The UK’s Financial Conduct Authority (FCA) is consulting on proposals to improve the transparency regime for bond and derivative markets.
The consultation, which is open to 6 March 2024, forms part of the Wholesale Markets Review (WMR). “We expect that our proposed changes will ultimately benefit price formation and increase market participation and confidence in the market,” the regulator said.
The WMR previously concluded that the current transparency regime for bond and derivatives markets had not delivered adequate transparency and had a limited impact on price formation while imposing a high cost to industry. The review proposed reforms to improve transparency and engender more valuable value post-trade data to support the creation of a consolidated tape (CT) for bonds in the UK.
The proposals are intended to address issues surrounding: the excessively broad scope of the current transparency regime; the number of transparency calculations thanks to the broad nature of the regime; the high operational costs to perform these transparency calculations; the calibration of pre-trade transparency; the post-trade regime, which provides for overly long publication deferrals for some instruments and does so in an overly complicated way; post-trade data reporting, the quality and timeliness of which is variable and poor for some asset classes, especially OTC derivatives; and systematic internalisers – the current definition of a SI requires firms to carry out data intensive quantitative calculations on a regular basis.
The FCA has made the case that minimum transparency requirements should apply to sovereign bonds, corporate bonds and certain derivatives subject to the clearing obligation. “For those financial instruments we propose to set large in scale (LIS) thresholds above which orders can benefit from pre-trade transparency waivers and trades can benefit from post-trade transparency deferrals.”
Investment firms dealing in instruments which the FCA has not specified above will not be required to report their transactions to the public. For trading venues, it is expected that “adequate” pre-and post-trade transparency is provided and these venues should set the standards and criteria when it comes to calibrating transparency.
The FCA has also proposed “a simpler and more timely” post-trade regime based on shorter deferrals for bonds and OTC derivatives while ensuring that liquidity providers are sufficiently protected against undue risk.
The regulator also wishes to expand on the definition of a SI in UK MiFIR. “The proposed new definition of a SI is based on qualitative criteria which aim to balance clarity for investment firms to decide if they are SIs with the need for the definition to flexibly apply to different markets and business models,” the regulator said in the consultation paper.
The proposals would apply to: trading venues which trade bonds and derivatives; investment firms dealing in bonds and derivatives; UK branches of overseas firms undertaking investment services and activities; SIs in all types of financial instruments.
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