Markets View - March 2025

Welcome to the March edition of Markets View! Our newest issue is jam-packed with regulatory developments across the board, but with some particularly juicy items from the world of commodities – with the FCA issuing a landmark penalty to the London Metal Exchange, and the Commission looking at a potentially significant shake-up of EU rules on commodity derivatives and energy markets. As always, we’re delighted to hear your comments and questions. Without further ado, let’s get stuck in!

Hot off the Press: FCA Hammers London Metal Exchange

On 19 March, in a first for a UK recognised investment exchange, the FCA issued a Final Notice to the London Metal Exchange (LME). The FCA imposed a financial penalty of £9,245,900 for significant failings by the LME in managing extreme market volatility, as highlighted by the events of 7 and 8 March 2022, when the price of the 3-month nickel contract surged dramatically.

The amount incorporates a 30% reduction due to LME's agreement to resolve the matter under the FCA's executive settlement procedures, and comes despite steps taken by LME since 2022 to avoid similar problems in the future.

We know the 2022 nickel crisis had severe impacts for many firms, and we advised extensively on its fallout at the time. You may recall that Elliott Associates and Jane Street Global Trading subsequently took the LME to court for this, but judgment went in favour of the LME based on the contractual terms between the LME and its members. An appeal by Elliott to the Court of Appeal did not succeed and on the day before the FCA published its notice, we heard that permission to appeal to the Supreme Court was refused.

The FCA’s own investigation, however, took a broader view and identified several failings resulting in this latest fine.

Key issues highlighted include:

• Inadequate Systems and Controls: The LME failed to have effective mechanisms to manage volatility, particularly during overnight trading hours, which were monitored by the Hong Kong team without sufficient escalation processes for severe market stress.
• Suspension of Price Bands: The LME's decision to disable its price bands during extreme market conditions allowed the nickel price to rise rapidly, increasing risks to investors and market users.
• Lack of Written Policies: There were no internal or published policies regarding the suspension of static and dynamic price bands (and indeed no policies regarding the use/purpose of static price bands at all).
• Failure to Inform: Aggravating its breach, the LME provided inaccurate information to the FCA about the calibration and suspension of price bands, delaying the disclosure of critical details.

The FCA believes the penalty reflects the seriousness of these breaches, which undermined market orderliness and confidence and – given the LME’s strategic position in the market – presented significant risks to the wider economy.

BoE Roadmap for Future-Proofing FMIs

You may have heard Sasha Mills, the Bank of England’s Executive Director for Financial Market Infrastructure, gave a speech on 10 February that elaborates somewhat on the proposed “Fundamental Rules” and updated “approach to supervision” for FMIs that it published last year (and which we commented on in our November edition). As a reminder, these new Fundamental Rules will provide an overarching regulatory framework for FMIs and are just the first step in shifting FMI requirements from primary legislation to a new BoE rulebook.

Mills’s speech outlines the BoE’s three priorities for the year, and what we can expect to see from them in each case. Briefly unpacking some of the key highlights:

• Ensuring FMI services are operationally resilient – including by bedding in the new rules for FMIs (for which compliance is due by the end of March), engaging with FMIs on operational incident and outsourcing requirements, and developing more detailed guidance around cyber resilience
• Safe and sustainable innovation – the Digital Securities Sandbox initiative will continue to play a key role here, as will the implementation of international standards for systemic stablecoins, and plans to simplify aspects of the on-shored EMIR rules (in collaboration with HMT)
• Financial resilience – EMIR again gets a key mention here: the BoE has in mind to replace it with “an adaptable and dynamic rulebook that aligns with evolving international standards”, so stay tuned for information on that! We can also expect an increased focus from the BoE on using data to monitor risks

FCA Working on New SSR Rules

In our February edition we highlighted the Short Selling Regulations framework that came in force on 14 January, including the powers the FCA have been given to enforce the new regime. The next step therefore is for the FCA to make the necessary rules to:

• regulate short selling of shares and related instruments as "designated activities" (in which context, the requirement for firms to notify the FCA of net short positions exceeding 0.2% of issued share capital is reaffirmed);
• grant waivers/exemptions from these rules and publishing/updating a list of shares to which the rules apply; and
• exempt market making activities and stabilisation, replacing the existing market maker rules

The FCA has since updated their webpage regarding the notification and disclosure of net short positions, as part of which they have announced their intention to conduct a consultation on the new short selling rules in Q3. Once the rules are finalised, certain elements of the Short Selling Regulation will come into force. In the meantime, the existing UK short selling regime will remain in place, including the current requirement for public disclosure of individual firms' net short positions in issuers at or above the 0.5% threshold.

Bond Voyage: FCA Launches CTP Tender

Last month we mentioned we were expecting the FCA to publish draft tender documents for a bond consolidated tape provider (CTP) by 07 March. They have dutifully done so, in the form of this Tender Notice. By way of reminder, the bond CTP will publish collated bond market data, including prices and volumes of trades, for both trading venues and OTC trades.

The estimated value of the contract is £29,500,000 +VAT, with dates estimated to run from 17 September 2025 to 30 March 2031, possibly extending to 30 March 2033. Questions may be submitted until 28 March 2025, with initial tender responses due by 25 April 2025 and final bids by 13 June 2025. The FCA will select bidders for the second stage of the tender by 18 July 2025, and a price auction will begin early August 2025, with a decision on authorisation by the end of 2025. Additional information on the tender was also published.

Carbon Countdown: UK Eyes Up ETS Extension

The UK Emissions Trading Scheme (ETS) Authority has initiated a consultation on extending the UK ETS cap beyond 2030. We’ve seen lots of consultations on expanding and reworking the UK ETS recently (and the EU ETS even more so), notably including the integration of new sectors such as energy from waste, engineered and nature-based greenhouse gas removals, domestic maritime etc. This latest consultation is of a more general nature, looking at the continued operation of the UK ETS as a whole beyond the expiry of the current phase, and at its role in delivering on the 2050 net zero target.

Three options are proposed for extending the UK ETS post-2030, which differ in terms of either aligning with the current 10-year phase approach for the sake of continuity, or with the government’s 5-yearly ‘Carbon Budgets’:

• a 7-year phase aligning with Carbon Budget 6 (2031-2037),
• a 10-year phase continuing the current cycle (2031-2040, or
• a 12-year phase aligning with Carbon Budget 7 (2031-2042).

The consultation also explores whether or not ‘banking’ of allowances from the current phase to the next should be permitted. This would enable participants to carry over allowances. The strong recommendation of the Authority is to allow such interphase banking for the sake of providing flexibility and supporting long-term emissions abatement planning.

Racing Towards Faster Settlement Cycles

Regular readers will be aware that the UK & EU shift to a T+1 settlement cycle has featured in several recent editions of Markets View, following a flurry of activity in the UK and EU. We now have the essential outline (the key headline being that the transition will in both cases apply from 11 October 2027) and are getting into the nitty-gritty.

• On the EU side, the Commission has now published its legislative proposal to amend Article 5(2) CSDR accordingly.
• On the UK side, the UK government has now published its response to the Accelerated Settlement Technical Group’s (AST) Implementation Plan (which we covered in our February edition), essentially endorsing all the AST’s recommendations. We can expect the UK government to introduce comparable legislation amending Article 5(2) of UK CSDR when Parliamentary time allows. The FCA has also published a new webpage on T+1 settlement. Of note, Sasha Mills outlined the BoE’s support for the transition in (another) speech, commenting that the BoE estimates it may allow CCPs to release £1bn-worth of margin.

Accordingly, firms should now begin preparations for 11 October 2027 as the first day of trading under the T+1 standard. (For those who are interested, the indications are that Switzerland will be moving to T+1 settlement at/around the same time).

Regulatory Recharge: EU Consultation on Commodity Derivatives & Energy

The European Commission has unveiled a targeted Consultation aimed at reviewing the functioning of commodity derivatives markets and certain aspects of spot energy markets. This is framed as a “comprehensive assessment” of the existing rules, and addresses no fewer than 77 questions. There’s a lot to unpack, and (in time) to compare against the UK commodity derivative reforms (FCA Policy Statement PS25/1) which we covered in last month’s edition.

By way of a brief run-down of some of the key proposals:

• Data Reporting and Transparency: The consultation seeks to streamline and harmonise reporting requirements under MiFID/MiFIR/EMIR and REMIT. This could lead to a centralised data collection mechanism for energy products in particular (a ‘one-stop shop’), potentially reducing the reporting burden on market participants and improving supervisory access to data.
• Ancillary Activity Exemption (AAE): The consultation reviews the AAE criteria under MiFID, which exempts certain non-financial market participants from obtaining a MiFID authorisation. Changes to these criteria could impact firms' regulatory obligations and their ability to participate in commodity derivatives markets without being classified as investment firms. The questions are of a searching/scoping nature at present.
• Position Management and Reporting: Enhancements to position management and reporting are being considered to ensure trading venues have comprehensive data on market participants' positions, including those in OTC contracts (citing the example of the LME nickel crisis). This includes a reassessment of whether the MiFID concept of ‘economically equivalent OTC derivatives’ is fit for purpose. Changes could affect how firms manage their positions and comply with reporting requirements.
• Position Limits: The consultation examines the impact of position limits on market liquidity and the ability of commercial entities to hedge. It also considers whether position limits should be differentiated by types of traders or activities.
• Circuit Breakers: The Commission is exploring the permanent implementation of static circuit breakers (in particular following the introduction of the temporary ‘intra-day volatility management mechanism’ to address the 2022 energy crisis) to manage excessive daily volatility in commodity derivatives markets.

Finally, section 6 of the consultation presents several possible developments drawing on other recommendations from the Draghi Report, including:

• Obligation to Trade in the EU: The Draghi Report suggests that trading activities in energy derivatives relevant to the EU/for EU delivery should be conducted by companies within the EU, with potentially significant impacts for firms that engage in cross-border trading of these products.
• Market Correction Mechanism/Dynamic Caps: The consultation discusses the potential for dynamic caps, following the experience of the MCM introduced during the 2022 energy crisis (which expired on 31 Jan 2025). The Draghi Report suggested making dynamic caps a permanent feature of energy spot & derivatives trading, to prevent EU energy prices from significantly diverging from global prices.
• MiFID for Spot Markets?: The Draghi Report recommends aligning the regulatory frameworks governing spot and derivatives markets to prevent systemic risks. This could involve extending certain MiFID requirements to spot energy markets (which are currently mainly governed by REMIT), bringing enhanced organisational and operational requirements for trading venues and market participants in the spot space.
• Enhanced Supervisory Cooperation: The consultation highlights the need for improved cooperation between energy and financial market regulators, and potential developments in this space.

Responses to the consultation are due by 23 April – do let us know if you have any questions or we can help at all.

CSDR Settlement Discipline – ESMA Whips RTSs into Shape

Previously, when we’ve looked at settlement discipline on Markets View, the focus has been on concerns around the introduction of a “mandatory buy-in regime”. As we noted in the January 2024 edition, CSDR Refit controversially retained the buy-in regime, but provided that it will only be brought into force via an implementing act, as a measure of last resort.

With mandatory buy-ins becoming a last resort, there is increased focus on other measures such as cash penalties. CSDR Refit introduced a legislative mandate for ESMA to develop draft Regulatory Technical Standards (RTS) in relation to settlement discipline measures, and we now have ESMA’s Consultation Paper providing technical details around such measures, for insertion in the CSDR RTS on Settlement Discipline. The proposals cover:

• Timing and means for sending allocations and confirmations
• International open communication procedures and standards for messaging and reference data
• Onboarding of new clients; and hold and release and partial settlement functionality
• Auto-collateralisation; and real-time gross settlement versus batches
• Reporting top failing participants and reasons for settlement fails; and CSDs’ public disclosure.

CSDR Refit included a second legislative mandate for ESMA to develop draft Regulatory Technical Standards (RTS) to improve settlement efficiency. To this end, ESMA has unveiled further technical proposals for amendments to the CSDR RTS on Settlement Discipline:

• Unique transaction identifiers (UTIs) and the Sensitive Security Information (SSI) format
• Place of safe keeping (PSAF) and place of settlement (PSET) as mandatory fields
• Transaction type; and timing for sending settlement instructions to the securities settlement system (SSS)
• Alignment of CSDs’ opening hours, real-time/night-time settlement and cut-off times
• Shaping; and automated securities lending

Responses to the consultation are due by 14 April 2025, with a final report expected by October 2025, when the draft RTS will be submitted to the European Commission. This is a little later than the timeline envisaged in the two mandates, which had envisaged deadlines of 17 January 2025 and 17 July 2025 respectively.

ESMA also published on 20 February 2025 three Final Reports with (amended) draft RTSs, which have now been submitted to the European Commission for adoption:

• On the Substantial Importance of CSDs under Article 24a(13) of CSDR, proposing criteria under which a CSD in a host Member State could be considered to be of substantial importance for the functioning of the securities markets and the protection of investors. CSDR Refit specified new requirements for mandatory colleges with formal cooperation arrangements between home and host competent authorities, for the supervision of a CSD of substantial importance.
• Amending Regulation (EU) 2017/392 and Regulation (EU) 2017/394 under CSDR on review and evaluation (R&E), proposing to reduce the frequency for the annual R&E process and defer the application of certain new requirements, by one year to facilitate IT adaptations.
• On the information notified by third-country CSDs, with proposed amendments to the information that third country CSDs are required to notify for notary services, central maintenance and/or settlement services for financial instruments.

Data Daze: IOSCO Report on the Technological Challenges to Effective Market Surveillance

IOSCO has released a paper following its thematic review on the technological challenges to effective market surveillance. This follows an earlier (2013) IOSCO Report on the subject, and sets out IOSCO’s findings in relation to each of its original 8 recommendations.

Several issues of concern are noted in the report, in relation to the implementation of the recommendations. The theme underlying them all is the difficulty of analysis the data involved, particularly due to reasons of:

• Size: some regulators reporting being overloaded by HFT data
• Format & quality: deficiencies and inadequate standards present practical obstacles to reconstructing/analysing order books
• Cross-venue analysis: products traded across multiple venues (an increasing phenomenon) require integrated order/trade analysis and automated surveillance methods.
• Cross-border analysis: cross-border market activity is a real challenge for regulators, “most” of whom have not fully mapped their cross-border surveillance capabilities. The result is there are “gaps” in the data.

Alongside these interesting themes based on past practice, the report touches at several points on new challenges (and opportunities) – especially on machine learning & AI. The use of these technologies to analyse order/trade patterns and strategies is clearly not yet mainstream, although examples are cited from the UK and France. Clearly, this is going to be a key area of focus for regulators in this space.