Market Structure Update – What's going on? 23 July 2025 edition

Welcome to the first edition of the Ashurst Market Structure Update, which covers key developments that took place in the market up to the 15th of July 2025.

Over the last few weeks, the FCA has confirmed the end date for the non-equity SI regime, and set out concerns about the equity market: is too much liquidity draining away from central limit order books? ESMA has been busy as usual, proposing what could (but probably won't) be a grand and ambitious framework for simplifying regulatory reporting frameworks (a great idea in principle). We have also seen the RTS around EMIR's active account requirement, which has taken a step back from some of the more disproportionate proposals – but the EU's march to clear EURO/Polish Zloty denominated IRS/STIRS on EU CCPS continues. There was an update on DORA sub-contracting - the market finally has clarity around how deep it has to peer into its ICT service providers subcontracting chains. Turning to the world of settlement, T+1 settlement cycle work is picking up and we've touched on what we are seeing in the market (FX as usual being an issue).

We also finish with some interesting papers we saw - in case anyone wants some light reading. We thought it interesting that the Chicago Federal Reserve have referenced EU DORA - be careful what you wish for! More eyebrow raising was the FCA's paper on ETFs and bonds - it doesn't look like they did much canvassing of the market on that. We're not sure about its conclusions at all!

As usual, we'd love to hear from you so let us have any thoughts on these topics.

This edition will cover the following updates:

Systematic Internalisers & Trading Venues

1. FCA publishes consultation on UK Market Transparency and Structural Reforms

2. FCA Policy Statement on the New Public Offers and Admissions to Trading Regime: Key Developments and Implications

Transaction / Trade Reporting

3. ESMA Call for Evidence on Streamlining Financial Transaction Reporting

Settlement

4. Final Compromise Text on Proposed Regulation to Shorten Settlement Cycle under CSDR

5. The EU T+1 Committee publishes High-Level Roadmap to T+1 Securities Settlement in the EU

Operational Resilience

6. EU adopts new standards for ICT subcontracting in the financial sector under DORA

Digital Markets

7. ESMA Report on the DLT Pilot Regime

8. BoE delivers speech on harnessing innovation to develop future financial markets

Clearing

9. HM Treasury: Updating the UK’s regulatory framework for central counterparties

10. EMIR 3: Final Regulatory Technical Standards on the Active Account Requirement

11. ESMA Consultation on Draft RTS for Clearing Fees and Associated Costs under EMIR

12. ESMA Briefing: Operationalisation of Resolution Cash Calls for CCPs

Things we saw of interest

13. US DORA?! Not quite yet. Technology Providers and Financial Stability: Overview of Risks and Regulatory Frameworks

14. Federal Reserve Bank of Chicago publish How Have Capital Levels of Futures Commission Merchants Changed Since the Global Financial Crisis?

15. Occasional Paper 68 publish ETF (Mis)Pricing and Inventory Management Analysis

Much of this was expected - in particular, the removal of the SI regime for non-equities. Taking a step back, it's still a significant moment – the end of the non-equity SI regime. If you were being charitable, you'd simply chalk this up to the trial and error of regulatory initiatives. There are a few low hanging fruit policy actions, such as the removal of restrictions on trading venues and the extension of the reference price waiver (see below). The interesting part of the paper relates to the FCA's concerns over the equity market. This covers worries over central limit order book liquidity draining to the OTC market and what the regulator is proposing to do about that.

Matched principal trading & SIs by venues

The FCA also proposes to remove two market structure restrictions that never made sense: the prohibition on an SI operating an Organised Trading Facility (OTF) in the same legal entity and the prohibition on matched principal trading by firms operating a Multilateral Trading Facility (MTF). Under MiFID II, MTF operators were barred from interposing themselves between buyers and sellers on their own venue, a restriction that led to unnecessary complexity and costs, as firms established separate legal entities to comply. There was never much basis for these measures (and they arguably acted as barriers to entry to the market).

Reference price waiver

Interestingly, the consultation addresses the reference price waiver for equity trading venues. The FCA proposes to allow trading venues to source reference prices from a broader set of venues, not just the primary market or the most relevant market in terms of liquidity. The FCA is also considering whether the reference price waiver should apply at the order level, rather than the protocol level, potentially allowing mid-price dark orders on lit order books and reducing liquidity fragmentation. This seems a good thing.

Equity markets

Beyond the immediate rule changes, the FCA is seeking industry views on the broader structure and transparency of UK equity markets. This is the most interesting part of the paper. The FCA highlights a marked shift away from central limit order books (CLOBs) towards bilateral trading, including off-venue and systematic internaliser activity. The FCA is concerned about the implications for price formation, the visibility of addressable liquidity, and the effectiveness of the current transparency regime. The discussion paper poses a series of open questions around whether reforms are needed to ensure price discovery and a level playing field, including potential changes to SI quoting obligations, trade flagging, and the scope of the SI regime for equities.

The FCA raises the following interesting questions (some with more easy answers than others):

• whether the current criteria for determining which instruments fall within the equity SI regime - such as shares, ETFs, depositary receipts, and certificates - are appropriate. The answer is probably not given most are illiquid;
• on SI quoting obligations, whether the existing rules on minimum quote size (currently set at 10% of standard market size, which is often much smaller than typical SI trades) and the conditions for price improvement (where SIs can offer better prices than their published quotes in "justified cases") are still effective in supporting meaningful price formation, or whether recalibration or clarification is needed to ensure SI quotes are genuinely useful to the market; and
• whether the SINT flag should be restricted to trades executed against published SI quotes or below standard market size, to avoid overstating SI contributions to price discovery, and whether additional or revised flags are necessary to distinguish between different types of bilateral trading and better identify addressable liquidity, particularly as more trading shifts away from central limit order books to bilateral and off-venue channels.

There also seems to be buried in the text a side swipe at exchanges with single market makers.

Timetable

The FCA will finalise the proposed changes to the SI regime for non-equities, matched principal trading, and the reference price waiver in Q4 2025. Feedback on the equity market structure discussion will inform a further consultation on equity transparency reforms, scheduled for 2026. The FCA’s approach is guided by its objectives to support market integrity, competition, and the UK’s position as a leading global financial centre.

2. FCA Policy Statement on the New Public Offers and Admissions to Trading Regime: Key Developments and Implications

The FCA has published its final rules implementing the new Public Offers and Admissions to Trading Regulations 2024 (POATRs), which will take effect in January 2026. There are a number of changes to the listing rules/prospectus requirements. From a market structure perspective, there will be a new regulated activity of operating a public offer platform (POP), aimed at facilitating off-market public offers, particularly for smaller and growth companies. POP operators will be subject to tailored due diligence and disclosure requirements, acting as gatekeepers to ensure investor protection and market integrity.

The new regime is expected to make UK capital markets more accessible and efficient, particularly for growth companies and retail investors, while maintaining disclosure and investor protection. Let's see how popular it is.

Transaction / Trade Reporting

3. ESMA Call for Evidence on Streamlining Financial Transaction Reporting

This is on our list as an initiative that could be bold and ambitious, but probably (if history is anything to go by) will not be.

What's going on?

On 23 June, the European Securities and Markets Authority (ESMA) launched a call for evidence aimed at simplifying and streamlining supervisory reporting requirements for financial transactions. This initiative is part of ESMA’s broader effort to enhance regulatory efficiency and reduce the compliance burden on market participants, while ensuring robust regulatory oversight is maintained.

The call for evidence specifically seeks feedback on how to address longstanding industry concerns regarding overlapping and duplicative reporting obligations under various EU regimes, most notably the European Market Infrastructure Regulation (EMIR) and the Markets in Financial Instruments Regulation (MiFIR). Market participants have highlighted the challenges posed by multiple, often unsynchronised, reporting channels and the operational complexity created by frequent regulatory changes.

What's on the table?

ESMA’s outlines two options for reform:

• Eliminating overlaps without altering current reporting channels: This approach would focus on clarifying and rationalising existing requirements to remove duplication, but would not fundamentally change the structure of reporting.
• Developing a unified reporting template based on the ‘report once’ principle: This more ambitious option would replace multiple reporting frameworks with a single, integrated template, allowing firms to submit data once to satisfy all relevant regulatory obligations.

Importantly, ESMA has clarified that, while this consultation is ongoing, it will not implement changes to existing reporting frameworks as envisaged under the MiFIR Review. Instead, ESMA has published final reports on transaction reporting (RTS 22), order book data (RTS 24), and financial instrument reference data, which summarise feedback from previous consultations but do not propose new technical standards at this stage.

Industry bodies such as ISDA, AFME, and FIA are actively engaging with these developments, having already produced a position paper addressing many of the issues raised by ESMA. ISDA is now considering how its recommendations can inform ESMA’s call for evidence.

What do we think?

The option to have a single unified reporting template has been an aspiration and call from many for years. It would be a herculean effort of engineering. Take the example of EMIR - wasn't Refit, EMIR 2.2 and now EMIR 3 meant to lead to simplification? However, intellectually, it is exactly what should happen.

Settlement

4. Final Compromise Text on Proposed Regulation to Shorten Settlement Cycle under CSDR

T+1 Settlement is nearly here. The final CSDR text has now been published and will apply from 11 October 2027.

What's going on?

The core change introduced by the Regulation is the shortening of the standard settlement cycle for transactions in transferable securities executed on EU trading venues from two business days after the trade date (T+2) to one business day (T+1). This brings the EU in line with a global trend towards shorter settlement cycles, already adopted or planned in several major jurisdictions.

The amendment does not stop central securities depositories (CSDs) from settling transactions on a same-day (T+0) basis where feasible.

Carve outs?

The T+1 requirement applies to transactions in transferable securities executed on trading venues. However, the Regulation provides for specific exemptions:

• Securities Financing Transactions (SFTs): Certain SFTs, such as securities lending, borrowing, buy-sell back, sell-buy back, and repurchase transactions, are exempt from the T+1 requirement, provided they are documented as single transactions composed of two linked operations.
• Other Exemptions: The T+1 requirement does not apply to privately negotiated transactions executed on a trading venue, bilateral transactions reported to a trading venue, or the initial recording of securities in book-entry form.

What is the market talking about?

We are seeing market participants check readiness amongst other things for corporate actions and transactions that do not fall within the exemption for SFTs. The EU landscape on settlement has always been more fragmented in terms of settlement practices - different cut-off times apply depending on instruction processing and CSD workflows. This didn't matter so much for T+2, but matters more for T+1.

FX transactions are, as normal, a site of concern and may in some instances give rise to increases in fail rate (in particular where there is a FX conversion window/need). In this case, conversion in general will be tricky.

We also note that if you are on a manual process, the deadline looks tight (some legacy systems are throwing up issues). And in any event trade affirmations need to be given quicker than they sometimes are.

5. The EU T+1 Committee publishes High-Level Roadmap to T+1 Securities Settlement in the EU

The High-Level Roadmap, published on 30 June 2025, is an industry-led initiative coordinated by the EU T+1 Industry Committee that shows just how much work is involved in the move to T+1 settlement. It's a must read for those involved, providing industry level recommendations for what needs to be done: standardising processes, updating trading venue rulebooks, compressing post-trade timelines, and improving settlement efficiency through enhanced straight-through processing, real-time instruction management, and harmonised cut-off times. 

The roadmap also addresses the impact on asset management, securities financing, FX, and corporate actions, with ongoing monitoring and flexibility to adapt to market-specific needs and external dependencies.

Operational Resilience

6.  EU adopts new standards for ICT subcontracting in the financial sector under DORA

On 7 July 2025, the European Commission adopted the Delegated Regulation (EU) 2025/532, introducing new subcontracting standards under the Digital Operational Resilience Act (DORA). This regulation will now come into effect this July.

DORA applies to all financial entities in the EU – including banks, insurers, investment firms, and their ICT service providers and subcontractors. See our previous briefing on DORA here.

DORA requirements include:

• Full chain visibility: Financial entities must identify and assess all ICT subcontractors involved in critical or important services, not just direct suppliers;
• Risk assessment and due diligence: Firms must evaluate the operational, financial, and security capabilities of ICT providers and their subcontractors before contracting, and conduct ongoing risk assessments as circumstances change;
• Contractual controls: Contracts must specify which ICT services can be subcontracted and under what conditions. Providers must monitor and report on subcontractors, while financial entities retain audit and information rights throughout the subcontracting chain;
• Location and concentration risks: Firms must assess where subcontractors process and store data and avoid over-reliance on a single provider or location;
• Material changes and termination rights: ICT providers must notify financial entities of significant changes to subcontracting. Financial entities can object, request changes, or terminate contracts if new risks arise or changes are made without approval; and
• Group consistency: Parent companies must ensure these requirements are applied consistently across all group entities.

What's going on currently?

The issue of sub-contracting is one of the most contentious in DORA; not helped by the fact that European authorities didn't seem to agree on how it should be approached. At least there is now some certainty as to what is expected. There is, however, a rule of reality about how much certain EU financial firms can ask for in terms of their overseas ICT service providers. We have seen very mixed responses from overseas ICT providers. More to come on this, as the dust settles.

Digital Markets

7.  ESMA Report on the DLT Pilot Regime

ESMA has published its first comprehensive review of the EU’s DLT Pilot Regime, established under Regulation (EU) 2022/858, which aims to foster innovation in market infrastructures through distributed ledger technology (DLT). The regime provides a controlled environment for market participants to test DLT-based trading and settlement models, offering time-limited and conditional exemptions from existing EU financial services legislation, including MiFID II, MiFIR, and CSDR. So far it hasn't worked.

What's the current market?

Uptake of the regime has been limited, with only three authorised DLT market infrastructures (MIs) as of May 2025: CSD Prague (DLT Settlement System), 21X AG (DLT Trading and Settlement System), and 360X AG (DLT Multilateral Trading Facility). Each represents a distinct approach: CSD Prague operates a permissioned, private DLT for SME and unlisted securities; 21X AG uses a public, permissionless blockchain (Polygon PoS) with permissioned access for tokenised securities; and 360X AG leverages Clearstream’s D7 infrastructure for DLT-based issuance and settlement, while trading remains off-chain.

Why hasn't the regime worked? 

The main reasons have been lack of access to central bank money (or a digital euro) and restrictive thresholds for eligibility (EUR 500 million for equities, EUR 1 billion for debt, and an aggregate EUR 6 billion cap). Maybe if ESMA eases these coupled with the up swing in digital issuance / tokenisation the market is seeing, there will be more interest in the coming year.

8.  BoE delivers speech on harnessing innovation to develop future financial markets

On 2 July 2025, Sasha Mills, Executive Director of Financial Market Infrastructure at the Bank of England (BoE), delivered a speech on driving innovation to shape future financial markets.

What were the key points?

• The BoE is taking a proactive role in overseeing the evolving financial system, reviewing regulations that may hinder new technologies, and encouraging both existing and new market participants.
• The BoE will soon consult on the UK’s systemic stablecoin framework, reflecting updates since its 2023 discussion paper. It is considering allowing some backing assets to be remunerated, responding to industry feedback.
• The potential use of stablecoins in wholesale markets and innovation via the Digital Securities Sandbox will be further explored later in 2025.
• Tokenised deposits are gaining attention, with the BoE working to integrate them safely into regulated banking and payment initiatives.
• The BoE plans to outline its approach for onboarding new entrants to the FMI landscape. 

What do we think?

A thoughtful speech and framework is being developed, but the proof is in the pudding. The Bank of England has historically been resistant to (or, at least, cautious about) digital securities. The "mini-revolution" in regulation that is about to sweep the crypto asset market may help change this perspective by giving the asset class a recognisable regulatory framework.

Clearing

9. HM Treasury: Updating the UK’s regulatory framework for central counterparties 

On 15 July, HM Treasury published a policy paper regarding updating the UK's regulatory framework for central counterparties. The UK government, with the Bank of England, is changing framework for central counterparties (CCPs). The reforms are designed to transfer primary regulatory responsibility for CCPs from EU-derived law (UK EMIR) to the Bank of England.

Key Legislative Changes

• Transfer of Rule-Making Powers: The Bank is now responsible for setting direct regulatory requirements through its own rulebook, which can be updated in response to market conditions.
• Updated Authorisation and Variation Procedures: The process for authorising new CCPs and approving variations to existing CCPs’ recognition orders has been streamlined.
• Model Review and Change in Control: The Bank will oversee all changes to CCPs’ risk models and parameters, with material changes requiring explicit permission. The criteria for materiality will be set out in a policy statement.
• Overseas CCP Regime and Systemic Importance Assessment: The new Overseas Recognition Regime (ORR) replaces the previous equivalence-based approach, allowing for more proportionate and timely market access decisions for overseas CCPs.
• Qualifying CCP (QCCP) Status: Two permanent routes for non-UK CCPs to obtain QCCP status are being introduced: (i) through designation under the new Overseas CCP Regime, and (ii) via a Bank-administered process for CCPs in non-designated jurisdictions. This is intended to provide certainty for market participants and support cross-border business.

10.  EMIR 3: Final Regulatory Technical Standards on the Active Account Requirement

On 19 June 2025, ESMA published its Final Report and draft Regulatory Technical Standards (RTS) specifying the conditions of the new Active Account Requirement (AAR) under EMIR 3. See our briefing on the proposals here. 

These rules have been a long time in the making and are part of the EU's attempt to move trade volume away from UK CCPs to EU CCPs (in Euro denominated & Polish zloty IRS/STIRS). There is a few easing of disproportionate measures but still some uncertainty - mainly around how stress tests will be run by clearing entities.

What's changed?

A significant focus of the revisions is the simplification of operational conditions that in-scope entities must meet to demonstrate that their EU central counterparty (CCP) accounts are permanently functional and capable of processing large volumes of in-scope transactions at short notice. ESMA responded to market feedback that some of the original requirements were redundant, given the existing CCP onboarding processes. 

Under the former draft stress scenario, 85% of a counterparty's total global clearing activity would move onshore within five business days for OTC derivatives or two business days for listed derivatives. This has now been dropped, with the new scenario providing a threefold increase over a month stress model with annual testing. This is a better outcome than the draft, but still leaves a lot of open questions about how stress testing will be performed in practice. We see CCPs simulated environments for them to carry out the stress tests.

The requirement for firms to appoint a dedicated staff member to monitor clearing arrangements has been replaced with a more flexible obligation to ensure "necessary human resources" are in place. Similarly, the previous obligation to establish cash and collateral accounts with "sufficient financial resources" has been replaced by a requirement that CCP contractual arrangements include provisions for such accounts, which is standard practice. 

The requirement for CCP certification of operational clearing capacity remains, but ESMA has clarified that this can be provided electronically and made available to all relevant counterparties at once, shifting some practical responsibility to the CCPs themselves, though the legal obligation remains with the in-scope entity. Additionally, the frequency of account stress testing has been reduced to an annual basis.

Adjustments to the Representativeness Requirement

The technical standards maintain the broad categories of transactions in scope for the AAR, namely OTC euro-denominated interest rate derivatives, OTC Polish zloty-denominated interest rate derivatives, and euro-denominated short-term interest rate derivatives. However, ESMA has made a minor reduction in scope by removing euro-denominated short-term interest rate options and extending the longest maturity range for euro-denominated short-term interest rate derivatives from 12-18 months to 12-24 months. The sub-categories for other classes remain unchanged.

Streamlining of Reporting Requirements

A major area of revision is the streamlining of AAR reporting obligations. The number of reporting fields has been significantly reduced to align more closely with existing EU EMIR reporting requirements, thereby reducing duplication and the compliance burden. For example, fields relating to posted margin and whether transactions are cleared have been removed. The reporting of compliance with operational requirements now only requires a six-monthly statement of compliance, with supporting evidence to be provided upon request.

For the representativeness requirement, the obligation to report gross and net notional amounts of cleared transactions has been replaced with a requirement to report only the number of cleared transactions, and the need to report Unique Trade Identifiers has been removed. Reports are to be submitted by the last day of January and July each year, covering the previous twelve months, with an initial six-month grace period for the first report.

Clarifications and Implementation

ESMA has clarified that the calculation of whether the clearing threshold has been exceeded should be conducted on a continuous basis, likely requiring rolling monthly calculations. All EU-consolidated groups must include all group transactions (excluding intragroup transactions) in their assessment. While certain AAR tasks can be outsourced within a group, the legal obligation remains with the outsourcing entity. The 85% exemption from the operational requirement is calculated based on the total gross outstanding notional of in-scope contracts already cleared, allowing entities to benefit from the exemption immediately if the threshold is met.

Overall, the revised technical standards for the AAR under EU EMIR represent a significant streamlining of operational and reporting requirements, providing greater clarity and reducing the compliance burden for market participants, while maintaining robust supervisory oversight. The changes are expected to facilitate smoother implementation and ongoing compliance as the AAR continues to apply across the EU derivatives market.

11.  ESMA Consultation on Draft RTS for Clearing Fees and Associated Costs under EMIR 3

ESMA has published a consultation paper on draft RTS concerning the disclosure of clearing fees and associated costs by clearing service providers (CSPs). It's the subject of fees and how they are disclosed – this tends to be emotive for those who are focused on the issue. From ESMA's perspective, the initiative is designed to enhance transparency and comparability of clearing fees across the EU, supporting the broader policy objective of making EU clearing markets more efficient and competitive.

What's being proposed?

The draft RTS proposes that CSPs must provide detailed, standardised disclosures to both existing and prospective clients for each central counterparty (CCP) at which they offer clearing services. The required disclosures include:

• Onboarding fees: One-off costs at the start of the clearing relationship, such as registration and IT set-up.
• Fixed fees: Recurring charges not linked to clearing activity, including account maintenance and infrastructure costs.
• Transaction fees: Charges based on the volume or number of transactions cleared.
• Other fees: Any additional costs not captured by the above categories, with an explanation of their origin.
• Pass-on costs: Fees charged by the CCP that are passed on to clients by the CSP, clearly distinguished from the CSP’s own charges.
  The consultation also addresses the level of disaggregation required, proposing that fees be broken down by CCP and by service, to facilitate meaningful comparison. Disclosures are to be made bilaterally, rather than publicly, and may be subject to confidentiality safeguards such as NDAs.

By when?

Feedback on the draft RTS is invited until 8 September 2025, with ESMA aiming to finalise and submit the standards to the European Commission by December 2025. 

12.  ESMA Briefing: Operationalisation of Resolution Cash Calls for CCPs

ESMA has issued a detailed operational briefing for National Resolution Authorities (NRAs) on the use of resolution cash calls as a tool for the recovery and resolution of CCPs under Regulation (EU) 2021/23 (CCPRRR). Resolution cash calls enable NRAs to require non-defaulting clearing members to provide additional funds to absorb losses, recapitalise the CCP, and maintain its continuity during a resolution event.

The briefing outlines a methodology for NRAs to access and calibrate the necessary data, conduct impact assessments, and implement cash calls in a manner that is both effective and consistent across the EU. Key steps include: (1) collecting a minimum data set from CCPs, including default fund contributions by clearing members; (2) calibrating the cash call based on the type of scenario—default loss (DL), non-default loss (NDL), or combined; and (3) assessing the impact on clearing members, financial markets, and financial stability in Member States.

Anything of particular interest?

Yes - special attention is given to the involvement of third-country clearing members. The briefing recommends that NRAs obtain legal opinions on the enforceability of cash call provisions under both EU and third-country law, and engage proactively with third-country authorities to address recognition and non-performance risks.

Things we saw of interest

13.  US DORA?! Not quite yet. Technology Providers and Financial Stability: Overview of Risks and Regulatory Frameworks 

This working paper, authored by staff from the Federal Reserve Banks of Chicago, Boston, and Dallas, provides a detailed analysis of the growing systemic importance of technology-focused third-party service providers (TPSPs) in the financial sector. We include here because anyone who has experienced EBA outsourcing guidelines / DORA will be interested in how the US appears to be drawing on EU experience!

The paper highlights that, in the United States, regulatory oversight of TPSPs remains limited and largely micro-prudential, focusing on the safety and resilience of services provided to depository institutions. The paper mentions EU’s Digital Operational Resilience Act (DORA)! For those that went through the scaring process of DORA this will raise eye-brows. Still, interesting to know US has taken note of DORA. The UK's more proportionate and tiered regime may be a better place to start.

The paper concludes that TPSPs represent a significant and growing source of systemic vulnerability, with risks that are difficult to assess due to limited data on interconnections and criticality. They call for enhanced regulatory powers, improved data collection, and greater international coordination to address these challenges. We look forward to the US version of DORA. 

14.  Federal Reserve Bank of Chicago publish How Have Capital Levels of Futures Commission Merchants Changed Since the Global Financial Crisis?

The Federal Reserve Bank of Chicago has released an analysis exploring how capital levels among U.S. futures commission merchants (FCMs) have changed since the Global Financial Crisis (GFC). The report reviews the regulatory landscape, capital requirements, and the consequences of declining excess capital for the future of derivatives and securities clearing. It's an interesting read. 

The analysis suggests that regulatory capital for FCMs has skyrocketed while the ratio of FCM excess net capital (capital above the regulatory minimum) to customer funds has dropped sharply, from 0.65 in mid-2009 to below 0.25 in early 2024 for the six largest FCMs by client assets. This decline suggests a shrinking buffer to support further growth in client clearing. With excess capital at FCMs declining, their ability to meet rising demand for central clearing may be limited, especially as the U.S. Securities and Exchange Commission (SEC) prepares to require central clearing of U.S. Treasury transactions by the end of 2026. To support more client clearing, FCMs would need to justify higher capital allocations by earning sufficient returns on equity—estimated at an annualized rate of 0.96% on client assets held for initial margin, based on a typical industry return on equity of 12%. This could mean higher fees for clients, limits on growth, or reduced services for less profitable clients.

Medium and small FCMs may also need to boost their capital to keep up with expected growth in initial margin requirements.

15.  Occasional Paper 68 publish ETF (Mis)Pricing and Inventory Management Analysis

The FCA’s Occasional Paper 68, "ETF (Mis)pricing and Inventory Management Analysis", from May 2025, offers a detailed study of why and how exchange-traded funds (ETFs) can become mispriced, focusing on the crucial role of Authorised Participants (APs) in managing inventory and arbitrage. The study seems to take as an assumption that ETFs are mispriced compared to the bond market. This will come as a surprise to some, as it is often considered the reverse! We're not sure whether the FCA reached out to APs in conducting this analysis. The study does highlight the importance of APs, but suggestions of inventory disclosure positions need to be treated with care.