Decisions to tailor securities financing transaction reporting and settlement buy-in rules...; The FCA welcomes recommendations to look at aligning prospectus documentation..; There is scope to simplify and remove costs from some parts of the MiFIDII regime without material loss of benefits.
The UK left first the EU, and then at end-December last year, the EU single market.
11 weeks into the UK’s post-EU future, I know there is a lot of
interest in the opportunities for London’s much-envied financial
markets, and the FCA’s approach to regulating these going forwards given
that rule-setting powers have been returned from Brussels and Paris to
London.
We will be building on strong foundations.
For the past 10 years I have enjoyed the personal privilege of being
part of regulating and supervising London’s wholesale financial markets –
first at the Bank of England, and more recently at the FCA, and seeing
just how strong those foundations are. I have been able to enjoy working
with genuinely world-leading infrastructures for clearing, and for
trading, and hugely talented individuals from the sell-side, the
buy-side, from our law and professional services firms. I have seen what
this community can deliver, whether that’s building new infrastructure
such as trade repositories, or improving the way markets function, as in
the – initially seemingly impossible – task of transition from LIBOR.
Looking ahead, we have a new opportunity and ability to shape our
regulatory framework in a way that maximises the scope for the
practitioners and customers of the UK’s financial markets to prosper.
You will have seen the Chancellor’s announcement in his budget that
the government is examining the case for capital markets reforms, and
that it will set out further plans on this soon. The FCA shares the
government’s determination to ensure our regulatory framework is
tailored to allow UK financial markets and their users, from around the
globe, to thrive.
The
FCA shares the
government’s determination to ensure our regulatory framework is
tailored to allow UK financial markets and their users, from around the
globe, to thrive.
That doesn’t mean change for the sake of change. We know change can
carry unwanted costs. Nor does it mean seeking low standards in pursuit
of competitive advantage. We don’t think low standards are a competitive
advantage. But where regulation has imposed costs without beneficial
outcomes to justify that cost, then we will want to use our new ability
to change direction.
Let me turn to a couple of specific examples, close to the interests of this audience.
SFTR reporting
I will start with the Securities Financing Transaction Regulation
(SFTR). This reporting regime is one of the last pieces of regulation
implemented in response to the 2008/09 financial crisis. This has helped
create a data set that supports a Financial Stability Board (FSB)
recommendation, endorsed by the G20, to enhance transparency of the
securities lending and repo markets. As this audience knows well, the
securities financing market supports liquidity management and trading
liquidity in large parts of the financial system. The effort to improve
data on this key market reflects the importance that authorities attach
to the market’s smooth functioning.
Following a 6-month delay beyond its previously planned
implementation date, SFTR reporting finally came into application in the
EU and in the UK in July 2020 for credit institutions, investment
firms, CCPs and CSDs. The delay of the first phase-in was a response to
the immediate impact of Covid-19, allowing those firms to focus resource
on managing their own liquidity risks and other priorities during that
challenging period.
SFTR has been a complex regulatory reporting regime to implement. We
recognise the considerable time and money this will have consumed. The
number of fields to report is large. There is considerable complexity in
how some are populated. Despite this, and the added complications of
managing Covid-19 impacts, we saw largely smooth implementation, and
relatively few issues compared with what might have been expected for a
reporting regime of this scale. The engagement with firms and trade
associations, including a very useful roundtable with ISLA and some of
its members, has been good. We hope and expect this open dialogue with
you will continue.
In onshoring SFTR, the FCA also assumed the new role of Trade
Repository (TR) supervision. That role now dovetails neatly with
supervision of the firms who report to TRs. This will make it easier to
encourage efficient and timely remediation of reporting issues, feeding
better data quality.
As SFTR was already in application for investment firms, credit
institutions, CCPs, CSDs, UCITS, AIFs, insurance companies and pensions
funds by the end of the Brexit transition period, we onshored the SFTR
regime for these firms as it was. However, for non-financial companies
(NFCs), for whom the regime only came into force in the EU in January
2021 – after the end of the transition period – we were not under the
same obligation to onshore this extension of the reporting regime.
Reporting by NFCs was not required under the FSB recommendation. Given
that NFC-to-NFC securities lending or repo is rare, we don’t think such
reporting is necessary for data adequacy or financial stability
purposes.
The FCA therefore encouraged and supported HM Treasury’s decision not
to bring non-financial companies into scope of UK SFTR reporting. Where
NFCs do have significant trading activity, we will still be able to see
almost all these transactions as they will be reported by their
financial counterparties.
We are often asked whether we intend to diverge any further from the
current regime. It seems prudent to allow the regime to mature before we
consider if there is a case for refinement or trimming. We seek a
balance in which the regime meets its overall objectives while remaining
proportionate in terms of cost and operational burdens for UK-based
firms.
One change we are open to considering is whether to remove
commodities lending transactions from scope. These transactions were not
included within the original FSB recommendations which focused on repo,
securities lending and margin lending.
We will also assess carefully the evidence on the relative benefits
of single versus double-sided reporting. This is something market
participants and trade bodies have often raised with us in the context
of EMIR reporting. But many of the costs of implementation, including of
this 2-sided model, have already been borne. We do not wish to add to
these costs with further expense from unnecessary change.
We and the EU will continue to have very strong common interests in the functioning of our regulatory frameworks.
Likewise, we are conscious that many UK-based firms are part of
groups with EU entities subject to the EU SFTR regime. Divergence
between the 2 regimes could add additional complication or cost to
groups who would then have to adhere to 2 different sets of reporting
requirements. This is just 1 small example of a wider reality that we
and the EU will continue to have very strong common interests in the
functioning of our regulatory frameworks.
Any future policy considerations will also be made in close
cooperation with our colleagues at the Bank of England, who will have
responsibility for submitting the aggregated UK data to the FSB, and of
course with HMT, who would be responsible for any amendments to the
primary SFTR legislation.
CSDR
Another Regulation of importance to this community is the Central
Securities Depositories Regulation. As with SFTR, the CSDR regime was
onshored into UK legislation as it stood at the end of the transition
period.
However, the EU CSDR settlement discipline regime had not begun to
apply before the end of the transition period. Consequently, it could
not be included in the UK CSDR as part of the onshoring process. And HMT
could decide whether and how we implemented the settlement discipline
regime in the UK CSDR.
Consistent with FCA advice, HMT decided not to implement the EU CSDR
settlement discipline regime in the UK. For many years, we had argued in
relevant EU fora that the case for introducing the regime, in
particular the buy-in provisions and arrangements for resolving failed
transactions, was not strong. Both buy-side and sell-side
representatives have consistently expressed their concerns to us about
these provisions. They have pointed to a seemingly credible risk of
negative impact on market liquidity, perhaps particularly on the
securities of smaller issuers.
That is a risk we have no desire to take. Some may have been
attracted to these CSDR buy-in provisions and penalties as a constraint
on short-selling activities. But we think the Short Selling Regulation
is the better, more direct and more effective vehicle for setting
regulatory parameters around that market. Investors in securities value
liquidity. We should be wary of introducing measures which stand to
reduce that liquidity in the name of investor protection.
Of course, together with colleagues at the Bank of England and HMT,
we will remain open to ideas on whether, and, if so, how, the UK’s
settlement arrangements could be refreshed to support both market
liquidity and settlement efficiency. We would be happy to work with the
grain of market consensus if and where there is a case for change.
The wider capital markets framework
In addition to post trade regulations, we also inherit from the EU
the extensive framework of legislation and rules around secondary market
trading – notably, but not only, in the form of MiFID II – and around
primary market issuance of securities – in the form of the Prospectus
Regulation.
We see real
efficiency and effectiveness gains in better aligning prospectus
documentation requirements with the type of transaction being
undertaken.
On the primary markets side, Lord Hill’s recent review has usefully
flagged scope for reform to the prospectus regime. We see real
efficiency and effectiveness gains in better aligning prospectus
documentation requirements with the type of transaction being
undertaken. Follow-on capital raising by companies whose shares are
already listed and traded on public markets is a very different type of
transaction from an off-market public offer by a private company.
Yet the Prospectus Regulation seeks to cover both with the same
rules. That was the result of a regulatory compromise in the EU. It is
timely to revisit this framework, making the route to capital raising
through public markets one which is efficient for issuers because the
regulatory requirements are focused tightly on what their investors
actually need, while maintaining alignment with existing standards where
this is more efficient for market participants operating in UK, EU and
other international markets.
The FCA is carefully considering Lord Hill’s recommendations for
changes to our own listing rules, in line with our objectives, including
on free float, dual class share structures, and special purpose
acquisition companies (SPACs). We are treating a response to these as a
priority.
It is timely to
assess where
MiFID II rules, and the costs some of them impose, have –
or have not – achieved the intended benefits.
On secondary markets for securities, derivatives, and other
investments, it is timely to assess where MiFID II rules, and the costs
some of them impose, have – or have not – achieved the intended
benefits. The EU has been reflecting on this too, as we have seen in the
already agreed changes in the so-called MiFID ‘quick fix’. We will
shortly put out to consultation in the UK a similar set of changes – not
absolutely identical, but we hope at least equally effective in
achieving the same desired outcomes.
We have also had to consider or decide how to implement on a UK-only
(as opposed to EU-wide) basis various elements of the MiFID transparency
regime. For example, whether and when so-called ‘dark’ trading should
be capped, and how thresholds for post-trade, and, in particular,
pre-trade transparency should be calculated.
On dark trading, our initial approach is not to have automated caps
in the absence of evidence that the levels of dark trading we have seen
harm price formation or execution outcomes for investors, and given no
need to preserve alignment of cap application in the absence of the EU
accepting the equivalence of the UK share trading regime. It’s no
secret that the FCA has long been sceptical about the merits of this
regime. The adjective ‘dark’ sounds unhelpfully pejorative. This is
investors trying to protect their own interests by not telegraphing
before they need to, their desire to buy or sell a share.
On threshold calculation and application, there are important
questions about how best to achieve desired outcomes, and whether the
complex, sometimes costly and cumbersome calculation procedures, do
achieve those outcomes. We may be able to find ways of simplifying this
currently elaborate machinery. Flexibility in our approach may indeed
create options for alignment across jurisdictions where that is
important for industry efficiency or other reasons. That might be better
for all than rigidly insisting on different transparency thresholds for
the same instruments in different jurisdictions because those
thresholds are derived, under the letter of current MiFID rules, from
different data sets.
The detailed machinery of the MiFID II transparency regime can be
difficult to follow for those not immersed in its detail, but the key
point is that we have important opportunities to refine our framework
for securities and derivatives trading in a way that helps those doing
business here, without sacrificing equivalent outcomes in terms of
investor protection and market integrity.
Another part of MiFID II about which we have expressed doubts from
the outset is the commodity derivatives regime. The EU has also
identified the need for revisiting this regime as part of its ‘quick
fix’. We think there is scope substantially to simplify this regime.
As we look to key themes of the years ahead, what is most striking is
the common challenges facing market regulators in all jurisdictions –
in the UK, the EU, the United States and beyond.
For example, we have been working together – through FSB and IOSCO –
to look at what lessons can be learnt from the impact of Covid-19 on our
markets, notably in terms of the liquidity stresses experienced in
asset markets, and in various fund structures.
We are also working together on how financial markets can support
that all-important transition to net zero. As with the global work
completed over past years and now embedded in regulatory frameworks
across jurisdictions – such as the agreement of common and equivalent
standards for clearing and settlement, or the improved international
data collection on securities financing markets which I talked about
earlier – we will be striving for common outcomes.
We face the same global issues. The most effective and efficient way
of addressing them will be through globally connected markets. We look
forward to ensuring our approach in the UK is an integrated part of that
coordinated international effort.
FCA
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