Trading venues consultation suggests FCA shift from EU regulatory approach

The FCA said that a lack of certainty about permissions, and a layered definition of multilateral system – along with recent technological developments – meant that firms have found it hard to distinguish certain arrangements and systems from trading venues. The UK’s withdrawal from the EU now allows it to “consider approaches which are better tailored to the specificities of the UK market” so firms have more certainty about the permissions they need  and ensure that the “trading venue regime is applied consistently”, the FCA said.

The regulator said it believes that some firms’ arrangements comprise a multilateral system but are not authorised and regulated as trading venues. It said the resulting unlevel playing field potentially presented a risk to the market and to consumers and impacted competition. According to the consultation (44 pages / 605KB PDF), the FCA plans to issue general guidance on the definition of a multilateral system in the Perimeter Guidance Manual (PERG).

The regulator also plans to publish Q&As in PERG on the application of the general guidance to specific types of arrangements covering voice brokers, internal matching systems, primary market platforms, bulletin boards and blocking trades onto regulated trading venues. The FCA said the changes would help clarify the requirements so participants can more easily identify whether their activities constitute a multilateral system.

While the FCA previously expected firms to familiarise themselves with Q&As on the trading venue perimeter issued by the European Securities and Markets Authority (ESMA), it now said that doing so “could lead to uncertainty” over how they fit with its new guidance. Because of this, the FCA suggested that Q&As 7, 10, 11 and 12 in Section 5 of the ESMA market structures Q&As should not form part of its supervisory expectations once its final guidance has been published.

Josie Day of Pinsent Masons said: “We are now starting to see signs of the regulator moving away from the EU’s approach to regulation. In this current consultation, for example, a possible divergence in approach between the FCA and ESMA on the trading venue perimeter means some of ESMA’s Q&A on the topic may be dropped from the FCA’s supervisory expectations.”

“The FCA notes that most respondents to the wholesale markets review (WMR) supported clarifying the multilateral system definition with guidance, rather than by further legislative change, to allow enough flex in the trading venue perimeter to absorb future market developments, so clearer guidance will be welcome,” she said.

She added: “A shift away from the EU’s approach to regulating this part of the market is beginning to be discernible elsewhere too, with the WMR findings also driving proposals in the Financial Services and Markets Bill to amend the MiFID II framework.”

The FCA’s consultation on the trading venue perimeter guidance closes on 11 November 2022. The draft guidance, and a policy statement, will be published in the second quarter of 2023.