FCA finalises plans to improve functioning of equity secondary markets

The FCA has today published its policy statement and final rules (PS23/4) on improvements to equity secondary markets.  This forms part of the Wholesale Markets Review (WMR) conducted by the FCA and HM Treasury (HMT) and follows a consultation in July 2022 (see our blog post here). The changes also support the objectives set out in the FCA’s Strategy 2022‑2025 and its recent business plans which include a commitment to strengthen the UK’s position in wholesale markets.

The final rules have been published at the same time as proposed reforms to the UK listing regime (see our blog post here).

Changes since CP22/12:

• The proposals relating to waivers from pre-trade transparency and tick size have not changed since the consultation.
• Some changes have been made to the proposals relating to post-trade transparency including amendments to the content of post-trade transparency, specifically to the scope of exemptions and to reporting flags. The FCA has also allowed a longer implementation period of 12 months. The FCA has decided to keep the 'entity level', rather than 'asset-class', designation proposals in relation to the new designated reporter regime (DRR) which will replace the current MiFID system for the reporting of trades. Under the DRR, firms will be able to elect to register themselves, at entity level, as designated reporters (DRs) by notifying the FCA, regardless of their systematic internaliser (SI) status. However, to address concerns raised by some sell-side firms, the FCA has now provided an option for DRs to bilaterally agree, explicitly and in advance, which party would fulfil the reporting obligations.

Timing: The changes to waivers from pre-trade transparency and to the tick size regime apply immediately. To allow firms with sufficient time to make the necessary changes to their IT systems and internal processes, the implementation period for the requirements relating to post-trade transparency and the DRR has been extended by 6 months and will apply from 20 April 2024.

Plans for further work:

• Deferral for ETF transactions priced at NAV – The FCA will consult 'at the earliest opportunity' to amend Article 15 of RTS 1 to introduce a new deferral for transactions in exchange traded funds (ETFs) executed at NAV. The implementation timeline for the new deferral will be aligned with the other changes in post-trade transparency set out in the PS.
• Alignment between trade reporting and transaction reporting flags – Some of the flags being amended are also part of the information reported by firms for transaction reporting purposes. Some respondents have commented that not aligning the changes between the flags used for trade reporting and those required for transaction reports may increase the complexity for firms' reporting systems. The FCA will be considering policy options and will communicate its expectations for transaction reporting in due course.
• UK market for retail orders – The consultation had sought views on whether the Retail Service Provider (RSP) system works well for retail clients and whether there are ways to improve best execution for retail orders while enhancing the efficiency and liquidity of public markets. The FCA will continue to discuss the RSP model with stakeholders and consider whether a more formal review would be appropriate. The FCA also reminds firms using the RSP model to take account of its expectations on the interaction between best execution and the RSP system.
• Resilience to outages – The FCA plans to form a subcommittee of its Secondary Markets Advisory Committee to work on good practices for trading venues and investment firms in the event of a trading venue outage and may provide confirmation to industry guidance in due course. The FCA confirms that it plans to consult on the establishment of a consolidated tape (initially for bonds only) to enhance market resiliency during outages 'in the near future'.

Divergence from EU rules:  The FCA acknowledges that divergence between requirements and standards in the UK and the EU, in particular in relation to post-trade transparency and trade reporting, will be a potential source of complexity and cost for some firms with operations in both UK and EU. However, it believes that the benefits will outweigh the potential costs arising from divergence.

Interaction with the Financial Services and Markets Bill:

• The Bill implements the changes proposed following the WMR, as confirmed in the government’s response in March 2022, including amendments to the trading venues and SI regimes, removal of the double volume cap (DVC) and the share trading obligation (STO) in equity markets, as well as other proposals in the fixed income and derivatives markets and commodity derivatives markets, market data and reporting requirements. The Bill is currently still expected to be passed in H1 2023.
• The reforms set out in the PS concern parts of the wholesale market regime the FCA already has the power to implement (because they relate to parts of the regime that are already set out in regulatory rules and guidance) and are not contingent on changes that are intended to be implemented via the Bill.
• Generally, in the hope that a staggered approach will allow firms to absorb and respond to its proposals in a more manageable way, the FCA is implementing the WMR by consulting on topics in different stages. It intends to consult on other reforms covered in the WMR which are more closely linked to changes to legislation over the course of 2023.