The Bank of England has published its annual report on its supervision of financial market infrastructures, covering the period December 16, 2023 —December 17, 2024. The report sets out the work undertaken by the BoE over the past year in relation to FMIs to deliver its financial stability objective and secondary innovation objective. The report also outlines the BoE's objectives for the coming year.

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The European Banking Authority has published a no action letter stating that competent authorities should not prioritize any supervisory or enforcement action in relation to the processing of applications for initial margin (IM) model authorization received as a result of the entry into force of EMIR 3.

EMIR 3 requires that counterparties apply for authorization to their competent authorities before using, or adopting a change to, a model for initial margin calculation. Compliance with this requirement immediately after EMIR 3 enters into force may cause difficulties for competent authorities and counterparties until the EBA has established its central validation function and the draft regulatory technical standards and guidelines setting out key requirements have been published.

The no action letter sets a registration process for counterparties in scope of IM model authorization for any first application submitted after EMIR 3 enters into force and for subsequent changes to such IM models. As per the no action letter, however, competent authorities should not prioritize the processing of such applications, until the draft RTS on Initial Margin Model Validation and the guidelines on application and authorization process mandated under EMIR 3 come into application.

The U.K. Financial Conduct Authority has published a consultation on the regulatory framework for the Private Intermittent Securities and Capital Exchange System (PISCES), the proposed new platform for trading shares in private companies. The draft legislation implementing the PISCES sandbox ( the Financial Service and Markets Act 2023 (Private Intermittent Securities and Capital Exchange System Sandbox) Regulations 2025 were published in November 2024. The consultation contains the FCA's proposed rules and guidance for the PISCES sandbox, as well as alternative options the FCA considered in its policy development process.

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The Financial Conduct Authority has published a Dear CEO Letter setting out its key concerns and priorities over the next two years for benchmark administrators. The FCA's supervisory priorities include:

• corporate governance and oversight — the FCA will conduct a governance review in late 2025 to assess how the U.K.-regulated benchmark administrators' business is governed and led by U.K. Approved Persons under the Senior Managers Regime, and to what extent they are able to oversee the full range of risks to which the firm is exposed;
• data quality controls — in early 2025, the FCA will evaluate the adequacy of the due diligence BMAs perform on data providers. Through this multi-firm data controls project, the FCA will seek evidence of how BMAs' control frameworks adequately mitigate the additional risks associated with unregulated or innovative data; and
• benchmarks controls — in H2 2025, the FCA intends to evaluate the adequacy of end to-end benchmark controls. This will involve a multi-firm review, across different asset types, focusing on custom and more complex benchmarks. The FCA will seek evidence that firms have adapted their controls for the launch, calculation, and rebalancing of custom or complex benchmarks.

The U.K. Financial Conduct Authority has published a Dear CEO letter for data reporting services providers. Since its previous letter in May 2022, the FCA has seen improvement in some areas such as within firms' data quality system and controls and more bespoke DRSP documentation. However, there remain risks of harm.

The FCA's ongoing supervisory priorities are:

• operational resilience — the FCA has observed a low number of operational resilience-related incidents being reported by DRSPs. While this could reflect strong operational resilience, the FCA is concerned that it may indicate that firms have not set appropriate thresholds for reporting incidents. The FCA will closely monitor reported incidents and work with DRSPs to review the adequacy and compliance of incident management and response procedures;
• data quality systems and controls — the FCA expects DRSPs to prioritize enhancing data quality systems and controls to ensure all reported data is complete, accurate, and submitted on time; and
• communication with the FCA and the notification regime — firms are required to provide prompt and accurate notifications to the FCA. The FCA will undertake a review to assess DRSPs' procedures for submitting notifications, which will focus on ensuring that firms have clearly established and appropriate thresholds for determining when a notification is required.

The U.K. Financial Conduct Authority has published a Dear CEO letter setting out its key concerns and priorities over the next two years for trading venues (that is, recognized investment exchanges, multilateral trading facilities and organized trading facilities).

The FCA's supervisory priorities include:

• operational resilience — in the coming period, the FCA will focus on the preparedness of RIEs for the new regulatory framework surrounding operational resilience confirmed by PS21/3. The FCA will also be selecting certain MTFs and OTFs for a further review of their operational resilience;
• market orderliness — the FCA will continue to discuss with trading venues how they are developing the systems and controls they have, to maintain an orderly market in response to the evolving technology and risk landscape, with a focus on volatility management;

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The Financial Conduct Authority, Prudential Regulation Authority, and the Bank of England have launched consultations on operational incident and third-party reporting. The regulators propose to establish a framework to enhance incident and third-party risk management, strengthen firms' operational resilience and minimize harm. To achieve this, the regulators propose a definition for an operational incident and introduce new material third-party reporting rules. The proposals introduce standardized reporting templates to allow the regulators to collect data which would be used to monitor and respond to potential risks arising from operational incidents and firms' increasing reliance on third parties.

The deadline for comments is March 13, 2025. The FCA intends to publish finalized rules in H2 2025. The PRA and the BoE propose that the implementation date for the proposals will be no earlier than H2 2026. You may like to see our client bulletin, "Operational incident reporting: UK financial regulators propose new rules", which goes into the details of these proposals.

The Council of the European Union and the European Parliament have reached a provisional agreement on the proposed Regulation amending the Benchmark Regulation. The proposed Regulation will amend the scope of the benchmark rules, the use of benchmarks provided by a third-country administrator, and certain reporting requirements. The Council and EP agreed:

• To reduce the regulatory burden on administrators of non-significant benchmarks by removing them from the scope of current rules.
• That only those benchmarks defined as critical or significant, EU Paris-aligned benchmarks, EU Climate Transition benchmarks, and certain commodity benchmarks should remain in scope. In addition, there will be the option for out-of-scope administrators to opt-in voluntarily under certain conditions.
• To add further qualitative criteria to the calculation methodology for significant benchmarks.

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The EMIR 3 Regulation and Directive have been published in the Official Journal of the European Union and will enter into force on December 24, 2024. The EMIR 3 Regulation amends the European Market Infrastructure Regulation and applies from December 24, 2024, except for the amendments to the calculation of the clearing thresholds for financial counterparties and non-financial counterparties which will only apply once the related technical standards enter into force. The EMIR 3 Directive amends the Directive on Undertakings for the Collective Investment in Transferable Securities, the Capital Requirements Directive and Investment Firm Directive. Member States must transpose the EMIR 3 Directive into national laws and bring those into force by June 25, 2026. This aligns with the implementation date for CRD VI.

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The Bank of England has published the final report on its system-wide exploratory scenario. The SWES was a 'system-wide' exercise, incorporating a wide range of financial firms and business models, focusing not on the resilience of individual participants, but the impact on important U.K. financial markets.

Through running the SWES, the BoE, working closely with and with the full support of the U.K. Prudential Regulation Authority, Financial Conduct Authority, and the Pensions Regulator, has drawn key financial stability conclusions, including that actions taken by authorities and market participants following recent market shocks have improved gilt market resilience, but further work is required given the other vulnerabilities highlighted by this exercise. The BoE considers that the SWES has proven to be an effective tool to understand system-level vulnerabilities. The BoE, alongside the FCA, will use the experience as a framework for future system-wide analysis and embed it into how market-wide surveillance is conducted. To support this the BoE will invest in its in-house capacity to model system-wide dynamics, supported by continuing engagement with market participants.

The BoE also published the results of its 2024 CCP Supervisory Stress Test. In the core credit stress test, the BoE found that all three U.K. CCPs have adequate pre-funded resources to cover a severe stress scenario and the default of the 'Cover-2' members—the two members whose default generates the greatest depletion of mutualized resources at the CCP. The BoE identified that in some very extreme but plausible scenarios there may be a risk to CCPs, and will follow-up with CCPs to probe how they capture the risks identified by these hypothetical scenarios via their own stress testing.

The International Organization of Securities Commissions has published its final report on the evolution in the operation, governance, and business models of exchanges. The Report focuses on equity exchanges, but IOSCO considers that it may be of relevance to other types of trading venues and trading in other classes of financial instruments. In the report IOSCO describes and analyzes the changes in the structure and organization of exchanges and, in particular, their business models and ownership structure. IOSCO then outlines the impact of these changes on market structure, emphasizing the shift from traditional models to more competitive, cross-border, and diversified operations, whereby exchanges have become part of larger corporate groups, leading to resource-sharing and process consolidation. Finally, IOSCO discusses regulatory considerations and potential risks and challenges and outlines good practices that regulators may consider in the supervision of exchanges, particularly when they provide multiple services and/or are part of an exchange group. The good practices are complemented by a non-exhaustive list of regulatory and supervisory tools currently used in IOSCO jurisdictions to address the issues under discussion, which may serve as examples to other regulators.

The Collective Investment Schemes (Temporary Recognition) and Central Counterparties (Transitional Provision) (Amendment) Regulations 2024 have been published, alongside an explanatory memorandum. The Regulations amend the Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 to remove the requirement that a CCP must continue to be recognized in the EU to remain in the temporary recognition regime for overseas CCPs.

The Regulations also make amendments to the Collective Investment Schemes (Amendment etc.) EU Exit Regulations 2019 (CIS EU Exit Regulations), which established the temporary marketing permissions regime for EEA investment funds. Amendments include extending the duration of the TMPR from five to six years (that is, until December 31, 2026). This reflects an HM Treasury policy announcement made in January 2024. In addition, technical amendments are made to the TMPR to ensure that sub-funds are able to transition smoothly to the Overseas Funds Regime on direction by the Financial Conduct Authority where they are in scope of the U.K. government's equivalence decision concerning EEA states or alternatively apply for recognition. The FCA published guidance in October 2024 to assist firms in making an application for an overseas investment fund to be recognized under the OFR.

The Regulations come into force with immediate effect, that is November 26, 2024.

The International Organization of Securities Commissions has published a consultation report on pre-hedging. The report assesses potential conduct and market integrity issues associated with the practice of pre-hedging. IOSCO proposes a definition of pre-hedging and a set of recommendations to guide regulators in determining acceptable pre-hedging practices and managing the associated conduct risks effectively.

IOSCO seeks feedback on the proposed definition, and a minimum set of recommendations as guidance which are broadly applicable in most circumstances. IOSCO additionally seeks feedback on whether the proposed recommendations need to be adapted to specific circumstances. For example, IOSCO particularly requests feedback in relation to the differences in the proposed recommendations between bilateral non-electronic transactions and pre-hedging in the context of electronic trading, including competitive requests for quotes. The deadline for comments is February 21, 2025. IOSCO anticipates providing a final report with recommendations to IOSCO members in 2025.

The European Securities and Markets Authority has published a consultation on the conditions of the Active Account Requirement under the amended European Market Infrastructure Regulation (EMIR 3). The active account requirement requires EU counterparties active in certain derivatives to hold an operational and representative active account at a Central Counterparty authorized to offer services and activities in the EU.

ESMA is seeking stakeholder input on several key aspects of the active account requirement, including the: (i) three operational conditions to ensure that the clearing account is effectively active and functional, including stress-testing; (ii) representativeness obligation for the most active counterparties; and (iii) reporting requirements to assess their compliance with the active account requirement. The deadline for comments is January 27, 2025. ESMA will then consider the feedback it receives to this consultation in Q1 2025 and expects to publish a final report and submission of the draft technical standards to the EC for endorsement as soon as possible.

The Bank of England has published a consultation on fundamental rules for financial market infrastructure firms. The BoE proposes to introduce a set of fundamental rules for FMIs incorporated in the U.K. The aim of the proposed rules is to increase the resilience of FMIs through providing a clear and transparent articulation of the desired outcomes of the BoE's policy framework. The BoE intends to support FMIs' compliance with the relevant regulatory regime and their supervisory engagement with the BoE, and so U.K. financial stability. For central counterparties and central securities depositories, the fundamental rules will take the form of rules made under the Financial Services and Markets Act 2000. For recognized payment service operators and specified service providers, they will take the form of a binding Code of Practice pursuant to the powers given to the BoE under Part 5 of the Banking Act 2009. The BoE intends to apply the fundamental rules to systemic stablecoins in due course. The fundamental rules will form the foundation of a broader BoE rulebook for FMIs, as the BoE uses its new rulemaking power over U.K. CCPs and CSDs to replace detailed firm-facing requirements currently in U.K. primary legislation. The deadline for comments is February 19, 2025. The BoE proposes a six-month implementation period between the publication of the final rules and their application. The BoE welcomes views on what an appropriate implementation period would be.

The Bank of England has updated its approach to financial market infrastructure supervision. The BoE states that its approach to supervision continues to be underpinned by four core principles: (i) its supervisors rely on judgement in taking decisions; (ii) the BoE assesses firms not just against current risks, but also against those that could plausibly arise further ahead; (iii) the BoE focuses on those issues and firms that are likely to pose the greatest risk to its objectives; and (iv) it applies proportionality to ensure that its interventions do not go beyond what is necessary in order to achieve its objectives.

In light of experience, and the new powers and responsibilities set out in the Financial Services and Markets Act 2023, the BoE has aimed to make its approach more risk-based and flexible, updated its potential impact and risk assessment frameworks so that they can better accommodate the current risk environment, made greater use of horizontal supervisory work to assess the risks posed across sectors, and continued to embed the use of horizon scanning to identify areas of potential vulnerability. The BoE sets out its processes for identifying and assessing risks posed by each FMI and its approach to supervising FMIs in practice, including the degree of intensity of supervision and the tools and legal and enforcement powers available to it.

The Council of the European Union has adopted the Regulation amending the European Market Infrastructure Regulation, the Capital Requirements Regulation, and the Money Market Funds Regulation as regards measures to mitigate excessive exposures to third-country central counterparties and improve the efficiency of Union clearing markets (EMIR 3) and the Directive amending the UCITS Directive, the Capital Requirements Directive, and the Investment Firms Directive as regards the treatment of concentration risk arising from exposures towards central counterparties and of counterparty risk in centrally cleared derivative transactions. The legislation will be published in the Official Journal of the European Union before entering into force 20 days later. EMIR 3 will apply from that date, subject to certain provisions which will not apply until the date of entry into force of certain technical standards. Member States are expected to implement the amending Directive 18 months after the date it enters into force.

The European Securities and Markets Authority has finalized its technical advice for the European Commission on the Central Securities Depositories Regulation penalty mechanism. ESMA hopes to incentivize all actors in the settlement chain to improve settlement efficiency, also in view of the potential move to T+1 in the EU.

The report outlines ESMA's advice to improve the application of the CSDR penalty mechanism on three main aspects: (i) alternative parameters to calculate the penalties due to lack of cash, when the official interest rate for overnight credit charged by the central bank issuing the settlement currency is not available; (ii) the treatment of historical reference prices for the calculation of late matching fail penalties; and (iii) the design and level of the penalty rates for each asset class. ESMA proposes to maintain the design of the current penalty mechanism—for example, not introducing fundamental changes to the methods for calculating penalties—and to introduce an overall moderate increase of the penalty rates, in full alignment with the current types of settlement fails and targeting most asset classes. The Commission will take into account ESMA's technical advice when amending the Commission Delegated Regulation (EU) 2017/389. The revised penalty mechanism will become applicable once the amended Commission Delegated Regulation has been adopted by the Commission, scrutinized by the European Parliament and the Council of the European Union, and published in the Official Journal of the European Union.

The Financial Stability Board has published a letter sent to the G20 leaders ahead of their meeting on November 18, 2024, together with the FSB 2024 annual report. The letter warns of ongoing vulnerabilities within the global financial system, illustrated by recent episodes of market turmoil and the failure of several banks and non-banks in recent years. The letter stresses the importance of effective implementation of the FSB's policies, emphasizing that authorities must not only put policies into national laws and regulations, but also build the capacity to operationalize them.

In the annual report, the FSB provides an overview of its work in its key priority areas, which include: (i) addressing lessons from the March 2023 banking turmoil; (ii) enhancing the resilience of non-bank financial intermediation; (iii) addressing financial risks from climate change; (iv) improving cross-border payments; (v) responding to technological innovation; and (vi) enhancing the resolvability of central counterparties. Looking ahead, the FSB will continue to focus on these priority areas and will also place an emphasis on: (a) implementation monitoring of its recommendations on crypto-asset activities and global stablecoin arrangements; (b) further work on resolution reforms; and (c) regular monitoring and progress reports on financial stability issues.

For more information on the issues and developments relating to FinTech, see our blog A&O Shearman on fintech and digital assets.

The European Securities and Markets Authority has published a final report on its assessment of the shortening of the settlement cycle in the EU to T+1. The report highlights that the increased efficiency and resilience of post-trade processes that should be prompted by a move to T+1 would facilitate achieving the objective of further promoting settlement efficiency in the EU, contributing to market integration and to the Savings and Investment Union objectives. ESMA recommends that the migration to T+1 occurs simultaneously across all relevant instruments and that it is achieved in Q4 2027.

Considering the different elements assessed by ESMA, in particular the difficulties linked to the go-live of such a big project in November and December, and the challenges linked to the first Monday of October (just after the end of a quarter), ESMA recommends October 11, 2027, as the optimal date for the transition to T+1 in the EU. ESMA suggests following a coordinated approach with other jurisdictions in Europe.

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The U.K. Financial Conduct Authority has issued a discussion paper on potential options for improving the U.K. transaction reporting regime. The FCA has two primary objectives: to improve the usefulness of transaction reporting data through better data quality and to support the competitiveness of U.K. markets by ensuring requirements remain proportionate for firms. The discussion paper asks firms to consider: (i) the overall shape of the transaction reporting regime, seeking feedback on the relative merits of simplification against the cost of change. The FCA is also seeking feedback on areas of the regime that are most burdensome for firms, as well as the role it could play in accommodating the development of new and existing technologies; (ii) the scope of firms subject to transaction reporting obligations and the scope of financial instruments captured by the requirements. The FCA considers the scope of reporting obligations for over-the-counter derivatives and identifiers for these instruments; and (iii) potential changes to the fields contained in RTS 22 to improve data quality. The FCA considers where it could add new fields to improve use of data, where existing fields could be removed to streamline reporting, and trading scenarios where clearer guidance may be needed to improve outcomes. The deadline for comments is February 14, 2025.

The draft Financial Services and Markets Act 2023 (Addition of Relevant Enactments) Regulations 2024 have been published, together with an explanatory memorandum. The Regulations add to the list of "relevant enactments" for the purposes of sections 13 to 17 of the Financial Services and Markets Act 2023. Under section 13 of FSMA 2023, HM Treasury may make regulations which may modify the effect or application of such relevant enactments for the purpose of testing the efficiency or effectiveness of new technologies or practices in the carrying on of financial markets infrastructure activities, the FMI sandbox. The Regulations will bring the following relevant enactments into scope of the FMI Sandbox powers: (i) the Stock Transfer (Gilt-edged Securities) (CGO Service) Regulations 1985; (ii) the Government Stock Regulations 2004; (iii) the Money Laundering Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017; and (iv) the Prospectus Regulation. The effect is to include new relevant enactments within the list at section 17(3) of FSMA 2023 so that these enactments can be modified by FMI sandboxes. Bringing the Stock Transfer Regulations, the Government Stock Regulations, and the Money Laundering Regulations into scope is intended to facilitate activity in the first FMI Sandbox, the "Digital Securities Sandbox" and relevant amendments will be set out in detail in a later statutory instrument and accompanying explanatory memorandum. Bringing the U.K. Prospectus Regulation into scope of the FMI Sandbox powers is designed to facilitate the creation of PISCES. The Regulations have been laid before Parliament and will come into force the day after the day on which they are made.

As part of the Autumn Budget delivered on October 30, 2024, the U.K. Government expressed it is committed to delivering the Private Intermittent Securities and Capital Exchange System (PISCES), a new innovative market for trading private company shares. In line with that commitment, the government announced a power-enabling HM Treasury to make Stamp Duty and Stamp Duty Reserve Tax changes in relation to financial market infrastructure sandboxes, as established under the Financial Services and Markets Act 2023. This power will be used to provide an exemption from Stamp Duty and Stamp Duty Reserve Tax for transfers on a PISCES platform and for onward transfers to end purchasers which result from trading on a PISCES platform. The exemption will be introduced on a similar timeline to the legislation establishing the PISCES regulatory framework.

The European Banking Authority has launched, in cooperation with the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority, a survey addressed to entities within the scope of the initial margin model authorization regime introduced by the European Market Infrastructure Regulation 3.

EMIR 3 will introduce new requirements such as: (i) an authorization regime for IM models used by counterparties in the EU; (ii) a new EBA central validation function for pro-forma margin models; and (iii) a supervision of IM models with greater focus on larger counterparties. The survey is seeking general information on entities within the scope of IM model authorization, as well as specific information relevant for fee calculation and on initial margins and IM models used. The information gathered will guide the EBA in the setup of its central validation function and inform the EBA's response to the European Commission's July call for advice on a possible Delegated Act on fees. The information will also be used to develop proportionate requirements for entities within the scope of IM model authorization, especially for smaller entities (the so called "Phase 5" and "Phase 6" entities) as part of upcoming mandates under EMIR 3.

The deadline for responses to the survey is November 29. Closer to the EMIR 3 publication, the EBA will publish on its website operational clarifications aimed to ensure a smooth, convergent entry into force of EMIR 3 requirements in the EU.

The European Securities and Markets Authority has published a consultation on amendments to the research provisions in the revised Markets in Financial Instruments Directive following changes introduced by the Listing Act. The Listing Act introduces changes that enable joint payments for execution services and research for all issuers, irrespective of the market capitalization of the issuers covered by the research. The consultation paper includes proposals to amend Article 13 of MiFID II to align it with the new payment option offered. The proposals aim to ensure that the annual assessment of research quality is based on robust criteria and that the remuneration methodology for joint payments for execution services and research does not prevent firms from complying with best execution requirements. The deadline for comments is January 28, 2025. ESMA aims to provide its technical advice to the Commission in Q2 2025.

The Critical Benchmarks Regulations 2024 have been published, together with an explanatory memorandum. The Regulations come into force on November 13, 2024. The instrument specifies two benchmarks, the WMR Closing Spot Rates and the ICE Swap Rate, as 'critical' under Article 20 of the U.K. BMR. A benchmark is recognized as a 'critical benchmark' where it meets certain qualitative or quantitative criteria, such as where the value of the contracts referencing the benchmark is at least €500bn, where it has no or very few market-led substitutes if it were to cease being produced, or where it is not reasonably practicable for one or more users to switch to an available market-led substitute. As a result of this specification, the administrators of these benchmarks will become subject to more stringent regulatory requirements and the FCA will have greater powers to intervene to address any potential market disruption.

The European Securities and Markets Authority has launched a survey on legal entity identifiers to gather evidence on how the optionality in the use of legal identifiers would impact market participants were it to be introduced in future reporting regimes or in the review of existing reporting regimes. ESMA had proposed to mandate the LEI in technical standards under the EU Digital Operational Resilience Act and Markets in Cryptoassets Regulation, in line with G20/Financial Stability Board and European Systemic Risk Board recommendations, which advocate for the use of the LEI to identify all parties involved in financial transactions. However, in response to concerns raised by the European Commission on the mandatory use of LEIs by non-financial entities, the proposals now set the LEI as the default identifier for legal persons, but also allow for the use of alternative identifiers where an entity does not have an LEI. The Commission has advocated for allowing for the use of the European Union Identifier in the context of DORA, which does not contain the same level of information as the LEI.

ESMA's survey is intended to raise awareness about these recent developments and to collect feedback on the potential impacts of adding alternatives to the LEI. The deadline for responses is November 12, 2024.

The Bank of England has began consulting on proposals for its supervisory fees for financial market infrastructure firms for 2024/25. The proposals cover: (i) the fee rates to meet the BoE's 2024/25 funding requirement for its FMI supervisory activity and the policy activity that supports this; (ii) the BoE's proposed hourly rates for special project fees for 2024/25; and (iii) the fees for the 2023/24 fee year including rebate and recovery rates. The BoE explains that the most significant factor driving fee increases this year are its new FSMA 2023 rule-making powers and responsibilities, which have resulted in increased policy work including the creation of the CCP rulebook. The BoE proposes to spread related one-off costs across the next three years. The deadline for comments is December 18, 2024. The proposed implementation date for the proposals is Q4 of the 2024/25 fee year (December 2024 to February 2025), when invoices will be issued for the 2024/25 fee year.

A draft version of the Collective Investment Schemes (Temporary Recognition) and Central Counterparties (Transitional Provision) (Amendment) Regulations 2024 has been published, alongside a draft explanatory memorandum. The Regulations amend the Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 to remove the requirement that a CCP must continue to be recognized in the EU to remain in the temporary recognition regime for overseas CCPs.

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The Bank of England and Financial Conduct Authority have published a joint policy statement providing feedback to responses received to the Digital Securities Sandbox joint consultation (CP24/5). We discussed the proposals in April in "UK Regulators Consult on Digital Securities Sandbox". The policy statement covers the following topics: (a) the approach to regulating DSS firms; (b) the scope of the DSS; (c) settlement of the payment leg; (d) operation of the DSS; (e) Gate 2 and end-state rules; (f) supervision of the DSS; and (g) other general issues relating to the DSS. Overall respondents welcomed the regulators proposals, with no respondents explicitly disagreeing with the creation of the DSS.

In response to feedback, the BoE and FCA have made some changes to their proposed approach and guidance, such as: (i) extending the scope of the DSS to include non-GDP (non-pound sterling) denominated assets; (ii) a more flexible approach to firm-specific limits at Gate 2, moving from fixed 'go-live' limits to a flexible range; and (iii) reducing the minimum capital requirement for a DSD from nine to six months of operating expenses.

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The U.K. Central Counterparties (Transitional Provision) (Extension and Amendment) Regulations 2024 (together with explanatory memorandum) have been published. The Regulations come into force on November 29, 2024. The SI:

• extends the temporary recognition regime for overseas central counterparties by 12 months, until December 31, 2026. This will allow overseas CCPs in the regime to continue to offer clearing services in the U.K. whilst they wait for their applications for recognition to be determined by the Bank of England; and
• extends the transitional regime for overseas qualifying central counterparties (QCCPs) contained within the U.K. Capital Requirements Regulation for an additional 12 months. The expiry date of the QCCP transitional regime varies between individual CCPs as it is dependent on when a firm has applied for recognition in the U.K., but the explanatory memorandum notes that for a large percentage of firms this currently expires on December 31, 2024. The extension will ensure that U.K. firms with indirect exposures to the QCCPs within the regime will not face a sudden and disruptive increase in their capital requirements on the expiry of the QCCP transitional regime. HM Treasury has previously extended the temporary recognition regime and the QCCP transitional regime twice, by 12 months each time.

The European Commission has published a report on the future of European competitiveness, prepared by Mario Draghi, former President of the European Central Bank. The report aims to set out a new industrial strategy for Europe to overcome barriers to the EU's competitive strength. It sets out priority proposals in the short and medium term in key strategic sectors. For financial regulation, the report focuses on the completion of the Capital Markets Union and the Banking Union.

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The FCA has published two new webpages on its work establishing consolidated tapes for equities and bonds. The final FCA framework for the bond CT was published in December 2023, along with a consultation on proposed payments from the bond consolidated tape provider to data providers, as well as responses to the FCA's discussion paper on the design of the equities CT. Feedback to the FCA's discussion paper was divided as to whether, and how much, pre-trade data should be included in an equities CT. The FCA has now appointed consultants to analyse the potential impact of including pre-trade data on the stability and resilience of U.K. equity markets and the outcomes for different types of users of the market. The FCA intends to provide a further update before the end of the year. As regards the bonds CT, the FCA published a Handbook Notice in April 2024 confirming that it would not require the bond CTP to make payments to data providers. The FCA is finalising the tender design to appoint a bond CTP and expects to commence the tender before the end of the year. The FCA requests any who are interested in taking part in the tender process to contact them by September 13, 2024 to allow it to be in contact with all relevant parties when making decisions to finalise the tender process.

The Financial Conduct Authority has launched a consultation on proposed rules for a new public offer platform regime, which will allow public offer platforms to facilitate companies making public offers of securities to investors outside public markets when raising more than £5 million. The new regulated activity was created by the Public Offer and Admissions to Trading Regulations 2024, which will replace the current U.K. Prospectus Regulation. This new activity will supplement existing regulation, such as existing investment-based crowd funding that is already regulated. Firms wishing to operate a public offer platform will either need to vary their permissions, or seek authorization from the FCA.

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The European Securities and Markets Authority has published three consultation papers on different aspects of the Central Securities Depositories Regulation Refit. The proposed rules relate to the information to be provided by EU the Central Securities Depositories to their national competent authorities for the review and evaluation process, the information to be notified to ESMA by third-country CSDs, and the scope of settlement discipline.

The draft rules are set out in three separate consultation papers, covering:

• The review and evaluation process of EU CSDs, suggesting a harmonization of the information to be shared by CSDs on their cross-border activities and the risks to be considered by the relevant authorities for the purpose of feeding the overall assessment of the competent authorities.
• Third-country CSDs, where ESMA is proposing to streamline the information to be notified, aiming for an accurate understanding of the provision of notary, central maintenance and settlement services in the Union, limiting the reporting burden.
• The scope of settlement discipline, covering ESMA's proposals on the underlying cause of settlement fails that are considered as not attributable to the participants in the transaction, and the circumstances in which operations are not considered as trading.

The deadline for comments is September 9, 2024. Following the consultation, the responses will be assessed to finalize the proposals, before submission to the European Commission in Q1 2025. ESMA states that other consultations about other aspects of CSDR will follow in the coming months.

The European Securities and Markets Authority has published a consultation paper on supervisory expectations for the management bodies of firms directly supervised by ESMA, namely credit rating agencies, benchmark administrators of EU critical benchmarks and third-country recognized benchmarks, third-country Tier 2 (i.e., systemically important) CCPs, data reporting service providers, securitisation repositories and trade repositories. The consultation paper sets out ESMA's supervisory expectations in relation to good practice in governance arrangements, such as on the role, operation, and effectiveness of the management bodies of these entities. The expectations set out in this consultation paper are intended to provide all of ESMA's supervised entities with the same reference point for ESMA's expectations regarding governance arrangements. ESMA believes that the publication of these expectations will ensure that all ESMA supervised entities are equally aware of ESMA's expectations in this area. It will also increase transparency for any potential applicant or future supervised entities as to what ESMA expects in this area.

The deadline for comments is October 18, 2024. ESMA will consider the feedback it receives to the consultation with a view to finalising its supervisory expectations in Q1 2025.

The Bank of England's Securities Lending Committee has published its Settlement Efficiency Report. The findings have been collated by a Working Group since H2 2023. The aim was to highlight the issues around settlement efficiency in the U.K., building on the work conducted by the International Securities Lending Association. The report confirms that the persistent level of settlement failure within the U.K. securities lending market would be significantly reduced with: (i) enhanced static data management; (ii) real-time communication of position-impacting data between parties; (iii) consistent trade and lifecycle event instruction discipline; (iv) increased investment in pre- and post-trade automation; and (v) a market-wide adoption of industry best practices. It lists a series of recommendations on ways to alleviate the current level of settlement fails. The Committee considers that the report can be useful to all market participants, given it relates to achieving a robust settlement rate alongside a more transparent, real-time framework to address failing and failed securities transactions.

The European Commission has published a report addressed to the European Parliament and Council of the European Union on the delegation of power to adopt delegated acts conferred on the Commission pursuant to the Benchmark Regulation. Under Article 49(1) of the BMR the Commission was empowered to adopt delegated acts for five years, which could be extended for a further five-year period unless the European Parliament and Council of the European Union oppose it no later than three months before the end of each period. Initially, the five-year period ran from June 30, 2016, until June 30, 2021. Regulation (EU) 2019/2089 amended Article 49(2) of the BMR extending the empowerment to December 10, 2024, and imposed a requirement on the Commission to prepare a report on the delegation of power. The report aims to fulfill that requirement. 

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The International Organization of Securities Commissions has published its final report on market outages. The report examines key findings from recent market outages on listing trading venues in IOSCO jurisdictions and builds on past IOSCO work on operational resilience and business continuity planning to identify good practices for listing trading venues that may enhance market-wide resilience in the event of a market outage.

The good practices include: (a) establishing and publishing an outage plan; (b) implementing a communication plan, which provides, through an appropriate communication channel, initial notice (as soon as practicable) of the outage to market participants and the general public and, thereafter, regular updates to all market participants on the status of the outage and the recovery pathway; (c) communicating information relevant to the reopening of trading in a timely and simultaneous manner to all market participants, providing clarity on the status of orders and ensuring an adequate period of notice before the resumption of trading; (d) ensuring the processes and procedures that trading venues will follow to operate a closing auction and/or to establish alternative closing prices are published in the outage plan and communicated to all market participants during an outage; and (e) conducting and sharing with the relevant regulators a lessons-learnt exercise of the market outage and adopt a post-outage plan, with clearly defined timelines and allocation of responsibilities for remediation, designed to reduce the likelihood of future incidents and to improve the ability of the trading venue to effectively respond to outages.

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On April 3, 2024, the Bank of England and U.K. Financial Conduct Authority published a joint consultation paper on proposed rules for the incoming digital securities sandbox. The Financial Services and Markets Act 2023 (discussed in our client note, A Boost for UK Financial Services) empowered HM Treasury to establish sandboxes to facilitate the use of digital assets in financial markets. HM Treasury confirmed its approach to the DSS, which is the first such sandbox, in December 2023. The DSS will offer eligible firms a modified set of rules and regulations for a period of five years, enabling them to test out services using technology such as distributed ledger technology and give the regulators time to finesse a regulatory regime. It is hoped that digital securities could bring advantages, such as streamlining processes and reducing settlement risk and settlement times.

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On January 29, 2024, the Public Offers and Admissions to Trading Regulations 2024 (SI 2024/105) were published. The Regulations implement the new Public Offers and Admission to Trading Regime, part of the new designated activities regime, and revise the existing prospectus regime inherited from the EU that currently sits in the U.K. Prospectus Regulation. The designated activities regime (DAR) is a new U.K. concept to give the Financial Conduct Authority rulemaking powers over financial sector activities, such as public offers and listing, which are not necessarily carried out by regulated firms such as banks (we discussed the DAR in our client note, "A Boost For UK Financial Services"). The new Regulations introduce a general prohibition on public offers of securities, coupled with a collection of exceptions from this prohibition. Many of the existing exemptions in the U.K. Prospectus Regulation, such as offers solely to qualified investors and offers made to fewer than 150 persons, are retained. Certain provisions, such as those establishing the new designated activities and provisions enabling the FCA to make rules, came into force on January 30, 2024. Most of the other provisions will enter into force once the U.K. Prospectus Regulation is revoked using powers under the Financial Services and Markets Act 2023. The FCA has engaged with stakeholders regarding many of the changes that will be housed in its rulebook in the future. It is expected to publish a consultation paper in Summer 2024 on its detailed proposals.

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The Council of the European Union and European Parliament have reached provisional political agreement on the latest revisions to the European Market Infrastructure Regulation, publishing on February 14, 2024, the agreed text of the EMIR 3 Regulation and EMIR 3 Directive. The controversial mandate for EU counterparties to hold "active accounts" at EU CCPs for all products, and to use such accounts for some products, has been substantially watered down from the European Commission's December 2022 proposal (we discussed the Commission's proposals in our client note, "Clearing in the EU After EMIR 3").

According to the final draft text, in-scope counterparties for the new "active account" requirement will be required to open and maintain accounts with EU CCPs and clear some transactions through EU CCPs for in-scope products. However, the Commission's (and some member states') ambitious and misguided attempt to force market relocations into Europe seem to have faltered. Even the largest EU derivatives traders (with EUR 6 billion + of open positions) need only clear a minimum of five (5) trades per annum for sub-categories each of the in-scope categories of products. In-scope products are interest rate derivatives denominated in euro and Polish zloty; and Short-Term Interest Rate Derivatives (STIR) denominated in euro. It had previously been proposed for CDS denominated in euro to be included, but this product is no longer in scope. 

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HM Treasury has published the Central Counterparties Special Resolution Regime Code of Practice, setting out guidance on the operation of the expanded resolution regime for CCPs established under the Financial Services and Markets Act 2023 (discussed in our client note, A Boost for UK Financial Services). The FSM Act 2023 replicates some, but not all, aspects of the EU's CCP Recovery and Resolution Regulation (which came into effect post-Brexit), granting powers to the Bank of England, as the U.K. resolution authority, to safely resolve a CCP. The expanded U.K. regime came into effect on December 31, 2023 (by virtue of The Financial Services and Markets Act 2023 (Commencement No. 4 and Transitional and Saving Provisions) (Amendment) Regulations 2023), applying to any resolution that commences from that date. The Code applies to the Bank of England as well as HM Treasury, the Prudential Regulation Authority and the Financial Conduct Authority (all of which have roles in the operation of the special resolution regime).

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Legislation implementing the U.K.'s first digital sandbox – the Financial Services and Markets Act 2023 (Digital Securities Sandbox) Regulations 2023 – came into force on January 8, 2024. The DSS Regulations enable the Digital Securities Sandbox to be established. The regulators are expected to consult soon on the proposed application process and rule changes.

U.K. recognized investment exchanges, recognized central securities depositories and investment firms that are licensed to operate a multilateral trading facility or organised trading facility, as well as any other U.K. firms identified by the Financial Conduct Authority or Prudential Regulation Authority, may participate in the FMI sandbox as a "sandbox entrant". Sandbox arrangements carried out by a sandbox entrant must relate to either the activity of operating a trading venue or carrying on maintenance, notary or settlement functions in relation to in-scope instruments, or be ancillary to those activities. In addition to the ability of the primary sandbox entrant to carry out those activities within the sandbox, the following classes of firms may participate in FMI sandbox arrangements: firms using the services provided by the sandbox entrant; firms providing services to the sandbox entrant or its users; and firms carrying on activities or providing services in connection with an in-scope instrument used in connection with the FMI sandbox arrangements. By including this third class of firms, firms would be allowed to provide services that are ancillary or complementary to trading and settlement activities, such as clearing, within the sandbox.

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The Financial Services and Markets Act 2023 (Benchmarks and Capital Requirements) (Amendment) Regulations 2023 were enacted on December 19, 2023. The Regulations amend two pieces of legislation that are set to be repealed by the Financial Services and Markets Act 2023, both of which are subject to a transitional period until that repeal takes place. HM Treasury is able to amend the legislation during the transitional period to ensure that it remains up to date.

The Regulations amend the U.K. Capital Requirements Regulation to reintroduce the inadvertently removed "discount factor" that reduces the amount of capital that small- and medium-sized firms must hold for their trading and derivative activities. The amendment took effect on December 20, 2023. This move is in line with the approach of other leading jurisdictions and aligns with the government's policy to enhance the competitiveness of the U.K. markets. It also accords with the Prudential Regulation Authority's introduction of a simpler prudential regime for Small Domestic Deposit Takers.

The Regulations also amend the U.K. Benchmarks Regulation to extend the transitional period for third-country benchmarks from the end of 2025 to the end of 2030. This change is in line with HM Treasury’s policy announced in November 2023. The extension took effect on January 1, 2024.

A U.K. statutory instrument has been published specifying that the US Commodity Futures Trading Commission regime for central counterparties is equivalent to the U.K. regime (which is set out under the U.K. European Market Infrastructure Regulation). The new SI — The Central Counterparties (Equivalence) (United States of America) (Commodity Futures Trading Commission) Regulations 2023 (with accompanying explanatory note) — will take effect from December 28, 2023. The CFTC equivalence decision will only apply to CCPs that are registered with the CFTC and have either been classified as systemically important by the CFTC or otherwise voluntarily comply with the CFTC requirements for systemically important CCPs.

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Following its consultation earlier this year, HM Treasury has published a response to its consultation on the Digital Securities Sandbox, confirming that it will mostly adopt the approach consulted on to establish the DSS. The DSS, which will be the first sandbox to be established using new powers granted by the U.K. Financial Services and Markets Act 2023, is intended to facilitate the use of digital assets in financial markets. The DSS is designed to allow firms to: (i) establish and operate FMIs using digital asset technology; and (ii) perform the activities of central securities depositories and trading venues in relation to existing security classes.

HM Treasury intends to lay before Parliament draft legislation to implement the DSS, which will be run by the Financial Conduct Authority and the Bank of England. The regulators will be consulting soon on their proposed approaches to the DSS, including the application process and proposed rule changes.

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HM Treasury has published a policy paper and draft legislation for extending the transitional period for third-country benchmarks under the U.K. Benchmarks Regulation. The transitional period will be extended from the end of 2025 to the end of 2030.

The U.K. Benchmarks Regulation provides that no financial instruments and financial contracts in the U.K. may start to reference a benchmark provided by a third-country benchmark administrator unless that benchmark administrator has approval through equivalence, recognition or endorsement. However, the applicability of these provisions to third-country benchmark providers has been extended numerous times. The government will consider whether the third-country benchmarks regime should be revised as part of the Smarter Regulatory Framework. The extension to 2030 is intended to provide certainty to market participants while that assessment and related work is carried out. The draft legislation is intended to come into force on January 1, 2024.

In October this year, the EU extended to the end of 2025 the transitional period for third-country benchmarks under the EU Benchmarks Regulation.

U.K. EMIR (the onshored European Market Infrastructure Regulation) generally requires the clearing at a central counterparty of all interest rate swaps and credit default swaps. As announced earlier this year, HM Treasury has launched a review of an applicable exemption for pension funds, with the publication of a call for evidence. Currently, pension schemes meeting certain requirements are exempt from the clearing obligation for a temporary period. The exemption was included in EMIR due to the difficulty that pension funds would find in funding margin calls; nominally, to provide CCPs with time to develop solutions for the transfer of non-cash collateral by pension schemes to meet variation margin calls. CCPs require highly liquid collateral, mostly cash, as variation margin, but pension schemes are not set up to hold large amounts of cash and would have to amend their business model at high costs to do so. In June, the Pension Fund Clearing Obligation Exemption and Intragroup Transaction Transitional Clearing and Risk-Management Obligation Exemptions (Extension and Amendment) Regulations 2023 extended the temporary exemption for pension schemes to June 18, 2025.

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The Bank of England has published a discussion paper on its proposed approach to developing a regulatory regime for systemic payment systems using stablecoins and related service providers. The BoE’s paper follows the government’s recent Policy Paper on Plans for the Regulation of Fiat-backed Stablecoins which confirmed that these types of stablecoins will be brought into the U.K. regulatory perimeter.

This is part of HM Treasury’s plan to regulate cryptoassets, focusing first on fiat-backed stablecoins. The BoE will be responsible for the financial stability of systemic payment systems using stablecoins. The Financial Conduct Authority will supervise non-systemic fiat backed stablecoins for prudential and conduct of business purposes, and systemic fiat-backed stablecoins for conduct purposes only, and has published a discussion paper alongside the BoE's discussion paper. Responses to both discussion papers may be submitted until February 6, 2024. The Prudential Regulation Authority will supervise banks' activities in tokenized deposits. The PRA has written to banks stating that any business in fiat-backed stablecoins will, among other things, need to be conducted from a separate legal entity under branding that is different to the bank' branding. The Payment Systems Regulator will supervise the competition aspects relating to systemic payment systems using fiat backed stablecoins.

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