Global Regulatory Brief: Trading and markets, March edition
The Global Regulatory Brief provides monthly insights from regulatory bodies on developments within risk and regulation. This brief was written by Bloomberg’s Regulatory Affairs Specialists.
Trading and markets regulatory developments
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- EU lawmakers move into the end-game for the MiFIR-D review process
- ESMA publishes final opinion on trading venue perimeter under MiFID II
- Industry and regulators prepare for overhaul of UK financial regulation
- CFTC designates unique product identifier (UPI) for swaps recordkeeping and reporting
- SEC finalizes rules to reduce risks in clearance and settlement
EU lawmakers move into the end-game for the MiFIR-D review process
European lawmakers are making significant progress toward completing their review of the flagship legislative file for securities trading, the Markets in Financial Instruments Directive and Regulation (MiFIR-D). As part of a broader push to revitalize the European Capital Markets Union (CMU) initiative, this review is intended to provide a number of targeted fixes to the MiFIR-D regime that has been in place since 2018.
Following the release of initial proposals from the European Commission (EC) in November 2021, the 27 EU member states agreed their common negotiating stance on December 22, 2022. The European Parliament is also close to agreeing its position on the file, at which point the Parliament, member states and EC will negotiate a final set of amended rules.
Among other things, discussions in the European Parliament are exploring the appropriate arrangements for a consolidated tape regime in each asset class and simplification to the pre- and post-trade transparency rules. There is also lively discussion about whether practices such as Payment for Order Flow should be restricted.
Though still some time off, as the updated rules are not expected to be finalized until the second half of 2023 and only then come into force in 2024-2025, market participants can expect significant changes to the rules and processes governing the European trading landscape over the coming years.
ESMA publishes final opinion on trading venue perimeter under MiFID II
The European Securities and Markets Authority (ESMA) has published on February 6 its final opinion regarding when trading systems should be considered as multilateral and should seek the appropriate authorization. This was deemed necessary to ensure there is a level playing field for authorized trading venues. ESMA will now work with national European regulators to ensure that firms assess their systems against the updated guidance.
In its report ESMA considered a range of scenarios where technology providers offering communication, execution and order management services might be operating multilateral systems which require authorization. Given the complexities involved, ESMA has underlined the need for such systems to be assessed on a case by case basis.
Industry and regulators prepare for overhaul of UK financial regulation
The United Kingdom (UK) is embarking on a substantial rethink of its regulatory approach to financial services and capital markets following the country’s departure from the EU. The draft Financial Services and Markets Bill (FSMB) is designed to repeal various items of retained EU law, such as the insurance framework under Solvency II, with a view to establishing a more proportionate financial services regulatory framework. It will also introduce new mandates for UK regulators to consider competitiveness in their work. The Bill is currently still under review by the UK Parliament but it is the Government’s ambition for the FSMB to become law by Easter, marking a symbolic new chapter in the UK’s approach to financial services regulation.
The FSMB will also implement various elements of the Wholesale Markets Review (WMR) that was first published in July 2021 and mirrors many of the same issues arising from the EU MiFIR review. The WMR tackles a range of issues such as pre- and post-trade transparency, consolidated data, and regulatory reporting and the Financial Conduct Authority (FCA) now has the task of drawing up rules for implementation.
To tie together the work being done across the WMR and the FSMB, UK Chancellor Jeremy Hunt announced in December 2022 a substantial package of regulatory reform regarding the UK financial services, dubbed ‘The Edinburgh Reforms’. This contains a wide range of initiatives designed to make the UK a more attractive financial services hub, such as a commitment to reviewing the rules around research unbundling, a new retail disclosure regime to replace the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation, and reform to the ring-fencing regime for banks.
CFTC designates unique product identifier (UPI) for swaps recordkeeping and reporting
Efforts to better identify and monitor systemic risk in swaps data received a boost when the US Commodity Futures Trading Commission (CFTC) issued an order to designate the unique product identifier (UPI) and product classification system for use in swap recordkeeping and reporting. Specifically, the regulator judges UPIs issued by the Derivatives Services Bureau (DSB) for swaps in the credit, equity, foreign exchange, and interest rate asset classes to comply with their requirements. The key compliance date for registered entities and swap counterparties is January 28, 2024. Updates to the relevant legislation reflecting this change will be published here in due course.
SEC finalizes rules to reduce risks in clearance and settlement
The US Securities and Exchange Commission (SEC) has adopted rule changes to shorten the standard settlement cycle for most broker-dealer transactions in securities from two business days after the trade date (T+2) to one (T+1). This is designed to benefit investors and reduce the credit, market, and liquidity risks in securities transactions faced by market participants. In addition to shortening the standard settlement cycle, it is also expected that the final rules will improve the processing of institutional trades. The Commission last shortened the standard settlement cycle from T+3 to T+2 in 2017.
Further, the final rules add a new requirement to facilitate straight-through processing, which applies to certain types of clearing agencies that provide central matching services. The final rules will become effective 60 days after publication in the Federal Register. The relevant compliance date for the final rules is May 28, 2024.
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