ESMA Ponders Adding Spot FX to Market Abuse Regulation

The European Securities and Markets Authority (ESMA) has issued a consultation paper that in part looks at whether spot FX should be brought into scope of its Market Abuse Regulation (MAR).

The regulator has been asked by the European Commission to investigate adding spot FX to the markets that it regulates, specifically it has been asked whether the relevant National Competent Authorities (NCAs) or local regulators, are capable of efficiently supervising and sanctioning market abuse in these markets.

ESMA says in its consultation paper that it has “has identified a number of arguments in support of the inclusion of spot FX contracts under the scope of MAR”, specifically whereas NCAs currently exercise their capacity to monitor the capital, reputation of the management body, systems and controls and activity of regulated entities, only the national legislative framework of one Member State enables the relevant NCA to act against misconduct of authorised firms in their regulated activities and their ‘ancillary activities’ carried out ‘in connection with’ or ‘held out for the purposes of’ regulated activities, like can be the case for spot FX activities.

It also notes the investigation into misconduct in the spot market in November 2014 that led to fines being imposed by the UK FCA, the Swiss FINMA, the US Commodity Futures Trading Commission (CFTC) and the US Office of the Comptroller of the Currency. “ESMA also notes that the UK FCA, Bank of England and HM Treasury in their Fair and Effective Markets Review concluded, back in 2015 before the FX Global Code was developed and voluntary adhered to by significant proportion of the market, that a new statutory civil and criminal market abuse regime should be created for spot FX that should include some of the key features of the current MAR-MiFID II scheme,” the paper states. “The open FEMR recommendations relating to new legislation would be kept under review as noted in 2018 in a report on the progress of FEMR.”

The paper also notes the linkages from spot FX markets to other financial instruments, specifically FX derivatives, but also observes that a delay may be prudent to properly ascertain the impact of the FX Global Code. Of some concern possibly to incumbents in the market, the paper also suggests the spot market may “need to develop features required by MiFID II to trading venues and market participants regarding systems and controls, transparency, conduct requirements, and reporting obligations”.

The paper also notes the potentially “significant” challenge of NCAs being able to collate the necessary data from spot markets given the huge number of transactions in the market.

Stakeholders are invited to provide feedback on the consultation before 29 November 2019. An open hearing on this Consultation Paper will take place in ESMA’s premises on 5 November ahead of a final report expected in Spring 2020.

Colin Lambert

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