(1)

The COVID-19 pandemic is severely affecting people, companies, health systems and the economies and financial systems of Member States. The Commission, in its Communication to the European Parliament, the European Council, the Council, the European economic and social committee and the Committee of the regions of 27 May 2020 entitled ‘Europe's moment: Repair and Prepare for the Next Generation’ (2) stressed that liquidity and access to finance will be a continued challenge in the months to come. It is therefore crucial to support the recovery from the severe economic shock caused by the COVID-19 pandemic by cutting red tape through introducing limited targeted amendments to existing pieces of financial legislation. The overall aim of the amendments should therefore be to remove unnecessary red tape and make temporary exceptions that are deemed effective in order to mitigate the economic turmoil. The amendments should avoid making changes that result in more burdens on the sector and leave complex legislative questions to be settled during the planned review of MIFID II. This package of measures is adopted under the label ‘Capital Markets Recovery Package’.

(2)

Directive 2014/65/EU of the European Parliament and the Council (3) on markets in financial instruments was adopted in 2014 in response to the financial crisis that unfolded in 2007-2008. That Directive has substantially strengthened the financial system in the Union and guaranteed a high level of protection of investors across the Union. Further efforts to reduce regulatory complexity and investment firms’ compliance costs and to eliminate distortions of competition could be considered, provided investor protection is sufficiently taken into consideration at the same time .

(3)

As regards the requirements that were intended to protect investors, Directive 2014/65/EU has not fully achieved its objective to adapt measures that take the particularities of each category of investors (retail clients, professional clients and eligible counterparties) sufficiently into account. Some of those requirements have not always enhanced the protection of investors but at times rather hindered the smooth execution of investment decisions. To better enhance investor protection, it is critical that the debt level of retail investors is taken into account in the suitability assessment, in particular given the rising level of consumer debt due to the COVID-19 pandemic. Furthermore, certain requirements in Directive 2014/65/EU could be amended to facilitate the provision of investment services and the performance of investment activities provided that the amendment is done in a balanced way which fully protects investors .

(4)

Product governance requirements can restrict the sale of corporate bonds. Corporate bonds with a ‘make whole clause’ are generally considered safe and simple products that are eligible for retail clients. Such a ‘make whole clause’ protects investors against losses in case an issuer opts for early repayment, by ensuring that those investors are provided with a payment equal to the net present value of the coupons they would have received if the bond would not have been called. The product governance requirements should therefore no longer apply to corporate bonds with such ‘make-whole clauses’.

(5)

The call for evidence, launched by the European Securities and Markets Authority (ESMA), on the impact of inducements and cost and charges disclosure requirements under Directive 2014/65/EU and the public consultation of the Commission both confirmed that professional clients and eligible counterparties do not need standardised and mandatory cost information as they already receive the necessary information when they negotiate with their service provider. That information is tailored to their needs and often more detailed. Eligible counterparties and professional clients should therefore be exempted from those cost and charges disclosure requirements, except with regard to the services of investment advice and portfolio management, because professional clients entering into portfolio management or investment advice relationships do not necessarily have sufficient expertise or knowledge to be exempted from the costs and charges disclosures.

(6)

Investment firms are currently required to undertake a costs-benefit analysis of certain portfolio activities in case of ongoing relationships with their clients in which financial instruments are switched. Investment firms are thereby required to obtain the necessary information from the client and to be able to demonstrate that the benefits of such switching outweigh the costs. As this procedure is overly burdensome for professional clients, who tend to switch on a frequent basis, they should be exempted from this requirement, while maintaining the possibility to opt-in. As retail clients need a high level of protection, that option should be limited to professional clients.

(7)

Clients with an ongoing relationship with an investment firm receive mandatory service reports, either periodically or based on triggers. Neither investment firms nor their professional clients find such service reports useful. Those reports have proved in particular unhelpful for professional clients in extreme volatile markets, as those reports are provided in a high frequency and number. Professional clients often react to those service reports either by not reading those reports, or by making fast investment decisions rather than continuing with a long-term investment strategy. Eligible counterparties should therefore no longer receive such service reports, Professional clients, however, should have the possibility to opt-in to those service reports.

(8)

Directive 2014/65/EU introduced reporting requirements on how orders were executed on terms most favourable to the client. Those technical reports contain large amounts of detailed quantitative information about the execution venue, the financial instrument, the price, the costs and the likelihood of execution. They are rarely read by investors, as is evidenced by the very low numbers of downloads from the websites of the investment firms. As they do not enable investors to make any meaningful comparisons on the basis of those data, the publication of those reports should be temporarily suspended.

(9)

In order to facilitate the communication between investment firms and their clients and thus the investment process itself, investment information should no longer be provided on paper but should, as a default option, be provided electronically. Retail clients should however be able to request the continued provision of information on paper.

(9a)

The Commission should come forward with a report on the impact of the application of position limits and position management on liquidity, market abuse and orderly pricing and settlement conditions in commodity derivatives markets, as provided for in this Directive. An evidence-based assessment of the commodity derivatives regime and the consultation of a diverse range of stakeholders is essential when reviewing the substance of those provisions, which were adopted in response to the 2009 Pittsburgh and 2011 Cannes G20 summit agreements to improve the regulation, functioning and transparency of commodity derivatives markets and to address excessive price volatility. [Am. 2]

(10)

Directive 2014/65/EU allows persons that trade in commodity derivatives, emission allowances and derivatives on emission allowances on a professional basis to make use of an exemption from authorisation as an investment firm when their trading activity is ancillary to their main business. Those persons applying for the ancillary activity test are required to notify the relevant competent authority annually that they make use of that possibility and to provide the necessary elements to satisfy the two quantitative tests that determine whether its trading activity is ancillary to its main business. The first test compares the size of an entity's speculative trading activity to the total trading activity in the Union on an asset class basis. The second test compares the size of the speculative trading activity, with all asset classes included, to the total trading activity in financial instruments by the entity at group level. There is an alternative form of the second test, which consists of comparing the estimated capital used for the speculative trading activity to the actual amount of capital used at group level for the main business. Those quantitative tests should remain the baseline rule for the ancillary activity exemption. As an alternative, national supervisory authorities should be able to be authorised to rely on qualitative elements, subject to clearly defined conditions. ESMA should be empowered to provide guidance on the circumstances under which national authorities could apply a qualitative approach, as well as to develop draft regulatory technical standards on the qualitative criteria. Persons that are eligible for the exemption, including market makers, are dealing on own account or providing investment services other than dealing on own account, to customers or suppliers of their main business. The exemption would be available for both cases individually and on an aggregate basis where this is an ancillary activity, when considered on a group basis. That exemption should not be available for persons who apply a high-frequency algorithmic trading technique or are part of a group the main business of which is the provision of investment services, or banking activities, or acting as a market maker in relation to commodity derivatives. ▌

(11)

Competent authorities currently have to establish and apply position limits on the size of a net position which a person can hold at all times in commodity derivatives traded on trading venues and in economically equivalent Over-The-Counter (EEOTC) contracts designated by the Commission. As the position limit regime has proved to be unfavourable for the development of new commodity markets, nascent commodity markets should be excluded from the position limit regime. Instead, the position limits should only apply to those commodity derivatives that are deemed significant or critical commodity derivatives and their EEOTC contracts. Significant or critical derivatives are energy commodity derivatives with an open interest of at least 300 000 lots over a one-year period. Due to its critical importance for citizens, agricultural commodities that have an underlying that is for human consumption, and their EEOTC contracts, will remain under the current position limit regime. ESMA should be mandated to develop draft regulatory standards to define agricultural commodities with an underlying for human consumption subject to position limits and critical or significant derivatives subject to position limits. For significant and critical derivatives, ESMA should take into account the 300 000 lots open interest over a one-year period, the number of market participants and the underlying commodity.

(12)

Directive 2014/65/EU does not allow hedging exemptions for any financial entities. Several predominantly commercial groups who set up a financial entity for their trading purposes found themselves in a situation where their financial entity could not carry out all the trading for the group, as the financial entity was not eligible for the hedging exemption. Therefore, a narrowly defined hedging exemption for financial counterparties should be introduced. That hedging exemption should be available where, within a predominantly commercial group, a person has been registered as an investment firm and trades on behalf of that commercial group. To limit this hedging exemption to only those financial entities that trade for the non-financial entities in the predominantly commercial group, that hedging exemption should apply to those positions held by that financial entity that are objectively measurable as reducing risks directly related to the commercial activities of the non-financial entities of the group.

(13)

Even in liquid contracts, only a limited number of market participants typically act as market makers in commodity markets. When those market participants have to apply position limits, they are not in a positon to be as effective as market markers. Therefore, an exemption from the position limit regime should be introduced for financial and non-financial counterparties for positions resulting from transactions undertaken to fulfil mandatory liquidity provisions.

(13a)

The changes to the position limit regime are designed to support the development of new energy contracts, in particular in the electricity market, and do not seek to relax the regime for agricultural commodity contracts.

(14)

The current position limit regime does not recognise the unique characteristics of securitised derivatives. Securitised derivatives should therefore be excluded from the position limit regime.

(15)

Since the entry into force of Directive 2014/65/EU, no same commodity derivative contracts have been identified. Due to the concept of ‘same contract’ in that Directive, the methodology for determining the other months’ limit is detrimental to the venue with the less liquid market when trading venues are competing on commodity derivatives based on the same underlying and sharing the same characteristics. Therefore, the reference to ‘same contract’ in Directive 2014/65/EU should be deleted. Competent authorities should be able to agree that the commodity derivatives traded on their respective trading venues are based on the same underlying and share the same characteristics, in which case the baseline for the other months’ limit on the most liquid market for that commodity derivative can be used as the baseline limit for setting the other months’ position limit for the competing contracts traded on the less liquid venues.

(16)

Significant dissimilarities exist in the way positions are managed by trading venues in the Union. Therefore, position management controls should be reinforced where necessary.

(17)

In order to ensure the further development of e uro denominated EU commodity markets, the power to adopt acts in accordance with Article 290 of the Treaty on the Functioning of the European Union should be delegated to the Commission in respect of which agricultural commodity derivatives should be subject to position limits and which critical or significant derivatives should be subject to position limits, in respect of a procedure for which persons may apply for a hedging exemption for positions resulting from transactions undertaken to fulfil mandatory liquidity provisions, in respect of a procedure for which financial entities that are part of a predominantly commercial group may apply for a hedging exemption for positions held by that financial entity that are objectively measurable as reducing risks directly related to the commercial activities of the non-financial entities of the group, in respect of the clarification of the content of position management controls. It is of particular importance that the Commission carries out appropriate consultations during its preparatory work, including at expert level, and that those consultations are conducted in accordance with the principles laid down in the Interinstitutional Agreement of 13 April 2016 on Better Law-Making (4). In particular, to ensure equal participation in the preparation of delegated acts, the European Parliament and the Council receive all documents at the same time as Member States' experts, and their experts systematically have access to meetings of Commission expert groups dealing with the preparation of delegated acts.

(18)

The EU Emissions Trading System (ETS) is the Union’s flagship policy for achieving the decarbonisation of the economy in line with the European Green Deal. Trading in emission allowances and derivatives thereof is subject to Directive 2014/65/EU and to Regulation (EU) No 600/2014 and represents an important element of the Union’s carbon market. The ancillary activity exemption under Directive 2014/65/EU enables certain market participants to be active in emission allowance markets without having to be authorised as investment firms, provided certain conditions are met. In view of the importance of orderly, well-regulated and supervised financial markets, the significant role of the ETS in achieving the Union’s sustainability objectives, and the role that a well-functioning secondary market in emission allowances has in supporting the functioning of the ETS, it is essential that the ancillary activity exemption is appropriately designed to contribute to those objectives. This is particularly relevant where trading in emission allowances takes place on third country trading venues. In order to ensure the protection of the Union’s financial stability, market integrity, investor protection and the level playing field, and to ensure that the ETS continues to function in a transparent and robust manner to ensure cost-effective emission reductions, the Commission should monitor the further development of trading in emission allowances and derivatives thereof in the Union and in third countries, assess the impact of the ancillary activity exemption on the ETS, and where necessary, propose any appropriate amendment as regards the scope and application of the ancillary activity exemption.

(19)

Directive 2014/65/EU should therefore be amended accordingly.

(20)

The objectives pursued by this amendment aim at supplementing already existing Union legislation and can therefore best be achieved at Union level rather than by different national initiatives. Financial markets are inherently cross-border in nature and are becoming more so. Because of that integration, isolated national intervention would be far less efficient and would lead to the fragmentation of markets, resulting in regulatory arbitrage and distortion of competition.

(20a)

Since the objectives of this Directive, namely to refine already existing Union legislation ensuring uniform and appropriate requirements that apply to investment firms throughout the Union, cannot be sufficiently achieved by the Member States but can rather, by reason of their scale and effects, be better achieved at Union level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union. In accordance with the principle of proportionality, as set out in that Article, this Directive does not go beyond what is necessary in order to achieve those objectives.

(21)

In accordance with the Joint Political Declaration of 28 September 2011 of Member States and the Commission on explanatory documents (5), Member States have undertaken to accompany, in justified cases, the notification of their transposition measures with one or more documents explaining the relationship between the components of a directive and the corresponding parts of national transposition instruments. With regard to this Directive, the legislator considers the transmission of such documents to be justified.

(21a)

The aim of the amendments should be to make temporary exceptions and remove clear red tape in order to mitigate the economic crisis; the amendments should therefore avoid opening up more complex issues of the legislation which could risk causing more burdens for the sector. Larger changes to the legislation should first be re-evaluated in the planned review of MiFID II,