The French regulator is facing intransigence from the European supervisory authority (ESMA) over a practice that is widespread in French financial markets. The AMF will respond to ESMA's negative opinion before the end of the month.
Will the AMF ignore the negative opinion of ESMA, the European Securities and Markets Authority, on liquidity contracts, as requested by professionals?
"Of course, AMAFI hopes that the AMF will maintain its position without taking ESMA's advice into account,"the French financial markets association, which has 153 members and more than 10,000 professionals, said last week.
It was reacting to a communication from ESMA, which had invalidated the new operating framework for French liquidity contracts applicable from 1 July as notified to it by the French supervisor on 31 March. However, this was a "non-binding" opinion, which followed other negative opinions from the same regulator, notably in 2018.
Positive ESMA opinions in Spain and Italy
The purpose of liquidity agreements between an issuer and an investment services provider is to promote the liquidity of the issuer's shares, i.e. the ability to buy or sell them in all circumstances.
These contracts have long been proven in France. They are even used for nearly 70 % listed on Euronext Paris.
The broad outlines of the system were defined as early as 2001, before being adjusted over the years, most recently in the latest version proposed by the AMF but rejected by ESMA.
Such liquidity contracts also exist in Spain and Italy, but to a lesser extent and without having received negative opinions from ESMA. In other countries, securities liquidity is provided by specialised market makers.
"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 said.
Accepted Market Practice (AMP) means a recognized practice that the regulator has validated in accordance with the applicable regulations.
The French regulator is required to respond within two months. It has indicated that the issue will be put on the agenda of a forthcoming college of the regulator, its main decision-making body, and that a response will be given before the current framework expires, i.e. before the end of the month.
Relevance of French liquidity contracts
The AMF can maintain the PMA as it has already proposed, modify it or align it taking into account ESMA's advice.
If it is maintained, ESMA nevertheless asks it to justify itself on its website and explain why the market practice "does not pose a threat to market confidence".
In a study published at the end of April, which included the period of high volatility at the start of the health crisis, the AMF attempted to demonstrate the relevance of liquidity contracts as they exist in France: "Statistical and econometric analysis shows that liquidity contracts improve spreads and the price impact of transactions for all securities, although the impact is greater for illiquid securities than for liquid and highly liquid ones. We also found that liquidity contracts improve the spreads of liquid and highly liquid securities during periods of market stress, without triggering any of our market abuse alerts".
The AMF had also argued that it has the best possible tools to carry out this market surveillance.
These arguments obviously did not convince ESMA, whose intransigence is puzzling and does not reflect the excellent understanding between supervisors who are supposed to act jointly for the Capital Markets Union.
While awaiting the AMF's response, AMAFI was particularly forceful in its statement, not hesitating to question the European authority's expertise.
Incomprehensible and regrettable
"ESMA incomprehensibly ignores not only the extremely well-documented analyses on which the AMF relied, but also the attention paid by the AMF to the prevention and repression of market abuse".
He continued: "ESMA is once again adopting a dogmatic stance that is far removed from the pragmatism based on reasoned analysis that should govern its work. Beyond the issue of liquidity contracts, this approach is all the more regrettable because it fuels and justifies mistrust about the appropriateness of extending the powers of an authority that has yet to prove its expertise and ability to respond pragmatically to the issues facing issuers, investors and market participants in Europe."