The countdown towards the new implementation date of 3 January 2018 has begun, and firms need to be getting to grips with the detail of MiFID II and preparing in earnest for the important changes under this new regime.
Are we there yet?
The final "Level 1" legal texts (comprising a revised Markets in Financial Instruments Directive (the MiFID II Directive) and the Markets in Financial Instruments Regulation (MiFIR), together MiFID II), which were published in June 2014, represent only one layer of the regime. The “Level 2” measures (delegated acts and binding technical standards) and “Level 3” measures (guidelines and recommendations) are in the process of being finalised. These expand upon the Level 1 legislation and contain (or will contain) crucial technical details and guidance that are necessary for firms (and regulators) to be able to comply with the high-level provisions in the Level 1 texts.
The lack of finality and certainty over the Level 2 measures in particular has meant that many firms have, understandably, been reluctant to commit full budget and resource to their MiFID II implementation projects so far.
Despite the twists and turns, however, it seems that the end (or, rather, the beginning) is finally in sight. With the Level 2 measures almost finalised and the new implementation date of 3 January 2018 confirmed, there is now a much clearer road ahead to implementation. Although 2018 may still seem some way off, given the amount of preparation required it will remain a challenge for firms to meet this deadline, and (as we mentioned in our earlier alert) Brexit is certainly not a reason to delay or scale back MiFID II implementation plans.
Level 2 measures
MiFID II contains various mandates for the European Commission to produce delegated acts and to adopt binding technical standards developed by the European Securities and Markets Authority (ESMA).
The Commission has adopted three delegated acts, based upon the technical advice provided by ESMA:
1. A delegated directive under the MiFID II Directive containing provisions on:
- the safeguarding of client assets and client money, including in particular provisions on the use of client assets and the appropriate use of title transfer collateral agreements;
- product governance obligations for both manufacturers and distributors; and
- the provision or receipt of fees, commissions or other non-monetary benefits (inducements) and the requirement for firms to pay third party research costs either directly or from a pre-funded dedicated research payment account.
2. A delegated regulation under the MiFID II Directive, the key provisions of which relate to:
- certain definitions under MiFID II, including definitions of particular financial instruments, the activity of “investment advice”, algorithmic trading and direct electronic access, and the criteria for being a systematic internaliser;
- organisational requirements for investment firms, including with regard to compliance, risk management, internal audit, remuneration, personal transactions, outsourcing and conflicts of interest; and
- conduct of business obligations for investment firms, including information to be provided to clients and potential clients, the provision of investment advice on an independent basis, suitability and appropriateness assessments, client agreements, reporting obligations to clients, best execution, client order handling, client classification and record-keeping.
3. A delegated regulation under MiFIR containing provisions on:
- the determination of liquid markets for equity instruments for the purposes of the pre- and post-trade transparency requirements;
- the obligations for trading venues and systematic internalisers to provide market data on a reasonable commercial basis;
- publication, order execution and transparency obligations for systematic internalisers; and
- the criteria to be taken into account by ESMA, the European Banking Authority and national regulators when determining whether to use their product intervention powers.
These are in almost final form and are expected to be published in the Official Journal shortly.
ESMA produced final drafts of almost all of the technical standards required under MiFID II throughout 2015 (of which there are over 40 in number). These take the form of Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS) and cover matters ranging from transparency requirements to standard forms, templates and procedures for the transmission of information under MiFID II.
The Commission began adopting these in May 2016 on a piecemeal basis, and most of the RTS are in near-final form, although there are a number of ITS still to be finalised. The process has been extended by the Commission asking ESMA to revise three sets of draft RTS, and by the Council and the Parliament saying they would not sign off on the more recently endorsed RTS over the summer months. Therefore, we would not expect all of the final measures to have been published in the Official Journal until at least the end of the year.
Level 3 measures
MiFID II contains various mandates that either require or permit ESMA to produce non-binding guidelines on various aspects of the Level 1 texts. Three sets of guidelines have been finalised so far, another set has been consulted on, and there may be up to another seven sets for ESMA to produce.
Now that its work on the Level 2 measures has almost finished, ESMA has been turning its resources to producing the remaining guidelines and producing its Q&A on MiFID II, and has reportedly been making “significant progress” on these. ESMA has also indicated that it is still open to suggestions for possible areas where guidance would be helpful and areas that ought to be a priority for Level 3 work, so there is still scope to request further clarification to help with implementation.
Implementation of the MiFID II package in the UK requires changes to UK legislation and to regulatory rules and guidance, although it should be noted that MiFIR, being a regulation, will apply in the UK from 3 January 2018 without its provisions needing to be transposed into UK law. The provisions in MiFIR will not be copied out into UK regulatory rules, although “signposts” to them will be included.
To date, the FCA has issued two Consultation Papers on MiFID II implementation (in December 2015 and July 2016), covering various markets and organisational issues. The FCA has stated that it plans to issue one further Consultation Paper, on conduct of business issues, later in 2016. It was hoped that this would be published at the end of September, but the minutes from the FCA’s latest MiFID II Implementation Trade Association Roundtable (which took place on 3 August 2016) suggest that it is likely to be later than this.
The FCA has indicated that is minded to issue a single Policy Statement providing feedback on all of its MiFID II consultations during the first half of 2017. It has stated that it hopes to open the authorisation gateway for new regulated activities and investments from January 2017, giving firms just enough time to extend their permissions or obtain authorisation ready for 3 January 2018.
At this stage, we also await HM Treasury’s feedback on its March 2015 consultation concerning required changes to UK legislation, and a further consultation paper from the PRA on its limited aspects of MiFID II implementation. The timing of each of these is unknown at present, but it seems unlikely that HM Treasury will look to finalise the UK legislation until all of the Level 2 measures have been finalised.