Mar and SME Growth Markets: EU regolation on liquidity contracts published

On 18 October 2022, Delegated Regulation (EU) 1959/2022 adopted by the European Commission on 13 July 2022 (“Regulation”) was published in the Official Journal of the European Union and came into effect from the twenty-first day after its publication (9 November 2022). Such Regulation supplements Regulation (EU) 596/2014 on market abuse (“MAR”) with certain regulatory technical standards (“Regulatory Technical Standards” or “RTS”) In order to provide issuers on an SME growth market with a liquidity contract template.

The European Commission’s regulatory action implements Article 13, paragraphs 12 and 13, MAR ([1]) in accepted market practices, introduced by Regulation (EU) 2019/2115 ([2]). More specifically, paragraph 12 of Article 13 allows issuers of an SME growth market to enter into a liquidity contract for their shares, provided that such contracts are in accordance with the conditions set forth in Article 13(2) of the same regulation ([3]). Paragraph 13 of the same article entrusts ESMA, with the task of developing a contractual template to be adopted for the purpose of entering into such liquidity contracts.

On 6 May 2020, ESMA published a consultation paper (“Consultation Paper” or “CP”) ([4]) and, at the end of the consultation ([5]), presented its proposal on the draft RTS on liquidity contracts, in particular, with reference to opening a liquidity account, setting limits on the resources allocated to the liquidity contract, the issue of independence of the liquidity provider, limits on the liquidity provider’s trading activity and obligations incumbent on the liquidity provider, the remuneration of the liquidity provider, and finally, the issue of transparency of liquidity contracts vis-à-vis the market. ([6])

As explained in ESMA’s consultation paper, the legislative intent is to establish a uniform template for issuers operating in all Member States, regardless of whether that Member State has already adopted a market practice on liquidity contracts. It follows that the EU framework on liquidity contracts is going to coexist with both current and future national market practices (^[7]).

Having regard to the above, Delegated Regulation (EU) 1959/2022, consisting only of two articles, develops in its annex a contractual template that substantially transposes the draft regulatory technical standards submitted by ESMA to the Commission, or rather takes up the contractual template annexed to the same CP. In particular, said contractual template is characterized by the presence of certain minimum elements, which should be present in all liquidity contracts in order to ensure compliance with the conditions set out in Article 13(2), MAR. However, the parties are free to include in the contract additional clauses, based on their specific case, in accordance with the principle of freedom to contract ([8]).

In accordance with ESMA’s proposals, the Regulation provides for limits to be set on volumes, prices and resources so that the latter are allocated to the liquidity contract proportionally to the objectives set out in Article 13(2) of Regulation (EU) 596/2014 ([9]). Such a decision highlights the fact that the Commission has not taken up the proposal outlined in the context of the deliberations of the Technical Expert Stakeholder Group (TESG) on SMEs and illustrated in the Final Report “Empowering EU Capital Markets For SMEs – Making listing cool again” ([10]), which suggests that the parties should be given more trading freedom with respect to the determination of the prices of buy and sell orders and daily volumes ([11]).

This is not a major innovation for Italy, given CONSOB’s Market Practice No. 1 ([12]), which already regulates liquidity support activities in a way that is similar to the existing liquidity contract.

In addition, EU regulation aims to ensure the integrity and smooth functioning of SME growth markets through the independence of the liquidity provider from the issuer and from the decisions of other functions, within the intermediary, engaged in trading in the same share or in financial instruments whose value or price depends on the value or price of the share in question, and through the setting of a limit to the variable part of its remuneration (^[13]).

Finally, again with a view to ensuring market integrity, and also investor protection, the Commission considered it appropriate to provide, in liquidity contracts, for certain transparency obligations to be placed on the issuer, throughout the entire liquidity provision phase, consisting in the publication on its website of useful information to enable other market participants to make an informed decision on the shares covered by the liquidity contract ([14]).

This article is for information purposes only and is not, and cannot be intended as, a professional opinion on the topics dealt with. For any further information please contact Lukas Plattner and Alessandra Gisonna.

News(^[1])       Article 13, paragraph 12: “Without prejudice to accepted market practices as established in accordance with paragraphs 1 to 11 of this Article, an issuer of financial instruments admitted to trading on an SME growth market may enter into a liquidity contract for its shares where all of the following conditions are met: a)  the terms and conditions of the liquidity contract comply with the criteria set out in paragraph 2 of this Article and in Commission Delegated Regulation (EU) 2016/908; b)  the liquidity contract is drawn up in accordance with the Union template referred to in paragraph 13 of this Article; c)  the liquidity provider is duly authorised by the competent authority in accordance with Directive 2014/65/EU and is registered as a market member with the market operator or the investment firm operating the SME growth market; d)  the market operator or the investment firm operating the SME growth market acknowledges in writing to the issuer that it has received a copy of the liquidity contract and agrees to that contract’s terms and conditions.

The issuer referred to in the first subparagraph of this paragraph shall be able to demonstrate at any time that the conditions under which the contract was concluded are met on an ongoing basis. That issuer and the market operator or the investment firm operating the SME growth market shall provide the relevant competent authorities with a copy of the liquidity contract upon their request”.

Article 13, paragraph 13: “ESMA shall develop draft regulatory technical standards to draw up a contractual template to be used for the purposes of entering into a liquidity contract in accordance with paragraph 12, in order to ensure compliance with the criteria set out in paragraph 2, including as regards transparency to the market and performance of the liquidity provision”.

News(^[2])          Regulation (EU) 2019/2115 on the promotion of the use of SME growth markets, besides making changes to the MAR, specifies, in whereas clause 8, that ESMA is mandated to submit to the European Commission draft regulatory technical standards (“Regulatory Technical Standards”) in order to provide a liquidity contract template to be made available to issuers.

News(^[3])          In relation to paragraph 12 of Article 13, MAR, it is pointed out that the Commission did not accept the proposal indicated in the context of the deliberations of the Technical Expert Stakeholder Group (TESG) on SMEs and illustrated in the Final Report “Empowering EU Capital Markets For SMEs – Making listing cool again”, and specifically on page 83: “Amend MAR article 13, paragraph 12, point d, so that market operators or investment firms operating SGMs do not have to agree to the issuers and liquidity provider terms and conditions of their contracts”.

News(^[4])          This document can be found at the following link: https://www.esma.europa.eu/sites/default/files/library/esma70-156-2061_mifid_ii_consultation_paper_on_sme_gms_under_mifid_ii_and_mar.pdf.

News(^[5])          ESMA received 25 responses to this consultation paper, one of which was confidential.

News(^[6])          On 27 October 2020, ESMA published a Final Report on the MAR amendments made by Regulation (EU) 2115/2019 which can be found at the following link: https://www.esma.europa.eu/sites/default/files/library/esma70-156-3581_final_report_on_sme_gms_rts-its_under_mar_0.pdf.

News(^[7])          See point 87 of paragraph 5.2: “The legislative intent behind the EU framework for liquidity contracts is to establish a template that issuers can use in all Member States, regardless of whether that member state has an established AMP on liquidity contracts that would permit these contracts to operate under a ‘safe harbour’. Hence, the Union framework on liquidity contracts will coexist with existing or future national AMPs on liquidity contracts”. (Consultation Paper of 6 May 2020, page 29)

News(^[8])          The fulfilment of the aforementioned conditions of Article 13(2) MAR - as recalled in the first whereas clause of the Regulation - implies, at the same time, that contracts ensure a high degree of safeguards to the operation of market forces and the proper interplay of the forces of supply and demand, a positive impact on market liquidity and efficiency, and that there shall be no risk to the integrity of related markets.

News(^[9])          See whereas clauses from 2 to 6 of the Regulation.

News(^[10])         See the Final Report “Empowering EU Capital Markets For SMEs – Making listing cool again”, May 2021, page 83: “In addition, ESMA should modify its proposed draft RTS on Liquidity Contracts reflecting the MAR article 13 requirement by deleting paragraph 2 of Article 2 and setting limits and boundaries on certain aspects of the liquidity contracts (i.e. limits on resources and volumes, trading during periodic auctions and restrictions on large orders) which only limit the overall freedom to design agreements that would best suit the parties in a specific case”.

News(^[11])        See the Final Report “Empowering EU Capital Markets For SMEs – Making listing cool again”, May 2021, pages 80-81, in which the TESG pointed out the need to give the parties more trading freedom with respect to the determination of prices and volumes, as pre-set parameters do not fit the need to have a framework that can be tailored to the issuer’s capitalization size, as well as to the liquidity of its instruments and the characteristics of the market. With reference to the answers given in ESMA’s consultation on SGMs, see the Final Report on the amendments to the Market Abuse Regulation for the promotion of the use of SME Growth Markets of 27 October 2020, page 10.

News(^[12])         CONSOB Resolution 2138/2020

News(^[13])         See whereas clauses 8 and 9 of the Regulation. With particular reference to the remuneration of the liquidity provider, ESMA’s Consultation Paper states that: “ESMA considers that a 15% threshold would strike the right balance between providing an incentive to the liquidity provider and avoiding that his independence is impaired. The remaining (85% or more) remuneration should hence be a fixed amount”. Article 3.4 of the contractual template attached to the Regulation reflects exactly the provisions of the CP and of the template attached thereto. (Consultation Paper of 6 May 2020, page 36)

News(^[14])         See whereas clause 10 of the Regulation, as well asl paragraph 3 of the contractual template attached thereto, in relation to the “Obligations of the issuer”.