ESMA Updates Best Execution (RTS 27) and EMIR Q&A

The big recent announcement from ESMA was last week’s formal dates to change lower leverage on CFDs and ban binary options. However, prior to that, ESMA released a series of Q&A updates related to MIFID II governance, transparency rules and EMIR reporting.

Clarification on RTS 27 Best Execution Scope

Published last month, ESMA issued their updated Q&A’s on MiFID II and MiFIR investor protection and intermediaries topics (Link). Of timely importance was clarification of the ‘Other Liquidity Provider’ status under 27 of the MiFID II legislation.

Due for the first time on June 30th for Q1 data, RTS 27 is a standardized Best Execution transparency report under MiFID II (More on RTS 27). Unlike other MIFID II reports, the requirement to comply with RTS 27 is limited to investment firms that are Execution Venues. Execution venues include Trading Venues, Systematic Internalizers (SI), Market Makers and other Liquidity Providers.

While the definition of trading venues and SIs are very clear under MiFID II, market makers and liquidity provider designations are more ambiguous. As such, it has led to questions to ESMA for additional clarification.

Liquidity providers and CFD brokers

Answering what is a liquidity provider under RTS 27, ESMA explained that they are similar to market makers and “deal on own account and provide liquidity to other market participants on an on-going basis, however do not necessarily have formal agreements in place for this activity. Accordingly, a liquidity provider may not commit to providing prices in an instrument under all market conditions.”

They further added that CFD brokers that deal on their own account fall under this category of other liquidity providers. This is due to their continuous two way pricing of instruments. As such, such brokers are required to comply with RTS 27 reporting.

EMIR Q&A answers questions related to corporate trading

While recently overshadowed my MiFID II going into effect, ESMA continues to provide additional information for EMIR reporting (More on EMIR). Specifically, ESMA and EU regulators are aiming to improve the data collected through EMIR to allow for more robust supervisory of derivative trading and exposure.

With the new Q&A, ESMA added three new questions. Two of them focused on the specific fields required for two products; derivatives on deliverable currencies and energy swaps.

The relationship between these two products is that they are common products used by non-financial corporate firms. Corporates use derivatives such as energy swaps such for electricity and natural gas and currency forwards to hedge their energy price and foreign exchange risks.

For non-financial firms, trade reporting such as under EMIR is a new requirement for them. As such, many corporates struggle with understanding what needs to reported and how. Therefore, the additional information from last week’s EMIR Q&A provides useful details for them.

Need help with RTS 27, EMIR or MIFID II reporting? Contact Cappitech today and let us know how we can help (contact us)

About the author: Ron Finberg

Ron is Executive Director, Product Specialist at S&P Global Market Intelligence Cappitech and helps customers with their compliance of EMIR, MIFIR, SFTR, MAS and ASIC derivative reporting. Ron is an ongoing contributor of regulatory focused content and webinars and leverages his over 20 years’ experience in the financial industry. He was also awarded the Editor’s Recognition Award for Best RegTech Vendor Professional in the RegTech Insight Europe Awards 2021.