MiFID II is of interest to a range of stakeholders involved in the securities markets. It is a package of measures that form the legal framework for financial instruments, investment firms and markets.
The key elements include:
- a recast Directive;
- a Regulation; (known as MiFIR) and
- supporting delegated and implementing acts and technical measures (Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS)).
The MiFID II measures were published in the Official Journal on 12 June 2014 and enter into force 20 days thereafter. EU Member States are required to implement the MiFID II Directive in their national legislation within 24 months after the entry into force (June 2016) and the package of measures will generally apply within 30 months after the entry into force (ie January 2017).
During the interlude before the provisions apply, the European Securities and Markets Authority (ESMA) will prepare draft RTS and ITS to provide the clarity or substance to concepts in MIFID II and, once finalised, the European Commission will confirm it adopts these standards. At the current time, ESMA is expected to finalise its technical advice for the Delegated Acts in December 2014. It should submit its final RTS to the European Commission in June 2015 and the final ITS in December 2015.
In brief, what does MiFID II cover?
MiFID is a central part of the way in which financial markets are supervised and regulated in the EU. MiFID has applied since November 2007. The new MiFID II measures are said to enhance the way in which financial markets operate and are regulated, by catching up with market innovations (usually technology driven), and to offer greater consumer protection.
To do this, the MiFID II package extends the concepts of MiFID to new fields (such as high frequency trading (HFT), commodity derivatives, and the new concept of organised trading facilities (OTFs)) and adjusts the way in which existing concepts apply. MiFID II covers authorisation of investment firms and trading venues, how investment services and activities are provided, and requirements for trading in certain financial instruments in the EU.
1. The MiFID II Directive
The Directive aims to harmonise requirements, allowing for necessary adjustments to existing nuances in markets and Member State legal systems. It covers:
- authorisation and operating conditions for:
- investment firms;
- OTFs, MTFs, and regulated markets;
- data reporting services providers; and
- credit institutions when providing investment services (in some circumstances);
- freedom of establishment and to provide services, and provision of investment services or activities by non-EEA headquartered firms through establishment of a branch;
- change of control and acquisition of qualifying holdings;
- investor protection measures; and
- supervision, co-operation and enforcement by competent authorities, such as the PRA and FCA, on a home / host state basis.
As a Regulation, MiFIR institutes directly applicable requirements in fields where the least amount of local divergence is appropriate. This includes:
- disclosure of trade data to the public;
- transaction reporting;
- trading derivatives on organised venues;
- non-discriminatory access to clearing and trading in benchmarks;
- product intervention powers for ESMA and EBA;
- position management controls and position limits powers for ESMA; and
- provision of investment services or activities by non-EEA firms following an equivalence decision with or without a branch.
3. Delegated acts and technical standards
It is advisable to spend time taking on board the specifics of the technical standards and implementing measures as much of the essential detail about how MiFID II will be relevant to your firm will be set out in these measures.
To facilitate the drafting of the delegated acts, ITS and RTS, EMSA has issued its MiFID II Discussion Paper (DP) and Consultation Paper (CP), covering a range of innovative, complex and technical areas that will form the basis of future CPs from ESMA. ESMA is seeking feedback (by 1 August 2014). This list gives you a flavour of their coverage:
- Investor Protection (authorisation, best execution, passporting, exemptions from MiFID II, advice and distribution, complaints, record-keeping, recording telephone conversations and e-communications, product governance, safeguarding, conflicts, remuneration, information to clients, inducements and commissions, suitability and appropriateness, client agreements, client order handling, product intervention);
- Transparency (pre- and post-trade transparency, trading obligations, non-equity financial instruments, liquidity, delineation between bonds, structured finance products, and money market instruments);
- Microstructural issues (HFT, direct electronic access, organisational requirements such as algorithm and IT systems testing, security, monitoring & review, controls and recording keeping, market abuse, obligations on trading venues, testing and reviewing capacity, market making strategies, agreements and schemes and other issues);
- Data publication and access (access to systematic internalisers' quotes, unexecuted client order limits);
- Commodity derivatives;
- Market data reporting (obligation to report transactions, supplying financial instruments data, maintaining records, HFT records);
- Post trading issues;
- Requirements for trading venues (growth markets, suspension and removal from trading, substantially important trading venues, monitoring compliance); and
- Portfolio compression.
MiFID II is a package of measures and as such as the Directive, Regulation and technical standards need to be read together. To perfect your understanding of the requirements for your firm, you will need to consider local implementing measures (for the Directive) e.g. amendments to the Financial Services and Markets Act 2000, the Regulated Activities Order (SI 2001/544) and the Handbooks (eg the Conduct of Business Sourcebook (COBS) and Perimeter Guidance Manual (PERG)).
Your MiFID II plan
We believe it is important to spend time planning your firm's approach to MiFID II. Perhaps a reasonable starting point is to work out what MiFID II actually does, what it may mean for your business and how your organisation needs to approach implementing any change. Implementing MiFID I was a bit of a challenge for most organisations and significant learning points can be taken from that:
- It's easier if you engage earlier on in the process (including at consultation stage) - of course, reading the relevant parts of MiFID II, MiFIR, the CP and the DP sooner rather than later will help to ensure you are on top of the measures in general even if the confirmed details take longer to emerge. The ESMA website is a useful source for this information;
- Take a steer from the FCA. Checking their MiFID II webpage on a regular basis will help you work through the developments and the FCA's expectations;
- Use your voice – work with your trade associations or other stakeholders to give constructive feedback to ESMA and the FCA (or the regulators in your Member State);
- Use your ears – engaging with peers and your regulators can help you understand how this impacts your business and how you can develop solutions for implementation;
- Get the right people on board – you need to pull a team together that is proportionate for the size of your business; your team might involve:
- Legal and compliance – although central to implementation, legal and compliance staff cannot handle the project alone and they will need to work with colleagues from across your business;
- Senior business personnel – senior management need to be engaged in the process of adapting your business for MiFID II, through steering and reporting to the Board, where necessary;
- "the detail people" – along with senior personnel, the project needs to involve personnel who know the detail of your business, systems and products to understand the tweaks that might be needed to accommodate MiFID II requirements – with a framework for reporting to steering and management;
- IT – MiFID II may well involve systems changes and should be factored into existing developments, work plans and projects – this work is often planned years in advance so it can help to engage them early;
- Project management – to help keep track of all the strands – and to ensure team skills are used in their area of expertise; and
- Other business functions - HR, finance, tax, marketing and communications, and others will have a role to play because of the changes to remuneration, commission, client communications and other key operational areas.
There's probably more than one way to eat the MiFID II elephant, but it will go down better in smaller chunks.