The Global Regulatory Brief provides monthly insights on the latest risk and regulatory developments. This brief was written by Bloomberg’s Regulatory Affairs Specialists.
Trading and markets regulatory developments
Regulatory authorities continue to advance initiatives to improve the efficiency and sophistication of global securities markets. From the US to India, the following global developments in trading and markets from the past month stand out:
- US: SEC charges sixteen firms over $81 million to settle charges for record-keeping failures
- UK: FCA cracks down on insider dealing and outlines bolder approach to enforcement
- Singapore: MAS issues additional guidance for new derivatives reporting regime
- Australia: ASIC proposes changes to OTC derivatives reporting rules
- US: SEC adopts rules to include certain significant market participants as dealers or government securities dealers
- EU: Council adopts MiFIR-D texts
- EU: Lawmakers revamp EMIR rules for EU clearing services
- US: SEC approved FINRA proposal to begin disseminating information on individual transactions in U.S. Treasury Securities
- India: IFSCA to develop GIFT City currency derivatives market
- UK: FCA executive gives overview of listing reform
SEC charges sixteen firms over $81 million to settle charges for record-keeping failures
The US Securities and Exchange Commission announced charges worth over $81 million against 16 broker dealers and investment advisers for widespread and longstanding failures to maintain and preserve off-channel electronic communications.
In more detail: The SEC’s investigations uncovered pervasive and longstanding uses of unapproved communication methods where employees communicated through personal text messages about the business of their employers.
- Broker-dealer firms: These firms admitted that from at least 2019 or 2020 their employees communicated through personal text messages about the business of their employers
- Investment adviser firms: These firms admitted that their employees sent and received off-channel communications related to recommendations and advice
- Failure to preserve: The firms did not maintain or preserve the substantial majority of these off-channel communications and these failures involved employees at multiple levels of authority, including supervisors and senior managers
More than fines: In addition to the significant financial penalties, each of the firms was ordered to cease and desist from future violations of the relevant record-keeping provisions.
- The firms also agreed to retain independent compliance consultants to conduct comprehensive reviews of their policies and procedures relating to the retention of electronic communications found on personal devices
- The consultants will also help firms shape their frameworks for addressing employee non-compliance with policies and procedures
Looking ahead: The charges are the latest in a series of SEC enforcement actions focused on off-channel communications. With each subsequent settlement, the SEC is continuing to demonstrate a willingness to seek significant fines for record-keeping violations and to bring cases against a wider swath of the industry, including investment advisers.
UK FCA cracks down hard on insider dealing and outlines bolder approach to enforcement
The UK Financial Conduct Authority (FCA) confirmed that they are working with the National Crime Agency on a major insider dealing operation and have also won a criminal case against a former compliance analyst found guilty of insider dealing.
Insider dealing operation – in more detail: As part of the operation several digital devices have been seized in searches conducted by FCA investigators, who have made clear that economic crime is firmly on their radar and action will be taken to uphold market integrity.
Wider context: The FCA announced a step-change in its approach to enforcement by confirming it will conduct enforcement cases at a faster speed and will be more transparent when an enforcement investigation is opened.
- As part of the new approach the FCA has begun a consultation on plans to publish updates on investigations as appropriate and be open about when cases have been closed with no enforcement outcome
- This consultation runs until April 16, 2024
In parallel: The FCA have shared observations and recommendations regarding insider dealing by organized crime groups in Market Watch 77.
- Suspicious trading by members of OCGs in products whose underlying securities are UK and internationally listed equities, forms a significant component of the overall volume of suspicious trading the FCA observes in equity markets
- Executing firms should be alert to the possibility of being used to facilitate insider dealing by members of OCGs and the FCA outline common triggers that a firm might be executing trades on behalf of OCGs
- The FCA urges executing firms to consider a range of measures such as making it clear to clients that accounts will be terminated based on low thresholds of suspicion and that all overseas broking firms that are clients submit documentary evidence of adequate surveillance arrangements and a zero-tolerance approach to market abuse
MAS updates guidance on OTC Derivatives Reporting Regime
The Monetary Authority of Singapore (MAS) updated their FAQs on the Securities and Futures (Reporting of Derivatives Contracts) Regulations 2013 which sets out the regulatory reporting framework for OTC derivatives transactions.
Background: MAS had consulted in July 2021 on revised regulatory reporting requirements.
- The revised requirements incorporated CPMI-IOSCO technical guidance on the harmonization of the Unique Transaction Identifier (UTI), Unique Product Identifier (UPI) and other Critical Data Elements (CDE)
- Subsequently in May 2023, the regulator issued “close-to-final” amendments to the regulatory reporting framework, with implementation set to take effect on October 21, 2024
New FAQs in more detail: The additional FAQs seek to facilitate market participants’ implementation of the revised rules, and clarify that reporting entities should not submit incomplete reports.
- Updated reports should be submitted within two days in the event of additional information or changes in reportable information
- Reporting is required whenever a reportable derivatives contract is entered into, and not on an end-of-day consolidated position basis. From October, 21 2024, reporting entities may submit a position report for certain contracts in addition to a report already submitted for its execution, amendment, termination or expiry
Implementation progress by other key APAC jurisdictions: Revised OTC derivatives transaction reporting will take effect from April 1, 2024 in Japan and October 21, 2024 in Australia. The effective date of implementation in Hong Kong is to be confirmed.
ASIC propose changes to derivative transaction reporting rules
The Australian Securities and Investments Commission (ASIC) published further amendments to the Derivative Transaction Reporting Rules.
In more detail: ASIC set out our proposals on simplifying the exclusion of exchange-traded derivatives and the scope of foreign entity reporting, and the removal of the alternative reporting provisions.
- It also addresses certain additional data elements and other matters that have been raised by industry
Looking ahead: Comments are due by March 28, 2024 and the relevant rule amendments are expected to be made in Q3 2024.
SEC adopts rules to include certain significant market participants as dealers
The SEC adopted two rules requiring significant liquidity providers, such as principal trading firms and hedge funds, to register as “dealers” or “ government securities dealers” with the SEC.
The details: The new rules would further define the phrase “as a part of a regular business” in the Exchange Act definition of a dealer to include new qualitative standards to identify market participants who take on significant liquidity-providing roles. The rules will apply to any person engaged in
- (1) “Regularly expressing trading interest that is at or near the best available prices on both sides of the market for the same security that is communicated and represented in a way that makes it accessible to other market participants” or
- (2) “Earning revenue primarily from capturing bid-ask spreads… or from capturing any incentives offered by trading venues to liquidity-supplying trading interest.” Persons with total assets of less than $50 million are exempted from the new rules
Compliance Timeline: The new rules become effective 60 days after publication in the Federal Register and the compliance date will be one year after the effective date.
EU Council adopts final MiFIR-D texts
The European Union (EU) Council has adopted the revised Markets in Financial Instruments Regulation and Directive (MiFIR-D) that govern investment services and financial market activities in the EU.
The intention: The changes to the EU’s trading rules are intended to increase the global competitiveness of the EU’s capital markets and give investors greater access to the market data needed for effective investment decision making.
In more detail: The revised framework aims to, among other things, facilitate the emergence of EU-level ‘consolidated tapes’ that will publish key information such as price, volume, and time of transaction as close as possible to real time.
- This is intended to make it easier for investors to access key information such as the price of instruments, and the volume and time of transactions
- The revised framework will also impose a general ban on payment for order flow (PFOF), while providing Member States with a discretion to allow the practice in their territory until 30 June 2026
Next steps: The texts will be published in the EU’s Official Journal and enter into force 20 days later. The Regulation will apply immediately upon entry into force, with Member States having 18 months to transpose the Directive.
In parallel: The European Securities and Markets Authority (ESMA) is looking for candidates for its Securities and Markets Stakeholder Group (SMSG) to represent the interests of all types of financial markets stakeholders. Input is welcome until March 18.
EU lawmakers revamp EMIR rules for EU clearing services
The Council and the Parliament reached a provisional political agreement on the review of the European market infrastructure regulation (EMIR) and directive.
The intention: The EMIR review aims to make the EU clearing landscape more attractive and resilient, to support the EU’s open strategic autonomy and to preserve the EU’s financial stability.
Context: EMIR lays down rules on over-the-counter (OTC) derivatives, central counterparties (CCPs) and trade repositories.
What is changing? The EMIR review contains several legislative measures to improve EU clearing services, notably by streamlining and shortening procedures, improving consistency between rules, strengthening CCP supervision and requiring market participants of substantial systemic importance, who are subject to a clearing obligation, to have an operationally active account at an EU CCP.
Main elements of the agreement:
- Streamline supervisory processes, such as authorisation and validation
- Strengthen cooperation among supervisors and ESMA and ensure an appropriate division of tasks between national authorities and ESMA
- Strengthen the role of ESMA by providing it with a coordination role in emergency situations, while providing clarity that ultimate decision-making powers are the responsibility of the national competent authorities
- ESMA will also take the role of co-chair of supervisory colleges together with the relevant national competent authorities, who will keep ultimate decision-making powers
- The active account requirement (AAR) will require certain financial and non-financial counterparties to have an account at an EU CCP, which includes operational elements such as the ability to handle the counterparty’s transactions at short notice if need be and activity elements so that the account is effectively used. Counterparties above a certain threshold are required to clear trades in the most relevant sub-categories of derivatives of substantial systemic importance defined in terms of class of derivative, size and maturity. Furthermore, a Joint Monitoring Mechanism is created to keep track of this new requirement
Next steps: The provisional political agreement will now be endorsed by the Council and the Parliament, before going through a legal review and formal adoption.
SEC approved FINRA proposal to begin disseminating information on individual transactions in U.S. Treasury Securities
The U.S. Securities and Exchange Commission (SEC) approved a FINRA proposed rule that would provide for dissemination of trade-by-trade information for U.S. Treasury Securities transactions in On-the-Run Nominal Coupons.
The details: FINRA would begin disseminating individual transaction information on an end-of-day basis for eligible trades reported to FINRA’s Trade Reporting and Compliance Engine. The disseminated transaction information would be anonymized but would include counterparty type and a flag to indicate whether the trade was executed on an ATS, and other trade modifiers and indicators.
Compliance Timeline: Following approval, FINRA will announce the effective date of the proposed rule change in a Regulatory Notice.
India to develop GIFT City currency derivatives market
India’s International Financial Services Centres Authority (IFSCA) has established a new advisory committee to make recommendations on making GIFT City an international currency trading hub.
In more detail: The committee would be tasked with making recommendations to develop the GIFT City market for exchange-traded currency derivatives, based on lessons and best practices from other markets globally.
Key personnel: The IFSCA said the advisory committee will be chaired by Shri Gurumoorthy Mahalingam, a former whole-time member of the Securities and Exchange Board of India (SEBI). Other members include senior executives from the likes of Goldman Sachs Singapore, IndusInd Bank, Deutsche Equities India, ICICI Bank, NSE IFSC and others.
FCA executive gives overview of listing reform
Director of Market Oversight at the UK Financial Conduct Authority (FCA), Clare Cole, provided an overview of the FCA’s work to reform the UK listing regime at the Westminster Business Forum.
In summary: Having set out draft proposals in December 2023 to encourage a more diverse range of companies to list and grow on UK markets, the FCA aims to publish final rules in summer 2024 and implementation will follow shortly thereafter.
Context: The FCA has heard from the industry that there is a need for a rest of the UK’s listing regime due to the disadvantages faced by UK-listed companies when competing on the global M&A stage.
- Specifically, processes that increase issuer and shareholder costs and deal contingency mean that UK issuers are at a disadvantage to their non-UK peers, with small and mid-cap companies being the worst affected
- Cole states that there is no clear evidence of a valuation premium for UK-listed companies due to the additional standards
Proposals in detail: The FCA aims to deliver the following initiatives:
- Replace the ‘Premium’- and ‘Standard’-listing segments into a new, consolidated, single category for commercial companies
- Reshape the significant transactions regime to no longer require FCA-approved circulars and prior shareholder approval of transactions below reverse takeover levels, while focusing on timely and effective disclosure by issuers to promote engagement
- Rationalise the related-party transaction regime similarly to remove prescribed shareholder votes, while retaining independent checks and balances such as the ‘Fair & Reasonable’ opinion from sponsors and the role of independent directors
- Alleviate sunset clauses on dual class shares structures and enable a wider range of pre-IPO participants to hold such shares in issuers post IPO.
In parallel: The FCA continues work to reform the UK’s prospectus and public-offer infrastructure and the listing rules disclosures are complemented by existing aspects of wider UK regulation such as transparency, market abuse and prospectus regulations.
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