Regulating financial instruments during Covid-19

in Regulatory/Compliance, 09.06.2020

This article has been written together with Thor-Hagen SCHELLER.

Lately, business as usual has become crisis management. By assessing Covid-19’s impact on risk, market participants are trying to maintain operational resiliency and regulatory risk mitigation. It is possible that available resources will decrease, translating into decreased personnel shouldering a greater workload.

In this context, the European Securities and Markets Authority (ESMA) has launched a series of novel regulations that require action from market participants. To save you time, here’s a summary of the most important items:

An immediate hazard: limits implied by the short selling regulation

Market participants need to act now: Assets must be rebalanced, and current monitoring tools must be adjusted, e.g. by calibrating alerts to excessive net short positions.

On 18 May, ESMA announced the non-renewal and termination of short selling bans by Austrian FMA, Belgian FSMA, French AMF, Greek HCMC, Italian CONSOB and Spanish CNMV. This does not impact ESMA’s 16 March 2020 Decision on short selling. Anyone holding a net short position in European shares traded on EU-regulated markets that exceeds 0.1 percent of the issued share capital (rather than 0.2 percent) must notify their national authorities.

A standoff, for now: collateralization of financial instruments

Market volatility immediately affects margin requirements. In particular, collateralization of over-the-counter derivatives has led to a heavy shift in counterparty risks. Changing a tire while driving is no easy task, and neither is reviewing calculation models, but it should be done nonetheless. This review must consider the potential impact of the Final Report of the European Supervisory Authorities (ESA) regarding bilateral margin requirements under the European Market Infrastructure Regulation (EMIR) published on 4 May.

In response to the Covid-19 outbreak in 2020, the ESA proposed a 12-month deferral of Phase 5 and Phase 6 of the implementation schedule for initial margin (IM) requirements. If adopted, IM requirements for impacted financial counterparties would take effect 1 September 2021 or 1 September 2022, respectively.

Furthermore, the ESA proposes harmonizing the EMIR margin framework. First, the application of the margin requirements for single-stock equity options or index options shall be postponed for another year, until 4 January 2021. Second, the margin obligations for physically settled FX Swaps shall be lifted if one counterparty of the transaction is a so-called non-institution.

In the absence of any objections by the European Commission, the Delegated Act included in this Final Report will enter into force following the end of a two-month scrutiny period.

A late bloomer: reporting under the Securities Financing Transaction Regulation

Market participants are currently implementing regulatory reporting for Securities Financing Transactions (SFT), such as repurchase agreements and securities lending. This initiative must be kept on track, though an altered deadline allows assigned resources to be stretched.

On 19 March, ESMA issued a public statement in response to the adverse developments resulting from the Covid-19 pandemic. In its publication, the institution advises national authorities not to prioritize supervisory actions related to entities subject to the reporting obligations as of 13 April 2020 and until 13 July 2020.

A summer brainteaser: technical standards for settlement discipline

Market participants should consider studying their trading flows during “quieter” summer months to understand the impact of the Central Securities Depositories Regulation (CSDR). Most players think that CSDR just applies to depository banking, but this regulation has far-reaching implications, including for asset managers (especially of less standardized financial products).

In Article 2 of its Technical Standards, called Measures Concerning Professional Clients, the European Commission requires all investment firm clients to confirm any financial transaction within a highly restrictive timeframe, e.g. by close of business when both parties are in the same time zone. Compliance must be achieved by 13 September 2020.

A candidate for the watch list: consultation for reporting under EMIR

Since 26 March, ESMA has been consulting on changes to the reporting regime of derivative transactions. Market participants may reply to the propositions but must carefully study the regulatory draft standards that could come out of them by the end of the year. It is already apparent that all reporting parties will have to modify their engines and monitoring models for delegation oversight.

To set the scene, ESMA’s papers consist of over 300 pages that will significantly change today’s reporting environment. In effect, ESMA proposes implementing new templates and amending the structure of existing templates. The data format of the reports would migrate to XML, and the number of fields would increase from 129 to 203. The consultation further implies greater granularity and enhanced formats for existing fields. In order to increase data quality, ESMA requires trade repositories to be more restrictive with regard to the acceptance of reports.


To sum it up, the regulation of market infrastructure is rapidly changing. We recommend gaining awareness of these developments and analyzing their impact on your operating model.

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