Wholesale Markets Review: summary of proposed changes

Wholesale Markets Review: summary of proposed changes

This week our Chief Executive Officer, Alexander Culley, summarises some of the key points from the UK Government’s Wholesale Markets Review: Consultation which are of practical interest to the day-to-day operations of investment firms and their clients. The consultation period closed on 24 September 2021.

Proposed changes to MiFID II position limits and reporting requirements 

The UK Government stated that is dissatisfied with the structure and operation of the existing position limit and reporting regime in multiple respects.

First, the UK Government views the current definition of a ‘commodity derivative’ for the purposes of the regime as being too broad, including instruments that are:

  • derivatives based on climatic variables; and
  • legally constructed as securities.

The UK Government perceives the link of such instruments to physical commodities to be ‘weak’. The UK Government therefore proposed to revise the definition to exclude these.

Second, the UK Government believes that the current extension of the MiFID II regime to economically equivalent OTC contracts has been a source of confusion for market participants. This is primarily owing to difficulties in identifying them. Accordingly, the UK Government proposed to cease the default inclusion of these products from the UK position limit regime. However, the UK Government stated that it would like the FCA to continue to account for these in its own monitoring.

For further updates on this and other topics, please check back to this website or subscribe to receive our updates here.

Proposed changes to the ancillary activities test

Continuing in the spirit of simplification, the UK Government proposed to significantly reduce the requirements of the UK’s ancillary activities test. If adopted, the UK regime would:

  • return to a qualitative test set by the FCA, negating the need for complex calculations;
  • seek to be proactive (based on an holistic assessment of a commercial entity’s current and future activities) as opposed to being reactive (merely referencing historical data); and
  • no longer require commercial entities to provide annual notifications to the FCA to confirm they have performed a self-assessment.

If adopted, the FCA would still be entitled to request evidence from commercial entities for the purposes of determining their status.

For further updates on this and other topics, please check back to this website or subscribe to receive our updates here.

Proposed changes to the Oil Market Participant (“OMP”) and Energy Market Participant (“EMP”) regimes

The UK Government proposed to abolish to OMP and EMP regimes, asserting that it considers them to be too burdensome on firms currently utilising them. Instead, the UK Government stated its intention that these firms be authorised under the UK’s MiFID II regime, subject to any exemption available under the ancillary exemption test.

For further updates on this and other topics, please check back to this website or subscribe to receive our updates here.

Proposed changes to the Systematic Internalisers (“SI”) regime

Again, the UK Government’s focus here is on making life easier for market participants.

If the UK Government’s proposals are adopted, the UK will:

  • return to applying a qualitative (as opposed to quantitative) test to determine if an investment firm’s activities render it an SI for a given asset class;
  • determine whether an investment firm is an SI on an entity level as opposed to instrument level basis;
  • allow SIs to execute client orders at mid-point, subject to the fulfilment of certain conditions.

For further updates on this and other topics, please check back to this website or subscribe to receive our updates here.

Proposed changes to certain requirements concerning equity markets

The UK Government made the following proposals with the objective of simplifying trading in the equity markets:

  • removing the double volume cap (“DVC”) and letting the FCA take a more flexible approach to monitoring trading on dark pools instead;
  • encouraging even more standardisation in post-trade transparency reporting to aid price formation;
  • abolishing the share trading obligation (“STO”), permitting investment firms to trade equities on any trading venue (British or foreign) or OTC with any counterparty, subject to a requirement to observe best execution; and
  • abolishing the formal market maker obligations imposed on algorithmic liquidity providers, freeing up firms to decide whether they would like to participate in optional incentive schemes instead.

For further updates on this and other topics, please check back to this website or subscribe to receive our updates here.

Proposed changes to the derivatives trading obligation (“DTO”)

The UK Government does not believe that the DTO has not achieved the increase in transparency sought by the authors of MiFID II. Accordingly, the UK Government proposed to:

  • rectify the misalignment between changes made to the EMIR clearing obligation by EMIR REFIT and the DTO, i.e. to exclude small financial counterparties from the ambit of the DTO;
  • amend the current exemption from the DTO for certain portfolio compression exercises to all post-trade risk reduction activities; and
  • give the FCA a permanent right to amend or suspend the DTO.

For further updates on this and other topics, please check back to this website or subscribe to receive our updates here.

Proposed changes to the transparency regime for fixed income and derivative instruments

The UK Government is seeking to reduce the burdens associated with the transparency regime by:

  • abolishing the notion of ‘traded on a trading venue’ (“TOTV”) because of its ambiguous nature; and
  • replacing this with a simpler concept whereby the application of the OTC transparency regime is dictated by whether a trade is centrally cleared (on a mandatory or voluntary basis). Centrally cleared OTC contracts would attract pre-and post-trade reporting.

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