Global Regulatory Brief: Trading and markets, November 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. From Saudi Arabia to Hong Kong, the following global regulatory developments in trading and markets over the past month stand out: 

• EU: Commission proposes review of the Benchmarks Regulation 
• Saudi Arabia: CMA opens applications for alternative trading system in secondary debt markets
• US: SEC proposes rule to address volume-based exchange transaction pricing for NMS stocks 
• EU: Member States endorse final legislation for the MiFIR-D II review
• UK: FCA outlines supervision strategy for corporate finance firms
• Korea: Government opens access to its interbank FX market
• Hong Kong: SFC consults on market sounding guidelines
• US: CFTC approves certain compliance exemptions for commodity pool operators, commodity trading advisors, and commodity pools
• EU: ESMA seeks feedback on shortening of the settlement cycle
• US: MSRB seeks comment on streamlining interpretive guidance related to interdealer confirmations

European Union proposes review of the Benchmarks Regulation

The European Commission proposed amendments to the Benchmarks Regulation as part of a package of measures to rationalize reporting requirements. 

In more detail: The proposals relate to the scope of the rules for benchmarks, the use of benchmarks in the EU that are provided by third-country administrators, and certain reporting requirements. 

• The proposal reduces the scope of the third-country rules to those benchmarks that are critical or significant for the EU
• It also removes the risk of not being able to reference certain benchmarks for users of critical benchmarks in the EU
• The review will also ensure that only EU administrators can administer EU climate benchmarks

Wider context: The proposals are intended to reduce the regulatory burden on EU administrators of benchmarks which are not deemed significant or critical. 

Next steps: The proposals will now be debated by lawmakers in the EU and the final legislation is expected to apply from January 1, 2026 when the current third-country exemption expires.

Saudi CMA opens applications for alternative trading system in secondary debt markets

Saudi Arabia’s Capital Market Authority (CMA) announced that the submission period is now open for firms wanting to provide securities trading facilities as an alternative trading system (ATS) for Sukuk and debt instruments.  

Wider context: The announcement comes as part of a broader initiative to enhance the secondary market of debt instruments, provide a deeper investor base, and promote a greater range of products in the Saudi capital markets. 

The licensing process: The licensing requirements require that applicants submit a proposed list of the types of securities to be traded and the categories of investors to be enabled to trade them. 

Once approved: Upon approval of the application, the CMA may impose conditions or restrictions deemed appropriate to achieve market safety and investor protection.

SEC proposes rule to address volume-based exchange transaction pricing for NMS stocks and adopts amendments to rules on beneficial ownership reporting

US Securities and Exchange Commission (SEC) proposed a new rule that would prohibit national securities exchanges from offering volume-based transaction pricing in connection with the execution of agency or riskless principal (“agency-related”) orders in National Market System (NMS) stocks. 

In more detail: The proposal would require national securities exchanges to have certain anti-evasion rules, written policies and procedures, and disclose certain information if they offer volume-based transaction pricing for member proprietary volume in NMS stocks. 

Next steps for volume-based exchange transaction pricing: The public comment period will be open for 60 days after the publication of the proposing release in the Federal Register. 

Closely related: The SEC adopted rule amendments governing beneficial ownership reporting under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934. The amendments update Regulations 13D-G to require market participants to provide more timely information on their positions. Among other things, these amendments: 

• Shorten the deadline for initial Schedule 13D filings from 10 days to five business days and require that Schedule 13D amendments be filed within two business days 
• Generally accelerate the filing deadlines for Schedule 13G beneficial ownership reports (the filing deadlines differ based on the type of filer) 
• Clarify the Schedule 13D disclosure requirements with respect to derivative securities
• Require that Schedule 13D and 13G filings be made using a structured, machine-readable data language

Next steps for beneficial ownership reporting: The amendments will become effective 90 days after publication of the adopting release in the Federal Register. Compliance with the revised Schedule 13G filing deadlines will be required beginning on Sept. 30, 2024. Compliance with the structured data requirement for Schedules 13D and 13G will be required on Dec 18, 2024. Compliance with other rule amendments will be required upon their effectiveness.

European Union member states endorse final legislation for the MiFIR-D II review

The Council of the EU that represents the member states endorsed the final compromise texts for the review of the Markets in Financial Instruments Regulation and Directive (MiFIR II and MiFID III).

In summary: The amendments to the EU’s securities and trading rules aim to enhance transparency, remove the obstacles to the emergence of a consolidated tape, optimize trading obligation rules, improve best execution, and prohibit payments for forwarding client orders.  

What next: The European Parliament will endorse the text before a final legal review. Following that, formal adoption of the rules is expected in early 2024, which will be followed by their publication in the Official Journal of the EU by the end of Q1 2024. Technical rules to implement the new MiFIR-D framework will then be developed.

Closely related: The European Securities and Markets Authority (ESMA) announced it had performed the first annual assessment of Data Reporting Service Providers’ (DRSPs) relevance for EU financial markets. ESMA will conduct a second assessment in 2024. 

FCA outlines supervision strategy for corporate finance firms

The UK Financial Conduct Authority (FCA) wrote a letter to the chief executives of around 500 corporate finance firms (CFFs) in the UK that advise corporate clients seeking to raise funds or execute strategic transactions. 

What are corporate finance firms? CFFs typically raise funds from institutional investors and treat the corporate issuer as a client and investors as a corporate finance contact. It also includes firms that offer ancillary services such as corporate broking and investment research.

In more detail: The letter details potential drivers of harm in the areas of unsuitable products, market abuse, financial crime and financial resilience. 

• Market context: Lower IPO and M&A activity has affected most CFFs and this has prompted cost consolidation in the sector. Overall, the FCA considers the CFF sector to have been resilient during this period and that market integrity has been upheld. The FCA expects any CFFs that take on higher-risk business during a period of low activity to have commensurately strong controls.
• Equity market reform: CFFs are important stakeholders in the reforms to UK equity markets, with significant changes on the horizon for the UK regimes for listing, admission to trading and public offers to streamline the primary and secondary capital raising process for issuers. The FCA will make new rules to implement these new regimes when consultations conclude and the FCA also aims to make new rules in response to the Investment Research Review. 
• Market abuse: Examples of CFFs with poor market abuse systems and controls include ineffective information barriers, inadequate processes for the identification of inside information, poor wall crossing controls and incomplete or inaccurate insider lists. Firms must ensure market abuse controls are tailored to their individual business models. The FCA is conducting reviews of firms’ systems and controls to comply with market abuse requirements. 

Next steps: CEOs are expected to discuss the expectations set out in the letter with their directors and board, and to have agreed appropriate actions and next steps by the end of November 2023.

Korea opens access to its interbank FX market

The Korean Government approved an amendment that allows foreign financial institutions (FIs) to participate in the Korean foreign exchange (forex) market, provided they meet certain requirements. 

Registration process: The amendment specifies the scope and requirements of foreign FIs that are eligible for registration. 

• Foreign FIs can register if they fall in the category of the government-designated sectors, such as banking or securities and can demonstrate financial soundness standards through measures such as Basel III
• They must also meet requirements such as signing sufficient credit line agreements with existing forex market participants, and opening won or foreign currency accounts for business purposes
• Registered FIs will then be able to trade in the domestic forex market through forex brokers

Relevant requirements: Registered FIs that directly participate in the Korean forex market will be subject to the same legal obligations as existing market participants, such as the prohibition of violation of sound forex trade order and reporting key information. 

• The government can monitor whether these institutions are trading in compliance with the order and obligations of Korea’s forex market through the Bank of Korea.

Wider context: The change comes as Korean policymakers look to improve the quality and stability of forex services through higher trading volumes and better price competition in the domestic market. 

Looking ahead: The amendment is already in effect and the Korean Government has prepared guidelines that regulate detailed matters including registration requirements and procedures.

Hong Kong SFC consults on market sounding guidelines

The Hong Kong Securities and Futures Commission (SFC) published proposed guidelines for market soundings to clarify regulatory expectations and assist intermediaries with their compliance obligations. 

In summary: Under the proposals, intermediaries would have to implement robust governance and effective policies and internal control procedures to prevent the misuse and leakage of non-public information they are entrusted with during market soundings. 

• They would also have to keep records of their market soundings, as well as follow specific requirements based on their respective roles. 

What are market soundings: Market sounding is an established mechanism widely adopted by market participants to communicate information with potential investors, prior to the announcement of a transaction.

Wider context: The proposals follow a review of market soundings conducted by the SFC in early 2022 and are intended to reinforce international best practice, with regard to the need to conduct business activities fairly, honestly and in the best interests of clients and market integrity. 

• In recent years, the SFC has observed an increasing number of cases regarding trading activities ahead of placings and block trades that indicate some intermediaries might have taken advantage, or unfairly exploited information received during market soundings
• The SFC is concerned that firms have made unjustified profits on the back of information that was not generally available to the rest of the market

Next steps: The SFC is proposing to provide a six-month transition period for the industry to update their internal procedures and controls after the proposed guidelines are finalized.

Comments on the consultation are due by December 11, 2023.

CFTC approves certain compliance exemptions for commodity pool operators, commodity trading advisors, and commodity pools

The US CFTC published a proposed rule that would amend CFTC Regulation 4.7, a provision that provides exemptions from certain compliance requirements for commodity pool operators (CPOs) with respect to commodity pool offerings to qualified eligible persons (QEPs) and for commodity trading advisors (CTAs) with respect to trading programs advising QEPs. 

Next steps: The comment period will be open for 60 days after publication in the Federal Register.

ESMA seeks feedback on shortening of the settlement cycle

The European Securities and Markets Authority (ESMA) is seeking stakeholders’ feedback on the reduction of the securities settlement cycle in the EU. 

Wider context: Currently transactions in transferable securities executed on trading venues in the EU must be settled by no later than the second business day after the trading takes place (T+2). 

• However, other jurisdictions are transitioning towards shorter settlement cycles like T+1 and even T+0, in order to reduce post-trade counterparty and volatility risks
• In addition, recent technological developments such as Distributed Ledger Technology (DLT) could transform the entire trading and post-trading life-cycle, including potentially instantaneous settlement

The details: ESMA is collecting stakeholder views and quantitative evidence to assess the costs and benefits linked to the harmonized shortening of the securities settlement cycle in the EU. ESMA’s call for advice is looking to consider all the possibilities for a shortened settlement cycle, including both T+1 and T+0. 

Looking ahead: ESMA plans to submit a final report following feedback to its consultation to the EU Commission in Q4 2024 at the latest. Building on that report, the European Commission may propose regulatory changes to the EU settlement cycle in 2025. ESMA’s consultation is open until December 15, 2023.

MSRB seeks comment on streamlining interpretive guidance related to interdealer confirmations

The US Municipal Securities Rulemaking Board (MSRB) issued a request for comment on draft amendments to MSRB Rule G-12, on uniform practice, to codify, retire and reorganize approximately 40 pieces of interpretive guidance related to interdealer confirmations, some of which date back more than 40 years. 

What you need to know: With this proposal, the MSRB will have advanced efforts to codify or retire approximately one fifth of its body of interpretive guidance since launching the modernization initiative in Feb, 2021. Comments should be submitted no later than Dec 15, 2023.

View the additional regulatory briefs from this month:

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

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