The European Commission (EC) published a report summarizing responses to the targeted consultation on the supervisory convergence and the single rulebook in the European Union (EU). As far as the single rulebook is concerned, this stocktaking exercise did not reveal strong support for further-reaching EU level harmonization across all sectoral legislation. However, respondents overwhelmingly converge in their request to better align the timing of level 2 measures with the timing for the application of level 1 measures. EC also published the Delegated Regulation 2022/76, which supplements the Investment Firms Regulation (IFR: 2019/2033) regarding the regulatory technical standards specifying adjustments to the K-factor “daily trading flow” (K-DTF) coefficients. Regulation 2022/76 sets out adjustments to the formula for determining coefficient of the K-DTF cash trades and coefficient of the K-DTF derivatives and provides the meaning of the "period of stressed market condition." Regulation 2022/76 shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.
The daily trading flow (DTF) is calculated based on the volume of transactions. Circumstances leading to higher trading volumes may, therefore, force investment firms dealing on own account, including market makers, to reduce their trading activities. This may lead to a risk of reduced market liquidity, with potential detriments to financial stability. Consequently, the K-DTF coefficients are being adjusted in a way that does not disincentivize trading activities. Where circumstances lead to lower trading volume, those considerations do not apply and therefore, the adjustments to the K-DTF coefficients are based only on the trades volumes occurring during periods of high volatility. If the K-DTF requirements in stressed market conditions are overly restrictive and detrimental to financial stability, the coefficient shall be adjusted to be smaller than the one provided in Table 1 of Article 15(2) of IFR, in order to avoid making the K-DTF a disincentive to trading.
For the purposes of calculating the adjusted K-DTF, stressed market conditions should cover cases where short-term changes in trading volume and price have a significant impact for the calculation for the K-DTF. As stressed market conditions may last for an indeterminate period of time, including periods as short as a few minutes, the adjusted coefficients should be capable of reflecting the value of the daily trading flow that takes place during periods of any different duration. According to Regulation 2022/76, an event of stressed market condition means a situation where the specific parameters are met and where those stressed market conditions lead to increased trading volumes. The start and end time of an event of stressed market condition shall be the time which the trading venue has identified in accordance with Article 6(2) of Delegated Regulation 2017/578 which sets out regulatory technical standards specifying the requirements on market making agreements and schemes.
Effective Date: February 09, 2022
Keywords: Europe, EU, Banking, Investment Firms, Regulatory Technical Standards, IFR, K-Factor Regime, Derivatives, EC
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