September Global Regulatory Brief: Trading and markets
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
Regulatory authorities continue to advance initiatives to improve the efficiency and sophistication of global securities markets. From investment research in the UK to illegal trading activity in Thailand, the following global developments in trading and markets from the past month stand out:
- US: SEC fines 26 firms for off-channel communications recordkeeping failures
- UK: FCA publish final rules on new payment option for investment research
- EU: ESMA consults on assessing order execution policies
- Thailand: Regulators partner to fight against illegal trading activities
- UK: FCA consults on public offers and admissions to trading regime
- UK: FRC launch paper on future of digital reporting
- US: SEC adopts amendments to require more frequent reporting by registered funds and provides guidance on open-end fund liquidity risk management programs
- Bahrain: Bourse issues new regulatory framework for market makers
SEC fines 26 firms for off-channel communications recordkeeping failures
The US Securities and Exchange Commission (SEC) announced nearly $400 million in fines against 26 broker-dealers, investment advisers, and dually-registered broker-dealers and investment advisers for failing to maintain and preserve electronic communications of employees.
Wider context: The charges are the latest in the SEC’s expansive sweep of regulated entities’ off-channel communications recordkeeping practices that has resulted in billions of dollars in fines.
In more detail: The SEC’s orders state that each firm admitted that, during the relevant periods, their personnel sent and received off-channel communications that were required to be maintained under securities laws.
- The Commission further states that the failures to retain these records involved personnel at multiple levels of authority.
- The SEC also highlights that three firms self-reported their violations and therefore paid lower penalties.
- The Commodity Futures Trading Commission (CFTC) levied additional fines against several firms that also operated under the Commission’s authority as swap dealers and introducing brokers.
FCA publishes final rules on new payment option for investment research
The UK Financial Conduct Authority (FCA) confirmed new rules for how asset managers pay for investment research which will allow the option to ‘bundle’ payments for research and trade execution.
The new option in more detail: The new option that the FCA is introducing facilitates joint payments for third-party research and execution services, provided that the firm meets the relevant requirements, including:
- A written policy describing the firm’s approach to joint payments, including with respect to governance, decision-making and controls.
- An arrangement that stipulates the methodology for calculating and separately identifying the cost of research.
- A structure for the allocation of payments between research providers, including IRPs.
- An approach for the allocation across clients of the costs of research purchased through joint payments, appropriate to the investment process, product, services and clients of such firm, but ensuring its outcome is fair, such that the relative costs incurred by clients are commensurate with relative benefits received.
- Periodic assessment of the value, quality, use and contribution to investment decision-making of the research purchased, and how the firm ensures that research charges to clients are reasonable against relevant comparators, to be undertaken at least annually.
- Disclosure to clients on the firm’s approach to joint payments, including for instance if and how joint payments are combined with any other payment option, the most significant research services purchased, and costs incurred.
- Operational procedures for the administration of accounts used to purchase research, and for the delegation of such responsibilities to others.
- A budget to establish the amount needed for third-party research, reviewed and renewed at least annually, and based on expected amounts needed to purchase such research as opposed to volumes or values of transactions.
- It is confirmed that research services are not a factor in assessing best execution.
The intention: The additional flexibility is intended to lead to a reduction in the frictions firms face when accessing research (particularly when accessing research from overseas jurisdictions).
- This should lower research procurement costs for asset managers, and improve competitiveness amongst small, fast-growing and new entrant firms, especially those using RPAs, and avoid placing asset managers at a competitive disadvantage globally.
- There may also be an increase in the amount or breadth of research purchased, such that investors gain other benefits, for instance an enhanced understanding of new sectors, business models and product innovations.
Context: These changes form part of wider reforms to strengthen the UK’s position in global wholesale markets .
- The Investment Research Review (IRR) set out a series of recommendations to improve the investment research market, including the creation of an option to pay for research using combined payments for trade execution and research.
- Survey data indicates that asset managers largely receive the research they need but that it can be operationally difficult for them to do so.
Looking ahead: The new rules were implemented on August 1, 2024 and firms can determine whether they want to take up this new option.
ESMA consults on assessing order execution policies
The European Securities and Markets Authority (ESMA) is consulting on draft technical standards that specify the criteria for establishing and assessing the effectiveness of investment firms’ order execution policies, accounting for whether the orders are executed on behalf of retail or professional clients.
Context: When an investment firm executes a specific client order, the choice of the appropriate execution venue requires a complex assessment of a range of factors to achieve the best possible result in the execution of client orders, I.e. To obtain “best execution”.
- The choice is further complicated by the fragmentation of European securities markets and the broad choice of venues for firms to send an order to buy or sell financial instruments.
- The implementation of firms’ execution policies under MiFID II have revealed several shortcomings such as a lack of detail and the need for further clarification.
Proposed order execution policies: ESMA proposes that investment firms should distinguish between the different classes of financial instruments they offer in their order execution policy and arrangements.
- ESMA also proposes that firms include in their execution policies information on at least these venues that enable the firms to obtain on a consistent basis the best possible result for the execution of client orders.
- ESMA proposes that firms must measure the performance per class of financial instruments related to specific thresholds so that they account for the emergence of new execution venues and new functionalities provided venues.
- Firms will be required to update their order execution policies and ESMA propose that firms must compare the prices obtained for client orders with a reference dataset, which might be based on consolidated tape data, and explicitly distinguish the cost of venue membership.
- The draft proposals also include details on client instructions and dealing on own account execution practices.
Looking ahead: ESMA will consider the feedback received to this consultation and expects to publish a final report and submit the draft technical standards to the European Commission for endorsement by 29 December 2024.
Thai regulators partner to fight against illegal trading activities
Thailand’s Anti-Money Laundering Office (AMLO), Securities and Exchange Commission (SEC) and Stock Exchange of Thailand (SET) have signed a Memorandum of Understanding (MOU) to strengthen their collaboration to combat illegal trading activities.
Key objectives: The MOU aims to streamline work processes, including facilitating information sharing and eliminating redundancies in data collection among law enforcement agencies to shorten the time required for investigation and enforcement processes. The MOU also serves as a commitment to the public that future securities violations will be met with swift and coordinated responses from relevant authorities.
Further background: SEC has been collaborating with the AMLO and SET through bilateral agreements on coordination and information sharing for law enforcement purposes.
- The new trilateral MOU is expected to deepen their cooperation in information exchange, coordination, and the potential formation of task forces when necessary.
- The goal is to improve prevention and enforcement efforts against unfair securities trading practices, embezzlement, fraud, and financial misconduct under the Securities and Exchange Act B.E. 2535 (1992).
- Recent incidents involving listed companies in Thailand have shaken domestic and international investor confidence – this renewed commitment by Thai authorities to fight against illegal trading activities and conduct is part of Thailand’s efforts to restore and strengthen investor confidence in the Thai capital market.
Financial Reporting Council examine the future of digital reporting in the UK
The cross-regulatory UK Financial Reporting Council announced the launch of a comprehensive discussion paper on the future of digital reporting in the UK.
Important context: The FRC comprises of the Financial Conduct Authority, Companies House, HMRC and Charity Commission for England and Wales and the paper aims to gather stakeholder feedback on developments in digital reporting.
- The paper addresses changes in the regulatory landscape and considers the impact of the recently passed Economic Crime and Corporate Transparency Act 2023.
- The FRC has been developing and maintaining UK taxonomies for over a decade, providing a framework for high-quality, consistent digital reporting.
- The UK Taxonomy Suite aims to minimise burdens on businesses while supporting economic growth by enabling investors to access and compare information efficiently and allowing regulators to confirm compliance with legal and regulatory requirements.
Key details: Main topics covered in the discussion paper include:
- Potential alternatives to the European Single Electronic Format (ESEF) taxonomy for UK regulated markets.
- Proposed changes to structured digital reporting to support regulatory disclosure initiatives.
- Considerations for mandatory assurance of digital tagging.
- The impact of “full tagging” requirements on companies and charities.
- Strategies to support stakeholders in adapting to new digital reporting requirements.
Looking ahead: The FRC encourages all interested parties to submit their responses by November 1, 2024.
- While no specific decisions will be taken as a result of this Discussion Paper, responses will inform the FRC’s thinking on the technical and practical implications of policy decisions.
- This may result in future consultations from specific regulators or agencies on the implementation of digital reporting requirements.
FCA consults on public offers and admissions to trading regime
The UK Financial Conduct Authority (FCA) published draft proposals to establish the new Public Offers and Admissions to Trading Regulations (POATRs) which will replace the existing UK Prospectus Regulation.
Context: At present a company offering transferable securities to the public can raise capital of up to EUR 8m without triggering the obligation to publish a prospectus.
- This is seen to have left a gap that allows potentially higher risk investments to be offered to the public with limited regulatory oversight.
- The threshold is also seen to have acted as a ‘cap’ beyond which companies looking to raise capital face a cliff edge of costs due to having to produce a full prospectus.
- The thinking for the new regime is that it allows more targeted regulation of offers of securities by companies where they are not being admitted to a public market while ensuring robust regulation of offers of securities such as ‘mini-bonds’ given the higher risks and past losses experienced by investors.
In more detail: The POATRs will decouple the regime for admissions to trading from that for public offers by creating a new regulated activity of operating an electronic system for public offers of relevant securities (a ‘public offer platform’ or ‘POP’).
- Companies seeking to make public offers of securities outside a public market to a broad investor base and where the value of the offer is more than £5m will need to do so via a POP.
- The FCA assume that POPs will most likely be chosen as a means of raising capital by earlier-stage and smaller companies.
- From an investor perspective, such companies will generally be characterized as having more uncertain prospects than established companies with securities admitted to trading on public markets and their securities may have limited liquidity.
- The FCA propose certain requirements for POP operators so that they have a gatekeeping role in deciding if a public offer should be made to investors.
- The new requirements will supplement existing regulation, such as existing investment-based crowd funding that is already regulated.
Looking ahead: The consultation is open until October 18, 2024 and the FCA is aiming to finalize rules for the POATR regime by mid-2025.
SEC adopts amendments to require more frequent reporting by registered funds and provides guidance on open-end fund liquidity risk management programs
The SEC adopted amendments to reporting requirements on Forms N-PORT and N-CEN to require certain registered funds to file reports with the Commission on a more frequent and public basis.
In summary: Open-end funds will also be required to disclose information about service providers they use to comply with liquidity risk management program requirements. In connection with the amendments, the Commission also provided guidance related to open-end fund liquidity risk management program requirements.
The Details: Under the amendments, registered funds are now required to file information on their portfolio holdings (Form N-Port) on a monthly basis. These filings will be due within 30 days after the end of the month to which they relate. The Commission will publish the forms (with certain data redacted) 60 days after the end of the month.
Additionally, The Form N-CEN amendments will require open-end funds that are subject to liquidity risk management program requirements under the liquidity rule to report certain information about service providers used to fulfill those requirements, including identifying information about the liquidity service providers and the asset classes for which the liquidity service providers are used.
Timeline: The amendments to Forms N-PORT and N-CEN will become effective on November 17, 2025. Funds generally will be required to comply with the amendments for reports filed on or after that date. Fund groups with net assets of less than $1 billion will have until May 18, 2026, to comply with the Form N-PORT amendments.
Bahrain Bourse issues new regulatory framework for market makers
The Bahrain Bourse introduced a new regulatory framework for market making and updated the rules for liquidity providers to advance capital and bolster its funds.
In summary: The initiative, approved by the Central Bank of Bahrain, aims to regulate market making and liquidity provision in line with international best practices and standards, as well as distinguish between the role of Market Makers and Liquidity Providers.
Looking ahead: Effective July 28, existing market makers will be certified as liquidity providers, and a transition period will be granted to ensure compliance with the updated guidelines.
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