Global Regulatory Brief: Trading and markets, October edition

The Global Regulatory Brief provides monthly insights on the latest risk and regulatory developments. This brief was written by Bloomberg’s Regulatory Affairs Specialists.

Trading and markets regulatory developments

Volatile macroeconomic winds and a growing focus on capital market efficiency continues to drive the reform of global financial market structures. Some of the most significant trading and market developments over the past month include:

• US: SEC directs equity exchanges and FINRA to improve governance of market data plans
• Nigeria: Securities regulator invites bids for a real-time surveillance system
• UK: UK Government confirms rule changes to wholesale markets
• Hong Kong: Monetary Authority designates market makers for southbound trading under Bond Connect
• Hong Kong: Regulators consult on changes to clearing rules for over-the-counter derivative transactions
• Singapore: Singapore Exchange Group proposes changes to derivatives trading rules
• EU: ESMA publishes validation rules and XML schemas ahead of EMIR Refit go-live date
• UK: FCA consults on validation rules and schemas for SFTR reporting
• US: SEC approves funding amendment to National Market System Plan governing the Consolidated Audit Trail
• US: SEC adopts amendments to exemption from national securities association membership
• Singapore: MAS reports robust enforcement activity

US SEC directs equity exchanges and FINRA to improve governance of market data plans

The US Securities and Exchange Commission (SEC) i­­­ssued an order directing the equity exchanges and the Financial Industry Regulatory Authority (FINRA) (the “participants”) to file a new national market system plan (NMS Plan).

What this means: The NMS Plan replaces the three existing national market system plans that govern the public dissemination of real-time, consolidated equity market data for national market system stocks.

The details: The order follows a May 6, 2020 commission order that was reviewed by the D.C. Circuit and, among other things, was upheld with respect to the commission’s requirements that the new plan allocate votes by exchange group and provide for an independent administrator.

Looking ahead: Under the order, the participants must submit a new NMS plan that will be published for public notice and comment. Until such a new NMS plan is effective, the current NMS plans will continue to govern the provision of consolidated equity market data.

Nigeria securities regulator invites bids for a real-time surveillance system

The Nigerian Securities and Exchange Commission (SEC) invites bids for the supply, installation, and deployment of an automated real-time surveillance system for securities markets.

Specific goals: The Nigerian SEC is looking for a surveillance solution that covers market monitoring across all existing and future trading platforms and all tradable securities and products.

The problem in question: The current absence of real-time monitoring of trading activities makes exchanges and trading platforms susceptible to infractions when it comes to the trading of securities.

Broader context: The invitation for bids comes as the SEC undergoes a wider project of digital transformation, seeking to improve efficiency of surveillance, boost investor confidence, and increase the competitiveness of Nigerian capital markets.

The relevant criteria: Eligible bidders must fulfill various criteria that, among other things, demonstrate the firm is sufficiently embedded in the African market and has carried out similar projects successfully in the past. Bids must be received by October 17, 2023.

Closely related: The Nigerian SEC recently proposed an expanded definition of an inter-dealer broker to include financial intermediaries that operate in exchange-traded derivatives markets. This comes in addition to the current definition that covers intermediaries in over-the-counter derivatives and bond markets. This change in scope aims to deepen market liquidity and sophistication.

UK government confirms rule changes to wholesale markets

The UK government published an explanatory note to the Financial Services and Markets Act, confirming that a number of provisions under the Wholesale Markets Review have now come into effect. Among other things, these include:

• Removal of Share Trading Obligation (STO): The Act removes the STO and therefore permits firms to trade shares on any trading venue in the UK or overseas with any counterparty or on an OTC basis. This is intended to ensure that investors can get the best price for their trade.

• Replacing the pre-trade transparency waiver regime and removing the Double Volume Cap (DVC): The Act revokes the existing system of waivers from pre-trade transparency requirements. Instead, it gives the FCA new rule-making powers to determine under which circumstances waivers are available and any conditions that are to be attached to their use. The Act removes the DVC from the MiFID II framework.

• Changes to the systematic internalizer (SI) definition: The Act reverts to a qualitative definition of an SI and gives the FCA the power to specify how the new definition should be interpreted. This is intended for a more flexible regime that can better account for market evolutions.
• Aligning the Derivatives Trading Obligation (DTO) with the EMIR Clearing Obligation (CO): The Act formally realigns the counterparties (including financial, non-financial and analogous third country entities) in scope of the DTO with those in scope of the CO in EMIR.
• Giving the FCA a permanent power to modify or suspend the DTO: The Act gives the FCA a new, permanent power to modify or suspend the DTO, subject to HM Treasury approval, to prevent or mitigate disruption to markets.

• Looking ahead: The Act aims to reduce the complexity of the current transparency regime for fixed income and derivatives. It will ensure that the right instruments fall within scope by delegating responsibility for calibrating the scope and firm-facing transparency requirements to the FCA. The FCA is expected to consult on transparency requirements for fixed income and derivatives markets later this year.

Closely related: The FCA has issued updates in relation to the UK’s share trading obligation (STO) and derivatives trading obligation (DTO) to reflect the changes in legislation.

Hong Kong designates market makers for southbound trading under Bond Connect

The Hong Kong Monetary Authority (HKMA) announced that it has designated the following nine additional financial institutions as market makers for Southbound Trading under Bond Connect:

• China International Capital Corporation Hong Kong Securities Limited
• CMB Wing Lung Bank Limited
• CSI Global Markets Limited
• DBS Bank Limited
• Deutsche Bank AG, Hong Kong Branch
• Guotai Junan Securities (Hong Kong) Limited
• Huatai Financial Holdings (Hong Kong) Limited
• Industrial Bank Corporation Limited
• UBS AG

Wider context: Designated market makers provide investors with secondary liquidity, and therefore facilitate the orderly operation of Southbound Trading under the Bond Connect scheme.

• The selection of designated market makers follows HKMA’s established internal evaluation process that is based on a range of criteria such as debt market activities, business presence in Hong Kong, counterparty network with Mainland financial institutions, and internal control systems

What next: The HKMA will review the list of designated market makers and evaluate the need for enhancement and expansion as and when appropriate, with a view to enhancing cross-boundary financial connectivity and promoting the development of Hong Kong bond market.

Hong Kong regulators revise OTC derivative clearing rules

The Hong Kong Monetary Authority (HKMA) and Securities and Futures Commission (SFC) have set out their response to feedback on proposed changes to the mandatory clearing regime for specified standardized interest rate swaps (IRS) between major dealers.

In more detail: The proposals to remove the requirement to clear certain OTC derivative transactions that reference interbank rates (IBORS) that have ceased or will cease to be published, or considered representative by the relevant authority, have received strong support.

• Instead, Hong Kong regulators propose to require clearing of those transactions that reference alternative reference rates (ARRs) as identified by the relevant regulators in the jurisdictions concerned

Next steps: The clearing guidelines will be updated accordingly to reflect the legislative amendments. Implementation is expected no earlier than July 1, 2024.

Singapore Exchange Group proposes changes to derivatives trading rules

The Singapore Exchange Group (SGX) is inviting public comment on proposed changes to the Futures Trading Rules (FTR) and the rules covering securities trading and derivatives clearing.

In more detail: The proposed rule amendments will update policies and rules relating to the admission of derivatives trading members, the requirements pertaining to customer margin, automated trading, and emergency powers.

• SGX has also made changes to enhance readability and ensure consistency with a more principle-based approach

Next steps: SGX requests all comments by October 11, 2023.

ESMA publishes validation rules and XML schemas ahead of EMIR Refit go-live date

The European Securities and Markets Authority (ESMA) published their revised validation rules and XML reporting schemas for the European Market Infrastructure Regulation (EMIR) Refit.

In more detail: The changes seek to provide more clarity and alignment to facilitate better quality data.

• There are specific changes to cross-report validation between the trade and margin reports as well as file-level validations
• It is worth noting that ISINs have become optional for derivative transactions executed on a systematic internaliser

Looking ahead: Another schema update is expected before the year-end and firms should plan for further updates ahead of the EU-EMIR Refit go-live on April 19, 2024.

FCA consults on validation rules and schemas for SFTR reporting

The UK FCA has issued for consultation revised validation rules and XML schemas for UK Securities Financing Transactions Regulation (SFTR) reporting requirements.

In more detail: The changes include adoption of the EU-SFTR updates that went live on 11 September and further changes to align to EMIR REFIT, UK policy and to improve data quality.

Looking ahead: The consultation period closed on September 15 and final versions will be finalized and published soon. The proposed go-live date is November 4, 2024.

US SEC approves funding amendment to National Market System Plan governing the Consolidated Audit Trail

The US SEC approved an amendment to the National Market System Plan governing the Consolidated Audit Trail (CAT) (the “CAT NMS PLAN”) to adopt a revised funding model, called the “Executed Share Model,” for the CAT. This amendment also establishes a fee schedule for CAT fees for the self-regulatory organizations that are participants to the CAT NMS Plan, in accordance with the Executed Share Model.

The details: The approved amendment establishes a framework that participants will use to recover the costs to create, develop, and maintain the CAT, including the method for allocating CAT costs among participants and the members of a national securities exchange or a member of a national securities association

What you need to know: The order approving the amendment will be published in the Federal Register and the amendment became effective upon the SEC’s approval

US SEC adopts amendments to exemption from national securities association membership

The US SEC adopted rule amendments that narrow the exemption from Section 15(b)(8) of the Securities Exchange Act of 1934. It requires any broker or dealer registered with the Commission to become a member of a national securities association, unless the broker or dealer affects transactions in securities solely on an exchange of which it is a member. FINRA is currently the only registered national securities association.

What you need to know: The final rule will become effective 60 days after the date of publication of the adopting release in the Federal Register. The compliance date will be 365 days from the date of publication of the adopting release in the Federal Register.

Singapore reports robust enforcement activity

The Monetary Authority of Singapore (MAS) issued its latest Enforcement Report, providing details on robust enforcement actions taken against financial institutions (FIs) and individuals for market abuse, financial services misconduct and money laundering (ML) related offenses.

In more detail: The report covers enforcement actions taken during the period January 2022 to June 2023, for breaches of MAS’ regulatory requirements. These include:

• Over $7 million in penalties for anti-money laundering related breaches
• Almost $13 million in civil penalties for market abuse cases
• 39 criminal convictions of individuals involved in market misconduct and related offenses

Looking ahead: MAS enforcement priorities for the next year include enhanced capability to tackle misconduct in the digital asset ecosystem and continued focus on asset and wealth managers’ compliance with the applicable laws and regulations.

View the additional regulatory briefs from this month:

• Risk, capital and financial stability
• Green finance
• Digital finance

Sign up to receive these updates in your inbox first.

How we can help

Bloomberg’s Public Policy and Regulatory team brings you insight and analysis on policy developments to help navigate the complex and fast changing global regulatory landscape. To discuss regulatory solutions, please get in touch with our specialists or read more insights from our Regulatory team.