HM Treasury announces sweeping wholesale markets changes in first response to consultation

Government has outlined a swathe of changes across UK capital markets, including plans for a consolidated tape and changes to the systematic internaliser regime.

HM Treasury has announced its first set of sweeping changes across the capital markets as part of its ongoing review of the UK wholesale markets.

Announced on 1 March, the paper is the result of the Wholesale Markets Review consultation launched in July last year by the HMT in an effort to enhance UK markets and attract more competition to them following Brexit.

It focuses on HMT’s priority issues across equities, fixed income and derivatives, data, outages and trading venues, based on 78 responses received from across the industry. A secondary Regulatory Framework Review will be completed later to address other less urgent issues.

“We think that this step-by-step approach will ensure we can address the most burdensome requirements now while ensuring we maintain a coherent and agile regime for wholesale markets,” said Claudia Trauffler, head of capital markets at HM Treasury, speaking at the AFME Future of the Wholesale Markets event.

As part of the changes to the UK systematic internaliser (SI) regime, HM Treasury has set out to allow them to execute at the midpoint between the best bid and offer below Large in Scale (LiS).

Other changes include that systematic internalisers should be clarified as qualitative as opposed to quantitative to simplify and reduce their “costs and burdens”. The reporting regime of SIs was also a topic touched upon in the WMR consultation, suggesting that they be determined at an entity level rather than instrument by instrument to clarify their post-trade reporting obligations.

In the equity markets, HM Treasury has – as announced last year – moved to officially scrap double volume caps (DVCs) and the share trading obligation (STO) alongside the requirement for algorithmic trading firms to enter into market making agreements with venues.

The WMR also consulted the industry on whether reference price systems should be allowed to match orders at the midpoint within the current bid and offer of any UK or non-UK trading venue that offers the best bid or offer. Following a supportive response, the paper concluded that these changes to pre-trade equity waivers should be delegated to the FCA to be implemented when parliamentary time allows.

With regard to tick sizes, HM Treasury concluded that trading venues should follow the tick size applicable to the primary market of a share even when that market is overseas and that they should to establish tick sizes for new shares “until sufficiently robust data is available”.

The WMR response paper has also acknowledged that further work is needed to be done to ensure resilience by developing a playbook to be used in the case of a market outage. However, rather than legislating the issue the government said it believed this would be best addressed by regulators using existing tools and communicating with firms.

HMT set out several changes to pre-and post-trade transparency in the fixed income markets in its wholesale markets review, including the potential to limit the scope of the regime to systems such as electronic order books and periodic auctions and streamlining the deferral regime, however, delivery on this has been delegated to the FCA to take forward.

With regards to the implementation of a consolidated tape, the government has given the FCA the responsibility of drafting the requirements for consolidated tape providers with the aim of implementing one or more consolidated tapes “for any asset class and for either pre- and post-trade data, or both.” Despite consultations respondents’ concerns over having multiple consolidated tape providers, HMT outlined that this would maintain competition in the space.

HMT added that the FCA would continue to examine high market data costs in its ongoing investigation following concerns raised by respondents in the WMR consultation.

With regards to trading venues, the government has concluded that it will not amend the legal definition of a multilateral system, however, added that it alongside regulators would consult on new guidance following their work in the ongoing Wholesale Markets Review.

The developments come as Europe is conducting its own MiFIR review. In a Capital Markets Union (CMU) update in November, European regulators moved to introduce new regulations to drive volumes back onto lit markets including introducing a blanket double volume cap (DVCs) and a set of stringent new regulations for SIs.