WIREDGOV

The Financial Services Authority (FSA) yesterday published a discussion paper that considers the potential issues raised for the FSA's oversight of markets for multilateral trading facility (MTF) shares. This is as a result of the proposed modernisation by Her Majesty's Treasury (HMT) of stamp duty relief on the trading of shares.

From November 1 the Government will extend the regime for intermediary relief for shares admitted to a regulated market to all intermediaries regardless of exchange membership and to all trades, including over-the-counter (OTC) trades. HMT is also considering similarly amending the relief for shares which are admitted to trading on multilateral trading facilities, such as AIM and Plus Markets.

Sally Dewar, FSA Director of Markets, said:

"These markets are an important component of the UK's financial system with nearly two thousand issuers admitted to trading solely on multilateral trading facilities. While recognising that the Treasury's modernisation of the stamp duty regime could facilitate an increase in competition and provide greater choice for market participants, the potential fragmentation of the market raises issues about how best to ensure markets remain efficient and orderly, and investors are protected.

"Our paper identifies a number of areas where action may be needed in order to ensure that adequate oversight of these markets is maintained. This paper seeks industry views on whether certain regulatory arrangements are best left to the market to devise or are better established by the FSA."

Competition and Fragmentation

The modernisation of the stamp duty regime for MTF shares would remove the need for intermediaries to conduct their dealings on one of the currently designated markets to qualify for the relief, and eliminate one of the obstacles to competition between trading venues for trading MTF shares. While the degree of competition is not easy to predict, increased competition should deliver a number of benefits including:

• downward pressure on explicit trading costs;
• stimulate innovation and improvements in trading systems; and
• attract wider participation.

However, there is a risk of liquidity fragmenting, and this would present challenges for the quality and efficiency of the market process and the effectiveness of market oversight. It is likely to impact in the areas of monitoring issuer disclosure, securing efficient price formation and monitoring for disorderly trading.

The paper invites discussion on possible ways of mitigating the risks, including more effective responsibilities for oversight of issuer disclosures and market oversight as well as greater trading transparency.

Notes for editors

1. Discussion paper DP07/3 - Trading of MTF shares: impact of proposed stamp duty changes.
2. The final date for submissions to this paper is 7 September. This is to allow the FSA time to discuss its feedback with HMT prior to the pre-budget report.
3. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
4. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.