FCA Consultation paper Improving Equity Secondary Markets CP 22 12

On 5 July 2022, the FCA issued Consultation paper: Improving Equity Secondary Markets (CP 22/12). This follows on from the Wholesale Markets Review (WMR) response published in March 2022 and the Queen's speech in April 2022 (see our briefing here), which contained details of the Financial Services and Markets Bill.

The changes that the FCA is focusing on are: improving the content and consistency of post-trade transparency reports; establishing a new designated reporter status for OTC trades; allowing UK trading venues to use reference prices from overseas markets where those prices are robust, reliable, and transparent; and permitting the use of the tick size regime from overseas primary markets. There are also general proposals in relation to outages.

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 SI's and all entities that trade report currently. Lastly, trading venues and members of trading venues should focus on the FCA's outage section which is likely to lead to further substantive work for relevant firms.

FCA approach in light of WMR

Under the Future Regulatory Framework (FRF), the firm facing requirements of the MiFID II regime currently found in legislation will move to the FCA Handbook. When this occurs, the FCA will be able to revise them through its rule-making powers. The FCA is proposing a staggered approach to consultation on the implementation of WMR. It is proposing to first consult on changes to the requirements that it already has the power to implement and will then consult on other reforms covered in the WMR, which are more closely linked to changes to legislation over the course of this 2022 and 2023.

Post trade transparency – exemptions

The FCA proposals in relation to post-trade are pitched as "tidy-ups" - arrangements/trades that are nonprice forming but were not clearly scoped in by the initial MiFID II drafting. This looks useful in relation to give ups / RFMD and intra-group trades. There may be a few systems workflow amendments (reporting) required by investing firms (and APAs).

The FCA is planning to make changes to the list of exemptions from post-trade transparency:

• maintaining exemptions relating to transactions that are exempted from transaction reporting purposes;
• amending exemptions concerning transactions executed by portfolio managers;
• extending the scope of exemptions concerning give-up and give-in transactions;
• deleting exemption concerning transfers of shares or other equity instruments that arise in the context of investment firms complying with margin or collateral requirements or that are part of the default management of a CCP;
• introducing new drafting around benchmark trades; and
• introducing a new exemption for intra-group transactions when undertaken OTC.

In relation to give-ups in the RFMD context, the FCA states that these should not be reported, as they often do not provide any additional information to the one already provided by the reporting of the market leg of trades concluded by the executing broker.

The FCA is also proposing to introduce a definition of give-up/give-in trades to include RFMD where the trade is passed to hedge the prime broker's derivative position with the client. The FCA is also proposing guidance to clarify further the types of give-ups and give-ins that can benefit from the exemption from post trade transparency.

The FCA is proposing to allow trading venues to defer publication for all transactions in Article 13 until before the opening of the next trading day (this is to address the current situation where some same types of transactions are exempted from post-trade transparency when executed OTC but are subject to real-time reporting when reported under the rules of a trading venue).

Improving the information content of trade reports

Following the above, the FCA also is proposing to simplify the post trade reporting flags. The proposals are likely to require some workflow amendments by investment firms and trading venues/APAs.

The changes suggested include:

• Deletion of the SI related flags “SIZE” and “ILQD” and “RPRI”;
• Deletion of the agency cross flag “ACTX”, the duplicate trade flag “DUPL” and the algorithmic trade flag “ALGO”;
• Identifying “benchmark”, “portfolio” and “contingent” trades with one single flag, “TNCP”;
• Aggregating the three negotiated transactions flags into one single flag, “NETW"; and
• A proposal that only numerical values to be used to populate the field “Price”. This will be done in conjunction with the introduction of a new field “Price conditions” to be used in those instances where the price is not available but pending (this may be useful for certain forward starting derivative trades). This field will only be populated with pre defined text “PNDG”.

Designated reporting

The FCA is proposing to create a regime where firms will be able to opt in as designated reporters at an entity level by notifying it. Firms will be able to register as designated reporters regardless of whether they are an SI in any instrument. The regime will apply across all classes of financial instruments, equities and non-equities. The FCA states that the fundamental principles of the regime will continue to apply, i.e. firms executing trades OTC will have to report transactions through APAs. The FCA is proposing that the approach to OTC will apply to trades in all financial instruments.

To be able to report a trade you have to have been a counterparty/involved in the trade. Therefore, conceptually, the designated reporting regime can be viewed as a swap for SI status, at least for those that only had SI status for post trade reasons.

FCA is also proposing to maintain a register of designated reporters for firms to determine who reports OTC trades.

Waivers from pre trade transparency

The FCA is proposing targeted changes to the reference price and to the order management facility waivers initially and will consider broader changes once the waiver regime is delegated to it. Broadly, these changes seemed aimed at making venue liquidity slightly more attractive i.e. removing some of threshold hurdles to benefit from OMF pre trade transparency waiver. Clearly, if there is more material change to come, it is to come later. The plan appears to be for the FCA's newly established markets committee to chew over more radical market structure reforms.

Current proposed changes include:

• 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.
• Creating a separate definition of the MRMTL for the purposes of determining a tick size.
• Removing the current requirement that orders benefitting from the OMF waiver must meet a minimum size threshold and delegating the decision to set a minimum size threshold for reserve and other orders to trading venues.

Tick size

The interaction between tick sizes and overseas markets has been bedevilled by issues from the start. The FCA is proposing that trading venues can adopt the minimum tick size of the primary market located overseas when that tick size is smaller than the one determined based on calculations using data from UK venues. One assumes more is to come on tick sizes.

Outages

The section on outages is probably the most substantive in terms of new policy ideas (although none perhaps surprising given they have been aired by the FCA previously). The FCA is proposing to introduce a series of expectations in relation to outages for trading venues and market participants. This appears to be part of the general operational resilience reform framework. The below summarises some of the obligations on the different participants in the market ecosystem.

Trading Venues

• Monitoring and flagging: Expectations in respect of monitoring for system disruption and mechanisms for market participants to raise issues.
• Communication during an outage: Trading venues’ procedures for communicating during an outage, including but not limited to system status, whether it affects all or part of the listed securities, estimated time of re-opening and orderbook status; the frequency of updates; the standardised and unique systems statuses used for the different types of outage and the format of these messages; and communication around re-opening, including timeframes.
• Playbook: Expectations in respect of procedures setting out different types of outage and policies on the treatment of the orderbook for these types of outage. Areas that need to be covered would include the publication of the last time stamp and last reference price to be used, considerations on order validity for different order types, the last trade confirmations to affected market participants and the accessibility of the playbook to market participants.
• Post-outages: The need for trading venues to provide the FCA with a root cause analysis and remedial plan after all incidents.
• Closing prices: Expectations on the determination of alternative closing and settlement prices in the event of an outages.

Market participants

• Pre outages: Expectations of market participants to be well-informed about trading venue communication channels and protocols in case of a trading venue outage and have clear policies in place around best execution for clients.
• Routing: Expectations on market participants to ensure that their system set-up (e.g. smart order router) allows for orders to be routed to an alternative venue during a market outage if it is appropriate to do so.
• Closing price: Expectations on market participants, including index providers, in respect of policies and procedures to specify the use of an alternative closing reference price during a primary market outage.