In PS23/4: Improving Equity Secondary Markets, the Financial Conduct Authority (FCA) has confirmed a range of targeted changes to the UK’s post-trade transparency regime, pre-trade transparency waivers and tick size regime for equity instruments that it consulted on in July 2022. The introduction of the new designated reporter (DR) regime will also affect trading in non-equity instruments. The FCA also provides an update on potential further reforms to operational resilience standards for trading venues and the retail service provider model.
Firms will be pleased to see that the FCA has listened to industry calls for longer than six months to implement the changes to the post-trade transparency regime and the new DR regime, which will now enter into force after 12 months in April 2024. This will give firms more time to implement and test systems changes. The changes to the pre-trade transparency waivers and tick size regime will enter into force immediately. The FCA will be setting out further details on registration for entity-level designated reporter status in due course.
Further changes affecting equity markets can be expected as part of the wider Wholesale Markets Review (WMR) once the Financial Services and Markets Bill (FSMB) becomes law. The FCA acknowledges the EU’s ongoing review in this area and the additional complexities that firms operating in both the UK and EU will face.
What changes has the FCA confirmed in PS23/4?
The following changes will be implemented through amendments to the UK regulatory technical standards known as RTS 1, 2 and 11.
- Post-trade transparency
- Exemptions from post-trade transparency for OTC trades. The FCA has confirmed adjustments to the types of over the counter (OTC) transactions that are exempt from post-trade transparency, including inter-fund transfers, give-ups and give-ins, inter-affiliate trades and certain transactions with central counterparties. Following industry feedback and engagement, the FCA has made various technical changes to the scope of these exemptions, which should help to ensure that they better capture the types of activities that the FCA intended to exempt.
- Deferred publication for on venue trades. The FCA is not currently taking forward proposed temporary changes to deferrals for on venue transactions, pending the passing into law of the FSMB, which will enable the FCA to make changes to the UK version of the Markets in Financial Instruments Regulation (MIFIR). The FCA has also said that it will be consulting on a new proposal to allow deferred publication of transactions in exchange traded funds (ETF) priced at net asset value (NAV).
- Streamlining post-trade flags and updating fields. The FCA is implementing proposals to streamline Articles 2, 6 and 13 of RTS 1, to expand the definition of benchmark trades to include transactions at the market closing prices and to introduce a new “CLSE” flag to identify them. The FCA will also delete various flags, amalgamate the negotiated trade waiver flags and amend the “Price” and “Currency” fields. However, the FCA has decided against amalgamating benchmark, portfolio and contingent flags under the “TNCP” flag and will be introducing a new “PORT” flag for portfolio transactions. The FCA will also introduce a new “NTLS” flag for negotiated transactions that are large in scale.
- Designated reporter (DR) regime. After considerable industry debate, the FCA is proceeding to introduce the new opt-in DR regime at entity level, replacing the current regime which links systematic internaliser (SI) status with responsibility for reporting. The FCA considers that this regime will be beneficial for the greatest number of market participants, particularly on the buy-side, who will not have to check on an asset-by-asset basis whether their counterparty is responsible for reporting. The FCA is intending to publish further details on the notification process to become a DR separately.
- Pre-trade transparency waivers
- Reference price waiver. The FCA is proceeding with its proposal to allow reference prices to be sourced from the most relevant market in terms of liquidity (MRMTL), including non-UK trading venues where prices are reliable, transparent and consistent with best execution.
- Order management facility (OMF) waiver. The FCA is proceeding with its proposal to allow trading venues to set their own minimum sizes for reserve and stop orders in financial instruments traded on their systems in relation to the OMF waiver.
- Tick size regime
- The FCA will allow trading venues to adopt the minimum tick size of a non-UK primary market for an instrument where that tick size is smaller than the one determined based on calculations from UK venues as required under the current rules.
The FCA comments that these changes are intended to improve the content of post-trade transparency data by enabling market participants to better identify transactions that contribute to the price discovery process, simplify the reporting of OTC transactions for all classes of financial instruments, and to improve choice, competition, and the quality of execution on trading venues by removing restrictions on using data from overseas venues.
What is still on the FCA’s agenda?
- Operational resilience for trading venues
- The FCA will form a sub-committee of its Secondary Markets Advisory Committee (S-MAC) to work on good practices on market outages. The FCA has also said that it will consider providing formal confirmation to industry guidance on trading venue outages and industry good practice for resilience in the event of market interruptions.
- Review of Retail Service Provider (RSP) model
- The FCA is still considering whether to launch a formal review into whether the RSP model is fit for purpose – the main focus being on whether the inability of retail order flow to interact with other, non-RSP liquidity meets best execution requirements and allows for sufficient competition.
- Separately the FCA reminds all firms using the RSP system that they should be making this clear to clients in their order handling or best execution policies and that they need contingency arrangements if the system is not available.