Improving Equity Capital Markets

General Background

The FCA has published a Consultation paper (CP22/12, closing 16 September 2022) on “improving equity capital markets”. With this, the FCA has essentially triggered much anticipated changes to the UK MiFID II regime following the UK Wholesale Markets Review (WSM) conducted by HMT in association with the UK regulators. 

This will entail several rounds of changes to UK regulation of wholesale financial markets, including changes made to primary legislation and new powers being delegated to the FCA/ PRA in the upcoming Financial Services and Markets Bill (FSM Bill), as well as FCA consultations on other aspects of the UK regime. FCA CP22/12 focuses on requirements for equities secondary markets trading.

Key Points from FCA CP22/12

Equities post-trade transparency

The FCA has proposed several changes to the exemptions from post-trade reporting requirements and the content of post-trade reports in order to allow market participants to identify addressable liquidity. As such:

• Exempting non-price forming transactions that do not contribute to price formation but add “noise” to post-trade data
• Deferring publication for certain exempted trades (i.e. OTC) on-venue equities transactions
• Aligning exemptions from post-trade transparency, the share trading obligation and pre-trade transparency
• Streamlining the flags used in post trade reports
• Clarifying post trade reporting fields.

New Designated Reporting Regime – for equities and non-equities instruments

• De-coupling investment firms’ responsibility for post trade reporting from their systematic internaliser (SI) status and instead notifying the FCA that they wish to be a “designated reporter” – be warned, this may cause issues as election is proposed at entity level and not by asset class.

Equities pre-trade transparency waivers

• Focusing on amending UK RTS 1 to allow trading venues and deriving prices from the most relevant market in terms of liquidity.

Tick sizes

• FCA proposing the allowing UK venues to use tick sizes applicable to the relevant primary market outside the UK.

Market outages

• Working with trading venues and other market participants on communications and protocols during outages. This covers a myriad of systems and circumstances.

UK market for retail orders

• Essentially looking at best execution for retail orders and focusing around RSP systems.

The Future

As stated, FCA CP22/12 is one of a package of reforms following the UK WSM Review.

The FCA proposes to consult on several other aspects of the regulatory regime, including:

• A further CP on equities transparency requirements, including pre-trade transparency waivers
• A CP covering guidance for trading venues and market participant on market outages
• A potential CP on the creation of the consolidated tape
• A CP on guidance regarding the trading venue perimeter/meaning of multilateral trading system (not mentioned in the current FCA CP but widely expected to be published this month)
• One or several CPs on the non-equities pre- and post-trade transparency regimes.

 

Firms should note that this is a brief synopsis of the consultation paper.