Broker and trading financial regulatory outlook for 2022 – UK and Europe

Broker and trading financial regulatory outlook for 2022 – UK and Europe

The aim of this outlook is to provide busy senior managers and compliance professionals at brokers and trading firms with an overview of key regulatory milestones in 2022.

Key milestones – UK

What When To do list
Items following the implementation of the Investment Firms Prudential Regime (“IFPR”) 1st February 2022

(AT1 notification deadline)

 

Late 2022

(Internal capital adequacy and risk assessment (“ICARA”) review)

Inform FCA of intended treatment of instruments treated as additional tier 1 (“AT1”) under the UK CRR.

Review ICARA process in preparation for submitting first MIF007 report in early 2023.

Be prepared for interactions with the FCA on Remuneration Policy elements, particularly Policy Statements and the identification of material risk takers (“MRTs”).

Changes to UK EMIR trade reporting requirements Consultation CP21/31 closes 17th February 2022 Consider how to source data for additional fields that are relevant to firm’s operations (89 proposed).

Consider impact of amendments to existing fields.

Review policies and procedures to accommodate the:

  • swift resolution of reconciliation breaks;
  • proposed unique trade identifier (“UTI”) generation waterfall;
  • collection of legal entity identifiers (“LEIs”) from non-financial clients under the clearing threshold (“NFCs- ”); and
  • obtaining of broker ID, clearing member IDs and purpose of trade information from NFC-s.
Review of the appointed representative (“AR”) regime and publication of final rules. Consultation CP 21/34 closes 3rd March 2022

 

Publication of final rules during H1 20211

If your firm supports ARs, get ready to provide additional information on existing ARs’ business models within 60 days of final rules entering into force.

Revise AR supervision procedures / monitoring programme to:

  •  verify AR’s details at least annually;
  • ensure updates to AR’s activities are promptly reported to the FCA;
  • collect and provide AR related complaints and revenue data to the FCA;
  • facilitate increased oversight of ARs (including introducer ARs) per the requirements outlined in the FCA’s proposals; and
  • facilitate an annual self-assessment of the adequacy of the firm’s arrangements to oversee their ARs.
Implementation of rules and guidance concerning operational resilience. 31st March 2022 Identify important business services.

Set impact tolerances for maximum tolerable disruption.

Identify vulnerabilities in operational resilience.

Conduct of information gathering exercise by the FCA into the sale of trading data: “we will undertake a significant programme of work over the next year and beyond to understand, and, where appropriate, address the potential harms we have identified” (FCA Feedback Statement 22/1). Spring 2022 It is likely that trading venues and data vendors will be the primary recipients for information requests from the FCA. However, it is possible that investment firms could be contacted for examples of pricing structures and terms and conditions for onward distribution. Accordingly, it might be worth checking this is in order in anticipation of a possible request.
Introduction of new Consumer Duty (“CD”) Closing date for comments on CP21/36: 15th February 2022

 

Publication of final rules by 31st July 2022

If your firm is involved in the provision of financial services to consumers, start to consider:

  • if the firm’s target markets are clear;
  •    if the firm’s current product development processes are delivering positive outcomes for consumers; and
  • how relevant employees and third party promoters could be effectively trained on the CD’s requirements.
Publication of new rules on the marketing of cryptoassets and high-risk investments Closing date for comments on CP22/2: 23rd March 2022

 

Final rules to be published in summer 2022

If relevant, determine whether the firm is offering any products that would be classed as ‘qualifying cryptoassets’ pursuant to the new rules.

Conduct a review of current promotional activity. Make an assessment as to the likely impact of the new rules.

Train employees and third parties involved in promoting cryptoassets on the firm’s behalf.

Implementation of phase 6 of the bi-lateral margin requirements. 1st September 2022 Calculate average aggregate notional amount of uncleared OTC derivatives as at last business day in March, April and May.

Review your counterparties. Determine if they are also in-scope of the requirements.

Work out how much collateral you will probably need to post.

Review your collateral management processes, particularly in view of the calculation methodology to be used and permitted collateral types.

Ensure custody arrangements with service providers are in place and have been tested.

Check all requisite legal documentation is in place. If an entity is significantly impacted by Phase 6 then it would be prudent to have your documentation arrangements reviewed by outside counsel.

Publication of outcomes from HM Treasury’s Wholesale Markets Review. To be confirmed Consider impact of outcomes on firm’s operations.

 

Key milestones – Europe

 

What When To do list
ESMA monitoring of developments in relation to retail trading activities. Possible mystery shopping. Further work on crypto assets.

 

Possible new guidance on the issuance of investment recommendations via social media channels.

Publication of strategy for retail investments in Europe, with amendments to legislation to be tabled by the European Commission by mid-2022 If your firm’s group is involved in the provision of online trading services to retail clients based in the EEA, get ready for potential contact from national competent authorities (“NCAs”) on:

  • ‘payment for order flow’ (“PFOF”) and ‘zero-commission’ practices;
  • the use of social media in promoting investments to retail investors, including the use of third-party influencers in campaigns;
  • the effectiveness of risk warnings in the provision of ‘non-advised services’;
  • conflicts of interest often associated with certain retail trading business models, e.g. ‘b-booking’;
  • the use of ‘gamification’ techniques; and
  • the cross-border provision of online trading services.
Expiration of UK central counterparty (“CCP”) equivalence decision 30th June 2022 If firm holds positions at UK CCPs model possible impact if equivalence decision is not renewed.
Expiration of temporary regulations for UK firms to provide investment services to eligible counterparties and per se professional clients in Norway. 31st December 2022 Examine client base to identify any Norwegian eligible counterparties and per se professional clients.

Prepare to enable continuity of service post expiry of temporary regulations. Communicate plan to affected clients as soon as practicably possible.

Issuance of new guidance on “pre-hedging” pursuant to the Market Abuse Regulation (“MAR”). To be confirmed If firm is involved in principal trading activities, train relevant front office staff when guidance has been issued.
Continued review of the second Markets in Financial Instruments Directive (“MiFID”) II by ESMA, particularly:

  • the third country regime
  • product governance
  • costs and charges
To be confirmed If your firm’s group has broking operations in the European Economic Area (“EEA”), consider if:

  • target markets have been clearly defined with a clear audit trail evidencing challenge;
  • there is a clear rationale for cost and charging structures, particularly markup; and
  • bespoke products have been stress tested, for example to consider periods of high volatility.

 

Summary

2022 promises to be another intense year for brokerages and trading firms in the UK and Europe. However, with careful planning it should be possible to avoid major operational upheaval.

Need help?

A.C.Culley & Co. has extensive experience of broker and trading firm operations. Contact us today if you would like help with strengthening your systems and controls.

Originally published by Thomson Reuters © Thomson Reuters

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