Global Regulatory Brief: Trading and markets, September 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 continue to drive the reform of global market structure with regulators looking to boost investor confidence in the case of China, clarify industry uncertainty in the UK, and enforce sanctions for inappropriate trading practices in Israel. The following global developments in trading and markets over the past month stand-out:   

• China unveils capital market reforms to boost investor confidence
• Israel imposes sanctions on ‘spoofing’ activity for the first time 
• UK FCA publishes statement on transaction reporting
• UK FCA consults on securitisation rules
• Hong Kong finalizes risk management guidelines for futures dealing activities
• US CFTC approves final DCO reporting and information requirement and three proposals

China unveils capital market reforms to boost investor confidence

The China Securities Regulatory Commission (CSRC) has specified an array of initiatives to reinvigorate Chinese capital markets and boost investor confidence. 

Measures formally announced: The CSRC has formally announced a range of short-term measures to boost the Chinese stock market, including: 

• Balancing the initial public offering (IPO) and secondary market by slowing the pace of IPOs, tightening refinancing scales and restricting financing activities of certain poorly performing listed companies; 
• Tightening stock sales of controlling shareholders;
• Reducing stock margining level from 100 percent to 80 percent;
• Reducing CSD equity settlement funds for securities firms, lowering equity and fund order sizes; 
• Allowing block trade under Stock Connect program between the Chinese mainland and Hong Kong market; and
• The Ministry of Finance announced that the stamp tax levied on securities trading will be halved.

Measures under review: There are also a range of longer-term regulatory measures that are under review and development, including:

• Fund investment: to encourage more equity fund issuance, lowering the index fund registration thresholds, reducing fund management fees, expanding fund investment scope, and easing the restriction on derivatives trading;
• Improving the attractiveness of listed companies: to offer green channels in listing and financing for certain science and technology companies, bond issuance, and streamlining the mergers and acquisitions process. The possibility of revisiting share buyback rules to ease conditions is also under review; 
• Trading: to reduce stock transaction fees and commissions, expanding margin trading and security lending scope and reducing fees, extending the trading hours for A-share and bond markets to satisfy demand for trade and investment;
• Financial institutions: encourage investment banking through development of risk management metrics, reducing margin levels, and launching more equity futures and options; 
• Market opening-up: expanding the range of stocks eligible under the Stock Connect program, allowing Hong Kong to launch China bond futures and equity index options and encouraging dual listing in Hong Kong for Chinese companies listed in the US; 
• Inter-agency coordination: Tax policy, bank participation in capital markets, insurance sector and other long-term investors participation in equity markets.

Closely related: The CSRC has also published draft clarifications for consultation on the scope, application and exemption from the short swing profit rule (SSPR). 

Further, the CSRC and the Hong Kong Securities and Futures Commission (SFC) have reached an agreement on the introduction of block trading under the mutual stock market access arrangements between the Mainland and Hong Kong (Stock Connect). The stock exchanges will announce the implementation details and official launch dates in due course.  

Israeli regulator imposes sanctions on ‘spoofing’ activity for the first time

The Israeli Securities Authority (ISA) has imposed sanctions on the fraudulent practice of persuading investors to trade securities while omitting material facts, known as ‘spoofing’. 

The bottom line: This marks the first time that the ISA has imposed sanctions for ‘spoofing’ which is a trading pattern based on the submission of orders without the intention of executing them in order to inappropriately manipulate security prices.

UK FCA publishes statement on transaction reporting

The UK Financial Conduct Authority (FCA) has published a statement on further temporary measures for the reporting of certain fields in the UK Markets in Financial Instruments Regulation (UK MiFIR) transaction reports. 

In more detail: The FCA has confirmed that it is putting in place additional temporary measures for the reporting of certain other fields in transaction reports: waiver indication, over-the-counter post-trade indicator, commodity derivative indicator, and securities financing transaction indicator.

What’s next: The FCA is reviewing these indicators and will not take action against firms which fail to populate these fields until those reviews are complete. 

Closely related: It is also worth noting that the FCA’s Market Watch newsletter from July 2023 focuses on market conduct and transaction reporting issues. Specifically, the FCA outline recent supervisory observations on transaction reporting and the submission of financial instrument reference data. 

UK FCA consults on securitization rules

The UK FCA has set out its proposed rules for the UK securitization markets as part of the repeal and replace process when it comes to retained EU law. 

Intended outcomes: Through its proposed changes, the UK is looking to make its securitization rules more proportionate, to remove barriers to the issuance of and investment in securitization, to maintain appropriate protections for investors, and provide a clearer framework within which the market can operate. 

Background context: Securitization is the process of bundling together loans and other debt instruments such as residential mortgages or auto loans and distributing the risk associated with these loans and debt instruments using a variety of investments that offer different tranches of exposures to investors. 

• As such, securitization is an important tool for UK banks and non-bank lenders to help fund and mitigate the credit risks of lending to companies and households.

The big picture: The EU Securitization Regulation (EU SR) came into effect in January 2019 and was replaced, in the UK, by the UK SR at the end of the Brexit transition period on December 31, 2020. 

• The EU SR and UK SR aim to address harms identified following the Global Financial Crisis such as inadequate disclosure and misalignment of interests between manufacturers and investors. 
• The UK has identified three main areas for policy change, the disclosure regime, due diligence obligations, and risk retention requirements. 

Next steps: The consultation runs until October 30, 2023. The FCA does not expect the need for a long implementation period because the proposals do not involve any changes to reporting templates (which would in turn involve systems changes) and transparency requirements more generally. As such, the implementation date is expected to be in Q2 2024. 

Hong Kong finalizes risk management guidelines for futures dealing activities

Hong Kong’s Securities and Futures Commission (SFC) has published its conclusions following consultation on proposed risk management guidelines for licensed futures brokers.

In more detail: The guidelines set out a comprehensive risk management framework for futures brokers which covers market risk management, commodity futures trading, client credit risk management, concessionary margin, and risk management over executing or clearing agents. 

• Requirements are also included for funding liquidity risk management, safeguarding client assets, trading in futures markets outside Hong Kong and stress testing.

Next steps: The guidelines will become effective on February 25, 2024 and futures brokers will have a transitional period of six months to comply with the guidelines and an additional 12 months to implement system changes for compliance with requirements relating to the automation of client risk limit controls and stress testing.

US CFTC approves final DCO reporting and information requirement and three proposals

At its open meeting on July 26, 2023, the Commodity Futures Trading Commission (CFTC) approved the following: 

(1) final rule on reporting and information requirements for derivatives clearing organizations; 

(2) proposed rule on swap confirmation requirements for swap execution facilities; 

(3) proposed amendments to provisions common to registered entities; 

(4) proposed rule on margin requirements for uncleared swaps for swap dealers and major swap participants. 

What you need to know: The final rule is effective 30 days after publication in the Federal Register. The proposed rules and amendments each have a 60-day comment period after the publication of respective proposing releases in the Federal Register. 

View the additional regulatory briefs from this month:

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

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