In the first instalment of this month’s regulatory summary, we take a look at SEC penalty activity, FCA assessments of fund managers, Bank of England green bond reporting, a new appointment for Australia’s stock exchange, the introduction of block trading in Hong Kong, the cessation of Euroyen TIBOR, and much more.
CONTENTS
- SEC fines 10 broker-dealers US$289m for recordkeeping violations
- Bittrex settles $24m with SEC over unregistered exchange, broker and clearing agency
- FCA: fund managers’ value assessments ‘significantly improved’, but still work to do
- Bank of England updates reporting requirements for green bonds
- ESMA publishes data on quarterly bond liquidity assessment, SI calculations and consolidated tape calculations
- AFME says actions to strengthen resilience are paying off in response to stress test results
- Abu Dhabi implements enhancements to its Financial Regulatory Framework
- New virtual assets trading platform receives ADGM approval
- DIFC-registered companies report 23% growth in H1 2023
- ASX appoints Diona Rae as COO
- Hong Kong Securities & Futures Commission to introduce block trading under Stock Connect
- Hong Kong’s financial regulator to broaden the scope of insider dealing provisions
- Hong Kong warns against improper practices by virtual assets trading platforms
- Singapore finalises stablecoin regulatory framework
- Japan launches public consultation on the permanent cessation of Euroyen TIBOR
- ICMA identifies 58 solutions for electronic trading in fixed income markets
Introduction
In the latest instalment of our regulatory round up, we see the US Securities and Exchange Commission has been busy, coming down on broker-dealers for recordkeeping violations – the regulator said “off-channel communications” were pervasive with even senior executives guilty of the practice. The regulator also agreed to settle with Bittrex over unregistered exchange, broker and clearing agency.
Elsewhere, the UK’s Financial Conduct Authority, following a review over the last year, found fund managers’ value assessments have “significantly improved”, while in Australia, the Australian Securities Exchange appointed a new chief operating officer. Read the full summary for all this and much more.
US
SEC fines ten broker-dealers US$289m for recordkeeping violations
Ten sell-side firms have been fined a combined US$289 million by the US Securities and Exchange Commission (SEC) for violating recordkeeping provisions.
The 10 broker-dealers and one dually registered broker-dealer and investment advisor are: Wells Fargo Securities, together with Wells Fargo Clearing Services, and Wells Fargo Advisors Financial Network, which agreed to pay a US$125 million penalty; BNP Paribas Securities and SG Americas Securities have each agreed to pay penalties of US$35 million; BMO Capital Markets and Mizuho Securities USA have each agreed to pay penalties of US$25 million; Houlihan Lokey Capital has agreed to pay a US$15 million penalty; Moelis & Company and Wedbush Securities have each agreed to pay penalties of US$10 million; and SMBC Nikko Securities America has agreed to pay a US$9 million penalty.
Gurbir Grewal, director of the SEC’s division of enforcement, said, “To date, the Commission has brought 30 enforcement actions and ordered over US$1.5 billion in penalties to drive this foundational message home. And while some broker-dealers and investment advisers have heeded this message, self-reported violations, or improved internal policies and procedures, today’s actions remind us that many still have not.”
The SEC uncovered “pervasive and longstanding” communications made via messaging platforms on personal devices. These “off-channel” communications, made through platforms such as WhatsApp, Signal and iMessage, were not kept by employees’ firms in violation of the Securities Exchange Act 1934, and were therefore unavailable to the SEC if it was to require them.
The failures involved employees at multiple levels of authority, the SEC said, including supervisors and senior executives.
Bittrex settles $24m with SEC over unregistered exchange, broker and clearing agency
Crypto asset trading platform Bittrex and co-founder and former CEO William Shihara have agreed to settle charges with the SEC that they operated an unregistered national securities exchange, broker, and clearing agency. Foreign affiliate Bittrex Global also agreed to settle charges that it failed to register as a national securities exchange.
Bittrex and Bittrex Global have agreed to stump up a total of US$24 million.
The regulator alleged that Bittrex acted as an unregistered broker, exchange and clearing agency by providing services to US investors in connection with crypto assets that the SEC’s complaint alleges were offered and sold as securities.
Bittrex also allegedly directed issuers who wished to list their crypto assets on Bittrex to remove from the public eye “problematic statements” that CEO Shihara thought might lead a regulator to consider the crypto asset sold was a security.
Gurbir Grewal, director of the SEC’s division of enforcement, said: “For years, Bittrex worked with token issuers to ‘scrub’ their online statements of any indicia that they were investment contracts—all in an effort to evade the federal securities laws. They failed.”
UK
FCA: fund managers’ value assessments ‘significantly improved’, but still work to do
In a follow-up review, carried out over the last year, the UK’s Financial Conduct Authority (FCA) has found that fund managers’ value assessments have shown improvement, there are some which still require improvement.
In 2017, the FCA published its Asset Management Market Study, which found evidence of weak demand-side pressure on fund prices, resulting in uncompetitive outcomes for investors in authorised funds.
Camille Blackburn, director of wholesale buy-side at the FCA, said: “It is vital that firms make sure they are not solely focused on a fund’s profitability over value for money for investors.”
While many firms have fully integrated considerations on assessment of value into their product development and fund governance processes, the FCA said, there remain outliers. ensure the price a customer pays for a product or service is reasonable compared to the overall benefits.
The FCA found that: there were “significant” differences between good and poor practice in how asset fund managers assess their funds’ performance; firms were putting too much emphasis on comparable market rates to justify their fees, rather than conducting an assessment using the full range of value assessment considerations; some firms now have better processes for allocating costs but are reaching conclusions on AFM costs and economies of scale that don’t take into account the information made available by that better process.
Bank of England to update reporting requirements for green bonds
The Bank of England is to update the reporting requirements for green debt at the end of this year.
The changes to the Issuing and Paying Agents’ reporting form (IPA Form), which is used to collect data on the volume of outstanding debt and new debt issued and repaid by companies each month, will see the requirement to identify green finance, designed to help the UK meet its commitment to the G20 Data Gap Initiative (DGI).
Under direction from the DGI Green Finance Task Team, DGI requirements have expanded to identify green bonds, sustainability bonds and sustainability-linked bonds.
The Bank said green bonds are debt securities whose proceeds are used to fund projects intended to deliver a positive environmental impact; sustainability bonds can be defined as debt securities whose proceeds are used to fund projects intended to deliver a combination of positive environmental and social impact; sustainability-linked bonds can be defined as debt securities whose characteristics can vary depending on whether the issuer achieves predefined environmental or other sustainability objectives.
The Bank does not plan to amend the reporting template at this stage but asks reporting IPAs to include all three types of bonds when completing the requirements on green finance.
The Bank said it’s likely it will update the Form IPA template in the future to enable the separate identification of the three different types of bonds.
Europe
ESMA publishes data on quarterly bond liquidity assessment, SI calculations and consolidated tape calculations
The European Securities and Markets Authority (ESMA) on 1 August published the new quarterly liquidity assessment of bonds, the data for the quarterly systematic internaliser calculations for equity, equity-like instruments, bonds and for other non-equity instruments and the consolidated tape provider (CTP) under MiFID II and MiFIR.
ESMA’s liquidity assessment for bonds is based on a quarterly assessment of quantitative liquidity criteria, which includes the daily average trading activity (trades and notional amount) and the percentage of days traded per quarter. For this period there are currently 1,105 liquid bonds subject to MiFID II transparency requirements. The transparency requirements for bonds deemed liquid for the past quarter will apply from 21 August to 19 November 2023.
Data for ESMA’s quarterly systematic internaliser (SI) calculations covers the total number of trades and total volume over the period 1 January – 30 June 2023 and includes 25,015 equity and equity-like instruments, 131,849 bonds, and 5,874 sub-classes of derivatives (including equity derivatives, interest rate derivatives, commodity derivatives, emission allowance). Investment firms were required to perform the SI test by 15 August 2023.
ESMA also published data on a voluntary basis covering the total number of trades and total volume for the asset classes of bonds and emission allowances over the period January to June 2023 in order to support CTPs in their compliance with the regulation to allow an operator wishing to enter this business to perform the required test.
AFME says actions to strengthen resilience are paying off in response to 2023 EU-wide stress test results
Following the recent publication of the EU-wide stress test results by the European Banking Authority (EBA), the Association for Financial Markets in Europe (AFME) issued a statement on behalf of its members that participated in the exercise.
Caroline Liesegang, head of prudential regulation at AFME, said: “AFME welcomes the results of this year’s EBA stress tests. Despite an extreme ‘adverse scenario’ including high and persistent inflation and a severe decline in EU GDP, plummeting 6% over the three-year period, this year’s stress test shows that the steps both banks and supervisors have taken over the years to strengthen the resilience of the EU banking sector are now paying off.
“The results reflect a better starting point for banks, with higher levels of capital, improved asset quality and profitability driving the change compared to the previous stress test. We also note that EU subsidiaries of international banks, included in the EU-wide stress test for the first time this year, have finished the exercise showing a robust solvency position.
“Notwithstanding the overall positive outcome, we urge the EBA to take a fresh look at the stress test methodology and remove or at least recalibrate some of the existing constraints that often override banks’ bottom-up projections. The EBA stress test follows a constrained bottom-up approach, involving banks in identifying risks using their own models to encourage better risk management practices. A successful stress test should find a balance between supervisory standardisation and accommodating individual bank characteristics.
“Finally, the new banking package (CRR3/CRD6) – the entry into force of which is expected by January 2025 – will warrant a comprehensive review of the EU stress test framework. The structural changes to the calibration of the Pillar 1 framework combined with other overlaps across the Pillar 1 and Pillar 2 capital risk coverage warrant a critical assessment of the methodology.”
Middle East
ADGM FSRA implements enhancements to its Financial Regulatory Framework
The Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) has implemented amendments to its regulatory framework in relation to client classification, client assets and certain conduct requirements relating to Investment Business.
In response to Consultation Paper No. 2 of 2023, the FSRA received positive feedback on the proposed enhancements that support its ongoing commitment to align with international best practices and to provide a “fair, well-regulated and internationally-recognised platform that meets the needs of its markets”.
Virtual assets trading platform receives ADGM approval
New virtual asset platform M2 has been officially granted a Financial Services Permission (FSP) license from ADGM’s FSRA and is now approved to operate a multilateral trading facility and offer custody services to United Arab Emirates (UAE) residents.
M2 is approved to offer institutional and retail clients in the UAE the ability to buy, sell and custodise virtual assets. The platform has been developed over the past year with a long-term vision to establish trust, security and integrity in the emerging virtual asset class.
Subject to regulatory approval, the M2 platform is scheduled to launch later this year, offering UAE virtual asset investors the opportunity to purchase market-leading virtual assets (BTC and ETH), and benefit from institutional grade trading features in addition to having a secure on and off-ramp for fiat payments. Growing the M2 product offering beyond launch, the platform intends to increase the number of assets and services offered to include derivatives along with a market leading yield product.
DIFC-registered companies report 23% growth in H1 2023
In its latest results the Dubai International Financial Centre (DIFC) reported 661 new companies registered in H1 2023, a 23% increase from the same period last year. Fintech and innovation companies surged from 599 to 811, up 35% year-on-year.
According to the Spring 2023 edition of the Global Financial Centres Index, Dubai is one of only ten financial centres categorised as a global leader with broad and deep capabilities. Dubai is the only financial centre in the Middle East, Africa and South Asia region to be included in this classification.
DIFC has also seen a notable influx of hedge funds, further raising its reputation as a new global centre for alternative investments. Notable new firms joining DIFC in 2023 include global leaders such as Asia Research and Capital Management, Edmond de Rothschild, EnTrust Global, Hudson Bay Capital, King Street Capital, Nomura Singapore, St. James’s Place and Verition Fund Management.
APAC
ASX appoints Diona Rae as COO
The Australian Stock Exchange (ASX) has appointed Diona Rae as chief operating officer (COO), effective 7 August.
Rae will be responsible for the enterprise customer and operations function, including project delivery, customer, brand and marketing, digital, and regulatory reporting.
ASX CEO and managing director Helen Lofthouse said: “Diona brings extensive experience in regulatory remediation programs and a proven track record delivering large, complex transformation, technology and risk programs. Her experience in transformation delivery will be invaluable for ASX as we start to move into the execution phase of our strategy.
“Diona will be responsible for executing our enterprise-wide customer strategy, working closely with our customers to improve our markets, products and services. This includes leading our ‘digital by design’ approach to making customer and people experiences frictionless and easy.”
Prior to joining ASX, Rae was most recently executive general manager, privacy program delivery with Commonwealth Bank, where she overhauled the bank’s privacy remediation program to satisfy regulatory requirements.
Prior to that role, Rae was the chief controls officer for the bank’s enterprise services group, enhancing line 1 risk management for the technology and operations functions.
Hong Kong Securities & Futures Commission to introduce block trading under Stock Connect
Hong Kong’s Securities and Futures Commission (SFC) and the China Securities Regulatory Commission on 11 August announced the proposed introduction of block trading under Stock Connect, the landmark mutual market access programme between Hong Kong and Mainland China.
When the enhancements are implemented, offshore investors will be able to conduct block trades via Northbound trading under Stock Connect, on both the Shanghai and Shenzhen stock exchanges; and investors from Mainland China will be able to conduct manual trades via Southbound trading under Stock Connect on Hong Kong’s stock market.
Hong Kong Exchange Group (HKEX) COO and head of equities, Wilfred Yiu, welcomed the move: “The launch of block trading is the latest significant enhancement to the Connect franchise, providing price and execution certainty for large-sized deals that will help further enhance trading efficiency. This will support the continued growth and development of this exclusive mutual market access platform, offering more choice and more liquidity. We look forward to working closely with our partners to prepare for this rollout, as well as on other Connect-related enhancements, as we connect China and the world.”
HKEX will develop an implementation proposal for the introduction of block trading and manual trades, including the relevant business, technical and regulatory arrangements.
The exchange group posted strong H1 results in August, with group revenues up 18% on last year. On 26 July HKEX also signed a cooperation agreement with Indonesia Stock Exchange to collaborate on cross-border listings and ESG initiatives.
Hong Kong’s financial regulator to broaden the scope of insider dealing provisions
Hong Kong’s Securities and Futures Commission (SFC) plans to proceed with the proposal to broaden the scope of the Securities and Futures Ordinance (SFO)’s insider dealing provisions, it announced this month.
The scope of the insider dealing provisions of the SFO will be broadened to cover insider dealing perpetrated in Hong Kong with respect to securities listed on overseas stock markets or their derivatives; and insider dealing perpetrated outside of Hong Kong, if it involves any securities listed on a recognised stock market, such as HKEX, or their derivatives. The industry will have the opportunity to review the draft amendments during the legislative process.
Hong Kong warns against improper practices by virtual assets trading platforms
Hong Kong’s SFC has observed some unlicensed virtual asset trading platforms (VATPs) engaging in improper practices and issued a statement warning these firms of the potential legal and regulatory consequences of these improper practices, reminding investors to be wary of the risks of trading virtual assets on unregulated VATPs.
Some unlicensed VATPs claim to have submitted licence applications to the SFC when in fact they have not done so. “These untrue and misleading claims give the public a false sense of assurance that the VATP is in compliance with the SFC’s regulatory requirements,” said the SFC.
Singapore finalises stablecoin regulatory framework
The Monetary Authority of Singapore (MAS) on 15 August announced a new regulatory framework that seeks to ensure a high degree of value stability for stablecoins regulated in Singapore. The regulatory framework takes into account feedback received following an October 2022 public consultation.
The stablecoin regulatory framework will apply to single currency stablecoins (SCS) pegged to the Singapore Dollar or any G10 currency, that are issued in Singapore. Ho Hern Shin, deputy managing director (financial supervision), said: “MAS’ stablecoin regulatory framework aims to facilitate the use of stablecoins as a credible digital medium of exchange, and as a bridge between the fiat and digital asset ecosystems. We encourage SCS issuers who would like their stablecoins recognised as ‘MAS regulated stablecoins’ to make early preparations for compliance.”
Japan launches public consultation on the permanent cessation of Euroyen TIBOR
The JBA TIBOR Administration (JBATA) has issued a public consultation on the permanent cessation of Euroyen TIBOR and related issues.
JBA TIBOR was reformed as one of the major interest rate benchmarks in July 2017 to enhance transparency, robustness and reliability based on the Final Report on Principles for Financial Benchmarks published by IOSCO in July 2013 and the Reforming Major Interest Rate Benchmarks report published by the US Financial Stability Board (FSB) in July 2014.
Global
ICMA identifies 58 solutions for electronic trading in fixed income markets
The International Capital Market Association (ICMA) has updated its Electronic Trading Directory following its latest review of electronic trading platforms, order and execution management systems (OMS/EMS) and bulletin boards in fixed income markets.
The directory now includes 58 technology solutions, up from 55 in 2022. Although the landscape has not fundamentally changed, several existing solutions have expanded their reach, providing new products, protocols, services and more.
A few new trading venues have been added, offering a variety of features such as a new OpenAI GPT-4 powered software aimed at assisting investors by answering bond related questions, compliance and reporting tools, bond pricing sources and new execution protocols.
ICMA research published earlier this year found that generally smaller trade sizes are executed on venues while block trades are traded OTC. From a liquidity perspective, trading venues can provide access to a wider range of market participants. This is particularly the case with the emergence and adoption of different protocols.
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