Changes to UK MiFIR

The UK Government’s Wholesale Market Review¹ proposed a number of changes to the UK MiFIR² regime. Some of these have been included in the recent Financial Services and Markets Act 2023 (FSMA23).

These have been drafted as “Transitional Amendments” to UK MiFIR with the intention that the entire regime ultimately be replaced as part of the UK Government’s review and replacement of EU-based regulation.

Some of the proposed amendments to UK MiFIR are due to take effect on 29 August 2023 and other changes will require further consideration by the FCA, as summarised below.

1. Changes Taking Effect on 29 August 2023:

• The Share Trading Obligation³ will no longer apply, allowing UK investment firms to trade shares on the most liquid markets, regardless of whether that is a UK or non-UK market.
• The Derivatives Trading Obligation⁴ is amended to make the scope more aligned with the clearing obligation under EMIR. From 29 August, it becomes applicable to “relevant financial counterparties and relevant non-financial counterparties”, where a relevant financial counterparty is a financial counterparty subject to the clearing obligation and a non-financial counterparty (NFC) is a relevant NFC in respect of a class of derivatives if it is subject to the clearing obligation in respect of that class.

The double volume cap⁵ mechanism for limiting use of pre-trade transparency waivers for equity instruments (the reference price waiver and the negotiated transaction waiver) will cease to apply. Consequently, these waivers will be available without being restricted by volume of trading.

• Systemic internalisers (SIs) are currently required to make public firm quotes in respect of equity instruments traded on a venue for which they are the SI and for which there is a liquid market⁶. SIs may decide the sizes at which they quote according to classes into which they are grouped, such grouping being allocated on the basis of the arithmetic average value of the orders executed in the market for that instrument. The FCA have been given the discretion to determine these classes otherwise than on the basis of the arithmetic average value of orders for a transitional period extended to four years from the Brexit implementation date or earlier if the UK Treasury directs.
• Currently, SIs are permitted to match orders large in scale (LIS) at mid-point within the current bid and offer prices⁷. FSMA23 amends requirements to permit SIs to match any orders at mid-point not just LIS orders.

2. Other FSMA23 Changes to UK MiFIR

A number of the changes to UK MiFIR set out in FSMA23 do not yet have a commencement date and these include the following changes:

• the FCA will be empowered to make technical standards relating to pre-trade transparency for equities;
• the FCA will be empowered to make rules granting or suspending waivers in relation to pre-trade transparency for equities;
• provisions relating to pre- and post-trade transparency for non-equity instruments will be removed (in relation to venues, SIs and investment firms) and FCA given powers to make new rules;
• the definition of a Systematic Internaliser will be amended so that the determination of whether a firm’s dealing is “organised, frequent, systematic and substantial” will be determined by rules to be made by the FCA (this will be a move from a quantitative to a qualitative determination);
• the FCA will be given the power to suspend or modify the Derivatives Trading Obligation;
• the FCA will be given the power to make rules determining that the Derivatives Trading Obligation not apply in relation to activities or transactions of a specified description carried out as part of a risk reduction service.

3. Further Changes to UK MiFIR

The Wholesale Markets Review made a number of other recommendations not covered by FSMA23. In most of these cases, policy determination will follow implementation of the Future Regulatory Framework Review⁸. In addition, the FCA is consulting on changes to develop a consolidated tape⁹ and the FCA have published rules that are due to take effect on 29 April 2024 affecting post-trade transparency for equities and the entity-level designated reporter regime¹⁰.

4. Changes to EU MiFIR

The EU are also making changes to their MiFIR regime and a political agreement was announced in respect of this on 29 June 2023. These changes are expected to start taking effect from January 2024 and we will be providing a separate update on this.

5. Next Steps

We will continue to monitor and report on developments in this area. Please reach out to your usual Akin contact or to the authors for further information.

^{1 Consultation Response available here: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1057897/Wholesale_Markets_Review_Consultation_Response.pdf}

^{2 The UK retained law version of Regulation (EU) No 600/2014}

^{3 Article 23 UK MiFIR – the Share Trading Obligation requires an investment firm to ensure the trades it undertakes in shares that are admitted to trading on a regulated market or traded on a trading venue shall take place on a regulated market, MTF or UK systematic internaliser or a third country trading venue deemed equivalent by HM Treasury, unless their characteristics include that they: (a) are non-systematic, ad hoc, irregular and infrequent; or (b) are carried out between eligible and/or professional counterparties and do not contribute to the price discovery process.}

^{4 Article 28 UK MiFIR – Subject to certain exemptions, the Derivatives Trading Obligation requires trading in specified classes of derivatives to be carried out on a regulated market, MTF, OTF or a third country trading venue deemed to be equivalent.}

^{5 Article 5 UK MiFIR}

^{6 Article 14 UK MiFIR}

^{7 Article 17a UK MiFIR}

^{8 See here for the FCA’s page on this: https://www.fca.org.uk/publications/corporate-documents/future-regulatory-framework-review-reforms}

^{9 https://www.fca.org.uk/publications/consultation-papers/cp23-15-framework-uk-consolidated-tape}

^{10 https://www.fca.org.uk/publication/policy/ps23-4.pdf}