The FCA has introduced an updated transparency framework in the UK aimed at refining the bond and derivatives markets to foster enhanced market integrity, investor protection and competition. This initiative is part of the Wholesale Markets Review (WMR) and follows extensive consultations with market participants. The new framework in FCA’s Policy Statement (PS24/14), set to come into full effect by December 2025, marks a shift towards more tailored, cost-effective and liquidity-sensitive transparency requirements for various financial instruments.
Background
The current bond and derivatives regime, established post-Brexit and significantly influenced by EU’s MiFID II standards, was criticised for its broad scope, high compliance costs, and limited impact on price formation. The FCA’s recalibrated framework aims to provide clarity, increase competition and protect liquidity providers without stifling market innovation.
The overarching goals of this new framework are:
- Enhancing market integrity by making price and liquidity information more accessible;
- Improving investor protection by ensuring that transparency leads to better price discovery;
- Supporting international competitiveness by aligning UK standards with those of other major markets, such as the US and EU, whilst ensuring they remain suitable for the UK market’s unique dynamics.
Key Changes
The FCA’s Policy Statement (PS24/14) outlines several changes that will shape the future of transparency for bonds and derivatives. The most significant adjustments include:
- Scope and Categories of Financial Instruments
Bonds traded on UK venues and certain derivatives under the clearing obligation are now defined as Category 1 instruments. These will have the highest transparency requirements, reflecting their higher liquidity.
Instruments that are less liquid, such as bespoke derivatives, are classified as Category 2. These have reduced transparency obligations, tailored to their trading characteristics.
The goal is for the new categorisation to provide adequate protection for liquidity providers and reduce compliance costs. However, some suggested that instruments like Exchange-Traded Commodities (ETCs) could be reconsidered for future inclusion, depending on market trends.
- Enhanced Pre-Trade Transparency Waivers
The new framework exempts voice and Request for Quote (RFQ) systems from pre-trade transparency requirements, aligning with practices in other markets like the US.
Large-in-Scale (LIS) waivers, which allow delay in the publication of details for large transactions, will apply consistently across pre-trade and post-trade reporting to avoid market fragmentation.
- Simplified Deferral Regime for Post-Trade Reporting
The FCA introduced two models to simplify post-trade transparency deferrals:
- For bonds, Model 1 sets different thresholds for disclosure delays based on trade size, ensuring larger transactions benefit from extended deferrals.
- For derivatives, Model 2 caps the size of trades that can indefinitely mask transaction volumes. This ensures transparency in large trades while protecting market participants from undue risks.
- Introduction of a Bond Consolidated Tape
In conjunction with transparency reforms, the FCA is establishing a bond consolidated tape, which will centralise bond trading data for improved access and analysis. The consolidated tape is expected to reduce costs for accessing high-quality data, ultimately supporting the FCA’s objectives of strengthening the UK’s competitive position.
The CT is expected to significantly enhance transparency and simplify data access, fostering greater competition among data providers and reducing overall trading costs.
Market Implications
The FCA’s revised framework is poised to make the UK a more attractive financial centre. By tailoring transparency requirements to instrument liquidity and aligning with global standards, the FCA aims to boost investor confidence, market participation and liquidity, particularly in times of market stress. The changes are expected to reduce systemic risks associated with market illiquidity and lower capital costs, thereby benefiting both issuers and investors.
How can Complyport help?
Complyport can support your firm in understanding and following these changes by providing:
- Regulatory Guidance: helping your firm understand the FCA’s expectations and providing expert advice on the relevant regulatory requirements;
- Documentation updates: assistance in drafting appropriate policies and procedural documents;
- Ongoing Support: providing ongoing support to ensure that your firm remains compliant as regulations evolve;
- Training: providing training sessions to educate staff on the practical requirements and best practices for compliance.
By utilising Complyport’s experience and expertise, you can navigate the complex regulatory environment seamlessly and maintain high levels of compliance with the FCA’s rules and expectations.
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