ESMA's annual report this week points out that Italian-style liquidity contracts have received a positive opinion, unlike the French practice that was invalidated two weeks ago. The supervisor attributes this difference in assessment to a question of proportion and limits. The impact of the negative European opinion remains uncertain for Paris market participants.
Has the AMF been treated unfairly by ESMA, which issued a negative opinion on French-style liquidity contracts on 31 May? The question arises because a similar scheme in Italy was approved by the European Securities and Markets Authority in 2020.
Consob's specific commitment
The European regulator's annual report, published this week, reminds us of this in the section on accepted market practices in the "market integrity" chapter:
"On 31 January 2020, ESMA issued a positive opinion on a proposed accepted market practice on liquidity contracts notified by Consob (the Italian regulator, ed.). ESMA considered that Consob's market practice contained various mechanisms to limit the threat to market confidence in relation to liquidity contracts, including Consob's specific commitment to strengthen supervision of such contracts", says ESMA.
Accepted market practice means that the national regulator has validated a market practice, in accordance with the texts in force.
In September 2019, a positive opinion had also been given to the liquidity contract scheme proposed by the Spanish regulator.
Liquidity contracts, which are very common on the Paris market, are concluded between an issuer and an investment services provider to promote the liquidity of the issuer's shares.
At the end of May, however, the French regulator was unequivocally refused:
"ESMA considers that the new accepted market practice, applicable from 1 July 2021, replacing the current market practice on liquidity contracts, applicable since 1 January 2019, is not compatible with the Market Abuse Regulation (MAR) and the related implementing regulation, and also deviates from ESMA's 2017 advice on the convergence points", the European authority had said.
There are several areas of concern
When asked by Finascope, ESMA explains this difference in treatment by the proportion and limitations of the French system: "In its assessment, ESMA identified several areas of concern. These are the lack of limits on positions and the presence of volume and resource limits that are significantly higher than those recommended in ESMA's 2017 Convergence Point Advice. On this basis, ESMA has issued a negative opinion."
On the Italian side, ESMA seems to point to a certain goodwill on the part of the regulator:
"In the case of Consob, ESMA had also identified several areas of concern. However, ESMA concluded that Consob's accepted market practice was compatible with Article 13(2) MAR (Market Abuse Regulation) and ROC 2016/908 and contained various mechanisms to mitigate the threat to market confidence in relation to liquidity contracts, including Consob's specific commitment to strengthen oversight of such contracts".
The AMF, which has two months to respond, must react before the end of June, i.e. before the current regime expires.
What would happen before a European judge?
Although this opinion is non-binding, the consequences for players in the Paris market remain uncertain. After a strong statement published in the wake of ESMA's decision, professionals are abstaining while awaiting the outcome of the races. Amafi, the financial markets association, has remained silent.
One market participant, who prefers to remain anonymous, nevertheless believes that ESMA's negative opinion could set an unfortunate precedent, regardless of the content of the AMF's reaction. He hopes for a compromise solution: "This case symbolises the shift that took place at European level in 2016 with the Market Abuse Regulation that was uniformly imposed on all countries. France and the AMF have always tried to defend this market practice but, if appealed, Esma's negative opinion could carry a lot of weight before a European judge".