Regulatory Strategy 2019
Leading the debate
London Stock Exchange Group is an active participant in international and domestic regulatory debates.
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 agrees with the general approach proposed for ESMA’s assessment for comparable compliance however we are generally more supportive of an outcome based approach as opposed to a requirement-by-requirement one – that is proposed in the paper for the assessment of Tier 2 TC-CCPs. An outcome based approach ensures that CCPs are in compliance with all requirements and saves time and cost that may be associated with meeting each requirement using a requirement-by-requirement approach.
LSEG is generally supportive of a principles-based approach when determining the Tiering criteria. However ESMA’s approach involves the collection of a large amount of information and it is unclear how some of this information relates to the criteria indicated in EMIR Article 25(2a) or would allow ESMA to assess the systemic relevance of a TC-CCP for the Union. In addition:
- LSEG would welcome additional clarity from ESMA as to how the indicators chosen allow determining the systemic importance of a CCP for the Union, especially given that they are not described in a measurable way.
- LSEG would recommend prioritising indicators to set out which ones are more important in its assessment. This would make the tiering assessment more predictable. In line with this, ESMA should have a subset list of information linked to these indicators for all CCPs as a starting point. At a second stage ESMA could ask for the full set of information only from those CCPs that may be more complex and likely to be deemed Tier 2.
- The relevance of specific indicators defined to assess the categories set out in primary legislation is unclear in several cases. For example, the choice of indicators to assess the impact of failure or disruption of a TC-CCP seem to relate to CCP’s risk management procedures rather than the than the impact of failure or disruption of a TC-CCP on EU.
LSEG believes that supervisory fees and yearly budget should be proportionate to its supervisory duties and should be set once TC-CCP tiering requirements are finalised/adopted and the number of TC-CCPs subject to supervision is known. Fees should be predictable and linked to TC-CCPs revenues to correctly reflect a TC-CCP’s systemic importance to the Union and be in line with ESMA mandate in EMIR level 1. Finally, LSEG believes that further incentives/discounts could be provided for a higher degree of comparable compliance in an attempt to promote harmonised application of regulation across jurisdictions, promote market efficiency and enhance resiliency
LSEG welcomes the opportunity to provide input to the FSB’s Discussion Paper on Financial resources to support CCP resolution and the treatment of CCP equity in resolution. We are strong supporters of a clearly defined Recovery and Resolution regime and will continue to work with global and national regulators to ensure preservation of financial stability in the market.
Concerning CCP equity, LSEG does not find it necessary to adjust the exposure of equity bearing loss in resolution or increase Skin-In-The-Game since those actions would negatively impact the incentive structure put in place after the financial crisis. Any attempt to impose trading losses to a CCP’s ownership structure or to a CCP’s operating capital would disincentivise market participants from participating in the default management and recovery process and would considerably discourage any private investment in the CCP thereby jeopardising financial stability.
We believe that in a defaulting scenario, the CCP’s existing default waterfall is structured and assessed effectively to ensure that any resulting loss is fully allocated back to the CCP’s membership and therefore avoids the need to put the CCP in resolution. The Resolution Authority (“RA”) should not intervene until the recovery process is either (i) fully completed or (ii) deemed insufficient to ensure continuity of clearing services and guarantee financial stability. Regarding non-default scenarios, we agree that CCP regulatory capital funded by shareholders remains the primary line of defence and has been calculated to respond to the probability and scale of risks in line with national regulations and in agreement with authorities.
IOSCO has a key role to promote globally consistent standards for sustainable finance disclosure, to support companies navigating between standards and investors who need consistent credible data. We understand that these proposed recommendations are aimed at emerging markets, and would encourage IOSCO to encourage broader adoption where appropriate.
There is an important role for IOSCO to support the consistent and proportionate implementation of the FSB Task Force on Climate-related Financial Disclosures (TCFD) recommendations.
We recognise that some jurisdictions already have mandatory or voluntary standards, and there is disparity in terms of capital market development. IOSCO can provide consistent definitions that can be proportionately implemented. For example, taking into account large companies and SMEs, or proposing guidelines to build market consensus ahead of rules.
Especially regarding social and governance standards, there can be quite specific local market needs- IOSCO can provide guidance on where it is helpful to be prescriptive or not. IOSCO can add value by identifying local market standards e.g. regarding gender pay gap, and then build global consensus to prevent fragmentation.
There is an important balance to be struck between growing investor needs for consistent, detailed data and proportionate standards for issuers that are not overly burdensome. We believe that any disclosures that companies make should be based on guidelines and best practice principles, taking into account individual specificities of issuers. There is a need for consistent quantitative data from all companies with more sector-specific requirements for companies operating in industries where investors need more specific information to understand and assess climate change risks.
LSEG welcomes BCBS’s initiative to consult on potential changes to the Leverage Ratio treatment of client cleared derivatives. We firmly support the G20 objective of promoting central clearing and encourage the review and amendment of prudential frameworks to promote central clearing, where such amendments would not compromise financial stability.
LSEG supports Option 3, aligning the treatment of client cleared derivatives with the measurement as determined per the SA-CCR, as used for risk-based capital requirements, to facilitate quick adoption in industry by alleviating implementation difficulties and ensuring there is harmonisation with jurisdictions that have moved forward with respective legislative proposals.
We believe that segregated client Initial Margin (“IM”) deposited with Clearing Members (“CMs”) should be recognised within the Leverage Ratio framework to prevent unnecessary constraints being imposed to CMs. LSEG highlights that the Leverage Ratio can become the binding constraint in low-risk business activities and believes adjustments should be made where such activities enhance financial stability and meet the G20 objectives of promoting central clearing.
Capital requirements that disproportionately constrain client clearing capacity and/or prohibit new market participants from accessing central clearing services inadvertently work against the market dynamics that the G20 were looking to reinforce and increase risk of CMs refusing to accept porting of Clients during a default, particularly if doing so brings significant capital implications.
- London Stock Exchange Group (LSEG) is delighted to respond to ESMA’s call for evidence on periodic auctions for equity instruments. We support the priority that ESMA has signalled on ensuring that the objectives of MiFID II / R are being delivered and as a group operating venues offering different trading protocols including both continuous lit trading, dark pools and periodic auctions we understand the full range of interests and perspectives on the debate. LSEG operates a Frequent Batch Auction model – Turquoise Lit Auctions™, launched in December 2017, rebranded Turquoise Plato Lit Auctions™ in December 2018.
- Policy Process. We welcome that ESMA’s paper is positioning as a call for evidence because we recommend that further work and consultation would be required before proposing any changes to regulation or further guidance. The proper mandate for legislative or regulatory action is based on the MiFIR Art. 52 reviews of the transparency requirements scheduled to begin during 2019.
- Supporting Lit Trading.
- We support the objective of the correct balance between lit and dark trading to ensure the appropriate level of price formation and we support the policy intent behind the mechanisms that MiFID introduces to achieve this (trading obligation; waivers to mitigate price impact of large trades; double volume cap mechanism – even if this is somewhat blunt as an instrument).
- Order books have been shrinking trade size over the last 20 years, hence the need for other types of execution at scale and with minimal market impact. The MIFID II / R guiding principles should be used to evaluate new types of execution including FBAs. In particular we agree with ESMA’s focus on the degree of (i) multilaterality and (ii) price formulation (and where this is zero, such trading should be considered as effectively a reference price mechanism subject to DVC).
- Dark Trading and FBA Correlation. We do acknowledge the link which the data suggests between trading under volume caps and using FBAs. However, we note that frequent batch auctions are still a tiny part of the market, as demonstrated by the data which ESMA reports in the CP 0.5% in Jan 2018 rising to 2.3% in Aug 2018
- Best Execution. FBAs offer a new execution channel for participants to meet their best execution requirements, which is an integral part of MiFID II. Some academic experts argue that FBAs provide a potential solution to latency arbitrage due to the discrete-time matching mechanism, complemented by a random end time, provides improved execution analytics and this is demonstrable with data from independent analytics providers which shows that with continuous matching this can cause the price to move immediately after the trade takes place. Best execution is optimised when price formulation is maximised (and potentially undermined if there is zero price formulation).
- Auction Duration. Auctions are typically characterised by containing an auction call period prior to an uncrossing event. We do not think that the regulator should determine a minimum length of time for the periodic auction but we think that the features of the auction should be determined by the trading venue in order to allow to its members concrete possibility to interact.
- Self-Matching. Turquoise data shows an extremely low amount of self-matching (0.02% of trades are self-matching of orders of the same size arriving within the 100ms, the maximum duration of an auction call period). FBAs are still in the adoption phase, looking to drive more participation and an active pipeline of players looking to join which we expect will reduce the level of self-matching. We note that ESMA seem comfortable with self matching on order books and order priority functionality that seeks to increase the possibility of self-matching based on long-standing functionality of certain Central Limit Order Books or other trading systems, and it is unclear why there is therefore extensive focus on FBA mechanisms in this regard.