It’s been another very busy month in the world of market regulation – especially in the UK, where we’re seeing major strides in the post-Brexit strategy to overhaul legacy EU regulation. At the heart of this process, as we’ll see, lies FSMA 2023, which repeals EU legislation only for it to be lifted and shifted (but with changes) into UK regulators’ rules. So, without further ado, let’s take a look at what’s been happening.
From the Ground Up – New BoE “Fundamental Rules” for FMIs
The Bank of England has announced a Consultation on introducing a set of 10 new “Fundamental Rules” for Financial Market Infrastructures (FMIs) – i.e. for the central counterparties, central securities depositories, recognised payment systems operators and specified service providers that it supervises – alongside publishing an updated approach document for supervising these firms.
FSMA 2023 provides the key: it gives the BoE powers to make rules for CCPs and CSDs to replace retained EU law. To that end, the new Fundamental Rules will provide an overarching regulatory framework and high-level outcomes for FMIs, much as we see with the PRA’s Fundamental Rules and the FCA’s Principles, but their implementation is just the first step in a broader programme to shift FMI requirements from primary legislation to a new BoE rulebook. Third country CSDs and systemic third country CCPs are not in scope, but may become so in the future if HMT makes regulations to enable this.
By way of a quick run-down, the Fundamental Rules (as drafted) align with the Principles for Financial Market Infrastructure and will require an FMI to:
conduct its business with integrity.
conduct its business with due skill, care and diligence.
act in a prudent manner.
maintain sufficient financial resources.
have effective risk strategies and risk management systems.
organise and control its affairs responsibly and effectively.
deal with its regulators in an open and co-operative way and must disclose to the Bank appropriately anything relating to the FMI of which the Bank would reasonably expect notice.
prepare for resolution or administration so, if the need arises, it can be resolved or placed into administration in an orderly manner with a minimum disruption to critical services.
maintain sufficient operational resilience.
identify, assess, and manage the risks that its operations could pose to the stability of the financial system.
The consultation is open until 19 February. The BoE will then publish its final policy, whereafter it expects a 6-month implementation period for the rules to take effect.
Diving Deep into FMI Sandboxes
Regular readers will recall that another innovation of FSMA 2023 was to grant HMT powers to develop “FMI sandboxes”. Over the course of this year, we’ve been tracking the development of two in particular, namely:
- the “Digital Securities Sandbox” (DSS), for firms looking to trial developing technology – such as DLT/blockchain – to perform the activities of CSDs and MTFs. The DSS opened for applications on 30 September; and
- the “Private Intermittent Securities and Capital Exchange System” (PISCES), which relates to a new category of “intermittent exchanges” for secondary sales of shares in private companies.
There are a few recent developments worth noting if they’re not already on your radar.
The main recent news specifically concerns PISCES. There was good news at the end of October, when the government announced as part of its Autumn Budget that PISCES transactions would be exempted from Stamp Duty and Stamp Duty Reserve Tax (SDRT). The Treasury then published a Response to its consultation from back in March (which we covered in that month’s Markets View), and a draft Statutory Instrument (due to be laid before Parliament by May 2025). The Response largely tracks the consultation proposals, with perhaps the most significant change being that the previous proposal for a tailored market abuse regime is now replaced with a new disclosure-based approach (based on bespoke rules to be set by the FCA) and a corresponding “disclosure liability” regime.
We have also seen a new draft Statutory Instrument, laid on 31 October 2024, that affects both sandboxes. A key (and obvious) feature of the sandbox regime is to provide participants with temporary sanctuary from legislation that may otherwise limit their ability to use emerging technology or new practices. FSMA 2023 already empowers the Treasury to modify certain key pieces of legislation such as FSMA 2000, MAR, MiFIR and CSDR for these purposes. This draft SI essentially adds several additional pieces of legislation to that list, with DSS and PISCES in mind – e.g. the Prospectus Regulation, which is a key blocker for sales of shares in private companies under current rules.
Short Selling, Long Impact – New UK Regime Nearly Here
The disclosure obligations and trading restrictions set out in the Short Selling Regulation (SSR) originally came into UK regulation in 2012 via the UK’s membership of the EU, and have been retained (with certain adaptations) since the end of the Brexit transition period. There’s been a bit of divergence since, notably in February this year when the UK increased the notification threshold from 0.1% to 0.2% of issued share capital. However, the SSR as a whole has been on the governmental chopping block for a while, again courtesy of FSMA 2023.
The latest news is that a new draft Statutory Instrument has just been laid before Parliament, building on the previous version published back in November 2023. There are several parts to the new regime, and there isn’t space here to cover them all. However, of particular interest is the way in which short selling has been framed as a “designated activity” (under the new designated activities regime, or DAR, which is yet another product of FSMA 2023). The upshot is that firms doing short selling – whether or not they are authorised under the FSMA 2000 regime – will need to comply with the new rules that the FCA is empowered to make regarding short selling. There are also notable new powers for the FCA intervene in relation to short selling “in exceptional circumstances”.
In big picture terms, this is another example of the government looking to pass responsibility for detailed rule-setting to the regulator. The final plank, which we don’t yet have, are the new FCA rules themselves. These will ultimately be what triggers the new regime to take effect (and the repeal of the existing SSR). We’re expecting a consultation on them shortly, so watch this space!
UK MiFID Reforms – Divergence Be Upon Us
In the programme to repeal EU law, the biggest nut to crack must surely be MiFID, and so it’s no surprise we’re seeing further action on this front too. On 14 November – the day of the Chancellor’s Mansion House speech – HMT published a one-page Policy Paper on next steps for reforming the UK’s MiFID regime. The Paper simply sets out three reforms:
- Legislation for FCA powers of direction over reporting OTC positions, in light of the crisis in the nickel market on the LME in March 2022.
- Revocation of assimilated MiFIR requirements on transaction reporting, delegating the set-up of a new regime to the FCA.
- Revocation of assimilated MiFID Org Regulation requirements, replacing them in the FCA Handbook.
On the same day, the FCA published a discussion paper on “Improving the UK transaction reporting regime” (DP24/2). Chapter 5 of that paper covers specific proposals on the content of the transaction reports, including for some new reporting fields.
A key aim is to tailor the transaction reporting regime to the UK’s markets, and delegate responsibility for regulatory requirements from government to the regulators who have day-to-day experience of the financial markets. Inevitably, that means there will now be increasing divergence between the UK and EU reporting regimes – not least because on 03 October ESMA also published a consultation paper on changes to EU RTS 22 and RTS 24, as covered in our October edition.
Responses to the FCA’s discussion paper are due by 14 February (the most romantic of deadlines…). We don’t have any further details on timings from either the FCA or HMT just yet.
FCA PS24/14 – Looking Through the New Transparency Rules
In further MiFID-related news, on 05 November the FCA published a policy statement (PS24/14) on the new UK MiFID/MiFIR bond and derivative transparency regime, which is due to come into force from 01 December 2025. This builds on two CPs published in December 2023:
- CP23/32 (improving transparency for bond and derivatives markets); and
- CP23/33 (the framework for a UK consolidated tape) which we mentioned in Markets View just last month, where we noted that the FCA intends to commence its tender for the bond CTP by the end of 2024
The (extensive) detail in the PS largely concerns the transparency regime, in which the FCA intends to simplify the existing EU-derived rules and to strike a balance between supporting price formation and best execution while protecting liquidity providers’ ability to hedge their risks. The relevant requirements will be brought into the FCA Handbook via a new Chapter 11 of the Market Conduct (MAR) sourcebook.
Overall, the outcome reinforces the messages we flagged in our commentary on CP23/32 back in January. Core elements, such as limiting the regime’s scope to bonds traded on a trading venue and certain cleared derivatives, remain largely unchanged. However, the FCA has tweaked a number of the finer details, in particular regarding deferral duration/calibration and grouping criteria for bonds, and a simplification of post-trade reporting information.
The revocation of the existing UK MiFIR and MiFID RTS 2 transparency provisions commences at the beginning of December 2024 (courtesy of FSMA 2023, naturally). However, the new regime will mostly not kick in until a year later. The PS therefore provides for a transitional provision to preserve the effect of the current transparency regime within that gap. A couple of provisions, perceived as ‘quick wins’, will come in early from 31 March 2025, namely:
- trading venues won’t have to apply pre-trade transparency to voice and RfQ trading, and
- systematic internalisers (SIs) in bonds and derivatives will no longer need to provide public quotes.
The PS also includes, in Chapter 9, a Discussion Paper on ‘The Future of The SI Regime’. The FCA will be replacing the SI definition with one based on qualitative criteria and new PERG guidance, as previously proposed. However, given the breadth of changes brought in by FSMA 2023, the FCA are taking the opportunity to ask various questions the future of the SI regime in the round. Responses are due by 10 January 2025. A consultation paper is then expected in Q2 2025, before the new SI regime comes in on 01 December 2025.
FCA Market Watch 81 – Transaction Reporting Tidy-Up
In yet more MiFID-related news, transaction reports are under the spotlight in the FCA’s latest edition of Market Watch. The FCA notes an overall improvement in data quality since 2018, but flags certain persistent bugbears and the factors that it considers are responsible. They point in particular to the following common areas of weakness:
Change management: The FCA cites various examples of how organisational changes can impair data quality – e.g. errors in mapping out requirements, use of incorrect information sources, insufficient testing, poor documentation and records, inadequate oversight of outsourcing and lack/loss of institutional knowledge.
Reporting process and logic design: A firm’s reporting processes should align with its regulatory requirements and business context. Misalignment can lead to misreporting and undetected errors. In addition, unclear transaction reporting processes can result in manual delays, backlogs and amendment issues.
Data governance: The FCA notes firms often use data from multiple sources which can result in fragmented data management and lead to increased errors such as misuse of identifiers and incorrect data sourcing due to inaccurate mappings. This can impact not only transaction reporting and reconciliations but also record-keeping obligations.
Control framework: The FCA observes several common issues with reconciliation processes, such as poor design preventing the identification of data quality issues, incomplete/irregular implementation (thereby potentially missing errors and omissions), failure to update in line with evolving reporting processes, and omission of services and data from third parties.
Governance, oversight and resourcing: Reporting should be integrated into firms’ broader risk management frameworks. The FCA identifies a range of issues including MI failures resulting in a monitoring gap for senior managers, deficient organisational structures, unclear terms of reference for governance bodies, limited compliance oversight, lack of accountability and insufficient resourcing.
To ensure firms meet the FCA’s expectations, we strongly recommend taking a thorough look at their observations in full, checking that your existing arrangements are sufficient and implementing any remedial measures as soon as possible.
EU EMIR Strikes Back – Unpacking the Latest Announcements
Switching focus now to the EU, there’s a lot suddenly happening with the EU’s “EMIR 3” reforms. The biggest news is the EU Council’s announcement on 19 November that it has adopted EMIR 3. As we mentioned last month, as soon as this is published in the Official Journal, the timer will start for its entry into force and the drafting and publication of Level 2 materials. Within EMIR 3, we’re also starting to see activity from the regulators on a couple of the key points:
The Active Account Requirement (AAR): You may recall this is the requirement for firms to operate an account with an EU CCP, and to clear a certain number of representative contracts through it – you can find the detail on this back in our February edition. ESMA has now issued a consultation on the AAR, which includes a draft RTS, in which it is seeking feedback on a range of aspects to help define the operational and representativeness obligations.
There’s a lot of complexity to grapple with here, so do get in touch if we can help. ESMA will be holding a public hearing on the consultation on 20 January. The final deadline for responses due by 27 January. There’s some hurry here, as ESMA is due to submit the draft RTS to the Commission within 6 months of EMIR 3 taking effect.
Initial Margin Model (IMM) Authorisation: EMIR 3 supplements existing requirements to exchange collateral with a new requirement to apply for authorisation before using/changing an initial margin calculation model, while also creating a central validation function for pro-forma margin models. The European Banking Authority has launched a survey to gather information about firms who fall within the scope of such authorisation (at the individual entity level, for firms in groups). Responses are due by 29 November 2024. We can expect the EBA to consult on a draft RTS shortly – there’s slightly more time here, as the EBA will have 12 months to submit the draft to the Commission.
The EU MiFID3 Marathon: Latest on Consultations & Reports
You will recall (if only because we keep banging on about it) that various “MiFID3” reforms became effective on 28 March 2024, but that we’ve been waiting on the underlying legislation setting out how to comply with the relevant changes. We wanted to provide a quick roundup of where we stand with the publications that have been flying around for the last few months (for an overview of the reforms as a whole, refer back to our March edition).
One concrete recent change we can point to is that on 14 October ESMA updated its Manual on post-trade transparency and its Opinion on pre-trade transparency waivers, to reflect changes due to the implementation of relevant changes to MiFIR and industry feedback. Most notably this impacts the Manual provisions regarding the scope of derivatives subject to post-trade transparency (section 4.1): they will now need to either be an ETD or a certain type of OTC derivative (on-/off-venue).
Beyond that, there have been several ESMA consultations (most of which are now closed) for which we expect Final Reports from ESMA, as summarised in the table below. The key takeaways are (1) if you want to respond to the CP on RTS 22 & 24 make sure you do so by 03 January, and (2) brace for a flurry of Final Reports by the year end.
ESMA Consultation Subjects - Consultation Status & Next Steps
RTS 22 and RTS 24 (transaction data reporting and order book data) – for our overview, see the October edition of Markets View: Closes on 03 Jan 2025. Final Report expected Mar 2025.
Order Execution Policies: Closed. Final Report expected by 29 Dec 2024
RTS 1, RTS 2 and RTS 3 (equity & non-equity transparency and volume cap): Closed. Final Report expected Dec 2024 for specific sections to align with CTP requirements, the rest to follow in Mar 2025
RTS 2 and RTS 23 (transparency and supply of reference data): Closed. Final report expected by 29 Dec 2024
Consolidated Tape Providers and DRSPs: Closed. Final report expected by 29 Dec 2024. Feedback on specification of assessment criteria for CTP selection procedure expected by end 2024
ESMA Consultation on Commodity Derivatives: Closed. Final Report expected Dec 2024
Staying Up To Date on EU CSDR
In our October and September issues, we looked at the UK and EU's respective plans to move from T+2 to T+1 settlement under CSDR. We’ve since seen a couple of developments on the EU side. First there was a Joint Statement from ESMA, the ECB and the Commission's Directorate-General, which demonstrated a new sense of urgency (notably it spoke of the need for the EU to “accelerate every aspect of the technical work” to avoid becoming misaligned with other major jurisdictions). Then, hot on its heels, ESMA published its Final Report on the subject, on 18 November 2024.
A key highlight from ESMA’s report is its recommendation of 11 October 2027 as the optimal transition date. As we noted in our September edition, the UK is aiming to move to T+1 by the end of 2027, and so – cheers all round – it is looking likely that the EU and UK could move pretty much in lockstep. CSDR will need to be amended to give effect to the transition. ESMA has also indicated that T+0 could be envisaged in the longer term.
And while we’re on the subject of EU CSDR, you may have seen this month ESMA published its Final Report regarding cash penalties for CSD participants (as part of settlement discipline measures). The key upshot here is that ESMA is recommending sticking with the existing design of the penalty mechanism (thereby ruling out fundamental change), and is proposing only moderate increases in penalty rates. ESMA’s advice will now be fed into the Commission’s review of the delegated regulation.
Leafing Through IOSCO’s Final Report on Carbon Markets
COP29 may have been somewhat sidelined by recent world events, but remains an important focal point for anyone operating in the carbon markets space. One item that caught our attention was IOSCO’s publication of its Final Report on Voluntary Carbon Markets, following a consultation announced at the last COP. The report finalises IOSCO’s set of 21 “Good Practices” for VCMs, to support the financial integrity of carbon credits and markets. These look to support establishment of sound market structures, to promote transparency and advocate for good conduct, organised across the following areas:
- Regulatory frameworks
- Primary market issuance
- Secondary market trading
- Use, disclosure of use and retirement of carbon credits
Of course, the Good Practices are not legally binding by themselves. However, by establishing global standards drawn from financial markets regulation, we see them as potentially having a significant ability to influence the regulation and operation of this sector as it evolves. If carbon markets are on your radar, we’d love to hear from you – please reach out to Rosali Pretorius if you have any questions.
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