A regulated market which is authorised and functions regularly and in accordance with Title III of Directive 2014/65/EU of the European Parliament and of the Council on markets in financial instruments (EU MiFID II) (see article 2(1)(13B) Retained Regulation (EU) No 600/2014 (UK MiFIR)).

A regulation is a legally binding instrument of the European Union.

Scope of this Practice Note A central bank digital currency (CBDC) uses an electronic record or digital token to represent the virtual form of a fiat currency of a particular nation (or region). A CBDC is centralised as it is issued and regulated by the competent monetary authority of the country. A CBDC would make electronic money, issued by a country’s central bank, available to all households and businesses. This would allow everyone to make electronic payments in central bank money. This Practice Note focuses on the work carried out by EU authorities towards the establishment of a digital euro. The ECB’s role in proposals for a digital euro ECB report and consultation on digital euro On 2 October 2020, the European Central Bank (ECB) published a report on examining the issuance of a CBDC, the digital euro, from the perspective of the Eurosystem. The ECB said a digital euro could support the Eurosystem’s objectives by providing citizens with access to a safe form of money ‘in the fast-changing digital world’, but the report noted a number of important legal

What are CCPs and what do they do? A central counterparty (CCP) is a type of financial institution (also known as a clearing house) which facilitates the clearing of both over-the-counter (OTC) derivatives and exchange-traded derivatives (ETDs). CCPs are classed as financial market infrastructures (FMIs). A derivative is a type of financial instrument whose value is determined by reference to (and so derived from) an underlying asset, index, rate, reference point or risk (referred to as the underlying asset or underlying). Derivatives are bi-lateral contracts which involve the transfer of all or part of the risk and reward associated with the underlying from one party to another without the immediate transfer of the underlying itself. The terms of OTC derivatives are agreed directly between the parties (or in some cases arranged through a broker). OTC derivatives can be distinguished from derivatives (usually futures or options) which are traded on public exchanges (exchange traded derivatives or ETDs). The terms of ETDs are specified by the exchanges on which they are traded, not by the parties. ETDs are, generally,

What is a credit default swap? A credit default swap (CDS) is a bilateral transaction which takes its underlying value from the credit risk of a third party, known as the 'reference entity', and specific or generic obligations of the reference entity, which are known as ‘reference obligations’. The reference entity can be a corporate, sovereign, municipality or a similar organisation and is not a party to the CDS. The primary purpose of a CDS is to isolate the credit risk of the reference entity from all of its other risks and from ownership of the reference entity’s obligations, including the reference obligation. One party to the CDS (known as the 'protection seller') assumes the credit risk of the reference entity and the other party (known as the 'protection buyer') makes periodic payments to the protection seller. If a credit event (a default, bankruptcy, or other situation which is recognised as affecting the creditworthiness of the reference entity) occurs, the protection seller’s payment obligations under the CDS will be triggered and the

What is a credit rating agency methodology? A credit rating agency (CRA) methodology is the body of practices, procedures and rules applied by a CRA when issuing or revising a credit rating. CRAs issue three main types of ratings: • ratings of corporates • ratings of sovereigns, and • ratings of securities issued in a securitisation or similar transaction (structured securities) in which a special purpose vehicle (SPV) holds a pool of underlying assets, and payments to holders of the structured securities are dependent on payments (cash flows) generated by the underlying assets A credit rating of a corporate or sovereign is typically based on an analysis of: • the creditworthiness of the entity being rated before external support • any external support that might be available to the entity being rated if it finds itself in financial difficulties, and • the specific financial instruments that are being rated A credit rating of structured securities is typically based on an analysis of: • the credit quality of the underlying assets • legal and

Scope of this Practice Note This Practice Note focuses on the approach of EU authorities and regulators (ie, the European Banking Authority (EBA) and the European Securities and Markets Act (ESMA)). It also provides some background to the meaning of cryptoassets and the unique challenges that cryptoassets pose to regulators. For information about the approach taken by UK authorities and regulators, see Practice Note: UK regulation of cryptoassets. For more information about the approach taken by supranational bodies, see Practice Note: Supranational approach to the regulation of cryptoassets. This Practice Note should also be read in conjunction with Practice Note: Web 3.0, digital assets and cryptoassets—essentials which discusses: • What are cryptoassets? • Common terms associated with cryptoassets • Development of cryptoassets • Characteristics of cryptoassets • Considerations for businesses looking at cryptoasset technology • Cryptoassets, the smart contract and ICOs • Disputes involving cryptoassets • Regulation of cryptoassets • Cryptoassets as regulated investments What are cryptoassets? One of the hurdles in relation to understanding non-traditional currencies and assets lies in the inconsistent use of

OTC derivatives and ETDs There are two broad types of derivatives: • over the counter (OTC) derivatives, and • exchange traded derivatives (ETDs) OTC derivatives may be subdivided into: • non-cleared OTC derivatives, and • cleared OTC derivatives, which have features in common with both non-cleared OTC derivatives and ETDs For more information on OTC derivatives and ETDs, see Practice Notes: OTC and exchange traded derivatives—key features and concepts and OTC and exchange traded derivatives—documentation. Why are derivatives regulated? Derivatives trading is a significant area of financial activity which has long been regulated—however, the aim and extent of regulation of derivatives has changed since the global financial crisis of 2007–2008. Before the crisis, broadly: • ETDs were regulated because they were traded on public exchanges and there was a desire to protect market users and the public from fraud, manipulation, and abusive practices, but • OTC derivatives were regarded as private bilateral arrangements which could be left to the counterparties themselves and which did not require regulation The events

Background to this Practice Note In this Practice Note, the term ‘cryptoasset’ is used as described in the Markets in Cryptoassets Regulation (MiCA) as meaning: a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology In its legislative schedule for MiCA, the European Commission states that a basic taxonomy of the term ‘cryptoassets’ distinguishes between: • payment tokens (these are a means of exchange or payment) • investment tokens (these have profit rights attached), and • utility tokens (these enable access to a specific product or service) MiCA also contains specific requirements relating to ‘stablecoins’. A ‘stablecoin’ is a type of cryptoasset whose value is tied to an outside asset, such as a fiat currency or gold, to stabilise the price, or one whose value is determined by an algorithm. This Practice Note focuses on the EU regulation of digital assets (including cryptoassets and stablecoins) from a payments perspective, in particular digital assets which are subject

Scope of this Practice Note As a result of a European Commission report in October 2008 which stated that the first Electronic Money Directive was holding back development of the e-money market, a second Electronic Money Directive (Directive 2009/110/EC) (2EMD) was adopted by the European Parliament and the Council on 16 September 2009 which repealed the original Electronic Money Directive. European Member States were required to transpose the new directive into national law by 30 April 2011. This Practice Note provides an overview, and highlights the key provisions of 2EMD. This Practice Note also looks at amendments to the 2EMD made by the recast Payment Services Directive (Directive 2015/2366/EU) (PSD2). Background to the second Electronic Money Directive The first Electronic Money Directive (Directive 2000/46/EC) (EMD) was required to be implemented in the EU Member States by 27 April 2002. In October 2008, the European Commission reported that the legal framework set by the EMD was holding back development of the e-money market. The main causes identified were: • uncertainty over the application of the framework to

What is an equity derivative? An equity derivative is a financial instrument that references and offers economic exposure to the performance of an equity asset or other equity-related variable from which the instrument's price or value is derived. Equity derivatives may be traded on an exchange or over the counter (see further details below). They may also be funded or unfunded. Equity derivatives are used primarily by funds and investors as speculative investments and by end users and banks as commercial hedges. However, they also have a variety of other uses which will be covered in further detail below. Types of equity derivative instruments Equity derivative instruments fall into the following seven principal categories: • Options—the two main types of options are put options and call options. A put option holder has the right to sell an underlying asset (for example shares) to a counterparty for an agreed price on an agreed future date. A call option holder has the right to buy an underlying asset (for example shares) from a counterparty for

This Practice Note describes the EU regulation of exchange traded funds (ETFs), which are broadly open-ended investment funds that track, for example, an index, asset class or strategy and are traded on an exchange or other trading venue. What is an ETF? In the EU an ETF is defined as ‘a fund of which at least one unit or share class is traded throughout the day on at least one trading venue and with at least one market maker which takes action to ensure that the price of its units or shares on the trading venue does not vary significantly from its net asset value (NAV) and, where applicable, from its indicative NAV’. This definition of ‘ETF’ is set out in Article 4(1)(46) of the recast Markets in Financial Instruments Directive (2014/65/EU) (MiFID II). ETFs are the most popular form of exchange traded products (ETPs) in the EU. Other forms of ETPs include exchange traded notes and exchange traded commodities, which are regulated differently than ETFs. Key difference between ETFs and other forms of