The FCA's new logic for equity secondary markets – get ready for the Super Reporter

On 5 July 2022, the Financial Conduct Authority (FCA) published a consultation outlining its proposals to improve the UK’s equity secondary markets (the Consultation), including the introduction of what has been referred to as the proposed ‘Super Reporter’ regime.

The Consultation forms part of the UK’s Wholesale Markets Review, which was launched in July 2021 with a view to reforming and improving the UK’s regulation of secondary markets and taking advantage of the UK’s increased legislative freedom following its withdrawal from the EU.

What is the Consultation focused on?

The reforms outlined in the Consultation include proposals to:

• simplify the systematic internaliser (SI) regime to provide clarity and remove unnecessary regulatory burdens;
• remove restrictions on firms’ ability to execute transactions to ensure better outcomes for investors;
• reconfigure the transparency regime for fixed income and derivatives markets so that only appropriate instruments are subject to enhanced transparency requirements;
• reduce the scope of the commodities position limits regime and delegating it to trading venues;
• ensure that the FCA can help support the provision of a consolidated tape, which will better enable participants to identify the best available pricing for instruments; and
• make the post-trade transparency regime more useful by excluding non-price forming transactions, achieving greater consistency and limiting duplications in the use of flags for trades that are exempted from post-trade transparency and improving the information context of trade reports.

These changes are primarily relevant to trading venues, investment firms and UK branches of overseas firms which are undertaking investment activities, though they should also benefit investment managers and other buy-side firms in terms of rationalising their post-trade transparency obligations and (if HM Treasury’s objectives are achieved) improving the quality of execution that they receive.

Simplifying the systematic internalisers’ regime

Of these changes, the FCA’s proposal to simplify the status of systematic internalisers for the purposes of public reporting of OTC transactions in particular is intended to lower the cost of doing business for firms and increase competition in the market.

Under the current rules, firms that wish to take on the responsibility for reporting transactions with clients are often forced to opt-in to the systematic internaliser regime and comply with applicable pre-trade transparency obligations in order to remove this burden from their buy-side clients. This has resulted in operational challenges for firms seeking to follow a reporting rule based on the status of a firm as an SI on an instrument-by-instrument basis, with firms relying on a privately operated electronic register and SIs voluntarily providing information about the instruments or classes of instruments for which they are SIs in order to confirm their counterparty’s SI status.

The Consultation notes that has led to some sell-side firms registering as SIs in a larger number of instruments than which they are actually SIs in order to be able to offer to buy-side clients the legal certainty that they will comply with the obligation to report trades they enter into with them. In the view of the FCA, this creates compliance risk, increases the costs of doing business for firms. It alsohas negative consequences for ability of firms to enter and compete in the market, given the need to source granular information as to whether a counterparty is an SI in the relevant instrument and pay third parties who maintain registers of such complex information.

Consequently the reforms set out in the Consultation propose to delete the condition which currently requires investment firms to publicly report transactions in instruments for which they are an SI. Instead, the FCA is proposing to introduce a designated reporter regime (the so-called ‘Super Reporter’ regime) whereby firms can voluntarily assume the obligation to trade report when trading with their clients in any instrument they deal with, whether or not they are also an SI in the relevant instrument(s). A register of designated reporters will be maintained at an entity – rather than instrument – level, which the FCA expects to be significantly simpler and more stable than the existing SI register.

It is anticipated that creating a simpler framework where such delegation can occur will enhance efficiency and lower costs for firms, as well as result in better outcomes for investors (although it is acknowledged that the changes will result in greater IT costs for SIs and Approved Publication Arrangements (APAs) in the short run).

Feedback to the consultation

Outcomes from this consultation are subject to HM Treasury approval once closed, following the consideration of responses and development of the relevant technical standards. If those standards are approved, FCA will then publish a policy statement including the amended technical standards.

Market participants are invited provide feedback to the Consultation by 16 September 2022.