Changes to UK MiFID confirmed: FCA Policy Statement (PS23/4)

The FCA has published Policy Statement setting out changes to equity secondary markets (PS 23/4). The changes form part of the broader Wholesale Markets Review (please see our briefing here), which the FCA has been consulting on alongside the Government. It also follows a July 2022 consultation paper issued by the FCA (please see our briefing here). 

The FCA confirms that the changes will be delivered using the FCA's existing powers and are not subject to changes that are to be introduced to UK MiFID under the Financial Service and Markets Bill 2022-23 (see our briefing here).

The amendments cover: post-trade transparency reports; a new designated reporter status for OTC trades; waivers from pre-trade transparency; and the tick-size regime. The new rules are set out in the Technical Standards (Markets in Financial Instruments Transparency) Instrument 2023 (FCA 2023/19), which amends UK RTS 1, UK RTS 2 and UK RTS 11. The new post-trade transparency requirements will enter into force in April 2024. The changes to waivers from pre-trade transparency and to the tick size regime apply earlier.

For firms, the changes will require some amendments to reporting workflows, both in content and when trades are reported. The designated reporter framework proposed should be reviewed by all current systematic internalisers and all entities that trade report currently. Firms wishing to register as a designated reporter will need to submit a notification to the FCA.

Exemptions from post-trade transparency

In CP22/12, the FCA proposed several amendments including modifying the list of transactions exempted from post-trade transparency that are non-forming.

The FCA confirms it is proceeding with its proposed amendment to the current exemption concerning transactions executed by portfolio managers under article 13(b) of UK RTS 22 (transactions transferring the beneficial ownership of shares or other equity instruments from one collective investment undertaking to another managed by the same company) so that it would no longer apply to transactions executed by UCITS management companies and AIFMs. The amendment will ensure that the exemption applies to investment firms carrying out portfolio management and that are subject to MiFIR.

The FCA confirms that it is proceeding with its proposal to expand the exemption to give-ups and give-ins in the context of requests for market data (the FCA considered that they do not provide additional information to that provided by the reporting of the market leg of the transaction, which is concluded by the executing broker). The FCA has amended the definition of give-up transaction and give-in transaction in response to feedback.

The FCA confirms that it will proceed with introducing an exemption from post-trade transparency for inter-affiliate transactions, but that it will amend its proposed exemption by removing the reference to centralised booking models, in line with feedback received to ensure that the exemption is not restricted to specific risk management practices.

Deferrals for transactions under Article 13 when executed on venue

The FCA confirms that it is not proceeding with its proposal to introduce a deferral that would permit trading venues to postpone the publication of transactions within scope of Article 13 until prior to the opening of the next trading day. Article 13 of UK RTS 1 allows certain types of trades to be exempted from post-trade transparency. In the consultation, the FCA had argued that post-trade transparency should apply to trades executed OTC in the same way they apply to trades concluded on a trading venue. As the FCA did not have a mandate in UK MiFIR to align the transparency regime between on venue and OTC transactions, the FCA had proposed this as a temporary measure until when it had powers conferred onto it to address the matter fully.

Alignment between Article 13, Article 2 and Article 6 in UK RTS 1

The FCA is proceeding with its proposal to streamline Articles 2 and 6 by: deleting types of transactions that are already in Article 13, while adding a cross reference to that Article; and expanding the definition of a benchmark trade used in Articles 2 and 6 to trades priced at the closing market price. The FCA confirms that following the amendment to those articles, all transactions included in Article 2(5)(b) of UK RTS 22 will be included in the relevant articles of RTS 1. It will proceed with expanding the definition of benchmark trade to include transactions at the market closing prices and introduce a new flag “CLSE” to identify them.

Flags

The FCA confirms that it is proceeding with its proposal to delete SI-related flags “SIZE” and “ILQD” and “RPRI”, as well as its proposal to delete flags such as "ACTX" and "DUPL". The FCA confirms it will retain the separate flags “BENC” and “TNCP” (it had proposed using the TNCP flag to identify benchmark, portfolio and contingent trades). It confirms that it will introduce a new flag, “CLSE” for benchmark trades concluded at the closing price and will also introduce a new “PORT” flag for portfolio transactions under point b in Articles 2 and 6. The FCA confirms that it will proceed with aggregating the existing flags for negotiated transactions “NLIQ”, “OILQ” and “PRIC" into a single trade waiver flag “NETW". It is also proceeding with a new flag ("NTLS") to identify transactions that are equal or above the pre-trade large in scale threshold bilaterally negotiated off-book and reported to trading venue for acceptance.

Content of fields

The FCA confirms that it will maintain its proposals for both the “Price” and “Price currency” field and will introduce, as proposed, a new field “Price conditions” to be populated with pre-defined text "PNDG”. It notes possible divergence between requirements and standards in the UK and the EU and the impact on firms in terms of changing the reporting systems but believes these will be balanced by ongoing benefits in terms of better content of post-trade information.

Implementation timelines for changes to flag regime

The FCA has extended the implementation period for the requirements relating to post-trade transparency and the designated reporter regime to 12 months, up from 6 months as originally proposed. It considers that this will provide firms with sufficient time for them to make the necessary changes to their IT systems and internal processes.

Designated reporter regime

The FCA proposed to create a regime where firms would be able to opt in as designated reporters at an entity level by notifying it. Under the regime, firms would be able to register as designated reporters regardless of whether they are a systematic internaliser in any instrument. The regime would apply across all classes of financial instruments, equities and non-equities. Where they are trading with a non-designated reporter, it was proposed that designated reporter would be responsible for reporting all trades.

The FCA is proceeding with the proposed entity level designation for the designated reporter regime and believes that this is preferable to adopting an asset-class designation and to retaining the current SI based method of determination. To respond to concerns raised by some sell-side firms, it has amended proposed requirements to provide the option for designated reporters to bilaterally agree which party should fulfil the reporting obligation. Under the regime, the seller would always have the regulatory obligation to report, but this obligation may be discharged by entering into an agreement with the buyer whereby the buyer agrees to report on its behalf.

Waivers from pre trade transparency

The FCA is proceeding with its proposal to amend UK RTS 1 by changing the definition of the most relevant market in terms of liquidity (MRMTL) for the reference price waiver test to allow trading venues to derive the price from a non-UK venue, provided that the price is transparent, robust and offers the best execution result. The FCA had also proposed creating a separate definition of the MRMTL for the purposes of determining a tick size. The FCA also indicates it might look further into the methodology for calculating the MRTL and other possible amendments that could allow for a broader set of reference prices to be used (including in relation to the trading of shares traded in different currencies) once it has wider powers conferred onto it via the Financial Services and Markets Bill. For overseas prices, the FCA expects venues to have in place appropriate policies and procedures to satisfy the requirement that reference prices are widely published and regarded by market participants as reliable reference prices.

The order management facility (OMF) waiver

The FCA will proceed with its proposal to remove the current requirement that orders benefitting from the OMF waiver must meet a minimum size threshold and to delegate the decision to set a minimum size threshold for reserve and other orders to trading venues. Venues are expected by the FCA to have regard for the overarching requirement to maintain fair and orderly trading when setting the minimum size of orders held in an OMF operated by them.

Outages

In CP22/12, the FCA proposed introducing a series of expectations in relation to outages for trading venues and market participants. It confirms that it will form a subcommittee of its Secondary Markets Advisory Committee to work on good practices reflecting the views of all relevant stakeholders and may provide confirmation to industry guidance. In response to feedback received concerning establishing a consolidated tape to improve market resiliency during outages, the FCA confirms that it will be issuing a consultation in the near future as part of its general work of having a regime for a consolidated tape. It confirms that the regime will initially be for bonds, but could be adapted for equities.

RSP

In CP22/12, the FCA sought views on the workings of the UK market for retail orders and possible changes to the regulatory regime in relation to best execution. The consultation paper described the UK model for execution of retail orders based on Retail Service Providers and summarised the results of the FCA's 2018 Investment Platforms Markets Study. The FCA is still gathering feedback on best execution and the RSP system but reiterates a number of key messages: 

• firms should make clear to clients in their order handling policies or best execution policies that they use the RSP system;
• firms using the RSP system need contingency arrangements if the RSP system is not available at a time of market volatility; and
• firms using the RSP system need to carry out thorough assessments to confirm that the way in which they select venues under their execution policies, particularly where they rely on a small number of RSP market makers, delivers a consistently high quality of execution for their clients.