
FCA consults on market transparency changes
The FCA is consulting on significant changes to the transparency regime for bond and derivatives markets.
The FCA published its final rules for Improving transparency in bond and derivatives markets on 5 November 2024. PS 24/14 follows a previous consultation, CP 23/32, which proposed a range of measures aimed at ensuring the UK’s pre- and post-trade transparency requirements effectively support price formation and best execution, while also protecting the ability of liquidity providers to hedge their risks when dealing in large sizes.
The final rules are consistent with earlier proposals in many areas. The FCA has made several changes to the calibration of the rules on waivers, deferrals and bond groupings, reflecting feedback received from industry.
The majority of the rules will come into effect on 1 December 2025, providing firms with 13 months to implement any necessary systems and reporting changes.
These rule changes form part of the FCA’s wider agenda to strengthen UK wholesale markets.
The FCA notes that respondents to CP 23/32 were broadly supportive of a wide range of the proposals. The FCA’s rules therefore adopt many of the proposals unchanged.
Scope: Bonds and derivatives will be divided into two categories, with different transparency requirements for each. Category 1 instruments will be bonds that are traded on trading venues (ToTV) in the UK, and certain derivatives that are subject to the clearing obligation. The full list of Category 1 instruments is specified in the new FCA handbook chapter MAR 11, Annex 1R. Remaining bond and derivative instruments are classified as Category 2.
Post-trade transparency requirements set by the FCA will apply to trading venues and investment firms for Category 1 instruments. For Category 2 instruments, trading venues will need to set transparency requirements in line with FCA criteria, while investment firms will not have any transparency obligations.
Pre-trade requirements will apply depending on the type of trading system used. In a change to its earlier proposals, the FCA’s final rules will remove trading systems other than continuous auction order books, quote-driven trading systems, and periodic auction trading systems, from the pre-trade transparency requirements. Voice and request for quote (RFQ) systems will therefore not be subject to pre-trade requirements. Trading venues can waive the pre-trade transparency requirements for Category 1 instruments above certain large-in-scale (LIS) thresholds as set by the FCA, and can calibrate the level of transparency they provide for Category 2 instruments.
Deferrals: The FCA’s rules will introduce a new framework for deferrals from publishing real-time post-trade information which will apply only to LIS transactions, on a non-aggregated basis.
To calibrate the LIS thresholds, the FCA groups instruments according to different characteristics, with less liquid instruments subject to lower thresholds and longer deferral periods.
For bonds, there will be four groups of trade sizes with different post-trade transparency requirements for each. In a change to earlier proposals, the FCA will require that information on the price and size of each trade be made available at the same time. Deferral periods will range from 1 day to 3 months.
For derivatives, thresholds are set according to the maturity (tenor) of the instrument and size of the trade. Trades above those thresholds must be reported by the end of day, or by the end of the next day for ‘broken-dated’ (i.e., non-benchmarked) trades with a maturity longer than 12 months. Information about the volume of the largest trades (i.e., those above higher thresholds set by the FCA) can be deferred until the end of the following quarter after the trade took place.
Trades below the LIS thresholds must continue to be made public in real-time. A 15 minute delay will be made available for package and portfolio trades, given the operational complexity of booking these trades.
Exemptions from post-trade transparency: The final rules confirm an exemption from post-trade reporting for certain trades that are non-price forming, including inter-fund transfers, inter-affiliate transactions, and give-up/give-in transactions.
Fields and flags: The FCA will allow firms to report OTC derivatives using Unique Product Identifier (UPI) codes, as well as International Securities Identification Numbers (ISINs). The FCA will also delete certain transaction report flags and add a new flag for identifying trades of a portfolio of bonds (‘PORT.’)
Systematic Internalisers: In line with the CP 23/32 proposals, the FCA’s rules provide a new, qualitative, Handbook Glossary definition of when an investment firm is acting as a systematic internaliser (SI), as well as related guidance in the Perimeter Guidance (PERG) chapter.
Within this PS, the FCA also included a Discussion Paper (DP) on the future of the SI regime. Once the PS 24/14 rule changes go live, SIs will no longer be subject to pre-trade transparency requirements for bonds and derivatives; the FCA also notes a range of other relevant changes to wholesale markets which impact the SI regime in the UK. In light of these changes, the FCA is seeking views on a set of wide-ranging questions on the future of the SI regime. This includes asking market participants whether they think the current transparency regime for SIs is effectively contributing to the price formation process for equities, an area not covered in the FCA’s reforms to date.
Implement systems changes to integrate and manage the new requirements.
Update reporting processes and controls.
Consider the impact of these changes alongside broader and forthcoming wholesale market data and reporting reforms.
Firms that are active in bond and derivatives markets should begin preparing to implement the FCA’s new rules. This is likely to require changes to internal operational systems for recording and reporting in-scope trades and transactions, and reporting processes, systems and controls.
While the majority of the rules come into effect on 1 December 2025, some apply earlier. From 31 March 2025, trading venues and investment firms operating SIs will not need to apply pre-trade transparency to voice and RFQ trading systems.
Firms should also be alive to the potential for further reforms coming down the line. In particular:
The FCA will begin the process of appointing a bonds Consolidated Tape (CT) provider shortly. The CT will go live after these transparency rules come into effect.
The FCA has confirmed it will publish a separate DP on the UK’s transaction reporting regime (expected Q4 2024).
A post-implementation review of the bond and derivatives transparency requirements, based on the first 6 months of data under the new rules, will be completed before the end of 2026, with the potential for further changes.
PS 24/14 also hints at a future review of the pre-trade transparency regime for equities.
Given the cumulative impact of these changes, firms are likely to benefit from a holistic review of their reporting processes, systems and controls. Future reforms by the FCA, such as the potential for changes to the MiFID II restrictions on operating a multilateral trading facility (MTF) as mentioned in PS 24/14, may also inform firms’ business and growth plans.
Responses to the DP on the future of the SI regime can be submitted until 10 January 2025.
Owen Jones