Proposals signal that the UK government is willing to diverge significantly from EU rules.
On 1 July 2021, HM Treasury published a consultation on its Wholesale Markets Review. The Review was established to determine how the UK’s approach to regulating secondary markets needs to adapt post-Brexit, and to ensure that the framework is flexible enough to adapt to future challenges and opportunities. HM Treasury is also consulting separately on changes to the UK prospectus regime.
While the government and the regulators have already made or consulted on a number of changes to the UK regulatory framework post-Brexit, these changes have targeted specific areas and have not signalled fundamental change. For example, the FCA’s recent consultation on changes to MiFID proposed amendments that are similar to those already agreed in the EU. However, the Review represents the UK’s most significant and far-reaching proposals to date, indicating that the UK government is not afraid to diverge substantially from EU standards where it feels this is best for UK markets. Indeed, no longer does there seem to be a concern about maintaining equivalence with EU standards.
The consultation is extremely broad-ranging and covers a large number of technical areas. While there are concrete proposals on some aspects of the regime, elsewhere, the government is looking for feedback before determining a policy position. Other areas, such as the transaction reporting regime, are earmarked for consideration and consultation by the FCA. The government’s focus is on clarification, simplification, and the reduction of regulatory burden and costs.
Some of the most significant proposals include:
- Equity markets: The government believes that there is scope to simplify the MiFID II transparency regime by removing restrictions that have not aided price formation. Specifically, the government’s proposals include:
- Removing the share trading obligation, allowing firms to trade shares on any trading venue in the UK or overseas with any counterparty on an OTC basis, as long as best execution is upheld
- Repealing the double volume cap (DVC), as it considers that the DVC is not an appropriate tool to protect price formation in UK markets. However, the FCA would retain its ability to limit dark trading if there is evidence that the volume of trading is undermining the efficiency of the price formation process
- Considering recalibrating the tick size regime for overseas shares so that trading venues can follow the tick sizes applicable in the relevant primary market of a share, if that share does not have its primary market in the UK. The government is also considering delegating the setting of tick sizes to trading venues
- Enabling reference price systems to match orders at the mid-point within the current bid and offer of any UK or non-UK trading venue that offers the best bid or offer
- Fixed income and derivatives markets: The government intends to recalibrate the transparency regime for fixed income and derivatives markets to ensure that the right instruments are subject to transparency requirements. This recalibration would include:
- Formally realigning the counterparties in scope of the derivatives trading obligation (DTO) with those in scope of the clearing obligation under EMIR, and granting the FCA a permanent power to modify or suspend the application of the DTO
- Removing the concept of “traded on a trading venue” (ToTV) completely and instead requiring pre- and post-trade reporting for OTC derivatives when the transaction is centrally cleared
- Considering replacing liquidity assessments with a qualitative and quantitative assessment to determine the liquid classes of financial instruments, and simplifying the deferrals regime
- Commodities markets: The government plans to fundamentally review the commodities regime to ensure that market activity is not unnecessarily restricted, and plans to go further than the EU reforms in this area. The proposals include:
- Removing derivatives that are not based on physical commodities from the scope of the regime, as well as other types of financial instruments that refer to commodities as a pricing element but are securities in their legal form
- Stopping the automatic inclusion of economically equivalent OTC commodity derivatives in the regime
- Revoking the requirement for position limits to be applied to all exchange traded contracts, and transferring the setting of position controls from the FCA to trading venues
- Reverting to a principles-based approach to the ancillary activities exemption, and abolishing the annual notification requirement for firms relying on this exemption
- Trading venues: The government wishes to clarify the regulatory perimeter and the conditions governing trading venues. The proposals include:
- Considering how best to clarify the definition of an MTF, and whether this should be done through legislation or guidance
- Considering whether the operating conditions for MTFs (that do not permit matched principal trading) and OTFs (that do not allow them to operate an SI within the same legal entity) should be changed, and whether OTFs should be allowed to execute transactions in packages involving derivatives and equities
- Considering whether a new venue or new market segment should be introduced for smaller SMEs, with reduced disclosure requirements to alleviate the perceived burden for smaller companies looking to list
- Systematic internalisers: The government is looking to simplify the regime, so that firms no longer feel the need to opt in simply because this is less costly than undertaking the quarterly calculations. The proposals include:
- Reverting to a qualitative definition, whereby an SI is determined by its market activity for a particular asset class and does not have to undergo complex calculations. This would be supported by more detailed guidance, developed over time by the FCA
- Reverting to the MiFID I approach and determining the status of an SI at an entity level
- Permitting SIs to execute client orders at the mid-point within the best bid and offer for trades below large in scale, provided the executed price is within the SI’s quoted prices and the execution is in a size not larger than the quoted size
- Market data: The government would like to understand the industry’s views on two potential options for a fixed income consolidated tape in the UK. The first option would involve changes to legislation to remove the perceived impediments to the emergence of a private sector tape. The second option would be public sector involvement in creating and running a tape.
While HM Treasury asks for responses to specific questions, it also sets out higher-level questions about longer-term priorities and asks which areas of the regime could be improved more generally. The proposals indicate that the government is serious about really considering what needs to change, and that it is not necessarily restrained by trying to maintain equivalence with the EU.
Consequently, firms and market participants are unlikely to find a better opportunity to feed into such a comprehensive review of the framework — now is the time to highlight which rules do not work well.
The Review is taking place alongside various other initiatives, as the government looks to reassess the UK’s approach to regulation post-Brexit. The Future Regulatory Framework review is considering how regulation in the UK can be made more “nimble” and “agile”, by delegating more power to the regulators and returning to a more principles-based approach to regulation. A recent report to the government also recommended that the UK move away from “highly prescriptive rules which are stifling business”.
The Review was published on the same day that HM Treasury published a paper entitled “A new chapter for financial services”, setting out the government’s vision for the future of financial services. While it does not contain any new policy proposals, this paper sets out key areas of focus and highlights the government’s general direction of travel. The Review consultation asks respondents to comment more generally on what else can be done within the wholesale markets framework to advance the technology, sustainable finance, and consumer protection objectives outlined in the paper.
The consultation will run until 24 September 2021. HM Treasury does not set out a specific timeline for change, but indicates that, to implement the changes informed by this consultation, the government intends to bring forward legislation “as soon as parliamentary time allows”. The FCA will undertake any further consultations about parts of the regime that fall within its rules and guidance from the second half of this year. It should be noted that the EU is due to publish a legislative proposal on its review of MiFID II by the end of the year. This proposal would need to be agreed and progressed through the EU legislative process, meaning the UK could well move ahead with its own changes without regard to how the regime will develop in Europe.