The UK government dropped its flagship legislation that would change many of the rules governing Britain’s financial markets.
Since Brexit, the UK has been operating with EU laws but with the introduction of the whopping 330-page Financial Services and Markets Bill, the divergence between Britain and the continent is set to widen.
Here are the key details:
The Bank of England will be given greater powers to regulate clearing houses. Clearing — where traders must use a third party to post collateral as a safety net in case one side defaults — was a major EU rule passed after the 2008 financial crisis.
While the BoE already oversees clearing houses, the ability to set regulatory requirements still lies within EU laws that the UK adopted post-Brexit. The bill would extend the powers the BoE has to regulate clearing by allowing the bank to amend rules and also set capital requirements.
Clearing remains one of the sticking points since Brexit. A large chunk of derivatives clearing is conducted in London, the slow pace of moving clearing out of London has caused the European Commission to extend equivalence status until June 2025.
A market structure expert told Financial News that even with the BoE’s new powers, the UK is still taking a conciliatory approach to EU clearing concerns. EU rules around clearing remain in effect in UK law.
“No government wants to be out of control of their own destiny and the impact on their people if there is a default in the market,” the expert said. The new bill, “suggests the Bank is likely to start out wanting to recognise EU [clearing houses] because they should be able to rely on the home authorities’ supervisory powers and transparency to be as good as their own”.
The expert added: “But it allows for retaliation if the EU starts to be difficult or withhold information over this.”
Included in the bill are also changes to so-called dark trading. These are trades that are conducted off of visible, or “lit” trading platforms and exchanges. Dark trading allows traders with elephant-sized stock trades to buy or sell in the market without showing their hand. Traders use dark pools to ensure outside knowledge of their trades doesn’t impact pricing before the trade is completed.
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The government is scrapping volume caps that, for some stocks, limit the amount of trading done through dark pools. Research from the Financial Conduct Authority found that firms can reduce execution costs by utilising dark pools, and the regulator has previously said it was hard to justify the costs of limiting with volume caps.
However, if more trading moves onto dark pools, the UK would be under increased pressure to improve data access, such as through an electronic system called consolidated tape.
“The UK bill is disappointingly lacking clarity on how to improve data,” said the expert.
Share Trading Obligation
The government is also scrapping the share trading obligation. The STO is another holdover rule from EU regulation. It required EU-listed shares to be traded on EU-approved venues. Many trading venues have established EU trading operations, diminishing the problem that European firms could have suffered post-Brexit due to suboptimal trades. Leaving the STO in place would have also disadvantaged UK firms since it would restrict their trading to solely within the UK.
“The abolishment of the STO is the right thing to do to help make the UK more competitive and allow investors to access the best possible deals wherever they are available.” the expert said.
“However, it will make it hard for the UK and EU to agree on equivalence if the UK abolishes this.”
Stablecoins and “digital settlement assets” are being brought into the regulatory perimeter. They will be overseen under the same approach as the payments industry. Both the FCA and BoE would gain regulatory oversight. The FCA will look after consumer protection and fraud while the BoE’s jurisdiction will be under the lens of protecting financial stability.
Both BoE deputy governor Sir Jon Cunliffe and incoming FCA chair Ashley Alder have advocated for this approach.
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The bill would also enable the creation of “Financial Markets Infrastructure Sandboxes”, which would allow firms to test new technologies and propositions under real market conditions.
One of the more controversial additions is that UK regulators should also consider “growth” as a secondary objective.
Though financial stability and consumer protection remain the primary objective of regulators, how regulation affects the UK’s competitiveness will now be something they will also need to factor in.
In a speech at UK Finance’s offices on 20 July ahead of the publication of the bill, Prudential Regulation Authority executive director for authorisations, regulatory technology and international supervision, Nathanaël Benjamin, said “it’s important that [the competitive objective] is secondary.”
With more shocks set to rock markets over the next decade, he added, “safety and safe spaces will be very important”.
“That’s how we think about things from a competitiveness point of view. You want the UK to be attractive because of its safety, not in spite of it.”
To contact the author of this story with feedback or news, email Jeremy Chan