Global Regulatory Brief: Trading and markets, July 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 trade surveillance in Qatar to hedge fund fee disclosure in the U.S., the following global developments in trading and markets from the past month stand out.
- India: SEBI reviews rules for derivatives trading to prevent market manipulation
- Qatar: Financial Markets Authority outlines ambition to improve trade surveillance
- US: Supreme Court curbs SEC’s use of in-house judges in fraud cases
- Switzerland: Federal Council consults on amendments to Financial Market Infrastructure Act
- US: SEC hedge fund fee disclosure rule struck down by federal appeals court
- Saudi Arabia: CMA consults on buyback and selling of listed companies’ shares
- International: IOSCO publishes good practices to improve trading venue resilience during market outages
- Indonesia: Stock Exchange upgrades its trading platform
SEBI reviews rules for derivatives trading to prevent market manipulation
The Securities and Exchange Board of India (SEBI) has proposed tighter rules for trading in individual stock derivatives, with the aim to avert risks of market manipulation.
Summary: The proposed rules adjust the market parameters for eligibility in the derivatives market to ensure that only high-quality stocks in terms of size, liquidity and market depth are eligible. Public comments are sought on the following areas:
- Whether SEBI should review the eligibility criteria in line with the growth of broad market parameters reflecting the size and liquidity of the cash market
- Whether the proposed revisions in criterion related to Median Quarter-Sigma Order Size (MQSOS), Market Wide Position Limit (MWPL) and Average Daily Delivery Value (ADDV) are appropriate
- Whether SEBI should extend the product success framework to stock derivatives
Background: SEBI notes that derivatives markets enhance price discovery and market liquidity; however in the absence of sufficient depth in underlying cash market and appropriate position limits on leveraged derivatives, there would be increased risk of market manipulation, volatility and compromised investor protection.
As a result, SEBI established a framework in 2018 for the selection of stocks eligible for derivatives trading. Given evolving market developments, SEBI is now reviewing the 2018 framework.
Qatar Financial Markets Authority outlines ambition to improve trade surveillance in 2023 Annual Report
Qatar Financial Markets Authority published its 2023 annual report that summarizes the key activities and initiatives over the past year and looks ahead to upcoming regulatory developments affecting Qatar’s financial markets.
Specific initiatives: The annual report provides detail on a number of specific initiatives that are underway in Qatar. These include:
- Dividend distribution rules: The new rules for the dividends distribution in the financial markets were approved by the QFMA last November and introduces substantial changes in the mechanisms of annual dividend distribution to shareholders in public shareholding companies listed on Qatar Stock Exchange (QSE). One of the most important implications of the new Dividend Distribution Rules is that they provide investors in the stock market with a periodic return (quarterly or annually) on the value of their investments instead of waiting for the annual one.
- Single window: The launch of the Single Window E-Portal aims to simplify the procedures for companies wishing to list their securities by limiting their dealings with only one entity instead of dealing with other competent authorities separately, including QFMA, Ministry of Commerce and Industry (MOCI), Qatar Stock Exchange (QSE), and Edaa (QCSD).
- Offering and listing: During 2023 the Book Building mechanism was implemented for the first time in Qatar to support more realistic pricing, as it depends on the desire and seriousness of qualified investors with experience in buying the shares offered for subscription.
Trade surveillance in focus: QFMA will work on a number of initiatives to improve trade surveillance in Qatar, including:
- Issuing a code of market conduct
- Developing a methodology for monitoring suspicious behaviors through the development of regulatory alerts
- Developing the methodology and controls of investigation, data collection, data analysis, and preparation of analytical notes and reports forms
- Developing a methodology to monitor and track the marketing activities of unlicensed financial instruments and financial advice traded on websites and social media sites
- Preparing the surveillance manual that includes all the procedures and tasks of the Surveillance Section
- Developing an electronic system for managing market data
- Adopting a new surveillance system
- Strengthening surveillance over the insiders
- Enhancing the Code of Conduct for Dealers in the Financial Markets
Looking ahead: The report also provides detail on upcoming workstreams for the QFMA, including:
- Complaints management: QFMA is working on developing electronic systems for receiving complaints to become integrated
- Licensing: QFMA has started reviewing and amending the issued legislation and introducing new legislations to ensure that it keeps pace with developments in the current financial markets to reflect the best international practices in line with the local market
- AML/CFT: In the field of Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT), QFMA will improve its capabilities and will hold workshops on providing feedback to licensed parties of the AML/CFT obligations and requirements. It will also hold workshops in cooperation with the Financial Information Unit to raise awareness among licensed parties on improving the number and quality of suspicious transaction reports, especially the patterns and indicators of suspected terrorist financing
Important context: Qatari policymakers are seeking to establish a regulatory framework and infrastructure for the Qatari financial markets which is in line with the best international standards and practices.
This framework aims to achieve the sustainability of financial markets, promote green financial instruments, and adopt technological and digital developments in a way that promotes Qatar as a leader among the Arab financial markets.
The QFMA is aiming to elevate Qatar from ’emerging’ to ‘developed’ financial market status, and is prepared to consider a range of regulatory proposals to achieve this goal.
U.S. Supreme Court curbs SEC’s use of in-house judges in fraud cases
In a 6-3 opinion, the U.S. Supreme Court held that defendants in Securities and Exchange Commission (SEC) civil fraud cases have a constitutional right to a jury trial in federal courts. The ruling likely ends the SEC’s practice of adjudicating such cases in-house under Commission rules and administrative law – a system that has allowed the Commission to extract financial penalties in nearly 100 cases per year.
Broad implications for federal agencies: The ruling may also impact similar administrative proceedings used by other federal agencies such as the Environmental Protection Agency and Federal Trade Commission, among others according to Bloomberg News reporting. During arguments, government lawyers stated that more than two dozen agencies now impose penalties through administrative proceedings and that only some of those bodies have the option to go to federal court instead.
Swiss Federal Council consults on amendments to Financial Market Infrastructure Act
The Swiss Federal Council is proposing a series of amendments to the Financial Market Infrastructure Act (FinMIA) to take account of technological advances and relevant developments in international standards and foreign legislation.
Important context: The FinMIA governs the organization and operation of financial market infrastructures such as stock exchanges and other trading facilities, payment systems and central counterparties.
- The FinMIA sets out the requirements on the conduct of financial market participants in securities and derivatives trading, including provisions aimed at preventing market abuse (insider trading and market manipulation)
- The FinMIA has been in force since 2016
Proposals in detail: The main elements of the draft are the following:
- Financial market infrastructures: Reforms intended to help prevent the failure of a systemically important financial market infrastructure such as strengthening capital requirements, improving recovery and resolution planning, and specifying requirements for payment systems.
- Derivatives trading: Reforms to assist foreign supervisory authorities accessing Swiss trade repositories and improving the identification of global stability risks in derivatives markets. In particular, this rule simplification is intended to benefit small companies that are not active in the financial sector (“small non-financial counterparties”).
- Market abuse: Reforms intended to improve the prevention, identification and sanctioning of insider trading and market manipulation. In particular, the Act will set out the basic principles regarding the duties of issuers that are important for market integrity. Currently, these duties are regulated by the stock exchanges. In addition, the Swiss Financial Market Supervisory Authority (FINMA) should be able to monitor market abuse across trading venues.
Looking ahead: The consultation runs until October 11, 2024.
SEC hedge fund fee disclosure rule struck down by federal appeals court
A federal appeals court struck down the SEC’s rules requiring hedge funds and private equity firms to, among other things, detail quarterly fees and expenses to investors and prohibited firms from allowing some favored investors to cash out more easily than others.
SEC exceeded its authority: The three-judge panel sided with industry groups, finding that the SEC “exceeded its statutory authority” by adopting the rule and that “by congressional design, private funds are exempt from federal regulation” of their internal structures. The court also held that Dodd-Frank, expansive legislation enacted in response to the 2008 financial crisis, is not as permissive as the SEC argued in defending the rule.
Importantly, the appeals court also rejected an argument from the SEC that the rule was necessary because it would weed out fraud, ruling that the SEC is conflating a lack of disclosure with deception and that the Commission’s claims of fraud prevention were too vague to justify the rule. This anti-fraud authority has been used by the SEC to justify other recent rules, including its Predictive Data Analytics Rule (PDA) and Cybersecurity Rule, among others.
Next steps: The SEC must now weigh a response – if any – to the appeals court ruling. During an interview at the Bloomberg Invest event in New York, SEC Chairman Gary Gensler stated that “we do everything within the law and how courts interpret the law,” and that “If need be, we pivot”.
Saudi Arabia issues public consultation on regulation of buyback and selling of listed companies’ shares
The Saudi Capital Market Authority (CMA) has called upon relevant and interested persons participating in the capital market on the Draft Amendments of the Implementing Regulation of the Companies Law for Listed Joint Stock Companies.
Summary: The Draft aims to develop the provisions regulating the buyback or selling of shares by listed companies to grant more flexibility and improve the execution of the buyback or sale of these shares.
- The proposed amendment provides greater flexibility by developing the regulations for buyback or selling shares of listed companies, by removing the link between the quantities of companies buying or selling their shares during one trading day to the approved quantity
- Instead the proposal stipulates that the buybacks or sales in a single trading day should not exceed 25% of the average daily trading volume of the company’s shares over the last five trading sessions preceding the buyback or sale
Next steps: Public consultation is open for a period of 30 days and closed on July 6, 2024.
IOSCO publishes Good Practices to improve trading venues’ resilience in case of Market Outages
IOSCO published its final report on Market Outages to address the need for improved preparedness and management of market outages to ensure market resilience and investor confidence.
In summary: The report identifies key findings from recent market outages and sets forth five good practices to assist regulators, trading venues and market participants in preparing for, and managing, future market outages and thereby helping improve market-wide resilience.
Five key areas: The good practices cover five key areas-
- Outage plans
- Communication plans
- Reopening of trading
- Closing auctions / Closing prices
- Post-outage plans
The intention: These good practices are designed to offer flexibility for adoption across various trading venues, asset classes, and market structures and are generally applicable to market outages caused by different types of root causes.
Indonesia Stock Exchange upgrades its trading platform
The Indonesian Stock Exchange (IDX) has expanded its partnership with NASDAQ to upgrade the former’s trading platform, market surveillance capabilities and index business.
Objectives of platform upgrade: IDX’s move to upgrade its platform is intended to achieve a robust, stable and sustainable capital market that can support the ongoing development of the Indonesian economy, as outlined by the Indonesian Financial Services Authority (OJK)’s capital markets roadmap.
- IDX has also experienced rapid growth over recent years, with trading volumes increasing by 65% since 2019 and the total number of investors trading on its exchange growing by over 400% to 12.6 million
- The platform upgrade would better serve increased activity, as well as to leverage opportunities for further growth, such as for IDX to quickly design and launch new indices
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