A venue, or not a venue, that is the question

Initially published by Thomson Reuters [24 November 2021], Shoosmiths partner Sam Tyfield below explores the Financial Conduct Authority’s policy and supervisory priorities in the areas of market abuse monitoring, data collection and the classification of a ‘venue’ - for the purposes of the FCA Handbook.

The Financial Conduct Authority (FCA) released Market Watch 68 on November 16, 2021. The newsletter provides an indication of the FCA's policy and supervisory priorities in the areas of market abuse monitoring, data collection and who/what is a "venue" for the purposes of the FCA Handbook.

In summary, the FCA is concerned that too many web-based trading platforms and operators are failing to comply with their obligations under the Market Abuse Regulations (MAR) or UK Markets in Financial Instruments Regulations (UK MiFIR) regimes.

There is some confusion about what constitutes a ‘web-based trading platform’. The FCA refers to all the following:

• "wholesale brokers (operators) introducing types of electronic trading platforms to increase access to liquidity and efficacy in trade execution";
• "growing use of periodic, continuous and dark liquidity, via web-based user interface (UI) portals, matching sessions and 'pop-ups'";
• "platforms now supplement traditional services in a hybrid broking model, working alongside central limit order book (CLOB) style platforms, within an organised trading facility (OTF) or multilateral trading facility (MTF)"; and
• "electronic execution platforms (whether part of the systems of a regulated market, MTF, OTF or systematic internaliser) [that] require formal connection and interface with a user's trading systems [and those that do not]".

‘Web-based trading platforms’ could therefore be execution venues, trading venues, any dashboard-type system or a hybrid broker-led arranging or dealing as agent client portal, whether accessed online or by a graphic user interface (GUI) or direct interface.

This is unlikely to have been an unintentional error, as the FCA clearly is concerned about the lack of data, know-your-client (KYC)/antimony laundering (AML) and surveillance/monitoring generally in fixed-income markets. Given that:

• these markets are systemically important to the UK (and volumes and liquidity are large), and
• market participants are seeking out and providing liquidity in an increasing number of different ways, what may not have been a "platform" previously now has taken on the characteristics of one. The FCA, then, is seeking to ensure that appropriate systems and controls, KYC/AML and data collection mechanisms are embedded in the markets as widely as possible.

This does blur the lines in terms of how to categorise the duties, responsibilities and roles of various firms. This is not the FCA's first rodeo in blurring previously understood lines. Some intermediaries now are treated as having "agency-like" relationships with clients and counterparties. The FCA never has been terribly keen on black-letter interpretation of rules (depending on the result that gives) and has always preferred firms to consider overarching principles.

Moreover, the concept of ‘chains of supply’ in the proposed ‘consumer duty’ brings wholesale and B2B firms within scope of that duty without any clear idea about to whom those duties are owed or what they must do to satisfy them. Those most in the ‘firing line’ of this particular blurred line will be intermediaries which may operate OTFs or MTFs, but also conduct more standard ‘investment firm’ activity.

The author has previously expressed concern that the FCA will look at the status of platforms which ‘look and feel’ like venues but are not so (whether due to how they are established or because the instruments/assets accessible on them are not ‘financial instruments’).

The author has had discussions with various contacts within the industry who, while they agree with him, do not believe that formal guidance on what is a ‘platform’ will be forthcoming.

Notwithstanding the adage that one should be careful what one wishes for, particularly as regards FCA guidance, the alternative to further guidance is ad hoc and individual interpretation by firms' supervisors. On balance, the author suggests an overall policy is better, even if the answer/guidance is not what one might have hoped.

The Futures Industry Association European Principal Traders Association (FIA EPTA) recently released a report about the evolution of some market participants from liquidity ‘takers’ to liquidity ‘makers’. If buy-side firms are using ‘new systems [to] help to solve traditional impediments in bond markets which prevent the buy-side from engaging with a more diverse and broader set of counterparties’, then the likelihood is that more of these ‘systems; will take on characteristics more common to traditional venues.

There are a few things all market participants should consider urgently:

1. How well do their compliance, surveillance and monitoring teams know the business (including relationships with counterparties, clients and/or members/users ) — this is a whole other topic because the FCA's view is that the answer should be “very well, but not too well and with a healthy dose of cynicism, but not too much cynicism".

2. What data are they capturing, providing and recording.

3. Are they relying on a nuanced or fairly ‘legalistic interpretation’ of any FCA rule to conduct business in a certain way.

4. If there was a knock on the door and one of Endeavour Square's finest said "you are operating a trading/execution venue", or "you are a SI", what would they say?

5. What “steps to ensure that [they] are monitoring all orders and transactions” would they need to take if the aforementioned finest asked them that question?

Nor will gold-plating compliance will be the answer. Beware the Catch-22. Imagine the alternative conversations as follows:

FCA: "Why aren't you collecting X data?"
Firm: "We're not a venue"
FCA: "Oh really? Why?"

or

FCA: "Why are you collecting X data?"
Firm: "To monitor for abuse"
FCA: "But that's an obligation only applicable to venues. Are you a venue?"
Firm: "No"
FCA: "Well clearly you are acting like you are, which must mean you think you might be, so which is it?"

Neither is good.