Improving Equity Secondary Markets: A Debrief

The FCA has released its much-anticipated policy changes on the back of last year’s consultation: ‘Improving Equity Secondary Markets’, part of the Treasury’s Wholesale Markets Review (WMR).  As suggested, the aim is to enhance execution quality, increase liquidity and ultimately strengthen the UK’s position and competitiveness in global wholesale markets.

This first Policy Statement relates to equities only, RTS 1 of MiFIR, and the majority of proposals will enter into force in April 2024, although it is noted that, for investment firms, changes in areas like pre-trade waivers will apply immediately (per the FCA’s existing powers). So please read through the document and understand the impact on you and your organisation…

The Future Regulatory Framework (FRF) Review gave responsibility of retained EU law to the regulators and subsequently moves the UK MiFIR/MiFID II regime into the FCA Handbook.  Improving the content of Post-Trade Transparency (PTT) Reporting with a clearer identification of transactions that contribute to the price discovery process in a consolidated way, was important. The simplification of reporting by delineating the Systematic Internaliser (SI) regime from the new Designated Reporter Regime (DRR) was also key.

The changes by the FCA should lead to:

• improved market liquidity
• more efficient prices
• greater competition, choice and access between trading venues, SIs and investment firms
• lower operating costs for firms
• lower costs of trading
• greater activity on UK trading venues.

In this article I focus on three main areas – Exemptions, Flags and DRR.

1. Exemptions

The FCA was keen to expand on the list of transactions that are exempted from PTT reporting due to their non-price forming nature. The changing of conditions for when investment firms are required to PTT Report should simplify and lower costs. Article 13, RTS 1 lists the transactions exempt from PTT, adding noise to the market unnecessarily, but for consistency links to Article 2(5) of RTS 22.  Going forward, this list would include intra-group transactions, deemed non-price forming and which do not constitute addressable liquidity and are mainly used for the purpose of Risk Management (mirroring market conditions but not contributing to price). ‘Inter-affiliate transaction’ means a transaction between entities within the same group carried out exclusively as part of centralised booking for intra-group risk management purposes.”  The FCA would also streamline the overlap between Article 2, 6 & 13 of RTS 1.

2. Flags

The deletion of Pre & Post-Trade Transparency flags was proposed and has now been confirmed.  For post-trade this means the deletion of ‘SIZE’, ‘ILQD’ & ‘RPRI’ plus ‘ACTX’ & ‘DUPL’, taking into account the limited use of them today.  ‘ALGO’ will be maintained. Merging existing flags into one was discussed but ‘TNCP’ and ‘BENC’ will be maintained.  ‘CLSE’ has been introduced for Closing Prices and ‘PORT’ introduced to align with EU standards for Portfolio Transactions.

The FCA highlighted that the removal of waivers would mean improved access to liquidity under the reference price waiver. In line with post-trade flags, there’s the aggregation of existing pre-trade flags ‘NLIQ’, ‘OILQ’ and ‘PRIC’ to ‘NETW’ for different types of negotiated trades.  A new flag will also be introduced for pre-trade large in scale ‘NTLS’, which has not been in place since MiFID II inception.

It was noted that some of the pre and post trade flag changes will have an impact on fields 61 & 63 of Firms Transaction Reporting under RTS 22.

3. DRR

The proposal was to remove the SI status as a criterion in establishing when an investment firm is obligated to report a transaction. Under the DRR, firms could elect to register themselves as a designated reporter (DR) by notifying the FCA. A firm would be able to register as a DR regardless of its SI status. Registration would apply at entity level. This would mean DR status would apply to all that firm’s reportable trades across all eligible financial instruments. Where firms are trading with a non-DR, a DR would be responsible for reporting all trades. The seller would report where both, or neither, of the counterparties are a DR.

Concerns were raised by some sell-side firms but the FCA clarified DRs can bilaterally agree, explicitly and in advance, which party shall fulfil the reporting obligation. The seller will always have the regulatory obligation to report but may discharge this by entering into an agreement with the buyer whereby the buyer agrees to report on its behalf. This option addresses the situation of having a reporting obligation but no arrangements to make the report public. DRR firms that wish to register as a designated reporter will need to submit a notification to the FCA. The FCA has said it will announce further details of this process in ‘due course’.

Other points to note; the slight adjustments to the ‘Price’ field (numerical values only) ‘Price Currency’ field (incl. minor ccys) and the introduction of a new field called ‘Price Condition’ (already an existing FIX field but not published) to be populated with ‘PNDG’ when the price is not available at point of execution.

Lastly, the FCA continues to highlight that it is developing the Consolidated Tape (CT) regime with the Treasury. The FCA intends to consult on this in the near future as part of work towards having a regulatory regime in place for a CT by 2024. A framework for CT will initially be for bonds but will have the scope to be built upon and adapted for equities.

To summarise, the FCA post-Brexit consultation has been discussed for a while now and should not come as a surprise but there is still an impact on Investment Firms, (SIs & DRs) and APAs alike.  Careful consideration is needed on the Front Office IT development required and the understanding, across the market, of the DR responsibilities and communication with the buy-side.  Lots more to come and we hotly anticipate the non-Equities RTS 2 review in due course.

• Read the full Policy Statement: Improving Equity Secondary Markets on the FCA’s website
• For a conversation with Chris on any of the MiFID II Post-Trade Transparency Reporting matters raised above, please contact us.