FCA targets tokenisation amid reform push

Speaking at the ISDA Derivatives Trading and Treasury Forum in London on Wednesday, Jon Relleen, director of infrastructure and exchanges, supervision, policy and competition - markets at the FCA, said the revised transparency regime had significantly increased the proportion of derivatives transactions visible in real time.

“Under the old regime, only up to 10% of reportable OTC derivatives could be observed in real time, and that's now increased to 55% to 65%. So a big jump,” Relleen said in a speech. “We wanted to increase transparency, clearly, but on the other hand, we're conscious of allowing dealers to provide liquidity too. We think the first nine months of the regime suggests that we struck a decent balance.”

The new rules, which went live in December last year, has also delivered a 70% increase in corporate bond trades visible in real time and a 30% increase for government bonds. The FCA plans to review its calibration following its first months of operation.

Relleen said: “Bond and derivative traders now have a much clearer understanding of the market. Middle and back offices are better able to lower risk, and the data is a goldmine for research and analysis of market dynamics.

“That also makes the UK market easier to understand for new participants, including those overseas, which should be positive for the efficiency and competitiveness of UK markets.”

Relleen's comments build on the FCA's recent push to move tokenisation beyond testing and into production. FCA chief executive Nikhil Rathi said last week that firms want to move beyond experiments and regulatory sandboxes towards permanent infrastructure, with traditional exchanges increasingly expected to operate alongside on-chain markets and tokenised derivatives. Rathi said post-trade processes and more efficient collateral movement were among the main opportunities identified by market participants.

FCA pushes tokenisation towards live markets

UK authorities are committed to developing tokenised wholesale financial markets, Relleen with a vision of “a digitally enabled system where tokenised securities, cash and collateral move seamlessly, supporting more efficient issuance, trading and post-trade processes”.

“But we also want to remain safe, resilient, and anchored to central bank money,” he said.

The UK's Digital Securities Sandbox has 16 applicants through its first stage, with two progressing towards live activity. Authorities are also working on tokenised securities and collateral and synchronised settlement in central bank money.

“But we are at a critical point in this journey,” Relleen said. “Firms will only invest and innovate if they have confidence in the regulatory framework.”

The FCA and Bank of England published a joint vision for tokenised wholesale markets in May, with industry feedback calling for certainty around prudential treatment, custody and market infrastructure.

“We share a sense of urgency. Our objective is simple: to provide the clarity firms need to innovate while ensuring markets remain safe, resilient, and trustworthy,” Relleen said.

“In November, we'll publish a roadmap so the industry can see where we go from here in terms of regulatory plans and how these interact with tokenisation work led by other parties,” he said, highlighting industry working groups with a particular focus on repo markets. “The overall key message is the UK must keep pace with global development, and that crucially requires partnership between the public and the private sector. Policy clearly has a role to play, but industry leadership is possibly even more critical here.

“We want UK firms to establish use cases and move from pilot to reality, as was discussed earlier, and we, as the regulator, want to help, not hinder.”

FCA targets derivatives reporting burden

Relleen also outlined plans to simplify derivatives regulation and transaction reporting, with the FCA and Bank receiving around 38 million transaction reports each day and more than seven billion annually.

In July, the regulators launched a task force to harmonise UK MiFIR and Securities Financing Transactions Regulation reporting.

“We definitely want to reduce unnecessary duplication in terms of what's reported across those regimes, and we want to improve data quality while doing it. So hopefully, that's a win-win for everyone,” Relleen said. “We definitely want to streamline and reduce reporting costs for firms, but it is also critical to ensure that the data is as useful as possible for us too.”

The FCA has also implemented a more focused commodity derivatives regime and proposed permanent exemptions from margin requirements, with final rules expected shortly.

Relleen said the regulator is working with the Treasury on the UK EMIR clearing threshold regime, which has been identified as a priority area for reform.

Relleen's comments came at the same ISDA event where chief executive Scott O’Malia said tokenised collateral could support continuous margin movement as derivatives markets move towards 24/7 trading. O’Malia said market participants and clearing houses need to move collateral continuously without existing bottlenecks, with tokenisation potentially improving intraday liquidity management and collateral mobility.

Bank of England executive director Nat Benjamin also told the event on Wednesday that greater central clearing and appropriately designed cross-margining could improve balance-sheet and collateral efficiency in government bond repo markets. Benjamin said cross-margining could “improve collateral efficiency and reduce unnecessary liquidity demands where genuine risk offsets exist”, while cautioning that those offsets must reflect genuine reductions in risk.