Article Post on 07 May 2020

Episode 8 - COVID-19 Webcast - ESMA Updates: Conduct of Business and EMIR Implementation Delay

_This is the eighth episode of our COVID-19 webcast series. In this episode Partner Mark Shaw wants to look at a couple of updates from European Securities and Markets Authority (ESMA) over the last few days regarding conduct of business under MiFID and an EMIR implementation delay.

Transcription of the video:

Today, we are looking at a couple of updates to come out of ESMA in the last few days, which sit at each end of the spectrum:

  • at one end, a reminder of firms’ MiFID II conduct of business obligations due to increased retail investor activity,
  • and at the other, a final report from the ESAs (which includes ESMA) on proposed delays to the implementation of initial margin requirements under EMIR due to COVID-19.

So, MiFID II conduct of business first…

We are well aware of the increase in market volatility caused by COVID-19 and it seems like retail investors are, too! Several National Competent Authorities have informed ESMA that they had noticed a significant increase in the number of investment accounts opened by retail clients and a surge in trading by them.

ESMA is acutely aware of the risks for retail clients who are perhaps trying to catch a falling knife and trading in these highly uncertain and unprecedented market circumstances.

So, whether it is your parents pumping their savings into the shares of a pharmaceutical company that they think has the cure, or your auntie and uncle using a spread betting account to short the airlines, ESMA issued a statement to remind firms of their conduct of business obligations under MiFID II.

Critically, and I quote “ESMA believes that firms have even greater duties when providing investment or ancillary services to investors, especially when they are new or have limited investment knowledge or experience, who decide to invest during these times of intensified market volatility.”

None of the following is new, of course, but a reminder that firms have an obligation to act honestly, fairly and professionally in accordance with the best interests of their clients.

Firms must have adequate product governance arrangements in place to ensure that financial instruments will only be offered when in the interests of the client.

Target market assessments should be appropriate and proportionate, taking into account the nature of the financial instrument and the investment service provided.

Firms shall provide appropriate information in good time; and all information must be fair, clear and not misleading – and include a description of the nature and the risks of financial instruments to enable the client to take investment decisions on an informed basis.

Finally, when assessing the suitability and appropriateness requirements, firms should -of course- obtain the necessary information regarding not only the client’s knowledge and experience, but also their financial situation, including their ability to bear losses. On this point, ESMA has emphasised that firms should pay particular attention to the possible ramifications of the COVID-19 crisis on the client’s personal situation.

It goes without saying that the NCAs and ESMA will continue to monitor the retail investment situation and the markets as the COVID-19 situation continues, so watch this space for any updates.

At the other end of the spectrum now, and ESMA and the other ESAs  published joint draft Regulatory Technical Standards (RTS) to amend the Delegated Regulation on the risk mitigation techniques for non-centrally cleared OTC derivatives, under the European Markets Infrastructure Regulation (EMIR), to incorporate a one-year deferral of the two implementation phases of the bilateral margining requirements.

The initial margin dates should be delayed such that counterparties with an aggregate average notional amount of non-centrally cleared derivatives above €50 billion would have to exchange initial margin from 1 September 2021 -this being the phase 5 implementation date-, and those with an aggregate average notional amount above €8 billion from 1 September 2022 - that being the phase 6 implementation deadline.

The ESA’s report has to be submitted to the European Commission for its endorsement in the form of a Delegated Regulation, which would then be legally binding across all Member States of the EU.

The slight complication here being that the ESAs cannot disapply EU law, and the temporary exemptions from bilateral margin exchange have already expired in January 2020. However, what they can do, is state that they expect national competent authorities to apply the EU framework in a risk-based and proportionate manner until the amended RTS enters into force. Which, of course, is what they have done!

If you are in any doubt as to how to handle the legal issues arising out of the COVID-19 pandemic, please do use our helpline or visit our COVID-19 toolkit.

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