The Future of Wholesale Markets Regulation

The FCA has published a speech delivered by Edwin Schooling Latter, their Director of Markets and Wholesale Policy. The speech covered the future regulation of the wholesale financial markets in the UK.


We have read and digested it (so you don’t have to). Here are our key takeaways.


1. Divergence


Divergence is a key topic for future UK -EU relations in financial services. The mood music indicates an increasing willingness by the UK to diverge from the black letter requirements of EU Directives and Regulations. The lack of willingness by the EU to offer the UK equivalence appears to be giving encouragement to the UK to take this approach.


At the same time, it also seems clear that the UK wants to remain in line with international best practice such as recommendations made by the Financial Stability Board (FSB).


2. Sunk costs


The FCA recognises that many firms have already had to implement the full EU version of regulations either due to timing or because they also have significant operations in the EU. FCA therefore considers it prudent to allow those newer regimes time to mature as divergence could add complications and costs.


That said, FCA is willing to consider removing commodities lending under the Securities Financing Transactions Regulation (SFTR) and the relative benefits of single versus double-sided reporting.


More generally, FCA is considering taking a different path where it feels the costs of some regulatory requirements are not justified by the benefits.


3. SFTR and CSDR


Mr Schooling Latter used these regulations as examples of the FCA’s new approach. For example, the UK has decided not to require NFC- firms* to report under SFTR, the logic for this is that virtually all SFT transaction undertaken by NFC firms face an FC who will report the transaction. As such this should have a minimal impact on the FCA’s ability to oversee the market. The one-sided reporting approach is also followed by firms subject to Dodd Frank.


Equally the FCA has decided not to implement the mandatory buy-in requirements under CSDR. This approach seems to have been influenced by industry concerns about the impact on liquidity, particularly for securities from smaller issuers.


This might well be an example where regulatory philosophies between the UK and EU diverge. As Mr Schooling Latter notes there is a view that mandatory buy-ins constrain short selling. Whereas the FCA seems to view that the existing Short Selling Regulation is sufficient. We might see more on this debate on the back of the GameStop saga. Please see our blog on this: https://www.leamancrellin.co.uk/post/gamestop-reddit-compliance-issues


4. Capital markets reform and MiFID 2 quick fix


This follows on from Lord Hill’s review and comments from the Chancellor of the exchequer on the UK listing regime. FCA believes they can achieve efficiency gains if prospectus documentation is better aligned with the type of transaction being undertaken.


There might be some good news for the commodities markets where FCA are considering simplifications from both a SFTR and MiFID 2 perspective.


FCA will be consulting soon on changes to MiFID II. The FCA says their changes are going to be similar “but not absolutely identical” to the changes being made by the EU. FCA says their approach will support economic recovery.


An area of MiFID 2 where we might see some more divergence is in relation to transparency. Here FCA have decided not to follow the approach of having automated caps on the amount of dark trading that can happen, instead preferring an approach of only intervening where dark trading is shown to harm execution or price formation. It is notable that Mr Schooling Latter also comments that the ‘dark trading’ could be seen as pejorative and that there is no need to keep the cap in the absence of EU equivalence on the Share Trading Obligation.



5. International cooperation


In this area FCA point towards a broader (than the EU) regulatory agenda in areas such as lessons from Covid-19 (liquidity stresses for example) and ESG. The message here seems to be the UK will look more towards FSB and IOSCO driven initiatives for best practice in markets regulation whilst the direction of travel from the US will be at least as important as that from the EU.


Conclusions


As we have noted in previous blogs it is likely true that most people in the City would have preferred to closely follow EU regulations if that had meant cross border access to wholesale clients in the EU could be maintained.


If that is off the table for the time being then then there are increased incentives for UK plc, and by implication the FCA, to start adjusting UK regulations where it is felt what has been inherited from the EU does not really work or is not needed.


Whilst FCA and other UK authorities have been keen to stress that standards will remain high we potentially could see nimbler rule making from FCA in future. For all its’ many qualities one thing we know about the EU is that their rule making is rarely nimble.



* An NFC- is a non-financial counterparty with limited non-hedging derivative or SFT trades.

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