On 1 March 2022, HM Treasury published its response to its consultation on the Wholesale Markets Review, which closed on 24 September 2021. This response is available to view here and was based on four key principles;
The response explains how the Government and the FCA plan to deliver the proposals, through a combination of legislative change and changes to FCA rules and guidance. The Government indicated in the WMR consultation that a number of the proposals would most appropriately be handled by the FCA following the completion of the post-Brexit Future Regulatory Framework (FRF) Review, which will involve the transfer of more rule-making powers to the FCA. The effect is that implementation of the WMR will proceed on a piecemeal basis and that a number of the reforms proposed may not take effect for some time.
Some WMR issues likely to be of greatest interest to market participants include.
The regulatory perimeter for trading venues. It is intended that the FCA will consult on new guidance in the first instance, rather than the Treasury bringing forward amendments to the definition of a “multilateral system”, the concept of which underpins the trading venue regulatory perimeter.
Removal of some restrictions on MTF and OTF operators. The Government believes that it would be appropriate to remove the matched principal trading restrictions for investment firms operating a multilateral trading facility, and to allow the operators of organised trading facilities to execute transactions in equities when dealing in packages. However, these issues have been deferred for now, with the FCA to consider them further following implementation of the FRF Review.
SME markets. The Government will continue to explore the creation a new type of trading venue for small and medium-sized enterprises in collaboration with the FCA and market participants as part of the wider UK Listings Review.
Market outages. The FCA will discuss with market participants how it can use its current tools to clarify what should happen when there is a market outage (and whether and how to amend the requirement for trading venues to resume trading within two hours of an outage), as a prelude to further consultation later in 2022.
It is planned to make a number of adjustments to the systematic internaliser (SI) regime, including;
A return to qualitative thresholds. Whether or not a firm is an SI in a particular instrument is currently determined by reference to quantitative thresholds, which are calibrated at different levels for each asset class. The Government intends to revert to qualitative thresholds (as was the case under MiFID I), in order to reduce the compliance burden on firms by removing the need to undertake complex quarterly calculations.
Simplifying the SI reporting regime. In principle, the proposal to simplify the reporting regime for SIs was welcomed by most respondents, although a number of different approaches were put forward. On the face of it, it appears that the Government’s original proposal that if a counterparty is dealing with an SI, then the SI will always be responsible for reporting (whether or not they are an SI in the particular asset class that is being traded) may not be taken forward. It is expected that the FCA will consult on this in the first half of 2022.
Minimum quote sizes. The FCA has also been given responsibility for taking forward the proposal for increasing the minimum quote size for equity SIs as a proportion of standard market size (SMS) following the implementation of the outcomes of the FRF Review.
Removal of the Share Trading Obligation (STO). The Government has also committed to bring forward legislation to remove the STO.
Amendments to the Derivatives Trading Obligation (DTO). The Government intends to bring forward legislation to align the scope of the DTO with the scope of the Clearing Obligation (CO) so that counterparties that are in scope of the CO will also be in scope of the DTO, as well as extending the exemption from the DTO to all post-trade risk reduction services, provided certain conditions are met. The FCA will also be given a permanent power to modify or suspend the DTO, beyond the initial post-Brexit period.
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