Shaking up the wholesale markets: UK, EU and US approaches

In his Mansion House speech on July 1, 2021, Rishi Sunak, the then-Chancellor of the Exchequer, announced his vision to improve the competitiveness of the United Kingdom's financial services sector while maintaining high regulatory standards. This launched HM Treasury's Wholesale Markets Review, which sought input from stakeholders across the financial services sector.To get more news about emar markets review, you can visit wikifx.com official website.

HM Treasury published its Consultation Response in March 2022, and its proposals will be implemented through a combination of legislation and regulatory developments. The UK's Financial Services and Markets Bill 2022-23, which proposes a broad range of changes to the UK's financial services sector, incorporates a number of the recommendations proposed in the Wholesale Markets Review. In parallel, the UK's Financial Conduct Authority (FCA) has been tasked with implementing some of the new proposals through new and existing regulatory powers.

This article focuses on some of the upcoming changes that are driven by the Wholesale Markets Review, and examines how these changes may impact infrastructure providers and market participants. We assess the developments through the prism of three core themes: addressing economic inefficiencies, improving securities regulation, and moving from legislation to regulation.

We will also look at similar reform initiatives in the European Union and the United States, and examine whether the UK's approach suggests a drift from its continental neighbors toward a closer alignment with the US.
Addressing economic inefficiencies
The recast Markets in Financial Instruments Directive (MiFID II) introduced a number of structural reforms to the securities regulatory framework in the EU (including, at the time, the UK). These reforms were driven, in part, by the 2008 financial crisis, as there was an increased emphasis on market transparency and the need to strengthen investor protection. Several of the proposals introduced by the Wholesale Markets Review seek to address developments in the UK economy since MiFID II was implemented.

Trading venues and systematic internalizers
When MiFID II took effect in 2018, it imposed various operational conditions on multilateral trading facilities (MTF) and organized trading facilities (OTF). One of the aims of the Wholesale Markets Review was to assess whether these changes were beneficial, or whether they had the unintended effect of discouraging new market entrants and stifling innovation.

One of the restrictions imposed by MiFID II was to prohibit MTF operators from engaging in matched principal trading to avoid conflicts of interest arising where an MTF operator wanted to execute a trade on its own trading venue. The UK government agreed with the majority of respondents that this prohibition was costly and unnecessary, as MTF operators are already obliged to identify and manage conflicts. Separately, the consultation sought views on whether OTFs—which are fundamentally non-equity venues—should be permitted to execute derivative package trades that include an equity product. This change would allow a derivative package trade to be executed in its entirety on an OTF, rather than splitting execution across two venues. The UK government agreed with respondents that this change would cut unnecessary costs and reduce execution risk.

The FCA has been tasked with implementing these changes as part of the Future Regulatory Framework, which is a parallel initiative to reform the UK's financial services regulatory framework post-Brexit.

The Wholesale Markets Review also addressed regulatory requirements that may have had a negative economic impact on systematic internalizers (SIs). SIs are investment firms that deal on their own account when executing client orders outside of a trading venue on an organized, frequent, systematic and substantial basis. The MiFID II definition of "systematic internalizer" introduced complex quantitative calculations that apply on an asset class basis in which the calculations have to be updated periodically. The Wholesale Markets Review notes that many firms choose to opt out of the regime rather than engage with the calculation requirements. The UK government supported the move from a quantitative to a qualitative definition, which would allow more firms to opt into the regime without carrying out costly and burdensome calculations. This is reflected in the bill, which uses a qualitative definition and provides the FCA with the power to specify how it should be interpreted.