market abuse and prohibited him from performing any functions in relation to regulated activity. The FCA states that the trader demonstrated a high level of cooperation during the investigation and as result the trader's financial penalty was reduced by 25% and the trader additionally received a further 30% settlement discount.

The FCA notes that it considers that the fine and the prohibition imposed reflect the serious nature of the breach set out in the Final Notice and should act as a deterrent to other market participants.

12. EBA publishes opinion on risks of money laundering and terrorist financing across the EU

On 3 March 2021, EBA published its biennial opinion on the risks of money laundering and terrorist financing (ML/TF) currently affecting the EU's financial sector.

The EBA has identified ML/TF risks that are applicable to the entire financial system, for instance risks associated with the use of innovative financial services, while others affect specific sectors, such as de-risking. The EBA confirmed that the list also includes ML/TF risks that emerge from wider developments such as the COVID-19 pandemic which has had an impact on both firms’ AML/CFT compliance and competent authorities’ supervision. The opinion sets out recommendations to authorities aimed at closing these gaps.

Within the opinion, the EBA identified a number of risks associated with virtual currencies, innovative financial services, and identified differences in the treatment by competent authorities of financial institutions’ involvement in facilitating or handling tax-related crimes (‘cum-ex/cum-cum’). The EBA also observes a continuing trend of de-risking, which has implications from a ML/TF, consumer protection and financial stability point of view.

The EBA has developed an interactive tool, which gives European citizens, competent authorities and credit and financial institutions access to all ML/TF risks covered in the opinion. The interactive tool is available here.

13. FCA: Updated webpage: FS19/2: a duty of care and potential alternative approaches – summary of responses and next steps

On 15 March, the FCA updated its webpage on its Feedback Statement on duty of care and potential alternative approaches to confirm that it is planning to consult in May 2021. The FCA has delayed work in this area owing to COVID-19.

14. The CMA launches consultation on the future governance of open banking

On 5 March 2021, the CMA launched a consultation on the governance of open banking, an initiative that allows consumers and SMEs to share their bank account information securely with trusted intermediaries.

UK Finance has submitted proposals that involve creating a new body, with a more broadly-based funding and governance model, and which is industry supported to succeed the Open Banking Implementation Entity. The CMA noted that it will consider these proposals as part of its consultation.
Interested stakeholders are being consulted on 3 main areas:

• whether the successor organisation proposed by UK Finance proposals will be independent and accountable; adequately funded; dedicated to serving the customer’s interests; and robust and sustainable;
• what compliance monitoring arrangements will it be necessary for the CMA to put in place going forward; and
• what transitional arrangements should be adopted and when should the process begin.

The CMA’s consultation close on 29 March 2021.

15. FCA confirms changes to contactless payment rules

On 3 March 2021, the FCA published its Policy Statement on "amendments to single and cumulative transaction thresholds for contactless payments" (PS 21/2). PS 21/2 confirms that the FCA will change its contactless payment rules by increasing the single transaction contactless payment threshold from £45 to £100, and increasing the multiple transaction contactless payment from £130 to £300.

According to the FCA, there has been an ongoing surge in the use of contactless payments in recent years. Changes in consumer behaviour as a result of Covid-19 has resulted in the FCA's initial increase from £30 to £45 in April 2020.

The FCA confirmed that while adoption of contactless payments increases, cash remains an important payment method for many, including vulnerable consumers and small businesses. It is part of the FCA’s Business Payments priority to make sure consumers can access the cash they need.

This decision follows the FCA's Consultation Paper on various aspects of payment services (CP21/3) published in January this year. For more information on CP21/3 please see our previous edition of the Financial Services SpeedRead here.

16. ECON publishes a draft report with recommendations on the proposal for a regulation on a pilot regime for market infrastructures based on DLT

On 11 March 2021, the European Parliament's Economic and Monetary Affairs Committee (ECON) published a draft report setting out recommendations on the proposal for a Regulation on a pilot regime for market infrastructures based on distributed ledger technology (DLT).
ECON's recommendations include:

• Scope: amending the requirements for entities allowed to participate in the pilot regime and adjusting the financial thresholds and instruments (transferable securities) that can be admitted to trading on or recorded by DLT market infrastructures under the pilot regime;
• Level playing field: amendments to ensure consistent regulatory supervision across member states; and
• Early-exit assessment: introducing of appropriate provisions regarding transitioning out of or winding down DLT market infrastructures. The Rapporteur questions the five-year duration of the pilot regime and proposes that an early-exit assessment report on potential adjustment or discontinuation be submitted by the Commission after three year.

17. ECON publishes a draft report on proposed Regulation on markets in cryptoassets

On 9 March 2021, the European Parliament's Economic and Monetary Affairs Committee (ECON) published a draft report (dated 25 February 2021) setting out recommendations to the European Commission on the proposed Regulation on markets in cryptoassets and amending Directive (EU) 2019/1937 (MiCA).

The draft report contains a draft European Parliament legislative resolution, the text of which sets out suggested amendments to the proposed Regulation. The suggested amendments include

• tweaks to the definitions of 'DLT' and 'utility token';
• changes to the own funds requirement for issuers of asset-referenced tokens so as to include a fixed-overheads component; and
• new suggested provisions with respect to the authorisation of e-money tokens, enhanced AML/CTF requirements and an obligation for crypto-asset service providers to have in place an orderly wind-down plan.

For more information on the MiCA proposal, see our briefing.

18. HM Treasury publishes remit and recommendations for the Financial Policy Committee Budget 2021

On 3 March 2021, HM Treasury published its remit and recommendations for the Financial Policy Committee Budget for 2021. Within the recommendation, there was no abolition of business asset disposal relief (previously entrepreneurs' relief), no one-off wealth tax and no immediate hike in tax rates. The government originally intended to hold a second Budget in Autumn 2020 however, this had been cancelled in light of the COVID-19 pandemic.

Within the recommendation, the Chancellor announced a number of revenue-raising measures for corporate and individual taxpayers. Larger companies will see a rise in corporation tax from 2023 but those able to invest in qualifying new plant and machinery in the meantime will receive a "super-deduction" of 130% of expenditure. For individuals, short term relief offered by the extension of the SDLT "holiday" and extension of the furlough and self-employed income support schemes will be more than be offset by the freezing of the capital gains tax annual exempt amount, income tax personal allowance and higher rate threshold for a four-year period from 2022-23.

The government is due to publish additional tax-related consultations on 23 March 2021.