Markets View - February 2025

Following a flurry of recent developments, there’s fun for everyone in this month’s issue. On the UK side we’ll delve into the FCA’s first fine for transaction reporting failures under UK MiFIR, explore the incoming UK short selling regime, and unpack the FCA’s policy statement on commodity derivatives, and more. Meanwhile, with our EU hats on, we’ll be navigating the latest developments around EMIR and MiFID3. As ever, do get in touch if you have any comments or questions we can help you with!

Lost in Transaction (Reporting): FCA Fine for Reporting Failures

On 27 January, the FCA published its Final Notice to Infinox Capital Ltd (Infinox), relating to transaction reporting failures in breach of UK MiFIR. This final notice imposes a fine of £99,200 on Infinox, which was discounted by 30% from the original figure of £141,800 following Infinox’s agreement to settle.

Between 01 October 2022 and 31 March 2023, Infinox failed to submit any transaction reports by the close of the following working day, or at all, for single-stock CFD trades executed through one of its corporate brokerage accounts.

Infinox was made aware of the breach following a third-party compliance review in March 2023. However, it did not disclose it to the FCA until 50 days later in May 2023 (likely following an FCA prompt). Moreover, it took a year to provide the FCA with a complete and accurate figure of the number of transactions it had failed to report (46,053), with previous estimations ranging from 6,000 to 50,000.

The fine was calculated using a value of £2.00 per missing transaction, on top of which the FCA applied a 20% increase owing to the seriousness of the breach, plus a further 10% owing to aggravating factors (including the delay and previous failures to submit transaction reports in other business areas). A final increase was applied as the FCA to deter the firm from future misdemeanours.

This is the first FCA enforcement action against a firm for a breach of transaction reporting requirements under UK MiFIR. It comes at a time of increased focus on transaction reporting generally, following the FCA’s publication last November of DP24/2, which considers potential improvements to the regime. It is a timely reminder of the seriousness with which the FCA regards transaction reporting, and the need to maintain effective systems and controls and to ensure data is readily available.

AI’s on the Prize: New Call for Evidence

The UK Treasury Committee published a Call for Evidence on artificial intelligence in financial services on 03 February 2025. According to the Bank of England, 75% of firms are already using AI, with a further 10% planning to use it over the next three years. The Committee’s driver here is to understand how the UK can strike the balance between utilising AI’s immense opportunities while mitigating threats to financial stability and customers.

The consultation topics are limited to five general questions:

• How is AI currently used in different sectors of financial services and how is this likely to change over the next ten years?
• To what extent can AI improve productivity in financial services?
• What are the risks to financial stability arising from AI and how can they be mitigated?
• What are the benefits and risks to consumers arising from AI, particularly for vulnerable consumers?
• How can Government and financial regulators strike the right balance between seizing the opportunities of AI but at the same time protecting consumers and mitigating against any threats to financial stability?

The broad scope matches the staggeringly broad impact that AI could have for the industry. Within this, there will clearly be implications for financial markets and market participants, including opportunities around enhanced trading strategies and processes, but also risks of potentially increased market volatility and disorderliness. We know this is a major area of focus for many of you.

Responses to the call for evidence are due by 17 March 2025.

Short Shift: Replacement of UK SSR takes Shape

The Short Selling Regulations 2025 (SI 2025/29) were made on 13 January 2025. By way of reminder, these regulations establish a new legislative framework to replace the EU-derived regime under the Short Selling Regulation. The changes were envisaged by the previous government’s Edinburgh Reforms and legislated for under FSMA 2023.

Under provisions that came into force on 14 January, the FCA is given powers to make rules to give effect to the new regime, including powers to:

• regulate short selling of shares & related instruments as “designated activities” under the new designated activities regime (which is also a product of FSMA 2023). Notably, as part of this, the existing requirement for firms to notify the FCA of net short positions above 0.2% of issued share capital is being restated in FCA rules;
• provide waivers/exemptions from the rules. Note the FCA will also be obliged to publish and update a list of (non-exempt) shares in relation to which the rules apply, in place of the current arrangement where the FCA merely publishes a list of shares considered to be exempt from the regime; and
• exempt market making activities and stabilisation (replacing the current market maker rules)

After the FCA has made the new rules, we can expect the remaining provisions to come into force on the day the EU-derived regime is revoked. Key points to note are that:

• the FCA will be required to publish all net short positions in an anonymised and aggregated form based on the information it receives, replacing the current obligation on firms to publicly disclose individual net short positions above 0.5% of issued share capital
• where present EU-derived rules contain provisions related to sovereign debt and sovereign credit default swaps (SCDS), the new regulations do not include restrictions on uncovered short selling of such instruments
• the FCA will retain emergency intervention powers to request additional short selling-related information and restrict short selling in exceptional circumstances

The Regulatory Initiatives Grid is still awaiting a full update after the change in government, and does not mention FCA planned timelines for issuing guidance or policy statement for short selling.

Clarity on Commodities: New FCA Policy Statement

In March last year we reported on the FCA’s proposals in CP23/27 for reforming the commodity derivatives regulatory framework. Front and centre among industry concerns (especially for trading functions in producers) were the FCA’s proposals to replace the ancillary activity exemption. Those proposals were subsequently dropped last summer, with the effect that the existing RTS 20 is retained pending an alternative, permanent solution.

We now have the FCA’s Policy Statement (PS25/1) on the other proposals in the consultation. We’ve summarised some of the key policy changes for you below, which are now set to come into force later than initially proposed, on 06 July 2026. We are pleased to report that FCA has taken into account many of the points the Futures Industry Association (FIA) made in response to the CP.

1. Which contracts should be subject to Position Limits? The proposal was and still is to include 14 “critical” contracts and contracts closely “related” to those (including, controversially, WTI). However, the list of related contracts will likely be shorter: the definition of related contracts has been narrowed and now allows trading venues some discretion to identify contracts that could influence the pricing or settlement of critical contracts. The FCA has also addressed concerns about the time period for updating the list of critical contracts by allowing for a consultation period before finalising any changes.

2. Setting of Position Limits: The FCA has confirmed that trading venues will have the power to set position limits for critical and related commodity derivative contracts. This approach is intended to leverage the venues' market knowledge while maintaining a framework established by the FCA. It also decided not to set a fixed timeline for implementing position limits on any new critical contracts, allowing for flexibility based on discussions with trading venues and market participants.

3. New Exemptions: As proposed in the CP, the FCA will introduce two new exemptions from the position limit regime: a pass-through hedging exemption and a liquidity provider exemption. The FCA has softened the contentious risk management condition for relying on the hedging exemption (so rather than having to show positions can be unwound in conditions of market stress, non-financial firms will just have to show that the position can be unwound in an orderly manner). While there was support for a US-style exemption for firms in financial distress, the FCA has not introduced it at this stage but may consider it in the future through a separate consultation.

4. Exemption Ceilings and Accountability Thresholds: The FCA is implementing exemption ceilings and accountability thresholds to enhance market oversight and prevent large positions from undermining market integrity. The FCA clarified that these are not intended to act as hard limits, but as tools for early warning and risk management. Trading venues are expected to monitor positions and report any significant breaches to the FCA.

5. Position Reporting: Previously, the FCA had proposed making it mandatory for trading venues to report OTC positions under certain conditions. However, in response to (highly negative) feedback, the FCA has removed that obligation. Instead, trading venues must have the ability to obtain OTC data and demonstrate its appropriate use for risk monitoring. The FCA may require those trading venues which request OTC data to provide the FCA with the OTC data to maintain market integrity.

What is clear is that operators of trading venues will have quite a bit of room to shape the regime. With this in mind, market participants will no doubt take a keen interest in how the regulator oversees trading venues’ activities.

One aspect raised by the FIA which has not been directly addressed was a request that trading venues keep information provided by participants confidential and not use it for their own economic benefit. The FCA has not explicitly banned commercial use in the policy statement and declined to adopt robust information barrier requirements along the lines of rules that are in place for US DCMs. Instead, the FCA opted for guidance to venues to use information “appropriately”, that is, under new MAR 10.3.7 G(2), trading venues will not be allowed to use information on positions for purposes other than to discharge their regulatory functions and responsibilities. Further, in MAR 10.3.3J the FCA points to guidance that UK RIEs must have regard to the independence of their regulatory department from their marketing and commercial functions when imposing additional reporting obligations on matters such as related overseas positions, underlying commodities, inventories, storage and so on.

Accelerated Settlement: Save the Date

Back in October, we looked at the work of the UK’s “Accelerated Settlement Taskforce Technical Group” (AST) on the UK transition to T+1 settlement under UK CSDR. We now have further details from the AST, in the form of an Implementation Plan.

The key headline is that the AST recommends transitioning to T+1 settlement for UK cash securities trading on 11 October 2027. This aligns precisely with ESMA’s recommendation, set out in a Report last November, that 11 October 2027 would be the optimal date to shift to T+1 on the EU side. So, for now at least, the two are aligned. Besides this, the Implementation Plan also defines a “UK T+1 Code of Conduct” (UK-TCC), comprising a slew of recommended actions and expected behaviours for market participants, to ensure effective implementation of T+1.

We will be looking out for action by the UK government and EU Commission, respectively, to carry these recommendations into law.

Marginal Delay to new EMIR 3.0 IMMV Rules

Switching over to the EU now, we mentioned at the end of last year that EMIR 3.0 was finally published in the Official Journal and came into force on 24 December. Before looking at the latest news, we wanted to share that we have created a tool that advises on the EMIR 3.0 changes and provides a single resource for EMIR related rules. It does so by providing an overview of:

1. the complete regulatory framework (i.e. EMIR and secondary legislation in the form of Level 2 and Level 3 rules), as well as relevant Q&As;
2. the changes to EMIR (i.e. which articles were changed, added or left unchanged);
3. the changes to the actual text of EMIR, with an explanation of these changes;
4. all applicable EMIR provisions and explanations of them.

Please contact our partner Rezah Stegeman in case of interest.

You may recall that, as part of the EMIR 3.0 reforms, there is a new requirement to apply for authorisation before using/changing an initial margin calculation model, and at the same time a new central validation function is being created for pro-forma margin models. However, the RTS on Initial Margin Model Validation (IMMV RTS) and guidelines on EMIR 3’s application and authorisation process (Authorisation Guidelines) are not yet in place – indeed, the EBA isn’t due to submit the draft RTS until 25 December this year, and the EBA has not yet set up the central validation function.

In light of this, it’s perhaps unsurprising (and certainly helpful!) that the EBA on 17 December issued an Opinion, described elsewhere as a “no action letter”, asking national regulators not to prioritise supervisory or enforcement action in relation to the processing of applications for initial margin model authorisation until the IMMV RTS and the Authorisation Guidelines come into application. The ECB has since published a helpful set of FAQs on the approach firms should take in the interim.

Separately, readers may recall that another key development under EMIR 3.0 is the so-called “active account requirement”. In-scope firms will need to have an account set up by 25 June 2025. This is potentially a challenging timescale, given that we don’t yet have the final RTS here either, but in this case there isn’t a no action letter granting forbearance. However, we do at least have ESMA’s draft RTS (attached to their recently-closed consultation), which should provide a good indication of what’s expected here, and ESMA are promising to publish a final report as soon as possible.

Equivalence of UK CCPs: As a final, welcome side-note on EMIR, you may have seen the Commission adopted Implementing Decision (EU) 2025/215 on 30 January 2025, which extends temporary equivalence for UK CCPs from 30 June 2025 to 30 June 2028. According to the Commission’s press release, the extension of three years is intended to allow time for implementation of EMIR 3.0, which is of course designed to reduce the EU’s significant reliance on UK CCPs.

MiFID3 – Where Are We Now?

Regular readers will recall that, looking across the EU’s extensive “MiFID3” reforms, many have already been in effect since 28 March 2024 (principally those concerning MiFIR), but we are still waiting for a slew of legislation and technical standards to be finalised before the remainder are implemented.

We won’t attempt to give a comprehensive summary here of everything that’s going on – anyone involved will know it’s a hugely complicated picture. However, there have been some key recent developments worth drawing attention to. In particular, last December saw a suite of ESMA Final Reports on topics including:

• Transparency for equities
• Commodity derivatives
• Transparency for bonds, structured finance products and emission allowances
• Consolidated tape providers and data reporting service providers (See below where we look in more detail at the CTP selection process, which is now underway)

In each of the above cases, the reports are now with the Commission, which is expected to endorse or reject proposed RTS amendments by 16 March 2025. Around the same time, we can expect ESMA to publish another raft of Final Reports on the wide range of topics it consulted on last year. As ever, you may wish to refer to ESMA’s overview chart, which shows what to expect and when.

One related item of note is the development of the EU Listing Act Directive, which introduces significant changes to MiFID research provisions, particularly concerning issuer-sponsored research. It involves the establishment of a new EU code of conduct, which ESMA is developing. The aim is to ensure that issuer-sponsored research is fair, clear, and not misleading, and that it complies with the standards of independence and objectivity. There is a live ESMA CP which sets out a draft RTS for establishing this code, covering issues from conflicts of interest to minimum contract terms and remuneration structures. Feedback is due by 18 March.

Measuring Up the UK Consolidated Tape Regime

For a refresher on consolidated tapes, check out last October’s edition of Markets View. On the UK side, plans are advancing to establish two such tapes, for bonds and for equities respectively.

The bond consolidated tape is the further ahead of the two. The FCA had said they would publish draft tender documents for a consolidated tape provider (CTP) by 31 January 2025, although that deadline has slipped slightly, to 07 March. Potential bidders will need to register on Atamis, the FCA’s procurement portal.

Meanwhile, details for the equities tape are still being worked out. You may recall we mentioned last year that the key point relates to whether, and how much, pre-trade data should be included. Late last year, the FCA published an Update summarising insights from a Report it commissioned on this issue from Europe Economics. The discussion centres on likely demand for a pre-trade consolidated tape in various permutations. The Report, in particular, helps to summarise for different types of market participants: the potential use cases for an equities consolidated tape that includes pre-trade data; current access to pre-trade data; and appetite for adopting a pre-trade consolidated tape. The FCA continues to engage with the industry on design options, with a view to publishing a consultation paper later this year.

Sticking with Consolidated Tapes…

On the EU side, we mentioned last year that ESMA would be launching a selection procedure for a bond consolidated tape at the start of 2025. And so it has turned out – the window for potential bidders just closed on 07 February. There will now be a pause while we wait for ESMA’s decision on the selected applicant, which is expected by early July 2025, with the successful applicant operating the bond consolidated tape for five years following authorisation.

According to ESMA’s CTP webpage, selection of a CTP for shares and ETFs will be launched in June 2025, and selection of a CTP for OTC derivatives will be launched in Q1 2026. Authorisation is subsequently expected in Q1/Q2 2026 and Q4 2026/Q1 2027 respectively.

Potential applicants for CTPs will want to bear in mind ESMA’s feedback statement of 16 December 2024 on Criteria to assess CTP applicants, which cover a range of issues including: governance and organisation requirements; costs, fees and revenue redistribution; ability to process data and dissemination speed; data quality, modern interface and record-keeping; and resilience, cyber risk and energy consumption.