On 20 September 2017, the European Commission published proposals to reform the framework for the three European Supervisory Authorities (ESAs), namely the European Securities and Markets Authority (ESMA), the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA).
ESMA is being entrusted with direct supervisory power in sectors of strategic importance or with a significant cross-border dimension. Meanwhile, its governance and funding arrangements will be strengthened. The Commission also takes note of the new challenges represented by fintech and sustainable finance by including them in the tasks assigned to the ESAs. The ESAs are additionally to be given a greater role in supervising third-country entities that are active in the EU.
While supporting the overall thrust of the Commission’s proposals, especially on assessing and monitoring third-country equivalence agreements (AMAFI / 17-77), AMAFI felt that they needed to go further in some areas and accordingly expressed concerns about:
• Weak interaction between ESMA and stakeholders, since such contact is vital to high-calibre regulation founded on an understanding of the issues faced by stakeholders.
• The need to ensure that the new independent body – the Executive Board – is made up of high-level figures with the experience to establish a strategic vision.
• The need to limit ESMA’s increased powers to areas where a pan-European approach is warranted, since domestic and regional issues should be primarily handled by local supervisors, who have a better grasp of issuer and investor needs and who are the customary talking partners for market participants.
• The importance of credible and hence effective enforcement powers, which requires such powers to be exercised within the framework of a procedure that is unlikely to be challenged.
• The lack of clarity in the proposal about financing for the scheme; simply referring to a delegated act is not enough.
Trade confirmations
Given the difficulties faced by members in implementing the obligations on trade confirmations, AMAFI alerted the AMF to the scale of the IT developments required to issue confirmations consistent with MiFID 2 requirements. An additional six months will be needed to complete these developments.
Accédez à l'Interview de Stéphane Giordano "MIF2 va modifier les structures de marchés" http://www.agefi.fr/financements-marches/actualites/hebdo/20180125/mif-2-va-modifier-structures-marches-237456 …
MiFID 2
The MiFID 2 framework's entry into application on 3 January has not resulted in any major difficulties, at least for now. AMAFI continues to work on various aspects, while widening its scope to look at a broader spectrum of issues.
Paying for research
AMAFI and AFG have updated the standard agreement on the provision of research services published in early November 2017 (AMAFI / 17-89). A new annex has been added that offers a matrix of criteria to analyse the nature of research services acquired. The aim is to help users of the standard agreement identify services as MiFID 2 research or minor non-monetary benefits.
One of the risks with the new framework, as AMAFI and many others have repeatedly stressed, is that it could undermine the capacity for mid cap investment research within a market ecosystem whose business model is known to have weaknesses. This might make it harder for affected companies to raise the market financing they need to grow. For this reason, discussions were launched with a view to identifying potential solutions that could be considered with other stakeholders.
On 17 January, the AMF published a revised version of its Guide on the new rules governing the funding of research by investment services providers under MiFID 2. As part of the update, the AMF amended its position on whether the documentation published for a primary transaction may be considered as a minor non-monetary benefit (Section 3 question 7). After initially refusing to treat such documentation as a minor non-monetary benefit, the AMF now says that it is possible provided that the documentation is made available to all prospective investors. This positive change followed a request by AMAFI, which had alerted the AMF to the economic importance of this issue.
Product Governance
A third version of the AMAFI Guide to implementing product governance obligations was published in mid-December (AMAFI / 17-87). The revised version adds two new annexes that clarify how to implement the obligations with regard to plain vanilla products (i.e. ordinary equities and bonds) and derivative financial instruments respectively. The annexes set out AMAFI's proposals for standard target markets, which were discussed with the AMF. The new version of the Guide is also available in English.
Cost disclosures
Following the publication in late November of the AMAFI Guide to implementing cost disclosure obligations (AMAFI / 17-76), the group that is looking into this area will resume its work in early February with a view to exploring a number of questions in greater depth, particularly in relation to the provision of disclosures required ex-post.
Customer relations
AMAFI is completing the process begun in June 2017 of updating its memo on key points to watch in relations with customers, which was published when MiFID 1 came into application. Like the previous version, the updated memo provides guidance on the new framework introduced with MiFID 2, which will be especially valuable given the material changes in the area of customer relations. The document, which is divided into ten themes, reports on the discussions conducted by a dedicated working group on the basis of MiFID 2 legislation applicable under French law, including regulations with direct effect as well as directives transposed into the Monetary and Financial Code and the AMF General Regulation. These discussions were the subject of a consultation involving several AMAFI committees and groups.
In mid-December, the European Commission published a legislative proposal on the prudential requirements and supervision of investment firms in the Union. Comprising a directive and a regulation, the proposal aims to improve the oversight of investment firms by adjusting supervisory tools to reflect the specific features and diversity of these participants. To do this, investment firms are classified into three broad classes and made subject to the prudential rules associated with that class.
AMAFI is reviewing the proposal, which contains a number of aspects that offer satisfactory responses to concerns that it raised earlier in the process. Even so, a number of difficulties have already been identified. Their reach now needs to be clarified and solutions found. With this in mind, AMAFI will be continuing the fruitful discussions it has had in recent months with French and European authorities on this issue. As a preliminary step, under the new "Give your feedback" system, summary observations will be submitted to inform discussions by the European co-legislators and the Commission.
AMAFI teamed up with LabEx ReFi, a financial regulation research centre, to prepare feedback to the public consultation on initial coin offerings (ICOs) launched by the AMF in late October (AMAFI / 18-02). In sharing their thoughts on the framework for ICOs, which are currently subject to no regulatory or supervisory measures when proposed to French investors, AMAFI and LabEx ReFi stressed the following:
More generally, AMAFI and LabEx ReFi expressed their wish to participate actively in the AMF's discussions on these topics.
Product governance
The work of the European Working Group (EWG) bringing together a panel of financial players in Europe, including AMAFI, resumed in early 2018. After several months’ use of the standardised European MiFID Template (EMT) developed in 2017 for the exchange of information between manufacturers and distributors, the EWG aims to pinpoint useful changes to the template and its accompanying Q&A document. It will also be working on a set of standardised exchanges for sales outside the target market, which distributors must report to manufacturers. AMAFI continues to actively contribute to these efforts so as to facilitate convergence with its own recommendations (AMAFI / 17-87).
Best selection
In response to a request made by several of its members, AMAFI organised a working meeting in early February on the implementation of the “best selection” mechanism following the entry into force of MiFID II. Discussions were subsequently held between AMAFI and the AMF, notably to clarify the application of obligations in respect of Delegated Regulation 2017/576 (RTS 28). The discussions notably focused on mandatory reporting on best execution venues to be published by entities subject to the best selection system. Some of the points addressed at this meeting may be included in a new upcoming version of ESMA’s Q&A.
MiFIDVision platform
SFAF, AFG, AMAFI, Euronext and Paris Europlace recently launched the MiFIDVision platform. AMAFI has been working together with other players from the Paris financial centre for a number of months on the consequences of the new rules governing the acquisition of financial analyses by management companies. And unfortunately, the initial findings show that the regularly voiced concerns are entirely founded, with research budgets having already been cut substantially. The direct and logical consequence is a reduction in the number of assets monitored. This mainly affects SMEs and mid-tier companies with their traditionally fragile business models for financial analysis. Meanwhile, the OFEM corporate capital market observatory recently published a study led by several researchers on the “role of analysts in the attractiveness and liquidity of SMEs and mid-tier companies”. The study confirms the positive role played by the financial analysis of securities in drawing the attention of investors, based on the reduction of spreads and volatility as well as increases in liquidity.
The MiFIDVision initiative addresses this issue. The aim, with the assistance of the EDHEC Risk Institute, is to publish a barometer not simply reflecting the trend in the financial analysis market following the entry into force of MiFID II but also identifying, in respect of the attractiveness of the Paris financial centre, solutions likely to develop the production of financial analyses.
Customer relations
In early February, AMAFI published a document on key points to watch in relations with customers under new French regulations arising from MiFID II of 15 May 2014 and its implementing measures (AMAFI / 18-08). The document is an update similar to that published by the association in 2007 following the application of MiFID I. It assesses the new mechanism introduced by MiFID II, characterised by substantial changes and an increase in legal sources. Divided into ten topics, the document surveys discussions led on the basis of MiFID II texts applicable in French law by a special working group, rounded out by wide-ranging assessments from several AMAFI Committees and Groups.
Market structure
The AMF and AMAFI have agreed to make regular quarterly reviews of issues relating to the organisation of markets under MiFID II. With the new system set to generate considerable changes to the market structure, some of them already largely under way, discussing these matters is vital. The main issue is providing essentially operational input to inform the work in which the AMF is involved as part of ESMA.
As such, the Market Structure Committee met with the AMF in late March. The Committee presented AMAFI’s study on the consequences of the new system of tick sizes on the micro-structure of the market (AMAFI / 18-16). More technical questions were also discussed, including best execution reports, transaction reporting and trading obligations.
Algorithmic trading
AMAFI has resumed its work on issues in the implementation of obligations relative to algorithmic trading and direct electronic access (DEA) set out notably in DR 2017/589. The aim is to identify the obligations applying to the market players in question, where they are DEA customers, DEA suppliers, users or algorithm designers. The findings of these discussions will be published at a later date in an AMAFI Q&A.
