In this Sidley Update, we cover, among other things, UK Financial Conduct Authority (FCA) compliance matters, including the 2022-23 FCA Business Plan, FCA thematic review on wind-down planning, joint statement from UK Financial Regulation Authorities on London Metal Exchange (LME) and LME Clear, the European Securities and Markets Authority (ESMA) final report on review of certain aspects of the Short Selling Regulation (SSR), and updates on the EU Markets in Financial Instruments Directive (MiFID II), the Securitisation Regulation, and European Market Infrastructure Regulation (EMIR).

1. UK — FCA Compliance Matters

2. UK — LME

3. UK — Securities Financing Transactions Regulation

4. UK — Cryptoassets

5. EU — Short Selling Regulation

6. EU — MiFID II

7. EU –  Securitisation Regulation

8. EU – EMIR  

1. UK — FCA Compliance Matters

FCA 2022-23 Business Plan and Three-Year Strategy

On 7 April 2022, the FCA published its 2022-23 Business Plan, setting out its priorities for the year ahead (Business Plan), together with a Three-Year Strategy to improve outcomes for consumers and in markets throughout the UK (the Three-Year Strategy). The Three-Year Strategy sets out a new vision for a different FCA that will be “more innovative, more assertive, more adaptive.” In particular, regulated firms can expect to see the FCA using its powers more proactively in the following manner:

being tougher on firms who want authorisation to operate in the UK, using data more systematically to ask the firms we supervise more rigorous questions and using our enforcement and intervention powers more actively, pushing the boundaries where we need to.

The FCA has grouped its commitments into the following three areas and outcomes:

  • Reducing and preventing serious harm, through (i) removing problem firms (i.e., those that do not meet minimum regulatory standards) from financial services markets; (ii) improving the redress framework; (iii) reducing harm from firm failure by minimising wider fallout; (iv) improving oversight of Appointed Representatives (AR) to reduce poor conduct (it notes principal firms using ARs generate up to 400% more complaints and supervisory cases than other directly authorised firms); (v) reducing and preventing financial crime by joining up actions across sectors and working with partner agencies to provide a “whole system” response; and (vi) delivering assertive action on market abuse, by increasing the resilience of financial services markets and detecting and taking decisive action.
  • Setting and testing according to higher standards, through (i) putting consumers’ needs first by focusing on the FCA’s proposed Consumer Duty and the outcomes consumers get; (ii) enabling consumers to help themselves through targeted action to ensure promotions are clear, fair, and not misleading; (iii) promoting a strategy for positive change by delivering on the FCA’s recent ESG strategy; and (iv) minimising the impact of operational disruptions by testing firms’ resilience to inevitable operational disruptions.
  • Promoting competition and positive change, through (i) preparing financial services for the future by tailoring the FCA’s rules to better suit UK markets in a global context; (ii) strengthening the UK’s position in the global wholesale market; and (iii) shaping digital markets to achieve positive outcomes.

The FCA has outlined how it plans to deliver the commitments laid out in its Business Plan and the Three-Year Strategy and will for the first time hold itself accountable against published outcomes and performance metrics. It will focus on the outcomes of activities rather than the processes that are followed. As such, regulatory activities such as authorising firms and individuals, setting rules and standards, and supporting competition and innovation have been utilised to frame how the FCA will deliver on its commitments.

Finally, although the Business Plan does not provide any new information on the FCA’s forthcoming Consumer Duty, it is clear that it will be a priority item for 2022. In particular, the FCA plans to “make the Consumer Duty an integral part of our regulatory approach and mindset — including authorisation, supervision and enforcement priorities and processes.” The FCA is expected to publish its feedback statement on the Consumer Duty and any finalised rules and guidance by the end of H1 2022.

FCA publishes findings following thematic review on wind-down planning

On 11 April 2022, the FCA published its thematic review on wind-down planning across a number of different business models in light of the ongoing COVID-19 pandemic.

The FCA’s review found the following:

  • Considerable work is required to ensure that the wind-down planning of firms is credible and operable, particularly in relation to liquidity and cash-flow modelling, intragroup dependency, and wind-down trigger calibration.
  • Firms should evaluate how liquidity needs in wind-down will affect their assessment of resource adequacy, risk appetite, and point of non-viability.
  • Examining the results of wind-down planning is the best way of showing the firm’s board and governing body as well as the FCA that the plan and process is credible and operable.

The FCA has encouraged firms to incorporate these observations into their own wind-down planning and to do so in a way proportionate to the nature, scale, and complexity of their own activities. The FCA concludes that it may take the observations from this thematic review into consideration when performing a review of wind-down plans at a future date.

FCA publishes updated guidance on financial sanctions measures in relation to Russia

On 12 April 2012, the FCA published an updated guidance on financial sanctions measures concerning Russia.

Authorised firms and firms operating under the temporary permissions regime (TPR) are advised to notify the FCA without undue delay if they (or their ARs and agents) are subject to any sanctions, directly or indirectly, including sanctions listed by the office of Financial Sanctions Implementation (OFSI) as well as those listed by any other country or jurisdiction.

The FCA notes that a firm could be subject to sanctions in several ways including where it:

  • is directly named on a sanctions list;
  • is indirectly sanctioned via beneficial ownership/controller/shareholder; and
  • has directors or employees that are named on a sanctions list.

Firms are advised to notify the FCA in line with SUP 15 requirements through the usual reporting mechanisms, via the FCA Contact Centre, submitting a SUP 15 notification, or by contacting their FCA supervisor.

Firms are expected to provide the FCA with sufficient information, including the country that has imposed the sanctions, when the measures came into force, who is affected by the sanctions, and their analysis of how the sanctions affect their activities.

2. UK — LME

Joint statement from UK Financial Regulation Authorities on LME and LME Clear

Following the LME’s suspension of nickel trading on 8 March 2022 and subsequent resumption on 16 March 2022, the FCA, the Bank of England (BoE), and the Prudential Regulation Authority issued a joint statement on 4 April 2022. The statement notes, now that trading has resumed, the supervisory authorities expect LME and LME Clear to remain vigilant.

The FCA intends to review the LME’s approach to managing the suspension and resumption of trading, and the BoE will look into the operation of LME Clear during the affected period, in order to ascertain what lessons can be learnt in relation to both organisations’ governance and risk management. Skilled persons will be appointed, as per section 166 of the Financial Services and Markets Act 2000, to report on the reviews. The FCA and the BoE will consider the reports in determining future action.

The recent events around suspension and resumption of trading raise questions on the role of transparency in the LME and related markets. The FCA expects the LME to consider carefully how recent events should shape its future approach to market structure.

3. UK — Securities Financing Transactions Regulation (SFTR)

On 6 April 2021, the FCA announced that legal entity identifiers (LEI) of non–European Economic Area (EEA) third country issuers would not need to be reported under the UK version of the EU SFTR (UK SFTR) until at least 13 April 2022. This was put in place to reduce potential market disruption resulting from the large number of non-EEA third country issuers without a LEI.

On 1 April 2022, the FCA announced that it would extend the period during which reports under UK SFTR without the LEI of a non-EEA third country issuer will be accepted until 13 October 2022. The FCA explained that whilst industry has made further progress in wider LEI coverage, it is aware that many non-EEA third country issuers have still not acquired an LEI, which may affect reporting under UK SFTR after 13 April 2022.

In the interim, the FCA expects reporting counterparties to continue engaging with non-EEA third country issuers to obtain an LEI and to report an LEI for such issuers where available.

4. UK — Cryptoassets

UK regulatory approach to cryptoassets, stablecoins, and distributed ledger technology in financial markets

On 4 April 2022, the UK government published a response to a prior consultation paper that sets out its proposal to regulate firms “that issue or facilitate the use of stablecoins used as a means of payment,” by bringing such activities within the existing UK regulatory perimeter. The government also conducted a Call for Evidence on the investment and wholesale uses of distributed ledger technology (DLT) in financial markets and intends to support the industry in ensuring that regulations can accommodate tokenisation and DLT in financial market infrastructures (FMIs).


The UK proposes to regulate stablecoins “that reference fiat currencies, including a single currency stablecoin or stablecoin based on a basket of currencies” with such stablecoins to be defined as “payment cryptoassets.”

Please see our Update UK to Regulate Fiat-Linked Stablecoins (April 26, 2022) for a discussion of the UK government’s proposals.

Cryptoassets and DLTs in FMIs

Additionally, the Chancellor has announced that HM Treasury will partner with the FCA and BoE to develop an FMI Sandbox. This will support firms wanting to test new technologies or structures, in particular (but not necessarily limited to) DLT, to provide the infrastructure services that underpin markets (such as trading and settlement). The FMI Sandbox will be up and running in 2023. HM Treasury intends to legislate for powers that will enable it to set up the FMI Sandbox (and potentially multiple iterations of the Sandbox).

Unregulated tokens and new market developments

Looking ahead, the UK government will continue to assess the appropriate regulatory response to risks, opportunities, and regulatory issues relating to unregulated cryptoassets, and newer cryptoasset developments, namely decentralised finance. The UK government will continue to monitor this area of financial services and will work with the UK financial regulators and industry to consider appropriate future regulation.

5. EU — Short Selling Regulation

ESMA publishes final report on review of certain aspects of the SSR

On 4 April 2022, ESMA published its final report on the review of certain aspects of the SSR.

The final report proposes targeted amendments to the SSR aimed at, among other things, facilitating the operation of the SSR in any future emergency circumstances. The report focuses on three main areas:

  • An empirical analysis of the effects of the emergency measures adopted during the COVID-19 pandemic. ESMA would like to see amendments made to the rules that enable EU relevant competent authorities (RCAs) to issue long-term and short-term bans and for ESMA to be provided with intervention powers. ESMA notes that making these reforms will ensure that the procedure taken for issuing bans is sufficiently clear and efficient for RCAs to tackle emergency situations.
  • A review of the existing framework for the calculation of net short positions, the so-called “locate rule,” and the ESMA list of exempted shares. In this regard, ESMA proposes enhancements to the current rules against uncovered short sales by introducing recordkeeping requirements and proposing the harmonisation of sanctions.
  • A review of the framework for transparency and the publication of net short positions. ESMA proposes the introduction of a centralised system for publication and disclosure to the public of net short positions.

ESMA has submitted its final report to the European Commission for review, which is expected to provide technical support in relation to a potential review report of the SSR.

6. EU — MiFID II

European Commission adopts Delegated Regulation supplementing MiFID II in relation to Regulatory Technical Standards (RTS) for the application of position limits to commodity derivatives

Following a public consultation in May 2021, on 20 April 2022, the European Commission adopted a Delegated Regulation together with an annex supplementing MiFID II with regard to RTS for the application of position limits to commodity derivatives including procedures for applying for exemption from position limits. This framework aims to improve the stability and integrity of European financial markets.

The Delegated Regulation will replace the existing framework, RTS 21 to MiFID II. RTS 21 subjects national competent authorities to a harmonised method of calculating and applying position limits across commodity derivatives, traded on trading venues and economically equivalent over-the-counter contracts. Calls for changes to the existing framework have been introduced by the EU MiFID II quick fix package, with the aim of supporting European businesses to recover from the impact of the COVID-19 pandemic. Please see our January 2021 Update for further information on the EU MiFID II quick fixes that are likely to be of most relevance to investment managers.

Amongst other things, the Delegated Regulation:

  • specifies the criteria for the liquidity provision exemption and for the risk-reducing exemption for financial entities;
  • builds on the RTS 21 list of non-financial entities, while turning it into a positive list of legal or natural persons defined as financial entities; and
  • deletes securitised derivatives from the scope of the MiFID II position limits.

The Delegated Regulation will enter into force on the 20th day following its publication in the Official Journal of the European Union.

7. EU — Securitisation Regulation

EBA draft RTS specifying the requirements for originators, sponsors, original lenders, and servicers relating to risk retention under the EU Securitisation Regulation

On 12 April 2022, the European Banking Authority (EBA) published a final draft RTS specifying the requirements for originators, sponsors, and original lenders related to risk retention requirements under the EU Securitisation Regulation.

The draft RTS follows the initial publication of proposals in 2018, and the EBA’s June 2021 consultation.

Although the final draft RTS carries over a substantial part of the 2018 draft, several additional provisions have been included in the final draft RTS, addressing the extended mandate for the EBA on risk retention requirements following recent amendments to the EU Securitisation Regulation. The final draft RTS provides clarification on various aspects of the risk retention requirement, including:

  • requirements regarding the modalities of retaining;
  • the measurement of the level of retention;
  • the prohibition of hedging or selling retained interest;
  • the conditions for retention on a consolidated basis; and
  • the conditions for exempting transactions based on a clear, transparent and accessible index.

Regarding the new requirements proposed in the draft, the EBA notes that the additional requirements, particularly regarding some aspects of non-performing exposure (NPE) securitisations, should provide clarity on risk retention and may therefore contribute positively to the structuring of securitisation on the NPEs. However, other additional requirements may present challenges to the market, and this will likely require a significant effort by the supervisors for them to be implemented correctly (such as requirements on the fees paid to the retainer, the net value regime for NPE securitisations, the experience of the service, and the adverse selection of assets).

The final RTS will enter into force on the 20th day following its publication in the Official Journal of the European Union.

8. EU — EMIR

ESMA consultation on review of the EU central clearing framework under EMIR

On 1 April 2022, ESMA published its high-level response to the European Commission’s consultation of 8 February 2022 on the review of the EU central clearing framework. ESMA provides a set of measures for consideration that will support the EU’s objective of increasing the attractiveness of EU markets and reducing exposure to central counterparties located outside the EU.

Among other things, ESMA recommends:

  • revising the assessment for when bilateral margining and the clearing obligation should apply by moving away from the current approach of whether a derivative is over the counter or not to the approach of whether a derivative is cleared or not;
  • revising the clearing obligation procedure to be more agile and flexible by ensuring that any changes that may be considered and introduced for the clearing obligation procedure are also considered and reflected in the procedure for the derivative trading obligation, given the strong interdependency of the EMIR clearing obligation and the MiFIR derivative trading obligation;
  • reviewing the intragroup exemption framework for the clearing obligation and bilateral margining in the EMIR, notably the reliance on equivalence decisions under the current Article 13;
  • further coordination across public entities to voluntarily clear in the EU; and
  • the removal of the temporary exemption from the clearing obligation for Pension Scheme Arrangements.

The Commission’s consultation closed 22 March 2022. The Commission is expected to develop a legislative proposal amending the EU central clearing framework.