HM Treasury (HMT) launched the Wholesale Markets Review (WMR) consultation on 1 July 2021 with the aim of tailoring the on-shored MiFID II and MiFIR regimes for the UK market. HMT has now set out which of the proposals it will take forward. It is prioritising two areas: removing restrictions on where market participants can trade — by deleting the Share Trading Obligation (STO) and the double volume cap (DVC) — and reducing and simplifying the regulatory burdens in the systematic internaliser (SI) regime, the fixed income & derivatives transparency regime and the commodity position limits regime.
It will be some time before the exact rules and changes firms need to implement are finalised. Where the changes are to technical standards or regulatory rules and guidance, the FCA will action these through its usual consultation processes. Changes that are seen to be urgent will be implemented through changes to legalisation `laid' by HMT and approved by Parliament. Less crucial changes will await the implementation of the Future Regulatory Framework Review which is likely to move much of the MiFID II / MIFIR legislation into the FCA rulebook.
The European Commission's proposal to amend MIFIR contains similar but not identical changes which is likely to further complicate the operating environment for firms working in both jurisdictions.
Detail on changes
HMT will alter the legislation to remove the double-volume cap (DVC) which currently limits the amount of equity trading that can happen without pre-trade transparency (i.e. on dark venues), as there have not been negative impacts on price formation since the FCA suspended the DVC for UK and EU securities in early 2021. However, the FCA will continue to monitor the level of dark trading and will retain its current ability to limit it if there is evidence that the volume of such trading is undermining the efficiency of the price formation process.
Agreeing with the market participant view that firms should be allowed to decide where to trade, HMT will also amend the legislation to remove the share trading obligation (STO).
There was strong support to amend the reference price waiver (RPW), so HMT will amend the legislation to delegate the pre-trade equities waivers regime to the FCA. The FCA will then consult in H1 2022 on extending the concept of the most relevant market in terms of liquidity for the purposes of the RPW to include overseas trading venues.
The FCA will take forward amendments to its rulebook to allow tick sizes to be based on the primary market of the share even where that may be overseas, and to allow venues to establish tick sizes for new shares until sufficiently robust data is available for the FCA to gather a more comprehensive picture.
Fixed income and derivatives markets
HMT will amend legislation to bring the scope of the derivatives clearing obligation (DTO) in line with the EMIR clearing obligation (CO) and exempt post-trade risk reduction from the DTO.
HMT agrees with market feedback that the current transparency regime for fixed income and derivatives markets, which is modelled on the one for equities markets, does not work. Therefore, it will amend legislation to delegate the transparency regime for fixed income and derivatives to the FCA, which will then be responsible for recalibrating the scope and requirements.
Systematic Internalisers (SIs)
HMT will alter the legislation to clarify and simplify the definition of SIs, replacing the current definition which requires firms to carry out a complex quantitative calculation on a regular basis, with a qualitative one.
In response to the WMR, there have been calls to separate the ability to do post-trade reporting on behalf of clients from the other obligations of being an SI. There was also support for determining SIs at asset class level rather than on an instrument-by-instrument basis. The FCA will consult on amending the SI reporting regime in H1 2022.
Reacting to support for removing restrictions around SIs executing trades at midpoint, to bring the UK in line with practices with the rest of the non-EU world, HMT will now change the legislation accordingly. Although SIs will still need to consider the extent to which their mid-point execution is consistent with best execution obligations.
HMT remains committed to helping the emergence of a consolidated tape and believes that competition between multiple tapes would help deliver the best solution. HMT will amend legislation so that the FCA will be responsible for setting the requirements for consolidated tape providers. Although HMT believes that it is more of a priority to develop a consolidated tape for fixed income data, it will be up to the FCA to decide on the priority of asset class and pre-and post-trade data.
Market participants also asked for clarity around the concept of `Reasonable Commercial Basis' for market data — the FCA will take this forward as part of its analysis around wholesale data markets.
To improve the usability of trade data, the FCA will consult on changes to equity and non-equity trade reporting standards in 2022.
Trading venue perimeter
There have been some complaints in the market that there is a unlevel playing field between firms that are authorised as multi-lateral trading facilities (MTF) and data or technology firms that bring together buyers and sellers through such services as order management systems but do not have to be authorised as an MTF. The FCA will consult on new guidance to clarify the definition of an MTF.
HMT proposed developing a new category of trading venue with a more proportionate framework for SMEs with sub-£50m market capitalisation as many small and micro-sized companies often use crowdfunding platforms and private markets rather than public markets to access finance. Although it was agreed that the current regulatory regime is onerous for SMEs, there was not wide support for a new venue type, nor was there consensus on how to alter the regime. HMT will continue to discuss with market participants.
To improve market resilience and clarify existing ambiguity regarding the role of market operators and participants in the event of a market outage, the FCA will consult on further guidance such as a playbook for market outages.
In the commodity derivatives regime, HMT will amend legislation to revoke the requirement for position limits to be applied to all exchange-traded contracts, and to transfer the setting of position limits from the FCA to trading venues and simplify the determination around whether firms participating in the commodities derivatives market need to be regulated. HMT and the FCA will take more time to consider other changes to the regime such as abolishing the oil market participant (OMP) and energy market participant (EMP) regimes.