Earlier this week FCA released its Consultation Paper (CP) on improving Equity Secondary Markets. Although some elements cover ALL asset classes, the expectation is that we will see the staggering of topics and the equivalent for the more complex Non-Equity asset classes released soon too.
Since Brexit there has been the gradual transition of MiFID II/MiFIR into UK Law, without the need for a ‘bonfire of regulations’, but with the indication that the UK and HMT (see Wholesale Markets Review WMR) look to right some of the ambiguity and unnecessary complexity caused by the regulation since its inception in 2018. HMT’s first step was to give the FCA the power to change and adapt the regulation, without the bureaucracy of legislative changes.
With that, we now see this CP, seeking feedback from the industry, with responses due by mid-September 2022.
For this blog, I’ll concentrate on Post-Trade Transparency Reporting (PTT) RTS 1, in which the FCA’s plan, along with the WMR, is to lower costs and improve the information content of trade reports and how Equity Markets operate;
“We want to change our rules to enhance the quality of execution for investors and improve the information content of post-trade transparency”.
So as we dig into the details, we can see the aim of improving the content of PTT reporting by enabling market participants to better identify transactions that contribute to the price discovery process and to improve the consolidation of trade reports from multiple sources. Price Discovery being the key element to close to real-time reporting, within 1 minute of execution for RTS 1. In addition, a high priority is simplifying the reporting of OTC transactions by removing the Systematic Internaliser (SI) status as a criterion for establishing when an investment firm is required to report transactions. The FCA is proposing to adopt a new regime based on designated reporting firms, thus segregating the SI requirements from reporting responsibility. n.b. SI’s will not go away.
Two of the main issues identified within the PTT regime;
- The current system of flags does not always provide sufficiently precise information to separate price forming transactions from technical trades
- There is ambiguity as to which flags should be used leading to different firms adopting different standards which lowers the comparability of trade reports and the ability to consolidate them.
These shortcomings negatively impact the quality of the information contained in post-trade reports, increase compliance costs for the reporting entities as well as the costs for firms that use post-trade data to inform their trading decisions.
Yes there is an overlap of descriptive flags and a tidy up will make things clearer e.g. clarification of TNCP and NPFT but the removal of some flags should be closely reviewed with feedback from the industry as to whether there is any exposure to undue trading risk to some firms.
The Designated Trade Reporter adoption is stepping back into what looks like more of a MiFID I reporting regime. Investment Firms electing themselves as the designated reporter, with notification to the FCA mandatory and regardless as to whether they are an SI in the instrument or asset class, delineating the SI regime from the reporting responsibility. This will certainly favour the buy-side but as a reminder, there is still the possibility of reporting if neither party to the trade is an SI or a Designated Reporter and as before the seller will report.
In my opinion, for this to work, a central source, database or register has to be consolidated and maintained with the emphasis on the SIs and Designated Reporters to register and communicate to their buy-side clients. We saw this succeed leading up to MiFID II go-live with the APAs coming together as a consortium along with Smartstream RDU to create the SI Register (SIR), which was imperative to understanding reporting obligation. Ultimately with a change in rules, there will be reporter uncertainty or missing reporter status’s which could lead to under or over-reporting, which is a key area Kaizen’s PTT testing service highlights.
The FCA is aware and did highlight the high costs associated with regulatory changes. These can be seen across multiple teams within firms that regulatory reporting affects and industry conversations have been and will continue to be had.
What the industry wants from any change or divergence around PTT is; simplification, less ambiguity meaning consistency of reporting across firms and ultimately better quality trade reporting data, so investors can be better informed on pricing, liquidity and best execution.