Swiss Federal Council commissions revision of Financial Market Infrastructure Act FMIA

Background

On 30 September 2022, the Swiss Federal Council instructed the Federal Department of Finance (FDF) to prepare a consultation draft to amend the Financial Market Infrastructure Act (FMIA) by mid-2024.

The report of the Swiss Federal Council proposes a comprehensive review and potential adaptations of the FMIA to market realities, regulator expectations and international standards.

Seventy-five points are expected to be reviewed and potentially amended, such as among others:

• simplification of conditions to recognise foreign trading venues;
• counterparties categorisation in cross-border scenarios;
• introduction of a formal obligation for certain DLT trading facilities to implement preventive liquidation plans;
• introduction of specific resolution instruments in case of insolvency, particularly for CCPs;
• introduction of a definition of algorithmic trading and high-frequency trading in the FMIA or FMIO.

The report also suggests the review of certain existing rules, such as short-selling rules, potential interactions between payment systems/transactions and FinTech as well as transparency requirements for ETFs and ETPs in order to determine any need for action.

This contribution is an overview of certain proposed modifications with a focus on a new definition of OTFs as well as clarification on CSD and payment system definitions, transaction reporting, shareholding disclosure and market abuse provisions.

New definition for organised trading facilities (OTFs)

A new definition of OTFs should be introduced. Experience shows that the current definition is not always clear, in particular as to whether trading facilities for CFDs and FX should be in scope. Certain market participants offering such products have already been challenged under their existing business model, but lack of clarity in the current definition set out in the FMIA, despite a Circular issued by the Swiss Financial Market Supervisory Authority (FINMA) aiming at providing clarifications, makes the application of existing rules hardly practicable. The amended definition, if adopted, might impose new obligations for those participants. In the same vein and in an effort to increase transparency, it is expected that the FINMA should maintain a list of OTFs.

Clarification on definition of central securities depository and custodian

A central securities depository (CSD) is either providing central custody of securities and other financial instruments and/or securities settlement, both activities being based on uniform sets of rules and procedures. In practice, the frontier between a CSD and a custodian of intermediated securities, which can include banks and securities firms that maintain securities account, may be blurry. As a reminder, intermediate securities are personal or corporate rights of a fungible nature against an issuer, which are credited to a securities account, and may be disposed of by the account holder in accordance with the provisions of the Federal Intermediate Securities Act (FISA). According to the Swiss Federal Council, regulation should clarify cases where a FISA custodian also requires a CSD authorisation under FMIA.

Payment transactions and systems

Under current FMIA rules, a payment system requires authorisation from FINMA only if this is necessary for the proper functioning of the financial market or the protection of financial participants and if the payment system is not operated by a bank, the Swiss National Bank (SNB) or on its behalf. There is however no quantitative threshold set in the FMIA or its implementing ordinance.

Against this background, the Swiss Federal Council proposes the introduction of a quantitative threshold in the FMIA whose payments systems would not be subject to the FMIA. This clarification is welcomed since in practice there is a certain degree of legal uncertainty as to potential application of FMIA provisions on payment systems. A level playing field is also contemplated for banks operating payment systems. Currently, such banks are not by law subject to the requirements for payment systems.

Improving data quality and information exchange

Data quality submitted to trade repositories (TRs)

Currently, reports submitted to TRs are based on a reporting template annexed to the Financial Market Infrastructure Ordinance (FMIO). Data reported may differ depending on the reporting counterparty and the relevant TR. According to the Swiss Federal Council, there is a certain lack of harmonisation hindering the capacity of authorities to aggregate and evaluate the data properly.

From a market participant perspective, reporting to TRs has not always been well understood due to this lack of clarity and precision in reporting fields. This question of the reporting is critical and important in practice from an operational perspective. In this context, it is suggested to align Swiss reports with international technical standards such as those on Legal Entity Identifiers (LEIs), Unique Transaction Identifiers (UTIs), Unique Product Identifiers (UPIs) and other critical data elements, which are included in the international ISO standard 20022.

Data exchange among regulators

The Swiss Federal Council also wishes to improve the exchange of information between authorities and foreign TRs. This should be implemented via an alignment with international standards and the adjustment of provisions on the exchange of data as part of administrative assistance.

Simplifications for small non-financial counterparty (NFC-)

Reporting duty

Currently, the only case in which a small NFC (NFC-) must report is when entering in a transaction with a foreign counterparty that does not report to a TR under Swiss law. In other scenarios, no reporting is required, including when the transaction takes place between two NFCs-. This situation is not satisfactory from a cost and operational perspective, and the relevance of such reporting for supervisory purposes is questionable. The Swiss Federal Council seems to have taken measure of the situation and is now proposing to abolish the reporting duty for small NFCs- completely. While waiting for this proposal to materialise and avoiding unnecessary implementation in the meantime, the reporting duty for derivatives transactions for NFCs- should enter into force with effect from 1 January 2028. This postpones the entry into force of such reporting, which was initially set to enter into force on 1 January 2024.

Clearing threshold monitoring

The Swiss Federal Council also proposes to align the rolling-average threshold calculation method on EMIR Refit. This means that the 30-day rolling average determination of positions of an NFC against the clearing thresholds should be replaced by an annual determination. This simplification aligned on EU regulation is a good news for NFCs since calculation requirements are relatively cumbersome.

Shareholding disclosure

Initial reporting threshold

As of now, the shareholding disclosure regime kicks in as soon as the 3% threshold is hit. This Swiss specificity is not in line with generally accepted international standards where the first reporting threshold is set at 5%. The increase of the initial reporting threshold is also a good news for investors (particularly, the smallest ones) as it will be easier for them to coordinate their notifications across various jurisdictions. In principle, the takeover law notification initial threshold should be aligned with that of the shareholding disclosure regime.

Reduction of complexity for certain specific reporting constellations

The Swiss Federal Council also desires an overhaul of the notification duty mechanism for collective investment schemes, where the Swiss Supreme Court recently intervened and clarified the scope of current FMIA provisions, but also for reporting in case of capital increase, firm undertaking and lock-up groups. Generally, the notification duty triggered by change in information previously disclosed currently set out in the FMIO-FINMA (a level three regulation) should also be reviewed to determine whether improvements are possible.

Finally, the Swiss Federal Council is questioning the reporting mechanism and wondering whether it should be those subject to the notification duty rather than the issuers, who should enter the disclosure notifications on the platforms operated by the disclosure offices. For the time being, an investor subject to the notification duty is required to submit its application to the disclosure offices as well as to the issuer and, on that basis, the issuer is required to enter the data submitted on the platform operated by such offices.

Sanction regime relief

Given that shareholding disclosure requirements are quite complex, it is not uncommon to have minor and negligent breaches of shareholding reporting duty. According to existing provisions in the FMIA, even minor negligent breaches are punishable and no materiality test applies. Based on this relevant observation, the Swiss Federal Council is proposing to limit criminal liability to material breaches of the notification duty. This proposal is to be welcomed. Engaging criminal proceedings for non-material breaches that do not undermine the purposes of the disclosure regime is more about excessive formalism rather than protecting market integrity and transparency.

Market abuse

Centralisation of reporting and trading supervision / order recording

The Swiss Federal Council calls for a complete redesign of the supervision system by the creation of a central trading supervisory body and a central reporting office (currently both existing exchanges, BX and SIX have their own bodies and offices).

To facilitate detection of transaction-based market manipulation as well as their reporting, it is envisaged that participants in a trading venue or DLT trading facility in Switzerland will be required to record information on the client/principal when entering the trade in the order book. This requirement will lead to a harmonisation of the Swiss rules with the European regulation. Along with this requirement, market participants will have to look at the practical modalities in due course to anticipate cost and operational phases (e.g. proper internal procedures, IT software and processes, data safekeeping/storage).

Insider lists

The Swiss Federal Council proposes obliging issuers to keep insider lists by formalising this requirement explicitly in the FMIA. In doing so, the Swiss Federal Council intends to facilitate the FINMA's investigation and follow the path of EU regulation. At this stage, no specific detail is given on the content of such lists, but available templates compliant with the EU Market Abuse Regulation (MAR) should give a good sense of the required rubrics.

Further, it is expected that provisions on ad hoc publicity and management transaction, which are currently governed by exchanges rules, will be transferred in the FMIA and FMIO. The Swiss Federal Council recognises that this shift constitutes a restriction of self-regulation issued by exchanges, but it takes the view that a formal legal basis will ensure better enforceability and a wider international acceptance of Swiss regulations.

Sanction regime revision

The Swiss Federal Council proposes an overhaul of the sanction regime, in particular:

• the inclusion of transaction-based market manipulation in the criminal law provisions. Such market manipulation are currently not captured by criminal provisions set forth in the FMIA, even if administrative enforcement may apply;
• abolition of the three offender categories for insider trading offences;
• review of the criteria that allows prosecution authorities to qualify insider trading or price manipulation as a crime; this may have the consequence of expanding predicate offences for money laundering.

In general, these proposals are coherent and in line with developments observed in practice. Even if they may lead to reinforcement of the sanction regime, this would not be inconsistent with general European and international trends.

Outlook

The positions taken by the Swiss Federal Council and the instructions given to the FDF are generally moving in the right direction. Simplification of various requirements for market participants in general or particular cases and alignment with EU and international standards is a good signal for the industry and also for other governments and supervisory authorities.

Nothing, however, is perfect. For instance, new definitions of OTFs might capture CFDs and FX trading facilities. The proposal of the Swiss Federal Council may reveal the willingness of Swiss authorities to take a harder stance with certain market participants, which are already regulated. Even if this vision is debatable, should a new definition finally be adopted, it will become important to put in place intelligible implementing provisions tailored to the Swiss market. This would avoid the creation of new layers of unnecessary complexity that could have a detrimental side effect on the competitiveness of certain Swiss platforms.

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