Introduction

The overall drive of MiFID II is to impose greatly increased regulation on all forms of trading venues and trading activities. The rules are designed to improve transparency, promote competition and improve the overall resilience of markets.

The diagram below contains an overview of trading platform obligations:

Click here to view the diagram.

Transparency

Pre-and post-trade transparency requirements will be extended not only to equity-like but also, with some variations, to other financial instruments (such as bonds, structured products, emission allowances and derivatives) and to “actionable indications of interest” as well as actual orders and quotes. All to be made available by regulated markets (RM), multilateral trading facilities (MTF) and organised trading facilities (OTF) (together Trading Venues) on a continuous basis during normal trading hours.

Systematic Internalisers (SIs) will be subject to an enhanced pre-trading and post-trading transparency framework and more detailed rules governing access to their quotes and prices at which they can execute orders.

Systems and controls

Trading Venues will be required to establish and maintain transparent and non-discriminatory rules based on objective criteria governing access or membership.

Those providing direct market access will be required to assess the suitability of persons using their service. DMA providers must also monitor trading and have appropriate risk controls in place to prevent disorderly markets and breaches of the market abuse regime.

All Trading Venue operators will be required to have robust risk management procedures and effective systems and controls in place, to prevent or minimise disorderly markets (including in some cases order rejection systems and circuit breaker facilities) and better detect market abuse or misconduct that takes place across the Venue. Enhanced controls will be required for algorithmic trading and high frequency trading on the trading platforms.

Trading Venues will also be required to cooperate and exchange information with one other and the suspension of trading in certain instruments on one market may trigger suspension of trading on other markets.

Conduct

RM and MTF operators will be subject to a limited number of conduct requirements.

OTF operators will be subject to the MiFID conduct of business requirements including best execution, client order handling, conflicts of interest, appropriateness and inducements.

Position Reporting, Position Limits and Position Management

Regulators will have “position management powers” (i.e. the ability to impose position limits on certain categories of derivative contracts that pose a threat to the financial system).

A position reporting obligation will be imposed on commodity derivative and emissions allowance exchanges/venues. This information must be made available to the public (in detail) on a weekly basis and the regulator (in aggregate) upon request. The public disclosure obligation to be triggered where certain minimum thresholds are exceeded.

Transaction Reporting

The obligations to report transactions to Member State regulators by the close of business the following working day will increase in scope and prescription.

The obligation to report will apply to: (a) financial instruments which are admitted to trading or traded on a Trading Venue or for which a request for admission to trading has been made; (b) financial instruments where the underlying is a financial instrument traded on a Trading Venue; and (c) financial instruments where the underlying is an index or basket composed of financial instruments traded on a Trading Venue.

All investment firms that execute transactions in financial instruments will be required to report the transactions to the relevant regulator. All operators of Trading Venues will be required to report details of transactions executed through their venue by firms that are not subject to the requirement to report under MiFID II. It will be important for operators to understand their users’ status to determine which trades they will be required to report.

We have prepared a detailed overview of the transaction reporting requirements, which may be found here.

Next steps

It is important that investment firms and Trading Venue operators understand the extent to which the new requirements will apply to them and work with clients and service providers to ensure that they are ready to comply from 3 January 2018 onwards.

On Friday 4 November 2016, the European Securities and Markets Authority (ESMA) published its updated Q&A on MiFID II and clarified that the first set of data needed to implement the systematic internaliser regime would be published by 1 August 2018 and so SIs would have until 1 September 2018 to comply with the new requirements under MiFID II. ESMA notes that SIs can opt into the SI regime on 3 January 2018 when MiFID II is implemented in order to enable clients to satisfy the mandatory trading requirements for equities.