It seems a long time since the global agreement on the need for radical reform of financial services regulation in the wake of the financial crisis. We always knew measures would take months and years in the negotiation and implementation stages. Suddenly, since the beginning of 2014, several critical pieces of EU legislation have reached milestones. Below, we summarise the major developments from the past six months.
The revised Markets in Financial Instruments Directive (MiFID 2) and Regulation (MiFIR), known collectively as the MiFID 2 package, was adopted and published in the EU's Official Journal on 12 June. This means most of its provisions will take effect in Member States from 3 January 2017. The package brings fundamental change to several areas of investment services and trading, including:
- Introducing a new trading venue, the Organised Trading Facility (OTF), to operate alongside Multilateral Trading Facilities, Regulated Markets and Systematic Internalisers: OTF operators can conduct a number of activities in non-equities but will need to get the correct authorisations.
- Harmonising derivatives trading requirements: the European Market Infrastructure Regulation (EMIR), discussed below, introduces the need for central clearing of certain derivatives contracts. All trading in these instruments must take place on a recognised trading venue under MiFID 2 so long as the instruments are liquid enough.
- Narrowing the scope of current exemptions: under the current MiFID, many businesses that carry on investment services on an ancillary basis (often commodity dealers) benefit from an exemption that means they do not require authorisation. The scope of this exemption will be reduced, so some businesses will need to restructure and/or seek new licences. The new regime will also better control the activities of high-frequency and algorithmic traders.
- Improving investor protection: MiFID 2 introduces a range of new organisational requirements, including greater fitness and integrity requirements for senior management, improved conflicts management procedures (including the inherent conflicts in remuneration policies), and a range of product intervention powers. The changes will also see improvements to client asset protection and information for customers.
- Better transparency: significantly enhanced provisions to require greater transparency in trade and position reporting, and in data quality and maintenance. The scope of the reporting obligations is greater and new obligations will apply to trading venues.
The European Securities and Markets Authority (ESMA) has published lengthy consultation and discussion papers. You can read our summary of these papers here.
Although 2017 may seem far in the future, it is not too soon to focus on the changes and assess how they will affect your business.
The Alternative Investment Fund Managers Directive (AIFMD) started to take effect in July 2013, but a year-long transitional period means we are only now seeing its full effects. The AIFMD requires that any person who manages "alternative investment funds" (AIFs) (broadly, any collective investment undertaking, whether open- or closed-ended that is not a UCITS) in the EU be authorised as an alternative investment fund manager (AIFM). Additionally, AIFs (whether constituted or managed within or outside the EU) can only be marketed under the AIFMD if their AIFM has made appropriate marketing notifications. In the case of non-EU AIFs there are additional conditions, including that the regulator in the AIF's home country has a co-operation agreement in place with the relevant EU regulator. Even then, marketing is possible only to professional investors unless the laws of the individual Member State allow for wider marketing.
So not only must AIFMs now have in place the right licence, anyone wishing to market an AIF needs to check how they can legally do so.
EMIR actually entered into force in August 2012, but the changes are being phased in.
Some obligations took effect during 2013. During 2014:
- ESMA has started to authorise central counterparties (CCPs) with a view to phasing in clearing obligations from 2015. It is now consulting on regulatory standards which will apply to the clearing of interest rate and credit default swaps.
- The requirement to report all classes of derivative contract to recognised trade repositories took effect in February.
- After significant negotiation, standards on the cross-border application of EMIR came into effect partly in April but the key provision that sets out which contracts have a direct, substantial and foreseeable effect within the EU applies from October.
- From 11 August financial counterparties/NFC+s (non-financial counterparties above the EMIR clearing threshold) must report each day on mark-to-market valuations of positions and on collateral value.
So some EMIR requirements already apply, while others will come into effect over the next few years. Again, firms that trade and clear derivatives need to keep a watchful eye on consultations and timelines.
And the rest?
Space in this note does not allow for further detail on:
- the fourth Capital Requirements Directive and Regulation package (CRD 4), in force and in new PRA and FCA rules since the beginning of the year;
- the Bank Recovery and Resolution Directive (BRRD) package, recently adopted;
- the fourth Money Laundering Directive and associated legislation, still under negotiation; or
- myriad changes affecting retail financial services providers, such as the Packaged Retail Investment and Insurance Products Regulation, the revised Insurance Mediation Directive and the revised Payment Services Directive.
So the message is: some change is in, make sure you comply; more change is coming, make sure you're prepared.
Law stated as at 30 July 2014.