Position limits and transparency waiver plan

With a compliance deadline looming in January 2018, the European Securities and Markets Authority (ESMA) has announced changes in its approach to position limits and pre-transparency waivers. Carolyn Jackson, partner at Katten Muchin Rosenman UK LLP, assesses an arrangement that shares the workload between domestic and European regulators.

Original news

The ESMA and national competent authorities (NCAs) have updated their work plan for the opinions on pre-trade transparency waivers and position limits that must be issued under the Markets in Financial Instruments Directive (Directive 2014/65/EU) (MiFID II) and Markets in Financial Investments Regulation (Regulation) 600/2014/ EU) (MiFIR). In view of the large number of opinions to be issued, the work plan presents a pragmatic approach for ensuring that the waivers and position limits can be implemented as of 3 January 2018, pending the issuance of the opinions.

Why has ESMA had to update its work plan for the opinions on pre-trade transparency waivers and position limits?

MiFID II and MiFIR are an ambitious, wide ranging financial reform of the EU financial markets. Not only do they amend existing regulation and procedures under Markets in Financial Instruments Directive 2004/39/EC (MiFID I), including pre-trade transparency waivers, they also introduce new obligations, such as position limits. The EU position limit regime is more wide-reaching and comprehensive than the current regime in the US. ESMA has extensive obligations placed on it under MiFID II and MiFIR, including the requisite opinions regarding pre-trade transparency waivers and position limits, continuing to offer guidance to the EU market place through Q&As issued on a variety of MiFID II and MiFIR topics as well as addressing the European Markets Infrastructure Regulation (EMIR) review.

The plan agreed between ESMA and the NCAs represents a sensible and pragmatic solution of a division of labour between ESMA and the NCAs to permit firms to prepare for and be in compliance with MiFID II and MiFIR as much as reasonably practicable on 3 January 2018. ESMA simply does not have the resources to issue all of the requisite opinions within the original timelines. ESMA and the NCAs took a realistic assessment of the remaining timeline and determined that it was essential to give market participants as much time as possible to prepare.

What may be the impact on the market if national competent authorities can determine the waivers and limits?

It is important to keep in mind that ESMA has stated that it intends to prioritise issuing opinions for the pre-trade transparency waivers for equity instruments and expects to have them finalised by the end of 2017. Additionally, ESMA also intends to finalise as many opinions on non-equity instrument waivers as soon as possible before 3 January 2018. Thus, there may be a limit on how many pre-trade transparency waivers are determined by the NCA without ESMA review. Additionally, ESMA has issued opinions on some commodity position limits as proposed by France’s L'Autorité des marchés financiers (AMF) and the Financial Conduct Authority (FCA).

The fact that ESMA will not issue some of the opinions and will have the authority to require revisions to any waivers or position limits made by an NCA does introduce some uncertainty into the market place. Everything else being equal, it would obviously be better to know that all waivers and position limits had been reviewed and agreed to by ESMA through an issued opinion. However, in reality the uncertainty should be minimal. The NCAs are closer to their actual markets and are the best placed to determine the waivers and the limits. Any modifications requested by ESMA are expected to be limited. Further, the FCA has indicated that it will discuss with market participants the appropriate time required to permit affected participants to adjust to any changes in a waiver or a position limit.

What guidelines (if any) will NCAs be following in making their determinations?

It is important to recognise that the NCAs have the initial responsibility for determining the waivers and position limits. ESMA’s opinion is a review and sign-off of the proposal submitted by an NCA. Although ESMA can request revisions and modifications to an NCA’s proposal before issuing such opinion, the NCAs’ are the entities closest to the markets in their jurisdictions. In determining the waivers and limits they will follow the procedures as set out in MiFID II and MiFIR, the related regulatory technical standards and any relevant implementing legislation.

When is it expected that ESMA be able to provide opinions on all the pre-trade transparency waivers and position limits?

As noted by ESMA, it intends to publish all the opinions related to pre-trade transparency waivers for equity instruments before the end of 2017. They further expect to publish as many opinions on non-equity instrument waivers as soon as possible before 3 January 2018. ESMA has also published some commodity position limits opinions. Thus, it would be reasonable to expect that ESMA will be able to finalise such opinions, possibly within the first quarter of 2018. Again, although not having the opinions finalised introduces a degree of uncertainty, for the reasons expressed above this uncertainty should be minimal.

How has the updated work plan on the waivers and position limits been received by the market? What problems or benefits does the market envisage?

Overall, the work plan on the waivers and position limits has been well received by the market. The market recognises the plan between ESMA and the NCAs as a prudent solution to the looming 3 January 2018 compliance date. Having the details of the waivers and the limits in place as soon as possible before that date is what is critical to market participants in order to ensure compliance. The pre-trade transparency waivers and the actual position limits need to be in place for market participants to finalise their operational procedures and compliance systems. Although some of the waivers and position limits may be required to be modified at a later date when ESMA finalises its opinions, requiring market participants to be in compliance on 3 January 2018 without the requisite pre- transparency waivers in place, and with position limits that were not finished, would simply not have been feasible.

Interviewed by Julian Sayarer.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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