On 5 November 2024, the Financial Conduct Authority (FCA) published a policy statement, PS24/14, on improving transparency for bond and derivatives markets. PS24/14 also includes a discussion paper (in Chapter 9) on the future of the SI regime.

Background

The FCA consulted on its proposed changes in December 2023, in CP23/32, as part of the Wholesale Markets Review (WMR). The WMR had previously concluded that the existing transparency regime for bond and derivatives markets had not delivered meaningful transparency and had limited impact on price formation while imposing a high cost to industry.

New transparency rules

The new transparency rules for bonds and derivatives markets are intended to result in more information for investors and lower costs for firms. They aim to create a simpler and more timely post-trade transparency regime based on fewer deferrals for bonds and certain over-the-counter (OTC) derivatives, while ensuring that liquidity providers are sufficiently protected against undue risk. 

Under the new rules:

  • Transparency requirements are specified only for bonds admitted to trading on a trading venue and certain derivatives subject to the clearing obligation.
  • The OTC trading of non-specified instruments by investment firms will not be subject to public trade reporting.
  • For trading venues, there are standards and criteria they should consider when calibrating their transparency requirements.
  • For recognised investment exchanges, the FCA’s supervisory approach to transparency aims to reflect the high standards that apply to them in relation to exchange-traded derivatives such as futures and listed options.
  • The requirement to perform transparency calculations, which had been used to determine whether an instrument was liquid, has been removed – the FCA will now rely instead on a set of reliable proxies to determine whether an instrument should be categorised as liquid.
  • The use of the Financial Instruments Transparency System for bonds and derivatives is being discontinued, as the new transparency regime does not depend on rigid liquidity calculations based on fixed parameters.
  • The definition of systematic internalisers (SIs) has been updated from a quantitative to a qualitative definition (although the FCA does not expect the new definition to alter which firms are designated as SIs).

Discussion paper

In Chapter 9 of PS24/14, in light of the breadth of changes made through the Financial Services and Markets Act 2023, the FCA is asking discussion paper questions about the future of the SI regime, in particular for bonds and derivatives. The discussion paper does not put forward proposals for consultation but instead asks questions for discussion. However, the FCA notes that, with the implementation of the new definition of an SI on 1 December 2025, it would be good to try and implement substantive changes to the obligations applying to SIs by that date.

The discussion paper closes on 10 January 2025.

Next steps for firms

The changes to the transparency regime will come into force on 1 December 2025.

The FCA is asking trading venues, investment firms and approved publication arrangements (APAs) to familiarise themselves with the rules to ensure they can comply with the relevant requirements, and to assess their current arrangements so they can provide adequate transparency once the rules take effect.

Under transitional provisions:

  • Trading venues will not need to apply pre-trade transparency to voice and request-for-quote trading from 31 March 2025.
  • SIs in bonds and derivatives will not need to provide public quotes from 31 March 2025.

Next steps for the FCA

The FCA plans to speak to trading venues, investment firms and APAs to monitor the implementation of the new rules and ensure an orderly implementation of the changes.

It notes that the bond consolidated tape will only go live after the changes to the transparency regime take effect. The FCA expects to start the tender to appoint a UK bond consolidated tape provider in December 2024, to give firms wishing to take part some time to familiarise themselves with the new rules.  

A consultation on the future of the SI regime is planned for Q2 2025, following responses to the discussion paper. The FCA expects the changes to the substance of the SI regime to take effect alongside the new qualitative approach to determining SIs on 1 December 2025.

The FCA says it will update its Handbook to reflect the finalised transparency regime for bond and derivative markets by 1 December 2025, when the rules in the instrument in PS24/14 are due to come into force.