Regulatory Strategy 2016
As one of Europe’s leading diversified exchange groups, London Stock Exchange Group is an active participant in international and domestic regulatory debates. This page contains links to recent submissions and responses on behalf of the Group, or certain entitites within the Group.
LSEG appreciates that ESMA has taken a balanced approach to the non-equity consolidated tape, hoping to achieve a reasonably good coverage of the non-equity space, while maintaining commercial attractiveness for the potential CT providers.
- We support ESMA allowing specialised consolidated tape. We agree that the greater granularity, the higher potential attractiveness to provide CT, however this may require users subscribing to several different tapes, in order to capture the market fully.
- We do not support introducing a threshold, under which trades would not be part of the CT, as this would not create a truly consolidated tape. Excluding the smallest venues/APAs from the CTP is potentially anti-competitive and reinforces the market position of the existing largest venues / participants. The threshold proposal introduces an overly complex and costly process, offsetting any costs saved by not simply including all data feeds in the first place.
LSEG continues to engage on the EU Benchmarks Regulation. We responded to the ESMA consultation on the draft Regulatory and Implementing Technical standards. Three overarching themes in our response are:
- Information in authorisation process, compliance statement and benchmarks statement
We would like to reiterate the difficulties the administrators will face while determining whether the benchmarks or families of benchmarks are significant or non-significant. This results from the fact that the reference value of a benchmark is difficult to determine and may fluctuate in such a way that a benchmark could move between the two. We seek ESMA’s guidance on whether it is in any way contrary to the BMR to treat significant and non-significant benchmarks in the same manner. We would appreciate ESMA’s guidance on such arrangement.
- Input data definition pertinent throughout the BMR
Throughout the BMR, various requirements are posed on administrators and contributors/submitters of input data. We believe that without further guidance on what exactly constitutes input data, achieving compliance will be difficult. We understand ESMA may have limited mandate in terms of setting out exact conditions that would need to be met for data to be considered “input data” for the purposes of BMR, however we would like to bring to ESMA’s attention that there are crucial dependencies in the “Code of conduct” and “Governance and control requirements for supervised contributors” sections.
- Recognition as a permanent solution for third country administrators
The current language of the RTS on Recognition of third country administrators could be interpreted such that recognition is a temporary measure – Article 32(1) states “Until such time as an equivalence decision …. is adopted”. Should a third country jurisdiction find it difficult to achieve equivalence and should endorsement not be suitable due to the size of the business of the administrator, recognition will be the preferred way for a third country administrator. We believe that replacing this wording with the following “In the absence of an equivalence decision ….” would clarify that recognition might be a permanent solution for some administrators, if this is indeed ESMA’s intention.
Prospectus Regulation €100,000 Minimum Denomination for Wholesale Bonds : Joint industry letter to the Presidency of the Council of the European Union, the European Commission and the European Parliament
LSEG has signed a joint industry letter to EU policymakers reported on POLITICO.EU supporting a compromise proposal made by the European Parliament that would abolish the €100,000 minimum denomination for wholesale bonds within the Prospectus Regulation. The Commission describe this as “one of the identified barriers to secondary liquidity on European bond markets”. The benefits of abolishing the denomination include:
- Removes barriers for institutional investors to fairly allocate assets across their clients, consistent with the fiduciary duty to treat customers fairly (recognised in the US, where the minimum denomination is $1000)
- More diversified investor base and greater liquidity for issuers, potentially meaning a lower cost of capital.
- Lower balance sheet costs for market makers to support liquidity
- Improved efficiencies in the settlement process (as the ECB has argued).
- Wider choice for retail bond investors (currently cut out of 70% of the market), particularly in the context of an ageing European population who need fixed income in their portfolio
A default back to the existing €100,000 system would represent a missed opportunity to deliver meaningful change. Signatories to the letter sincerely urge EU policymakers to adopt an approach based on the European Parliament proposal, which they believe is consistent with the interests of the Single Market and ordinary investors and the intentions underlying capital markets union.
LSEG is exploring the use of DLT in group businesses and puts forward the following key views in our response:
- DLT offerings must comply with current regulatory requirements – ESMA confirms that if a DLT offering is in effect providing an FMI regulated activity, the provider must be authorised. LSEG recommends that DLT-based clearing services for non-derivative assets should be subject to CCP requirements.
- FMI remain a point of trust in financial markets - FMIs will look to use DLT to achieve greater efficiencies and to create new value added services. FMIs are well placed as large scale service operators to manage DLT based systems.
- LSEG’s view of key benefits - increased resiliency, efficiency and cyber security and enhanced data reporting. Processing functionality, cybersecurity and governance standards are the current challenge.
- Application to clearing and settlement - some operational functions could be made more efficient by DLT, but core CCP functions will remain outside of DLT automation and settlement efficiencies remain subject to settlement finality requirements.
- Implementation will take longer than expected - first internal trials and simple applications are likely 2016-2020, with larger scale infrastructure adaptations (if risks, challenges and commercial justification prevail) between 2020-2030.
We welcomed SEC looking at the area of ESG disclosure, our key comments include:
- We emphasised that investors globally are increasingly using ESG data and are needing it to be consistent and reliable.
- We stressed that the SEC needs to be cautious about one-size fits all positions.
- Disclosure of immaterial information unnecessarily increases costs for registrants and diminishes the quality of information available to investors.
- Disclosure requirements should incorporate the appropriate international standards and guidelines – what issues are relevant differs between companies based on sector, business strategy and location of operations.
- The channel used to disclose the information (e.g., annual report, sustainability report, integrated report, filings) is less relevant so long as the quality and reliability of the information is equally high.
We support ESMA’s work on the draft Technical Advice to the European Commission and wish to stress the following elements of the future Delegated Acts:
- Third country regime – The objective reasons should not be set unnecessarily high to allow for cross-border competition and thus better offering to benchmarks users. It should recognise current investor demand as a “supporting indicator”.
- Accessibility of information for the administrator – The required information (i.e. identification of financial instruments referencing benchmarks / outstanding product notional) is not reported to the administrators and will be difficult to obtain.
- Dependencies of the BMR on MiFID delay – ESMA should recognize envisaged delay, as it is relevant for the elements of the regulation relying on MiFID reference data.
- Exemptions enshrined in Level 2 – The various exemptions, mainly stemming out of the BMR Level 1 recitals need to be reflected in the Level 2 to avoid market legal uncertainties.
- Core factors – methodology, outsourcing and ultimate decision-making power, in particular, should be the main element of administering the arrangements for determining a benchmark.
- Clarification of issuance to include exemption of practices such as novation of an original bilateral contract to a CCP.
As a keen partner in international dialogues on disclosure and a natural link between the issuers and investors, we:
- Understand that climate change needs a long-term engagement, exceeding both monetary policy horizons and election cycles.
- Recognize that the ongoing transition to a low-carbon economy requires increased understanding of the concentrations of carbon-related assets and the financial system’s exposures to climate-related risk.
- Support FSB aiming to harmonize the existing 400+ ESG disclosure regimes.
- Call for issuers and other similar sized non-listed entities to adopt the same reporting standards to avoid fragmented results.
- Support tailoring disclosure by particular industrial sectors to ensure materiality; and support scenario and sensitivity analysis.
- Point out best practice, such as the UK Mandatory greenhouse gas (GHG) emissions disclosure and the French decree on mandatory climate change-related reporting for institutional investors.
- Propose simplified grading system for climate risk information directed to retail investors.
- Encourage FSB to build on the work done by the UN Sustainable Stock Exchange (SSE) to enable true global harmonisation of disclosure standards.
As a stock exchange, we have a unique position, acting as a natural link between the issuers and investors. We promote fair and transparent market and sustainable investment. We believe that high quality non-financial reporting, including on ESG (environmental, social and governance-related) enhances corporate transparency. Our key messages, among others, encourage the European Commission Guidelines to:
- be investor-focused and “demand-driven” and avoid a one-size fits all approach
- strike a balance between encouraging supply of consistent, easily comparable and reliable data and the need to avoid overly prescriptive requirements, particularly where global consensus has not been yet reached
- take into account the national, international or other EU-based frameworks, particularly by the UN Sustainable Stock Exchange and reference the, and provide guidance to how to assess them
- acknowledge and understand the so called “non-financial” risks, as it is directly related to and can turn into financial risks
- ask companies to explain the relevance of specific ESG factors and their impact on the firm’s long-term profitability, risk management and competitive position
- take business relationships into account, in the cases where such information is relevant for investors.
We support ESMA’s work on the Benchmarks Regulation with the aim of strengthening the integrity of benchmarks. We offer our views, informed by our experience as a leading global index provider, on how the provisions of the Level 2 text could be calibrated.
We ask ESMA to consider:
- Clarify the thresholds and methods of assessment for characterising benchmarks
- Provide the ability for administrators to opt-in to a “significant benchmark administrator” regime
- Allow applying for authorisation at administrator level as oppose to benchmark level
- Ensure a level-playing field for the third country administrators
- Allow flexibility for the design of the oversight function
- Calibrate the requirements for input data imposed on contributors to avoid their withdrawal
- Clarify the scope of contributed data
- Strengthen the provisions that mitigate the risk of front-running
- Align the provisions of the Regulation to the IOSCO Principles for Financial Benchmarks in order to minimise the risk of unintended consequences.
London Stock Exchange Group (LSEG) supports the aim of the CPMI-IOSCO Harmonisation Group to enable the consistent global aggregation of OTC derivatives transaction data. We also agree that instrument identification and classification are essential components in facilitating this aggregation. We would like to highlight the following key points to CPMI-IOSCO, which under-pin our responses and are, we believe, crucial to the effective development of a approach in this area:
- Differentiate between identification and classification
We strongly disagree with the core concept of the paper that a single data element can both identify and classify a derivative. Whilst the roles of identification and classification are linked, they are designed for different purposes.
- ‘Identification’ uniquely identifies an instrument whilst
- ‘classification’ describes the attributes of that unique instrument.
- Maintain consistency with international standards
- UPI discussion needs to also consider ETDs rather than being exclusively an OTC swap focused consultation
Key messages from LSEG:
- LSEG fully supports efforts to enhance FMIs' cyber resiliency
- It is crucial to ensure that an internationally consistent approach is taken in order to mitigate against any regulatory arbitrage
- It is important in view of the upcoming international framework for CCPs' Recovery and Resolution of which we consider that non-default losses will be a key component
- LSEG is pleased that the guidance complements/clarifies the PFMI and does not seek to establish additional standards
- The guidance should be goal-orientated so that they can be implemented in a proportionate manner and avoid being overly prescriptive
- LSEG points out in certain sensitive areas that the recommended collaboration with third party stakeholders may not be appropriate as it may lead to additional risk exposures
- There are limits to what assurances FMIs can give in relation to the compliance and conduct of various stakeholders or other third party participants in relation to their cyber security procedures
- There is shortage of cyber specialists in the industry; LSEG encourages CPMI-IOSCO to consider this when devising the skill set requirements of those with cyber responsibility at board level
- A hard deadline of resumption of critical operations within two hours could exacerbate the situation because if the system’s integrity is compromised then successful recovery within 2 hours may not necessarily mean that the restored system is “fit for purpose”. LSEG recommends an alternative of requiring the restoration of the system to an approved operational state 'without delay'.
LSEG supports the development of a pan-European disclosure standard for retail packaged investment and insurance-based investment products. Standardised and clear disclosure requirements will enhance the ability of retail investors to compare the risks and features of these products.
However, LSEG does not support the extension of PRIIPs Regulation rules to exchange-traded futures and options or the classification of market operators as PRIP manufacturers.
LSEG welcomes the opportunity to contribute its views to this review of the post-crisis reform package. Key points of our response:
- Easing prospectus requirements
- Addressing the fiscal bias against equity
- Calling for a proportionate treatment of market makers in less liquid securities
- Removing MiFID II complex product classification from unit trusts
- Granting CCPs’ access to central bank liquidity
- Modifying the rules on Portfolio Margining to make it model independent
- Streamlining the Functioning of the EMIR colleges (to ensure level playing field)
- Ensuring that Capital requirements for CSDs and CCPs are appropriate, do not act as barriers to entry or create moral hazard
- Correcting the Leverage Ratio to avoid the risk of creating a disincentive to central clearing
- Transaction reporting: focusing on improving methodology (position reporting) and data quality to support dual-sided and ETD reporting
- Global competitiveness and third country provisions: supporting all measures to reduce barriers to the free movement of capital.