UK Conduct Regulator Consults on Bond and Derivatives Markets Transparency Requirements

The U.K. Financial Conduct Authority has opened a consultation on proposals for improving transparency for bond and derivatives markets. Following the Wholesale Markets Review, the Financial Services and Markets Act 2023 grants powers to the FCA to make rules which will replace the current pre-trade and post-trade disclosure rules for bonds, structured finance products, emission allowances and derivatives set out in the U.K. Markets in Financial Instruments Regulation. The FCA's rules must ensure efficient price formation and the fair evaluation of financial assets. This consultation sets out the FCA's proposed approach to those rules. Responses to the FCA's consultation may be submitted until March 6, 2024.

The FCA is proposing that trading venues and investment firms dealing OTC will be subject to minimum harmonized transparency requirements for sovereign bonds, corporate bonds and certain derivatives subject to the clearing obligation. For these financial instruments, there will be large in scale thresholds. Pre-transparency waivers will be available for orders above the threshold and deferrals for post-trade requirements. For other financial instruments, the FCA is proposing to set the standards and criteria to which trading venues should refer in order to meet the FCA's transparency expectations. Investment firms dealing in other financial instruments will not be required to report their transactions to the public.

The FCA is also proposing to develop guidance (to be included in the Perimeter Guidance part of its Handbook) to assist firms in interpreting the new definition of a systematic internaliser. SIs are firms which regularly execute transactions across their own books, rather than matching the transactions externally. The new SI definition is set out in the FSM Act 2023 and does not include the quantitative thresholds that had been inherited from the EU's Markets in Financial Instruments regime. The FCA is proposing guidance that would be capable of applying across asset classes, and different arrangements and business models, which would assist firms in determining whether they are subject to the transparency requirements as an SI.

The FCA is also proposing a transitional period for firms to implement the new rules, which will be one year from finalization of the rules. The implementation of the new rules, which will be housed in a new part of the FCA's Market Conduct Sourcebook, will be synched with changes to the U.K. MiFIR and related legislation. The FCA expects to finalize the rules in 2024, and that they would apply in 2025 before the consolidated tape for bonds goes live, which is anticipated to occur in the second half of 2025, following the publication in December 2023 by the FCA of its final policy statement on a CT framework for bonds.

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