Market Structure Update – What's going on? 5 August 2025 edition
05 August 2025
Welcome to the latest edition of the Ashurst Market Structure Update.
The FCA statement Market Watch was not a good way to start the summer holiday, it puts the industry on notice that transaction reporting remediation work is on borrowed time (followed up shortly by the FCA's second MiFID transaction reporting fine). Less abrasively, the FCA's reach on the tick size regime finds the regime is working well (more or less) – readers are invited to give their views good and bad to the FCA on this. There's a DORA update, on yes, risk registers (nothing too painful fortunately). UK Central Counterparties have been given a large amount of summer reading by the Bank of England – in particular, on operational resilience. Finally, if you've got a spare moment there's an interesting research paper on whether large language models can trade – answer, apparently yes…(but it’s a bit more complex than that).
As usual, we'd love to hear from you so please let us know if you have any thoughts on these topics.
This edition will cover the following updates:
Systematic Internalisers & Trading Venues
1. ESMA’s Preparations for MiFIR Single Volume Cap
2. FCA publishes research on the performance of the UK Tick Size Regime in 2024
3. Post-trade risk reduction service providers notified to ESMA for the purpose of the exemption from the clearing obligation under EMIR
Transaction / Trade Reporting
4. FCA Market Watch 82
Trading
5. The Financial Services and Markets Act 2023 (Mutual Recognition Agreement) (Switzerland) Regulations 2025
6. FCA Updates UK Derivatives Trading Obligation Direction
Operational Resilience
7. EBA Q&A Highlights: DORA Implementation and ICT Risk Management
8. Bank of England’s Fundamental Rules for Financial Market Infrastructures
Digital Markets
9. European Central Securities Depositories Association publishes paper on evolving Central Securities Depositories
10. OFSI publishes Cryptoassets Threat Assessment
Clearing
11. BoE Policy Statement on the Resilience of CCPs
12. Bank of England publishes consultation on key elements of the UK's future regulatory framework for Central Counterparties
13. Bank of England publishes draft supervisory statement on CCP margin
14. BoE and FCA publish statement on review of the MoU on FMI supervision
15. BoE publishes consultation paper and draft statement of policy on its approach to permissions and waivers
16. The OTC Derivatives Risk Mitigation and Central Counterparties (Equivalence) (Switzerland) Regulations 2025
17. BoE publishes draft statement of policy on supervisory processes and margin permissions
Things we saw of interest
18. Can Large Language Models Trade?
19. FMSB consults on statement of good practice on unauthorised trading frameworks
Systematic Internalisers & Trading Venues
1. ESMA’s Preparations for MiFIR Single Volume Cap
On 24 July 2025, ESMA published details on its preparations for the new single volume cap (SVC) mechanism under MiFIR. The SVC will replace the current double volume cap with a single cap applying to all EU trading venues with a threshold of 7%. The double volume was, of course, scrapped in the UK but the focus on the reference price and negotiated waiver continue. They have always been much more controversial/subject to regulatory tinkering than the simple large in scale waiver.
In the EU the SVC cap brings with it an organisational change that is interesting: the end of daily reporting of transparency data by trading venues and APAs will be stopped. Instead, the calculations (for the 7%) will be based on transaction reporting data collected under MiFIR.
The SVC is expected to come into effect in Q4 2025, subject to final legislative steps. The initial release of the calculation results is scheduled for 9 October 2025.
2. FCA publishes research on the performance of the UK Tick Size Regime in 2024
The FCA reviewed the UK tick size regime and found all is well but is admirably open to feedback on its conclusions.
The tick size regime sets the minimum price increment for stock trades. The regime was introduced with MiFID II and, (simplifying a bit), is intended to stop large tick sizes increases that can lead to trading instability. The other side of the debate is that tick sizes allow for price improvement and constraining them can reduce liquidity. For those that have a spare moment in their summer holidays Bayes Business School published an interesting piece of research on this.
The FCA’s analysis has found that the regime generally works as intended. Most stocks remain within the optimal range of 1.5 to 5 ticks per spread, which supports stable markets. Larger, more liquid stocks (especially in the FTSE 100) are more likely to be “tick constrained”, potentially limiting price improvement. In contrast, FTSE 250 stocks are less likely to be tick constrained and sometimes have spreads with more than five ticks.
Annual reclassifications based on liquidity help keep most stocks in the optimal tick range. When tick sizes are increased, spreads widen (raising trading costs), but order book depth improves and there are fewer rapid quote cancellations. The FCA found no significant drop in trading volumes after tick size changes, but did observe fewer, but larger orders. The conclusion would then be that tick size changes has led to more liquidity in single slices, but less smaller orders? That's interesting as not everyone has seen the same patterns.
The FCA concludes that the current tick size regime is broadly effective, with most stocks appropriately classified. The FCA is not planning immediate changes but welcomes feedback on the framework’s effectiveness.
For the tick size enthusiasts, we note that SEC last year also introduced changes to the US tick size regime expanding the ticks on some stocks. The FCA's research might also be read alongside the earlier French regulators analysis on the same subject back in 2018 (which broadly gave the regime a thumbs up also).
3. Post-trade risk reduction service providers notified to ESMA for the purpose of the exemption from the clearing obligation under EMIR
ESMA has recently published a list of post-trade risk reduction (PTRR) service providers that were notified to ESMA by competent authorities - the brave and bold two providers are TriOptima AB and Quantile BV.
Now if only EU authorities could provide a definition of PTRR (under the delegated MiFID power).
Transaction / Trade Reporting
4. FCA Market Watch 82
This was a Market Watch to sit up and take note of. It may almost have been printed with a watermark saying "Industry Warning".
On 23 July 2025, the FCA published its supervisory findings on UK MiFID transaction reporting in its Market Watch 82. The focus was on remedial timelines, back reporting and breach notifications. We think it is up there in the FCA's top five Market Watches as a warning, reading like an extended complaint letter on industries efforts regarding transaction reporting patch-ups.
Remedial Timelines: There is a lot of remediation work currently on transaction reporting (in large measure because it is complex). The FCA is observing slow planning, missed deadlines, unjustified extension requests and lack of progress on this work. Common causes of delay include fragmented internal processes, insufficient resources, failure to address root causes, a reactive compliance culture and weak governance structures – ouch;
Back Reporting: Back reporting involves firms correcting past inaccuracies in transaction reports, with delays undermining data reliability and regulatory oversight. The FCA provides several case studies which highlight common reasons for delayed back reporting, including ineffective compliance oversight, poor data access and infrastructure and underestimating the impact on the business-as-usual processes; and
Breach Notifications: The FCA received 241 breach notifications in Q1 2025 and summarised its observations and best practices following its review. Examples of good practice include providing clear, complete and timely notifications, identification of the root cause and any weaknesses in systems or controls.
Our takeaway, if you have transaction reporting problems you're not alone. We suggest upon a breach identification, a project plan is drawn up and implemented with regular weekly checkpoints. To an extent, transaction reporting investigations, remediation and enforcement in relation to MiFID II was inevitable given complex and demands. This Market Watch signals – alongside the two transaction reporting fines – a shift in tone and approach on the issue (although the FCA is simultaneously consulting on many points, so we think may be unlikely to throw the book at firms on all issues – i.e. obligations that look like they are on their way out are unlikely to get the same focus in terms of historic issues).
Trading
5. The Financial Services and Markets Act 2023 (Mutual Recognition Agreement) (Switzerland) Regulations 2025
HM Treasury has recently published a draft of The Financial Services and Markets Act 2023 (Mutual Recognition Agreement) (Switzerland) Regulations 2025 and relevant explanatory memorandum. The instrument implements the UK's commitments under the Berne Financial Services Agreement, referred to above.
It enables eligible Swiss investment firms to provide cross-border investment services to certain UK clients, including sophisticated high net worth clients, without requiring UK authorisation. This is one of the main points, i.e. it allows Swiss firms to deal with a retail segment (albeit a narrow one) that would have been difficult to access under the UK's overseas persons exemption. It is deliberately narrow and far from full access to UK retail markets – one reason for this is the absence of certain protections under Swiss law for retail clients (Switzerland and the UK retail regulation are by no means the "same").
6. FCA Updates UK Derivatives Trading Obligation Direction
Not much to see here. The FCA has issued an updated direction modifying the UK’s Derivatives Trading Obligation (DTO). This direction confirms the old direction continues to be the position i.e. derivatives in scope of UK and EU DTO can be executed by UK firms on EU venues, or ROIE's or any venue that can rely upon the overseas person exclusion, subject to the same conditions as before. You would hope that that with the acrimony of the Brexit negotiations behind us and a dramatically different global situation, the EU might recognise UK venues (or indeed provide for provide for some equivalence), but apparently not.
Operational Resilience
7. EBA Q&A Highlights: DORA Implementation and ICT Risk Management
The EBA has issued several Q&As (see here, here and here) on the implementation of the Digital Operational Resilience Act (DORA), focusing on ICT risk management and the scope of regulatory requirements for financial entities. There ICT service provider identification and risk registers occupied a disproportionate amount of time and resource during DORA implementation, so…
The good news first. The EBA has clarified that EU parent banks are only required to maintain registers of ICT service providers for subsidiaries and branches within the EU that fall under DORA’s scope. Non-EU subsidiaries are excluded, reducing administrative complexity and avoiding overlap with non-EU regulatory regimes. Any other answer would have been, frankly, unworkable.
The less good news (but predictable/predicted), the EBA covers the inclusion of non-financial group entities in the register of information. While the primary focus is on financial entities and intra-group ICT service providers, non-financial entities that provide ICT services or have entered into ICT service contracts on behalf of financial entities must also be included in the register.
There will definitely be more to come on the DORA ICT Risk Register…
8. Bank of England’s Fundamental Rules for Financial Market Infrastructures
On 18 July 2025, the BoE published its final policy on the Fundamental Rules for Financial Market Infrastructures (FMIs). The policy establishes high-level, outcome-focused rules for UK Central Counterparties (CCPs), Central Securities Depositories (CSDs), Recognised Payment System Operators, and Specified Service Providers. The principles are all "in principle" reasonable and not many have taken serious issue with any of them.
On the more granular details, the BoE had a number of responses to this initial consultation – and by and large they have taken the key points into account. In particular, clarifying that FMIs are not expected to take actions that would undermine their own resilience when managing systemic risks; emphasising the importance of transparency with participants to support risk management; and refining the application of rules to group activities. The Bank has also updated the definition of ‘group’ to align with the Companies Act 2006 and provided additional guidance to support implementation. FMIs will need to incorporate these policies and procedures.
Interestingly, while the policy currently applies to UK-based FMIs, the Bank may extend its scope to certain overseas entities in the future. This would have to be done in a careful way to ensure conflict of law are navigated around.
The rules will take effect from 18 July 2026, following an extended 12-month implementation period in response to industry feedback.
Digital Markets
9. European Central Securities Depositories Association publishes paper on evolving Central Securities Depositories
The European Central Securities Depositories Association has published a new publication highlighting the evolving role of CSDs as pillars of innovation within the EU’s capital markets. Key takeaway is that CSD's are adapting to technology (DLT/AI/Cloud). The paper notes that bonds are currently amongst the leading asset class in digitalisation currently and gives some interesting case studies of where CSD's have implemented DLT. What CSD's will look like and how they will change in the future is one of the most interesting questions on the digital horizon.
10. OFSI publishes Cryptoassets Threat Assessment
The Office of Financial Sanctions Implementation (OFSI) has published a comprehensive threat assessment focused on the UK cryptoasset sector, covering developments from January 2022 to May 2025. The assessment highlights that UK cryptoasset firms have almost certainly under-reported suspected breaches of financial sanctions since August 2022, with most non-compliance likely resulting from inadvertent exposures—often due to delays in identifying designated persons (DPs) and indirect links through complex transaction chains.
OFSI notes a high likelihood of both direct and indirect exposure by UK firms to the Russian exchange Garantex, which was designated in 2023, and its successor Grinex. There is also a realistic possibility that UK firms are facilitating transfers to Iranian cryptoasset firms with suspected links to DPs. Additionally, the sector faces a significant and persistent threat from North Korean cyber actors, who are targeting UK firms for both theft and sophisticated money laundering operations.
Clearing
11. Bank of England Policy Statement on the Resilience of CCPs
On 18 July 2025, the BoE published a draft policy statement outlining its approach to “tiering” non-UK CCPs under the UK’s post-Brexit regulatory framework. The BoE will assess non-UK CCPs that wish to provide clearing services in the UK to determine whether they should be classified as “Tier 1” or “Tier 2”.
Tier 2 CCPs are considered to pose greater potential risk to UK financial stability and will therefore be subject to more direct supervision and additional requirements by the BoE. The assessment will consider factors such as the CCP’s size, the nature of its UK clearing activities, and its interoperability with UK financial markets.
Importantly, the statement also sets out the process for non-UK CCPs to engage with the Bank and the criteria that will be used in the tiering assessment.
12. Bank of England publishes consultation on key elements of the UK's future regulatory framework for Central Counterparties
On 18 July 2025, the BoE published a consultation paper on CCP resilience as part of a new regulatory framework for UK CCPs. It's a lengthy read, and a lot of thought has gone into it (with canvassing of key parties / and trade associations). Those that it is relevant to will need to read the entire document. Broadly, it can be seen as part of the general regulatory move to strengthening operational resilience across all parts of the financial market. There are some specifics which have been trailed in the market and has wider implications for those who access CCPs. There are two headline grabbers and a series of significant areas touched on.
The first is a proposal to include a second tranche of CCP capital (known as "skin in the game" or SITG) in the default waterfall. This tranche would be used within the mutualised default fund pro rata with the default fund contributions of non-defaulting members in a default loss scenario.
The second is porting. Porting is one of the key aspects of the CCP architecture. The idea that an assets/fund can be transferred to a new clearing bank or broker upon default of a current one. A fundamental part of the clearing framework. Still, the difficulties of porting in practice have been discussed by industry for years. The challenge of moving accounts in a default scenario are both legal and economic. Regulators have been interested in improving the situation for years. Here the BoE has suggested some changes that make it more likely that accounts will be transferred, such as a requirement to incorporate porting in CCP testing of default management procedures. Another key suggestion is for a pre-agreed, backup clearing member that has been designated by all of the clients in the omnibus account. This policy idea that many have been asking for although it's not always as easy to implement in practice.
The BoE also covers other areas that will be of interest margin transparency and liquidity risk controls, and supervisory processes and some of these are to align with international standards.
The consultation is open until 18 November 2025.
13. Bank of England publishes draft supervisory statement on CCP margin
On 8 July 2025, the BoE published a supervisory statement providing guidance to UK CCPs on margin requirements. The statement sets out the BoE's expectations for CCPs in managing initial margin procyclicality, applying portfolio margining, providing margin simulation tools, and continuously monitoring margin levels.
The statement introduces a framework that requires CCPs to balance the need for adequate margin coverage, the cost of margin to market participants, and the reactivity of margin models to changing market conditions. This is intended to prevent sudden, destabilising increases in margin requirements during periods of market stress, which can exacerbate liquidity strains and threaten financial stability.
CCPs are now required to implement at least one anti-procyclicality margin measure, such as margin buffers or the use of stressed historical data, and to document their tolerance for margin procyclicality. They must regularly assess and report on the performance of their margin models using quantitative metrics and take proportionate action if their tolerance thresholds are breached.
The statement also clarifies the rules for portfolio margining, including strict limits on margin reductions (generally capped at 80% unless there is no residual risk) and detailed criteria for classifying financial instruments and products.
Additionally, CCPs must provide margin simulation tools to clearing members, clients, and prospective participants, enabling them to estimate margin requirements under various scenarios.
Continuous monitoring and, if necessary, revisions of margin levels are mandated to ensure they remain appropriate as market conditions evolve. These changes are designed to enhance the resilience, transparency, and prudence of CCP margin practices.
14. BoE and FCA publish statement on review of the MoU on FMI supervision
On 21 July 2025, the BoE and FCA published a joint statement on the annual review of their memorandum of understanding (MoU) on the supervision of markets and FMIs.
The BoE and the FCA have agreed, after consulting with CCPs, recognised investment exchanges and recognised CSDs, that the co-operation arrangements under the MoU continue to be effective.
The authorities BoE and FCA acknowledge that through efficient coordination, they can improve the effectiveness of their supervision. They will seek to address any specific areas identified by firms.
15. BoE publishes consultation paper and draft statement of policy on its approach to permissions and waivers
On 18 July 2025, the BoE published a consultation paper along with a draft statement of policy outlining how it plans to exercise its newly established rule permissions power under section 138BA of the Financial Services and Markets Act 2000.
This power, introduced through the Financial Services and Markets Act 2023, enables the BoE to grant exemptions or modifications to its rules in certain circumstances. Specifically, it may allow a recognised UK CCP, CSD, or a critical third party designated by HM Treasury to deviate from its rules - either upon request or with their consent - if the BoE is satisfied that certain eligibility conditions are met.
Feedback on the draft statement, consultation paper, and associated application form by 18 November 2025.
16. The OTC Derivatives Risk Mitigation and Central Counterparties (Equivalence) (Switzerland) Regulations 2025
The OTC Derivatives Risk Mitigation and Central Counterparties (Equivalence) (Switzerland) Regulations 2025 implement the UK’s commitments under the UK-Switzerland Agreement on Mutual Recognition in Financial Services, commonly known as the Berne Financial Services Agreement. This statutory instrument determines that Switzerland’s regulatory and supervisory regimes for OTC derivatives (OTCD) risk mitigation and CCPs are equivalent to those of the UK.
For UK firms, the OTCD equivalence determination allows reliance on Swiss risk mitigation standards when transacting with Swiss counterparties, thereby removing duplicative regulatory requirements and reducing administrative burdens. Notably, UK firms must continue to adhere to UK standards for initial margin models and variation margin for certain FX derivatives, reflecting specific divergences between the UK and Swiss regimes.
On the CCP front, the equivalence determination enables Swiss CCPs to offer clearing services to UK clearing members and trading venues without the need for UK authorisation, provided they are recognised by the BoE. This facilitates cross-border access to clearing services and supports market stability by broadening the range of available CCPs.
The instrument forms part of the UK’s broader programme to tailor its financial services regulatory framework post-Brexit, replacing inherited EU equivalence regimes with outcomes-focused, jurisdiction-specific recognition. The changes are expected to have minimal direct cost impact on UK businesses, while enhancing legal clarity and market access for professional market participants engaging in UK-Swiss financial transactions.
17. BoE publishes draft statement of policy on supervisory processes and margin permissions
On 18 July 2025, the BoE published a Draft Statement of Policy setting out a comprehensive framework governing how it will supervise CCPs in four key areas: (i) notifications of model and parameter changes, (ii) permissions to make material model changes, (iii) applications for recognition orders and variations of existing recognition orders, and (iv) margin-related permissions.
Recognised UK CCPs, systemic overseas CCPs and firms seeking UK recognition are urged to engage early with supervisors, with the Bank highlighting statutory “clock-stops” of 10 working days to assess model-change materiality, 60 working days for material-change permissions, 80 working days for material variations of recognition orders and 120 working days for new recognition applications.
Things we saw of interest
18. Can Large Language Models Trade?
On 16 April 2025, Alejandro Lopez-Lira published a new research paper assessing a stock market where large language models (LLMs) act as trading agents with different strategies, such as value investing, momentum trading, and market making. The framework includes an order book, supports market and limit orders, and allows for dividends and equilibrium clearing. LLM agents are programmed using natural language prompts that define their trading style and objectives.
He found that LLMs can “effectively function as sophisticated trading agents through careful prompt engineering and systematic validation”, but can also exhibit “very weird, correlated trading behaviour” that could amplify market movements and contribute to the formation of asset bubbles
The framework enables analysis of agent behaviour and market outcomes, making it possible to study financial theories and market phenomena without human participants. It also allows for systematic testing of how changes in market conditions or agent composition affect trading and stability. The research highlights potential risks, such as the possibility of correlated behaviour among LLM agents if they are based on similar models and prompts, which could amplify market instability. Unlike human traders, LLMs do not inherently seek to maximize profit; instead, they prioritize following their instructions, even if it leads to losses. The market dynamics generated by these agents closely resemble real financial markets, with features like price discovery, bubbles, and liquidity provision.
This platform is intended for use by financial practitioners, regulators, and researchers to explore the impact of AI-driven trading on market structure, stability, and regulation.
It's an interesting paper and people will disagree on some of the conclusions and analysis. The suggestion that an LLM can function as sophisticated trading agent is noteworthy. We have seen a range of responses to this type of suggestion, including reference to how current markets are based on algorithmic trading in any event and that the paper does not model long-term investor strategy and might struggle to do so given, or would struggle with new or 'black swan' events.
19. FMSB consults on statement of good practice on unauthorised trading frameworks
On 23 July 2025, the Financial Markets Standards Board (FMSB) released a transparency draft of a Statement of Good Practice (SoGP) on unauthorised trading frameworks for consultation. For some readers this might immediately spark memories of ESMA's and the FCA's perimeter statements in relation to the trading venue's; the relationship between technology and regulation continues to give rise to tension in this space and there have been no "quick" transformations following those papers.
Back to the FMSB, this the paper highlights that the financial services sector has developed and put in place risk management frameworks to prevent unauthorised trading. However, there remains a risk that new or existing vulnerabilities could lead to unauthorised trading occurring or going unnoticed.
The FMSB has divided its good practice recommendations into three key areas:
Governance: This includes establishing and maintaining a clear framework, defining an authorisation perimeter, ensuring accountability and governance for unauthorised trading controls, and documenting roles and responsibilities within the framework.
Controls and Monitoring: Here, the FMSB stresses the need for pre-trade and point-of-trade controls to prevent unauthorised trading, as well as post-trade controls to detect potential issues. This section also covers indicators and metrics for unauthorised trading, the regular testing and review of controls, and assessments of possible unauthorised trading scenarios.
Intervention and Reporting: The FMSB advises firms to have clear escalation channels and procedures in place for responding to potential or actual unauthorised trading incidents.
Much seems like good sense, some of the points may be unnecessary but the FMSB recommends that firms apply the SoGP based on the nature, scale, and complexity of their trading activities and the systems and controls they have (or intend to implement) to manage these risks – which hopefully deals with much of the later bucket.
The consultation period will close on 15 September 2025.
