The FCA published CP 15/43 (CP) , the first of its consultation papers on the implementation of the Markets in Financial Instruments Directive II.

With further EU Level II legislation still pending, the CP is limited to areas "where the FCA have sufficient certainty about the MiFID II legislation to be able to make proposals for implementation."

The CP sets out the draft rules, some representing changes to existing FCA rules, on trading venues, transparency, market data, algorithmic and high frequency trading, passporting and branches of non-EEA firms, the impact of MiFID II on the FCA Principles for Businesses and additions to the FCA Perimeter Guidance to deal with new instruments, such as structured deposits.

Much is still to come including changes to COBS and SYSC and the CP is a taster in terms of likely volume and general relevance of further draft rules.

The FCA also identifies important provisions in the Markets in Financial Instruments Regulation on which it cannot consult but the list is useful in indicating those areas of directly applicable EU regulation which the FCA considers to be particularly important.

The content of the draft rules is unsurprising given that MiFID II and MiFIR, together with draft Level II measures, which have been part of the regulatory dialogue for a long time. However, the implementing rules will be the most proximate source of legal duties and the indication of where these will be found in the UK is helpful.

The consultation period ends on 8 March 2016.

Transaction Reporting and Fund and Pension Managers

The FCA’s proposal not to apply the MiFID II reporting requirements to collective investment undertakings (CIUS), i.e. MiFID requirements do apply to fund and pension managers. The FCA flirted with gold plating in its MiFID II discussion paper DP 15/3 in the form of extending MiFID II to fund and pension managers who would not otherwise be subject to MiFID II.

UCITS VI and AIFMD II could result in transaction reporting requirements for UCITS managers and non-UCITS managers, respectively and MiFID II will apply to the non CIU related activities of such managers. Until the FCA consultation on implementing the investor protection measures, it remains yet to be seen whether fund and pension managers are caught directly in MiFID II’s web, for example, with product governance requirements. It remains the case that managers will be caught indirectly. For the time being, the FCA has left fund and pension managers alone.      

Trading Venues

  • Regulated Markets (RMs) – issues around new obligations relating to algorithmic and high frequency trading, direct electronic access, tick sizes, business continuity and systems and controls. The FCA propose making changes to the Recognised Investment Exchanges Sourcebook (REC).
  • Multilateral Trading Facilities (MTFs) – changes to the requirements for MTFs with changes to the Market Conduct Sourcebook (MAR), particularly MAR 5 proposed.
  • Organised Trading Facilities (OTFs) – issues around the requirements for this new category of trading venue. The FCA proposes a new MAR chapter for OTFs: MAR 5A.

Systematic Internalisers (SIs) - changes to the SI regime, much of which is directly applicable by virtue of being included in MiFIR. The FCA proposes amendments to MAR 6.

Transparency - the expansion of transparency requirements to equity-like and non-equity markets, including the FCA’s approach to pre-trade transparency waivers and post-trade transparency deferrals. The FCA are proposing changes to sections of the Handbook for trading venues including REC, MAR 5, and the new MAR 5A.

Market Data - introducing the new Data Reporting Services Providers (DRSP) category of firms and their responsibilities, and also covering Transaction Reporting.  A new Handbook chapter, MAR 9 on DRSPs is proposed. The proposals for not extending the transaction reporting obligations to managers of collective investment undertakings and pension funds, mentioned above, can be found in this part of the CP.

Algorithmic and High Frequency Trading Requirements - The controls for MTFs and OTFs in MAR 5 and 5A, and those for trading firms in the new MAR 7A. These proposals cover, among other things, business continuity, systems and controls, financial crime and market abuse, direct electronic access and tick sizes.

Passporting and UK branches of non-European Economic Area (EEA) firms - Where the FCA address the technical changes needed to make the correct references to the new MiFID II provisions and to highlight the harmonised forms required for passporting notifications. These changes will predominantly apply to the Supervision manual (SUP). The FCA also make a proposal to ensure that UK branches of non-EEA firms are subject to the same rules as investments firms when undertaking investment services and activities.

Principles for Businesses (PRIN) - Where the FCA take account of the extension in MiFID II of some conduct of business obligations and propose extending the application of some of the principles, to include firms that conduct business with clients categorised as Eligible Counterparties (ECPs).

The Perimeter Guidance manual (PERG) - PERG 13 provides guidance on the scope of MiFID. MiFID II introduces some changes to the scope of investment services and activities and financial instruments, requiring us to make proposals to revise parts of PERG 13. These include guidance on the MiFID II definition of a ‘multilateral system’.

MiFIR and the Regulatory and Implementing Technical Standards (RTSs and ITSs)

The FCA notes that these will apply directly in the UK and, in the main, do not require changes to UK law or rules to have effect in the UK.

Although the measures listed below are significant market issues, the FCA fwill not consult on them. Such measures include:

  • the double volume cap mechanism to restrict the ‘dark’ trading of equity and equity-like financial instruments (article 5 MiFIR)
  • the trading obligation in shares (article 23 MiFIR)
  • the obligation of investment firms to maintain records of transactions, and of trading venues to keep data relating to orders (article 25 of MiFIR)
  • transaction reporting (article 26 MiFIR)
  • the obligation to supply instrument reference data (article 27 MiFIR)
  • the obligation to trade on a RM, MTF or OTF (article 28 MiFIR)
  • the clearing obligation for derivatives traded on a RM and timing of acceptance for clearing (article 29 MiFIR)
  • portfolio compression (article 31 MiFIR), and
  • non-discriminatory access to central counterparties and trading venues and non-discriminatory access to, and obligation to, licenced benchmarks (articles 35 to 38 of MiFIR)

Further Consultation

The FCA indicates that it plans to consult on other MiFID II issues the first half of 2016 when the FCA expects to propose changes to:

  • the Conduct of Business Sourcebook (COBS)
  • Senior Management Arrangements, Systems and Controls (SYSC)
  • the Client Assets Sourcebook (CASS)
  • the Decision Procedures and Penalties manual (DEPP), and
  • the Enforcement Guide (EG)
  • PERG to reflect issues related to certain exemptions and definitions of financial instruments being dealt with in the implementing measures.