By Reiss Monioro, Compliance Consultant
On 5 November 2024, the UK’s Financial Conduct Authority (FCA) published its Policy Statement PS24/14, marking a significant step towards enhancing transparency in non-equity markets, specifically bonds and derivatives and the Systematic Internaliser (SI) regime.
This policy aligns with the UK’s ongoing efforts to promote market integrity and investor protection, while adapting its regulatory framework to post-Brexit market conditions.
Addressing the WMR review findings
The Wholesale Markets Review (WMR) conducted by the FCA in 2023 concluded that the existing bond and derivatives transparency regime implemented in 2018 as part of MiFID II / MiFIR had not delivered meaningful improvements in pricing transparency. It also only had limited impact on price formation whilst imposing a high cost on firms, particularly concerning over-the-counter (OTC) transactions. In addition, the inclusion of illiquid and bespoke instruments had proven problematic as, by their very nature, such instruments cannot deliver meaningful price transparency.
The FCA has therefore proposed a recalibration of the transparency regime to reflect more precisely the specific pricing dynamics of the bond and derivatives markets, tailoring reporting requirements to improve transparency effectively.
Implementation timeframe
The changes will come into effect on 1 December 2025, giving firms time to update their systems and processes to ensure compliance with the new reporting framework. However, according to transitional provisions set by the FCA, trading venues (MTFs/OTFs) using voice or request-for-quote (RFQ) trading methods, and SIs in bond and derivatives markets, will both become exempt from pre-trade transparency reporting obligations from 31 March 2025.
Key adjustments will be required for trading venues, Approved Publication Arrangements (APAs), and SIs.
Overview of the FCA’s new transparency requirements
The FCA has restructured the non-equity transparency regime by categorising instruments into two groups:
Category 1 instruments include bonds and a limited range of derivatives, currently those instruments subject to the derivative clearing obligations.
Transparency reporting obligations:
- Trading venues: Must provide both pre-trade and post-trade transparency (subject to any available exemptions for voice brokers or RFQ systems)
- Investment firms (OTC transactions): Required to comply with post-trade transparency obligations
Category 2 instruments include all instruments not included in Category 1, such as structured finance products and other debt securities like exchange-traded commodities.
Transparency reporting obligations:
- Trading venues: Obliged to provide adequate pre-trade and post-trade transparency for those that are not using either voice brokered or RFQ systems. They have the discretion to set thresholds for waivers based on factors like instrument liquidity and market conditions
- Investment firms (OTC transactions): Not required to publish post-trade reports for Category 2 instruments
Systematic Internalisers (SIs)
In its PS24/14 policy statement, the FCA introduced a qualitative definition for SIs, giving firms clearer guidance on determining if they meet SI criteria. This diverges from the EU’s strictly quantitative thresholds, providing more flexibility for UK firms to assess their status.
Key considerations:
- Restrictions in MAR 5.3.1A (3) would no longer apply. These rules relating to OTFs that reference SIs would be redundant if firms no longer need to identify themselves as SIs in bonds and derivatives
- Implications for best execution if firms are no longer identified as SIs in respect of bonds and derivatives
- Effectiveness of the current transparency regime for SIs and threshold considerations
The FCA notes that, with the implementation of the new SI definition on 1 December 2025, it would be good to try and implement substantive changes to the obligations applying to SIs prior to this date.
Next steps
- The FCA plans to engage with trading venues, investment firms and APAs to monitor and facilitate the orderly implementation of the new rules
- Following initiation of the tender process for appointing a UK bond consolidated tape provider in December 2024, the consolidated tape is expected to become operational after the new transparency rules take effect, providing a comprehensive source of bond market data
- The FCA intends to conduct a review of the bond and derivatives transparency requirements based on the first six months of data under the new rules. This review is expected to be completed before the end of 2026 and may lead to further adjustments to the regime
- A discussion paper on the future of the SI regime was published, with responses due by 10 January 2025. The FCA plans to consult on potential reforms in Q2 2025, aiming to implement any changes alongside the new qualitative approach to determining SIs by 1 December 2025
What do firms need to do?
Firms should assess their readiness and ensure that they fully understand the scope of the new rules including the revised pre-trade and post-trade transparency requirements. They must also ensure that their systems are prepared for the new transparency obligations.
The FCA expects firms to:
- Ensure trading venues are adhering to prescribed standards
- Assess their current arrangements to ensure they will be able to provide adequate transparency once rules take effect
- Be prepared to demonstrate eligibility to regulators – even those firms dealing in less liquid instruments that may benefit from waivers
- Review workflows to ensure compliance with the tightened timelines and improved data accuracy
How IQ-EQ can help
To discuss what the FCA’s updated non-equity transparency framework may mean for your firm, or to develop an implementation plan and find out more about the support available from IQ-EQ’s expert regulatory compliance consulting team, please contact us today.
As a first step, we would propose to undertake a cost-effective impact assessment of your firm’s transparency reporting obligations, either under the transitional provisions from 31 March 2025 or upon full implementation of the new regime from 1 December 2025.
