The upcoming months will bring about a busy regulatory agenda in the area of wholesale financial markets regulation in the European Union (EU) and in the United Kingdom (UK). With both jurisdictions following their own regulatory change initiatives, growing differences between various elements of the EU and UK frameworks are expected to create an additional layer of complexity for market participants active in both markets. Remaining up to date with regulatory changes becomes therefore even more important – and arguably challenging – than before. The following note aims to highlight the key themes in 2022 that EU and UK market participants should be aware of.
1. Markets regulation: focus on market data
EU | In the EU, the decision-makers and market participants are expected to mainly be focused on the ongoing review of the proposed amendments to the Markets in Financial Instruments Regulation (MiFIR) that were tabled by the European Commission (Commission) in November 2021. These include, among other proposals, an overhaul of the European legislative framework for the consolidated tape. With the key objective being to facilitate the emergence of a commercially viable consolidated tape provider (CTP) for each of four asset classes (shares, exchange-traded funds, bonds and derivatives) and ultimately help market participants to access market data, the Commission is proposing a CTP model based on a single consolidator and mandatory contribution of data. Already, pre-publication, the proposed changes have generated a lot of industry interest, and this is only likely to continue as the review progresses. Among other proposed changes, targeted amendments to pre and post-trade transparency requirements for equities and non-equities intend to facilitate the regime. On the retail side, a proposed prohibition of “payment-for-order-flow” has already sparked vivid reactions from some of the legislators, so we should expect an interesting debate ahead. The legislative review of the MiFIR amendments is expected to continue throughout this year.
UK | In the UK, we expect to see the next stage of the 2021 Wholesale Market Review in the form of consultations on changes that need to be made to the FCA Handbook and Regulatory Technical Standards. While the Review is part of the UK’s efforts to address those elements of the existing framework that are perceived as not serving the requirements of UK markets, many of the likely reforms focus on similar issues to work that is ongoing in the EU. That said, there are important differences in detail and, arguably, some more radical ideas on the UK side (see below re trading). One area where the UK appears to be ahead of the EU is on market data with the recent publication by the Financial Conduct Authority (FCA) of its Feedback Statement on Accessing and Using Wholesale Data announcing further work to take place in the area of trading data – including its pricing, costs and the licensing mechanisms and the launch of two market studies later this year. The first will investigate how competition is working between benchmarks, including how they are priced, what are the contractual terms governing access and use of benchmarks, as well as barriers to switching. With such in-depth market studies usually resulting in some sort of regulatory change, the upcoming review of the benchmarks sector is certainly worth keeping a watchful eye on, both by benchmark administrators and users.
EU | In addition to the ongoing markets regulation reform, 2022 will be the year of application of some of the previously adopted regulatory change. Notably, in the area of commodities, 28 February 2022 marks the application date of the reformed position limits regime for commodity derivatives. The so-called MiFID Quick Fix reform resulted in significant – and arguably welcome – changes to the regime, mainly focused on limiting its application to critical and significant contracts (with the exception of agricultural products, particularly products used for human consumption). Changes are also upcoming for non-regulated commodity market participants relying on the so-called ancillary activity exemption from the obligation to become an authorised investment firm. The MiFID Quick Fix changed the criteria that persons seeking to rely on this exemption will need to undertake. Regarding mandatory shares and derivatives trading, the recently proposed MiFIR review proposal includes targeted amendments to both regimes, but these are unlikely to become applicable this year. In terms of new proposals, the Commission’s November 2021 Capital Markets Package included, alongside the MiFIR review, a proposal for a regulation establishing a European Single Access Point (ESAP Regulation). With the objective of facilitating investors’ access to company and trading data, the proposed ESAP Regulation intends to create an overarching framework for access to data, data infrastructure and data availability. To this end, it amends over 20 existing sectoral legislative acts by, for example, mandating data to be available in an extractable or machine-readable format. Finally, following amendments to the settlement discipline provisions as included in the Central Securities Depositaries Regulation (CSDR) and the European Securities and Markets Authority’s (ESMA) December 2021 public statement on its supervisory approach on the implementation of the CSDR buy-in provisions delaying the application of the controversial buy-in regime beyond the initial 1 February 2022 application date, amendments to the relevant regulatory technical standards and a new application date are expected.
UK | The proposals in the Wholesale Markets Review are still at consultative stage but the expectation is that many of them will take effect in some form, particularly where they reflect changes being made in the EU. The headline grabbing changes are mainly on the equities side with the abolition of the share trading obligation and the double volume cap, the latter to be replaced by powers for the FCA to monitor and intervene if necessary. However, the proposed simplifications of the waivers and deferrals regimes for both equity and non-equity instruments would constitute important changes. The proposed removal of the traded on a trading venue is also useful. Perhaps the biggest difference for commodity derivatives looks to be the determination of the ancillary exemption, with the UK appearing to favour a more qualitative approach to the EU but the detail remains to be seen. The smaller differences in scope (including, for example, the extent to which, exotic derivatives will no longer be treated as commodity derivatives) will also need to be kept under review. From the perspective of commodity market participants active both in the UK and European markets, it will be important to track any further divergence between both regimes.
EU | The establishment of post-Brexit arrangements for Euro-denominated clearing and equivalence are likely to continue to dominate public debate and the industry’s focus in the EU in 2022. In January 2022 Commissioner Mairead McGuinness announced a proposed three-year extension of the temporary equivalence decision that allows continued access by EU firms to clear trades at UK central counterparties (CCPs), i.e. until June 2025. In terms of a longer-term perspective and in line with the strategy towards shifting more Euro-clearing onshore to EU clearing houses, the Commission plans to launch in 2022 a public consultation on a broader European clearing regime. In addition, market participants should expect some follow up to the ESMA November 2021 Discussion Paper on the Review of the Clearing Thresholds under the European Market Infrastructure Regulation (EMIR) . In its paper, ESMA sought stakeholder views on a wide variety of clearing-related issues, including the impact of Brexit and the international perspective on the EMIR regime, and the overall state of application of the clearing obligation and its evolution.
UK | The temporary recognition regime that has been in place since 31 December 2020 continues to enable UK persons to use third country CCPs but the deadline for applications for recognition is on 30 June 2022. In the meantime, the Bank of England (BoE) must finalise its approach to tiering third country CCPs and comparable compliance as set out in consultations published in November 2021 and as discussed by Christina Segal-Knowles in a speech to the Futures Industry Association. In parallel, HM Treasury is consulting on an extension of the BoE’s powers to supervise both CCPs and CSDs, subject to a new accountability and transparency framework, as part of the Future Regulatory Framework Review. This would give the BoE powers to waive or modify rules, investigate and gather information and take enforcement action in appropriate cases, working within an overall policy framework set by the government and Parliament.
EU | Following a delay to the publication of legislative proposals caused by the Covid-19 pandemic, a primary focus in the area of European prudential regulation will be on the review of the Commission’s October 2021 Banking Package, comprising amendments to the Capital Requirement Regulation (CRR) and Capital Requirements Directive (CRD). The proposals, attempting to implement in European law outstanding elements of the Basel III reforms, are expected to continue to attract much industry focus in the course of 2022 – notably some of the most controversial elements thereof, including the proposed introduction of an output floor and a new regime for third-country branches. The latter is of particular relevance to those UK credit institutions and “class 1” investment firms conducting cross-border business into EU, including intragroup.
UK | In December 2021 the Prudential Regulation Authority (PRA) published its feedback statement in relation to the responses received to the Discussion Paper (DP) 1/21, which explored options for developing a “strong and simple” prudential framework for non-systemic banks and building societies in the UK. The objective of the framework would be to maintain the resilience of those firms in scope and of the UK financial sector while using simplified prudential regulation, thereby enabling a dynamic and diverse banking sector in the UK. An initial consultation is planned for the first half of 2022, with further consultations to follow in 2022 and/or 2023. The consultation on the UK implementation of the outstanding Basel III reforms is expected later in 2022. In January the independent panel on ring-fencing and proprietary trading published an interim statement which provided an update on its findings ahead of the final report and recommendations. The panel will submit a report with its recommendations to HM Treasury following the review in early 2022. Although the new Investment Firm Prudential Regime is already in force since 1 January 2022, questions in relation to the new MIFIDPRU remuneration requirements and the ICARA process are still areas of ongoing work for affected firms. In addition, firms will need to work towards the first MIFIDPRU reporting deadline. Other areas of ongoing work relate to operational resilience requirements and for in scope mid-tier firms the requirement to meet the resolution outcomes in the Resolvability Assessment Framework.
5. Digital finance
EU | In the course of this year we expect to see the formal adoption of the landmark legislative proposals included in the Commission’s September 2020 Digital Finance Package. This notably includes the first harmonised European legislation for Markets in Crypto-Assets (MiCA), Digital Operational Resilience (DORA) and a pilot regime for distributed ledger technology market infrastructure. MiCA will introduce, among other things, authorisation requirements for persons proving services in crypto-assets, as well as rules for persons seeking to issue crypto-assets in the EU (including stringent regulation applicable to so-called “stablecoins”). Among other changes, DORA will introduce a comprehensive regime for financial institutions (and newly authorised crypto-asset service providers) for managing information and communication technology risks – including prescriptive rules concerning relationships with third-party service providers. While the application of the relevant requirements will not kick-in this year, given the breadth of the new requirements market participants that will become subject to the new rules may wish to start making their preparations without delay. In addition, the European Supervisory Authorities (ESAs) are expected to publish in early 2022 their recommendations to the Commission concerning digital finance, which may lead to further legislative action by the latter. It will be a continuation of an initiative launched in 2021, when the Commission instructed the ESAs to submit technical advice on digital finance and related issues.
UK | The UK’s focus on crypto-assets continues to be on consumer protection and market integrity. 2022 has already seen HM Treasury commit to expand the scope of the financial promotion regime when parliamentary time allows, at which point the FCA’s proposed changes to the rules applicable to promotions of high risk investments would also kick in. However, we wait to see the next steps on the proposed regime for stable tokens used as a means of payment and it seems unlikely that we will get beyond that first phase of legislative change to the possible inclusion of other crypto-assets in 2022. The FCA remains busy processing applications for registration of cryptoasset exchange and custodial wallet providers under the Money Laundering Regulations, where it has been quite clear that applicants need to up their game. In terms of fintech more generally, various government bodies and other organisations are working to take forward the proposals in the Kalifa Review, including in relation to artificial intelligence. The PRA and FCA also continue with the implementation of their requirements for operational resilience for the more systemically important authorised firms.
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