UK Financial Conduct Authority Consults on Regulatory Perimeter Guidance for Trading Venues

The U.K. Financial Conduct Authority has published a consultation paper on proposed guidance on the regulatory perimeter for multilateral trading facilities and on possible future changes to smaller trading venues' regulatory obligations. The FCA's consultation follows proposals made in HM Treasury's July 2021 U.K. Wholesale Markets Review, the response to which was published in March 2022. Responses to the FCA's consultation should be submitted by November 11, 2022. The FCA plans to finalize the draft guidance and publish a policy statement in Q2 2023.

There are currently three types of trading venue – regulated markets, MTFs and organized trading facilities. MTFs and OTFs can be operated by investment firms, which require FCA authorization. Regulated markets (i.e., exchanges) have a separate and special regulatory status, since they are also a regulator in their own right, being exempted from obtaining FCA authorization. However, exchanges must obtain recognition status from the FCA. Concerns have been expressed about the broad definition of MTFs in the revised EU Markets in Financial Instruments Directive, which some felt led to a lack of clarity as to which activities undertaken by firms would qualify them as MTFs. This in turn caused firms to adopt inconsistent approaches in the permissions that they seek from the FCA; certain brokers and investment banks have obtained MTF or OTF status as a defensive measure to avoid a technical infringement. The FCA's proposed guidance hopes to clarify this (but does not constitute a change to the existing regulatory perimeter) by setting out its view of each of the four components of an MTF that firms should consider when assessing whether their activity requires authorization as a trading venue. The four components are that:

• It has the characteristics of a trading system or facility.
• It involves multiple third-party buying and selling trading interests.
• It allows trading interests to interact in the system.
• Those trading interests are in financial instruments.

The FCA also gives examples of activities that do not require a firm to obtain authorization as a trading venue, including:

• operation of bulletin boards;
• arranging trades over the telephone;
• operating a system only for the purpose of blocking onto trading venues in accordance with the intentions of the underlying parties;
• a portfolio manager that executes, as its own discretion, trading interests on behalf of one client against those of another client in an internal matching system;
• a crowdfunding platform that matches the business funding interests of an issuer of certain types of security with those of investors. However, a crowdfunding platform that allows multiple third-party buying and selling investors to trade in a system (e.g., a secondary market) would be an MTF.

Voice broking may, but need not, constitute operating a multilateral system.

Separately, the FCA is canvassing views on more "proportionate" regulatory requirements for smaller trading venues, in a bid to combat perceived barriers to entry which may be reducing competition in the market. The FCA is also proposing that firms should no longer have regard to ESMA's Q&As on MiFID II and MiFIR market structures topics after this final guidance is published.

These changes indicate the U.K.'s increasing willingness to forge its own path in financial regulation, now it has left the EU. In a recent speech, Sarah Pritchard of the FCA emphasised the FCA's focus as a regulator on supporting the long-term competitiveness and growth of the U.K. economy. She made reference to the changes to the FCA's guidance on trading venues, noting that, while the FCA cannot yet change the definition of a trading venue, as that is still set by retained EU legislation, it can use its powers to provide guidance in a way that gives certainty to industry. On the same day as this consultation paper, the U.K. government also released its Brexit Freedoms Bill (the Retained EU Law (Revocation and Reform) Bill), which aims to end the special status of retained EU law in the U.K. by December 31, 2023. The U.K. government will then be free to adopt its own legislation in a way that, it is hoped, better suits the country's needs.

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