On 5 July 2022, the FCA published Consultation Paper 22/12 ‘Improving equity secondary markets’ (CP22/12).

The proposals in CP22/12 are part of the review of the UK wholesale financial markets that the FCA has been conducting with HM Treasury. The FCA has issued consultation proposals as these concern parts of the UK wholesale financial markets 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 Financial Services and Markets Bill.

The proposals in CP22/12 will be of interest mainly to trading venues, investment firms and UK branches of overseas firms undertaking investment services and activities. In summary, the proposals cover:

Post trade transparency. The purpose of the FCA’s proposals are to:

  • make post-trade transparency more useful by excluding non-price forming transactions that add noise to post-trade reporting and that increase the cost of reporting for firms;
  • achieve greater consistency and limit duplications in the use of flags for trades that are exempted from post-trade transparency, the share trading obligation and pre-trade transparency under the negotiated trade waiver;
  • improve the information content of trade reports by simplifying trade flags and other reporting fields; and
  • reform the framework that establishes the conditions under which investment firms are required to report trades executed over-the-counter, to lower the cost of reporting for firms.

The FCA is not at this time consulting on the calibration of thresholds for large trades or the length of the deferral regime. It will consider in due course what changes to those elements of the post-trade transparency regime are necessary to improve equity markets.

The FCA also plans to consider which changes to pre-trade transparency would improve market integrity and efficiency – but this will depend upon powers being delegated to it through legislation to make rules in this area, as set out HM Treasury’s consultation response to the wholesale markets review.

Waivers from pre-trade transparency. The FCA proposes targeted changes to the reference price and order management facility waivers. The FCA adds that once the waiver regime has been delegated to it (the Financial Services and Markets Bill will include changes to UK MiFIR to give the FCA the power to make rules to set the pre-trade equities waivers regime) it will consider whether broader changes to waivers regime are needed.

Tick size. Onshored Regulatory Technical Standard (RTS) 11 sets out the tick size requirements that trading venues shall comply with for equities, in particular for shares. In its consultation response to the UK wholesale markets review, HM Treasury noted that feedback from market participants supported improving how the tick sizes from overseas shares, i.e. shares traded on UK venues and whose main pool of liquidity is located on a trading venue outside the UK (which is usually the exchange where they are listed), and for newly issued shares are calibrated. In CP22/12 the FCA is consulting on changes to RTS 11 in relation to establishing tick sizes for overseas shares. The FCA will consider reforms to the approach to newly issued shares when it looks at the broader issue of the calibration of the current framework of the tick size regime, including the delegation to trading venues.

Improving market-wide resilience during outages. In its consultation response to the UK wholesale markets review, HM Treasury made three main policy proposals about outages: that the FCA and the industry work on a playbook for handling outages; the authorities explore an alternative to the closing auction operated by the primary market; and that the reference price waiver should be amended to allow for greater flexibility in terms of the reference price that can be used. In CP22/12 the FCA proposes guidance on communications and protocols on market outages on trading venues. The guidance would be relevant to firms’ obligations under the requirements in SYSC 15A.8 as well as requirements in the Recognition Requirements for Recognised Investment Exchanges dealing with Systems and Controls and Safeguards for Investors, and requirements in MAR 5.3A and 5A.5 for multilateral trading facilities and organised trading facilities.

The UK market for retail orders. At this stage the FCA is not making proposals for rule changes linked to the execution of retail orders for shares. However, the FCA is interested in views on whether there are ways to further improve best execution for retail orders while enhancing the efficiency and liquidity of public markets. The FCA also re-emphasises that the messages in the Investment Platforms Market Study about the Retail Service Provider (RSP) system and best execution are relevant to all firms who use the RSP system to execute client orders, and not just to the platforms’ operators.

The deadline for responding to CP22/12 is 16 September 2022.

Once the FCA has reviewed the responses it will submit the relevant updated technical standards to HM Treasury for approval. If HM Treasury approves them, the FCA will make and publish a Policy Statement and amend the technical standards.