Global Regulatory Brief: Trading and markets, January 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

In anticipation of a busy and ambitious 2024 for global market structure reform, financial regulators used December as a chance to advance important changes to various rules governing securities markets. From the US to India, the following global developments in trading and markets from the past month stand out: 

• US: SEC adopts central clearing and risk management rules for US Treasury market
• UK: FCA sets out significant programme of detailed reforms to UK wholesale markets
  
• India: SEBI approves framework for index providers
• EU: Lawmakers adopt reforms on Central Securities Depositories 
• Korea: FSC announces series of measures to enhance foreign-investor access 
• Switzerland: FINMA extends transitional period for equity options
• Qatar: Financial regulators publish 2023-27 strategic plan 
• China: FX regulator eases rules to boost trade and investment
• EU: Member States agree negotiating position on EMIR Review
• US: SEC adopts rule to prohibit conflicts of interest in certain securitizations
• International: IOSCO consults on market outages 
• US: SEC staff issues report on definition of Accredited Investor

SEC adopts central clearing and risk management rules for US Treasury market

The US Securities and Exchange Commission (SEC) adopted rules to enhance risk management practices for central counterparties in the US Treasury market and facilitate additional clearing of US Treasury securities transactions. 

The details: Covered clearing agencies in the US Treasury market must adopt policies and procedures designed to require their members to submit for clearing all secondary market transactions in US treasury securities to which it is a counterparty, including:

• All repurchase and reverse repurchase agreements collateralized by US Treasury securities
• All interdealer broker purchase and sale transactions
• All purchase and sale transactions between a clearing agency member and either a registered broker dealer, government securities broker, or government securities dealer

Transactions between a direct participant and a central bank, sovereign entity, international financial institution, or natural person are excluded from the definition of secondary market transactions.

Other important changes: Broker-dealers may include customer margin required and on deposit at a clearing agency in the US Treasury market as a debit in the customer reserve formula.

• Covered clearing agencies must collect and calculate margin for house and customer transactions separately and are required to develop policies to ensure access to clearing

Compliance Timeline: The amendments will go into effect in two phases, with the changes regarding the separation of house and customer margin, the broker-dealer customer protection rule, and access to central clearing required to be completed first, by March 31, 2025. 

• After that time, the requirement to clear specific transactions would go into effect in two phases, with cash transactions being required to be cleared before repurchase transactions

Compliance with the requirement to clear eligible secondary market cash transactions would not be required until Dec 31, 2025, and compliance with the requirement to clear eligible repo transactions would follow on June 30, 2026

FCA sets out significant programme of detailed reforms to UK wholesale markets

The UK Financial Conduct Authority (FCA) issued a range of publications representing significant reform to UK financial market rules and practices, including:

• Transparency for bond and derivative markets 
• Detailed changes to UK listings rules
• Consolidated tape framework
• Commodity derivatives framework 

Transparency reform for bond and derivative markets: The FCA issued proposals to recalibrate the UK’s market transparency regime to better tailor the existing transparency requirements for bond and derivative markets under the UK Markets in Financial Instruments Directive (MiFID). 

• The FCA sets out proposals regarding the scope, pre- and post-trade transparency requirements, exemptions from post-trade reporting, the content of post-trade information including identifiers, and guidance on the definition of a systematic internaliser (SI)
• The consultation closes on March 6, 2024 and the FCA will decide on final rules following industry feedback. 

Public listing regime reform: The FCA has published feedback to its May 2023 consultation on proposals to make the UK’s listing regime more accessible, effective, and competitive, and provides more detailed proposals to reform UK listing rules.

• The FCA continues to propose a single ‘commercial companies’ category for equity share listings to replace the current ‘premium’ and ‘standard’ listing segments. This is intended to streamline eligibility and encourage a greater range of companies to list in the UK
• The FCA is proposing to create an entirely new ‘UK Listing Rules’ sourcebook (UKLR) to make obligations for issuers and sponsors more accessible and less complex. The consultation will be open until March 22, 2024 
• The FCA aims to publish the final UKLR via a Policy Statement at the start of the second half of 2024

Consolidated tape: The FCA published a policy statement on the consolidated tape for bonds, along with proposals regarding payments from the consolidated tape provider (CTP) to data providers to offset the cost of connecting to send data to the CTP.

• The policy statement clarifies a range of key details on the future CTP framework, such as the requirement for the CTP to offer a historical data service, the need for legal separation for value-added services, data pricing rules, and the requirement for data to be transmitted from data providers and received by the CTP
• The FCA will appoint a single bond CTP through a two-stage tender process for a contract length of five years
• The FCA will continue to work on the basis that the bond CT will come into effect after the bond transparency regime changes go live

Commodity derivatives framework: The FCA published proposals on reforms to the UK’s regulatory framework for commodity derivatives.

• The proposals concern the key pillars of the regime, including setting of position limits by trading venues, applying position limits only to certain commodity derivatives contracts, exemptions from position limits, position management controls and reporting, and the ancillary activities test
• The consultation is open until February 16, 2024 and the FCA plans to publish a policy statement in H2 2024

India approves regulatory framework for index providers

The Securities and Exchange Board of India (SEBI) approved a regulatory framework for index providers at its board meeting in Mumbai on November 25, 2023. 

The intention: SEBI is aiming to foster greater transparency and accountability in governance and administration of financial benchmarks in the securities market. 

More detail: The regulatory framework will introduce a registration scheme for index providers to license ‘significant indices’, in line with IOSCO Principles for Financial Benchmarks.

EU adopts reforms to the Central Securities Depositories Regulation

The European Union (EU) adopted reforms to the rules governing central securities depositories (CSDs).

Objective: The new CSDR seeks to reduce compliance costs and regulatory burdens for CSDs, facilitate the provision of services across the EU, and improve cooperation among supervisors. It also addressed the challenges that the settlement discipline regime has posed to the industry.

In more detail: The new rules will bring a number of important changes to the existing regime for securities settlement, including:

• Simplified passporting regime: The new regulation clarifies and simplifies the rules for a CSD based in one EU member state providing services in another member state
• Enhanced supervision: CSD operating in more than one member states will be considered of substantial importance to the functioning of the securities markets and investor protection. As a result, a college of supervisors from these member states will be set up to facilitate cooperation and information exchange
• Improved settlement efficiency: The new regulation contains measures to improve ‘settlement efficiency’ (the rate at which securities transactions settle on the intended date) by amending certain elements of the settlement discipline regime, including the preconditions for applying so-called mandatory buy-ins. Under the revised regulation, such buy-ins will only be introduced as a measure of last resort, where the rate of settlement fails in the EU is not improving and is presenting a threat to financial stability
• CSDs to offer additional services: The reform facilitates CSDs access to banking-type services. As a result, offering services for a broader range of currencies as well as across borders will be facilitated

Settlement discipline in more detail: Mandatory buy-ins occur when a transaction has failed to settle at the end of an agreed period and the buyer of the securities is forced to repurchase them elsewhere. 

• The original 2014 CSD rules introduced a settlement discipline framework that included a mandatory buy-in process and cash penalties for settlement fails that would apply from February 2022 
• The implementation of the rules presented important challenges for the buy-side and the EU agreed to delay the application of the rules until a solution was found 
• Under the new rules mandatory buy-ins will only be introduced as a measure of last resort, where the rate of settlement fails in the EU is not improving and is presenting a threat to financial stability
• In addition, the scope of the cash penalties and of the mandatory buy-in process is clarified to distinguish the requirements relating to cash penalties from those relating to mandatory buy-ins

Looking ahead: The final rules should be published in the Official Journal shortly. Key changes will start being phased in from May 2024, and the new settlement discipline will apply from 2026.

Closely related: The European Securities and Markets Authority (ESMA) published a consultation on proposals to revamp the penalty mechanism rules under the central securities depositories regulation (CSDR).

• The consultation runs until February 29, 2024 and stakeholders’ input will shape ESMA’s advice to the European Commission which will be delivered by the end of September 2024. The EU will then decide on the final changes to the technical rules

Korea FSC announce measures to enhance foreign investor access

Korea’s Financial Services Commission announced that a set of measures intended to enhance foreign investors’ access to domestic capital markets have now taken effect. 

In summary: The measures include the abolishment of foreign investors’ prior registration requirement, the easing of reporting duty for foreign securities firms in their use of omnibus account, and the expanded scope of foreign investors’ OTC transactions eligible for ex post reporting. 

Foreign investor registration system: The requirement for mandated foreign investors to register prior to investing in domestic stock markets has been abolished. 

• Foreign investors are able to open investment accounts in domestic capital markets either with a legal entity identifier (LEI, for corporate investors) or a passport number (for individual investors) without going through a prior registration process 

Omnibus account system: The use of the omnibus account for foreign securities firms will be made more convenient by easing the reporting cycle to once every month. 

• Under the revised rules, foreign securities firms will be required to report each end-investor’s transaction details to an omnibus account operating domestic securities firm until the 10th day of the following month
• Then, the domestic securities firm will need to report their transaction details to the FSS until the 15th day of the same month
• The authorities expect that these changes will help to facilitate foreign investors’ use of the omnibus account and enhance their access to domestic stock markets

OTC transaction convenience: The scope of foreign investors’ over-the-counter (OTC) transaction types permitted on an ex post reporting basis will be expanded, which will help to mitigate their reporting burden.

• Until now, foreign investors’ OTC transactions were subject to a preliminary examination by the FSS, except for a limited scope of transaction types allowed on an ex post-reporting basis

Looking ahead: The Korean government, and other regulatory authorities, intend to set up and operate a joint inspection team to ensure that the new rules are properly implemented.

FINMA extends transitional period for equity options

Swiss regulator FINMA is extending the transitional period for the duty to exchange collateral for non-centrally, cleared over the counter (OTC) derivatives transactions that are options on individual equities or index options. 

The intention: This move is designed to prevent disadvantages for Swiss derivatives traders.

In summary: Due to legal developments in financial centers like the EU and UK, the transitional period for exchanging collateral in the case of equity options is being extended by at least two years. Against this background, FINMA is also granting a corresponding deadline extension until January 1, 2026 in order to prevent disadvantages for Swiss derivatives traders.

Closely related: FINMA had already extended the transitional period for the duty to exchange collateral for non-centrally cleared OTC derivatives transactions that are options on individual equities or index options twice. The Federal Council also extended the deadline in the corresponding ordinance to January 1, 2024.

Qatar financial regulators launch 2023-2027 3rd Strategic Plan

The Qatar Central Bank (QCB) and Qatar Financial Market Authority (QFMA) launched its 2023-2027, third strategic plan. 

The aim: The strategic plan is designed to achieve an enhanced regulatory framework aligned with international standards, including robust regulation on investor protection, market transparency, and corporate governance. 

• The vision of the QFMA in accordance with the new strategy is to advance the Qatari capital market to the “Developed” status

Enhancing capital markets: The plan seeks to support the enhancement of Qatari capital markets through implementing Governance Codes for Financial Services Companies, Companies Listed on the main and second market, listed funds and entities subject to the authority’s supervision, developing a framework for fixed-income markets and for asset management as well for Islamic finance, developing targeted regulations for green assets and an initiative for developing solvency standards.

Digital transformation in focus: The QFMA strategic plan includes a set of digital transformation initiatives such as establishing a framework for IT governance, establishing a project management system, an inspection system and another for insider information tracking, moving to cloud computing and artificial intelligence in social media for disclosure, developing a regulatory technology strategy and developing guidelines and implementation of Qatar’s National Cybersecurity Framework.

China FX regulator eases rules to boost cross-border trade and investment

China’s State Administration of Foreign Exchange (SAFE) is piloting a series of initiatives to increase cross-border trade and investment. 

In more detail: SAFE is implementing the following measures:

• Further facilitate the receipt and payment of foreign exchange funds under current accounts
• Supporting banks to optimize new international trade settlements and independently handle new international trade foreign exchange receipts and payments
• Expand the scope of net settlement of trade balance of payments
• Special remittances such as overdue remittances for trade in goods are exempt from registration
• Optimize the management of advance or apportionment business under service trade
• Domestic reinvestment by foreign-invested enterprises is exempted from registration
• Financial leasing parent and subsidiary companies share the foreign debt quota
• Foreign exchange registration for some capital items shall be handled directly by banks

Looking ahead: Branch offices in the pilot areas are asked to formulate detailed business implementation rules in accordance with this notice, strengthen supervision and verification, and ensure compliance with regulations.

EU member states agree negotiating position on review of EU clearing rules

European Union (EU) member states meeting in the Council of the EU adopted their negotiating mandate on the review of the European market infrastructure regulation and directive (EMIR).

What is the EMIR Review? EMIR sets out rules on over-the-counter (OTC) derivatives, central counterparties (CCPs) and trade repositories in the EU. 

• The proposed review of the rules aims to streamline and shorten procedures, strengthen CCP supervision, and require market participants subject to a clearing obligation to clear a portion of the products through active accounts at EU CCPs

What is the council proposing? Member states propose a strengthened role for the supervisory frameworks, by establishing a joint monitoring mechanism and providing ESMA with a coordination role in cross-border emergency situations.

The active account requirement: The council position would require certain financial and non-financial counterparties to have an account at an EU CCP, which includes operational elements such as the ability to handle the counterparty’s transactions at short notice if need be and activity elements so that the account is effectively used. 

• This is ensured by a number of requirements, which have to be fulfilled by these accounts, including requirements for counterparties above a certain threshold to clear trades in the most relevant sub-categories of derivatives of substantial systemic importance defined in terms of class of derivative, size and maturity

Important context: The risks that derivatives can pose to economic stability were demonstrated during the 2008 financial crisis, when significant weaknesses in the OTC derivatives markets were evident. 

• EMIR was adopted in 2012 to increase transparency in the OTC derivatives markets, mitigate credit risk, and reduce operational risk
• The EMIR review aims to make the EU clearing landscape more attractive and resilient

Looking ahead: With members of the European Parliament having recently adopted their negotiating position on the EMIR review, final negotiations between the parliament, council, and commission on the final text will start shortly. Final adoption of the rules is expected in Q2 2024.

SEC adopts rule to prohibit conflicts of interest in certain securitizations

The US SEC adopted Securities Act Rule 192 which will prohibit a securitization participant, for a specified period of time, from engaging in any transaction that would involve or result in any material conflict of interest between the securitization participant and an investor in the relevant asset-backed security (ABS). 

Further detail: Under the new rule, such transactions would be “conflicted transactions” and implements Section 27B of the Securities Act of 1933, a provision added by the Dodd-Frank Act, to prevent the sale of asset-backed securities that are tainted by material conflicts of interest.

Compliance timeline: Rule 192 will become effective 60 days after publication in the Federal Register. Compliance will be required with respect to any ABS the first closing of the sale of which occurs 18 months after the date of the publication in the Federal Register.

IOSCO publishes good practices for market outages

The International Organisation of Securities Commissions (IOSCO) published a report on market outages for public consultation. 

In summary: The report outlines key lessons from market outages across the 24 jurisdictions covered and sets out a set of best practices across five areas: 

(1) Outage plans

(2) Communications plans 

(3) Reopening of trading

(4) Closing auctions/closing prices

(5) Post-outage plans

Important context: The IOSCO report is intended to assist regulators, trading venues, and market participants prepare for and manage future outages and thereby help improve market-wide resilience.

Key dates: The report is open for consultation until March 1, 2024.

SEC staff issues report on definition of Accredited Investor

The quadrennial report, required under the Dodd-Frank Act, examines the pool of US individuals and households that qualify for accreditation and reviews various potential revisions. 

Wider context: While the staff report carries no rulemaking authority, it comes as the Commission continues to signal its appetite for reforms.

Increased risk to retail investors: The report shares concerns that the rise of private markets combined with non-inflation-adjusted income and asset thresholds may endanger retail investors. 

• While previous revisions to the definition allowed individuals to qualify through professional licensure, income or asset-based tests remain the most common qualification for accreditation.

Equitable participation: The use of income or assets as a proxy for financial sophistication has been a point of contention for various stakeholders. 

• In a recent report to Congress, the SEC’s Office of the Advocate for Small Business Capital Formation urged the Commission to proceed with caution on any proposed revisions to Regulation D and the accredited investor definition that could negatively impact small businesses capital formation, particularly for businesses founded by racially or ethnically diverse entrepreneurs.

View the additional regulatory briefs from this month:

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

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