Memo #
33998

European Commission's CMU Package; Summary of MiFID II/R, ELTIF and ESAP Proposals
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[33998]

January 18, 2022

TO: Derivatives Markets Advisory Committee
Equity Markets Advisory Committee
Global Advocacy Coordination Advisory Committee
Global EU Capital Markets Union Task Force
Global Operations Advisory Committee
Global Operations Advisory Committee - Asia
Global Regulated Funds Committee
Global Regulated Funds Committee - Asia
Global Trading & Markets Committee RE: European Commission's CMU Package; Summary of MiFID II/R, ELTIF and ESAP Proposals

 

As previously advised,[1] on 25 November 2021 the European Commission ("the Commission") adopted four legislative proposals under the auspices of its Capital Markets Union (CMU) action plan.[2] This memo contains a summary of the Commission's proposed reforms to the Markets in Financial Instruments framework and the European Long-Term Investment Fund (ELTIF) regime, and its proposals to develop a European Single Access Point (ESAP). A summary of the Commission's proposed reforms to the Alternative Investment Fund Managers Directive (AIFMD) and UCITS Directive (UCITSD) are contained in a separate memo.[3]

Proposed reforms to the Markets in Financial Instruments Framework

The Commission has proposed reforms[4] to the Markets in Financial Instruments Regulation (MiFIR)[5] and to the recast[6] Markets in Financial Instruments Directive (MiFID II).[7] Through its reforms, the Commission is seeking to ensure more transparency for all parties trading on the EU's capital markets.[8] The Commission's proposals include changes to market data transparency, removing obstacles to the emergence of a consolidated tape,[9] optimising trading obligations and prohibiting receiving payments for forwarding client orders (i.e., Payment for Order Flow.) The Commission has published an impact assessment of the proposals,[10] including a summary document.[11] The proposals follow a consultation by the Commission,[12] to which ICI Global responded.[13]

The core elements of the Commission's proposed reforms to MiFIR that are of relevance to regulated funds and their managers are summarised below. The Commission has also proposed complementary reforms to MiFID II.

Consolidated Tape

The Commission has proposed reforms to remove barriers to the establishment of a consolidated tape (CT). It has proposed that a single, independent consolidated tape provider (CTP) for each asset class is appointed through a competitive tender process run by the European Securities and Markets Authority (ESMA). CTPs would operate a 'hub and spoke model' - consolidating data from 'exclusive data consolidators' which would collect data from market data contributors provided as close as technically possible to real time. The CTP would then disseminate this consolidated data to subscribers.

The Commission has proposed a mandatory contribution model with "minimum revenue targets" incumbent on market data consolidators. Under this model, all market data sources would have to make standardised core market data available to market data aggregators. Minimum revenue targets would be established and regularly reviewed by an independent operating committee. The revenue targets would take into account usage of the CT and relevant parameters such as commercial redistribution, price referencing, indexing, syndication, sales of market data to media outlets. The Commission proposes that the revenue targets with respect to professional users would be set at levels sufficient to largely subsidise the cost of granting retail access for minimal or no cost.

The Commission has proposed various amendments to MiFIR to develop its preferred consolidated framework including:

  • Introducing obligations for trading venues to contribute harmonised market data directly and exclusively to the entities appointed as the CTP for each asset class (Article 1(10), MiFIR proposal).
  • Developing a tender process for ESMA to appoint a CTP for each asset class (shares, ETFs, bonds and derivatives) for a five year term (Article 1(15), MiFIR proposal).
  • Introducing organisational requirements for appointed CTPs, including the collection of consolidated core market data; the collection of licensing fees from subscribers; and developing a revenue participation scheme for regulated markets for their contribution of market data relating to shares (Article 1(16), MiFIR proposal).
  • Introducing public reporting obligations for CTPs concerning service level requirements quality features, e.g., on speed of delivery, and reports on operational resilience (Article 1(17), MiFIR proposal).
  • Providing ESMA with the supervisory competence for CTPs (Article 1(24) and 1(25), MiFIR proposal).
  • Introducing a definition of core market data items (to be further defined by ESMA) that would be included in the CT (Article 1(2), MiFIR proposal).
Market Data

The Commission has proposed amendments to improve the transparency, pricing, availability and usefulness of market data including:

  • Empowering ESMA to develop the content, format and terminology of the reasonable commercial basis information that trading venues, APAs, CTPs and systematic internalisers have to make available to the public (Article 1(7), MiFIR proposal); and
  • Aligning the trade reporting formats and reporting obligations for Systematic Internalisers (SIs) with those applicable to exchanges and alternative execution venues (MTFs/OTFs) (Article 1(10), MiFIR proposal).
Transparency Waivers and Deferrals

The Commission has proposed the following changes to the transparency waivers and deferrals regime:

  • Introducing a minimum threshold trade size for the reference price waiver (RPW), preventing any alternative trading venue from executing small trade sizes under the reference price waiver, in line with ESMA recommendations (Article 1(3), MiFIR proposal).
  • Shortening and harmonising publication deferrals for non-equity post trade reports to the public and removing the discretion of national competent authorities to allow that post-trade reports for non-equities are deferred for four weeks, by replacing it with EU wide thresholds (Article 1(6), MiFIR proposal).
Replacement of the Double Volume Cap

The Commission has proposed replacing the double volume cap with a single volume cap set at 7% of trades that are executed under the RPW or the negotiated trade waiver (Article 1(4), MiFIR proposal).

Systematic Internalisers

The Commission has proposed a strengthening of the public quoting obligations incumbent on SIs through the following changes (Article 1(8) and 1(9), MiFIR proposal):

  • increasing the pre-trade quotation size for equities to a minimum of twice the standard market size; and
  • replicating the floor established under the RPW to trades undertaken by an SI without pre-trade transparency, limiting the ability of SIs to match small trades at midpoint.
Share Trading Obligation

The Commission is proposing to 'codify' the perimeter of the share trading obligation (STO) by defining this as shares that are admitted to trading on an EEA regulated market. Furthermore, the Commission proposes establishing an EU "official list" of shares subject to the STO, avoiding current ambiguities in the perimeter of application of the STO (Article 1(11), MiFIR proposal).

Derivatives Trading Obligation

The Commission proposes alignment of the derivatives trading obligations (DTO) with the clearing obligation for derivatives under 'EMIR Refit' to ensure legal certainty between the two obligations, in particular with respect to the scope of the entities that are subject to the clearing and trading obligation and the possible suspension of such obligations (Article 1(18), (19), (20), MiFIR proposal). Furthermore, the Commission proposes to introduce a stand-alone mechanism to suspend the STO for certain investment firms acting as market-makers with non-EEA counterparties when certain conditions are met (Article 1(20), MiFIR proposal).

Open Access

The Commission proposes removing the "open access" obligation for exchange-traded derivatives (ETDs). As such, EU CCPs would no longer be obliged to clear ETDs that are not executed on their platform and trading venues would not be required to accept non-affiliated clearing for trades executed on their platform (Articles 1(21), (22) and (23), MiFIR proposal).

Proposed reforms to the European Long-Term Investment Fund Regulation

The Commission has proposed reforms[14] to the ELTIF Regulation[15] to increase the attractiveness of ELTIFs and make it easier for retail investors to invest in them.[16] The reforms include changes to the scope of eligible assets and investments, portfolio composition and diversification rules, the borrowing of cash and other ELTIF rules, and requirements for authorisation, investment policies and operating conditions of ELTIFs. The Commission has published an impact assessment accompanying the proposal[17] (including a summary)[18] and a report on the functioning of the existing framework.[19] The proposals follow a consultation by the Commission,[20] to which ICI Global responded.[21]

Eligible Assets and Investments

The Commission has proposed the following amendments to the eligible asset and investment rules in the ELTIF Regulation:

  • Enabling ELTIFs to make minority co-investments in investment opportunities, rather than be required to invest via or in 'majority owned' subsidiaries (Article 10(1)(a), ELTIF proposal).
  • Facilitating the possibility of ELTIFs pursuing fund-of-funds investment strategies and investing in EU AIFs - in addition to ELTIFs, EuVECAs and EuSEFs - managed by EU AIFMs, provided those ELTIFs, EuVECAs, EuSEFs¸ UCITS and EU AIFs invest in eligible investments (Article 10(1)(d), ELTIF proposal).
  • Lowering the threshold for investment in real assets to a minimum of EUR1mn in value to ensure that the portfolio investments made by ELTIFs are not solely limited to the forms of ownership via direct holdings or indirect holdings via qualifying portfolio undertakings of individual real assets (Article 10(1)(e). ELTIF proposal).
  • Broadening the scope of eligible assets by permitting investment in the following four categories of securitisations (subject to conditions): residential loans; commercial loans; corporate loans; and trade receivables (Article 10(1)(f). ELTIF proposal).
  • Streamlining the notion of a 'qualifying portfolio undertaking', raising the market capitalisation threshold for listed qualifying portfolio undertakings from EUR 500 million to EUR 1 billion, and ensuring that the market capitalisation threshold is solely applied at the time of the initial investment (Article 11(1), ELTIF proposal).
  • Enabling co-investment by an ELTIF manager and affiliated entities in their group into an ELTIF under management and into the same assets into which the ELTIF has invested, subject to conflicts of interest arrangements (Article 12, ELTIF proposals).
  • Lowering the threshold for eligible assets and investments for ELTIFs from 70% to 60% to improve the liquidity profile of ELTIFs' underlying portfolios and promote the flexibility of asset managers in executing their investment strategies (Article 13, ELTIF proposals).
  • For retail marketed ELTIFs, increasing the limit to 20% for an ELTIF's exposure to instruments issued by, or loans granted to, any single qualifying portfolio undertaking and to investments in any single eligible ELTIF, EuVECA, EuSEF, or EU AIF managed by an EU AIFM. Furthermore, increasing the limit for ELTIF's investment in UCITS eligible assets issued by a single body from 5% to 10% and removing the 40% cap on investment in individual real assets and qualifying portfolio undertakings which represent 10% of the ELTIF's investments (Article 13(2), ELTIF proposal).
  • Increasing the ability of ELTIFs to use leverage by borrowing cash - 50% of the ELTIFs capital for retail marketed ELTIFs and 100% for professional marketed ELTIFs, subject to conditions (Article 16, ELTIF proposal).
Liquidity Management

The Commission has proposed reforms to provide greater flexibility in the redemption terms that are offered by ELTIFs. The proposals include mandating ESMA to develop rules to allow ELTIFs to provide limited redemptions (Article 18, ELTIF proposal), including an optional liquidity window mechanism (Article 19, ELTIF proposal). The liquidity window mechanism is intended to provide a second market for ELTIFs by providing for the possibility of full or partial matching of transfer requests of units or shares of the ELTIF by exiting ELTIF investors with subscription requests by new investors.

Subscription and suitability requirements

The Commission has proposed making the following changes to the subscription and suitability requirements for retail investors:

  • removing duplicative suitability assessment requirements for ELTIF managers and distributors by cross-referring to MiFID II obligations (Article 28(1), ELTIF proposal); and
  • deleting the minimum EUR10,000 'entry ticket' subscription requirements and the 10% exposure threshold for retail investors whose financial portfolios are below EUR 500 000 (Article 30(1), ELTIF proposal)
Technical Amendments

The Commission has proposed various technical amendments in the following areas:

  • definitions e.g., broadening the definition of a 'real asset' (Article 1(2), ELTIF proposal);
  • the authorisation process (Article 5(1) and (3), ELTIF proposal) including clarifications on the information required for authorisation applications (Article 1(4), ELTIF proposal); and
  • removing the requirement for physical investor facilities and separate IT, personnel-related or administrative arrangements in light of the reforms introduced by the cross-border distribution of funds package (Article 26, ELTIF proposal).

Proposal for a European Single Access Point

The Commission has proposed the development of a European Single Access Point (ESAP)[22] to provide a single point of access to public information about EU companies and EU investment products. The proposal includes a Regulation establishing the ESAP,[23] and an accompanying Directive[24] and Regulation[25] to make consequential amendments to existing legislation, including the SFDR, AIFMD and UCITSD. The Commission has published an impact assessment of the ESAP proposal,[26] including a summary document.[27] The proposal follows an earlier consultation by the Commission.[28]

The Commission has proposed a framework for ESMA to establish the ESAP by 31 December 2024. The framework includes the conditions and requirements for entities to submit information and the roles and tasks of collection bodies and ESMA. Furthermore, the draft framework contains various operational considerations including IT security policies and the functionalities of ESAP through which users can access and search for information.

The Commission has proposed that the ESAP will provide at least the following functionalities (developed by ESMA):[29]

  • a web portal with a user-friendly interface in all the official languages of the Union to provide access to the information in ESAP;
  • an API enabling easy access to the information in ESAP;
  • a search function in all the official languages of the Union;
  • an information viewer;
  • a machine translation service for the information retrieved;
  • a download service, including for the download of large quantities of data; and
  • a notification service informing users of any new information in ESAP.

The Commission has identified via items of information that could be included in the ESAP. Through complementary proposals for a Regulation and Directive, the Commission has suggested reforms to the following pieces of legislation to facilitate the provision of information to the ESAP. The following reforms are of greatest relevance to regulated funds and their managers:

  • UCITS Directive;
  • AIFM Directive;
  • MiFID II Directive and MiFIR;
  • EuVECA Regulation;
  • EuSEF Regulation;
  • ELTIF Regulation;
  • Market Abuse Regulation;
  • CSD Regulation;
  • PRIIPS Regulation;
  • Benchmark Regulation;
  • Money Market Fund Regulation;
  • Pan-European Personal Pension Regulation;
  • Sustainable Finance Disclosure Regulation;
  • Taxonomy Regulation; and
  • Central Counterparty Recovery and Resolution Regulation.

Next Steps

The legislative proposals will now go through the ordinary legislative procedure whereby they are considered by the Council of the European Union and the European Parliament.[30]

 

Giles Swan
Director of Global Funds Policy
ICI Global

 

Endnotes

[1] See ICI Memorandum No. 33948, RE: European Commission Issues CMU Package: Summary of AIFMD/UCITS Review Proposal, dated 9 December 2021, available at https://www.ici.org/memo33948

[2] See Communication from the Commission: A Capital Markets Union for people and businesses-new action plan, COM/2020/590 final, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=COM:2020:590:FIN

[3] ICI Memorandum No. 33948

[4] Proposal for a Regulation amending Regulation (EU) No 600/2014 as regards enhancing market data transparency, removing obstacles to the emergence of a consolidated tape, optimising the trading obligations and prohibiting receiving payments for forwarding client orders, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021PC0727

[5] Regulation 600/2014 on markets in financial instruments, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32014R0600

[6] Proposal for a Directive amending Directive 2014/65/EU on markets in financial instruments, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021PC0726

[7] Directive 2014/65/EU on markets in financial instruments, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32014L0065

[8] Proposal for a Directive amending Directive 2014/65/EU on markets in financial instruments, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021PC0726

[9] https://ec.europa.eu/info/files/211125-capital-markets-union-package-consolidated-tape-factsheet_en

[10] Commission Impact Assessment Report accompanying the Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 600/2014 as regards enhancing market data transparency, removing obstacles to the emergence of a consolidated tape, optimising the trading obligations and prohibiting receiving payments for forwarding client orders Proposal for a Directive of the European Parliament and of the Council amending Directive 2014/65/EU on markets in financial instruments, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021SC0346

[11] Commission Executive Summary of the Impact Assessment Report accompanying the Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 600/2014 as regards enhancing market data transparency, removing obstacles to the emergence of a consolidated tape, optimising the trading obligations and prohibiting receiving payments for forwarding client orders Proposal for a Directive of the European Parliament and of the Council amending Directive 2014/65/EU on markets in financial instruments, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021SC0347

[12] See ICI Memorandum No. 32240, RE: European Commission Issues Consultation on MiFID II/MiFIR, dated 25 February 2020, available at https://www.ici.org/memo32240

[13] See ICI Memorandum No. 32460, RE: ICI Global's Response to the European Commission's MiFID II/MiFIR Consultation, dated 15 May 202, available at https://www.ici.org/memo32460

[14] Proposal for a Regulation amending Regulation (EU) 2015/760 as regards the scope of eligible assets and investments, the portfolio composition and diversification requirements, the borrowing of cash and other fund rules and as regards requirements pertaining to the authorisation, investment policies and operating conditions of European long-term investment funds, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021PC0722

[15] Regulation (EU) 2015/760 on European long-term investment funds, available at https://eur-lex.europa.eu/legal-content/en/ALL/?uri=CELEX:32015R0760

[16] https://ec.europa.eu/info/files/211125-capital-markets-union-package-eltifs-factsheet_en

[17] Commission Impact Assessment Accompanying the Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 2015/760 as regards the scope of eligible assets and investments, the portfolio composition and diversification requirements, the borrowing of cash and other fund rules and as regards requirements pertaining to the authorisation, investment policies and operating conditions of European long-term investment funds, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021SC0342

[18] Commission Summary of the Impact Assessment Accompanying the Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 2015/760 as regards the scope of eligible assets and investments, the portfolio composition and diversification requirements, the borrowing of cash and other fund rules and as regards requirements pertaining to the authorisation, investment policies and operating conditions of European long-term investment funds, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021SC0343

[19] Report from the Commission on the functioning of the European long-term investment funds (ELTIF) framework, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021DC0738

[20] See ICI Memorandum No. 32907, RE: European Consultation on ELTIFs, dated 11 November 2020, available at https://www.ici.org/memo32907

[21] See ICI Memorandum No. 33502, RE: European Consultation on ELTIFs: ICI Global Response, dated 19 January 2021, available at https://www.ici.org/memo33052

[22] See https://ec.europa.eu/info/files/211125-capital-markets-union-package-esap-factsheet_en

[23] Proposal for a Regulation establishing a European single access point providing centralised access to publicly available information of relevance to financial services, capital markets and sustainability, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021PC0723

[24] Proposal for a Directive amending certain Directives as regards the establishment and functioning of the European single access point, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021PC0724

[25] Proposal for a Regulation amending certain Regulations as regards the establishment and functioning of the European single access point, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021PC0725

[26] Impact assessment accompanying the documents Proposal for a Regulation of the European Parliament and of the Council establishing a European single access point providing centralised access to publicly available information of relevance to financial services, capital markets and sustainability Proposal for a Regulation of the European Parliament and of the Council amending certain Regulations as regards the establishment and functioning of the European single access point Proposal for a Directive of the European Parliament and of the Council amending certain Directives as regards the establishment and functioning of the European single access point, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021SC0344

[27] Executive summary if the impact assessment accompanying the documents Proposal for a Regulation of the European Parliament and of the Council establishing a European single access point providing centralised access to publicly available information of relevance to financial services, capital markets and sustainability Proposal for a Regulation of the European Parliament and of the Council amending certain Regulations as regards the establishment and functioning of the European single access point Proposal for a Directive of the European Parliament and of the Council amending certain Directives as regards the establishment and functioning of the European single access point, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021SC0345

[28] See ICI Memorandum No. 33104, RE: CMU - European Commission Consults on Establishing a European Data Platform, dated 16 February 2021, available at https://www.ici.org/memo33104

[29] Article 7, ESAP Proposal

[30] See https://www.consilium.europa.eu/en/council-eu/decision-making/ordinary-legislative-procedure/