On 22 September 2022, the Financial Conduct Authority (FCA) published CP22/18 (Guidance on the trading venue perimeter), a paper consulting new guidance which aims to ensure that firms have greater certainty about the permissions required to carry on their business. This guidance will be available in the Perimeter Guidance Manual (“PERG”) section of the FCA’s Handbook, as well as Questions and Answers (Q&As) on the application of the general guidance to specific types of arrangements in financial markets.
Why this matters
Trading venues require certain permissions in order to carry out their operations. With the release of this new guidance, certain definitions and categorisations of venues have been altered or re-outlined, meaning venues should now check whether the necessary permissions have changed or not.
Greater clarity about the perimeter helps to maintain a level playing field, support competition and help protect the integrity of the UK financial system. The proposed guidance will have an indirect positive impact on investor protection be ensuring that all arrangements which constitute a multilateral system are appropriately regulated, in order to secure an appropriate degree of investor protection. This necessity for greater clarity has grown in recent years due to a combination of technological developments and the evolution of the definition of what a multilateral system is.
This Consultation Paper is part of the Wholesale Markets Review (WMR), conducted by the FCA and HMT. In the WMR of 2022, HMT recognised the need for greater clarity about the types of firms which need to be authorised as a trading venue. The Paper is a response to the HMT’s recommendation.
This is relevant to the groups mentioned above because a firm does not require authorisation as a trading venue if it is not considered to operate as a multilateral system (although it must still consider how its arrangements relate to Article 25 of FSMA 2000 and RAO 2001):
- Arranging (bringing about deals in investments). Making arrangements for another person, whether as a principal or agent, in order to buy, sell, subscribe for or underwrite a particular investment.
- Making arrangements with a view to transactions in investments.
The guidance aims to ensure that the trading venue regime is more consistently applied and understood. This in turn would protect and propagate market integrity, as well as continuing to encourage competition. Since the UK’s withdrawal from the EU, this has been an opportunity for the FCA to review areas of potential uncertainty, or where industry lacks clarity and consider approaches which are better tailored to the specificities of the UK market..
It is important to state that the FCA is not attempting to alter or modify the trading venues perimeter as that would require legislative change. It is instead proposing guidance to clarify what constitutes as a multilateral system, focusing on the key areas of:
- Investment-based crowdfunding firms operating primary market platforms – The proposed guidance indicates that a crowdfunding platform in which business funding interests of an issuer and the investors are matched, is not a multilateral system.
- Bulletin boards – The proposed guidance clarifies demarcation between multilateral systems and bulletin boards.
- Tech providers – Proposed guidance draws a distinction between general purpose communications systems and multilateral systems.
- Voice brokers – Guidance clarifies that arranging/executing client orders over the phone without operating a trading system or facility does not constitute as a multilateral system.
- Portfolio managers operating internal matching systems – The proposed guidance sets out the circumstances where the executions of trading interests by a portfolio manager is not a multilateral system.
- Blocking onto trading venues – The proposed guidance indicates that where a firm operates a system for the purpose only of blocking trades onto a trading venue consistent with the intentions of the parties to the underlying transactions to trade on a trading venue, these arrangements do not amount to the operation of a multilateral system.
Based on this information, the FCA also proposes updating definitions in its Handbook such as that given for service companies, as this definition uses terminology from before the implementation of MiFID in 2007.
With regards to existing guidance, the FCA proposed that the Q&As previously published by the European Securities and Markets Authority (“ESMA”), which deal with the trading venue perimeter should not be used when the FCA issues its final guidance on this subject. This is to avoid uncertainty for the firms.
A breakdown of the more basic elements of a multilateral system is also provided:
- 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.
- Those trading interests are in financial instruments.
There are Q&As in the Consultation Paper, which is open for comments from now until 11 November 2022. If you disagree with any of the definitions given or decisions taken, the First Annex gives interested and/or affected readers the opportunity to give their own opinion on the subject.
Who this affects
All: trading venues, service companies, investment-based crowdfunding, platforms operating in primary and/or secondary markets, interdealer brokers, broker dealers, portfolio managers, technology firms offering platforms and systems for trading, firms providing communications systems or bulletin board services, appointed representatives providing or using communications systems or bulletin board services, and their principals. .
