Global Regulation Tomorrow

Introduction

It is interesting that the FCA has sought to amplify its guidance in relation to the execution of transactions by branches in CP26/34. However, there is a good argument that the new guidance creates more questions than answers when read alongside the guidance contained in PS26/15.

Whilst the FCA has provided useful clarification in certain specific scenarios, many of the broader issues surrounding branch execution remain unresolved. In particular, firms operating complex global trading models may find that the practical application of the guidance raises difficult questions regarding transaction reporting obligations.

Helpful clarification from the FCA

Taking the branch execution Level 2 guidance in CP26/34, the FCA has addressed a number of specific reporting scenarios.

One helpful example concerns a trader who is primarily employed outside the UK but is temporarily working from a UK office on a short-term assignment. The FCA confirms that, in these circumstances, there would generally be no transaction reporting obligation solely because the trader is physically located in the UK.

The FCA also recognises that individuals may work across different locations. This acknowledgment reflects the practical realities of modern financial services businesses and provides some welcome flexibility.

The continuing uncertainty

The position becomes less clear when considering Example 9 of the FCA’s reporting examples, involving a US firm with branches in Paris and London.

In that example, a trader located in Paris makes the discretionary investment decision, while a second trader based in London executes the transaction under London supervision. The FCA appears to regard this as falling within scope.

This outcome is not particularly surprising. However, greater complexity arises when the example is considered alongside the new MAR guidance contained in PS26/15, particularly MAR 14.13.26 to 14.13.32.

The FCA’s approach appears to indicate that where there is a substantive branch touchpoint, the transaction may fall within scope. Such touchpoints could include:

• A trader being located within the branch.
• Supervisory responsibility resting within the branch.
• A discretionary investment decision being made within the branch.
• Orders being transmitted between branches for execution.

Viewed individually, these scenarios are relatively understandable. Difficulties arise when applying them to the realities of modern global banking operations.

The challenge of global operating models

Many international banks operate follow-the-sun trading models, where responsibility for trading activity moves across regions throughout the day.

For example, an Asian or US trading desk may use London as an alternative execution location outside normal regional trading hours. In other cases, clients may interact with operational support teams located in London even where the client relationship, documentation and principal trading activities are based elsewhere.

A particularly challenging example arises where:

• A client is onboarded outside the UK.
• The client has no substantive UK relationship.
• An instruction passes through a UK-based team or call centre.
• Execution ultimately occurs in another jurisdiction.

The FCA’s guidance does not fully resolve how these situations should be analysed.

Why firms should revisit their analysis

Whilst CP26/34 provides useful clarification for specific fact patterns, those examples may represent relatively uncommon scenarios.

For many global institutions, the more frequent challenge will involve transactions where multiple teams across different jurisdictions have varying degrees of involvement. In these situations, the UK’s role may range from clearly material involvement to participation that is comparatively marginal.

As a result, firms should revisit their existing transaction reporting assessments and ensure that:

• Existing in-scope and out-of-scope determinations remain appropriate.
• Brexit-era reporting analyses continue to be valid.
• Cross-border execution models are reviewed against the FCA’s updated guidance.
• Documentation clearly supports the rationale for reporting decisions.

European banks that undertook detailed reviews during Brexit should consider whether those conclusions remain appropriate. Institutions from other regions would also be well advised to undertake a similar exercise.

The distinction between executing and booking

One important point that appears relatively clear is that questions concerning execution should not be confused with booking models.

The FCA’s broad interpretation of execution may encompass activities that resemble:

• Receipt and transmission of orders.
• Dealing as principal.
• Dealing as agent.
• Discretionary investment decisions.

However, the location at which a trade is booked remains a separate consideration from the place of execution.

This distinction provides at least some certainty within an otherwise complex area.

Key practical takeaways

Drawing the themes together, firms should consider the following practical steps:

• Revisit existing transaction reporting analyses, particularly where those assessments were originally developed during Brexit implementation projects.
• Review global execution arrangements and identify all branch touchpoints that may influence reporting obligations.
• Assess follow-the-sun operating models and determine whether UK personnel exercise supervisory, discretionary or execution-related functions that may bring transactions within scope.
• Document decision-making frameworks clearly, including the rationale for determining whether transactions are reportable.
• Distinguish carefully between execution models and booking models when assessing regulatory obligations.
• Maintain ongoing monitoring of FCA developments in this area, as further clarification may still be required for many of the practical scenarios faced by international banks.

Conclusion

The FCA’s guidance in CP26/34 is undoubtedly helpful in certain respects. However, it does not fully resolve the more challenging questions arising from complex global trading structures.

The broad concept of execution adopted by the FCA means that firms must continue to analyse carefully the role played by UK branches and personnel in transaction lifecycles. Whilst relatively little may be fundamentally new, there remains a strong argument that CP26/34 leaves many of the larger practical challenges unanswered.