FCA consults on market transparency changes

What does this mean?

These proposals form part of the FCA’s wider agenda to strengthen UK wholesale markets. The current regime’s scope is broad, applying to any bond or derivative admitted to trading or traded on a trading venue (‘ToTV’) in the UK. Once an instrument is ToTV, investment firms (IFs) must comply with the transparency requirements, including when dealing over-the-counter (OTC).

Scope: The FCA proposes to reduce the scope of instruments subject to transparency requirements via the introduction of new Category 1 and 2 groups.

Bonds traded on UK trading venues (TVs), and certain derivatives subject to the clearing obligation, will be Category 1.  The FCA notes that significant parts of the OTC derivatives market, namely FX derivatives and single-name credit default swaps, will therefore be outside the scope of Category 1.

All other instruments – including other derivatives, structured finance products, and emission allowances - will be Category 2.

TVs will need to comply with the pre- and post-trade transparency rules that apply to Category 1 instruments, while IFs will need to meet the post-trade requirements only.

For Category 2 instruments, TVs will need to ensure they provide adequate pre- and post-trade transparency in relation to all executed transactions, but the FCA’s rules will allow them to calibrate the appropriate level of transparency for their markets. IFs will not need to provide transaction reports for Category 2 instruments.

Transparency calculations: The FCA currently identifies liquid and illiquid instruments for the purpose of setting the thresholds for transparency exemptions or deferrals.

The FCA proposes to discontinue its Financial Instruments Transparency System. Instead, it will base its calculations for derivatives on the tenor of the instrument, and for bonds and credit default swaps on a number of characteristics including type of issuer, currency, issuance size, maturity, and credit rating.

Pre-trade transparency: The FCA proposes to retain the requirement for TVs to publish adequate information about bid and offer prices and the depth of trading interest on a continuous basis during normal trading hours.

However, detailed pre-trade requirements will be limited to fully transparent trading systems. Other systems, such as voice or request-for-quote, will not need to follow these requirements.

A new waiver for ‘negotiated orders’ will replace the existing waivers for instruments for which there is not a liquid market and size-specific-to-the-instrument. 

For Category 1 instruments, the FCA will specify the large in scale (LIS) threshold above which pre-trade transparency waivers can be applied, as well as post-trade deferrals. For Category 2 instruments, the FCA will provide criteria that TVs will need to have regard to when setting LIS thresholds.

Post-trade transparency: The FCA proposes to replace the current system of deferrals from publishing real-time post-trade transaction reports, which it sees as overly complex.

The new framework for deferrals would apply only to large trades and remove the ability to aggregate post-trade information. 

The FCA proposes that its rules prioritise making information public on prices, over size or volume of trades. The largest trades would benefit from an extended deferral time, or permanent reporting exclusion if capped.

The FCA proposes two models for setting the thresholds and length of deferrals, which will be dependent on the liquidity of the instrument in question, and invites views on both. The FCA states it believes both models will provide protection to market participants who conduct large trades, while still providing transparency.

Exemptions from post-trade transparency: Current exemptions from post-trade reporting, which apply to certain non-price forming trades, will be retained or expanded. The changes include an expanded definition of give-up and give-in trades, and a new exemption for investment firms that execute OTC transactions between entities within the same group.

Data reporting: The FCA proposes a number of changes to the reportable fields in post-trade transaction reports. This includes removing some redundant fields and flags, and adding a new field to identify the central counterparty used to clear the trade, where relevant.

The FCA also proposes to introduce a new Unique Product Identifier field, alongside several further data fields, while still retaining the use of International Securities Identification Number codes.

SI definition: The Financial Services and Markets Act 2023 confirmed that FCA rules will determine when trading is taking place on an organised, frequent, systematic and substantial basis.

The FCA proposes to use qualitative terminology to define those terms in its handbook, and work with HM Treasury to revoke the current quantitative calculations firms must perform. The FCA will provide additional interpretive guidance in its Perimeter Guidance Manual.

What do firms need to do?

Firms must ensure they remain compliant with their current reporting obligations.

Once any changes to the FCA’s rules are effective, firms will need to make the necessary operational changes to integrate and manage the requirements of the new regime.

Firms should also be alive to broader changes to wholesale market data and reporting standards. These include the introduction of a consolidated tape for bonds in 2025, and a review by the FCA of the UK MiFIR transaction reporting regime (date to be confirmed). The FCA’s Wholesale Data Market Study is also due for publication by 1st March 2024.

Firms should consider the cumulative impact of these changes, and holistically review their reporting processes, systems and controls.

Next steps

The consultation is open for comment until 6 March 2024. The FCA intends to finalise its rules in 2024 and implement in 2025, to align with the date that a consolidated tape for bonds is expected to go live. The FCA will conduct a post-implementation review within one year of the regime going live.