3 January 2018, the implementation date for the MiFID 2 package, may still seem quite a time away. However, national laws transposing key measures must be in place six months before that, and national regulators should be thinking of the timelines both they and regulated firms will need to work to in order to ensure compliance by January 2018. As part of the UK process, in early January, the Financial Conduct Authority (FCA) published an application and notification user guide on MiFID 2.
This article sets out a brief overview of the application guide and the major deadlines firms should be aware of, in addition to looking out for the confirmed changes to PRA and FCA rules, which are unlikely to be finalised much before the transposition deadline.
FCA has provided many forms and some guidance on what the Connect process will take applicants through, together with an overview of what forms firms will need to complete. The guide also sets out a prudential tree diagram, so firms can see what prudential categorisations are likely to result from common business models.
So, while we still await the final legislation and regulatory requirements to implement MiFID 2, the fact that the application window is already open for many applications and notifications reinforces the message that firms should not wait any longer – if they have not yet started their MiFID 2 gap analysis, time is now of the essence. If firms need to make new applications or notifications, leaving it much longer risks not having the correct permissions or passports in place by January 2018. This is a cliff-edge deadline and there will be no transitional arrangements in place. FCA has indicated it is willing to be helpful to firms providing draft MiFID 2 forms and will provide constructive criticism (but only in relation to applications for new MiFID 2 activities). Firms should take notice that most forms FCA receives are considered by FCA to not be "complete" – and FCA is only bound to determine applications within 6 months where the applications are "complete" applications. So waiting until 3 July 2017 to apply is a dangerous option.
What does the guide cover?
The guide deals with applications for new authorisation as investment firms or data reporting services provider (DRSP), recognition of investment exchanges, Variation of Permission (VoPs) and change of legal status. It also deals with notifications to provide regulatory information to FCA by FCA regulated firms, recognised investment exchanges and others, including passporting notifications.
MiFID 2 changes the scope of activities, services and financial instruments in a range of different ways. Firms need to be aware of and carefully consider the full range of changes and not purely the obvious ones, such as the creation of the new activity of operating an OTF. Any firm that needs to make a VoP application, as well as an application for new authorisation for investment activities (regardless of whether the activities the firm will carry out are changed in any way by MiFID 2) will need to start planning for the MiFID 2 changes ahead as FCA has set early deadlines to deal with the large number (recent estimates suggest some 600) of applications and notifications it expects to receive.
30 January 2017
1 February 2017
Deadline for equity and equity-like instruments waiver applications
FCA to publish policy statement on aspects of MiFID 2 implementation discussed in CP15/43
FCA to publish second policy statement on MiFID 2 implementation
1 June 2017
Deadline for bonds and derivatives waiver applications
3 July 2017
Deadline for submission of complete applications for authorisation of investment firms and DRSPs or VoP applications to guarantee FCA will determine them by 3 January 2018
31 July 2017
Passporting notification gateway opens
Early as possible after 31 July 2017
Notifications of establishment passports for branches to be sent to FCA
31 October 2017
Deadline for existing operators of MTFs, including RIEs, to provide FCA with the information required on the operation of their MTF under ITS 19, and any application to register an MTF as an SME growth market
2 December 2017
Deadline for notifications of cross-border passports
2 January 2018
3 January 2018
Key changes for investment firms
FCA has developed different application packs for each of the following circumstances. Many of the new forms reflect what is required under various MiFID 2 regulatory and implementing technical standards:
- Initial authorisation. An unauthorised business, or a business authorised under legislation other than FSMA, applying for a first Part 4A permission under FSMA to be authorised as a MiFID investment firm. So this will not apply only to new market entrants, but also, for example, to high frequency traders who may previously have not required authorisation, or payment services firms that carry out certain fx activities
- VoP to become a MiFID investment firm. A firm with a Part 4A permission under FSMA but which is not currently a MiFID investment firm, applying for a VoP to become a MiFID investment firm – either because of the change of scope of MiFID or because of a change in the firm's business. Locals may be caught by this, or firms that are currently exempt from MiFID because of Article 3, but now wish to "opt in"
- VoP for a MiFID investment firm. A firm with a Part 4A permission under FSMA which is already a MiFID investment firm, applying for a VoP to extend the range of activities it performs. This would, for instance, cover an investment firm that now additionally wants to operate an OTF
- Change of legal status (COLS). Although the incumbent firm will already be authorised, the new entity will not be and so will be making an initial authorisation under MiFID. FCA plans to apply this form proportionately, given it may already have much of the information MiFID 2 requires.
FCA has made the application packs (apart from the COLS pack) available on its Connect application portal from 30 January. To accompany the forms, it has made what it calls the "FCA MiFID Annex". Firms will provide the information needed by MiFID and the information FCA otherwise requires (as it will often want more information than is required by MiFID 2) by completing this form, and referencing it as appropriate in the MiFID authorisation form.
With all the forms it receives, FCA will treat those parts of the forms that relate to activities and products that will change with MiFID 2 as having been submitted only in draft until the relevant legal changes to bring them within FSMA scope come into force.
Under Article 3 of both the current MiFID and MiFID 2, Member States have the option to exempt domestic firms whose activities are restricted to arranging/advising and do not hold client money from authorisation as MiFID investment firms. The UK has chosen to keep this option, but MiFID 2 requires domestic legislation to ensure these firms comply with analogous requirements to MiFID 2, including the authorisation requirements. FCA has decided to apply the same process to these firms as it will use for MiFID investment firms. If firms that are currently Article 3 exempt firms want to become MiFID investment firms, they will need to use the VoP form for authorised firms wishing to become MiFID firms. Existing article 3 exempt firms that wish to remain exempt should be able to benefit from a proposed transitional provision which will grandfather the exempt status over to MiFID 2.
MiFID 2 requires firms to submit specific information in relation to members of their management bodies. FCA has created a new MiFID Form A that new applicants must submit for each member of the management body and person who effectively directs the firm's business, together with the list of management body members. This is likely to be most individuals who perform the FCA Controlled Functions 1 to 4, or 29. Firms can continue to use the existing FCA Form A (including the shorter version where appropriate) for any person who performs controlled functions not covered by the new MiFID requirement.
Firms applying for a VoP to bring them within the scope of a MiFID firm need submit MiFID Forms A only in respect of new recruits. From 3 January 2018, firms authorised under MiFID that propose to make changes to membership of the management body will have to notify FCA in the prescribed form.
MiFID 2 also restricts the number of directorships that individuals on the management body of a firm can hold. FCA is implementing this through changes to its SYSC rules, and proposes that "significant" firms will be able to follow the existing process (that already applies to CRD firms) for waivers if they seek authorisation for members of the management body to hold one additional non-executive directorship.
MiFID 2 does not require firms dealing with structured deposits to become authorised as investment firms. Treasury will be amending the FSMA (Regulated Activities) Order 2001 to require firms that carry on a range of activities in relation to structured deposits to vary their permissions to allow them do so do. There will be transitional arrangements that will allow firms that hold certain permissions now simply to notify FCA that they wish to perform those activities for structured deposits, but this period will only run until 2 January 2018. FCA will make the relevant form available once the legislative measures for the transition have been put in place. Firms that do not notify in time, and, in any event, firms that are not eligible for the transitional provision, must make a VoP application.
Passport notification and tied agents
Because of the changes in scope that MiFID 2 introduces, certain activities and investments will be eligible for passporting which the current MiFID passport does not cover. Existing MiFID passports will remain valid after MiFID 2 comes into effect, but it is firms' responsibility to decide whether they need to amend their existing MiFID passports to reflect the changes. If firms need to amend their passports, they must do so before 3 January 2018.
The changes will be provided in a combination of regulatory technical standards (the passporting RTS) and implementing technical standards (the passporting ITS). The passporting RTS will set out the information to be included in a passport notification. The passporting ITS will contain procedures and forms. The passporting ITS has not yet been adopted by the European Commission so is subject to change. FCA will replicate the relevant forms.
In a key change to the current process, from 3 January 2018, firms will have to submit one passport notification for each country when they want to provide cross-border services or have tied agents do so, in accordance with the passporting ITS. ‘Add Tied Agent’ notifications are also required for each tied agent established in the UK.
FCA expects firms that want to passport MTF and OTF services will need to submit separate forms, and one for each country and trading platform, when passporting. There will be forms available for this, but Recognised Investment Exchanges (RIEs) will need to submit their passport notifications by email.
The branch passporting process will remain largely unchanged, with notifications being made through Connect, but firms will need to provide some additional information. Additionally, firms wanting to use tied agents in other jurisdictions are now likely to have to submit two notifications – one for the establishment right and one for the tied agent appointment. Also, now that MiFID 2 obliges all Member States to keep a list of tied agents, UK firms will be responsible for re-registering their existing tied agents in the countries that did not previously do so.
Existing UK investment firms can apply to amend their existing passports to take account of the changes of scope in MiFID 2 and new applicants will be able to make passport notifications for new scope MiFID 2 business from 31 July 2017. FCA will set up a mailbox to receive these MiFID 2 passport notifications, while standard passporting notifications should go through Connect. Firms making notifications for both current business and MiFID 2 business will need to make two notifications.
FCA is encouraging firms to submit establishment notifications as early as possible, and is also encouraging firms to contact host authorities to confirm the status of their applications once FCA confirms it has passed on the relevant details.
Existing Approved Reporting Mechanisms (ARMs), Trade Data Monitors (TDMs) and any other entity wishing to become a DRSP in the UK will need to submit a new application to be authorised (including prior verification, in the case of operators of trading venues) as DRSPs under MIFID 2. Again, there are two forms:
- An application form to provide service of ARM and/or Approved Publication Arrangement (APA) and/or Consolidated Tape Provider (CTP)
- A notification form for list of members of a management body.
FCA has suggested at recent public events that it will only be accepting applications in relation to DRSPs via email.
FCA is accepting forms from 30 January 2017, and also reminds firms that prospective ARMs must meet FCA's technical Market Interface Specification as a condition of authorisation. ARAs and CTPs have separate data provision requirements and must also establish technical links to FCA's systems.
Most firms covered by MiFID 2 will have market data provision obligations under MiFID 2. FCA is replacing the ZEN system which MiFID investment firms currently use to submit their transaction reporting data with the MDP. By following FCA on-boarding process and timetable, prospective submitting firms will be able to meet their market data provision obligations when the new MiFID 2 regime comes into effect.
Firms that want to become submitting entities need to sign and return a non-negotiable confidentiality agreement to request a copy of the Market Interface Specification (MIS). The MIS gives the applicant the technical details needed to format and submit MiFID 2 market data to FCA.
The technical on-boarding process begins when the firms submits the MDP on-boarding application form that will be made available on FCA website. FCA will make a Handbook instrument to cover the relevant fee arrangements in 2017.
Testing will begin in the third quarter of 2017, so those firms that have MDP obligations as a pre-requisite to authorisation will not be informed of the outcome of their applications until after testing is completed.
MiFID 2 does not change the current recognition process for RIEs, and their status as exempt persons under FSMA.
However, the FSMA (Recognition Requirements for Investment Exchanges and Clearing Houses) Regulations 2001 (RRRs) will change, and existing RIEs will have to implement the necessary changes before MiFID 2 comes into effect to demonstrate they comply with the revisions being made to the RRRs to implement MiFID 2. For RIEs, the current application process will not change. Likewise, the process for making notifications for MTFs will not change (although – as there are for RIEs - there are new forms).
There are, of course, new forms for OTFs and SME Growth Markets. There are also forms prescribed at MiFIR level for SI notifications.
MiFID 2 introduces new forms for transparency waivers and deferrals for market operators, investment firms operating trading venues and SIs, and, again, FCA is accepting applications in draft form from 30 January 2017.
Applications should be submitted to FCA at least 5 months before the pre-trade transparency waiver is intended to take effect. For market operators and investment firms operating a trading venue that intend to use a pre-trade transparency waiver from 3 Jan 2018, applications should be submitted by 1 February 2017 for equity and equity-like instruments and by 1 June 2017 for bonds and derivatives.
FCA has suggested at recent public events that it will only be accepting applications for waivers via email.
Commercial firms trading commodity derivatives or emission allowances benefiting from the exemption from the requirement for authorisation in Article 2(1)(j) are required to make an annual notification that they make use of the exemption.
FCA are aiming to make a form available online from July 2017 for firms who need to notify that they are exempt from authorisation under the ancillary exemption, as well as forms for those who wish to apply for an exemption from the position limits regime for their hedging activity. The first annual notification will required to be made by 3 January 2018. Applications will need to be made at least 21 days before 3 January 2018 in order to be in place on that date.
Trading venues and investment firms who need to provide FCA with weekly and daily information on positions will need to on-board to FCA Market Data Processor. Tests for this will take place in the third quarter of 2017.
Articles 35 and 36 of MiFIR provide for access between CCPs and trading venues in a way that does not discriminate and is transparent. A trading venue or CCP that intends to make a request for non-discriminatory access should send a formal request in writing to FCA. Any relevant supplementary information that will enable FCA to assess whether to grant or deny access in line with MiFIR and the relevant technical standards should be included. Both the formal submission in Articles 35(2) and 36(2) of MiFIR to the relevant competent authorities and the CCP or trading venue to which access is being requested should be made at the same time.
A trading venue that wants to use a transitional exemption from Article 36 of MiFIR for ETDs from 3 January 2018 should submit its application and all relevant information needed to verify the trading venues notional amount calculations to FCA and ESMA at least three months before this date to ensure they can make a decision before MiFIR applies.
If a trading venue wants a further thirty month transitional exemption from Article 36 of MiFIR for ETDs, it should submit its application at least three months before the end of the previous thirty month exemption period.
From 3 January 2018, MiFID 2 requires firms to notify FCA of the following (going further than the existing notification requirements):
- changes to the membership of the management body
- if they engage in algorithmic trading
- if they provide direct electronic access
- classification as a systematic internaliser
- intention to act as a general clearing member.
FCA does not propose to charge fees for applications for new regulated activities under MiFID 2 between the time of accepting draft applications and when the relevant domestic legislative changes are in place.
FCA does, however, plan to charge the following fees for FCA solo regulated firms:
- Firms that want to apply for new regulated activities/activities in relation new financial instruments only. These firms will have to contact FCA before they submit their application. The fee will be charged when the legislation changes.
- Firms applying for both new and existing regulated activities. While the firm will not be charged for the fee related to the new permissions, it will be charged for the relevant fee in sofar as the application relates to existing activities and investment types. When the domestic legislative changes to implement MiFID 2 are in place, the case officer will contact the firm, and will charge any excess application fee over the amount already paid (and there may be no excess).
- Firms applying for existing activities and investment types. FCA will charge these firms the relevant fee when their application is submitted under the standard process.