Ahead of the MIFIR Review, the Association for Financial Markets in Europe (AFME) has today published its position on a Consolidated Tape in Europe. Adam Farkas, Chief Executive at AFME, said: “As the MiFIR Review fast approaches, all corners of the financial markets industry are articulating their needs for a consolidated tape in Europe. From AFME’s members’ perspective the use case is clear: in equities markets we need a real-time consolidated tape in Europe that provides access for all investors to help build deeper and more open capital markets in Europe. “An equity real-time consolidated tape would cut costs and democratise access to all retail investors across the EU, contributing to the creation of a truly pan-European market. This technological solution would help advance the objectives of the Capital Markets Union, while ensuring that interconnected national ecosystems continue to serve local communities. “This is also why having diverse market structure is vital, providing investor choice and competitiveness. The establishment of a consolidated tape should not in any way interfere with the existing market structure in the EU – policy makers need to protect market diversity which is the backbone of healthy, resilient, and competitive European financial markets. In this respect, a consolidated tape would also aid with reducing the market power of trading venues when selling real-time, extremely expensive, post-trade data. “Now is the time to address Europe’s lack of competitiveness with regards to having a single price comparison tool for investors across Europe. However, it will be important to get the balance right, so that it makes sense for investors at the heart of the tape, without damaging market structure.” In order for a Consolidated Tape (CT) to work, AFME members recommend: The equity CT must be real-time – there is no business case for a delayed tape, given that the legal framework already requires the provision of market data, free of charge, 15 minutes after publication. Conversely, an equity real time tape offers a number of benefits. Data quality should be addressed alongside the development of a CT – the implementation of the post-trade transparency regimes under MiFID II identified a number of data quality issues relating to SI and OTC post-trade reporting, particularly the treatment of non-addressable/non-price forming trades which should be excluded for the purposes of post-trade transparency. The bond CT needs to ensure committed liquidity providers are not exposed to undue risk by not publishing post-trade details until after the deferral period has expired. MiFID II introduced deferrals because it was recognised that real time post-trade transparency can expose committed liquidity providers to undue risks, especially when trading in illiquid instruments or transactions above a certain size, hence diminishing the liquidity available to corporates and investors. The establishment of a CT must not impact the well-established market structure framework in Europe The cost of accessing the CT should be as low as possible in order to democratise market data within Europe and ensure healthy, competitive markets Mandatory data contribution to the CT – trading venues, APAs and systematic internalisers (SIs) should be required to provide market data, free of charge, to the CTP. Without this approach, costs will ultimately be passed on end users and this could limit the number of firms consuming data, reducing the commercial incentive for the emergence of a single consolidated tape provider. No mandatory consumption of the CT – market participants should not be forced to consume the CT as, in many cases, this will mean that firms are forced to pay for the same data via direct feeds and via the CT (i.e. paying for the same data twice). Instead, a CT should be appropriately constructed so that it provides an offering that is economically attractive to market data users. This will ensure the continued success of a CT. There should be a single CTP for each asset class– without a single provider, the risk of multiple providers emerging with potentially different or overlapping product scopes may defeat the purpose of having a truly consolidated view of the market and increase costs to consumers. – Ends –

In response to ESMA’s recent public consultation, dated 1 October, calling for evidence on retail investor protection issues, such as payment for order flow (PFOF), the Association for Financial Markets in Europe (AFME) has issued the following statement: AFME agrees that payment for order flow (PFOF) models are unlikely to be compatible with existing MiFID II rules on avoiding conflicts of interests and ensuring best execution outcomes for clients. AFME also agrees that a review of PFOF models should be undertaken to encourage greater supervisory convergence among EU Member States. The safeguards put in place by MiFID II rules ensure that investors are suitably protected and that the primary goal of investment firms is to achieve best execution outcomes for their clients. Clients and regulators should be able to test claims from retail brokers that they are offering best execution through any liquidity provider which pays for order flow. We note that a consolidated tape showing prevailing available prices at the time of the receipt of a client order would assist in verifying these claims by reviewing a retail broker’s executions in aggregate. – Ends – Notes to Editors: MiFID II has strict requirements for investment firms to manage conflicts of interest. Firms are required to take all appropriate steps to identify and prevent or manage any conflicts of interest “between themselves… and their clients… including those caused by the receipt of inducements from third parties”. MiFID II also explicitly states that firms need to prevent conflicts of interest in the first instance and to rely on disclosure only as a last resort. These requirements are set out under Articles 23, 24 and 27 within MiFID II which cover conflicts of interest, best execution and inducements respectively. Some National Competent Authorities have commented on payment for order flow including the AMF[1] and FCA[2] agreeing that MiFID rules prevent conflicts of interest and ensure best execution for clients [1] Speech by Robert Ophele (AMF Chairman), March 2021 – link here [2] FCA supervisory guidance, April 2019 – link here

The Association for Financial Markets in Europe (AFME) has today submitted its response to the UK Treasury Wholesale Markets Review Consultation. Adam Farkas, Chief Executive of AFME, said: “The UK Wholesale Markets Review is a key moment for the industry and policy makers to reflect on how well capital markets are functioning. “The Review is comprehensive and proposes a number of changes to existing MiFID II provisions. It is vital that any future changes to rules governing how financial markets operate continue to support the development of capital markets in Europe, ensuring that they remain open, competitive and diverse. “AFME’s members are global wholesale banks that support European clients internationally, therefore, it is a priority to ensure the continuity of cross-border services and to avoid market fragmentation at all costs.” Among some of the key points in AFME’s response are: Supporting the removal of the STO and DVC AFME supports the removal of both the Share Trading Obligation (STO) and the Double Volume Caps (DVC) because these rules have not resulted in positive outcomes for investors and instead have increased complexity in market structure. With respect to the DVC, European equity markets are alone in having a volume-based constraint on undisplayed liquidity. This makes them global outliers in placing unnecessary caps on this type of trading activity, rather than enabling better execution performance for end investors. Meanwhile, the STO has had the unintended consequence of restricting firms’ access to the most liquid markets, making the delivery of best outcomes for investors more challenging. AFME has long argued that this is a feature which can render markets less attractive as a place in which to invest or raise capital. AFME has consistently called for the removal of both the DVC and STO and therefore welcomes the UK Treasury’s proposal to remove them and strongly encourages the European Authorities to do the same. AFME supports the UK Treasury’s proposal to ensure that the price formation process will continue to be monitored by the FCA. Improving primary market communication to avoid market outages AFME supports HMT’s proposal to have an industry playbook for both venues and market participants to follow in the event of an outage. In its response, AFME has set out recommendation on the key components of a playbook, which include: Accurate and timely identification of outages by participants and trading venues. An orderly halt to trading on the affected venue, and redirection of trading to alternate venues. Reliable and standardised broadcast of details surrounding the outage, order status, planned resolution and re-opening by the trading venue. A minimum time between participants being notified of a venue re-opening and trading on that venue re-commencing. Orderly restart of the affected trading venue and resumption of its trading without disruption to continued trading on other venues. Use of the reference price waiver (RPW) HMT proposes enabling reference price systems to match orders at the mid-point within the current bid and offer of any UK or non-UK trading venue, rather than the price of the primary market that has been the status quo since MIFID was implemented. AFME believes that this approach ensures that the price being used will be a reflection of the best execution conditions based on the nature of the order. Additionally, AFME members believe that HMT’s proposal will lay the groundwork for a solution to primary market outages as it would facilitate market participants moving trading onto an alternative venue in the case of an outage on the primary market. Creation of a Consolidated Tape AFME members agree that the UK Government should take action to encourage the development of a Consolidated Tape (CT) for both equities and bonds.AFME believes that the provision of an appropriately constructed CT could democratise access for all investors, regardless of resources or sophistication, with a comprehensive and standardised view of the trading landscape. However, design of an appropriately constructed CT raises many challenges, which must be thoroughly thought through ahead of any regulation or guidance being drafted toensure that ahigh qualitydata source is built. Improving MIFIR’s reporting framework AFME has long advocated for a review of MIFIR’s reporting framework. The existing regime creates uncertainty about who should report the trade and can lead to duplicative reporting, resulting in weak quality of the existing data sets. AFME proposes that the link between the Systematic Internaliser (SI) status and Post-Trade transparency/reporting is removed and that a designated reporting entity register is created and maintained by the FCA. This would remove uncertainty on who should report a transaction and, as a consequence, will lead to enhanced quality of the reported data. This approach would also provide the benefit that firms qualifying or opted in as SIs will only be those firms acting as liquidity providers. This would provide much-needed clarity to the overall equity market structure. Improving liquidity calculations for bonds The liquidity calculations to determine which bonds should be deemed liquid is a key element of the MIFIR transparency framework. AFME has been a long-standing supporter of a well-calibrated transparency framework for bonds, which recognises the heterogeneity of fixed income markets and that does not put committed liquidity providers at undue risk. The fact that the quality of existing data sets remains patchy makes liquidity calculations based on quantitative criteria only, prone to false positives (i.e. bonds deemed liquid that are effectively illiquid). AFME members are supportive of HMT’s proposal to move away from regular liquidity calculations based on quantitative criteria only, in favour of a qualitative and quantitative criteria. The current liquidity calculations outlined under MiFIR/MiFID II are complex and do not accurately measure or capture true liquidity within the market. Well-balanced and measured qualitative criteria, that more accurately captures and reflects true liquidity within the market would help smoothing out false determinations of liquidity. The HMT Wholesale Markets Review’s objective is to ensure UK regulation remains fit for purpose and proportionate for UK capital markets. This is a sensible approach to better regulate financial markets. AFME advocates for the same approaches both in the UK and the EU. – Ends –

A new report published today by the Association for Financial Markets in Europe (AFME) and Protiviti outlines potential key regulatory barriers to the greater adoption of cloud services in capital markets and provides recommendations for policymakers and Cloud Service Providers (CSPs) to assist banks with their adoption. The report entitled “Building Resilience in the Cloud” finds that, while banks are increasing migration to the cloud and identifying solutions to address regulatory concerns, two solutions that are becoming increasingly proposed by policymakers - portability and multi-cloud strategies – are likely to introduce further barriers to adoption. The report presents an assessment of five scenarios, covering the failure of a CSP in a particular region through to the loss of an entire CSP globally, to highlight why these solutions may not be appropriate in all instances. The report finds that the proposed recommendations from policymakers around portability and multi-cloud strategies would present significant challenges to banks from adopting a risk-based approach, limiting the benefits of cloud services and increasing the technical complexity to support multiple CSPs. James Kemp, Managing Director, AFME, said: “Banks are adopting cloud for a wide range of benefits, including greater business agility, innovation opportunities, and the ability to increase their security and resilience. We have seen through the pandemic that cloud services have been fundamental to enable remote working and provide access to core IT and business services. “However, emerging policy in the EU and globally is in danger of mandating how banks adopt cloud because of the perceived risks for security, the concentration of providers, and resilience of the sector overall. While the solutions being discussed, such as ensuring portability or the use of multi-cloud strategies, can provide resiliency benefits, they risk introducing significant limitations and complexity which would lead to reduced cloud adoption overall. “Banks should not be limited in taking a risk-based approach tailored to their cloud usage and technical needs allowing them to deploy multiple complementary solutions for resilience, rather than specific solutions being mandated for all.” James Fox, Director, Enterprise Cloud at Protiviti, said: “With digital transformation continuing to drive the adoption of cloud within financial services, we have seen that banks in particular are becoming increasingly more confident in using the cloud for sensitive workloads. Despite increased regulatory attention, we have seen an overwhelming demand from banks for access to new and innovative services powered by the cloud, which increases security and resilience and enables banks to quickly react to unforeseen events, such as COVID-19, due to the flexibility and configurability of the cloud. By working with banks on this paper, we have seen the range of mechanisms that are actively being used to enhance the security and design of cloud infrastructure that allows incidents to be resolved quickly and efficiently. Whilst banks are proactively taking a risk-based approach to the adoption of the cloud, there is a need for further clarity on cloud resilience, risk requirements and the opportunities that exist for sharing best practice between banks.“ Recommendations in the paper where policymakers and engagement from CSPs can assist banks with the resilient adoption of cloud services include: Ensure regional and global alignment on cloud resilience and risk expectations; Enhance information sharing and transparency requirements for CSPs; Promote increased comparison amongst CSP service offerings; and Encourage cloud cross-border data flows and storage. – Ends –

Following the publication of the results of the EBA’s 2021 stress test, Michael Lever, Head of Prudential Regulation at the Association for Financial Markets in Europe (AFME), said: “AFME is pleased to note that the European banking system remains well capitalised even after taking account of the impact from extremely harsh assumptions which formed the basis of the test.” “The EBA’s stress test adverse scenario was based on a narrative of an extended Covid-19 outturn in a “lower for longer” interest rate environment in which negative confidence shocks would prolong economic contraction. The assumptions used for economic growth, unemployment and market stress were substantially more severe than those applied in previous stress exercises and have become far less plausible in the light of a stronger than anticipated recovery from Covid-19, subsequent upgrades to economic forecasts and resilient market performances. While it is acknowledged that the improved economic outlook has benefitted from substantial fiscal and monetary support from governments and central banks, it is nevertheless imperative that when reviewing the stress test results that this “distance to reality” is recognised and taken into account in supervisory actions particularly in relation to Pillar 2 guidance and when evaluating distribution policies.” “AFME and its members continue to support a robust European stress testing framework to determine the resilience of banks and the financial system against long tail risks and look forward to contributing to its further development.” – Ends –

In response to the publication today of the European Commission’s consultation on the Article 46 review of the Securitisation Regulation, Richard Hopkin, Head of Fixed Income at AFME, said: “Today’s consultation is an important step in the review of the securitisation framework in order to improve the functioning of this vital funding and capital management tool in Europe. For the last 13 years, securitisation placed issuance has struggled to exceed much more than around EUR100 billion a year – much less than in the United States. The simple, transparent and standardised (STS) securitisation framework – a global “gold standard” - has struggled to attract new issuers and investors due to overly complex compliance requirements and only very limited recognition provided in associated capital and liquidity regulations.” “Securitisation can do so much more, so this needs to change - particularly in light of the Covid-19 pandemic. Securitisation is uniquely placed to help address some of long-term economic damage caused by the pandemic through its ability to transfer risk while still enabling banks to continue to lend. Furthermore, if well supported, ESG and green securitisation can also make an important contribution to funding the transition to a more sustainable economy. With EUR 603 million of green securitisation issued as at FY 2020, the market has the potential to grow with a well-designed regulatory environment.” “The review therefore needs to be ambitious and focus on introducing more proportionality and risk-sensitivity in the Securitisation Regulation, as well as in the treatment of securitisation in sectoral regulations governing bank capital and liquidity (CRR), insurance company capital (Solvency 2) and other areas.”

On 14 July 2021, sixteen trade associations* representing buy-side, sell-side and market infrastructures, wrote to ESMA and the European Commission regarding the timeline for implementation of the mandatory buy-in rules as part of the Central Securities Depositories Regulation (CSDR) Settlement Discipline Regime. The Joint Associations welcome the Report from the Commission on the CSDR Review published in July 2021 and fully support the Commission’s intention to consider amendments to the mandatory buy-in regime, subject to an impact assessment. In light of this, the Joint Associations request ESMA and the Commission to take action to ensure that the mandatory buy-in rules for non-CCP transactions are not subject to application on 1 February 2022, when the relevant RTS is currently set to enter into force, and to provide clarity to market participants on the matter on an urgent basis. The Joint Associations remain committed to further improving settlement efficiency in Europe’s capital markets. – Ends – *The sixteen trade associations include: the Association for Financial Markets in Europe (AFME), L’Association Française des Professionnels des Titres (AFTI), the Association of Global Custodians European Focus Committee, the Alternative Investment Management Association (AIMA), l’Associazione Italiana Intermediari dei Mercati Finanziari (Assosim) the, European Association of Co-operative Banks (EACB), the European Association of Public Banks (EAPB), the European Banking Federation (EBF), the Electronic Debt Markets Association(EDMA), the European Fund and Asset Management Association (EFAMA), the European Venues and Intermediaries Association (EVIA), the Futures Industry Association (FIA), ICI Global, the International Capital Markets Association (ICMA), the International Swaps and Derivatives Association (ISDA), and the International Securities Lending Association (ISLA).

In response to the publication today of ESMA’s consultation on the review of the regulatory technical standards – RTS 1 equity and RTS 2 – non-equity transparency – on transparency requirements under the Markets in Financial Instruments Regulation (MiFIR), Adam Farkas, Chief Executive of AFME, said: “We strongly welcome ESMA’s consultation on MiFIR transparency requirements.” “We appreciate ESMA’s clarity in stating that its data does not currently reflect the existing market structure. Ahead of the MiFIR review, it is vital to base analysis upon data that provides a clear picture of the EU trading landscape. This can only be done by distinguishing true economic trading activity from technical transactions, as we recently pointed out in a report we commissioned from Oxera. “ESMA’s initiative to consult on this issue will contribute to the successful delivery of the consolidated tape which will provide all investors, regardless of resources or sophistication, with a comprehensive and standardised view of European trading and also increase retail participation in EU markets. We stand ready to assist with the work of ESMA and the European Commission in improving the quality of reported data and analysis of market structure.” – Ends –

AFME has today welcomed the publication by the European Commission of the EU Renewed Sustainable Finance strategy. Adam Farkas, Chief Executive of AFME, said: “Europe’s leadership on sustainable finance has given rise to several ambitious and comprehensive regulatory proposals. Now, the next stages of the sustainable finance agenda will be critical to mobilise private investment on the scale needed to meet the EU’s sustainability objectives. “A broader, more flexible approach to classifying transition activities would go a long way to helping to accelerate Europe’s pathway to achieving net-zero carbon emissions by 2050. The recognition in the Renewed Strategy that the current EU Taxonomy framework could better recognise investments for intermediary steps on the pathway towards sustainability is extremely helpful. A robust transition framework should include both activities and entities that are already low carbon, but also be forward-looking and include firms, their assets, and their activities that demonstrate the commitment and potential for transition within scientifically determined thresholds. “Capital markets will need to play a central role in the green transition. We estimate that 35% of the funding needed to meet the Paris Agreement is required from equity, alongside 44% from loans and 21% in bonds. While the markets for green bonds have seen significant growth in Europe, climate finance needs to scale across all asset classes. It is important to take a holistic approach that fosters all products and asset classes – including equity and securitisation – that can contribute to mobilising capital resources towards the transition. “AFME will continue to support a risk sensitive approach to the integration of ESG factors into prudential regulation and we look forward to the work programme in this area. Any specific prudential treatment distinguishing between ‘green’ or ‘brown’ assets needs to be consistent with the principles of prudential regulation. This should be done in a dynamic, forward-looking and risk-oriented manner which is based on experience and scientific data, and agreed at an international level as far as possible. “We welcome the commitment for the EU to continue to cooperate with its partners in international fora to agree on common objectives and principles for taxonomies. The development of regional taxonomies should follow a set of common, globally consistent principles and, as such, the evolution of the EU Taxonomy should take international taxonomy developments into account. International regulatory convergence in ESG reporting is particularly important in the further elaboration of the European reporting framework.” – Ends –

Following the publication of the European Commission report confirming the settlement discipline regime will be reviewed, Pete Tomlinson, Director of Post Trade at AFME, said: “It is helpful that the Commission has stated its intention to consider amendments to the mandatory buy-in regime, subject to an impact assessment. Given that amendments may now be made at a later date, it does not make sense for the current rules to be implemented and enforced on 1 February 2022. “AFME strongly recommends that the Commission and ESMA take action to decouple the implementation of the mandatory buy-in rules from all other aspects of the settlement discipline regime. This would allow other measures, such as the penalties regime, to take effect as planned in February 2022, but avoid implementation of the current buy-in rules, which have been widely acknowledged as being flawed. “This action should be taken as soon as possible, in order to provide much-needed clarity to all market participants.” – Ends –