Supervision of the Swedish securities market

Summary: 

In its supervision of the securities market, Finansinspektionen's (FI) goal is to promote a stable, well-functioning market that offers high consumer protection. For the second time, FI publishes its annual report "Supervision of the securities markets", in which it discusses issues that are considered relevant, and it also provides a presentation of the developments in the Swedish securities markets in the past year.

The report focuses on key elements of the Swedish market that are currently subject to regulatory or supervisory activities – the requirements following from the revised MiFID rules regarding transparency in the fixed income market, new rules regarding commodity derivatives trading, high-frequency trading and market abuse. The report also discusses the regulation and supervision of central counterparties and central counterparty clearing.

New transparency requirements in the fixed income market

In 2014 the EU agreed on updated rules for markets in financial instruments, the Markets in Financial Instruments Directive and Regulation, MiFID 2. The overall purpose is to create conditions for more efficient markets. One objective of the rules is to increase transparency in the fixed income markets. High transparency is generally positive for financial markets; it can narrow the information gap and therefore better protect investors. Increased transparency can also bring benefits such as improved competition on the market. At the same time, it cannot be ruled out that greater transparency poses risks, for instance depending on the underlying market and how mature it is. Market participants are concerned that the new rules for better transparency will have a negative impact on market liquidity.

In order to increase transparency on the fixed income market, new rules will include requirements to publish orders and transactions in real time. In order to reduce the identified risks, there will be exemptions from these rules. For example, instruments classed as illiquid will be exempted from the reporting requirement. FI has analysed how the new rules might affect trade in Swedish bonds and has found that the new transparency rules might actually reduce transparency on the Swedish fixed income market.

In February 2015 FI changed its practice in order to increase transparency on the Swedish corporate bond market, entailing that aggregate information about volume and prices for all transactions must be published before 9.00 the following trading day. In the autumn of 2015, FI evaluated the effects of this change in practice and concluded that the altered practice has not yet had any noticeable effect, either on sales or competition.

New rules and sanctions

MiFID 2 also introduces rules on high-frequency trading, and on trading in commodity derivatives.

High-frequency trading is software-controlled trading in securities. It is a type of trading that is associated with certain risks. When the speed of trading increases and the market for the same securities becomes fragmented, this can make liquidity volatile and unpredictable. The technological advantage of some market participants also raises the question whether trading occur on equal terms. In order to address the risks of high-frequency trading, MiFID 2 contains stricter requirements for systems and controls.

Another significant new feature resulting from the new MiFID regulations is that firms that trade in commodities might come under FI's supervision. The background of the heightened regulation of the commodities market is the sharp price fluctuations in 2007 and 2008. The commodities market is of great importance to global food and energy supply. One purpose of the rules is to limit which positions may be taken on those markets. The regulations bring about increased reporting to FI.

In July 2016, new rules regarding market abuse will come into effect – the Market Abuse Regulation (MAR) and the Market Abuse Directive (MAD 2). At the global political level, counteracting various types of market abuse, such as insider trading and price manipulation, has been considered important. Market participants might find it difficult to have confidence in a market on which manipulation occurs, or where there is a wide information gap between different participants. It is proposed in the new rules that administrative sanctions supplement the existing criminal system.

Central counterparties and clearing

A central counterparty is a firm which offers securities clearing and which is therefore important to financial stability. Through EMIR, many new rules have been introduced for clearing operations, and central counterparty clearing of certain securities will be compulsory, for example. FI supervises the central counterparties in close cooperation with other supervisory authorities and central banks as part of supervisory colleges. FI is currently leading the work in the supervisory college for Nasdaq Clearing AB.

EMIR also contains rules about which margin collateral a central counterparty may accept. An amendment to the exemption that expired on 1 March 2016, which has permitted unsecured bank guarantees as margin collateral, will affect the Swedish electricity and gas derivatives market. FI is therefore monitoring developments in this area.

Given the importance of the central counterparties to financial stability, it is important that plans are in place to manage a central counterparty that is likely to fail or has failed. In the past year, FI has reviewed recovery plans for financial infrastructure firms. FI can conclude that the firms have prepared recovery plans, but a fair amount of work on them remains to be done.