Greg Kilminster
Head of Product - Content
FCA proposes rules to strengthen the UK wholesale market
The Financial Conduct Authority (FCA) has published several consultation papers (CP) proposing rules to strengthen the UK wholesale market. This includes the following consultation papers:
- CP24/12 on the new Public Offers and Admissions to Trading Regulations 2024 (POATRs)
- CP24/13 on a new regime for public offer platforms (POPs)
- CP24/14 on the derivatives trading obligation and post-trade risk reduction services
CP24/12 on the new POATRs
The proposals would introduce rules regarding admissions of securities to UK-regulated markets by creating a new Prospectus Rules: Admission to Trading on a Regulated Market sourcebook (PRM) and removing the PRR. The new regime would keep a large degree of consistency between the new and the current UK prospectus regime in the approach to admissions to trading on regulated markets. However, the FCA proposes to make improvements where it considers that it is possible to retain the intended outcome of the regulation but to reduce costs for issuers, improve access to markets, or improve the quality of information available to investors.
The proposal includes rules regarding when a prospectus may be required and what regulated market prospectuses should contain.
Next Steps: The deadline for feedback is 18 October 2024.
CP24/13 on a new regime for POPs
The proposed new rules and guidance will create a due diligence and disclosure framework for public offer platform (POP) operators and issuers. The proposals focus on two main elements:
- Bespoke rules and guidance specific to firms that choose to operate a POP.
- How wider rules, generally applicable to investment firms or firms across the Handbook, will be applied.
Regarding the more bespoke rules specific to operating a POP, the proposals focus on three key areas:
- Information gathering and due diligence carried out by POPs on prospective issuers and the securities being offered.
- The specific disclosures provided to investors on an issuer and the security being offered.
- The application of liability and redress related to the content of offers facilitated by POPs.
Next Steps: The deadline for feedback is 18 October 2024.
CP24/14 on the derivatives trading obligation and post-trade risk reduction services
This consultation is part of the Wholesale Markets Review (WMR) and involves proposals on three distinct but interconnected aspects of the derivatives trading obligation (DTO). The proposals aim to enhance the UK's regulation of secondary markets, decrease systemic risk in derivatives markets, and prevent fragmentation and disruption for firms trading over-the-counter (OTC) derivatives subject to the DTO.
Specifically, the FCA is seeking input on:
- Including certain overnight index swaps (OIS) based on the US Secured Overnight Financing Rate (SOFR) within the classes of derivatives subject to the DTO.
- Expanding the list of post-trade risk reduction (PTRR) services exempted from the DTO and other obligations.
- How the FCA intends to use its power to suspend or modify the DTO once its transitional powers under Part 7 of the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019 expire at the end of this year.
Next Steps: The deadline for feedback is 30 September 2024.
FCA issues PS24/9 on payment optionality for investment research
The Financial Conduct Authority (FCA) has issued a policy statement (PS) 24/9, introducing additional payment optionality for investment research. This PS provides UK buy-side firms with increased flexibility in purchasing investment research, allowing them to make joint payments for third-party research and execution services, provided they meet the specified requirements.
This new payment option will coexist with existing options, such as payments for research from a firm's internal resources and research payment accounts for specific clients. The FCA has no plans to alter the existing rules for these other payment options.
Next steps: The updated rules will be effective from 1 August 2024.
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FCA UK EMIR update
The Financial Conduct Authority (FCA) has made several updates, primarily concerning the UK European Market Infrastructure Regulation (UK EMIR) Q&As.
Some context
In February 2023, the FCA, jointly with the Bank of England, released policy statement (PS) 23/2 confirming changes to the derivative reporting framework under UK EMIR. Most of the new requirements will take effect from 30 September 2024, with a transition period for some aspects.
In response to requests for supporting guidance, the FCA provided Q&As grouped into topics. Before finalising these Q&As, the FCA sought feedback from the industry by conducting a joint consultation with the Bank.
In March 2024, the FCA published the first set of Q&As for consultation. The final first set of Q&As was released in May 2024. In May, the FCA also consulted on the second set of Q&A and proposed changes to the UK EMIR Validation Rules.
Key takeaways
The FCA has:
- Published the final UK EMIR Validation Rules and XML schemas, including updates since consultation.
- Published an additional finalised Q&A (10.9).
- Published the final second set of Q&A.
The FCA is also conducting a brief consultation on one Q&A regarding the reporting of spread bets. The deadline for response is 23 July 2024.
Next steps
The Q&As will be applicable from 30 September 2024.
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OFR, UKLR, access to cash: FCA issues Handbook Notice No 121
The Financial Conduct Authority (FCA) has released Handbook Notice No 121, which outlines changes to the FCA Handbook and other materials made by the FCA Board under its statutory powers. The changes include the introduction of new UK Listing Rules, the Overseas Fund Regime (OFR), the access to cash regime, and the new payment optionality for investment research for buy-side firms.
UK Listing Rules
The UK Listing Rules aim to streamline the UK listing process and reduce barriers to growth for listed companies, while maintaining a strong emphasis on disclosure to empower investors in making informed decisions.
The UK Listing Rules Instrument 2024 introduces a new UK Listing Rules sourcebook (UKLR).
This instrument comes into force on 29 July 2024.
OFR
The OFR aims to offer UK investors a wide range of investment funds to enhance competition and consumer choice. Eligible funds can apply for recognition under the OFR starting in September for new schemes and from October for funds currently in the temporary marketing permissions regime.
The Collective Investment Schemes (Schemes Authorised in Approved Countries) Instrument 2024 introduces new COBS and COLL sourcebooks sections.
This instrument comes into force on 31 July 2024.
Access to cash
These new rules establish a regulatory framework requiring designated banks and building societies to assess and address gaps in cash access that significantly impact consumers and businesses.
The Access to Cash Sourcebook Instrument 2024 introduces a new sourcebook: Access to Cash Sourcebook (ATCS).
This instrument comes into force on 18 September 2024.
Payment optionality for investment research
The new regime allows for the bundling of payments for third-party research and execution services, subject to proposed FCA guardrails. This provides UK buy-side firms with greater flexibility in purchasing investment research.
The Payment Optionality (Investment Research) Instrument 2024 mainly amends the COBS sourcebook.
This instrument comes into force on 1 August 2024.
Other changes
The notice also includes the Periodic Fees (2024/2025) and Other Fees (No 2) Instrument 2024, as well as the Decision Procedure and Penalties Manual (Digital Securities Sandbox) Instrument 2024.
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PRA issues PS13/4 on funded reinsurance
The Prudential Regulation Authority (PRA) has released policy statement (PS) 13/4 on funded reinsurance, which includes the final supervisory statement (SS) 5/24 – Funded reinsurance (FundedRe). Alongside this PS, the PRA has also issued a letter providing more detailed information on the implementation approach and expectations for firms to take in their self-assessment against the expectations of the SS.
This PS applies to UK Solvency II firms and insurance and reinsurance undertakings with a UK branch (third-country branch undertakings) when they hold or intend to enter into FundedRe arrangements.
Some context
The PRA is concerned that the current growth in FundedRe transactions by UK life insurers could, if not properly controlled, lead to a rapid build-up of risks in the sector.
Therefore, In consultation paper (CP) 24/23, the PRA proposed to set expectations in respect of life insurance firms entering into or holding FundedRe arrangements as cedants, covering:
- Ongoing risk management.
- The modelling of the solvency capital requirement.
- How firms should consider the structuring of FundedRe arrangements.
Key takeaways
The expectations included in the SS supplement relevant requirements (including under the Solvency 2 framework) and other existing PRA expectations that apply to firms in relation to their outwards reinsurance arrangements, but do not modify or replace any relevant requirement or other existing PRA expectations.
The PRA expects firms to:
- Establish internal investment limits in relation to FundedRe.
- Include an immediate recapture metric within these limits, to be calculated before the impact of any management actions.
- Set investment limits for single counterparty exposures so that a recapture of business would not threaten their business model.
- Set additional limits considering simultaneous recapture from multiple highly correlated counterparties and aggregate funded reinsurance exposures.
- Establish collateral policies as part of their risk management, with detailed policies for illiquid assets in collateral pools.
- Establish board-approved recapture plans covering steps to take on recapture of a funded reinsurance contract.
Next steps
The SS is effective on 26 July 2024.
The PRA will seek assurance on firms’ practices in a proportionate manner and may consider this as a topic in a firm’s Periodic Summary Meeting (PSM) or commission a Skilled Persons review if necessary.
The PRA will also continue to monitor the market’s evolution and may implement specific supervisory intervention or policy measures if needed.
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ESAs publish joint Final report on the draft technical standards on subcontracting under DORA
The three European Supervisory Authorities (EBA, EIOPA, and ESMA – the ESAs) have published their joint final report on the draft Regulatory Technical Standards (RTS) aimed at enhancing digital operational resilience within the EU financial sector. The RTS specify the conditions under which subcontracting of information and communication technology (ICT) services is permitted, particularly when these services support critical or important functions.
Some context
Article 30(2)(a) of Regulation (EU) 2022/2554 mandates financial entities to include clear descriptions of functions and ICT services provided by third-party service providers in their contracts. This regulation also dictates the conditions for subcontracting ICT services. The RTS ensure financial entities can assess risks across the ICT subcontracting chain, ensuring compliance with legislative and regulatory obligations.
Key takeaways
The RTS address ICT services provided by subcontractors that support critical or important functions, establishing requirements for managing these services throughout their contractual lifecycle. Financial entities must assess risks associated with subcontracting during the precontractual phase, including due diligence. The RTS outline the necessary steps for the implementation and management of contractual arrangements to ensure financial entities can effectively monitor and control the risks posed by subcontractors.
The report emphasises that intragroup ICT subcontractors are to be treated the same as external subcontractors. Even though the risks might differ, the requirements remain consistent. Furthermore, group-level management of ICT third-party risks is essential, ensuring consistent application across all subsidiaries.
The RTS stipulate that financial entities remain responsible for managing their risks and meeting legislative requirements, regardless of subcontracting. The guidelines cover the entire lifecycle of contractual arrangements, from planning and risk assessments to ongoing monitoring and exit strategies.
Next steps
The ESAs will now submit the draft RTS to the European Commission for adoption. These standards are designed to ensure that financial entities, regardless of their size or complexity, maintain robust governance arrangements and risk management practices when subcontracting ICT services supporting critical or important functions. This move aims to fortify the EU financial sector's digital operational resilience against evolving cyber threats and operational disruptions.
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ECB concludes cyber resilience stress test
The European Central Bank (ECB) has completed its cyber resilience stress test, designed to evaluate how banks would respond to and recover from severe cyber incidents. The exercise, launched in January 2024, tested 109 banks, with 28 undergoing more extensive scrutiny.
The stress test revealed that while banks have established response and recovery frameworks, there are still areas needing improvement. These findings will inform the ECB's 2024 Supervisory Review and Evaluation Process (SREP), enhancing awareness of cyber resilience strengths and weaknesses across the banking sector.
Banks were assessed on their ability to activate crisis response plans, communicate with stakeholders, and implement mitigation measures. Recovery capabilities, including restoring data and collaborating with third-party providers, were also evaluated.
This stress test aligns with the ECB’s supervisory priorities, reflecting increased cyber incidents amid rising geopolitical tensions and digitalisation challenges. Feedback has been provided to each bank, with some already addressing identified shortcomings.
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