European Affairs

The January 15 hearing by the European Securities and Markets Authority (ESMA) on the Market Abuse Regulation (MAR) kicks off the year.[1] Focused on investor protections, MAR will impose new regulations to prevent insider dealing and market manipulation while extending oversight to new trading venues and financial instruments (e.g., commodity derivatives) bought and sold over-the-counter. Regulators will have more investigative and sanctioning powers, and whistleblowers will have more protections.

ESMA already issued a discussion paper[2] on the ten areas MAR addresses. These are:  exemptions for buyback programs and stabilization measures; market soundings;  indicators and signals of market manipulation; accepted market practices; procedures, content and format to submit suspicious transactions and order reports; delay in the public disclosure of inside information and the conditions for delay; format for insider lists;    managers’ transactions and trading window; conflicts of interests in investment recommendations; and, reporting of breaches and protection of the person making the report.

Closely tied to MAR is the Markets In Financial Instruments Directive “2” (MiFID2)[3], another package of sweeping changes aimed at regulating rapid advances in trading technologies and applying lessons from the 2007-09 financial crisis to stock, bond, and derivatives markets. The framework covers investment services in financial instruments, including brokerage, advice, dealing, portfolio management, and underwriting by investment firms and banks.

Broad agreement has been reached on curbing and making more transparent “dark pools” (so-called because the activities are concealed from the public) of capital (a November agreement would cap trading in a stock anonymously at 8 percent of the total amount traded of that stock in the EU), supervising high-frequency trading, and permitting off-exchange swaps contracts. But sharp differences remain in determining the clout national regulations would wield, for example, in setting position limits to prevent commodities dealers from manipulating food and energy prices. Equally contentious are requirements for clearing of trades, the “open access” issues.

Negotiators had hoped to have had a deal by Christmas for the Council, Parliament, and the Commission to clear , but the trialogue failed in mid-December. The European Parliament seeks a narrower scope of regulation than the Commission for commodity derivatives.   Disagreement remained, too, over issues surrounding the “retail passport” of non-EU, or “third,” countries. Another trialogue session is slated for January 14, under a new Council presidency, as Lithuania passes that responsibility to Greece for the first six months of 2014. Concern mounts that final text would not materialize before European Parliamentary elections in May, raising the prospect that issues that had been agreed to may be reopened after the new Parliament is elected.

Some provisions originally contained in MiFID 1 were moved to the Markets in Financial Instruments Regulation (MiFIR) so that they could be valid throughout the EU. (See chart.) EU regulations effectively become part of domestic law as soon as they are valid without requiring implementation by member-states.  In contrast, directives are only legally binding upon the states, allowing them to decide the practical details of implementation.

As of mid-December, negotiators had agreed to delete a provision (Section 28e) that would have required all investors to use clearing houses rather than buying shares directly from companies.

Over-the-counter derivatives have come under regulations through European Market Infrastructure Regulation (EMIR) with compulsory reporting of derivatives trades (including credit, equity, interest rate, foreign exchange, commodity derivatives) to repositories effective February 2014. Counterparties established within the EU must ensure that the details of any contract concluded, modified or terminated are reported to an ESMA-recognized registered trade repository.   Further, EU-based banks cannot use clearing houses in non-EU countries unless that jurisdiction is deemed equivalent by the EU.

Mandating the reporting and requiring that all OTC derivatives trades be processed through clearing houses was driven by the belief that greater transparency will reduce risks.

More rulemaking is expected in 2014 by the Commission and ESMA.

Undertakings for collective investment in transferable securities (UCITS5) plans to revise the regime[4] by (EU language):

  • Introducing specific provisions on the depositary's safekeeping and oversight duties (Article 1 (3));
  • Defining the conditions in which safekeeping duties can be delegated to a sub-custodian (Article 1 (3a));
  • Setting out a limited list of entities that are eligible to act as UCITS depositaries (and transitional provisions for UCITS whose current depositary would not be eligible) (Article 1 (4));
  • Clarifying the depositary's liability in the event of the loss of a financial instrument held in custody. Unlike AIFMD, this liability cannot be contracted out of (Article 1 (5));
  • Setting out provisions on direct redress for investors (Article 1 (5) 5);
  • Introducing a requirement for the UCITS management company to implement a remuneration policy that is consistent with sound risk management and complies with minimum principles (Article 1 (1)); introducing a whistle blowing regime (Article 1 (14)); and,
  • Setting out the administrative sanctions and measures that regulators should be empowered to apply (Article 1 (13)).

The European Parliament and the European Council will start the final round of negotiations on the final text of the draft UCITS 5 Directive in early 2014.

Tensions between attracting low-cost capital to the EU and ensuring that its markets are well-protected against a repeat of the 2008-2011 (CK) financial crisis have forced EU regulations to overhaul – completely—these statutes. Total net assets of UCITS stood at EUR6.86billion in October 2013, while combined total net assets of the European investment fund industry stood at EUR9.63trillion, according to the European Fund and Asset Management Association.

And there’s more. In 2013, the EU Commission published regulatory proposals for European Long-term Investment Funds (“ELTIFs”). As the Commission explained in its proposal, by overcoming regulatory fragmentation, such cross-border funds would increase the amount of non-bank finance available for companies in the EU requiring access to long-term capital for projects in the areas of energy, transport and communication infrastructure, industrial and service facilities, and, housing.  These funds, too, the Commission believes would satisfy retail investors’ demands.

Timetables for these regulatory initiatives are likely to slip until after the EU Parliament elections running from May 22-25. A special Website ( was launched in early December, and the campaigns can be followed on Twitter using the #EP2014 hashtag.