In October’s second regulatory round-up, the SEC tweaks rules around securities lending and National Market System stocks, Europe and Japan have each been busy. Japan has opened a carbon credit market as well as unveiling a proof of concept for trading analysis data. Europe has conducted the first assessment of data reporting service providers’ relevance for the EU’s financial markets and begun consulting on possible changes to annual fees for Tier 1 Third country central counterparties. In the UK, new guidance around trading venue perimeter rules have kicked in, nudging derivatives trading venue OTCX to register as a multilateral trading facility (MTF) in the UK.
- SEC adopts rule to increase transparency in securities lending market
- SEC proposes rule to address volume-based exchange transaction pricing for NMS stocks
- JPXI unveils proof of concept testing for trading analysis data
- TSE opens carbon credit market
- JSCC joins Hyperledger Foundation
- OTCX registers as MTF as UK trading venue perimeter rules begin
- Trade bodies seek equity options exemption from margin rules
- EBA and ESMA consult on two sets of joint guidelines under MiCA
- ESMA conducts first annual assessment of data reporting service providers’ relevance for EU financial markets
- ESMA consults on possible changes to annual fees for Tier 1 Third country central counterparties
- ESMA extends temporary CCP collateral emergency measures by six months
Americas
SEC adopts rule to increase transparency in securities lending market
The US Securities and Exchange Commission (SEC) has adopted a new rule designed to increase the transparency and efficiency of the securities lending market.
Rule 10c-1a will require certain individuals to report information about securities loans to a registered national securities association (RNSA) and require RNSAs to make publicly available certain information that they receive regarding those lending transactions.
“Securities lending played a role in the 2008 financial crisis, and, currently, the securities lending market is opaque,” said SEC Chair Gary Gensler. “In the Dodd-Frank Act, Congress mandated that the Commission enhance the transparency of the securities lending market. Such transparency gets to the heart of the SEC’s mission. It promotes competition. It promotes fair, orderly, and efficient markets. In fulfilling Congress’s mandate, today’s adoption will promote greater transparency in the securities lending markets both to regulators and the public.”
The new rule also requires that an RNSA make certain information it receives, along with daily information pertaining to the aggregate transaction activity and distribution of loan rates for each reportable security, available to the public. The Financial Industry Regulatory Authority (FINRA) is currently the only RNSA.
SEC proposes rule to address volume-based exchange transaction pricing for NMS stocks
The SEC has proposed a new rule that would prohibit national securities exchanges from offering volume-based transaction pricing in connection with the execution of agency or riskless principal (“agency-related”) orders in National Market System (NMS) stocks.
Proposed Rule 6b-1 under the Securities Exchange Act of 1934 would also require national securities exchanges to have certain anti-evasion rules and written policies and procedures and disclose certain information if they offer volume-based transaction pricing for member proprietary volume in NMS stocks.
“Currently, the playing field upon which broker-dealers compete is unlevel,” said SEC Chair Gary Gensler. “Through volume-based transaction pricing, mid-sized and smaller broker-dealers effectively pay higher fees than larger brokers to trade on most exchanges. We have heard from a number of market participants that volume-based transaction pricing along with related market practices raise concerns about competition in the markets. I am pleased to support this proposal because it will elicit important public feedback on how the Commission can best promote competition amongst equity market participants.”
Rule 6b-1 would also require exchanges that have volume-based transaction pricing for member proprietary orders in NMS stocks to have anti-evasion measures, including rules requiring members to engage in practices that facilitate the exchange’s ability to comply with the prohibition on volume-based exchange transaction pricing for agency-related orders in NMS stocks and to have written policies and procedures reasonably designed to detect and deter members from receiving volume-based pricing in connection with the execution of agency-related orders in NMS stocks.
APAC
JPXI unveils proof of concept testing for trading analysis data
JPX Market Innovation and Research (JPXI) will conduct a proof of concept (PoC) testing for trading analysis data.
JPXI will provide samples of data analysed and processed by JPXI to help trading participants analyse their own transactions. JPXI will use the feedback from PoC participants to help determine whether this data can be utilised. Based on the results of this PoC, JPXI may consider distributing this data to users in the future.
To help trading participants analyse their transactions, JPXI will provide them with cross trade data, order volume increase data, among other data sets, which aggregate their order and execution information. This data will be extracted according to criteria chosen by JPXI, taking into consideration data processing loads.
Tokyo Stock Exchange opens carbon credit market
The Tokyo Stock Exchange opened the country’s carbon credit market and started trading on 11 October. To commemorate the opening of the market, a ceremony was held on the same day, which was attended by Nishimura Yasutoshi, minister of economy, trade and industry (METI).
Yasutoshi said: “METI has launched the Pro-Growth Carbon Pricing Concept, aiming for carbon neutrality by2050 and a 46% GHG reduction by FY2030, and aims to establish a system that benefits companies that are proactive and ambitious in reducing emissions.
“The use of carbon credits is a very effective approach to encourage GX investment from the private sector while achieving efficient emission reductions for society as a whole. It can be expected that, by putting a price on carbon reductions through the trading of credits, it will increase the predictability of investments in decarbonization and accelerate companies’ GX efforts.
“With the opening of this market, we will introduce a new market maker scheme with the cooperation of Tokyo Stock Exchange as an effort to further stimulate trading. By having market makers place a certain amount of buy and sell orders at the same time, it will be possible to publicly announce fair trading prices and ensure the liquidity of the market.
“With the trading of various environmental values, starting with the currently available J-credits, we expect that the carbon credit market will develop significantly in the future as an important infrastructure to encourage companies to make GX investments.”
JSCC joins Hyperledger Foundation
Japan Securities Clearing Corporation (JSCC) has joined Hyperledger Foundation, a non-profit organisation founded by The Linux Foundation to drive the development and adoption of blockchain and distributed ledger technology (DLT).
In January, JSCC introduced its first blockchain production solution based upon Hyperledger Besu, one of the open source software (OSS) platforms hosted by Hyperledger Foundation, to facilitate the efficient delivery settlement of rubber futures. The solution also leveraged the use of several Hyperledger OSS tools and libraries across multiple proof-of-concept projects.
JSCC said that in light of the anticipated widespread adoption of blockchain in future financial markets, the availability of a stable standardised OSS will support global harmonisation and contribute towards the building of a robust ecosystem. “Accordingly, we aim to contribute to the development of OSS in the spirit of the Hyperledger Foundation mission.”
Europe
OTCX registers as MTF as UK trading venue perimeter rules begin
Derivatives trading venue OTCX has been registered as a multilateral trading facility (MTF) in the UK, in the week that the UK’s Financial Conduct Authority (FCA) put its rules on the trading venue perimeter into effect.
OTCX operates an independent multi-dealer request for quote (RFQ) platform to support trading of over-the-counter (OTC) derivatives for investors and dealers, with automation of smaller trades and higher touch trading for larger orders. At the time of writing it is not registered as an MTF on the register of the European Securities and Markets Authority (ESMA).
The new rules, which came into force on Monday 9 October, determine that platforms which facilitate trading can be considered a trading venue, and therefore need to be regulated, if they fit the definition of a multilateral system based on four criteria:
- It has the characteristics of a trading system or facility;
- It comprises multiple third-party buying and selling trading interests;
- It allows trading interests to interact in the system;
- And those trading interests are in MiFID financial instruments.
The reason for the rules has been the perceived encroachment by some software firms into the multilateral facilitation of trading.
Similar rules in Europe have taken the form of guidance issued by ESMA in February 2023, regarding the Markets in Financial Instruments Directive (MiFID II), which as a directive requires transposition into local European markets by national competent authorities.
The rules are not without controversy. OTC markets such as corporate bond trading typically support electronic trading which is conducted bilaterally between two parties, with market operators only providing the routing of requests for quote, rather than firm orders.
In listed markets, firm orders are matched by a venue according to its own rules. By systematising the matching of queries – which can be subject to change and negotiation – in addition to the existing systematising of firm orders, some firms have argued it will be more difficult for efficient electronic communication to support pre-trade identification of counterparties.
“The regulation is very broad strokes,” said Andy Mahoney, managing director at FlexTrade, speaking at the TradeTech FX conference in Paris on 14 September 2023. “It’s basically saying, If you electronically communicate RFQ responses together and put them in a stack, whether you do it in Excel or Notepad, you’re collating quotes and you need to have a rule book around that. It’s very wide ranging. We’re still consulting with a number of legal firms on this. To my mind, it’s an attack on people’s ability to just harvest quotes and put them in a single place and it’s really stifling efficiency, stifling innovation.”
Trade bodies seek equity options exemption from margin rules
Four trade associations, the International Swaps and Derivatives Association (ISDA, the Association for Financial Markets in Europe (AFME), the Alternative Investment Management Association and the American Council of Life Insurers, have called on the UK’s Financial Conduct Authority to grant equity options exemption from margin rules.
The associations outlined how single stock equity and index options should be exempted from plans to introduce margin requirements on non-centrally cleared derivatives, arguing the exemption would bring the UK in line with the US and European regimes, and protect smaller firms trading the contracts.
“The associations believe a permanent exemption of equity options from the margin regulatory technical standards is warranted. Imposing margin requirements in relation to equity options will also have a disproportionate impact for smaller counterparties, potentially leading UK entities that currently use equity options for hedging and risk mitigation purposes to cease trading these products due to the funding cost increase, and – in the case of non-UK clients – discouraging them from entering into equity options transactions with UK dealers,” the trade bodies said.
EBA and ESMA consult on two sets of joint guidelines under MiCA
The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) have published a consultation paper on two draft joint guidelines covering suitability assessment of members of the management body, and suitability of shareholders and members with qualifying holdings of issuers of asset referenced tokens (ARTs) and of crypto-asset service provider (CASPs).
The guidance is designed to provide clarity and harmonisation with respect to the criteria to assess the suitability of the management body, the shareholders and members with qualifying holdings, thus reducing the risk of arbitrage in the application of the rules. The consultation runs until 22 January 2024.
The draft joint guidelines on the suitability assessment of the members of the management body of issuers of ARTs and CASPs provide common criteria to assess the appropriate knowledge, skills and experience of members of the management body as well as their good repute, honesty and integrity and if they are able to commit sufficient time to perform their duties.
The EBA and ESMA received two joint mandates under MiCA to issue (i) guidelines on the assessment of the suitability of the members of the management body of issuers of ARTs and of the shareholders and members, whether direct or indirect, that have qualifying holdings in issuers of ARTs in accordance with Article 21(3), and (ii) guidelines on the assessment of the suitability of the members of the management body of the CASP and of the shareholders or members, whether direct or indirect, that have qualifying holdings in the CASP in accordance with Article 63(11).
ESMA conducts first annual assessment of data reporting service providers’ relevance for EU financial markets
ESMA has performed the first annual assessment of data reporting service providers’ relevance for EU financial markets based on data collected in 2022. Through the assessment ESMA has established that two Data Reporting Service Providers (DRSPs) have exceeded the derogation thresholds. ESMA will conduct its second annual assessment in 2024.
The concerned DRSPs would fall under ESMA’s direct supervision from 1 June 2025 if they exceed the defined thresholds again next year. Until then, they will continue to be supervised by their respective National Competent Authorities (NCAs) in 2024.
ESMA is mandated to conduct an annual assessment of the relevance of Approved Publication Arrangements (APAs) and Approved Reporting Mechanisms (ARMs) for the European Union (EU) market. The specific criteria for identifying DRSPs eligible for derogation and, consequently, under the supervision of the NCAs, are detailed in the Delegated Act (DA).
ESMA consults on possible changes to annual fees for Tier 1 Third country central counterparties
ESMA has launched a public consultation on the revision of the Delegated Regulation regarding fees charged to Tier 1 third country central counterparties (CCPs) under the European Market Infrastructure Regulation (EMIR). The public consultation is open until 10 November 2023.
The aim of this consultation is to gather stakeholders’ views on the appropriateness and on the likely impact of the following proposals: allocation of the annual fees among all recognized Tier 1 CCPs via a weighting factor which depends on their global turnover; introduction of a basic minimum annual fee of EUR 50,000 per Tier 1 TC-CCP, and a maximum annual fee of EUR 250,000; introduction of an incentive scheme for Tier 1 TC-CCPs failing to submit annual audited turnover figures; ESMA’s proposals aim to ensure that the annual fees charged to Tier 1 third country central counterparties (TC-CCPs) are more proportionate and accurately reflect the differences in size and activity across all Tier 1 TC-CCPs.
ESMA extends temporary CCP collateral emergency measures by six months
ESMA has extended, by a period of six months, the emergency measures which temporarily expand the pool of eligible collateral for all types of counterparties.
Uncollateralised bank guarantees for non-financial counterparties (NFCs) acting as clearing members and public guarantees for all types of counterparties will continue to be temporarily eligible by central counterparties (CCPs) in order to avoid potential disruption during the upcoming cold season.
The temporary measures set out in ESMA’s Final Report were adopted during the height of the energy crisis to alleviate the liquidity pressure on NFCs active on gas and electricity regulated markets that clear in EU-based CCPs.
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