On 1 March 2022, HM Treasury published its response to its earlier consultation on the Wholesale Markets Review.
The response recaps the proposals in the consultation, summarises the feedback received and – in light of the evidence gathered – outlines the government’s views. The final chapter of the response sets out, at a high level, how the government and the FCA plan to take forward the various proposals.
Key points in the response include:
- Trading venues. The government recognises that there is a need for greater clarity about what types of firms need to be authorised as a multilateral trading facility. Given respondents’ support for this to be addressed through regulatory guidance, rather than legislation, the government does not intend to amend the legal definition of a multilateral system. The FCA has indicated that it will consult on new guidance in the first instance. The government also believes there is a clear case for removing matched principal trading restrictions for investment firms operating a trading venue, while retaining obligations to prevent conflicts of interest. Similarly, the government believes it would be appropriate to allow organised trading facilities to execute transactions in equities when dealing in packages. The government believes the best way to take these changes forward is through the upcoming Future Regulatory Framework (FRF) implementation. Therefore, these will be matters for the FCA to consider and progress as it takes on responsibility for direct regulatory requirements which apply to firms, following the implementation of the outcomes of the FRF Review.
- Market outage. The government believes that there is a case for further work to ensure market resilience in the event of an outage. In light of this, the FCA has indicated that it will discuss with market participants how it can use its current tools to clarify what should happen when there is a market outage (and whether and how to amend the requirement for venues to resume trading within two hours of an outage) as a prelude to consulting on proposals later this year.
- Systematic internalisers. The government therefore intends to proceed with its plan to revert to a qualitative definition of systematic internalisers (SIs) so that firms do not have to carry out complex calculations for this purpose. To deliver this the government plans to bring forward legislation when parliamentary time allows. In addition, the government recognizes that there is appetite to simplify the reporting regime for SIs. However, most provisions on investment firms’ obligations to publish trade reports are in technical standards, under the FCA’s responsibility. The FCA intends to consult on this issue in the first half of this year.
- Reference price waiver.The government believes that the amendments it proposed to the reference price waiver (RPW) will improve market integrity. As it sees this as a priority area, the government plans to bring forward legislative changes to delegate the pre-trade equities waivers regime to the FCA when parliamentary time allows. The FCA will also consult in the first half of this year on extending the concept of the most relevant market in terms of liquidity for the purposes of the RPW to include overseas trading venues.
- Derivatives trading obligation. The government welcomes the clear support for its proposals related to the derivatives trading obligation (DTO) and to exempt post-trade risk reduction (PTRR) services from the clearing obligation. It intends to bring forward legislation when parliamentary time allows to deliver these changes.
- Transparency regime for fixed income and derivatives markets.It is the government’s intention that the FCA should be responsible for recalibrating the scope and setting of the firm-facing transparency requirements. To enable this, the government plans to delegate the transparency regime for fixed income and derivatives to the FCA when parliamentary time allows.
- Position limits regime. The government will bring forward legislation when parliamentary time allows 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. As part of this proposal, the government will provide the FCA with the necessary discretion to determine which contracts trading venues will be required to set position limits on, in line with the UK’s G20 commitment, and to set limits directly on OTC contracts, if needed.
- Ancillary activities test. The government agrees with respondents that revoking the current ancillary activities test, re-introducing the “commodity dealer exemption” and removing the annual notification requirements would represent significant improvements to the current regime. The government intends to bring forward secondary legislation under existing powers to enact this change.
- Consolidated tape. The FCA will further consult on specific changes to support the development of a consolidated tape as soon as possible after it takes on responsibility for the relevant regulatory requirements, following the implementation of the outcomes of the FRF Review.