Global Regulatory Brief: Trading and markets, December 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

Global financial market structure continues to evolve as regulators and policymakers seek to improve efficiency and position their jurisdictions as attractive destinations for trading and investment. From Mexico to Korea, the following global regulatory developments in trading and markets over the past month stand out: 

• Korea: Authorities clamp down on short-selling
• Hong Kong: Securities regulator announces launch of China bond futures
• EU: ECB Governor calls for a European SEC to govern capital markets 
• Mexico: Congress approves bill to simplify securities markets for SMEs
• UK: UK Treasury defers benchmarks review to 2030
• UK: FCA provide observations and expectations on market soundings
• UK: HMT launches call for evidence on pension fund clearing exemption under UK EMIR
• EU: Parliament sets out stance on listing rules revamp for European public markets
• EU: Parliament adopts legislation on European single access point 
• US: SEC adopts rules on security-based swap execution facilities and clearing agency governance and conflicts of interest
• US: SEC issues exemptive relief for fixed-income from Rule 15c2-11

Korean regulators clamp down on short selling

Korea’s regulatory authorities are developing a set of proposals to reform the rules around short- selling, following concerns that illegal naked short-selling is preventing fair price formation. 

The intention: The authorities are hoping that new policy measures will level the playing field between institutional and retail investors, prevent naked short sales in advance, strengthen the detection of illegal short-selling activities, and expand short sale disclosure. 

What is naked short-selling? This is the practice of short-selling a tradeable asset without first borrowing the asset from someone else, or ensuring that it can be borrowed, or owning the asset in order to honor the agreement. Despite this practice being widely illegal, there continue to be instances of naked short-selling. 

Closely related: The Financial Services Commission held a meeting on November 5, 2023 where the authorities decided to ban all stock short-selling in domestic markets effective from Monday, November 6, 2023 until the end of June 2024. 

• A new taskforce has been formed, and at its first meeting, discussed a real-time blocking system to prevent illegal short selling
• The taskforce plans to meet at least once a month until the computer system is established

Looking ahead: Once fully developed, the authorities hope that these proposals will help to bring about improvements to the short-selling system, by balancing the concerns of retail investors alongside those of global institutional investors. 

Important context: Short-selling has become an important political issue in South Korea, as retail investors apply pressure on policymakers to restrict the practice ahead of parliamentary elections next year.

Hong Kong to launch China treasury bond futures

Hong Kong’s Securities and Futures Commission (SFC) announced that China treasury bond futures contracts will be launched in Hong Kong. 

More details: Hong Kong Exchanges and Clearing Limited (HKEX) is making preparations for the launch, including proposing amendments to relevant rules and HKEX will announce the details and the launch date as soon as practicable.

Important context: The amount of China treasury bonds held by offshore investors has increased steadily since the launch of Bond Connect in 2017, with the demand for related hedging tools also rising. 

Intention: The launch of China treasury bond futures aims to further expand the toolkit for overseas investors to hedge their exposure to mainland assets. 

ECB President calls for a European SEC to govern capital markets

In a speech to the European Banking Congress, President of the European Central Bank (ECB), Christine Lagarde, outlined the need for a European Securities and Exchange Commission (SEC) to enforce a single rulebook for securities markets. 

In summary: Lagarde considers that to create a unified capital market in the EU, it is time to pivot towards a new strategy through the creation of a European SEC responsible for direct supervision – to mitigate systemic risks posed by large cross-border firms and market infrastructures such as EU central counterparties. 

In more detail: The new supervisor would be built by extending the powers of the European Securities and Markets Authority (ESMA) and this should be accompanied by a single rulebook for EU securities markets.

Important context: President Lagarde considers that building a capital markets union in the EU is vital to addressing the structural issues that Europe faces. 

• Lagarde argued that a single EU capital market failed to develop due to the absence of a unifying project anchoring it and an overreliance on a bottom up approach 
• So far, the focus has been on risk-sharing to make the monetary union more resilient, instead of promoting investment, Lagarde argues
• Lagarde also stresses that the private sector has a role in providing consolidated market infrastructures, and that the creation of a European consolidated tape can encourage a shift towards larger, cross-border integrated market infrastructure and exchange groups

Mexican Congress approves bill to boost company listings

Mexico’s Congress approved legislative reforms to its securities market rules, in a bid to encourage more debt and equity listings. 

In more detail: The amendments aim to simplify and streamline the securities registration procedure to allow medium and small companies to access the benefits of securities markets and obtain the financing necessary for growth. 

• The changes also permit classes of shares with different voting rights – known as dual-class shares – to entice family-controlled companies to go public
• The reforms also indicate the creation of a new type of hedge fund to enhance investor returns and choice

Important context: The reform follows decisions from a number of large companies to de-list their shares.  

Next steps: Having now been approved by both the Mexican Senate and Congress, the bill will now be sent to the President to become law. Mexico’s banking and securities regulator will design implementing rules over the course of 2024. 

UK Treasury defers benchmarks review to 2030

The UK Treasury (HMT) has announced a further push-back to the application of the UK’s Benchmarks Regulation (BMR) regime for third-country providers. 

In more detail: The deferral removes the requirement for non-EU benchmarks administrators to seek specific access requirements and follows a current deferral to end-2025. 

• HMT has indicated the lengthy deferral will allow the Financial Conduct Authority to properly assess and implement a future benchmarks regime, as part of the broader overhaul of inherited EU law currently underway. 

Closely related: The announcement comes as the European Commission tabled a proposal for a narrowing of scope in the EU’s BMR, planned to take effect from January 1, 2026.

UK FCA provide observations on market soundings

The UK Financial Conduct Authority (FCA) published observations with regard to ‘market soundings’ and emphasized its expectations. 

What are market soundings? Interactions between issuers and investors that help determine interest in a transaction prior to its announcement and allow issuers to better calibrate transaction price, size, and structure. 

Background context: Robust market soundings procedures are important for protecting market integrity, as they manage the risks of investors inappropriately using inside information from these soundings.

• The UK Market Abuse Regulation (MAR) market soundings regime provides formalized arrangements for issuers and their advisors to legitimately disclose inside information
• Firms are expected to maintain a record of all communications with the Market Sounding Recipient (MSR), to gain their consent to receive inside information, and to inform the MSR that they are prohibited from using the information to trade relevant instruments

FCA observations: The FCA observed cases where MSRs have traded the relevant financial instruments after a Disclosing Market Participants (DMP) has initially communicated with them but before the DMP has disclosed the inside information. 

• While the DMPs did not disclose the identities of the financial instruments or the nature of the proposed transaction, the MSRs were still able to identify those details using other information available to them
• MSRs may have other information available to them that allows them to identify, with reasonable confidence, the relevant financial instruments before they consent to receiving and protecting the inside information in the market soundings
• The FCA urges MSRs to assess whether they possess inside information before trading when they are able to identify the security in a market sounding before agreeing to receive the inside information
• Importantly, the market sounding regime does not provide protections against MSRs trading on any inside information from market soundings

FCA guidance: The FCA encourages DMPs to take particular care when making market soundings on financial instruments that have few actors and where MSRs might easily identify the relevant instrument. 

• DMPs should remain alert to the risk of unlawfully disclosing inside information and may want to tailor the information in line with the nature of the transaction or the client
• MSRs should consider appointing specific teams or staff in compliance as the first point of contact for DMPs, and that staff are properly trained on the unlawful use of inside information
• DMPs and MSRs should consider minimizing time intervals between the DMP’s initial communications and requests for consent, and the MSRs consenting to such requests to reduce the risk of insider dealings

What can firms expect? Firms and their employees should be aware of the breadth of information that the FCA can request and which is available to the regulator when reviewing trades, communications, and documentation relating to market soundings 

HMT launches call for evidence on pension fund clearing exemption under UK EMIR

HM Treasury (HMT) launched a call for evidence on pension fund exemption from the obligation to clear certain derivative contracts under the UK European Market Infrastructure Regulation (EMIR). 

Broader context to the clearing obligation: G20 leaders agreed at the Pittsburgh summit in 2009 that all standardized and liquid derivative contracts should be cleared through a central counterparty (CCP). This requirement was implemented in the EU through the EMIR legislation, known as ‘the clearing obligation’.

Background to pension fund clearing: Pension funds can face particular challenges when clearing contracts through a CCP as they do not usually hold large cash reserves, preferring to invest the majority of their resources in fixed income.

• As such, meeting CCPs’ margin requirements can be more difficult for pension funds and in order to meet these requirements they may have to sell assets such as gilts that could have a negative impact on financial stability
• Pension funds in the UK are currently exempt from the clearing obligation until June 2025 

In summary: HMT has launched its call for evidence in order to determine its longer-term policy approach to the treatment of pension funds’ clearing obligations, with a view to avoiding further temporary extensions. In particular, HMT is seeking feedback on:

• Hedging and use of the exemption: These questions aim to develop a clearer picture of how funds manage their risks, the extent to which they use derivatives to do so as opposed to other means such as gilts, and the extent to which the clearing exemption is used
• Bilateral markets: These questions aim to inform how firms currently use bilateral, or ‘uncleared’ markets
• Facilitating clearing and meeting variation margin requirements: These questions focus on how pension funds can access clearing and how they can meet CCP requirements on variation margin 
• Autumn 2022 ‘LDI crisis’: These questions ask about the role of the clearing exemption during the ‘liability-driven investment (LDI) crisis’ in autumn 2022
• Impact of an expiry of the exemption: These questions focus specifically on how pension funds and their asset managers would be impacted if the exemption were to expire in June 2025

Looking ahead: Comments are due by January 5, 2024.

EU Parliament adopts reports on listing act

The EU Parliament’s Committee on Economic and Monetary Affairs (ECON) has adopted its reports (here and here) on the EU Commission’s proposals to amend the Prospectus Regulation, Market Abuse Regulation (MAR) and the Markets in Financial Instruments Regulation (MiFIR) and Directive (MiFID II). 

Specific goals: The proposals aim to alleviate the administrative burden for companies and facilitate their access to public funding by listing on stock exchanges, and to increase the availability of investment research covering midcaps and SMEs.

Further detail: Regarding the flagship MiFID II rules on research unbundling, the Parliament is advocating the removal of the prohibition to permit bundling payments of research and execution fees, subject to a new obligation for the investment firm to regularly assess the quality and price of the research. 

• The Parliament also supports the establishment of an EU marketplace for investment research, focusing on research in SMEs and IPOs, by the European Securities and Markets Authority (ESMA)
• The Parliament also recommends that a financial instrument from an issuer that is listed on an SME growth market can only be traded on another trading venue if the issuer has been duly notified and has not raised any objections
• The report suggests to mandate ESMA to develop guidelines on the communication methods used and the relevant timelines

What next: Final negotiations will begin soon between the European Parliament, Council, and Commission to determine the final rules, with an agreement expected by Q1 2024. 

European Union adopts legislation on European Single Access Point

The European Union (EU) adopted legislation establishing a European Single Access Point (ESAP).

What this means: The EU adopted the legislative framework for ESAP which is intended to provide centralized access to publicly available information of relevance to financial services, capital markets and sustainability.

Timeline: The regulation should be published in the Official Journal by end of the year. Once operational in 2027, the ESAP will be implemented in three phases: 

• The first phase will include information under short-selling, prospectus regulation and transparency rules. 
• A second phase will cover, among other things, disclosures under the sustainable finance disclosure regulation, the credit rating agencies rules and the benchmark regulation. 
• The final phase will include information under banking rules, MiFIR and the EU Green Bonds Regulation, among others.

US SEC adopts rules on security-based swap execution facilities and clearing agency governance

The US Securities and Exchange Commission (SEC) adopted (1) a new Regulation SE under the Securities Exchange Act of 1934 to create a regime for the registration and regulation of security-based swap execution facilities (SBSEFs) and (2) rules on clearing agency governance and conflicts of interest.

Security-based swap execution facilities rule: The new regulatory framework was required under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act relating to the over-the-counter derivatives market.

• Details: The adoption addresses the Exchange Act’s trade execution requirement for security-based swaps and the cross-border application of that requirement. It also implements Section 765 of the Dodd-Frank Act to mitigate conflicts of interest at SBSEFs and national securities exchanges that trade security-based swaps, and promotes consistency between Regulation SE and existing rules under the Exchange Act. 
• Compliance timeline: The adopted rules will become effective 60 days following the date of publication in the Federal Register. 
• Looking ahead: Any entity that meets the definition of SBSEF may file an application to register with the Commission on Form SBSEF at any time after the effective date.

Rules on clearing agency governance and conflicts of interests: The SEC has adopted new rules to improve the governance of all registered clearing agencies by reducing the likelihood that conflicts of interest may influence their boards of directors or equivalent governing bodies.

• Governance requirements: The new rules establish governance requirements regarding board composition, independent directors, nominating committees, and risk management committees
• Conflicts of interest: The rules also require new policies and procedures regarding conflicts of interest, management of risks from relationships with service providers for core services, and a board obligation to consider stakeholder viewpoints 
• Compliance timeline: The compliance date is 12 months after publication in the Federal Register, except for the independence requirements for the board and board committees, for which the compliance date is 24 months after publication

SEC issues exemptive relief for fixed-income from Rule 15c2-11

The US Securities and Exchange Commission (SEC) issued exemptive relief to broker-dealers transacting fixed-income securities under Rule 144A’s safe harbor provision. 

Background: Rule 15c2-11 requires that broker-dealers review certain information about issuers of securities before they can publish quotations.  

• In 2020, the SEC finalized amendments to the rule requiring that the information broker-dealers review be current and publicly available 
• Many market participants had argued that Rule 15c2-11’s information requirement should not apply to quotations for fixed-income securities due to Rule 144A’s safe harbor provision

Implications: Based on this exemptive relief, issuers of fixed income securities can now rely on Rule 144A and not be subject to detailed disclosure requirements under Rule 15c2-11. 

View the additional regulatory briefs from this month:

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

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