Regulatory Strategy 2017
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 fully supports the policymakers and the industry's ongoing efforts to enhance cyber resiliency and help raise the bar for the whole financial industry and wider economy.
- We encourage ENISA to coordinate at a pan-EU level and collaborate on a global level to achieve harmonization.
- We believe consistency and consideration of existing requirements would be key for regulatory compliance.
- We support the proposal to establish a pan-EU cybersecurity certification scheme. However, we encourage further clarification on the scope of the "ICT products and services" that it aims to cover.
- LSEG supports the principle of tech neutrality.
- Collaboration is key between regulators, FinTech providers and existing service providers.
- LSEG supports innovations that would improve customer value creation in terms of efficiency, broader choice, transparency and customer protection.
- LSEG welcomes efforts to support initiatives like the regulatory sandboxes but would like to note the risk of multiplicity of such initiatives.
- LSEG encourages EBA's pan-European approach while highlighting the need to also consider the global landscape and harmonisation.
- LSEG has been supporting education for retail customers as part of our commitment to ensure that the consumers can benefit from the supply of financial services to the optimal extent.
Supervision of EU CCPs
- EU CCP supervision - If EU regulation was to move to a more centralised model, we agree that ESMA would be the best placed entity to lead this task, provided that improvements are implemented relative to the current framework in particular in terms of skills, competences and communication with CCPs.
- Supervisory structure - Certain aspects of the approval process proposed could create unnecessary delays and administrative burdens, both for the CCPs and the authorities. The input should be centralised and allow for direct communication between the CCP and the authority responsible for the adoption of decisions structuring its activities.
Supervision of third-country CCPs
- Level of assessment - The assessment and recognition processes should be more granular and be conducted at the level of the CCP clearing service, activity or class of financial instruments and not at the level of the entire CCP. Because of the very nature of the products cleared, CCP clearing services have completely different profiles and need different supervisory solutions. Some products such as EU sovereign debt repos play a direct role in the central banks’ monetary policy operations which make them of particular importance for the EU, and have with higher liquidity needs . These could justify heightened oversight from central banks of issue and specific cooperation between regulators.
- Enhanced supervision and application of EMIR - LSEG supports the EC proposal (i) that Tier 2 CCPs would have to directly register with ESMA and be subject to ESMA supervision as well as be compliant with the relevant prudential requirements under EMIR. (ii) of enhanced supervision of third country CCPs. However, some agreements will need to be reached ex ante to ensure a stronger day-to-day supervision and a foundation for recovery and resolution mechanisms ensuring (i) strong cross-border effectiveness and enforcement of resolution actions as well as (ii) global regulatory coordination both in the drawing and activating of recovery and resolution plans.
- Duplication of recognition processes - LSEG suggest a strict separation between the equivalence regime (that should be applicable for Tier 1 CCPs only) and Tier 2 direct registration processes in order to ensure a more proportionate and streamlined third country regime, and avoid unnecessarily duplicative procedures by the EC and ESMA. These procedures should be alternative and not cumulative.
- Denial of recognition (‘location policy’) - Denying EU markets access to third country CCPs that directly comply with EMIR and are supervised by ESMA would create undue market fragmentation, imposing EU customers to exclusively use EU CCPs, cutting them off from global markets and corresponding liquidity and efficiencies. SwapClear impact analysis shows that this would very likely create a small local captive EU based liquidity market representing approximately 14% of SwapClear activities. The additional costs that SwapClear’s EU members and clients would face per annum for each basis point of worsening execution prices would be approximately $25 billion. This would be a continuous, ongoing cost, recurring every year, resulting from structurally deteriorated market conditions. It would also increase systemic risk by weakening the default management process and create financial stability risk associated with splitting and migrating liquidity from one CCP to another. A set of alternative requirements could provide EU authorities with the tools to appropriately monitor the risks third country CCPs manage in the EU market. These mechanisms should build on (i) the direct application of EMIR by third country-CCPs systemic services and (ii) the direct supervision of third country CCPs systemic services by EU authorities, developing the appropriate cooperation arrangements.
LSEG and FTSE Russell support the objectives of the BMR to ensure that benchmarks are produced in a transparent and reliable manner and so contribute to well-functioning and stable markets, and investor protection. We also support the broad goals of the BMR to provide a harmonised regulatory framework for non-significant benchmarks in the European Union (“EU”).
We support ESMA’s work on the Level 2 and Level 3 of the Benchmarks Regulation (“BMR”) and we appreciate that ESMA is following a tight schedule. In this response to the Consultation Paper (“CP”) published by ESMA on 29 September 2017, we offer our views, informed by our experience as a global index provider, on how we believe the various provisions of the Level 2 draft text could be calibrated and proportionate for non-significant benchmarks. In many cases, we build on our response to the ESMA BMR Consultation Paper on RTS & ITS under the Benchmarks Regulation which we submitted in December 2016.
Key themes in this response:
- Input data definition
Throughout the BMR, various requirements are imposed on administrators and contributors of input data. We believe that without further guidance on what exactly constitutes input data, achieving compliance will be difficult. We would very much support clarity from ESMA on the input data definition through Level 3 guidelines or Q&A, in particular to confirm that quantity data does not fall within the ‘other values’ within the definition.
- Contributor three lines of defence
It is important for a contributor to put in place robust three lines of control in particular where input data is contributed from a front office function (6.3.2). However, it would not be proportionate or appropriate for the administrator to “ensure” or be responsible for the internal oversight and verification procedures of another, independent market participant.
- LSEG believes that it would be beneficial for regulators to provide further clarity and take a more flexible/risk based approach to the definition of what constitutes "cloud outsourcing".
- We support the EBA's guidelines that the outsourcing institution should agree to chain outsourcing only if the subcontractor will also fully comply with the obligations existing between the outsourcing institution and the outsourcing service provider.
- We welcome further clarification that such obligation includes provision of access and audit rights, to outsourcing institutions.
- On a high level:
- Support the Commission’s principle of tech neutrality
- Collaboration is key, both across the market structure - between regulators, FinTech providers and existing service providers, and across regulators globally
- Support innovations that will create concrete customer values and ensure a healthy financial ecosystem.
- LSEG welcomes efforts to support regulatory sandboxes but would like to note the risk of multiplicity of sandboxes and the importance for existing financial services firms, especially FMIs, to be involved in the process.
- We are actively testing new DLT solutions to bring greater efficiency. We support open source development and work extensively with such libraries. We encourage cross industry initiatives to develop high level DLT technical standards.
- We welcome more clarity on boundaries around the outsourcing nature of cloud computing.
- On FinTech solutions for non-bank financing, LSEG supports light touch and open innovation programme for regulations in this area to ensure room for innovations. We believe that a common standard globally will support cross border investment and help firms to scale.
- We believe that RegTech is one of the most prominent aspects of innovations in financial services sector. LSEG as a RegTech provider has been working closely with customers to support them to better comply with regulatory requirements.
- We agree that funds invested in illiquid assets which offer daily liquidity face inefficiencies and complex issues in stressed market conditions.
- As a solution, LSEG propose admitting securities onto regulated markets, combined with a reduction in frequency of redemption events. This would provide an orderly secondary market for price formation and investor liquidity, reduce the need to ‘gate’ funds, and enhance investor protection and reduce systemic risk.
- Access to funds at calculated Net Asset Value would still be possible at periodic intervals, for example quarterly rather than daily intervals.
- LSEG’s proposal is based on the existing hybrid model of listed closed-ended funds.
London Stock Exchange Group (LSEG) welcomes the opportunity to take part in this consultation :
- LSEG have underscored the importance of ESG disclosure for underlying PRIIPs assets as specified in our ESG guidance for issuers, and LSEG believe that the benefits of ESG disclosure should be felt more strongly at retail investor level and should not be lost along the investment chain, in consistence with PRIIPs primary and secondary legislation;
- LSEG have created a framework for green bond listings (another key PRIIPs underlying asset) both in the UK and Italy and LSEG believe this constitutes good market practice EU Regulation should build on;
- As providers of ESG and LCE (Low Carbon Economy) analytics and indexes through FTSE Russell, LSEG make available tools that enable good EOS PRIIP product governance.
LSEG is delighted to respond to the Commission’s CMU Mid Term Review. Our key recommendations are:
- National SME Growth Market Funds of Funds to catalyse the quoted SME investment ecosystem
- EU signposting for SME advisory ecosystems (e.g. ELITE)
- Promote Private Placements. ‘ELITE Club Deal’ provides a standardised e-platform
- Prospectus Regulation. This is a major success measure for CMU and must be got right (e.g. to support SME Growth Markets)
- Corporate Bonds Liquidity. Issuer ecosystems; liquidity bridges; lower denominations; targeted standardisation and regulated electronic trading are key
- Fiscal Bias. We support addressing this but not by restricting debt relief, which increases the cost of capital
- Call for evidence on impact of financial regulation. Attention is due to SME investment research; Short Selling review; EMIR small counterparties; CSD-R market making impact
- Sustainable Investment. Access to ESG data; asset owners culture change; regulatory barriers are key
- Retail. We welcome the forthcoming distribution review. PRIIPs aggregated disclosures should be permitted
- EU Personal Pensions. The US 401k is a model that promotes equity investment. SME asset class restrictions should be avoided (also in Solvency II).
- European Post Trade Forum. Market infrastructures are the core hub for harmonisation
- Supervisory Convergence. ESMA should have an objective to support real economy growth
In line with the Open Access principle, we believe that customer’s choice and ability to switch providers has an overall positive impact, as it leads to lower trading prices, reduced spreads, faster and more resilient technology, and a fundamental rebalancing of the relationship between the providers of infrastructure and its users. Therefore, we welcome and support ESMA’s initiative to publish guidelines on transfer of data between TRs. However, we believe that the processes suggested in the Guidelines, which place the onus of data transfer solely on the TRs, are not the most efficient and effective approach. In our response we detail the reasons and potential impact of the switch being executed without TR participant’s involvement:
- Loss of data to the regulators
- Decrease in reconciliations and pairing rates
- Duplication of data sharing process
- Disproportional burden on the Old TRs.
London Stock Exchange Group (“LSEG”) welcomes the opportunity to respond to the Recommendations Report of the Financial Stability Board (“FSB”) Task Force on Climate-Related Financial Disclosures (“TCFD”).
- LSEG role.
- Global financial markets and international institutions are responding to climate change by embracing a transition to the low carbon economy. We play a key role in this transition, as we promote greater transparency around risk and opportunities related to various financial and non-financial disclosures. On our markets, we list green companies and bonds. FTSE Russell, part of LSEG, is a global leader in environmental, social and governance (“ESG “) indexing and analytics. In February 2017, LSEG has launched ESG guidelines, as a result of our commitment as an active member of the UN Sustainable Stock Exchange initiative, to establish guidance for all issuers on our UK and Italian Markets on best practice voluntary ESG reporting to investors.
- Feedback from the Phase I Report.
- We are pleased by the fact that the TCFD took into account several recommendations put forward by LSEG and the various industry participants in the responses to the Phase I report in April 2016, in particular on green revenue, sector approach, and standardization in frameworks. The TCFD recommendations were much anticipated by the industry and regulators alike. And we are pleased they 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 yet been reached
- Way forward.
- Climate change can affect financial stability in the long run and therefore we offer a long-term commitment to the issues underpinning it. We are a founding member of the European Commission High Level Expert Group on Sustainable Finance (“HLEG”), tasked with drafting recommendations for a comprehensive EU strategy on sustainable finance to determine how to integrate sustainability considerations into the EU's rules for the financial sector. This marks an important step in the follow-up to the EU's 2030 Agenda for sustainable development as well as the Paris Agreement on climate change.