HM Treasury Confirms Policy Approach on Wholesale Markets Review

HM Treasury has published its consultation response to the Wholesale Markets Review, setting out summaries of responses received to its proposals and how changes will be progressed. There are certain areas that HM Treasury will not progress at this stage, and which will be subject to further consideration.

For the proposals that are being taken forward, implementation may be by legislation or pursuant to the Financial Conduct Authority's rules. HM Treasury states that legislation will be brought forward when Parliamentary time allows. In certain instances, where details are currently set out in legislation, but would sit better in regulatory rules, the government intends to legislate to delegate responsibility to the FCA for preparing detailed rules, which it states will be part of the implementation of the Future Regulatory Framework review. The FCA is expected to consult on its proposals for existing rule amendments in the first half of this year.

HM Treasury confirms that, following the announcement of John Glen MP, Economic Secretary to the Treasury, on November 23, 2021, legislation will be brought forward when parliamentary time allows to:

• Remove the share trading obligation, which was introduced to bring more trading onto lit markets and increase transparency, which have not been achieved.
• Remove the double volume cap. The FCA's power to limit the amount of trading without pre-trade transparency will be retained.
• Revoke the requirement for commodities position limits to be applied to all exchange traded contracts and transfer the setting of position controls from the FCA to trading venues (as was the position before the revision of the first EU Markets in Financial Instruments Directive (i.e., pre-MiFID II)). The government will, however, give the FCA discretion to determine which contracts trading venues will be required to set position limits on and to set limits directly on OTC contracts, if needed. The FCA will also have power to establish a framework to support trading venues in setting position limits.

The following changes will also be brought forward through legislation when parliamentary time allows:

• Removing OTC derivatives that are economically equivalent to exchange traded commodity derivatives from the scope of the position limits regime.
• Removing the ancillary activities test, instead of reverting to the pre-MiFID II qualitative ancillary activities test, as proposed. HM Treasury will re-introduce the 'commodity dealer exemption' for commercial firms. The annual notification requirements will also be removed.
• Establishing a consolidated tape to increase data standardization and accessibility. The government considers that the FCA should be responsible for setting the requirements for consolidated tape providers and will legislate to provide the FCA with the power to do so. The FCA will be able decide how to enable the development of a consolidated tape for any asset class and whether it should cover either pre- and post-trade data or both. HM Treasury states that a fixed income tape is still its priority.
• Reverting to a qualitative threshold to determine whether an investment firm must be authorized as a Systematic Internaliser, with the determination being made according to a firm's market activity for a particular asset class. The FCA will consult on amending the reporting rules for Systematic Internalisers.
• Removing the restrictions on mid-point execution across a Systematic Internalizer's own book, provided that Systematic Internalizer considers the extent to which their use of midpoint execution is consistent with their best execution obligations.
• Aligning the scope of the derivatives trading obligation with that of the clearing obligation under the U.K.'s European Market Infrastructure Regulation and extending, subject to certain conditions, the exemption from the DTO for the termination or replacement of component derivatives in portfolio compression to all non-price forming post-trade risk reduction services. The FCA will be granted a permanent power to modify or suspend the application of the DTO. HM Treasury reports that there was clear support for these proposals.
• Clarifying the scope of the transparency regime, particularly for OTC derivatives, and revising the scope of the pre-trade transparency regime for fixed income and derivatives. There was overall support for these proposals, and the government intends to delegate the transparency regime for fixed income and derivatives to the FCA.

HM Treasury has acknowledged feedback that some areas will require greater consideration due to their complexity before they can be implemented. The following proposals will be subject to enhanced investigation:

• Reducing the scope of commodity derivatives and commodity market participants who are subject to MiFID II regulation as whole, by removing from the scope of regulation entirely certain derivatives, i.e., derivatives that are not based on physical commodities and financial instruments that refer to commodities as a pricing element, but which are securities in their legal form.
• The proposal to delete from the FCA Handbook the oil market participants (OMP) and energy market participants (EMP) regimes and subjecting firms under these regimes to the MiFID II requirements for commodity derivatives instead. HM Treasury and the FCA will review this further, taking into account that the changes could have unintended effects on how firms are authorized and the subsequent obligations that they must comply with.
• The proposal to introduce a new type of trading venue or additional segment on existing platforms tailored to the requirements of smaller SMEs (with a market capitalization of less than £50 million). HM Treasury is going to explore this proposal further in 2022 alongside the work on the U.K. listings regime. However, it remains committed to increasing firms' access to the primary and secondary markets. Most respondents did not support the idea of a new SME venue as it would potentially overlap with the existing SME Growth market category.
• Allowing investment firms to operate a Systematic Internaliser and an OTF within the same legal entity where the two activities are clearly segregated. HM Treasury believes that further consideration needs to be given to how conflicts of interest can be managed.
• Changes to the position limits reporting regime.
• HM Treasury will consider further whether the setting of tick sizes for shares admitted to trading for the first time should be delegated to trading venues, with appropriate controls, instead of the FCA doing this.

The following proposals will be implemented as part of the FRF review:

• Permitting OTFs to execute transactions in packages involving derivatives and equities.
• Lifting restrictions for MTFs to allow matched principal trading by an MTF, subject to conflicts of interest rules.
• Removing the requirement for algorithmic trading firms with a market making strategy to enter into binding, written market making agreements with trading venues, including the need for both entities to have effective systems and controls in place to fulfill their obligations under the agreement. Most respondents supported this proposal.

The following amendments will be implemented by changes to the FCA rules following consultation:

• Amending the tick size regime so that trading venues can follow the tick sizes applicable in the relevant primary market of a share where that share does not have its primary market in the U.K.
• Amending the reporting regime for Systematic Internalisers.

In addition, the FCA will provide clarification, following consultation, on the regulatory perimeter for trading venues, in particular MTFs, which will likely be in the form of regulatory guidance. The FCA will also develop guidance on the expected roles of market operators and participants during an outage, to further the aim of trading continuing during market outages.

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