Europe Archives - The TRADE

Can the Capital Markets Union save Europe from mediocrity?

Wesley Bray — Thu, 07 Nov 2024 10:21:04 +0000

The EU has a problem. It’s falling behind. Growth has been largely stagnant across the continent for the last two decades, with a wide number of metrics pointing to an ever-increasing investment and growth gap with the US.

The recently-published EU competitiveness report, penned by former prime minister of Italy Mario Draghi, is the latest in a long line of research projects that has shone a spotlight on the EU capital markets, reaching a similar conclusion to those gone before it: things need to change. If the EU wishes to be a competitive force on the global stage, there has to be a fundamental rethink of how the bloc operates.

At the heart of the problem is the fact that the EU is not a favourable location for a company to scale and compete effectively with their US (and now Chinese) counterparts. The Draghi report points out that only four of the world’s top 50 tech companies are European, while there isn’t a single EU company with a market capitalisation over ¤100 billion that has been established in the last 50 years.

Consequentially and simultaneously, the landscape for investors in the region is equally tricky. A key problem, for organisations and investors alike, is the muddled patchwork of rules and regulations across the continent, forged independently over centuries, which they must manoeuvre through to operate effectively.

So, the question now for the EU decision-makers is: how do you make the EU competitive again? The current plan is the Capital Markets Union (CMU): a flagship initiative designed to boost investment, enhance access to finance, enable cross-border investment, and reduce the fragmentation of Europe’s financial markets.

Sounds great, right? The problem though, is that the CMU has struggled to gain traction throughout the member states since its ideation in 2014. The lumbering, 27-pronged consortium is burdened with a deep-rooted inertia as consensus on policy and legislation can often be so hard to come by. Combine this with a rising nationalistic sentiment sweeping through the region, driving a further wedge between the EU and its harmonisation goals, and it is becomes abundantly clear that change won’t be easy.

But 10 years on, the political impetus surrounding the CMU seems to be reinvigorated. The string of damning reports appears to have awoken the beast, with government ministers and institutions across the continent coming forward with plans to kickstart Europe’s new age.

“The race is on and I want Europe to switch gear,” said Ursula von der Leyen, upon successfully securing a second mandate as European Commission President in July.

A more hospitable environment

To unlock those opportunities for growth and to boost investor power in the region, there needs to be a simplification of the disparate systems that exist within the EU.

“If you have 25 to 30 smaller places that operate independent of one another – this can be in Europe or anywhere else – the liquidity and interoperability associated between jurisdictions becomes limited,” explained Okan Pekin, head of securities services at Citi, at a recent AFME conference. “As a result, even if the investors want to bring in hundreds of billions of dollars of capital, getting in and out will become problematic because of frictional costs. So, by virtue of your market structures, you are impeding investor attractiveness.”

Take withholding tax, for example. Each country within the bloc has their own approach to the reliefs and refunds process, which are often complex, burdensome procedures that can actually serve as a deterrent for cross-border investment – particularly for individual and small investors. In some cases, the process takes years.

Another pertinent example is the provision of depositary services, where there is currently no passporting service available to asset servicers in the EU. “[This is] close to our heart as a provider of depositary services,” says Ben Pott, international head of public policy and government affairs at BNY. “You cannot provide cross-border depositary services under UCITS or AIFMD – which, when you talk about a unified Capital Markets Union, is a big miss.”

Insolvency laws, pension schemes, corporate actions, shareholder rights, securities laws – the list goes on. For Europe to become an attractive place for investors and issuers, the EU must tackle these regulatory divergences head on.

“It is not that Europe does not have the cash and investment potential,” says Sam Riley, CEO of Clearstream. “It is about market attractiveness for local and international investors.”

Harmonised post-trade as the bedrock for growth

The disparate frameworks also have a detrimental impact on the post-trade landscape, which faces its own fragmentation problems. To unlock those opportunities for growth and to boost investor power in the region, a harmonised post-trade landscape must form the bedrock on which other initiatives can sit. Without a smooth and efficient post-trade environment, the CMU risks stagnation as fragmented systems will continue to stifle market access and growth.

“We have said for a long time that when you look at some of the post-trade processes, there is still a significant amount of scope for harmonisation, for allowing much more effective cross-border provision for Europe to move closer together,” says Pott. “Historically when you look at the integration of investment services, there is a lot that has happened on the execution side, and not as much on the post-trade side.”

The Draghi report calls for a centralisation of clearing and settlement systems, with a single central counterparty platform (CCP) and a single central securities depositary (CSD) – but the acquisition and integration of 27 CSDs and 14 CCPs is an unrealistic, expensive and time-consuming task. Instead, a focus on strategic partnerships and interoperability would likely yield faster results.

As Riley, points out, over 90% of settlement activity within the EU is processed at three institutions. “That’s the reality,” he says. “We and the two other main CSDs in Europe have already progressed in providing consistency and harmonisation across platforms and processes. That naturally leads to consolidation.

“The challenge is determining what the top priorities for capital markets harmonisation are. What can we realistically achieve? Competition is good; it is healthy. It drives service quality, innovation and efficiency. Eliminating competition would not be a good idea, as it would limit investor choice.”

While progress has undoubtedly been slow-moving, there is a clear desire to bolster harmonisation across the post-trade landscape. Connectivity upgrades to the T2S are due to be rolled out next year, while the CSDR refit will enable the possibility of closer collaboration between CSDs.

Another notable success has been the integration of Euroclear Bank as the domestic CSD in Ireland. Following Brexit, the Irish market agreed that the asset protection framework on domestic securities would be governed by Belgian law, with Euroclear Bank now serving as the CSD for Irish securities. As pointed out in Euroclear’s Unlocking scale and competitiveness in Europe’s market report, the example shows that full CSD consolidation is possible and could serve as the basis for similar efforts in other countries, but it “requires the support of market participants and national authorities”.

The problem is that initiatives often encounter the same national barriers impacting regulatory alignment, as Pablo Portgual, senior director, public affairs at Euroclear, described at the AFME conference: “Some countries, for national security reasons, have a big problem with outsourcing, and that effectively prevents the creation of synergies between infrastructures.”

Next steps

With the political motivations seemingly in the right place, and the key areas identified to boost harmonisation, the next step is to put the plan into action – which may be easier said than done.

The rising tide of nationalism in Europe is placing increased pressures on domestic governments to take more inward-looking approaches when it comes to policy. The age of globalisation is grinding to a halt, with the European collective set to suffer as a result.

“People want to have their cake and eat it,” explained Pekin. “They want interoperability, they want union, they want integration – but also, nobody wants to give up anything from their national sovereignty agendas. So how do you square that circle? If you want a Capital Markets Union, you want no barriers, you want the single CSD – you may never get there in our lifetime. So, the next question becomes: what can you do in the meantime? You can start with interoperability; you can start with data – it’s a critical point.”

Therein lies the challenge for the EU. Policy makers and country leaders need to try and get those wheels turning again, and instil within these local governments a belief that a more consolidated Europe would bear fruit to all participants.

“Convincing is the word, and that is our daily business,” said Marcel Haag, director of horizontal policies at the European Commission, at the AFME event. “We are engaging with member states and we hear them out and we exchange arguments. A lot of member states will say, ‘our priority is to grow our national market’ or ‘we are on the periphery, we have an underdeveloped capital market’. We have to engage, assess the pros and the cons, and let’s see how we can accommodate their concerns.”

While some are eager to ensure an aligned approach across the 27 countries, others are not so patient. Talk of a breakaway coalition within the EU has picked up pace in recent months, with Spain’s minister for the economy, Carlos Cuerpo, outlining proposals to the Financial Times in October for a new mechanism that would allow three or more countries to proceed on joint initiatives without the inclusion of other member states.

On such a project, Haag said: “EU law allows for this under certain conditions. Of course, the Commission’s role is not to divide and create different leagues, but to unite and create a united Europe. Solutions that would allow a smaller group of member states to go forward faster, that for us is always the second best option.”

A ‘28th regime’

A separate proposal – set out in the Draghi report – recommends the establishment of a “28th regime”, whereby a special legal framework is created outside of the 27 different legal frameworks with a view to shortening the length of national procedures and integrating them into a single process.

“It’s a really interesting piece, which is gaining traction,” says Pott. “Rather than saying to member states, you have to all conform to a single system and we’re going to do away with the existing 27, you say to businesses that want to adopt the 28th regime that they can move in that direction.

“It might work better in some areas than others,” he continues. “For taxation, it won’t work so well because business is still bound by its local taxation rules. But when you think about insolvency rules, for example, which was one of those intractable areas where it’s very difficult to move beyond the national insolvency provisions that exist, having a 28th regime that firms could opt into, would be a helpful alternative and maybe overcome some of those national sensitivities of giving up or doing away with national systems.”

How ever the bloc plans to move forward, it’s important to get the ball rolling as soon as possible. The gap between Europe and the US is only widening – a 2023 report from the European Centre for International Political Economy found that the gap between US GDP per capita and EU GDP per capita rose from 47% in 2010 to 82% in 2021.

Harmonised tax and investment frameworks, and a unified post-trade environment are not just a technical necessity; they are the foundation upon which a successful Capital Markets Union can be built, enabling Europe’s capital markets to thrive on the global stage.

“I hope the political momentum and spotlight that we have in Europe at the moment can help us provide the right context to drive change,” said Portugal. “A lot depends on the market and on FMIs collaborating with their clients and with the ecosystem to deliver that call for more integration, more efficiency and cost reduction.”

Yes, the project is vast and the road will be long, but the EU and the financial services industry has the opportunity to spearhead something great in Europe. It’s time to make it happen.

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Regulatory burden labelled top issue faced within European listed derivatives markets

Wesley Bray — Fri, 21 Jun 2024 12:32:03 +0000

When assessing the top challenges expected to be faced in the next five years, more than half (53%) of respondents ranked regulatory burden as the main issue facing their firm, according to a new report by Acuiti.

Regulatory burden has been a key concern for market participants since the Global Financial Crisis in 2008, with the report from Acuiti – in partnership with FIA – adding that new frameworks are ‘lengthy and complex’, requiring significant resource mobilisation to navigate current regulatory requirements.

Most respondents felt that the level of European regulation on their respective firms was disproportionate, however it’s worth noting that nearly a third of respondents were indifferent on this viewpoint.

Looking at specific EU regulations, Investment Firms Directive (IFD) and Investment Firms Regulation (IFR) were highlighted as the most challenging, with more than half of respondents expecting ‘critical’ or ‘major’ challenges associated with the implementation of these regulations.

European capital regulations, including IFD and IFR, have constituted a major compliance burden for principal trading firms, with significant implication for the prudential requirements that these firms have become subject to.

The report noted that the cost implications have pushed various principal trading firms to give up their Mifid II licences or relocate their headquarters or specific trading desks outside of the EU.

Interestingly, when looking at the risks on the horizon within the European listed derivatives markets, regulatory risk was found to be the second largest risk that respondents were most concerned about – coming in just slightly lower than cyber risk.

“Regulation is a constant of listed derivatives markets – when one framework takes effect another is usually coming down the line,” Acuiti said in its report.

“While market participants frequently support the objectives of regulation, often there are unexpected consequences from rule proposals. These then require substantial lobbying efforts to counter or moderate.”

Brexit

Elsewhere in the report, Acuiti explored the impacts of Brexit just over four years since the UK’s exist from the EU. Looking at the impact Brexit has had on London as a financial centre, most respondents (51%) believe that the city will remain a financial centre but at diminished size and influence.

Despite initial viewpoints that Brexit would lead to regulatory independence from the EU, the report suggests that appetite for this routed has shifted.

A key portion (41%) of respondents felt that the UK should pursue some divergence from the EU, however, noting this should not be done at the expense of equivalence with the bloc’s regulations. A larger proportion (45%) felt that the UK should seek convergence with EU laws to reduce regulatory fragmentation.

“While the European listed derivatives industry has faced multiple challenges during the last five years, its market participants are viewing the next five years ahead with optimism,” Acuiti said in its report.

“Challenges have not dissipated, with the effects of Brexit still playing out, cyber risk rising as a threat to systems and regulation imposing a constant and heavy burden on operations. However, confronting this multitude of challenges had also created a fortified and resilient industry.”

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Fragmentation and regulatory complexity pegged as main hurdles to European ETF growth

Wesley Bray — Fri, 26 Apr 2024 11:54:54 +0000

With ETFs increasingly becoming more popular in Europe, panellists at TradeTech highlighted fragmentation and regulation as two key pain points that need to be addressed going forward in order to boost growth in the trading segment.

Simon Barriball, Virtu Financial

Simon Barriball, ETF and portfolio trading, EMEA, at Virtu Financial emphasised the detrimental impact the fragmented venue landscape was having on the assets – highlighting the sheer number of listing venues that Europe has for each ETF, as well as multiple sets of currencies and settlement depots. Europe has twice the listings of the US for just a fifth of the AUM, he explained.

“On the regulation side of things, it’s incredibly difficult in Europe to gauge aggregate trading volume as trades are reported across multiple venues, multiple tickets even for the same ETF,” said Barriball. “Post-Brexit, you even have dual reporting in some instances between UK and EU jurisdictions. That data is hugely important for making meaningful pre- and post-trade analytics.

“We need a consolidated tape, which has taken too long. Current proposals look like they don’t really fit what we need for ETF. There’s only top of book data and no venue attribution and obviously the time scale is still really vague.”

The issue of fragmentation in the European ETF landscape was echoed by David Smith, head of ETF sales at SIX Swiss Exchange. He highlighted that fragmentation is an issue that exists in many parts of the financial landscape, felt most keenly in areas like the ETF product segment.

“Investors have different demands – what they want, how they want to trade and settle. However, the result of that is you find dispersed liquidity. It’s difficult to know where to trade and how to trade and that’s clearly a factor why the RFQ protocol has become so popular,” said Smith.

Inevitable comparisons were drawn between European and US markets in relation to ETF at TradeTech this week – a discussion point seen across many of the event’s panels across several other aspects of the European capital markets. Panellists discussed what could be learned from the US and translated into European markets to help improve the landscape here.

“When looking at the US market, they have one very dominant exchange, one dominant clearer and a key currency. However, in Europe, it’s very fragmentated, multiple exchanges and different currencies,” said Ben Miller, vice president, ETF specialist sales, EMEA, at Citi Group.

“A centralised tape would be brilliant and a centralised clearing – in time we could get there – which would really help. Both markets have done a fantastic job of getting institutional adoption. If you were trading $200 million for a US ETF or European ETF, you’re going to get very similar experience.”

Miller added that the US has done a great job at rounding out that ecosystem with retail, adding that retail is seeing some strong growth in Europe and has the protentional to be the main driver for improving the European ETF landscape.

Providing a buy-side viewpoint on the European ETF landscape, Tim Miller, senior trader at Fidelity International, noted that we are experiencing an inflection point when considering ETFs.

Technology is having meaningful impacts on solving issues linked to ETFs in Europe, helping improve infrastructure and the volume of flow on exchange.

Such developments, he argued, will continue to promote growth within this segment of financial markets, helping bring everything together more efficiently.

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Consolidated tape: Avoiding a ‘garbage in and garbage out exercise’

Wesley Bray — Thu, 25 Apr 2024 12:20:15 +0000

A key discussion point at TradeTech Europe this week was the ongoing push for a consolidated tape and how this can help improve market structure within Europe. However, panellists noted various areas that need to be addressed to ensure a consolidated tape would be successful.

“Before a tape, we need a drastic cleaning of the data in order to make sure that the tape is simply not a garbage in garbage out exercise,” said Emilie Rieupeyroux, head of market strategy, cash equities and data services at Euronext.

“We also need to ensure that we have accurate extensive data helping to distinguish between what’s addressable liquidity, interesting information and non-addressable liquidity which should not even be covered in the tape.”

Elsewhere in the panel, Fabien Oreve, deputy global head of trading and securities financing at Candriam, noted that a consolidated tape could stimulate more investor participation in European equity markets if it increased the visibility of total and addressable liquidity.

“It could also represent an invaluable source of information for listed companies in Europe, and also for the small companies that would like to get listed in the continents,” said Oreve.

“On top of that, showing clearly when and where blocks are traded is extremely useful for small and mid-cap traders. A consolidated tape could help increase the visibility of block trades, but the tape should not be expensive and should not be costly for investors.”

Over the last few years, there has been a lot of regulatory change within Europe, alongside ongoing impacts from the Covid pandemic, Mifid II and Brexit. Some panellists felt that a consolidated tape would be a great benchmark across the whole market – with Alex Dalley, head of Cboe Netherlands at Cboe Europe, noting that “it would be easy if we had a uniform benchmark [in European markets].”

“Having a benchmark that everybody looks at, gives that clarity to everybody in the industry about what’s going on across the whole market. We still spend a lot of time debating what’s OTC, how much is addressable liquidity, etc, when it would be a lot easier to just have that benchmark that we all reference,” said Dalley.

The issue of settlement costs was also discussed among panellists, particularly the fact that settlement costs are higher in Europe despite the fact that clearing costs are similar. This being a result of differences in the post-trade landscape when compared to the US which has one clearing house compared to various settlement systems and clearing houses in Europe.

“Because of the fact that the post-trade landscape is all consolidated through one clearing house and settlement system in the US, you get a lot of netting benefits and not only is the cost a lot cheaper, but the actual netting ability is huge and you just don’t get that in Europe,” added Dalley.

Elsewhere in the panel, the issue of fragmentation and whether competition can help foster better market structure dynamics within Europe was discussed among panellists.

“We need to find a right and logical level for competition. Competition breeds innovation and pragmatic innovation certainly breeds more efficiency for market participants. But endless fragmentation does come with a cost and that’s a tough thing to manage, particularly as costs for IT [and similar developments] are going through the roof,” said Simon McQuoid-Mason, head of equity products UK and Ireland at SIX Swiss Exchange.

Fragmentation was a much-discussed topic on various conference panels this week, with differing viewpoints on its benefits and whether too much fragmentation could be detrimental to the European market landscape.

“When comparing ourselves to US market structure, do we need all the spaghetti on the page [in reference to a displayed chart showing considerable fragmentation in Europe]? Probably not. Actually, we could simplify. Consolidation and pragmatic innovation will help with that,” McQuoid-Mason concluded.

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Combating liquidity challenges in Europe requires caution especially when considering alternative means of trading

Wesley Bray — Thu, 25 Apr 2024 10:33:51 +0000

The creation of private rooms where members can trade bilaterally behind closed doors and the impact this would have on liquidity was a key theme addressed at TradeTech Europe 2024, with panellists discussing whether such methods can be considered fair and equitable.

James Baugh, TD Cowen

“We’re not talking about multilateral trading opportunities. Therefore, it means that there’s clearly going to be more business taken away from the public markets,” said James Baugh, managing director, head of European market structure at TD Cowen.

“I wouldn’t necessarily say that a private room would be dissimilar to maybe some of the RFQ models that certain platforms operate, where you have that bilateral relationship, meaning that certainly one platform has taken some retail business out of the public markets by providing that sort of bilateral arrangement between market maker and retail.”

Baugh added that we have to be careful we’re not self-harming when looking for liquidity opportunities in a difficult market – highlighting, however, that whether it’s a private room, or another liquidity opportunity, one will not turn them away if they can plug that liquidity gap.

“Ultimately, longer term, what does this mean for our ecosystem? What does this mean for those international investors looking into Europe, thinking, well, where’s the liquidity? There’s nothing to be doing here. That would be my personal take on it.”

Countering this viewpoint, Anish Puaar, head of European equity market structure at Optiver, added: “Not all orders or all liquidity is suitable for public markets, whether that’s lit, dark, or periodic and you do need those alternative means of executing.

“It’s something we have to be wary of but we have to be careful with not trying to force everything onto public, lit or dark markets because we’ve seen before from regulatory attempts to do that, that doesn’t end well.”

Baugh added that fragmentation is great, however adding, “Let’s just all be mindful if it swings too far one way and if there is less addressable liquidity, that’s going to cause us longer term damage.”

The challenging European liquidity landscape has, unsurprisingly, been central to several panel discussions at the conference throughout this week.

Panelists speaking on Tuesday highlighted the importance of understanding what has led to current liquidity landscape issues in order to create viable solutions.

“Everyone in this room is to blame for the liquidity problem in Europe,” said Rupert Fennelly, EU head of equities electronic trading and sales at Barclays.

Innovation – although typically associated with ironing out the creases in markets – was highlighted by some panellists as detrimental to participants in some cases, creating more complexity for firms.

“We all want to innovate and some of that has unintended consequences,” said Marc Wyatt, head of global trading at T. Rowe Price.

“We have to be very judicious with how we spend our time and how we decide on our allocation. Unfortunately, if you gave a buy-side firm a large tech spend, 20% is going on regulatory compliance and the next 10-15% is going on keeping the lights on. Small and medium-sized shops are going to struggle. We have to be judicious with technology and talent in place.”

With the common understanding and agreement that the European liquidity is suffering, panellists discussed methods in which market participants can help combat this.

“For us and specifically looking into the market structure, not only in Europe and the US, I think shortening up the market hours would go a long way for helping liquidity for us,” added Wyatt.

Several panellists agreed that a shortening of the trading day would be beneficial to improving liquidity conditions, with multiple labelling it as one of the easier solutions to this issue.

“Shortening trading hours is definitely one that would be easy to achieve if we didn’t have resistance from some of the exchanges, because that makes total sense. There’s no reason why we take two hours longer to trade a tenth of the volume that trades in the US,” said Fennelly.

“We talk a lot about retail and retail involvement in the market. How can we expect people to back our market when we’re not willing to back it ourselves? Those assets need to be freed up to participate more in the capital markets, take more risk and also reap the benefits of it.”

Tying up the potential solutions to the European market’s challenges with liquidity, Baugh concluded with a showstopping final quote: “Consolidated tape for me [could be beneficial], transparency is key. I think it’s a real shame that one incumbent exchange has decided they don’t see value in a pre-trade consolidated tape.”

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FIA EPTA suggests post-trade reporting gap responsible for shrouding the “real story” around volumes in Europe

Annabel Smith — Thu, 18 Apr 2024 15:24:12 +0000

The FIA European Principal Traders Association (FIA EPTA) has today released a report suggesting a portion of trading left unreported is partially to blame for the negative picture painted around declining volumes in the Bloc.

According to the association, the current Post-Trade Transparency (PTT) regime under Mifid in Europe does not obligate traders to report a transaction executed in a broker’s internal systematic internaliser (SI) in relation to a synthetic instrument.

The reporting gap relates to hedging using a synthetic instrument. When executed via a regulated market/multilateral trading facility, an external SI or another form of over the counter (OTC) trading where the broker interacts with third party liquidity, the trade and volume is reported under the PTT regime.

However, in its report, FIA EPTA suggests that if the trade is executed via an internal SI, for example against another hedge of a synthetic instrument in its SI, then the resulting trade has said broker as both the buyer and the seller of the trade – thus not recognising it under the PTT framework for printing into the market.

“This is how the transparency gap comes into being,” FIA EPTA said in its report, adding that the current unreported segment is unquantifiable at this stage.

“Bringing these volumes into the scope of the Mifid II post-trade transparency framework will, therefore, give a more accurate and (given the significant size relative to the other execution scenarios) a more positive picture of European equity volumes.”

FIA EPTA suggests that in order to plug this reporting gap in order to gain a more accurate picture of the market, the PTT must be altered to ensure that an executing broker fulfilling a trade using its own inventory internally should report the trade as if it were taking place on an external SI or trading venue.

Europe’s suffering liquidity has repeatedly come under fire in recent months, becoming the poster child for many conference discussions around how to fix the Bloc and reinvigorate interest in trading in the region.

Declining volumes and the perception that Europe is falling behind have been blamed for a lack of listings and capital allocation when compared to the US and Asia markets. Many suggest this is now becoming a self-fulfilling prophecy, whereby negative rhetoric has further discouraged interest in the region.

In its report, the FIA EPTA suggests that with this segment of trading relating to hedging remaining unreported, investors do not have the full European picture and therefore “incomplete conclusions will continue to be drawn regarding appropriate market structure needed in European equity markets”.

“This trading activity (and the economic interest in European equity markets that it reflects) is not just obscured or hard to find, it is completely missing,” the FIA EPTA has said in its conclusion.

“As a consequence, European share trading volumes are being perceived by the market (including global investors and issuers) as being significantly lower than they actually are. No one has the full picture. When viewed in combination with the fragmented nature of Europe’s trading landscape and the lack, as of yet, of a consolidated tape, it becomes easier to see why investors and issuers are shunning European markets in favour of other global financial centres.”

Instead, the association has insisted that regulators in Europe and the UK must push forward with the implementation of a consolidated tape for shares and ETFs so that the “full scope of trading” becomes clearer.

“Without this, Europe risks being left behind,” the association said.

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ESMA officially scraps ‘hardly read’ RTS 28 best execution reports

Annabel Smith — Tue, 13 Feb 2024 13:41:10 +0000

The European Securities and Markets Authority (ESMA) has officially scrapped RTS 28 best execution requirements following the milestone agreement reached last summer by the European Union and Parliament.

In a statement released on 13 February, ESMA said it no longer expected National Competent Authorities (NCAs) to prioritise supervisory actions towards investment firms relating to the periodic reporting obligation to publish the RTS 28 reports.

“ESMA stresses the importance of the best execution requirements under both the current and the reviewed Mifid II framework,” the regulator said in its Tuesday statement.

“So, apart from the content of this statement, investment firms are required to strictly adhere to best execution requirements and NCAs are expected to supervise their compliance.”

Read more – European Council and Parliament reach milestone Mifid compromise on consolidated tape and PFOF

The European Union and European Parliament reached a political agreement concerning the Mifid/Mifir review in June last year after a lengthy consultation process.

Among the topics discussed was the deletion of Article 27 under Mifid II which requires firms to make public the top five execution venues they executed client orders in the preceding year and information on the quality of the execution obtained. Article 28 specifies further format and content relating to this information.

Behind the proposed deletion were claims by market participants that the reports are “hardly read and do not enable investors or other users of those reports to make meaningful comparisons based on the information provided”.

ESMA confirmed that after the date of entry into the new directive amending Mifid II, member states will have 18 months to convert it into national law. Some firms may have to continue reporting until this takes place in their respective member state.

However, from 13 February, ESMA has advised that NCAs do not prioritise supervisory action towards firms relating to RTS 28.

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Millennium Advisors hires from within for new head of EMEA sales

Claudia Preece — Mon, 11 Dec 2023 11:27:43 +0000

Marion Juric has been named head of EMEA sales at Millennium Advisors, following five years with the business working across Europe, Middle East, Africa, and APAC.

London-based Juric was previously director of sales and business development at the business, in the fixed income – credit department.

Her previous experience includes a stint at MarketAxess in an eTrading sales role covering France and Belgium, and before that as an investment specialist – structured products, funds, and ETFs – indices at BNP Paribas Fortis.

Juric has also worked for Groupe Crédit du Nord in a structured products and sales role, and at Crédit Agricole CIB in sales and marketing e-business flow rates.

Speaking in an announcement on social media, Millennium Advisors said: “Marion has been with Millennium since 2018. Over the past five years she has had a huge impact on the growth of our London business, playing a pivotal role in the expansion our client footprint across EMEA and APAC, and in shaping our team.

“As our business continues to be more global in reach and outlook, we want to ensure our organisation is structured to best support our growth ambitions, and promoting Marion is an important piece of that puzzle.”

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Investment firms must improve market stress assessments when it comes to liquidity adequacy, says FCA

Claudia Preece — Thu, 30 Nov 2023 13:37:36 +0000

Amongst the final observations from the UK Financial Conduct Authority’s (FCA) in its Investment Firm Prudential Regime (IFPR) review was the need for investment firms to better assess their liquid asset threshold requirements during periods of financial stress.

The thematic review specifically focused on the progress made by firms in implementing the internal capital adequacy and risk assessment (ICARA) process and reporting requirements under IFPR – which applies to the investment firms engaged under Mifid.

IFPR is aimed at streamlining and simplifying the prudential requirements for the 3,500 Mifid investment firms that are prudentially regulated.

In terms of the firms’ liquidity adequacy, the FCA found some poor practice across the market and recommended that firms must work on considering all the relevant, plausible stresses which could affect business models, and subsequently do more to ensure that the resources are in place to minimise harm if severe situations should arise.

Where stress events and time periods were considered, these were found not to be necessarily relevant to their cashflows or liquid asset positions, or applied to only a subset. Further, currently “most” firms have not gotten into the habit of regular reviews and subsequent adjustments to their liquid asset levels in line with external market changes, said the FCA.

Highlighting the importance of doing so, the regulator explained: “Recent events have highlighted the importance of adopting this practice. The financial markets have been affected by heightened geopolitical risks and a challenging macroeconomic environment. There have been periods of rapidly escalating and sustained volatility, and higher prices in some markets.

“These lead to substantial margin calls, higher costs, credit stresses and increased counterparty risks for some firms. The impact of volatility in one market also tends to spill over to others, eventually being felt by other firms.”

The FCA also highlighted that insufficient consideration has been given by firms to timeframes, specifically in firms with significant intra-day or inter-day funding gaps or increases in liquid asset requirements during stress.

In these instances, only monthly or quarterly intervals were used to analyse stressed cashflows, found to be “insufficiently time granular to understand and plan for the actual timings and prompt mitigation of liquidity stresses specifically intra-day and inter-day stresses,” said the regulator.

It further suggested that these firms were more at risk of running out of cash in stressed conditions – with a possible end result of firm failure.

Other key areas of improvement found by the FCA included recommendations around: data quality, wind down plans, and ICARA risk processes.

The financial watchdog’s findings stated that the wind-down assessments from firms did not sufficiently consider impact on members and overall had not adequately planned for instances of potential failures.

Notably, it also found that for most firms, their internal intervention points lacked the appropriate structure to ensure actions could be triggered within the appropriate time frame to mitigate firm failure.

The IFPR regime came into force on 1 January 2022 and these final findings follow initial observations from the FCA’s thematic review in February – while all firms receive individual feedback, the regulator has urged the market to consider and proactively address the latest findings.

Despite some pain points, the FCA asserted in its most recent publication that “firms have made progress in understanding the requirements of the new regime. We saw a deliberate shift toward considering and seeking to mitigate the harm the firm can pose, particularly to consumers and markets.”

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EU committee gives green light for Euro derivatives clearing active accounts

Annabel Smith — Wed, 29 Nov 2023 17:19:18 +0000

A committee of European policymakers has, on Tuesday 28 November, voted in favour of the draft EU rules around active clearing accounts, aimed at encouraging more Euro clearing volumes away from the City of London and back to the Bloc.

Euro-denominated derivatives clearing is a market that has historically been dominated by the London Stock Exchange Group’s clearing house LCH in the City and has proved to be one of the key battle lines drawn since Brexit.

Proposed by the European Commission at the end of 2022, the new Emir 3.0 proposal includes the requirement for all participants to hold active accounts at European CCPs for clearing at least a portion of certain derivative contracts, designed to increase the attractiveness of EU CCPs and encourage more volumes back across the channel.

It also included simplified product approvals, faster model change authorisations and increased margin model transparency, alongside the proposal of a new clearing threshold calculation.

The regulation has proved divisive across the buy- and sell-side who suggest the active account proposal specifically could hamper competition and would harm liquidity by dividing volumes between the two regions.

“The mandate to clear on EU houses will bifurcate liquidity in cleared swaps,” said one panellist speaking at the FIX Trading Conference in Paris earlier this month. “That’s an attention point for us and we will be watching it carefully. It could increase costs and decrease liquidity.”

The committee acknowledged these challenges on Tuesday, adding that the changes should be brought in under a phased approach. It has also suggested that the European Commission undergo a cost benefit analysis to assess the stability and competitiveness of markets before it imposes the mandatory threshold.

Read more – Carrot or stick? How the EU plans to reduce reliance on UK CCPs for derivatives clearing

An Acuiti Clearing Management Insight Report released in May found that around two-thirds of sell-side clearing managers do not support the EU’s recent proposals to implement active account requirements for Euro denominated swaps under Emir 3.0.

Among the specific competition concerns listed in Acuiti’s findings were that the new rules could encourage participants to take certain “uncompetitive” prices just to meet a minimum threshold of activity.

The report found that the proposals lacked clarity around how the threshold for said active accounts will be defined – an area of anxiety for those surveyed in Acuiti’s report. Overall respondents suggested that this threshold should not just be defined quantitatively.

European trade associations including AIMA, EFAMA, BFPI Ireland, EACB, FIA EPTA, Federation of the Dutch Pension Funds, Finance Denmark, Nordic Securities Association, ICI Global, FIA and ISDA, also issued a joint statement in September urging EU policymakers to delete the proposal and instead focus on streamlining the supervisory framework for EU CCPs across member states.

The European Parliament is now set to engage with European member states to negotiate the final text before the end of the year.

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