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UK plans rule changes to lure back EU share-trading flows



The UK wants to change its rules around share trading to adapt to life after Brexit, in an effort to entice EU share deals back to the City of London.

EU share trading quickly fled the UK after the full terms of the country’s departure from the bloc kicked in at the start of this year, with cities like Amsterdam and Paris picking up the slack for the €8bn-a-day business. The EU did not recognise UK stock exchanges as having standards equivalent to its own, which meant its institutions were barred from using London-based venues.

To redress the balance, the UK Treasury has said it would like to boost off-exchange trading venues known as dark pools. Other proposals under consideration include easing the minimum pricing increments, known as tick sizes, on lightly regulated private venues run by banks and high-frequency traders, according to people involved in the discussions.

The government will launch a full consultation over the summer in a review of the UK’s wholesale financial markets. An announcement may come as early as the start of July in chancellor Rishi Sunak’s annual speech in the City of London, say people with knowledge of the plans.

London has portrayed its reforms as “ambitious”, while also ensuring its rule book is fair, competitive and of the highest regulatory standards.

“The question is what the UK does post-Brexit without equivalence,” said Rebecca Healey, founder of Redlap Consulting, a capital markets consultancy. “There’s a political desire to find a benefit and demonstrate that Brexit is a good thing for the market. But running two rules books is something people don’t want. You have to be careful what you tweak,” she said.

Changes to the vast pan-European Mifid II package of market regulations would be needed for the UK to achieve its goals here, potentially opening up another fissure between British and European authorities over financial services.

But the prospect is also dividing market participants in London between those wanting more freedom to trade where they want, and those worried diverging rules will raise operational and technology costs and further fragment the market.

Line chart of Dark pool trades on major indices, % showing London investors trade in the dark

Dark pool restrictions have become one of the touchstones for those arguing EU standards do not fit UK markets. The UK has long been at odds with the EU on the venues, which allow fund managers to buy and sell large blocks of shares without disturbing the price on the market. The UK has long regarded them as a benefit to investors.

The EU, worried about the growth in off-exchange trading, set caps in 2013 on the amount of business that could be executed in dark pools, both in individual stocks and on one venue.

In February more than 16 per cent of trades in UK blue-chip stocks were conducted in a dark pool, a record and the highest of all major indices in Europe according to data from Rosenblatt Securities.

Those figures may rise further after the final set of caps, last imposed when the UK was part of the single market, rolled off in early June and the regulator said they would not be extended.

The Treasury also wants to kill an EU rule called the “share trading obligation”, which determines where shares can be traded and was designed to stop banks from matching their customers’ deals on their internal trading desks, bypassing the exchange and saving on fees.

“The UK could create an environment that results in UK venues regaining market share in EU stocks,” said Anish Puaar, market structure analyst at Rosenblatt Securities in London.

“EU firms wouldn’t be able to trade on these venues, but UK, US, Asian firms could. If a significant amount of EU share trading moves back to the UK, it will then be interesting to see how the EU reacts.”

But alongside deleting unwanted EU rules lies the issue of what replaces them, if anything.

A 2017 paper by the FCA found dark trading began to damage liquidity on the UK market once it reached more than 15 per cent of the total value traded.

Data from BMLL, a UK group, has highlighted the difficult problem policymakers face. The amount of dark trading in blue-chip French and German stocks in the UK has risen from 29 per cent in January to half the monthly volume in June, it found.

The gains came after the FCA in March made it easier to trade EU shares in London, cutting the trade size threshold that qualifies for a UK dark pool to just €15,000. That compares to €650,000 in the EU.

But Elliot Banks, head of product development at BMLL, said the shift to dark pools was more likely because of wider spreads — the difference between the price quoted to purchase a share and the level to sell — on UK exchanges. 

The findings underscore that in spite of the political rhetoric, brokers remain highly sensitive to cost and pricing across different markets. “The question will be whether it’s worth adjusting our order routing systems for the UK,” said one trader at a London investment bank.

“We must be careful not to win business back to the UK for the sake of it, but for what’s best for the UK market,” said Alasdair Haynes, chief executive of Aquis Exchange, the share trading venue.

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US regulators launch crackdown on Chinese listings




US financial regulation updates

China-based companies will have to disclose more about their structure and contacts with the Chinese government before listing in the US, the Securities and Exchange Commission said on Friday.

Gary Gensler, the chair of the US corporate and markets regulator, has asked staff to ensure greater transparency from Chinese companies following the controversy surrounding the public offering by the Chinese ride-hailing group Didi Chuxing.

“I have asked staff to seek certain disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective,” Gensler said in a statement.

He added: “I believe these changes will enhance the overall quality of disclosure in registration statements of offshore issuers that have affiliations with China-based operating companies.”

The SEC’s new rules were triggered by Beijing’s announcement earlier this month that it would tighten restrictions on overseas listings, including stricter rules on what happens to the data held by those companies.

The Chinese internet regulator specifically accused Didi, which had raised $4bn with a New York flotation just days earlier, of violating personal data laws, and ordered for its app to be removed from the Chinese app store.

Beijing’s crackdown spooked US investors, sending the company’s shares tumbling almost 50 per cent in recent weeks. They have rallied slightly in the past week, however, jumping 15 per cent in the past two days based on reports that the company is considering going private again just weeks after listing.

The controversy has prompted questions over whether Didi had told investors enough either about the regulatory risks it faced in China, and specifically about its frequent contacts with Chinese regulators in the run-up to the New York offering.

Several US law firms have now filed class action lawsuits against the company on behalf of shareholders, while two members of the Senate banking committee have called for the SEC to investigate the company.

The SEC has not said whether it is undertaking an investigation or intends to do so. However, its new rules unveiled on Friday would require companies to be clearer about the way in which their offerings are structured. Many China-based companies, including Didi, avoid Chinese restrictions on foreign listings by selling their shares via an offshore shell company.

Gensler said on Friday such companies should clearly distinguish what the shell company does from what the China-based operating company does, as well as the exact financial relationship between the two.

“I worry that average investors may not realise that they hold stock in a shell company rather than a China-based operating company,” he said.

He added that companies should say whether they had received or were denied permission from Chinese authorities to list in the US, including whether any initial approval had then be rescinded.

And they will also have to spell out that they could be delisted if they do not allow the US Public Companies Accounting Oversight Board to inspect their accountants three years after listing.

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Wall Street stocks climb as traders look past weak growth data




Equities updates

Stocks on Wall Street rose on Thursday despite weaker than expected US growth data that cemented expectations that the Federal Reserve would maintain its pandemic-era stimulus that has supported financial markets for a year and a half.

The moves followed data showing US gross domestic product grew at an annualised rate of 6.5 per cent in the second quarter, missing the 8.5 per cent rise expected by economists polled by Reuters.

The S&P 500, the blue-chip US share index, closed 0.4 per cent higher after hitting a high on Monday. The tech-heavy Nasdaq Composite index climbed 0.1 per cent, rebounding slightly after notching its worst day in two and a half months earlier in the week.

The dollar index, which measures the US currency against those of peers, fell 0.4 per cent to its weakest level since late June after the GDP numbers.

“Sentiment about the economy has become less optimistic, but that is good for equities, strangely enough,” said Nadège Dufossé, head of cross-asset strategy at fund manager Candriam. “It makes central banks less likely to withdraw support.”

Jay Powell, the Fed chair, said on Wednesday that despite “progress” towards the bank’s goals of full employment and 2 per cent average inflation, there was more “ground to cover” ahead of any tapering of its vast bond-buying programme.

“Last night’s [announcement] was pretty unambiguously hawkish,” said Blake Gwinn, rates strategist at RBC, adding that Powell’s upbeat tone on labour market figures signalled that the Fed could begin tapering its $120bn a month of debt purchases as early as the end of this year.

The yield on the 10-year US Treasury bond, which moves inversely to its price, traded flat at 1.26 per cent.

Line chart of Stoxx Europe 600 index showing European stocks close at another record high

Looking beyond the headline GDP number, some analysts said the health of the US economy was stronger than it first appeared.

Growth numbers below the surface showed that consumer spending had surged, “while the negatives in the report were from inventory drawdown, presumably from supply shortages”, said Matt Peron, director of research and portfolio manager at Janus Henderson Investors.

“This implies that the economy, and hence earnings which have also been very strong so far for Q2, will continue for some time,” he added. “The economy is back above pre-pandemic levels, and earnings are sure to follow, which should continue to support equity prices.”

Those upbeat earnings helped propel European stocks to another high on Thursday, with results from Switzerland-based chipmaker STMicroelectronics and the French manufacturer Société Bic helping lift bourses.

The region-wide Stoxx Europe 600 benchmark closed up 0.5 per cent to a new record, while London’s FTSE 100 gained 0.9 per cent and Frankfurt’s Xetra Dax ended the session 0.5 per cent higher.

In Asia, market sentiment was also boosted by a move from Chinese officials to soothe nerves over regulatory clampdowns on the nation’s tech and education sectors.

Beijing officials held a call with global investors, Wall Street banks and Chinese financial groups on Wednesday night in an attempt to calm nerves, as fears spread of a more far-reaching clampdown. Hong Kong’s Hang Seng rose 3.3 per cent on Thursday, although it was still down more than 8 per cent so far this month. The CSI 300 index of mainland Chinese stocks rose 1.9 per cent.

Brent crude, the global oil benchmark, gained 1.4 per cent to $76.09 a barrel.

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Man Group posts tenfold gain in performance fees




Man Group PLC updates

Man Group, the world’s largest listed hedge fund manager, reported first-half performance fees 10 times higher than a year ago, in the latest sign of the industry’s robust rebound from the coronavirus pandemic.

Strong commodity and equity markets helped take performance fees at the London-based company to $284m in the six months to June, up from $29m a year before when March’s huge market falls hit many fund returns, and the highest level since at least 2015. Performance fee profits were 50 per cent above broker consensus forecasts.

Man also posted $600m of net client inflows in the three months to June, its fourth consecutive quarter of inflows, although the figure was lower than analysts had expected. However, $6bn of investment gains in the second quarter helped lift assets under management to a record high of $135.3bn.

Column chart of Half-yearly performance fees ($) showing Man Group cashes in on market rebound

Man’s results highlight how strongly the $4tn hedge fund industry has bounced back after a turbulent 18 months for markets, including a huge sell-off last spring, as well as sharp market rotations and retail investor-driven rallies in meme stocks that some funds were betting against.

Last year, hedge funds, which have long been criticised for mediocre returns and high fees, made 11.8 per cent on average, according to data group HFR, their best calendar year of gains since 2009 in the wake of the financial crisis.

Investors have taken notice. After three years of net outflows, the industry has posted $18.4bn of inflows in the first half of this year.

Chief financial officer Mark Jones said the hedge fund industry was now benefiting from a tailwind after strong gains last year. “You saw hedge funds deliver exactly what clients wanted,” he told the Financial Times.

“Clients need new sources of return,” he added. They “are trying to reduce their bond exposure, and most have as much equity exposure as they can stomach”.

This year Man has made strong gains at its computer-driven unit Man AHL, named after 1980s founders Mike Adam, David Harding and Martin Lueck, which tracks trends and other patterns in markets.

Its $4.6bn AHL Evolution fund, which bets on trends in close to 800 niche markets, has gained 10.2 per cent so far this year and contributed $129m of the performance fees in the first half. The fund is shut to new money but Jones said that late last year it opened briefly to new investment, raising $1bn in a week.

Man’s first-half profits before tax came in at $323m, well above analysts’ forecasts. The company also said it would buy back a further $100m of shares in addition to the $100m announced last September. Broker Shore Capital said the company had posted “blowout” figures.

Man’s shares rose 2.4 per cent to 196 pence, their highest level in three years.

Last month, Man announced that chief investment officer and industry veteran Sandy Rattray would leave the company. Meanwhile, Jones is set to step down from the board and take on the role of deputy chief executive, overseeing the computer-driven AHL and Numeric units.

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