Today marks a regulatory milestone within the United Kingdom’s financial sector, as the newly established Financial Conduct Authority (FCA) has released the final annual report of the now-defunct Financial Services Authority (FSA), signalling the very last time that the FSA will produce the report on the year’s activities.
In this report, the FSA details all regulatory matters leading up to its extinction, which came about in April this year. It describes the progress the FSA made against its objectives during that period, as they were set in the Financial Service and Markets Act 2000.
Britain was a very different place when the FSA came into existence under the leadership of Baroness Margaret Thatcher, and London was a thriving stock trading city, with a very well established banking sector. Financial crises, IMF bailouts and bankrupt, nationalized banks were almost unheard of, and a new, empowered generation of twenty-somethings looked forward to a highly profitable career in the city’s “Square Mile” financial district.
Despite the City’s long financial history, however, the mere notion of being able to trade electronic currencies through highly complex platforms, via algorithms and across ultra-fast global networks back then would have appeared somewhat futuristic to say the least. Today, London is the world’s largest financial center, with a very established institutional FX industry and the FSA had earned itself a reputation as being one of the world’s most reliable regulatory authorities.
Baroness Thatcher, the nation’s first lady Prime Minister and one of the longest-serving British premiers ever to have been in office was a patriotic leader who truly transformed the economy of the nation, passed away on April 8 this year, the exact same day that the FSA was consigned to the history books.
FSA Committed Itself To FX Regulation In Twilight Years
In its 2012/13 Business Plan which was written during its penultimate year of existence, the FSA drew particular attention to the need to develop internationally consistent standards and it also participated in the international BCBS-IOSCO Working Group on Margin Requirements.
This group issued two consultations in July 2012 and February 2013 to support the development of internationally consistent margin requirements for non-cleared over-the-counter (OTC) derivative trades.
The FSA chaired the OTC Derivatives Regulators’ Forum (ODRF) where international regulators discuss derivatives reforms around OTC derivatives central counterparties (CCPs) and trade repositories. During the UK’s chairmanship of the ODRF, the FSA implemented arrangements for the cooperative oversight of ICE Clear Europe’s credit default swap (CDS) clearing service and LCH.Clearnet’s SwapClear interest rate swap clearing service.
The FSA also implemented, through the ODRF, an oversight protocol for DDRL, a UK based trade repository for credit, equity, interest rates and foreign exchange derivatives.
The FSA co-chaired the IOSCO Task Force on OTC derivatives and played an active role in monitoring the workstreams, regulatory developments, and investigative proceedings related to the CDS markets as requested by G20 and IOSCO Board.
The FSA was involved in the development of the Legal Entity Identifier (LEI) system which has the objective of introducing unique identification of parties to financial transactions, including OTC derivatives. The FSA was a member of the LEI Regulatory Oversight Committee which was launched in January 2013 and is responsible for overseeing and upholding the governance principles of the global LEI system.
Central Counterparty Clearing
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American regulatory authorities have drawn a strict line when it comes to trade repositories, and central counterparty clearing (CCP), as set out in the Dodd-Frank Act, and as such, the US government is going through the painstaking motions of establishing a transparent procedure for the operation of such reporting.
Whilst such regulation may well make its way into Europe via MiFID collaborations with the US government, the FSA concentrated its efforts toward resolution mechanisms for failing CCPs and financial market infrastructure.
During the course of last year, the British authorities worked closely to develop a domestic statutory resolution regime for UK based CCPs and related group companies. This legislation is in place and the regime will take effect once the statutory instruments have been finalized.
Britain’s authorities also developed a proposal for a new recognition requirement, which would oblige UK based CCPs to adopt loss allocation rules and recovery plans.
The Government published an informal consultation earlier in 2013 on this proposed recognition requirement and UK authorities will work together to review responses and to appropriately progress this workstream. In parallel, the FSA continued to work with UK based CCPs and their clearing members to promote the voluntary adoption of loss allocation arrangements ahead of any statutory developments.
MiFID II and Markets in Financial Instruments Regulation (MiFIR)
The FSA worked with the Treasury on the negotiation of the MiFID II and MiFIR. It is expected that both pieces of legislation will be finalized in 2013.
The aim of the changes to the existing legislation are to contribute to delivering enhanced transparency of financial markets and reduced systemic risk; to ensure that EU financial markets are robust and resilient in the face of technological change; to ensure that commodity derivative markets provide robust and consistent price discovery mechanisms; and to enhance existing levels of consumer protection.
The FSA also began work, through various different Standing Committees at the European Securities and Markets Authority (ESMA), on collecting information to facilitate the role ESMA will play in drafting technical standards and advising the Commission on delegated acts under the framework legislation.
HFT On The Agenda Again
The FSA uses the rather damning term ‘Market Abuse’ in its annual report to apply to a directive which the regulator had worked on and was due to be finalized during this year and 2014.
The new legislation is intended to widen significantly the scope of instruments covered (including those traded on multilateral trading facilities (MTFs) and Organized Trading Facilities as well as Regulated Markets), expand the dealing and manipulation prohibitions, including prohibitions against attempted manipulation and interference with benchmarks, and strengthen the investigatory and sanctioning powers of competent authorities across the EU.
Using transaction data the FSA identified the firms most likely to be engaging in high frequency trading and algorithmic trading, along with platforms where such firms operate.
This study sought to understand better the risks such firms pose to the FSA’s objectives and their compliance with FSA requirements. Firms were assessed based on the FSA’s existing rules in conjunction with the somewhat bureaucratic European Securities and Markets Authority (ESMA) guidelines on automated trading.
The demise of the FSA in April was met with a largely ambivalent response across the industry as the new Financial Conduct Authority (FCA) was brought into existence to oversee the financial services industry’s operations whilst the responsibility for maintaining financial stability of the country itself, including the monitoring and rule making associated with the banking sector and credit institutions which was handed over to the Bank of England’s Prudential Regulation Authority.