The FCA, together with the other UK regulatory authorities, is continuing to build up the UK wholesale markets on the back of the recommendations set out in the wholesale markets review and the 2022 Edinburgh reforms.
Now, at the end of July 2024, the latest set of proposals has landed in the form of three consultation papers and a policy statement, addressing the Public Offers and Admissions to the Trading Regulations (POATR) regime, the Public Offer Platform (POP) regime, the Derivatives Trading Obligation (DTO) and the new payment option for investment research.
In this article, we look at these four elements and the key direction of the proposals.
1. A Consultation on the new Public Offers and Admissions to Trading Regulations regime
The biggest element of the latest set of rules and proposals to build up UK wholesale markets was the release of a consultation around the Public Offers and Admissions to Trading Regulations (POATR) regime. This new regime (as made by Parliament in January 2024) will replace the existing UK Prospectus Regulation rules (PRR) as well as give the FCA greater discretion to set new rules in this area.
The updated rules consist primarily of 3 key elements:
Firstly, changes in prospectus requirements;
- The threshold for triggering a requirement to issue a prospectus as part of a further issuance willrise from 20% to 75% of existing securities
- Issuers will still be allowed to produce a voluntary prospectus approved by the FCA for issuances below this threshold.
Secondly, changes for sustainability related disclosures;
- Where the issuer has identified climate-related risks or opportunities as material to the prospectus, certain climate related disclosures to be added to the existing minimum content requirements for equity securities being admitted to a regulated market
- FThe FCA will continue using non-handbook technical note guidance to clarify its expectations and review the content of the guide for general purpose non-equity securities
- Issuers will be required to disclose whether their debt instruments have been marketed as ‘green’, ‘social’ or ‘sustainable’ or issued under a bond framework or a similar document. If so, issuers will be prompted to disclose further information, depending on the type of bond being listed.
Thirdly, changes to protected forward looking statements (PFLS), with such statements becoming subject to an amended statutory liability threshold under the proposals;
- The FCA will provide a clear framework to give issuers legal certainty on what can be deemed PFLS
- Additionally, further guidance to help investors identify what is PFLS and what isn’t.
The deadline for responses to this consultation is 18 October 2024.The rules would come in the form of a new sourcebook (PRM) and by adding a new Chapter to the MAR sourcebook for the changes relating to multilateral trading facilities (MTFs) that operate primary markets as well as removing the PRR.
2. A consultation on the new public offer platform regime.
Following the 2021 UK listings review and first touted in the Edinburgh reforms, this consultation provides further clarity around the proposed Public Offer Platform (POP) regime, alongside the wider POATRs. The POP aims to target firms wishing to raise money outside of regulated markets or trading venues, and in excess of the current £5m threshold, above which issuers are required to publish a prospectus. Currently, many firms cluster around the threshold limits, indicating demand for raising higher amounts, but the structure of the regulations currently prohibit them from doing so at the right cost. POPs aim to address this gap, primarily targeting retail investors.
The proposals in the consultation primarily cover the specific requirements on due diligence and disclosures that POP operators must apply before listing an issuer’s securities, as well as rules applicable to firms in general. POP operators will effectively serve as gatekeepers for their markets.
The rules for operating a POP are proposed to be added to Chapter 23 of COBS, with the consultation response deadline closing on 18 October 2024.
3. A consultation on the derivatives trading obligation
The third consultation the FCA has launched as part of this package focuses on the derivatives trading obligation (DTO), with three distinct but interconnected aspects being proposed. Covering all three in turn:
- Changes to the classes of derivatives subject to the derivatives trading obligation: It is proposed that certain overnight index swaps (OIS) based on the US Secured Overnight Financing Rate (SOFR) are included within the classes of derivatives subject to the DTO. This propsal is based on the fact that the Bank of England has already brought the SOFR OIS under their clearing obligation in 2022, and existing evidence,including anecdotal evidence, suggests it is sufficiently liquid and already subject to the US trading mandate
- Exemptions for post-trade risk reduction services: Currently, transactions resulting from portfolio compression are already exempt from the DTO. The FCA now proposes to expand this exemption to other post-trade risk reduction services, such as portfolio rebalancing and basis risk optimisation. This should support firms’ risk management practices and contribute to reducing systemic risks.
- FCA power to suspend or modify the DTO: The FCA doesn’t propose any new rules here, but clarifies how it intends to use the power accorded to it by the newly inserted article 28a in UK MiFIR by FSMA 2023 This article gives the FCA a new ‘power of direction to suspend or modify the DTO it if considers this necessary for the purposes of preventing or mitigating disruption to financial markets and advancing one or more of its operational objectives’. In essence, it highlights that the FCA intends to use this power in a similar manner to the power granted to it under the temporary transitional powers (TTP). This will largely be used to avoid market disruption where EU and UK DTO requirements conflict,particularly for UK branches of EU investment firms.
The deadline for responses to this third consultation is 30 September 2024.
4. A Policy Statement setting out a new payment option for investment research
Finally, the FCA issued a Policy Statement (PS 24/9) setting out a new payment option that investment firms may choose to use to pay for research. This Policy Statement confirms the final rules that were consulted on in CP24/7, based on the July 2023 Investment Research Review, which outlined the original set of recommendations.
The new rules allow investment firms tocontinue paying for research as per any of the existing options, such as from their P&L or through Research Payment Accounts (RPA). However, a new, additional option is being introduced.
Under this new option, available from 1 August 2024, firms may bundle payments for research and trade execution, provided they meet a certain set of requirements. These requirements include a written policy describing the firm’s approach to joint payments and clear documentation of the methodology for calculating and identifying the cost of research.
This approach appears to mirror the EU’s proposed approach (which is still going through the EU policy making process), although at this stage, the EU’s requirements are less explicit.
In summary, it is encouraging to see the ongoing development of the new wholesale markets ruleset, in line with the new powers accorded to the UK financial regulators in the wake of FSMA 2023 and building on elements highlighted in the UK Wholesale Markets Review. The timing of these latest proposals are timed well and in most cases ‘front running’ equivalent EU rule changes, and supports the FCA’s secondary objectives of promoting the international competitiveness and growth of the UK market.
