FCA Consultation paper Improving Equity Secondary Markets CP 22 12
18 July 2022
18 July 2022
On 5 July 2022, the FCA issued Consultation paper: Improving Equity Secondary Markets (CP 22/12). This follows on from the Wholesale Markets Review (WMR) response published in March 2022 and the Queen's speech in April 2022 (see our briefing here), which contained details of the Financial Services and Markets Bill.
The changes that the FCA is focusing on are: improving the content and consistency of post-trade transparency reports; establishing a new designated reporter status for OTC trades; allowing UK trading venues to use reference prices from overseas markets where those prices are robust, reliable, and transparent; and permitting the use of the tick size regime from overseas primary markets. There are also general proposals in relation to outages.
The changes will require some amendments to reporting workflows, both in content and when trades are reported. The designated reporter framework proposed should be reviewed by all current SI's and all entities that trade report currently. Lastly, trading venues and members of trading venues should focus on the FCA's outage section which is likely to lead to further substantive work for relevant firms.
Under the Future Regulatory Framework (FRF), the firm facing requirements of the MiFID II regime currently found in legislation will move to the FCA Handbook. When this occurs, the FCA will be able to revise them through its rule-making powers. The FCA is proposing a staggered approach to consultation on the implementation of WMR. It is proposing to first consult on changes to the requirements that it already has the power to implement and will then consult on other reforms covered in the WMR, which are more closely linked to changes to legislation over the course of this 2022 and 2023.
The FCA proposals in relation to post-trade are pitched as "tidy-ups" - arrangements/trades that are nonprice forming but were not clearly scoped in by the initial MiFID II drafting. This looks useful in relation to give ups / RFMD and intra-group trades. There may be a few systems workflow amendments (reporting) required by investing firms (and APAs).
The FCA is planning to make changes to the list of exemptions from post-trade transparency:
In relation to give-ups in the RFMD context, the FCA states that these should not be reported, as they often do not provide any additional information to the one already provided by the reporting of the market leg of trades concluded by the executing broker.
The FCA is also proposing to introduce a definition of give-up/give-in trades to include RFMD where the trade is passed to hedge the prime broker's derivative position with the client. The FCA is also proposing guidance to clarify further the types of give-ups and give-ins that can benefit from the exemption from post trade transparency.
The FCA is proposing to allow trading venues to defer publication for all transactions in Article 13 until before the opening of the next trading day (this is to address the current situation where some same types of transactions are exempted from post-trade transparency when executed OTC but are subject to real-time reporting when reported under the rules of a trading venue).
Following the above, the FCA also is proposing to simplify the post trade reporting flags. The proposals are likely to require some workflow amendments by investment firms and trading venues/APAs.
The changes suggested include:
The FCA is proposing to create a regime where firms will be able to opt in as designated reporters at an entity level by notifying it. Firms will be able to register as designated reporters regardless of whether they are an SI in any instrument. The regime will apply across all classes of financial instruments, equities and non-equities. The FCA states that the fundamental principles of the regime will continue to apply, i.e. firms executing trades OTC will have to report transactions through APAs. The FCA is proposing that the approach to OTC will apply to trades in all financial instruments.
To be able to report a trade you have to have been a counterparty/involved in the trade. Therefore, conceptually, the designated reporting regime can be viewed as a swap for SI status, at least for those that only had SI status for post trade reasons.
FCA is also proposing to maintain a register of designated reporters for firms to determine who reports OTC trades.
The FCA is proposing targeted changes to the reference price and to the order management facility waivers initially and will consider broader changes once the waiver regime is delegated to it. Broadly, these changes seemed aimed at making venue liquidity slightly more attractive i.e. removing some of threshold hurdles to benefit from OMF pre trade transparency waiver. Clearly, if there is more material change to come, it is to come later. The plan appears to be for the FCA's newly established markets committee to chew over more radical market structure reforms.
Current proposed changes include:
The interaction between tick sizes and overseas markets has been bedevilled by issues from the start. The FCA is proposing that trading venues can adopt the minimum tick size of the primary market located overseas when that tick size is smaller than the one determined based on calculations using data from UK venues. One assumes more is to come on tick sizes.
The section on outages is probably the most substantive in terms of new policy ideas (although none perhaps surprising given they have been aired by the FCA previously). The FCA is proposing to introduce a series of expectations in relation to outages for trading venues and market participants. This appears to be part of the general operational resilience reform framework. The below summarises some of the obligations on the different participants in the market ecosystem.
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.