UK Wholesale Market Review

The U.K. government has launched a consultation, the Wholesale Markets Review, on proposals to amend the U.K.'s Markets in Financial Instruments regime. This regime is based upon the Markets in Financial Instruments Directive and related Regulation, as well as several pieces of delegated legislation thereunder, collectively and colloquially known as MiFID II, which the U.K. on-shored with minor amendments following its exit from the European Union.  HM Treasury is now seeking feedback on how the U.K.’s approach to regulating secondary markets should be adapted now that the U.K. has left the EU. The intention is to amend the regime to reflect that the U.K. market is one of the largest capital markets globally. Changes are also proposed where it is clear that the rules have had unintended outcomes, are duplicative or excessive or have curbed innovation. The consultation is open until September 24, 2021.

The proposals are wide-ranging and will impact many market participants. Some of the changes represent fundamental amendments to the regime, for example, those for the commodity derivatives markets, while others focus on reducing unnecessary burdens on firms. The proposals include:
 

• 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;
  • Financial instruments that refer to commodities as a pricing element, but which are securities in their legal form; and
  • OTC derivatives that are economically equivalent to exchange traded commodity derivatives.
• Revoking the requirement for position limits to be applied to all exchange traded contracts and transferring the setting of position controls from the U.K. Financial Conduct Authority to trading venues (as was done pre-MiFID II).
• Extending the position limit exemption, which currently applies for non-financial counterparties hedging risk, to all liquidity providers. Regulated firms would be allowed to facilitate hedging activity for a commercial entity, even where the risk being hedged arises off-exchange or on a different trading venue.
• Reverting to the pre-MiFID II qualitative "ancillary activities" test, which was more streamlined, proportionate and cost effective. In addition, it is proposed that the oil market participants (OMP) and energy market participants (EMP) regimes as set out in the FCA Handbook would be deleted. Firms subject to these regimes would become subject to the MiFID II requirements for commodity derivatives, unless out of scope under the new ancillary activities test.
• Introducing 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 £50m). This would involve amendments to the U.K. Market Abuse Regulation, a new offer document regime, not set out in regulation but set up by market operators, and new eligibility criteria, including reduced disclosure requirements, which still ensure investor protection because main investors would likely be retail.
• Establishing a fixed income consolidated tape to increase data standardization and accessibility, the preferred model being a private sector CT to ensure competition.
• Removing the share trading obligation, which was introduced to bring more trading onto lit markets and increase transparency, which have not been achieved.
• 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 fulfil their obligations under the agreement.
• Lifting restrictions for multilateral trading facilities and organised trading facilities to allow matched principal trading by an MTF, conducted under clear, transparent and non-discretionary rules.
• Allowing investment firms to operate a Systematic Internaliser and an OTF within the same legal entity where the two activities are clearly segregated.
• Permitting OTFs to execute transactions in packages involving derivatives and equities.
• 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.
• 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. HM Treasury is also considering 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.
• 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 may also be granted a permanent power to modify or suspend the application of the DTO.
• 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.
• Reducing the number of deferrals available for fixed income and derivatives post-trade publication.

HM Treasury also points to areas where clarification would be beneficial, indicating that its preferred option would be to bring that about through regulatory guidance. Some examples of these areas are the regulatory perimeter for trading venues and the roles of market operators and participants during an outage so that trading can continue during market outages.

Implementation of these changes to the U.K.’s MiFID II regime will be either through legislation or changes to the regulator’s rulebooks. The regulators are expected to consult on related changes to the rulebook before the end of the year. Feedback to this consultation will be considered alongside the Future Regulatory Framework Review.

View the Wholesale Markets Review consultation paper.

View details of the Future Framework Review. 

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