Markets View - July 2025

Welcome to the July edition of Markets View! In this most summery of months, we deliver a refreshing breeze of recent UK regulatory developments in the financial markets space (what more could you ask for?).

From the Supreme Court's landmark LIBOR ruling, to the Bank of England setting out new rules for FMIs, there's plenty to unpack. We also explore the UK Government's ambitious digital strategy for wholesale financial markets, the fallout from a major Bloomberg outage, and the latest on UK-EU ETS linkage talks.

We hope you enjoy the updates, and as ever please don't hesitate to get in touch if we can help!

The Tide Turns: LIBOR Convictions Swept Out

In a landmark ruling last week, the Supreme Court has quashed the conspiracy to defraud convictions of Tom Hayes and Carlo Palombo, who were accused of manipulating key benchmark rates, LIBOR and EURIBOR. The Court found that the trial judges had misdirected the jury. This decision has significant implications for the interpretation of what constitutes a "genuine" rate submission in financial markets.

The Supreme Court analysed two key questions concerning LIBOR and EURIBOR submissions:

• First, must a rate submission be an assessment of the single cheapest rate at which the bank could borrow, or a selection from within a range of borrowing rates? The Supreme Court concluded that it was a matter of subjective opinion which involved selecting a figure from within a range of borrowing rates.
• Second, if a rate submission is influenced by trading advantage, does that automatically mean that it could never be a genuine or honest submission? The Supreme Court disagreed, concluding that, as a submission involves the submitter's subjective judgement and opinion, it could only be false or dishonest if it did not reflect the submitter's actual opinion. Further, the question of what the submitter's actual opinion was is a question of fact, not law. 

The judge in Mr Hayes' trial had directed the jury that, if a submission had been influenced by trading advantage, then, as a matter of law, it could not be genuine or honest. In light of the Supreme Court's conclusions, this direction was wrong; determining whether a submission was genuine is a question of fact for the jury, not a matter of law.

The Supreme Court therefore criticised the trial judges' directions for incorrectly removing from the jury's consideration Mr Hayes' key defence: that he tried to influence submitters to make submissions which favoured his trading position where those submissions were within the range of rates from which the submitters could select.

This ruling follows years of legal challenges and is likely to have significant implications for the safety of convictions of others convicted of similar offences arising from alleged benchmark manipulation. It was also followed shortly after by a statement from the FCA that it had revoked Mr Palombo's ban from the financial services industry and discontinued its action against Mr Hayes.  

A Shore Thing: Bank Sets Out Fundamental Rules for FMIs

The Bank of England published on 18 July 2025 a Policy Statement on Fundamental Rules (FRs) for Financial Market Infrastructures (FMIs) that it supervises, final versions of which are set out in:

• Appendix 1: for UK central counterparties and central securities depositories

• Appendix 2: for UK recognised payment systems operators and specified service providers.

The two sets are closely aligned. There is also an Appendix 3 which contains a Supervisory Statement, relevant to all FMIs. Third-country CSDs and systemic overseas CCPs are not currently in scope; however, they could be covered in the future if HM Treasury provides for an expansion of scope.

As explained in Markets View November 2024 on the BoE's original Consultation Paper, the new Fundamental Rules 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. Their implementation is just the first step in a broader programme to shift FMI requirements from primary legislation to a new BoE FMI Rulebook, following FSMA 2023.

Key changes made from the Consultation Paper include clarifying that, in managing the risks that an FMI may pose to the stability of the financial system (FR10), the BoE does not expect that an FMI would take actions that harm its own resilience. Meanwhile, in connection with the rule on conducting business with integrity (FR1), further emphasis is placed upon the role of FMIs' transparency with their participants in supporting better risk management.

Another change relates to the requirement for FMIs to deal with their regulators in an open and cooperative way (FR7), and specifically to provide information concerning other members of their group. The BoE has clarified that it only expects to receive such information to the extent that it could have a material bearing on the FMI being able to meet its regulatory obligations or which might materially affect the activities of the FMI. The definition of "group" for these purposes is also changed from s421 FSMA (20%+ shares) to the narrower definition in s1162 Companies Act 2006.

The implementation period has been extended to 18 July 2026 (i.e. 12 months rather than the original 6), particularly to facilitate implementation of changes to comply with FR10 ("An FMI must identify, assess and manage the risks that its operations could pose to stability of the financial system.")

Surfing the Digital Wave: New UK Strategy for Wholesale Financial Markets

The UK Government published its Wholesale Financial Markets Digital Strategy on 15 July 2025 - one of a number of measures it is looking at to boost economic growth through innovation in the financial markets.

Its plan focuses on three key pillars: market optimisation, market transformation, and market leadership, with an overarching goal to enhance efficiency, resilience, and global competitiveness in the UK's wholesale financial markets.

Market Optimisation is about driving efficiency through:

• Eradicating Paper-based processes to reduce costs, bottlenecks and errors - with a special emphasis on dematerialisation of shares.

• Automation of manual processes that currently require frequent human intervention. The government is working with the Accelerated Settlement Taskforce to identify and prioritise next steps.

• Utilising Smart Data, i.e. by ensuring the UK has the right data principles & standards to support enhanced market functioning, in particular through new technologies such as AI.

Market Transformation is about reimagining market activity through new technology, including via:

• Adoption of DLT to tokenise financial assets, thereby enabling enhanced transparency and reduced operational costs through new solutions.

• Flexible Regulatory Frameworks, including Sandboxes such as the Digital Securities Sandbox, PISCES (see below) and the AI-related "Supercharged" Sandbox to facilitate the development, implementation and evolving regulation of new infrastructures.

• Cross-Sector Collaboration between the Government, regulators, and industry.

• Legal Clarity on tokenisation and the prudential treatment of digital assets.

Market Leadership is about developing a whole-sector and global approach, including through:

• Appointment of a new "Digital Markets Champion" to coordinate private sector initiatives and link with global initiatives.

Bloomberg Outage Turns Up the Heat on Traders

You may have seen - or even been affected - earlier this summer when a global outage of 350k+ Bloomberg (BBG) Terminals on 21 May 2025 disrupted financial markets, government operations, and institutional workflows for several hours.  BBG terminals are used by most financial institutions around the world for market data, pricing and deal execution. Bloomberg said the outage was caused by an "internal technical malfunction" and denied suggestions that it was caused by a cyber attack.

The outage appears to have had greatest impact in the bond markets where it coincided with a major increase in sovereign debt issuance by way of auction. The auction 'windows' had to be extended to allow participants time to engage with; such delays can increase borrowing costs.

More significantly, while the determination of SONIA and other RFRs appears to have been unaffected, the outage was reported to have caused problems in pricing longer-dated products which use the RFR as their basis - the so-called "forward-looking term rates" derived from RFRs, such as the FTSE Term SONIA. One buy-side trader described being limited to "only essential orders" due to delayed pricing data, while another compared the situation to "betting on a match you can't see". Many participants complained about a lack of transparency / communication during the outage.

If the disruption had persisted, market participants believe the Bank of England's fallback mechanism, relying on compounded historical SONIA, might have been activated and could have introduced so-called 'basis risk' for derivatives referencing term rates.

The case is being seen as having highlighted systemic vulnerabilities in sovereign debt markets. It has amplified calls for stricter oversight of critical financial infrastructure drawing attention back to IOSCO's 2024 guidelines on market outages. 

Regulatory bodies like the UK's FCA and EU's ESMA had already been examining market infrastructure resilience, and this event may accelerate reforms requiring additional compliance investments from market participants.

While the outage did not compromise SONIA's integrity, it highlighted risks in the "operational ecosystem" supporting RFR adoption. Market participants are likely to (and may be required to) prioritise:   

• Diversification of data sources for term-rate calculations;  

• Enhanced fallback language in derivatives contracts referencing term RFRs; possible increased adoption of "manual override" protocols in RFR-linked contracts; and  

• Regulatory scrutiny of vendor concentration in trading infrastructure.

Clearing the Air: UK and EU Seek to Re-Link ETSs

An agreement to work towards linking the EU and UK ETSs was reached at the summit between the UK and EU on 19 May 2025, summarised in a "Common Understanding" Policy Paper. The idea of linkage has been touted ever since the UK 'de-linked' from the EU ETS post-Brexit, particularly on the UK side because the UK's ETS is much smaller and so exposes firms to greater volatility in pricing, with fewer options for hedging.

Unfortunately, linking the two ETSs will not be entirely straightforward. In the few short years since they separated, there has been divergence (with more potentially to come), with the EU in particular having taken a more ambitious stance on expanding sector coverage, reducing emissions caps and speeding up reductions. This split is also reflected in allowance prices: since Brexit, UK allowances have traded at a discount compared to their EU equivalents (though the gap is reducing as the prospects of linkage improve).

However, that price differential is currently adding impetus to the desire for linkage, particularly on the UK side. The EU and UK are each in the process of implementing Carbon Border Adjustment Mechanisms (CBAMs), which are due to come into force in the next couple of years. These will impose carbon levies on importers of in-scope goods, based on the price of ETS allowances. Given that UK allowances are cheaper, the UK government estimates a cost to British exporters totalling £800m by 2030.

Linking the ETSs would align the price of allowances and so exempt cross-border trade from the impact of each other's CBAMs, as well as reducing firms' administrative burdens.

A key question is whether this can be done in time. This will be complicated by the issues of divergence mentioned above. We can expect the UK to need to do much of the heavy lifting here, in terms of addressing coverage, ensuring its cap and reduction pathway are at least as ambitious as the EU's, and making "an appropriate financial contribution" to cover the EU's relevant associated costs. Given the legal and political complexity of these issues, it is highly likely the CBAMs will already have entered into force before any linkage takes effect, which raises the further question of whether interim exemptions may be agreed in the meantime.

The UK and EU are continuing to hold talks following this agreement, and we will keep you posted as further details emerge.

Sun, Sea and Sandboxes: PISCES Regulations Here for the Summer

As anticipated in our May edition, the a new Statutory Instrument (SI 2025/583) was laid on 15 May 2025 with regard to the Private Intermittent Securities and Capital Exchange System ("PISCES"). The Regulations establish the PISCES Sandbox and empower the FCA to make rules and technical standards. On the day the Regulations came into force, 05 June 2025,  FCA published a policy statement (PS25/6) with the rules for the sandbox.

PISCES is a response to widespread concerns on UK capital markets by introducing a new way of trading shares in private companies, with the express aim of fostering growth. The regulatory framework does not use public markets as starting block but aims to support sandbox participants by experimenting with "private plus" models.  By using a PISCES platform, companies can decide when and how often their shares are traded, who is eligible to buy them, and even set price floors or ceilings.

Under the Regulations, not only RIEs, but MTF and OTF operators can operate a PISCES; FCA authorised persons with permissions to arrange deals in investments also qualify.  Orders can be placed by:

• Investors (both UK and overseas).
• Employees, consultants, and managers (as listed by the company for each trading event).
• Trustees of employee share schemes or share incentive plans.
• Financial intermediaries acting on behalf of clients (but subject to FCA rules on client protection and the client qualifying as a "specified PISCES investor" - broadly, professionals, HNWI and sophisticated investors as defined in the financial promotion rules).
• PISCES companies themselves, to manage their shareholder base.

The PS lists information that a private company would need to provide for its shares to be listed: these are relatively light touch, and include a business description, financial information, governance arrangements, share structure and trading controls as well as compliance and risk management arrangements.

PISCES could be a valuable liquidity option for early investors, employees, and other shareholders who may wish to realise the value of their holdings. Feedback from some of our corporate clients suggests that PISCES may be unlikely to make a big impact, but we will wait and see. The PISCES Sandbox Regulations will expire on 05 June 2030.

CATPs Catch Some Regulatory Rays

You may recall that, back in April/May, we saw a raft of publications in relation to the regulation of cryptoassets (previously proposed by the last UK government in October 2023), including for the regulation of cryptoassets trading platforms:

• A near-final draft SI, The Financial Services and Markets Act 2000 (Regulated Activities and Miscellaneous Provisions) (Cryptoassets) Order 2025;

• An HMT Policy Note: Future financial services regulatory regime for cryptoassets (regulated activities); and

• An FCA Discussion Paper (DP25/1): Regulating Cryptoasset Activities.

For those with a keen interest in crypto, these developments were discussed in a special issue of Crypto View at the time. For the purposes of this newsletter, one change worth singling out is the proposal to make "operating a qualifying cryptoassets trading platform" a specified activity under an amended Regulated Activities Order.

"Qualifying cryptoasset trading platform" is defined as: "a system which brings together or facilitates the bringing together of multiple third-party buying and selling interests in qualifying cryptoassets in a way that results in a contract for the exchange of qualifying cryptoassets for (a) money (including electronic money); or (b) other qualifying cryptoassets."

Essentially this replicates the existing definition of a multilateral trading facility (MTF) and is intended to ensure a clear perimeter between activities associated with cryptoasset trading, and those for the trading of traditional securities, including those in tokenised form. The Overseas Person Exclusion will not be extended to cryptoasset activities.

In terms of applying for authorisation, the FCA will be required to set a period, not later than one year ahead of full commencement of the regime, where firms will be able to submit applications for authorisation (the Relevant Application Period), with the Relevant Application Period having to be at least 28 days, and with at least 28 days between the end of the Relevant Application Period and the full commencement of the regime.   

A transitional period of 2 years from the full commencement date of the regime will apply to firms who applied for authorisation during the Relevant Application Period and whose application has not been determined by the FCA. There is a separate 2 year transitional period for firms who have their applications refused or who withdraw them, where they are able to continue operating, provided their activities are necessary and solely for fulfilling pre-existing contracts, in order to exercise an orderly wind-down.

The FCA discussion paper includes a chapter on cryptoassets trading platforms (which it refers to as "CATPs"). There are several points of interest here, particularly for CATPs that directly serve retail customers (which is not a possibility for MTFs):

• Authorisation: CATPs operating a trading platform in the UK or servicing UK retail clients will generally need to be authorised in the UK. However, the paper suggests that offshore firms may, in certain circumstances, provide trading services to UK clients through a UK branch, provided the group also has an authorised UK subsidiary. Other legal and operational structures may also be considered acceptable, depending on regulatory objectives and supervisory cooperation.

• Additional Rules: where there is retail access, algorithmic or automated trading, and market-making activity, to address risks such as market manipulation, operational inefficiencies, and conflicts of interest.

• Trading & Execution: CATPs must operate non-discretionary trading systems to ensure fair and consistent treatment of orders, while restrictions are proposed on matched-principal and proprietary trading by CATP operators to mitigate conflicts of interest and risks to market integrity.

• Pre- & Post-Trade Considerations: The FCA proposes measures to address risks in the issuance of cryptoassets, counterparty credit risk, and settlement processes, including ensuring CATPs remain risk-neutral and do not internalise credit risks, while also improving transparency and efficiency in settlement practices.

• Transparency and Record Keeping: The paper sets out high-level proposals for CATP-bespoke pre-trade and post-trade transparency and record-keeping regimes.