Summary of outcomes from the Wholesale Markets Review

Summary of outcomes from the Wholesale Markets Review

Pushed for time and looking for a quick summary to update key stakeholders in your business?

First, a quick recap. The Wholesale Markets Review is being conducted to help enhance the functioning of the UK’s regulation of wholesale markets after Brexit. Pursuant to this objective, HM Treasury (also, the “Government”) consulted on a range of proposals in 2021. The outcomes of the consultation were published on 1st March 2022. The table below summarises the core proposals, whether they were adopted and next steps. Some noteworthy takeaways are provided in the column labelled “comments”.

Proposal Status Comments
Trading venues
Provide more clarity regarding types of entities that need to obtain authorisation as a multi-lateral trading facility (“MTF”). Proposal accepted. However, the legal definition of an MTF will not be amended.

 

FCA and HM Treasury to work together to consult on new guidance.

The Government prefers the development of new guidance over a legislative change because this would be more flexible to keep pace with technological changes.
Delete matched principal trading restrictions for operators of an MTF. Proposal accepted. Implementation to be achieved through Future Regulatory Framework Review (“FRF”). There is likely to be an increased focus on MTF operator’s systems and controls to prevent conflicts of interest because of this change. MTFs should be ready for future regulatory interaction in this area.
Allow organised trading facilities (“OTF”) to execute large package transactions in equities. Proposal accepted. Implementation to be achieved through Future Regulatory Framework Review (“FRF”). The idea here is to help reduce costs for market participants because currently they would have to trade on two venues.
Permit an investment firm to house a systematic internaliser (“SI”) and OTF in the same legal entity. Not adopted. The Government did not take this proposal forward because it has not yet convinced about the ability of firms to mitigate potential conflicts of interest.
Create a new venue for micro small and medium sized enterprises (“SMEs”). Not adopted. The Government said that it will continue to explore this idea.
Create a playbook to guide market operators and participants in the event of a market outage. Proposal accepted.

 

FCA to develop guidance.

There is likely to be some crossover with operational resilience requirements that recognised investment exchanges must comply with from 31st March 2022 (PS21/3). PS21/3 will not apply to all forms of market operator.
Systematic internalisers
Simplify the definition of SIs by reverting to a qualitative definition. Proposal accepted.

 

Implementation through primary legislation when Parliamentary timetable permits.

This will result in the abolition of the requirement to perform complex quantitative calculations. Many firms have purchased expensive vendor solutions to help them perform the calculations. These firms should now examine the terms of the exit clauses in their agreements with vendors.
Simplify the reporting regime for SIs. Government supportive. FCA to consult on proposals to amend technical standards, considering feedback received. There was disagreement between firms as to whether to determine SIs at entity level or instrument level. Some firms advocated public or bi-lateral reporter election frameworks to make it clearer where the reporter obligation sits.
Permit midpoint crossing for trades below Large in Scale (“LIS”). Proposal accepted.

 

Implementation through primary legislation when Parliamentary timetable permits.

SIs will need to revise their best execution arrangements to ensure that their use of midpoint execution is consistent with these.
Permit a more proportionate approach to establishing the minimum quote size pursuant to standard market size (“SMS”). Proposal accepted. Implementation to be achieved through Future Regulatory Framework Review (“FRF”). The objective here is to ensure the minimum quote size accurately represents the average trade that occurs on a trading venue.
Equity markets
Deletion of the double volume cap (“DVC”). Proposal accepted.

 

Implementation through primary legislation when Parliamentary timetable permits.

After the abolition of the DVC the FCA would still monitor activity in dark pools and intervene if necessary.
Delegation of the pre-trade transparency regime to the FCA. Proposal accepted.

 

Implementation through primary legislation when Parliamentary timetable permits.

The Government remarked that improving the pre-trade equities waivers regime is a “priority area”. Accordingly, it is seeking to make the delegation to the FCA as soon as practicable so that it can continue in its efforts to make improvements.
Deletion of share trading obligation (“STO”). Proposal accepted.

 

Implementation through primary legislation when Parliamentary timetable permits.

Removal of the STO will allow firms to trade in the most liquid market to get the best outcomes for the clients.
Deletion of requirement for algorithmic trading firms to execute market making agreements with trading venues. Proposal accepted. Implementation to be achieved through Future Regulatory Framework Review (“FRF”). The objective here is to make it easier for firms to engage in liquidity provision.
Permit trading venues to follow the tick size applicable to primary market of an equity, including when market is overseas. Government supportive.

 

FCA to determine next steps.

This move should help prevent unnecessarily large tick sizes and associated costs for end users.
Permit trading venues to set tick sizes for new shares pending availability of sufficient data. Government supportive.

 

FCA to determine next steps.

It is hoped that this will increase the competitiveness of prices in the UK and mitigate the risk of arbitrage between venues.
Delegation of tick size regime to trading venues. Not adopted. Respondents were concerned that, if adopted, this proposal would have encouraged a “race to the bottom” between competing venues.
Fixed income and derivatives markets
Realign scope of derivatives trading obligation (“DTO”) and EMIR clearing obligation (“CO”). Proposal accepted.

 

Implementation through primary legislation when Parliamentary timetable permits.

This is to correct a misalignment that arose because of the implementation of EMIR Refit.
Exempt post-trade risk reduction services from DTO and CO. Proposal accepted.

 

Implementation through primary legislation when Parliamentary timetable permits.

This will take all non-price forming trades out of the scope of the DTO and CO.
Grant FCA ability to change scope of DTO in specified situations. Proposal accepted.

 

Implementation through primary legislation when Parliamentary timetable permits.

Respondents felt that this initiative would help ensure market functioning and resilience.
Delegation of pre-  and post trade transparency regime for fixed income and derivatives markets to the FCA. Proposal accepted.

 

Implementation through primary legislation when Parliamentary timetable permits.

This is to ensure the regime is managed by persons who have direct experience of the markets as opposed to central government.
Commodity derivatives
Amend definition of a commodity derivative. Not adopted. Many respondents were concerned that amending this definition could give rise to unintended consequences because it is referenced in a wide range of legislative provisions.
Delete economically equivalent over-the-counter (“OTC”) derivatives from the position limit regime. Proposal accepted.

 

Implementation through primary legislation when Parliamentary timetable permits.

The deletion of these contracts should reduce legal uncertainty and associated compliance risks.
Remove requirement that position limits be set on all exchange traded derivatives. Make trading venues responsible for setting position limits instead of the FCA. Proposal accepted.

 

Implementation through primary legislation when Parliamentary timetable permits.

Respondents felt that position management tools dynamically operated by trading venues are more effective than hard limits in managing volatility.
Simplify position reporting regime. Not adopted. Most respondents felt the existing regime works well and do not want to revisit it in case this increases costs.
Withdraw ancillary activities test introduced by MiFID II, replace with “commodity dealer exemption”. Abolish annual notification requirement. Accepted.

 

Government to make changes by statutory instrument.

Top revisit the wording of the previous “commodity dealer exemption”, see Article 2(1)(k) here.
Abolition of oil market participant (“OMP”) and energy market participant (“EMP”) regimes. Not adopted. No consensus was reached regarding what to do with the OMP and EMP regimes. OMPs and EMPs were not keen on becoming authorised as investment firms. It is possible that the Government will revisit this topic in future.
Market data
Equip FCA with powers to encourage the development of consolidated tapes. Proposal accepted.

 

Implementation through primary legislation when Parliamentary timetable permits.

The development of a consolidated tape received significant backing from respondents. The FCA will consult on how to develop consolidated tapes for specific asset classes once it has received the necessary powers.
Reporting
Reduce duplication between EMIR, MiFIR and SFTR reporting regimes. Government stipulated that the FCA has already consulted on widening the exclusion of securities financing transactions from MiFIR. The suggestion to make reporting single sided for derivative transactions does not appear to have been taken up.
Streamlining investor protection reports. Not adopted. Engagement with stakeholders to continue. The Government will approach consumer groups and retail facing bodies in the coming months.
Explore possibility of using a specific identifier for derivatives to address difficulties associated with using an International Securities Identification Number (“ISIN”) in certain contexts. Not adopted. The Government believes further work is required in this area. The Government asserts that potential changes to the “traded on a trading venue” regime will mitigate issues that stem from using ISINs to identify OTCs.

 

Looking for help?

A.C.Culley & Co. has substantial experience of wholesale market operations. Please contact us if you would like any help in implementing your wholesale markets compliance programme.

References

  1. Wholesale Markets Review: Consultation Response. HM Treasury, 1st March 2022. Available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1057897/Wholesale_Markets_Review_Consultation_Response.pdf (last accessed 1st March 2022).

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