Global Regulatory Brief: Trading and markets, August 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
Regulatory authorities continue to advance initiatives to improve the efficiency and sophistication of global securities markets. From listing rules in the UK to communications surveillance in Australia, the following global developments in trading and markets from the past month stand out.
- India: SEBI mandates fraud prevention mechanisms
- UK: FCA overhauls listing rules for UK stock markets
- Australia: ASIC publish communication surveillance guidance
- Qatar: FMA publish draft code of market conduct for consultation
- Saudi Arabia: CMA consults on reforms to debt offerings
- EU: ESMA consults on recalibrating CSDR framework
- US: SEC Adopts Tailored Registration Form for Offerings of Registered Index-Linked and Registered Market-Value Adjustment Annuities
- US: SEC Approves MSRB Amendments to Time of Trade Rule
- US: CFTC Approves Final Rule Allowing U.S. Introducing Brokers Direct Access to Registered Foreign Boards of Trade for the Submission of Customer Orders
SEBI mandates fraud prevention mechanisms for higher standards of market integrity and investor protection
The Securities and Exchange Board of India (SEBI) issued a circular to mandate stock brokers to establish an institutional mechanism to prevent and detect fraud or market abuse, in order to safeguard interests of investors.
Key requirements: Stock brokers are to establish surveillance systems for trading activities, enhance internal controls, implement a whistle-blower policy and establish escalation and reporting mechanisms.
Staggered implementation timelines: Stock brokers with more than 50,000 active unique client codes (UCCs) must comply by 1 January 2025; brokers with 2,001 to 50,000 UCCs are to comply by 1 April 2025; and brokers with up to 2,000 active UCCs must comply by 1 April 2026.
FCA overhauls listing rules for UK stock markets
The UK Financial Conduct Authority (FCA) issued new rules representing the biggest changes to the listing regime in over three decades.
The intention: The new framework takes a more disclosure-based approach and aims to support a wider range of companies to issue their shares on a UK exchange and to better align the UK regime with international market standards.
In more detail: The simplified listings regime includes a single category and streamlined eligibility for those companies seeking to list their shares in the UK.
- The new rules remove the need for votes on significant or related party transactions and offer flexibility around enhanced voting rights.
- Shareholder approval for key events, like reverse takeovers and decisions to take the company’s shares off an exchange, is still required.
Looking ahead: The new rules will apply from 29 July 2024.
Important context: The UK Listing Review found that the number of listed companies in the UK has fallen by about 40% from a recent peak in 2008. Between 2015 and 2020, the UK accounted for only 5% of Initial Public Offerings (IPOs) globally.
ASIC publish communications surveillance guidance
The Australian Securities and Investments Commission (ASIC) published practical guidance encouraging financial market firms to strengthen their business communication surveillance in order to better prevent, detect, and address misconduct.
In summary: ASIC’s guidance spells out some of the common challenges and pitfalls for market intermediaries in effectively supervising business communications, including:
- the emergence of new and popular communication channels that are outside the scope of surveillance systems;
- weak or no controls to identify where data used in surveillance systems is incomplete or erroneous; and
- reliance on ’out of the box’ settings of vendor-provided communication surveillance systems and a failure to routinely calibrate alert parameters.
Case studies: The guidance contains a number of case studies to consider the issues and risks. These case studies relate to the following scenarios:
- A representative of a market intermediary contacts a client on an encrypted messaging app from their personal device to discuss trading strategies;
- A client asks a representative of a market intermediary to use a messaging app that is outside its approved and monitored business communication channels.
- A scheduled review of a market intermediary’s business communications finds several representatives discussing business on their personal devices or unapproved channels.
Important context: This guidance follows concerns that the use of unmonitored communication channels and encrypted communication applications in business communications can significantly increase the risk of misconduct going undetected.
- New communication technologies are developing rapidly and changing how financial services firms communicate for business.
- ASIC acknowledges that the risks arising from the widespread use of personal devices and unapproved communication channels have been most visibly highlighted by the recent actions taken by the U.S. Securities and Exchange Commission and Commodity Futures Trading Commission which reached record-breaking settlements with dozens of financial institutions for failures to maintain and preserve electronic communications.
Qatar publish draft code of market conduct for consultation
The Qatar Financial Markets Authority (QFMA) announced a draft Code of Market Conduct for consultation.
Summary: The Code of Market Conduct aims to enhance the protection of investors in securities from unfair or improper practices that involve fraud, deception or manipulation, in addition to enhancing the regulatory environment and stability in the capital market, and aims to clarify prohibited behaviours involving manipulation or deception when it comes to securities trading, such as:
- Promoting the purchase of a security for the purpose of selling it or enabling another person to sell it;
- Promoting the sale of a security for the purpose of buying or enabling another person to buy it;
- Buy or sale of securities at the market close for the purpose of misleading investors acting on the basis of closing prices;
- Entering buy or sell orders in a security order book for the purpose of creating a false impression of the volume of the order or supply;
- Entering orders or a series of orders in a security order book for the purpose of influencing on the share price in order to create an opportunity to sell or buy a security at a preferential price; and
- Enter an order or series of buy or sell orders on a security without having the intention to execute it.
Next steps: The consultation is open until 25 July 2024.
Saudi Capital Market Authority announces public consultation for proposed regulatory reforms to offering of debt instruments
Saudi Arabia’s Capital Market Authority published proposed regulatory enhancements for the offering of debt instruments for public consultation, which aim to enhance issuers time to market and reduce transaction associated fees.
Context: The proposals come as Saudi Arabia looks to develop the domestic debt capital market as a primary funding channel for the national economy.
Summary: The main elements of the Draft Regulatory Framework can be summarized as:
- Expanding Exempt Offering: Allowing national development funds, national development banks, and local sovereign funds to offer debt instruments by way of an exempt offer; which enables such entities to offer their debt instruments to the public in a flexible manner in line with international best practices.
- Recalibrating CMA Private Placement Notifications: Developing provisions regulating private placement of debt instruments including provisions related to the required period of notifying the CMA, where local issuers are allowed to notify the CMA and commence offering immediately instead of having to notify the CMA 10 days prior to the commencement of offering.
- Facilitating Public Offering: Reducing the number of submission requirements by around 50% (e.g. listed issuers are required to satisfy 8 submission requirements instead of 18 submission requirements), and facilitating the requirements of the debt instruments prospectus by reducing the requirements by 25%; in addition to allowing incorporation by reference for listed issuers.
- Segregating Provisions Regulating Public Offer of Debt and Equity: Separating provisions of public offer of debt and equity to enhance the clarity of the regulations and requirements of public debt offering.
Next steps: The consultation is open for public comment until August 8, 2024.
ESMA consults on recalibrating CSDR framework
The European Securities and Markets Authority (ESMA) is launching a series of consultations on different aspects of the Central Securities Depositories Regulation (CSDR) Refit.
In summary: The proposed rules relate to i) the information to be provided by European CSDs to their national competent authorities (NCAs), ii) the information to be notified to ESMA by third-country CSDs, and iii) the scope of settlement discipline.
In more detail: The proposals set out the following draft changes-
- Review and evaluation process of EU CSDs: ESMA is proposing greater information to be shared regarding the cross-border activities of CSDs (including its users and the securities in which it provides services) and on the risks to be considered by the relevant authorities.
- Third country CSDs: ESMA is proposing to streamline the information to be notified to achieve a better understanding of the provision of notary, central maintenance and settlement services in the EU as well as limiting the reporting burden; and
- Scope of settlement discipline: ESMA proposes technical advise regarding i) the underlying cause of settlement fails that are considered as not attributable to the participants in the transaction, and ii) the circumstances in which operations are not considered as trading.
Looking ahead: Comments are due by September 9, 2024 and ESMA intends to submit technical advice to the EU Commission by December 31, 2024.
SEC adopts tailored registration form for offerings of registered index-linked and registered market-value adjustment annuities
The Securities and Exchange Commission (SEC) adopted new disclosure requirements and processes for offerings of registered index-linked annuities (“RILAs”) and registered market value adjustment annuities (collectively, “non-variable annuities”). Congress had directed the Commission to adopt registration forms for RILAs in 2022.
The details: The final rule will require issuers of non-variable annuities to register offerings on Form N-4, which is currently used to register offerings of most variable annuities.
- Additionally, the rule extends prohibitions on materially misleading advertising and sales literature to non-variable annuities by amending Rule 156.
- Finally, the rule makes technical and conforming amendments to various insurance product registration forms and will require Form N-4 filers to tag certain information using XBRL.
Compliance timeline: The amendments will become effective 60 days after publication in the Federal Register.
- Filers will have until May 1, 2026, to comply with most of the final amendments to Form N-4 and the related rule and form amendments.
- For the amendments to Rule 156, insurance companies will be required to comply on the effective date.
SEC approves MSRB amendments to time of trade rule
The SEC approved the Municipal Securities Rulemaking Board’s (MSRB) amendments to its time of trade rule (Rule G-47), which requires brokers, dealers, and municipal securities dealers (“dealers”) to disclose to customers, at or prior to the time of trade, all material information known about the transaction and the security, as well as material information that is reasonably accessible to the public through established industry sources.
The changes to G-47 include:
- Clarification that a dealer is not obligated to disclose material information in violation of insider trading rules or procedures;
- Amendments to the definition of material information;
- Codifies existing interpretive guidance pertaining to market discount and to zero coupon or stepped coupon securities; and
- Addition of examples and disclosure scenarios to Supplementary Material .03.
Compliance timeline: The compliance date for the amendments to Rule G-47 is March 3, 2025.
CFTC approves final rules allowing U.S. introducing brokers direct access to registered foreign boards of trade for the submission of customer orders
The Commodity Futures Trading Commission (CFTC) adopted final rules permitting a foreign board of trade (FBOT), registered with the CFTC, to provide direct access to its electronic trading and order matching system to an introducing broker (IB), located in the United States and registered with the CFTC, for the submission of customer orders to the FBOT’s trading system for execution.
The details: Part 48 of the Commission’s regulations had previously permitted FBOTs to provide direct access to eligible FCMs, CPOs, and CTAs for submission of client orders.
- The amendments approved under the final rules expand the eligibility for direct access to IBs located in the United States.
- The amendments also require that all U.S. customer orders be guaranteed by a registered FCM or firm exempt from FCM registration.
Timeline: The final rules are effective 30 days from the date of publication in the Federal Register.
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