Derivatives perform a critical function by enabling companies and investors to hedge their risks. Right now, though, the only effective clearing solutions for many of these products are located in the United Kingdom. Given this situation and the prospect of a hard Brexit, and assuming a transitional solution is not implemented, it is important to assess how an inability to access UK central counterparties (CCPs) after 29 March might affect the capacity to finance the economy and financial stability.
This was the focus of a position paper published by AMAFI mid-October (AMAFI / 18-59), which sought to raise the awareness of the issue to European decision makers. This concern seems to have been taken into account by Commissioner Valdis Dombrovskis, who said in an interview with the Financial Times in late October that the Union would have to temporarily recognise UK CCPs if no agreement was reached. This decision was then repeated in a communication published by the European Commission on readiness for the UK exit. Meanwhile, ESMA published a release in late November in which it said that it supported the Commission’s approach and that it had already begun working with UK CCPs to prepare for their temporary recognition on 30 March 2019.
In late September, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) adopted a report on the prudential treatment of investment firms. The Parliament took into account several requests made by AMAFI, notably concerning remuneration arrangements and assurance that the future framework for investment firms would be equivalent from a risk perspective to that applicable to credit institutions under the CRD and CRR. Other aspects, such as the possibility of conducting supervision on an exclusively consolidated basis, have not yet been addressed. As part of work led by its Board, AMAFI has sent the French authorities proposed amendments to the report (AMAFI /18-65).
Par sa décision 2018-01 publiée tout début juillet, l’AMF a modifié, au terme de plusieurs mois d’échanges avec l’Association, la pratique de marché admise dans le cadre de laquelle les contrats de liquidité sont mis en œuvre en France (cf. Info AMAFI n° 136). Depuis lors, l’Association a articulé ses travaux autour de deux grands axes.
Le premier pour mettre à jour le Contrat-type AMAFI de liquidité dont la nouvelle version a été publiée fin novembre (AMAFI / 18-67). Bien que les évolutions résultant de la décision AMF ne soient pas si nombreuses, elles ont néanmoins nécessité divers échanges, tant avec le Groupe Contrat de liquidité qu’avec les services de l’AMF. Suivra courant décembre la mise à jour de la note de commentaires qui l’accompagne afin de donner aux utilisateurs du Contrat type les éléments d’appréciation qui paraissent utiles.
Le second axe de travail se traduit par l’élaboration d’une note AMAFI afin, d’une part, d’apporter certaines clarifications, face notamment à des ambiguïtés susceptibles de naître de la décision AMF et, d’autre part, de définir une typologie non exhaustive des situations justifiant le non respect de certaines restrictions, et permettant ainsi de simplifier autant que possible la documentation à produire dans les situations où la décision AMF le demande. Des échanges sont en cours sur ce point avec les services de l’AMF.
The International Council of Securities Associations (ICSA) met with the Organisation for Economic Cooperation and Development (OECD) for the first time in Paris in late September. ICSA’s delegation, led by its chairman, Pierre de Lauzun, held talks with Greg Medcraft, head of the OECD’s Financial and Enterprise Affairs Directorate, and his team. The aim was to gain a better understanding of the work being done by the OECD to identify potential cooperation opportunities. Director Medcraft explained the priorities for his directorate, which include blockchain, infrastructure financing and sustainable finance. Based on the discussions, ICSA can now determine how best it can contribute actively to the OECD’s work.
On 10 January, the European Parliament's Committee on Economic and Monetary Affairs (ECON) adopted its position on the reform of the European Supervisory Authorities (ESAs) initiated by the European Commission in September 2017. However, with differences persisting among member states of the EU Council, the chances of reaching a trilogue agreement under the Romanian Presidency look slim. That being said, given the Presidency's stated goals, it could be that a tripartite agreement will be reached by end-June on the AML portion of the review.
AMAFI has been highlighting a number of questions in this area for many months. One key issue is the need to strike the right balance between convergence and proportionality, by promoting supervisory convergence for all areas where a pan-European market actually exists, while emphasising proportionality in other areas, so that national authorities can organise their markets locally to best meet the needs of investors and issuers (AMAFI / 18-43). Although a Capital Markets Union is obviously important, it cannot be held up as an article of faith while at the same time ignoring the true situation on markets that help finance a whole swathe of the economy through close-knit relationships. In AMAFI's view, one area to improve in terms of supervisory convergence would be to put ESMA's Q&As out for public consultation. To ensure that they achieve their goals, these Q&As need to be drawn up in a transparent manner, by giving affected participants the chance to have their say.
Furthermore, with Brexit approaching, ESMA’s powers need to be strengthened, since ESMA alone has the requisite expertise to assess and monitor over time the capital market equivalence granted to third countries.
On 3 December, the European Parliament's ECON Committee adopted its report on SME growth markets.
Broadly speaking, the ECON Committee listened to AMAFI's proposals (AMAFI / 18-44), because the report, while not distinguishing companies according to size criteria, not only allows Euro PP-type private placements to be excluded from the market sounding framework but also recognises the ability of issuers to be covered by a liquidity contract based on a European template (still to be defined) if there is no national practice. On the question of paying for research under MiFID 2, the European Commission has a mandate that gives it until 31 December 2019 to assess the impact of provisions that apply the inducements regime to managers that acquire research services.
The Romanian Presidency of the EU Council has announced that talks on this matter will begin during the second portion of its mandate.
PRIIPs
On 8 November 2018, the ESAs published a consultation paper (JC 2018 60) with draft amendments to Commission Delegated Regulation 2017/653 on the key information document (KID) for packaged retail and insurance-based investment products (PRIIPs), in preparation for the review of this framework.
In its feedback on the proposals (AMAFI / 18-69), which essentially involve performance scenarios, AMAFI stressed the following key messages:
· The priority must be to correct problems seen with a number of KIDs that convey confusing or even misleading information to investors, particularly about performance scenario outcomes and costs;
· In the case of performance scenario outcomes, only an amendment to the calculation methodology is beneficial and required;
· The proposal to add past performance to KIDs is completely unsuited to derivative and structured products insofar actual past performance does not exist for these products prior to issuance. Preparing simulations based on the past performance of underlying assets is not an alternative because such products have specific performances that inherently depend on the structuring approach taken;
· More generally, the proposed amendments and corrections must be carried out at Level 2, not Level 3, because only Level 2 measures can ensure better harmonisation of practices and afford participants greater legal certainty.
AMAFI also conveyed these messages in a summary memo (AMAFI / 19-02) which it sent to the staff of the AMF, ESMA and the European Commission.
The French regulators confirm their position on the interdealer market in the context of a no-deal Brexit: by way of a joint letter received on 14 February 2019 by the AMAFI, the AMF and the ACPR confirm that : « if the only investment services or activities provided or carried out in France by a third-country firm are OTC transactions on financial instruments on own account (excluding execution of transactions on behalf of clients) with credit institutions or investment firms (…) no permission in France is required ».
Read the letters – the English version follows the French version
