MiFID 2

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MiFID 2 Timestamps

Time is yet another example of how MiFID 2’s range makes a simple concept fiendishly complicated.  Activities like high frequency trading (HFT) measure time in micro seconds and smaller intervals whilst a structured transaction that’s taken six months to negotiate often appears to be executed over several days as the final terms are specified.  The new rules attempt to cover both of these extremes and also define what is the benchmark for time, it’s UTC and where can you find it.

MiFID 2 sets higher standards for HFT venues and traders whilst still setting a minimum precision of a second for more traditional dealing methods.  One second may sound fairly easy to match but remember every few years the physicists decide to add a second to UTC (usually at year end) to keep this measure in time with the way the Earth and the Solar System currently operate.  This gives system architects a headache.  Every computer ships with an on-board clock chip running the mother board.  But I’ve never heard of one of these clocks being set up for leap seconds so software clocks over the network might be better, but then how fast is your network, if the server is in Europe and the trader is in Tokyo what time is it actually telling?   Lots of practical issues for the very large firms with global operations affected by MiFID 2.  Here’s a quick summary of the MiFID 2 rules.

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MiFID2 Pre and Post Trade Transparency

The upgrade to the trading transparency regime is one of the largest components of MiFID2.  MiFID1 was very equity focused while MiFID2 has a vast scope across financial markets.  The regime focuses on three areas;

  1. Pre-Trade – When should orders be public?
  2. Pre-Trade – When should quotes and expressions of interest be public?
  3. Post-Trade – When should executed trade details be made public?

Financial instruments are divided into asset classes, sub asset classes and sub classes and their liquidity assessed.  Asset classes include bonds, interest rate derivatives while the sub classes cover areas like the maturity and underlyings of derivatives.  The liquidity assessment uses several methods and some of the levels are initially more relaxed being tightened over the next few years.

More liquid products (like equity shares) will be required to make more activity public while illiquid products will have waivers to allow participants to disclose less pre trade information and to defer publication of trades executed.  Generally, the rules are split between those for equity like instruments (shares, depositary receipts, ETFs, certificates) and non-equity-like (bonds, structured finance products, emission  allowances and derivatives).  Equity publication may be deferred one or two hours or until the end of day while non-equity-like publication may be deferred for two business days.  There are also provisions for regulators to effectively suspend the whole non-equity regime for months where a liquidity crisis occurs (MiFID2 is peppered with special rules covering government debt markets).

The detailed analysis can be found here.  These rules should also be viewed with the new requirements over the provision of best execution and the evidence that investment firms will need to keep to prove their compliance.

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Final MiFID2 Implementing Technical Standards published in Lex

The last two of the eight implementing technical standards for MiFID2 have been published in Lex bringing them into EU Law.  They are 2017/1110 which covers templates for the authorisation of Data Reporting Services and 2017/1111 which covers the reporting to ESMA of sanctions (both criminal and administrative) and measures as well as an annual report on this and investigations undertaken.  The full list is here.  There are now only six of the eight standards covering authorisation, passporting and acquisitions left to complete.

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Three More MiFID2 sub regulations finalised in Lex

Three more minor regulations have been published in Lex in the last few days;
2017/1005 on the format for communication that a financial instrument and its derivatives have been suspended or removed from a trading venue.
2017/1018 on the format for communication that an investment firm will be providing financial services in another EU state.
2017/ 1093 on the format for the daily and weekly reports that trading venues and investment firms must provide on commodity derivative, emission allowances and their derivatives positions and activity.
All are  included in my regulations guide here

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MiFID2 Progresses on the final subsidiary rules

Very roughly there are about ten more rules still to be published in Lex to bring MiFID2 to conclusion from an EU legal perspective and another one, 2017/081 was published a few days ago.  It covers the rules for templates which will assist regulatory cooperation in the authorisation of investment firms.  I’ve included it in the regulatory analysis and will try to clarify the status of the remaining rules and the details of the Q

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MiFID2 Updates

A lot of site updates relating to MiFID2 added, a consolidated list of all the defined terms in the regulations and delegated regulations here.
Diagrams showing the product and market scope of the regulations as well as the thresholds that Systematic Internalisers need to meet.  Finally an analysis of the Third Country Financial Institutions which will lead to further consideration of access into the EU for third countries, particularly as the UK will be joining them in a few years.