Markets View – December 2021

As the end of the year approaches, we bring you some of the latest developments and regulatory announcements affecting financial markets and market participants. This month we focus on the FCA's recognition of the FX Global Code and Global Precious Metals Code, the proposed delay to the EU CSDR mandatory buy-in regime, and the FCA's warning over the use of web-based trading platforms.

FCA recognises revised FX Global Code and Global Precious Metals Code

The FCA has recognised the updated FX Global Code and Global Precious Metals Code and at the same time taken aim at the misuse of 'last look' and 'pre-hedging' practices by market participants. The FCA warns that:

• last look practices incorporating 'additional hold time', i.e. a delay additional to what is required to complete price and validity checks, to, for example, see if future prices move in a market participant's favour in relation to a client's trade request are not consistent with the codes; and

• pre-hedging practices where market participants do not communicate these to clients in a way that allow the client to understand the potential impact on execution, including where appropriate controls to monitor conflicts of interest or to limit access to confidential information relating to anticipated orders are not in place, are also not consistent with the codes.

In light of these warnings, we would suggest participants and individuals subject to the FCA's Senior Managers and Certification Regime review the codes carefully and consider if their behaviour is in line with the spirit and letter of code provisions. This exercise will ensure that Senior Managers meet their obligation to observe 'proper standards of market conduct', which extends to unregulated activities such as those to which the codes relate.

Some trading venues have already adhered to the revised code. From late this month, they should be publishing more information on various practices, including the extent to which the venue is truly anonymous - the new FX code focuses on the practice of "tagging". Market participants who have not themselves adhered to the codes might become subject to their provisions as a result of venues adhering to the codes - Simmons' Trading Venue Reviewer interrogates venue rules on this point.

Proposed delay to the EU CSDR mandatory buy-in regime

To an audible sigh of relief from the industry, a tweet from Commissioner Mairead McGuinness confirmed the much-anticipated agreement by the EU Parliament and EU Council to postpone the CSDR mandatory buy-in regime (MBI regime) implementation from its planned date of 01 February 2022. The delay has been welcomed by the industry as the MBI regime has been widely criticised as unworkable and market participants have faced serious difficulties regarding implementing its rules.

Details of the postponement, including how long the postponement will be, are still to be confirmed. The formal process will likely involve an official regulatory amendment, but this would not be possible before 01 February. ESMA has therefore issued a public statement asking national competent authorities to exercise regulatory forbearance and not to prioritise supervisory actions in respect of non-compliance with the MBI regime. Sensing the agitation of market participants, ESMA has also informally indicated that a 2 to 3-year delay is likely to be considered.

Given the length of the likely delay and potential for amendments to the regime, we do not expect market participants to continue work on compliance with the MBI regime. Market participants can instead focus on Cash Penalties and Allocations, both of which will still come into effect on 1 February 2022. Read our note on what needs to be done here.

FCA warns firms on use of web-based trading platforms and MAR compliance

In a quasi-statement of intent, the FCA set out in its Market Watch 68 its concerns about gaps in market participants' surveillance of user activity on web-based platforms and strongly hinted at enhanced future regulatory scrutiny in this area.

The FCA's concerns centre around the growing use of web-based platforms where a direct connection to users' trading systems is not required and users have been unable to (or choose not to) establish one. Although trade details for trades executed on such systems are generally recorded in trade booking systems, this is not necessarily the case for related order messages that precede execution and those that do not result in a trade. The FCA is therefore concerned that this gap around capturing and monitoring orders means that the requirements for market abuse surveillance are not being met.

The FCA acknowledged that the industry in general faces specific challenges with regard to these platforms but emphasised that it would not accept this as an excuse for failing to comply with MAR. The FCA emphasised that it market participants should consider its concerns and take steps to ensure they are monitoring all orders and transactions. To capture all unexecuted orders and relevant order-related messages, participants should consider the following steps:

• Compliance awareness - Review the number of web-based platforms used, the quantity of activity happening on such platforms, and the scope for capturing order and trade data.

• Overcoming the data challenge - Instead of settling for a data gap, use tactical solutions to get useable data on both orders and trades in a format suitable for surveillance. Consider offboarding platforms if it is not possible to get the necessary data.

• Market abuse risk assessments - Risk assessments of the market abuse risks facing the business should include business entered on web-based platforms and particularly on orders which are deleted or otherwise do not result in a trade.

• Onboarding governance - Establish formal procedures and governance procedures for onboarding new platforms. As part of these procedures, the ability to retrieve relevant trade and order data should be included as a prerequisite to onboarding platforms and market participants should consider how to meet market abuse surveillance and record keeping obligations.

Chinese regulators take steps to severely restrict OTC derivatives trading in China

China's financial regulators have proposed wide-ranging restrictions to its OTC derivatives trading industry in a recently published consultation paper. The draft proposals would ban banks and insurance firms from providing OTC derivatives to individual clients and providing trading services to corporate clients for non-hedging purposes. Further, non-financial institution would be banned from providing derivative products or products with derivative features entirely. These proposals are currently only expected to affect domestic licensed entities, however.

The consultation paper comes amid growing regulatory concerns in China about the risks of speculative positions and the manner in which some products are mis-sold to retail consumers as investment or wealth management products.

The deadline for consultation was 18 December and no timing has been given on when market participants can expect further updates to be provided.  It's part of a wider development of China's derivatives industry with the promulgation of China's first-ever draft futures lawin April (read more here).

Swedish regulator reverses decision to publicly disclose names of firms with short positions

Market participants were more than a little surprised to discover that the Swedish Financial Regulator had been identifying on its public register market participants with net short positions in Swedish issuers below the public notification threshold of 0.5% of issued share capital. AIMA challenged this decision on the basis that it would appear to run counter to the framework established by the Short Selling Regulation, where short positions between 0.2% and 0.5% should be notified to the relevant European national competent authority but not made public. Several sources have since informally confirmed that the Swedish regulator cease to disclose this short sale information. Market participants will look forward, however, to formal confirmation from the Swedish regulator.

MiFID3 View and MiFID reforms

The European Commission published its long-awaited Capital Markets Union package of reforms. Among the proposals, market participants will be most interested in the legislative proposals reviewing MiFID2/MiFIR. The key MiFID2/MiFIR developments proposed in the package include changes to the consolidated tape provider regime, the share trading and derivatives trading obligation, and to the transparency regime. Read about the changes in full in the December edition of our MiFID3 View, which is available here.

Global legal and business outlook 2021 insights

Whether you want to catch up or you missed out, find the highlights from our Global Legal and Business Outlook 2021 on our dedicated webpage here. The conference, attended by over 1000 clients worldwide, included topics over 40 virtual sessions, with live interactive Q&A sessions and polls. The highlights include sessions with industry experts on ESG, crypto, and digital transformation.