Welcome to our April update of markets-related developments. There’s a real mix to report on this month, from the new EU REMIT energy market regulation (which is finally with us), to accelerated settlement of trades (which isn’t) and more. We also take another, deeper dive into the world of the UK Digital Securities Sandbox. As ever, we hope you enjoy our coverage and are grateful for any feedback you may wish to share.
Counting Down to Accelerated Settlement
Change is afoot for settlement of trades in the UK and EU. When CSDR came in 10 years ago, it brought with it a requirement for transactions executed on trading venues to be settled by no later than the second business day after trading (T+2). However, in today’s world T+2 looks increasingly pedestrian as other jurisdictions have either already moved (India), or are imminently moving (US and Canada) to T+1, while China already operates T+0. The UK and EU of course have separate CSDR regimes these days, but they are both looking at speeding things up.
At the end of March, the UK Treasury published a Policy Paper which endorsed the findings of a Report on this issue, published in the same month. Notably, the Treasury has said that the UK should aim to move to T+1 by no later than the end of 2027, and should work with the EU & Switzerland to explore whether coordinating a move to T+1 is possible within a suitable timeframe. Any potential move to T+0 (same day) or atomic (instantaneous) settlement has been kicked down the road for now. A Technical Group has been established to take forward the implementation.
The EU is slightly further behind, for now. ESMA published a Call for Evidence last October looking at the potential impact of shortening securities settlement cycle (from T+2 to T+1 or T+0), which is now closed. It is expected to report on the issue by the end of this year.
The REMIT Remix
You may recall we reported in Markets View at the start of 2024 on the EU’s proposals to amend the Regulation on Wholesale Energy Market Integrity and Transparency (REMIT). Well, the amendments are now finalised; they were published in the Official Journal just last week, and will take effect from 07 May 2024.
The EU energy regulators’ agency (ACER) has published a helpful download here on the latest reforms, as well as an open letter with responses to the most common questions they’ve received about it. Firms who know they are in line to be impacted may wish to attend the planned ACER/European Commission workshop slated for 11 June.
We’re aware there are many non-EEA firms who qualify as REMIT “market participants”, who will be interested in one reform in particular. The amended REMIT gives such third country firms six months to designate a representative in a Member State in which they are active. This sits on top of the existing need to register as a market participant in a Member State. The registration and designation should align (and there is no need to register/designate in more than one Member State).
We’d be delighted to help if you have any questions about how these changes may impact you, so please do get in touch.
UK Digital Securities Sandbox: Setting the Stage(s)
Earlier this month, the Bank of England and FCA published a joint Consultation Paper detailing their proposals for implementing and operating the DSS. The consultation is open until 29 May 2024, after which we can expect final guidance for firms and for applications to open.
We first flagged the DSS in our February edition of Markets View. It’s a regime that will allow firms to use developing technology, such as distributed ledger technology (DLT), to perform notary, maintenance and settlement activities (as a ‘Digital Securities Depository’), to operate a trading venue, or to combine both into a hybrid entity. The government’s hope is that, by the time the DSS expires in five years, there will be a permanent digital securities market.
The consultation gives us more insight into firms’ prospective pathways through the DSS. It outlines five different stages, from making the initial application for entry, through acceptance, testing, operations go-live and scaling up, all the way to operating outside the DSS under a possible new permanent regime. At each stage there will be a “gate” that firms must pass as their level of permitted activity increases. The general idea is to reduce the burden on firms to get set up, and then proportionately increase their requirements as they grow.
The envisaged hybrid entities will be supervised by the FCA for the trading venue aspects, and by the Bank for their depository activities. The main lift in terms of new rules is on the Bank’s side, as the FCA is keeping the trading venue aspect aligned with its existing regulation of MTFs/OTFs. The Bank’s new proposals are a mix of administrative measures, such as the new fees regime that it will need to put in place for DSS participants, alongside steps to mitigate financial stability risks, including detail around proposed capacity limits and capital requirements.
As ever, we’d love to hear from you if the DSS is on your radar.
Global Exchanges in the Spotlight
IOSCO (the International Organization of Securities Commissions) recently published a Consultation Report with their analysis of the current status of global equity exchanges. The report highlights some interesting trends and risks based on the way exchanges currently operate, and we can expect further regulatory scrutiny of these issues at the local jurisdictional level in the future.
The report itself provides an insightful global and historical perspective on changes in exchanges’ ownership structure, organisation and business models. Noting recent trends around cross-border expansion, additional business lines and centralisation of functions, IOSCO’s commentary draws particular attention to the operation of multinational exchange groups (such as ICE, LSEG and Euronext). It highlights the potential risks, conflicts of interest and interdependencies associated with these trends, and the need to bolster international cooperation in monitoring and supervision. IOSCO uses these findings to propose a set of good practice guidance to regulators, to ensure exchanges can continue to be regulated and supervised appropriately.
Anyone wanting to provide their feedback on the report should do so by 03 July 2024.
Heads-Up for EU Prop Traders
There are reports that the EBA and ESMA are intending to open a consultation this month on capital requirements for EU prop traders, to address concerns that the rules brought in under the Investment Firms Regulation (IFR) in 2021 have made the EU a disproportionately burdensome jurisdiction for these firms. As of today, the paper has still not been published, but we’ll be keeping an eye out in the coming weeks.
FCA: Market Watch 78
The FCA has published a new Market Watch in April, which will be of particular interest to trading venue operators and systematic internalisers. This edition focuses on the financial instrument reference data (IRD) that such firms are required to provide to the FCA under MiFID RTS 23. The FCA provides some useful data of its own around the most common IRD submission problems, and takes the opportunity to outline some examples of good and poor practices. Finally, the FCA mention their concern that they’re not receiving all the breach notifications they should be.
