UK regulator follows the European Securities and Markets Authority in clarifying the scope of the trading venue perimeter.

By Nicola Higgs and Sidhartha Lal

On 5 July 2023, the FCA published its Policy Statement (PS23/11) containing final guidance on the trading venue perimeter, following its September 2022 consultation on the same matter.

The new guidance will sit in the Perimeter Guidance manual (PERG) of the FCA Handbook, using a Q&A format, and is intended to clarify the regulator’s interpretation of the different elements within the definition of a multilateral system and how it applies to specific types of arrangements in financial markets. The Policy Statement represents the conclusion of the FCA’s assessment of the trading venue perimeter. ESMA conducted an analogous review and published its Final Report in February 2023.

FCA Guidance

As ESMA did in its Final Report, the FCA maintains that the regulatory perimeter is not changing but rather that the new guidance merely clarifies the interpretation of existing legislation (although, somewhat paradoxically, the new guidance “comes into force” from 9 October 2023).

The elements required to amount to a multilateral system remain the same as described in the consultation. The relevant system must have:

  • characteristics of a system or facility;
  • multiple third-party buying and selling trading interests;
  • trading interests that are able to interact in the system; and
  • financial instruments.

With regards to (ii), the FCA maintains that any two persons negotiating within a system between themselves would constitute a multilateral system. Accordingly, the main question is whether the system, at the point of entry, enables one person to “interact potentially” with multiple others (other than the operator).

With regards to (iii), the FCA further maintains that the definition of multilateral system does not require the conclusion of a legally binding contract as a condition, but simply that trading interests can interact in the system. Crucially, interaction between trading interests can arise purely because a system “allows users to respond within the system to other users’ trading interests”. Therefore, while the FCA is maintaining that the regulatory perimeter has not changed, this position alone represents a significant shift from the market’s previous interpretation.

Market participants might be disappointed to discover that the guidance does not clarify the distinction between the investment service of reception and transmission of orders, and the investment service of operating a trading venue.

Specific Considerations

While the FCA does explicitly exclude systems that arrange transactions which are ultimately concluded on a UK regulated venue, this situation does of course not apply to trades concluded over-the-counter (OTC). Furthermore, and specifically in relation to Forex (FX) platforms that allow clients to interact with the trading interests of liquidity providers, the FCA states that such systems must adapt their service in order to remain outside the trading venue perimeter.

Moreover, while the regulator has declined to explicitly exclude all primary market activity in the guidance, the FCA does recognise the distinction between primary and secondary market activity in the context of the trading venue perimeter. Namely, the regulator concedes that in many cases a trading interest in financial instruments may not exist prior to the issue of the financial instrument (and therefore, would not meet the definition of a multilateral system). The FCA has similarly declined to explicitly exclude all securities financing transactions (SFTs) in the guidance, and the regulator appears to have overlooked the “one-sided” element of many such transactions. Accordingly, while a system in which multiple third-party buying and selling trading interests in SFTs relating to financial instruments are able to interact can amount to a trading venue, it remains logical that one-sided SFT platforms cannot have said interaction.

Finally, the FCA notes that any restrictions on the system’s usage and practical effect may impact its multilateral status, but the regulator does not explicitly reference encryption as a particular restriction. However, the fact that an operator cannot see users’ communications does not mean the system is not multilateral.

Next Steps

The guidance will come into force from 9 October 2023. Ahead of this date, firms should satisfy themselves that they hold the correct regulatory permissions. If firms decide that they wish to adjust their regulatory permissions, the FCA is encouraging them to engage with their relevant supervisors at an early stage, and is stating that it will work with firms on a case-by-case basis to ensure an orderly transition.