What precipitated the SEC reforms, and are they needed?

It has been 17 years since the existing equity rules were adopted, and since that time, the stock market has seen significant change – including the growth of high-frequency trading, a dramatic decline in displayed liquidity on exchange, and a substantial rise in off-exchange trading.

We think that modernising regulation like this ensures that market competition among brokers, market makers, and exchanges will continue to benefit investors. 

What are the most crucial elements and why? 

While there are many key elements to these proposed reforms that will be discussed during the upcoming comment period, there seems broad support for narrowing tick sizes for highly liquid stocks, though the SEC has proposed more categories and narrower tick increments for some of these categories than most participants have proposed. One area of focus for comments around this reform is likely to be the trade-off between the value of giving participants more flexibility to quote and trade versus an increase in complexity and “noise” that may be associated with very narrow ticks. 

Investors of all types will benefit the most from the recently proposed reforms as this modernised market structure will help to drive further competition among brokers, market makers, and exchanges alike.  

Why has the SEC taken so long to move into best execution and what will the framework change? 

Based on the SEC’s comments, the intention of this proposed reform is not to take the place of FINRA or MSRB best execution rules. One point of comment will likely be the potential for confusion or overlap and questions about how the different standards may coexist. Given the importance of the best execution principle to investor protection, it makes sense that the SEC would want to consider having its own rule on that topic. 

Are there any further changes you’d like to see?  

We believe the reforms proposed by the SEC represent a constructive and positive effort to improve transparency, increase competition, and ensure that investors can access the best prices available in the market. Ultimately, modernising regulation ensures that market competition among brokers, market makers, and exchanges continues to benefit investors. 

The post SEC reforms: An exchange perspective appeared first on The TRADE.

Chris Murphy

It’s been a pretty flat out year for Ediphy. Whilst many people know us best for the data analytics work we have showcased regarding our advocacy on the consolidated tape, our main business is our fixed income execution offering.  

This year has seen us significantly expand the scope of that service, having recently launched our credit and cleared IRS offering alongside the existing government bond trading capability. It has been amazing to see the warm reception the execution service has received from our initial clients who are getting better trading outcomes from the outset. I’m also incredibly proud of our product and engineering teams who have delivered so effectively on our vision for a data-driven execution experience for the buy side.

How close do you think we are to a consolidated tape, and what are the remaining obstacles?

It feels really close right now. I appreciate how, for many, the subject feels a bit like Groundhog Day, but I think the Europeans have a sensible proposal for the bond tape with deferrals which balance the needs of all market participants. The whole process continues to be held up by the issues associated with the equity tape, however I think a compromise will be made to get that over the line in the coming months.  

Unfortunately, in order to get agreement on the equity tape it looks likely that there will be a number of opt outs for smaller venues and some optionality on payment for order flow (PFOF) for member states which will detract from a certain level of harmonisation, and a fully-fledged pre-trade tape is looking less likely now. Alongside these European developments, the UK Chancellor reaffirmed the UK’s commitment to a CT in his recent Edinburgh announcement, with the FCA already beginning its policy work on the topic, so we are hopefully looking at the prospect of having broad-based transparency on this side of the Atlantic in the not too distant future!

What can we expect from the upcoming Mifid II amendments and when do you think they will be finalised?

It is clear that the post-trade bond CT will have all of the necessary elements in the amendments for a tape to emerge, namely mandatory contributions, the removal of the free after 15 minutes requirement and a more sensible approach to deferrals. Whilst the framework for corporate bonds is broadly agreed, this being the primary focus of legislators from a Capital Markets Union (CMU) perspective, I would like to see a similar updated structure for sovereign bonds, which to date have been a bit of an afterthought. Given the essential role government bonds have in setting the benchmark level of rates, it would be a perverse outcome if we ended up with less transparency there than in credit. I anticipate the outcome on the equity tape will leave nobody happy, which I guess is the expected result when there is no broad consensus.

What role would Ediphy like to play in the consolidated tape and what do you expect for 2023?

Given our strong conviction that a CT is essential for the development of fair and efficient markets, we are working with a number of other industry participants to be involved in the tender process for the bond tape next year. We would hope that the legislation will get done in Q1 or Q2 next year with a tender running before year end. The work we have done already, having been consolidating the data for the last four years, puts us in great shape to be able to deliver an initial offering soon after the mandate is awarded. 

What other areas are you working on, other than the CT?

Our core focus is working with buy side firms to help them streamline and automate their fixed income trading. As anyone in the fixed income markets knows, liquidity is fragmented with different sub-sectors of the market requiring different solutions. This leads to the trading desk having to cope with either fragmented workflows or reduced access to venues which may offer better liquidity. We solve that problem by integrating to multiple venues and liquidity sources and providing a single point of access to everything. Furthermore, as we know from the upcoming developments on the CT and other initiatives, the use of data to optimize execution outcomes is becoming paramount. Our technology is designed to bring all context specific data together to benefit pre-trade, point-of-trade and post-trade processes.  

What can we expect from fixed income in 2023?

With central banks continuing to try to find a path between tamping down inflation and avoiding a severe recession, we can expect to see continued volatility. Various commentators note the ongoing challenges to accessing market liquidity so we think trading protocols will evolve and traders will look for alternative ways of executing their business. In addition, if asset values continue to remain under pressure this will feed through to cost pressures at many asset management firms, potentially accelerating the demand to streamline and automate more of their investment process. With yields having finally returned to more interesting levels for investors, what is certain is that fixed income will remain compelling in 2023 and beyond. 

The post Fireside Friday with… Ediphy’s Chris Murphy appeared first on The TRADE.

Tilman Lueder

Tilman Lueder, the head of the securities markets unit at the European Commission, gave a comprehensive update on Day Two of the Fixed Income Leaders Summit of the current progress on a consolidated tape for fixed income in Europe, in which he urged for shorter deferral times and the inclusion of indicative pricing – something he said has generated surprisingly strong resistance from the market.  

“Fixed income is a market, unlike equities, which is less frequently traded with often bulky transactions and high resistance to showing the prices while the trade is still on the books, so there is very little transparency on exact pricing,” he said.  

“I do not believe that we will be done by the end of the year.”

The European Commission issued its proposal for a consolidated tape in November last year and Lueder confirmed that “negotiations are still in full swing,” but warned that “there are lots of open issues, and I do not believe that we will be done by the end of the year,” meaning that it will likely fall to the Swedish EU presidency incoming in 2023 to wrap up the issue.  

The harmonisation of post-trade publication windows (known as deferrals) is, said  Lueder, the crucial issue that needs to be tackled in order to achieve “meaningful market data consolidation” for fixed income – which is, according to the European Commission, the most urgent, the most-needed and the most achievable asset class for a consolidated tape.  

The problem is that unlike shares, which are fungible and comparable, not every bond is compatible, which is why the Commission has defined two parameters: whether an issue is small or large, and whether the market in which it is traded is liquid or illiquid. The original proposal urged dramatically reduced deferral times: including immediate price publication for small trades of up to €3 million for high yield and €5 million for investment grade, along with 15 minutes for medium sized trades in liquid and illiquid markets (in the US these are published within one minute), and end of the trading day (EOD) for large trades in liquid and illiquid markets, while ‘extra large’ trades of €50 million and above were given a rather more relaxed timeline of days/weeks.  

“In terms of value, the large liquid pocket is the most commercially relevant, followed by large illiquid, which is why we chose EOD for these,” said Lueder. “You can’t judge this market just by looking at the very small retail trades, you need to look at the big buys.”  

“When do we reach a point when this tape doesn’t become commercially reasonable anymore?” 

However, he bemoaned the gradual dilution of the original proposal, which has seen these deferral times significantly extended. The latest proposals suggest a price deferral period of 15 minutes for medium liquid trades, EOD for medium illiquid, one week for large liquid, and two weeks for large illiquid and extra large trades.  

“We’ve lost considerable ground throughout the negotiations,” admitted Lueder. “When do we reach a point when this tape doesn’t become commercially reasonable anymore?” 

Another sticking point is the debate on indicative quotes, which Lueder believes are necessary in order to give an accurate picture of where the market is heading.  

“In our opinion, refusing indicative quotes is the wrong way to go.”

“I’m always amazed by the wall of resistance we meet on this,” he said. “Indicative quotes are deemed unreliable, pie in the sky, and we are hearing from the market that they don’t want them put on the tape. We are very surprised by that, because in the US we see exactly the opposite picture – indicative quotes from the big trading houses are very reliable, indeed far more so than prices from trades that are more than two days old. In our opinion, refusing indicative quotes is the wrong way to go.”

While the consolidated tape proposals currently only cover corporate bonds, Lueder revealed that the European Commission is currently reviewing the possibility of creating something similar for sovereign issues, while he also confirmed that they are involved in a live debate on whether or not to publish RFQ responses as a pre-trade element of the tape – a controversial subject that has long divided the market.

To conclude, however, he reverted back to the twin themes of deferral times and indicative pricing as the crucial elements for success.  

“We believe transactions have to be published within an ambitious timescale, and we believe indicative quotes are needed because any trade more than two days old does not give as clear a picture,” he reiterated.  

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After decades avoiding the regulatory spotlight, the FX industry has been rocked by not one but two major recent regulations that have had a significant impact on the way the market operates. The final phase of the Uncleared Margin Rules (UMR) came into force in September, while the Standardized Approach for Counterparty Credit Risk (SA-CCR, the capital requirement framework under Basel III addressing counterparty risk for derivatives trades) had its final implementation in January 2022. Between them, they’ve had a cataclysmic impact on operations, requiring participants on both sides of the Street to implement whole new systems and procedures in order to account for and comply with the new requirements.

“It’s been a big headache,” said Kirstie MacGillivray, CEO UK of Aegon Asset Management. “UMR only impacted a small proportion of our clients, yet we had a huge infrastructure to build. I’m glad to say we’re now regulatory compliant, but it took a lot of work.”  

Elke Wenzler, head of trading at MEAG, agreed. “It was clear that we were in scope, and to get the resources in place, the operational set-up for variation margin, for clearing, to get all that done – it really did take a lot of effort. We asked all our counterparties to get involved and push that forward. It’s now in place, and I’m looking forward to seeing how it will develop.” 

“We’re getting a lot of requests for help, from both the buy and sell-side,”

But players are still not entirely sure where they stand – or what they need to do. “We’re getting a lot of requests for help, from both the buy and sell-side,” said Ben Tobin, head of Europe/portfolio optimisation at Capitolis, a platform driving financial market optimisation.  

And optimisation is the key word here – and perhaps one of the biggest pain points. “SA-CCR is probably the hottest topic this year in terms of optimisation,” said Mattias Palm, business manager at triReduce FX, OSTTRA. “It impacts the whole industry, although banks are the worst hit right now.”  

“SA-CCR is really the first time FX has been front and centre of global regulation. Banks are finding it very hard to get this off their books. FX as an industry hasn’t really been known for its proactive optimisation, because it’s never really been in the front line, so banks are now suffering a lot. Even today, we’re optimising from dealer to client. More and more, the buy side are going to have to work with their liquidity providers,” added Tobin.  

This is already happening, and relationships are becoming of paramount importance. “We looked very carefully at our list of counterparts,” said MacGillivray. “We don’t see them as liquidity providers, we see them as liquidity partners. We need that interaction with them.”  

But the pain of SA-CCR is already filtering down to buy-side execution desks. 

“Banks at least have full visibility. We don’t,” pointed out MacGillivray. “A while ago we started to notice a change in pricing. We had several meetings with counterparts to determine what was happening. It took six meetings for them to finally admit that SA-CCR was behind it – they wouldn’t admit to us what was going on. That’s not partnership. We’re happy to work with them to solve issues, but they in return have to be transparent with us. Our job is to get best execution, and we can only do that by having a full dialogue with our counterparties.”  

“Our job is to get best execution, and we can only do that by having a full dialogue with our counterparties.”

So what trading strategies can the buy side use to help banks deal with this challenge? 

“All our positions are fully cash collateralised – it’s a fairly straightforward answer,” said MacGillivray. “Talking to our counterparties, that’s what they want. Also, when is the optimal time to trade to suit their book? We’re happy to talk about things like this, but it needs to be an open dialogue.”  

Actually though, suggests Palm, under SA-CCR it could be easier now to optimise than it used to be. “It used to be either gross-notional related, or by end-date. SA-CCR is only about spot, and that’s a much larger number,” he said. “There is a netting effect in it already, and to offset those exposures requires less operational activity – which means fewer trades.”  

Even if you’re not impacted yet, it’s worth paying attention, because you soon could be. 

“The banks who are really hurting are having to widen their spreads, but over time, everyone will fall under the SA-CCR remit and everyone will see the same struggle,” warned Tobin. “This is very new for FX, we’ve not really had to deal with anything like this before, and people may be struggling with their systems. If you’re a bank not yet under SA-CCR, you’re probably getting a lot more flow right now, but I would urge you to look at your systems in advance, and make sure they are ready, because it’s coming.”  

The Nirvana would be to achieve an all-in estimated cost for optimisation, an all-in system for everything, but most panellists agree that right now, that is more of a pipe dream than a realistic goal.  

“Many of the banks want to do it, but don’t have the time to even think about it,” said Tobin. “Most banks are struggling to calculate the numbers they need for their business and their regulators right now as it is. I think we should focus more on solving today’s issues first, and we’ll keep working towards Nirvana as we go.” 

“It’s a headache, but we have to pick our headaches, we can’t get rid of them all at the same time, so some of them you just have to deal with,” agreed MacGillivray. 

And now the buy-side are also starting to participate in optimisation. For banks, it’s capital cost-related. “The metrics for the buy-side will be different, but the same types of tools can be used,” said Palm. “Reducing counterparty exposure, reducing line items, reducing balance sheet, being able to cash out, compress risk.”  

“Optimising collateral management – when I started on the trading side, I didn’t expect it would be such a big topic for me!” said Wenzler.  

The post TradeTech FX: Life after regulation appeared first on The TRADE.

An academic paper published this week has concluded that payment for order flow (PFOF) has no apparent impact on price discovery – contrary to concerns expressed by regulators on both sides of the pond, who fear that a higher PFOF could result in a lower quality of execution. 

The issue has been brought to the forefront of the regulatory agenda in part due to the proliferation of ‘commission-free trading’ in recent years by sites such as Robinhood, which contributed to the meme stock saga that culminated in the Gamestop chaos of March 2021.  

In the US, the practice of PFOF is accepted by the SEC, which has required extensive additional disclosures for the brokers and market centres. These disclosures are designed to improve the ability of customers to determine the quality of broker-dealer services.  

“New research indicates that the current disclosure regime is insufficient and provides limited information regarding the quality of price execution.”

However, new research indicates that the current disclosure regime is insufficient and provides limited information regarding the quality of price execution across brokers – largely due to the difficulty in comparing the actual retail price execution quality of different brokers.  

“Self-reporting is haphazard and inconsistent across brokers,” noted the paper. “All brokers claim to provide ‘price improvement’ over the National Best Bid Offer (NBBO) price, a benchmark that is easily beaten, albeit often narrowly.” 

Conducted by researchers including Brad Barber, Gallagher Professor of Finance at the University of California, Davis and Terence Odean, Rudd Family Foundation Professor of Finance at the University of California, Berkeley, the study solved this challenge by running a controlled experiment to identify variation in price execution across five different brokers using six different accounts and generating a sample of 85,000 simultaneous market orders.  

The findings suggest that commission levels and payment for order flow (PFOF) differ across each account, with execution prices varying significantly across brokers.  

The mean account-level round-trip cost ranged from –0.07% to –0.45% excluding any commissions, while the average price improvement varied from $0.03 to $0.08 per share. According to the authors, the dispersion is due to off-exchange wholesalers systematically giving different execution prices for the same trades to different brokers.  

“Overall, however, there is no evidence that PFOF harms price execution,” stated the paper.  

“The size of PFOF payment, which ranges from $0.001 to $0.002 per share, is a tiny fraction of our observed variations in price improvement.”  

The full study can be found here.  

The post ‘No evidence that PFOF harms price execution,’ finds new research appeared first on The TRADE.

IEX was founded by former RBC electronic traders Brad Katsuyama and Ronan Ryan, notorious for their portrayal in 2014 Michael Lewis’ book ‘Flash Boys’. In 2020 the group applied for approval for the D-limit order, which it claimed would combat adverse selection, levelling the playing field between HFTs and slower market participants.  

A D-limit allows traders and investors to submit a discretionary limit order that can adjust its pricing if the stock price is about to change for the worse, using predictive technology called IEX Signal.  

“We deny the petition challenging the SEC’s decision,” stated three federal court judges.

“D-Limit… is an innovative, yet simple, solution designed to enhance on-exchange liquidity,” IEX group president Ronan Ryan said at the launch. “D-Limit has gained the support of a broad coalition of asset managers, pension funds, brokers and market makers, and represents a continuation of our efforts to partner with the broker-dealer community to provide new solutions for best execution designed to help all market participants achieve better performance in displayed trading.” 

The order gained market support from players including Virtu Financial and Goldman Sachs. However, others were strenuously opposed: including Citadel Securities, which wrote to the SEC on 14 August, 2020 expressing its concern that the IEX proposal would discriminate against liquidity takers. 

“This proposal represents a significant departure from the current market structure, unfairly favouring IEX liquidity providers without any corresponding obligation, compelling market participants to preference IEX over other exchanges, and adversely impacting tens of millions of orders submitted by retail investors annually,” said Stephen Berger, global head of government and regulatory policy at Citadel Securities, in the letter.  

The regulator nevertheless decided in favour of IEX and the order type was approved on 26 August, 2020, noting that there was no evidence that the D-limit would require “material changes” to brokers’ routing strategies. Widely seen as a victory for IEX, the D-limit was launched in October 2020. Citadel Securities subsequently petitioned for review, arguing that the SEC lacked substantial evidence for one of its findings and that three of the SEC’s decisions were (as referred to in the court statement) “arbitrary and capricious”. 

“No one in this case has alleged that latency arbitrage is unlawful. The issue, instead, is whether the SEC may allow IEX to innovate.”

The case was heard in October 2021 and on 29 July, 2022 the US Court of Appeals ruled conclusively in IEX’s favour. “We deny the petition challenging the SEC’s decision,” stated three federal court judges. “The SEC’s determination that the D-Limit order does not violate the Exchange Act by unfairly discriminating or unduly burdening competition was reasonable and supported by substantial evidence.” 

IEX, which promotes itself as a champion of fair investing, has vocally opposed latency arbitrage since it received regulatory approval to become a licensed trading venue back in 2016 – another controversial SEC decision that split the market, with detractors including Citadel Securities, the New York Stock Exchange and Nasdaq expressing vehement opposition, while players such as T Rowe Price and Franklin Templeton voiced public support.  

Last week’s decision saw the court expressing neutrality on the subject. “At issue is not whether companies like Citadel may seek advantages in the market by using advanced technology and ingenious trading strategies,” said the judges. “No one in this case has alleged that latency arbitrage is unlawful. The issue, instead, is whether the SEC may allow IEX to innovate, with the D-Limit order, in a way that offers new opportunities to long-term investors.”  

IEX called the ruling “a huge win for all investors and traders.” 

In a statement reported by Bloomberg, Citadel Securities spokesperson David Millar said: “We look forward to continuing to engage with the SEC to ensure that the best interests of both retail and institutional investors are protected.” 

Read more about IEX Exchange in our interview with Brad Katsuyama and Ronan Ryan following its licensing in 2016.  

Learn more about the consequences of the ‘Flash Boys’ case and the ripple effect from Lewis’ book in our latest feature for the Q2 magazine.  

The post Citadel Securities loses ‘Flash Boys’ appeal appeared first on The TRADE.

The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, has updated its Q&As on Mifid II and Mifir market structure to provide more detail on various elements of algorithmic trading, particularly around the issues of automated order management and third party systems.  

Clarified in mid-July, the first update confirms that orders executed through trading functionalities which offer automated managing of the order do indeed qualify as algorithmic trading.  

As specified in Article 4 of Mifid II, ‘algorithmic trading’ means “trading in financial instruments where a computer algorithm automatically determines individual parameters of orders such as whether to initiate the order, the timing, price or quantity of the order or how to manage the order after its submission, with limited or no human intervention.”  

That means that orders which are executed through functionalities which (additionally to routing orders to trading venues) offer automated managing of the order (e.g. automatically redirecting unexecuted portions of such orders to other venues or slicing orders prior to execution) do fall under the scope of the Mifid II definition.  

“Such functionalities differ from automated order routing systems, as the latter merely determine the trading venue (or trading venues) to which the order has to be sent without changing any parameter of the order,” explains ESMA. “On the contrary, algorithmic trading encompasses both the automatic generation of orders and the optimisation of order-execution processes (e.g. slicing of orders) by automated means.” 

“Firms trading through these functionalities should be considered as engaged in algorithmic trading and must therefore comply with the relevant regulatory requirements.”

The guidance confirms that firms trading through these functionalities should be considered as engaged in algorithmic trading and must therefore comply with the relevant regulatory requirements (found in Article 17 of Mifid II and RTS 6).  

In addition, the Q&As also clarify how firms should ensure compliance when using third party systems which offer algorithmic trading functionalities.  

“When firms use third party systems offering algorithmic trading functionalities, they are ultimately responsible for compliance with the relevant requirements,” confirms ESMA.  

“However, lacking direct control over the system, its operation and the algorithms deployed, these firms might not be materially able to ensure that all requirements are met.”  

In these instances, firms are allowed to ensure compliance with any technical requirements that can’t otherwise be met, through contractual arrangements with the system provider.  

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“Europe needs effective, understandable and deliverable changes to the current framework.”

“The current SIs regime is complex and unclear.”

“The new amendment minimises supervisory divergence and bans the payment for order flows across the Union.”

Dark pool caps scrapped
The report also recommends removing the dark pool limitations brought in under Mifid II, in a move that could see the EU move to compete with the UK for dark trading volumes. “These caps were set arbitrarily and proved to be of limited utility, and their removal would reduce complexity and align the Union with international practices,” said Hübner. 

Currently the Union has far lower dark pool allowances than the UK, which has sought to reinvent itself post-Brexit as an attractive destination for dark trading, while the EU has prioritised transparency within lit markets.

Convergence over divergence
Banning PFOF and scrapping dark pool caps would, notably, bring the EU closer to the UK in two key areas of regulatory focus – a rare example of convergence (for a change), compared to divergence.

“It’s positive to see a more pragmatic response to the EU Commission’s proposals, which could see Europe row back from some of the more restrictive measures tabled in November.”

“It’s positive to see a more pragmatic response to the EU Commission’s proposals, which could see Europe row back from some of the more restrictive measures tabled in November and ultimately lead to less regulatory divergence between the two markets,” commented James Baugh, head of European market structure at Cowen, speaking to The TRADE.

“I also see support for a real-time pre-trade tape as big step in the right direction. That said, PFOF remains an area of uncertainty and with Germany still pushing back on an outright ban, this will have to run its course.”

Nuts and bolts
The report contains a number of other amendments, including:

 – Reinstating the exemption for non-financial entities (NFEs) who execute transactions on trading venues.
 – Subjecting investment firms (in addition to trading venues) to data quality standards when submitting market data.
 – Requiring all market operators (and investment firms operating an MTF or an OTF) to obtain an ISO legal entity identifier (LEI) for all traded securities, in order to ensure an even playing field between EU and non-EU issuers. 
 – Confirming the removal of RTS27 and 28 with regards to reporting obligations. 
 – Adding a requirement for giving at least two “materially active” liquidity providers the opportunity to interact with independent order flow with regard to price formation.
 – Allowing, for third country shares, the use of the prevailing tick size on the main exchange, in order to boost competitiveness. 

The post Cat among the pigeons? New report outlines the latest Mifid II amendments appeared first on The TRADE.

At over 330 pages, the new Financial Services and Markets Bill submitted to Parliament on 20 July, 2022 is the biggest piece of financial markets legislation since the original Financial Services and Markets Act (FSMA) was first published, way back in 2000. But is it the ‘Big Bang 2.0’ that government sources suggested we could expect – and could it herald a long-awaited (and widely hoped for) period of regulatory relaxation similar to the sudden deregulation of the financial markets under Thatcher in 1986?

The bill is wide-ranging, covering vast swathes of the financial markets across everything from insurance to payments, but for wholesale players it contains some particularly relevant provisions, under the aegis of the Future Regulatory Framework (FRF) Review, first established in November 2021 to explore how the UK’s regulatory framework should evolve to fit the country’s new ex-EU position.  

Sections three, four and five of the bill specifically outline broad powers for HM Treasury to modify or review retained EU onshored legislation and replace existing references to EU directives. The Treasury now has the authority to amend onshored legislation and EU directives “for the purpose of making the law clearer or more accessible,” which is in theory promising.  

Beyond that, however, there are few surprises, with much of the relevant content following a similar path to that already proposed across parallel platforms such as the UK Wholesale Markets Review, the UK Listings Review, and the FCA’s recently launched equity secondary markets review.  

A notable change is that the bill delegates power from primary legislation down to both the Financial Conduct Authority (FCA) and the Treasury, in keeping with the government ambition of “agile regulation,” which could see faster and more responsive updates to reflect industry needs.  

“This can be seen in giving the FCA power to frame waivers from post-trade transparency requirements, via a replacement Article 4 of the UK onshored Markets in Financial Instruments Regulation (MiFIR), as well as giving the FCA rulemaking power over both pre- and post-trade transparency requirements for both fixed income instruments and derivatives,” pointed out law firm DLA Piper. 

Another significant element of the new bill is that it deletes the Share Trading Obligation (STO), along with a large part of Article 23 of the UK’s onshored Mifir (the regulation governing Mifid II), meaning that UK firms’ only requirement to be authorised as an MTF would be to operate an internal matching system to executive client orders for equities and equity-like instruments.  

The bill also introduces the concept of new ‘financial markets infrastructure sandboxes’, particularly in the fields of digital and other alternative trading, clearing or settlement solutions where operations do not easily fit into existing regulatory criteria – a move that should come as welcome news to digital pioneers.  

In addition, a ‘critical third parties’ provision brings service providers to the financial markets closer to regulatory supervision – in particular, data and cloud services providers, along with some intermediaries.  

And the bill plans to extend current banking and payment system rules to include crypto assets including stablecoins – something that may not directly impact the trading community immediately, but is reflective of the wider move towards a more robust regulatory attitude in the crypto space. 

This liberalisation of the secondary markets, coming as it does on the heels of a new capital markets reform taskforce headed by the London Stock Exchange, a new secondary markets committee formed by the FCA and including numerous heads of trading, and of course the recent consultation launched by the regulator on how to improve the UK’s equity markets, suggests that momentum for streamlining the UK’s regulatory environment could finally be gaining pace.  

“After a long period of increasing regulation, this bill might well be the catalyst for a long period of decreasing regulation. Either way, the ability to adapt to change will continue to be a sort after attribute for financial market reporting processes and frameworks,” agreed Phil Flood, regulatory expert at Gresham Technologies, speaking to The TRADE.    

“It is fair to say that we’ve been talking about divergence post-Brexit for a while, but nothing materially has changed so far. Many have anticipated a period of deregulation as the promise of Brexit was a more competitive landscape for the industry in the UK, but the regulator hasn’t really moved things forward.” 

Given that the latest bill was introduced to Parliament just a day before the summer recess, we are unlikely now to see any movement until at least September. Once Parliament returns however, the new leader of the Conservative party – and by default, new prime minister (whoever that may be) is likely to be keen to drive forward these reforms as part of the party’s signature financial liberalisation package post-Brexit, suggesting that we could see swift movement once the ducks are finally in a row.  

The post Could regulatory divergence finally be on the cards for the UK? appeared first on The TRADE.

US crypto exchange FTX US has confirmed that it will be making a strategic investment into IEX Group, the operator of the US-based Investors’ Exchange, in order to develop a transparent market structure for the buying, selling and trading of digital asset securities.

The question of crypto regulation has long been a thorny problem , and FTX US has been clear about its ambitions to become a regulated exchange, working with regulators to create a platform that enables both retail and institutional engagement with digital assets.  

The new partnership with IEX, an alternative trading system first launched in 2013 with a focus on investor protection, is another step down this road.  

“To unlock its full potential, the crypto and digital asset industry needs to engage with regulators and truly scale what has been built,” said CEO and Co-Founder of IEX, Brad Katsuyama.  

“From the first conversation with Sam [Bankman-Fried, CEO of FTX and FTX US], it was clear to me that FTX and IEX were truly aligned on the future potential for digital assets and the unique roles our firms could play as partners in shaping market structure that benefits the end investor. We both see the regulators as important allies in providing a clear path forward and attaining the highest possible standards for investor protection. The US market should be the largest player in digital assets globally and we believe that this partnership will help facilitate that.”

Earlier in March, parent company FTX Trading partnered with US-based crypto platform West Realm Shires Services to launch a new unit targeted at institutional investors. FTX Access will initially provide institutional investors interested in gaining exposure to digital assets with trade execution, analytics, index products, advisory services  and capital introductions, with plans to expand into custody, derivatives, structured products and other asset management products later down the line.

The recent developments accompany a growing interest in regulatory oversight for the sector. On 9 March, President Biden signed into law the ‘Executive Order on Ensuring Responsible Development of Digital Assets’, the first real attempt by US authorities to comprehensively address supervision of the fast-growing crypto space – including the potential development of a US central bank digital currency.  

“The order is a significant step toward developing a comprehensive federal approach on digital assets,” explained law firm Shearman & Sterling in a recent analysis. “Although the order does not prescribe a regulatory framework itself or require the issuance of new rules, it directs various parts of the federal government to issue reports and recommendations on potential regulatory or legislative actions concerning digital assets.” 

In November 2021, non‑state issued digital assets reached a combined market capitalisation of $3 trillion, up from approximately $14 billion in November 2016, marking a compound annual growth rate of 192.5% over the past five years, and this explosive growth has not gone unnoticed.  

“The unique and varied features of digital assets can pose significant financial risks to consumers, investors, and businesses if appropriate protections are not in place,” stated President Biden in March. “In the absence of sufficient oversight and standards, firms providing digital asset services may provide inadequate protections for sensitive financial data, custodial and other arrangements relating to customer assets and funds, or disclosures of risks associated with investment. 

The latest partnership between FTX and IEX Group looks to be preparing for the potential advent of further regulation, and the two firms have promised more information in the coming weeks on how they plan to broaden investor participation in the digital asset securities market – including a new initiative encouraging all investors to join the conversation about the future of market structure for digital asset securities. 
 
“Investing in IEX created a tremendous opportunity for FTX US,” commented Bankman-Fried. “With this investment, we’re aligned with one of the most trusted and innovative companies in equities markets. I’ve long respected Brad’s vision for IEX to be an exchange that caters to the needs of the investor and treats them fairly – part of the reason why we’ve operated similarly at FTX. As a result, we will collaborate on the further establishment of crypto market structure and work closely with regulators, allowing institutions around the world to enter the marketplace seamlessly.” 

The move comes as institutional interest in digital assets continues to grow. In December 2021, research from London-based digital assets hedge fund manager Nickel Digital Asset Management revealed that over $60 billion worth of Bitcoin is currently held through various Bitcoin closed-ended trusts and exchange traded products, with US and Canadian funds accounting for an overwhelming 75% of the holdings. 

Anatoly Crachilov, CEO and founding partner of Nickel Digital, said analysis of digital assets performance versus traditional asset classes shows sizable outperformance by digital assets over the medium to long term. “This helps explain the increasing interest in digital assets by corporations and institutional investors as part of their wider asset allocation.” 

In January, MSCI moved into the digital asset sphere for the first time through a collaboration with institutional digital asset investment product and services provider, Menai Financial Group; while sector is also creaming off industry talent, poaching numerous high-level executives from more traditional roles.

Most recently, decentralised Financial Market Infrastructure (dFMI) firm Bosonic hired former global head of LCH ForexClear, Paddy Boyle, as its global head of clearing and derivatives; while in November 2021 Citi promoted Puneet Singhvi from its global markets business to head up digital assets for its institutional client group, with plans to hire up to 100 more within the division.  

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