Autumn is upon us! The season of MiFIDs and market risk-fulness. There’s a huge amount going on, so this is something of a “bumper” edition. We’ll be covering the latest on the UK Digital Securities Sandbox, MiFID developments on both sides of the Channel, what to know on EMIR 3.0, REMIT2 and CSDR, the FCA’s new edition of Market Watch – and more! So get yourself some tea (or perhaps a strong coffee) and let’s get stuck in.
Digital Securities Sandbox – BoE / FCA Joint Policy Statement and Final Guidance
In an important move for the UK, the Digital Securities Sandbox (DSS) was opened for applications on 30 September 2024. The DSS is open until at least December 2028, when it is hoped some of the firms operating in the sandbox will become authorised under a set of new, specially calibrated laws and regulations. The DSS allows financial market infrastructure providers using developing technology, like DLT, to apply to become standalone Digital Securities Depositaries or DSDs, operators of trading venues or combine these roles into as hybrid entities. If successful, these firms could up-end the way the pipes supporting securities trading and settlement work.
The Bank of England and FCA published a joint BoE and FCA Policy Statement (PS24/12), supported by a raft of documents ranging from an Application Form, Guidance and Rules that will that will apply at Gate 2 (i.e. for go-live). Partially addressing concerns that the originally suggested framework was too rigid, the Policy Statement:
- Extends the scope of the DSS to include non-GBP denominated assets
- Makes the limits on issuance of securities in the DSS more flexible.
- Reduces the minimum capital requirements for a DSD at go-live
The plan is that firms in the DSS will enter a “glidepath” to full operation through a series of stages and gates. Rules for Gates 3 and 4 – end state - are still being calibrated and will be published 15 months after the DSS has been up and running.
We are seeing significant interest in the DSS from firms, but its success will depend on close and productive cooperation with the regulators.
ESMA’s MiFIR Transaction Reporting Revamp
As part of the EU’s package of “MiFID3” reforms (which we’ve commented on several times this year, most recently in September), ESMA has issued a Consultation Paper on amendments to RTS 22 on transaction data reporting, and RTS 24 on order book data. The paper was published on 03 October 2024, with comments due by 03 January 2025. In Q1 2025, a final report is due and the final revised draft RTSs will be submitted to the Commission.
On the transaction reporting side, among other measures, ESMA proposes several amendments and enhancements to RTS 22 including:
- new fields (transaction effective date and LEI of the entity subject to the reporting obligation) and changes to transaction identifiers, to link specific transactions and identify aggregated orders
- amendments to existing fields to align transaction reporting requirements with EMIR and SFTR reporting frameworks and international standards. This harmonisation has the potential to help streamline firms’ reporting processes and reduce the burden of compliance.
- extending the scope of cases considered as “transmission of an order” to include acting on own account
- confirmation that where an investment firm receives and executes an order for a portfolio or fund manager, that manager should be identified in the report as buyer/seller, rather than as decision maker (even though it is taking an investment decision for its client/fund).
ESMA is also considering a gradual transition towards the JSON format (JavaScript Object Notation) for several reporting regimes currently requiring an XML format, including not only transaction reports (RTS 22) but also MiFIR reference data (RTS 23), transparency (RTS 3) and position reporting for commodity derivatives (ITS 4). The choice of JSON follows a Study published by ESMA in January 2024. ESMA is seeking specific feedback on the costs and benefits of this change.
Market Mixtape: UK & EU Lay Down Tracks for CTPs
We’ve briefly touched on UK/EU consolidated tape providers (CTPs) in past editions, but never put them in the limelight – until now! For the uninitiated: a CTP is an entity that collects, consolidates, and disseminates real-time data (prices, volumes and transaction details) on trading activity across different trading venues. It’s a concept that’s embedded in MiFID2, whose purpose is to enhance market transparency by providing investors and participants with a comprehensive view of trading activity, enabling them to make more informed decisions. Which is all well and good, but in practice it has taken time to pick up much steam.
On the EU side, we mentioned back in March that CTPs were a feature of the MiFID3 reforms – precisely to address the problem that no entity had applied to become one. Those reforms sought to bulk up the regime, including the CTP authorisation process and requirements. It has since taken time for ESMA to consult on the necessary technical standards. We saw a Consultation Paper back in May, and we’re expecting a further update on this in December. ESMA has since confirmed it will launch the selection procedure for the CTP for bonds on 03 January 2025, with a decision by early July 2025. The selection procedure for the CTP for equities and ETFs will be launched in June 2025, with a decision by the end of 2025.
On the UK side, you may recall that the previous government’s Edinburgh Reforms included a commitment to put a CTP in place by 2024 (albeit with no specification as to what asset classes this would cover). Things are slowly moving along: in August, the FCA published details of its plans to establish a bond consolidated tape and an equities consolidated tape.
With regard to bonds, following consultations in 2023, it now expects to commence the tender for the bond CTP by the end of 2024. For equities, things are a little further behind. There is one key point to bottom out in terms of the CT’s design: namely whether, and how much, pre-trade (bid/offer) data should be included. Broadly speaking, inclusion is backed by investors (see e.g. the IA’s June Position Paper) but resisted by exchanges. The FCA has appointed consultants to look into the issue, and expects to give a further update before year-end.
From Brussels with Love: The Latest on Repeal & Replacement of EU Law
Zooming out, one of the big themes in the UK is of course the ongoing work to repeal and replace assimilated EU law with UK rules. The FCA has published a new webpage on this (save the link!) and adjusted timelines for several matters. In terms of markets regulation, the main news is on MiFID2 & MiFIR: besides the CTP update (mentioned above), the FCA is also signposting the following publications that we can expect before the year is out:
- A policy statement on commodity derivatives (following CP23/27, which we touched on back in March; this won’t cover reforms to the ancillary activities exemption, after those proposals were unceremoniously ditched earlier this year);
- A policy statement on transparency reforms for bonds and derivatives (following CP 23/32, which we looked at in January);
- A discussion paper on transaction reporting – to be followed by a consultation paper in the first half of next year; and last but not least
- A consultation paper on the Org Reg.
So stay tuned for lots of developments in this space!
EU REMIT: Plugging in Designated Representatives
Regular readers will be aware that there is a deadline coming up on 08 November for non-EU firms who are REMIT market participants to “designate a representative” in an EU Member State. We mentioned last month that we were expecting further guidance from ACER on this point. We now have that guidance, in the form of (another) Open Letter. (We note that this latest letter also considers obligations on “persons professionally arranging or executing transactions”; we’ll put that to one side for now as we know designation of representatives is the more pressing piece for most readers.)
In brief summary, ACER’s letter confirms that, from the perspective of a third country market participant:
- You must register as a market participant and designate a representative in the same Member State. So:
- If you have no existing registration, you register and designate in a Member State where you are active;
- If you are already registered in a Member State where you are active, you can either (1) designate in the same Member State or (2) designate in any other Member State where you are also active, but in the latter case you will have to re-register in that same Member State (which is slightly more complicated) to ensure that registration and designation match.
- You must give notice (via the CEREMP system) to ACER and the NRA of the relevant Member State, providing the representative’s details. Market participants registered in Italy, Romania and Slovenia must notify their NRA directly, which also counts as notifying ACER.
- Your representative may be either a natural or a legal person.
- You must have a contractual arrangement in place with your representative that reflects and corresponds to the obligations set out in Article 9 of the revised REMIT.
- If you are part of a group containing multiple market participants, each one must comply with the designation requirement on an individual basis.
The Clock's Ticking on EMIR 3.0: When Will the Alarm Sound?
We’ve not touched on EU EMIR since February, when the EU Council & Parliament reached provisional political agreement on the “EMIR 3.0” reforms. As a reminder, the headline changes we’re seeing here for market participants relate to changes to the triggers for the clearing obligation, the (especially controversial) introduction of an “active account requirement”, and changes to the rules around initial margin models.
The months-long hiatus is partly because we’re still awaiting final publication of EMIR 3.0 in the Official Journal (which will then start the timer on entry into force, and the drafting and publication of Level 2 materials). However, that doesn’t mean nothing’s happening! We’re aware that the relevant European authorities are busy lining up consultations on their draft RTSs, while industry bodies push to shape the outcomes and get clarity on some outstanding issues.
One of the key confusions at the moment stems from how the existing texts appear to require compliance with certain Level 1 provisions from the effective date (which is potentially very soon) before the associated Level 2 provisions have been prepared. A recent joint industry association Letter seeks to pin the regulators down on this point, requesting clarity in a form akin to the Commission’s “interpretative notice” on transitional provision, which (belatedly) accompanied the MiFID3 reforms earlier this year.
Settling Sooner: UK Sets Out Pathway to T+1
In September we looked at how things stand in the EU & UK in terms of the shift from T+2 to T+1 under CSDR, and we mentioned that the UK plans to make this shift by the end of 2027 (see also our April edition for a recap of how the story began). The UK’s “Accelerated Settlement Taskforce Technical Group” has now published its Draft Recommendations Report & Consultation setting out how the UK should go about achieving that transition.
In a labour of love drawing on input from over 110 firms, the Technical Group’s Report conveys:
- A twofold plan regarding the scope of instruments to be migrated to T+1, depending on whether (1) the UK migrates ahead of the EU/Switzerland and so has to ‘go it alone’, or (2) all three jurisdictions migrate at the same time (as seems increasingly likely)
- 43 “Principal” recommendations concerning the most vital post-trade activities that must be completed to make T+1, covering a range of specific areas such as settlement, FMI, static data, corporate actions, securities financing and FX; and
- 14 “Additional” recommendations to enhance any efficiency gains from T+1 (but which, as the name suggests, are considered non-essential).
The Technical Group repeatedly identifies the use of automation as one of the key elements to successful implementation, citing the experience of the T+1 implementation across the pond, where insufficient focus on automation is perceived as have created an increased burden in terms of manual processing and exception management. It also pushes for compliance with the recommendations (once finalised) to constitute a binding “Post-trade Code of Conduct” for all UK market participants, to ensure operational efficiency and a smooth and timely transition. It’s clear that conversations are still ongoing with regulators to understand exactly how this would work in practice: one suggestion given is for regulators to ask firms to ‘comply or explain’.
The Technical Group is inviting responses by the end of October. It will then set out its finalised recommendations in a report due at the end of 2024, which is expected to include a definitive implementation date in 2027, and a schedule of tasks for completion in the interim.
Double Trouble: Dawn Raids on Deutsche Börse & Nasdaq
The European Commission announced on 23 September that it was carrying out dawn raids (or rather, “unannounced antitrust inspections”) in two Member States over potential anti-competitive practices related to derivatives.
We know that the inspections in question targeted the offices of two exchanges: Deutsche Börse AG and Nasdaq Inc. Beyond that, limited detail is currently available: both firms have publicly confirmed their cooperation; meanwhile the Commission, for its part, has made it clear that this is only a preliminary investigatory step, and does not mean the firms have been found guilty of any wrongdoing. However, if the violations are confirmed, the potential fines are substantial, reaching up to 10% of each company’s global turnover.
We can also see that this investigation is part of a bigger picture: it comes only a few months after EEX (majority-owned by Deutsche Börse) abandoned plans to acquire Nasdaq’s Nordic power trading and clearing business – a deal that itself raised EU competition concerns. It also forms part of a broader trend of increased antitrust scrutiny in the EU financial services sector, from forex manipulation to benchmark rigging, merger control and more.
Beyond the Veil: New FCA Guidance Targets Hidden UBOs
In its latest edition of Market Watch, the FCA has shared some helpful tips for firms to ensure compliance with SYSC 6.1.1R (the rule requiring firms to have adequate policies and procedures) when dealing for overseas clients that operate ‘aggregate’ accounts providing no visibility of the ultimate beneficial owners.
The FCA is ever-mindful of the potential for market abuse, particularly where UK firms accept instructions to execute trades from aggregated accounts administered by firms based in countries with non-equivalent regimes – what the FCA calls “obfuscated overseas aggregated accounts”, or “OOAAs” for short (presumably pronounced “Ooh Aahs”). For example: a UK firm might terminate its relationship with a particular client owing to suspected market abuse, only for that client to open a trading account with an overseas broker, who anonymizes and aggregates their trades and sends them back to the very same UK firm for execution (such that the UK firm ends up unknowingly executing trades for the client it previously terminated).
The FCA acknowledges that identifying these UBOs is a tough nut to crack, but sets out some recommendations. It suggests that firms take extra precautions when onboarding and trading with OOAAs, such as to:
- (proactively) inform OOAAs how seriously they take the issue, e.g. that they have a zero-tolerance approach to market abuse, will submit STORs for suspicious trades, will liaise with regulators and law enforcement, and will end relationships should trading fall outside risk tolerance;
- require OOAAs that execute for anonymised UBOs share details regarding their systems and controls to prevent market abuse; and
- request that OOAAs that execute for anonymised UBOs assign each UBO a sub-account with a unique identifier code, to help single out (and if necessary exclude) trades from specific UBOs.
And that’s all, folks! Do get in touch if you have any questions or comments, otherwise look out for our next update in November.
