Regulatory Strategy 2018
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 supports the proposed mission statement for the GFIN and welcomes the fact that the initiative recognises the importance of international collaboration and early industry engagement in the proposed streams. We encourage policymakers to take an internationally consistent, technology neutral approach to avoid regulatory arbitrage and allow businesses to scale up and operate across borders more easily. We believe it would be beneficial for this network to develop a best practice for regulators to assess financial innovations and support the involvement of global standard setting bodies to the GFIN. Finally, LSEG would welcome opportunities to conduct cross-border trails that allow us to test innovative ideas in multiple jurisdictions.
LSEG anticipates and is hopeful of a market solution that allows continuity of Irish securities settlement and that the Bank of Ireland (BoI) will be able to provide dispensation to EUI for a short period of time until a viable alternative solution can be established. LSEG believes that provided issuance and settlement of Irish securities constituted under Irish Law could only be available in a certificated form, trading of those securities will be impacted and market participants would have to settle all non-certificated securities on a bilateral basis. LSEG believes that EUI should pursue further discussions with the Bank of Ireland (BoI) to identify ways in which Euro settlement could continue going forward and that it is in the best interest of the market to seek to retain Irish securities settlement within EUI’s Crest system.
LSEG is of the opinion that these guidelines should only apply to MTFs operated by MiFID investment firms and not to MTFs operated by market operators as this disproportionate approach could lead to duplications or inconsistencies. LSEG believes that if these guidelines are also applicable to CCPs with a banking licence they need to be consistent with ESMA’s corresponding guidelines for CCPs. Alternatively, and as CCPs with a banking licence are already subject to the robust/stringent ESMA guidelines, CCPs should either be exempted from these guidelines or it should be clarified that EMIR requirements take precedence. We believe that exit strategies from outsourcing arrangements should be part of any outsourcing arrangement; however, they should be maintained at a conceptual stage and not subject to “testing” as this would necessitate significant levels of resources and costs. Finally, LSEG is of the opinion that registers should contain basic information on outsourcing arrangements unless competent authorities deem that the outsourcing arrangement is critical.
LSEG response to the CPMI-IOSCO, FSB and BCBS consultation on incentives to centrally clear OTC Derivatives
LSEG agrees with the conclusions of the report that a combination of factors such as clearing mandates, capital implications and efficient margin netting have increased the amount of clearing for OTC derivatives undertaken by dealers and large clients. We have however highlighted that access to clearing services can be inhibited because of shortcomings in the definition of certain requirements such as the Leverage Ratio requirements under Basel III (i.e. recognition of client IM offsetting in the leverage ratio) and that these shortcomings should be addressed by international standard settlers.
LSEG believes that regulators need to consider product liquidity and capabilities of CCPs to manage the relevant risks and default processes before extending product coverage of clearing mandates and has reiterated that consistency of clearing mandates at a global level is necessary to avoid regulatory arbitrage. The same applies to exemptions to clearing obligations. These needs to be carefully assessed in light of the role of smaller financial counterparties on the liquidity of cleared markets.
Finally, in line with G20 Leaders Declarations, LSEG considers that the global nature of OTC derivatives should be protected to avoid excessive costs and risks stemming from the isolation of local investors from global markets.
We support the Commission’s view that sustainability and the transition to a low carbon economy is key to ensuring the long term competitiveness of the EU economy.
LSEG is a thought leader in sustainable finance working closely with issuers and investors as a market infrastructure provider.
FTSE Russell is an FCA-authorised benchmark administrator and has been providing sustainability indexes and benchmarks since 2001, when it launched its pioneering index family FTSE4Good. It currently calculates over 100 sustainability indexes and assesses more than 4,000 listed companies globally against its ESG methodology, and over 14,000 companies against its Green Revenue taxonomy and data model.
We support transparency and disclosure, and already extensively publish factsheets and ground rules, as well as BMR compliant benchmark statements and methodology documents for all our benchmarks. Additional requirements for sustainability benchmarks should be proportionate, and best designed to help investors.
The transition to a low carbon economy represents a wide range of investment risks and opportunities for investors and there is not a single “best” approach on how to address this. We advise that ‘harmonising’ or mandating a specific methodology for low-carbon and positive carbon indexes may prove counter-productive. This is an area that is evolving very rapidly. There is no single best way of incorporating climate change considerations into the design of benchmarks, and innovation here should be encouraged.
For example, if you look at the evolution of these indexes, typically a number of years ago they were focused on Scope 1 and 2 carbon emissions. There has since been a focus on bringing fossil fuel reserves and the carbon intensity of those into the design of benchmark indexes. More recently FTSE Russell has been championing capturing the positives of the ‘green economy’ in those indexes.
We also have to be careful regarding false precision regarding indexes as a tool to achieve the important 2 degree objectives of the Paris Climate Agreement. Benchmarks generally reflect listed securities, so can contribute but not drive this important transition.
We recommend that the Commission’s proposals should support continuous evolution and enhancements in the methodologies of measuring climate risk and opportunity and incorporating this into benchmark index design. Further, we would suggest that the proposed new categories are optional standards for industry.
LSEG is broadly in favour of extending trading of standardised products onto trading venues along with the processing of such transactions through connected post-trade infrastructures. We believe that, in most cases, this provides for transparent market processes and is in the best interests of market participants and price transparency.
LSEG supports the Monetary Authority of Singapore’s commitment to address potential concerns on duplicative requirements on participants in Singapore that are involved in cross-border transactions. Any trading obligation should look to ensure international consistency with the requirements adopted by other regulators around the globe, for e.g. the United States CFTC and EU MiFIR regimes. This would ensure more efficient international markets and clearing services, in particular given the interaction between trading obligations and clearing obligations in a number of jurisdictions.
LSEG welcomes the European Commission’s proposal for a Pan European Personal Pension. This is a positively forward looking initiative which clearly indicates that the post crisis policy agenda has pivoted towards an enabling viewpoint with the potential to unlock Europe’s capital markets to tackle long term economic challenges, as part of Capital Markets Union (CMU). These include the ageing population and the need to transition to a more sustainable economy. We welcome the support of the European Parliament, who have a key role to play in delivering more of an investment culture amongst EU citizens, which is key to move towards a more entrepreneurial and risk taking society required to support capital markets development and re-orientate away from an overreliance on bank financing. In turn this diversification will support innovation, growth and buffer against financial instability. However we believe that action is required to ensure that contribution that PEPP can make to these CMU objectives are maximised and also to avoid unintended consequences on existing pension provision.
- Capital Markets Capacity. Pension fund size supports capital market depth and this supports growth - matching the US scale would boost Eurozone market capitalisation by 31%
- Investment Culture. Giving citizens a stake in the growth of capital markets will support more an investment culture (like 401k did in the US).
- Existing Pensions Provision. There is significant pension fund potential in the EU and this needs to be supported. The European pension market is the second largest in the world.
- Role of Market Infrastructure. International liquidity pools; investor education; direct financing platforms; SME funding channels; sustainable finance hubs and fund accessibility
- Investment Rules. We support the prudent person rule however greater flexibility should be allowed.
- Supervision. A level playing field is required to encourage maximum PEPP provision
- Proportionality. Guarantees, fee caps and other compulsory features should be reconsidered
- CMU Framework. Solvency II and the Prudential Regime for Investment Firms should support more market liquidity and equity investments.
- Supporting Global Asset Managers. The industry is needed to make PEPP a success so it shouldn’t be hit with unwelcome changes to delegation under UCITS
- Role of Member States. Appropriate tax incentives and behavioural tools are needed
LSEG Response to the European Commission Proposal for a Prudential Framework for Investment Firms
LSEG welcomes the European Commission’s (the Commission’s) proposal for a Prudential Framework for Investment Firms. We recommend that the Regulation and Directive should be more proportionate than envisaged by the EBA in its application to principal traders acting as market liquidity providers, in order to support the Commission’s objectives for Capital Markets Union.
- The co-decision process represents a unique window to act because the EBA have declined to acknowledge the need to calibrate their advice to be consistent with the Commission’s CMU objectives (i.e. to support diversification away from an overreliance on bank financing in Europe).
- The proposed framework is welcome in many respects - for example it is simpler than CRR however it does not support market diversity
- In particular which are not suitable for principal traders as essential liquidity providers
- Principal traders provide a substantial (at least a quarter) amount of market liquidity as well as supporting market innovation.
- However as drafted they will get hit with a sevenfold capital requirements increase. They are different to banks and the risks are different.
- This will negatively impact liquidity, especially in stressed conditions, and will put up the costs of capital for investors.
- The result could be a less competitive European market, exacerbated by a third country regime which creates barriers.
LSEG propose 4 key recommendations to enhance the proposal:
- Greater optionality to use different risk metrics e.g. clearing member guarantee;
- Ability for smaller firms to access a lighter regime ‘class 3’;
- ESMA not EBA to be the lead regulator to ensure capital markets expertise is deployed and
- Removal of burdensome third country requirements.
LSEG is delighted to respond to this consultation. We fully support the SME Growth Market (SME GM) concept and to our knowledge are the only current operators of authorised SME GMs (AIM and AIM Italia). We welcome the objectives of the European Commission to seek further ways to enhance the regulatory framework to ensure that SME GMs are a success and support Capital Markets Union (CMU) and the EU growth, jobs and innovation agenda. We believe that the key benefit of getting the regulatory framework right is an increased investor pool. We urge against any focus on a simple reduction in standards because companies will generally be willing to meet higher standards of regulation if the benefits warrant the investment
- SME ecosystems. It is essential that vibrant ecosystems develop around growth markets to help ensure their success and create an enduring identity for such markets. Alongside comprehensive support and mentoring programmes such as ELITE, it is essential that all growth market participants have reasonable commercial incentives (e.g. brokers) to participate in equity capital markets compared to other forms of finance.
- Prospectuses. The ‘restricted circle’ to whom a public offer can be made without a prospectus should be increased from 150 to at least 500, not counting existing shareholders and employees. Secondary issuances should be completely exempt.
- Attracting investors. Increasing research coverage; SME fund of funds and embedding SME GM in regulatory regimes (e.g. UCITS)
- Definitions. We have no objection to raising the €500m threshold however we do not believe that the 50% threshold needs to be changed. Debt SME GM threshold should be €30m capital raised.
- Key advisors. We believe that markets should have the flexibility to be able to mandate whether or not a key adviser is required, taking into account local ecosystems.
- Delisting. We consider that it is important for rules around delisting, whether voluntary or mandatory are clear in their operation and that market operators are able to take measures to protect investors and preserve the integrity of markets.
- Transfer of listings. We believe that mandating transfers should be avoided and issuers should have the choice and flexibility to make decisions about when to move markets so that they are best served at each stage of their development.
- Administrative burdens. Alleviations should be available for all SME GM issuers. MAR imposes burdens (e.g. management transactions; PDMR; insider lists). PRIIPs are causing uncertainty for some issuers.
- Tick Sizes. We believe that the minimum tick size regime in MiFID II will have a reduced impact on the liquidity of shares traded on SME GM however market operators should be given full flexibility.
- Free Float. We do not believe that prescriptive free float requirements should be set and a qualitative consideration is essential to ensure there is an appropriate balance between existing shareholders retaining their desired stake at IPO and liquidity post admission.
LSEG support the objectives of the European Commission's proposal and we wish to ensure that the benefits of the proposal are more widely understood, together with necessary enhancements we believe are desirable to ensure that the ESAs are able to deliver effectively on an expanded mandate. In particular we support the vision of ESMA as a fundamentally enhanced organisation with some proportionate direct supervisory powers over CCPs and Benchmark Administrators, with the potential for more efficient decision making (within a framework of appropriate governance) and calibrated financial contributions from industry.
- Objectives. We support the objectives of the Commission to ensure a level playing field across the Single Market. We agree with the principle of supervisory convergence in order to reduce any real or perceived regulatory arbitrage between jurisdictions.
- Governance. At the same time we consider that some recalibrations of the proposal are needed to ensure an effective balance of powers and governance oversight for ESMA, with a more incremental approach towards building a single capital markets supervisor and tailored, proportionate approach towards market segments.
- Interdependence with EMIR. We consider that the co-legislators should assess the impact of the ESA review against the full context of relevant dossiers (e.g. EMIR 2.2; ECB Article 22; CCP R&R).
- Extraterritorial Licensing. We suggest a model closer to direct extraterritorial proportionate licensing for ESMA to supervise third country financial institutions with direct application of the acquis, underpinned by regulatory co-operation but without duplicative equivalence assessments.
- Key principles for ESMA. We focus on ESMA and propose five key enhancements which a transformed 'new ESMA' must possess in the future in order to support its important mission (accessibility; empowerment; accountability; proportionality and international competitiveness)
- Direct supervision. We set out three policy tests to determine which direct supervisory powers should be granted to ESMA (systemic impact; significant cross border activity and a clearly defined and manageable set of market participants)