By Anne Plested, MCSI, Senior Product Manager for Regulation, ION Markets.
Incentives for change
Earlier last year, as part of the UK Wholesale Markets Review (WMR), the Financial Conduct Authority (FCA) published its PS23/4 policy statement on Improving Equity Secondary Markets. Promising to remove the most burdensome and unnecessary regulatory requirements, this policy aims to lower the costs of reporting, improve the quality of execution through post-trade transparency, and remove some restrictions limiting the ability of UK trading venues to compete internationally. It reflects the regulator’s ambition to tidy up the UK rule book post-Brexit and align with the best outcomes for the UK outside the EU, paving the way for a new era of post-trade transparency. Since April, firms and market operators involved in trading and investing have been required to update their systems to comply with these changes.
Meanwhile, across Europe, the review of the second Markets in Financial Instruments Directive (MiFID II/MiFIR) has triggered a series of rulebook consultations and changes that promise to streamline and sanitize the post-trade data in share-trading markets.The incentives behind both these updates are highly sensible. The goal is to support better transparency, best execution, and more organized post-trade data that will go on to make up the consolidated tapes. However, market participants may wonder how to make sense of all these continuing incremental adjustments and how best to adapt.
Previous moves to improve equity markets
Following recent advances in automated trading, regulators have been under pressure to catch up with the markets. Historically, supervisors took steps to improve the equity markets by implementing regulations that ensure transparency and establish effective systems and controls around algorithmic and high-frequency trading. For example, in Europe (including the UK), the 2018 MiFID II made significant changes to transaction reporting and trade publication datasets, establishing more stringent control requirements on traders and algos. MiFID II also introduced?transparency requirements for non-equities.
Improving post-trade transparency for secondary markets is nothing new. Efforts to identify price-forming trades better and standardize the use of trade flags for easier data consolidation began decades ago. Take, for example, the development of standards like the Market Model Typology (MMT) for post-trade transparency across all asset classes subject to MiFID II. A collaborative initiative established by industry participants to improve standards for post-trade transparency, the MMT gained widespread support across Europe, moving under the jurisdiction of the FIX Protocol Limited Trust in 2013.
While adoption of the MMT standard continues across the industry, its impact on the upcoming development of the consolidated tapes is unclear. Recent EU consultations include proposals that are at slight odds with the established MMT. It’s difficult to say if this reflects a misunderstanding of the subject rather than any intentional deviation. What is clear is that regulators and industry stakeholders must remain engaged with industry-led initiatives and should not try to reinvent the wheel.
The UK-EU mismatch
In the UK, the FCA’s post-Brexit focus on maintaining market integrity and promoting competition has renewed the push to enhance transparency and trade execution. One reason for this is to adapt old rules inherited from EU frameworks – such as MiFID II – for a post-Brexit Britain. Another reason is to pave the way for improved execution quality and greater liquidity for investors.
As part of their built-in regulatory review process, the European regulator ESMA has been re-examining certain aspects of MiFID II and making changes. As a result, the industry must process multiple rule book changes including some diverging regulations between jurisdictions. This is complicated by different timelines and application dates. Not to mention the costs to market participants associated with continuously navigating mismatches between low-level detail requirements around market structure and post-trade transparency.
For example, in the UK, revisions to the Financial Services and Markets Act (FSMA) in 2023 removed the double volume cap (DVC) completely, whereas the EU plans to switch in 2025 to a single cap mechanism that applies for reference price waiver only. Some people think that instead of imposing dark caps, venues should come up with new solutions if liquidity moves away from continuous lit trading. Regardless of market opinion, both variations of these rules must be catered for. Another example of the mismatch is the introduction of new regimes around off-exchange trade publication. The UK ‘designated reporter regime’ (DRR) for off-exchange trade reporting in April 2024 aimed to determine (once and for all/again) the responsibilities for reporting trades. The EU version is a similarly named ‘designated publishing entity’ (DPE) regime, set to apply from February 2025. Although the two differ as the DPE has an asset class categorization dimension, whereas UK DRR registration is at legal entity level.
From a trading platform perspective and in the interests of minimizing costs and improving efficiency, no one wants divergence between the EU and UK rules. Coordination on implementation dates would also be highly desirable. However, since the first stages of EU change were applied from June 2023 to January 2024 – and the UK’s updates were in April 2024 – some divergence in rules has seemed unavoidable and we can look forward to more EU changes throughout 2025. What’s more, there is an ongoing stream of consultations, with the timing of the comment periods only further complicating the ability of market participants and other interested parties to provide meaningful input.
Looking ahead
What this means for practitioners is that already this year, financial markets have had to implement EU rule adjustments including to post-trade transparency in January, and UK amendments in April. According to EU consultations on the finer details of the next raft of MiFID II changes that are currently underway, application dates span from February to May to September 2025. Notably the first final reports and detail of EU requirements are not expected until December 2024. All of which means it is going to be a very tight timeline for venues and firms to digest, design and code to the new EU rules in 2025. The UK on the other hand has focused on one area and has consulted earlier this year on proposed changes to the bond and derivative transparency regime, the details of which were published this month.
In the EU, most recommendations from the MiFID II review will be effective by September 2025. Next year’s incoming EU changes to transparency are intended to dovetail into the regulator’s plans to establish a consolidated tape for bonds, followed by equities, and later derivatives, which is a big focus over the coming few years. The UK FCA is also developing proposals around a framework for consolidated tapes.
Whether removing a rule, changing a dataset, or adding a flag, change at any level requires effort to interpret, analyze, and implement, which all comes at a cost to market participants. Due to divergence, firms trading pan-European markets need to comply with both UK and EU regulations. As the UK and EU continue to evolve their regulatory landscapes, it is crucial for market participants to stay informed and adapt to these changes.
Subscribe to our newsletter
