This article summarises the technical standards on MiFID 2 that ESMA sent to the European Commission on 29 September 2015

The MiFID 2 package takes effect (with a few exceptions) from 3 January 2017. We still await key technical measures. Following ESMA's discussion, consultation and advice papers last year, it has now published the second set of final drafts of key Implementing and Regulatory Technical Standards (ITS and RTS) for the Commission to approve. In this factsheet we summarise the papers submitted to the Commission on 28 September 2015.

The background

In December 2014, ESMA published technical advice to the Commission and a set of draft ITS and RTS. On 29 June it published its final report and RTS submitted to the Commission on authorisation, passporting and third-country firms. It delayed submission of most of the remaining measures until September (with final ITS further delayed as it did not start consultation on those until early September). On 28 September it published the final report and annexed all outstanding RTS and ITS except the three still under consultation, for the Commission's approval.

We will publish detailed notes on the measures of most interest to our clients. This alert provides a high-level summary of what ESMA has published and what remains to be finalised.

The standards

ESMA grouped the standards into logical subject matters, and has now submitted to the Commission the following documents. Confusingly, the numbering does not follow the consultation numbering, and restarts at number 1, although the measures submitted in June already bore numbers 1 to 5.

Also, unfortunately, ESMA has provided neither a mark-up of the changes nor a clear explanation of them. There is therefore no substitute for close reading of the new standards to assess changes, omissions and additions.

Transparency

ESMA says it has made few changes to its proposals following consultation. It has made some minor changes and amended certain of the prescribed characteristics of a negotiated contract. In relation to the requirements for specific products, ESMA has in the main adopted its proposals, but has clarified and explained certain granular detail and tables showing the basis of key assessments. Other changes include a new approach for equity derivatives, other derivatives and emission allowances. The final report includes analyses specific to each asset class.

ESMA has published:

  • RTS 1 (formerly 8): transparency requirements in respect of shares, depositary receipts, ETFs, certificates and other similar financial instruments.
  • RTS 2 (formerly 9): transparency requirements in respect of bonds, structured finance products, emission allowances and derivatives.
  • RTS 3 (formerly 10): the volume cap mechanism and the provision of information for the purposes of transparency and other calculations.
  • RTS 4 (formerly 11): criteria for determining whether derivatives should be subject to the trading obligation (Article 32(6) of MiFIR).
  • RTS 5 (formerly 12): criteria for determining whether derivatives have a direct, substantial and foreseeable effect within the EU (Article 28(5) of MiFIR).

Microstructural issues

ESMA has made some, mainly minor, changes, for example to avoid potential conflict with the Market Abuse Regulation. It has also clarified that any regulated market (RM), multilateral trading facility (MTF) or organised trading facility (OTF) on which algorithmic trading may take place should be subject to the relevant RTS. It has also reconsidered certain elements of its position on market-making, and slightly amended parts of its tick-size proposals. Finally, it is amending its definition of material markets in terms of liquidity to include more trading venues.

ESMA has published:

  • RTS 6 (formerly 13): organisational requirements of investment firms engaged in algorithmic trading, providing direct electronic access and acting as general clearing members.
  • RTS 7 (formerly 14): organisational requirements of RMs, MTFs and OTFs allowing or enabling algorithmic trading through their systems.
  • RTS 8 (formerly 15): specifying the requirements on market-making agreements and schemes.
  • RTS 9 (formerly 16): ratio of unexecuted orders to transactions.
  • RTS 10 (formerly 17): requirements to ensure fair and non-discriminatory co-location and fee structures.
  • RTS 11 (formerly 18): tick-size regime for shares, depositary receipts and exchange traded funds.
  • RTS 12 (formerly 19): material market in terms of liquidity relating to trading halt notifications.

Data publication and access

ESMA's draft standards had recognised the need to differentiate between approved reporting mechanisms (ARMs), approved publication arrangements (APAs) and consolidated tape providers (CTPs). Its proposals met with mixed comments, and ESMA has made some changes as a result, including to make all disaggregation mandatory. ESMA has published:

  • RTS 13 (formerly 20 and 21): authorisation, organisational requirements and publication of transactions for data reporting services providers. The former RTS 23 on identification of the investment firm responsible for making public the volume and price transparency of a transaction seems in part to fall now within RTS 1.
  • RTS 14 (formerly 22): data disaggregation.
  • RTS 15 and 16 (formerly 24): clearing access in respect of trading venues, central counterparties and access to benchmarks.

Requirements applying on or to trading venues

Following responses to its consultation and after taking advice, ESMA has assessed the most appropriate technical formats and amended the standards accordingly. It has also made other clarifications and amendments to requirements on specific products and defined terms.

ESMA has published:

  • RTS 17 (formerly 25): admission of financial instruments to trading on RMs.
  • RTS 18 (formerly 26): suspension and removal of financial instruments from trading.
  • ITS 19 (formerly 27): description of the functioning of MTFs and OTFs.

Commodity derivatives

ESMA explains in the final report its understanding of the Level 1 text, as its RTS are based on that understanding. ESMA received many comments, including on its creation of a new C10 asset class. It has made amendments, some significant, following the concerns expressed. ESMA has also considered the results of the cost benefit analysis it conducted on position limits to inform the levels it sets in the RTS.

ESMA has published:

  • RTS 20 (formerly 28): criteria for establishing when an activity is to be considered to be ancillary to the main business.
  • RTS 21 (formerly 29 and 30): methodology for calculating and applying position limits for commodity derivatives traded on trading venues and economically equivalent OTC contracts.
  • The former ITS 31 on the format of position reports has not been carried over to the final advice, probably pending the outcome of the current consultation.

Market data reporting

ESMA has published:

  • RTS 22 (formerly 32): reporting obligations under Article 26 of MiFIR.
  • RTS 23 (formerly 33): obligation to supply financial instrument reference data.
  • RTS 24 (formerly 34): maintenance of relevant data relating to orders in financial instruments. The former RTS 35 on the specific requirement to maintain records of orders for firms engaging in high-frequency algorithmic trading techniques does not appear to have been carried over, but may be addressed in the final batch of standards.
  • RTS 25 (formerly 36): the level of accuracy of business clocks.

Post-trading issues

The new form of the RTS on derivatives clearing is barely recognisable from the initial draft of two RTS. In response to comments, ESMA has made several changes.

ESMA has published:

  • RTS 26 (formerly 37 and 38): obligation to clear derivatives traded on RMs and timing of acceptance for clearing (STP).

Best execution

ESMA received many responses to its proposals, and has adapted the RTS to address concerns on scope, and on quantity of reportable data. It has also made a change to confirm that information on professional client orders should not be mixed with that on retail client orders. ESMA has published:

  • RTS 27 (formerly 6): Article 27(10)(a), information on execution data.
  • RTS 28 (formerly 7): Article 27(10)(b), annual publication by investment firms of information on the identity of execution venues and on the quality of execution.

What next?

In terms of process, the Commission now has three months to consider the standards and either accept them or propose changes. In practice, the changes ESMA has made from its drafts and the length of the report make it hard to believe the Commission will be able fully to assess the standards within this period. As at 29 September, it had not published its views on the five standards ESMA submitted on 29 June. In principle, though, it must respond on all the September standards by 28 December, just over one year before MiFID 2 takes effect.