MiFID 2

MiFID2 Overview

 

MiFID2 with its sister regulation MiFIR is a huge overhaul and upgrade to the financial regulatory landscape for the EU.  It’s accompanied by a plethora of technical standards putting much more regulatory scope over a number of areas.

 

It comes into force on 3 January 2018.  Under EU law “regulations” take effect EU wide when they come into force.  “Directives” come into force through legislation passed by each of the twenty eight EU countries who have differing track records in achieving the deadlines.

It’s an upgrade to MiFID1 which has been in force since 2007 and acts to extend its scope to new areas and complete the EU’s implementation of the 2009 G20 Pittsburgh Summit commitments over the regulation of derivatives following the financial crisis.

The EU is fundamentally a trade body and as such one can often see a market improvement component to its rules which may not feature in other jurisdictions where regulators are simply looking to control and make markets safe.  Summarising it is hard but here are the key areas;

The Big Changes

  • Almost all financial instruments are now covered (only basic banking deposits and off-trading venue spot FX are now excluded).
  • Equities can no long be ordinarily traded OTC but must go through a Trading Venue or a Systematic Internaliser.
  • There are new rules for market transparency divided into;
    • Pre-trade, where quotes for liquid instruments have to made public
    • Pos-trade where trades have to be published, with delays for large trades and illiquid instruments
  • The trade data required to be reported is expanded significantly compared to the MiFID 1 requirement.
  • The in-house market making function of “Systematic Internaliser” is extended beyond equities.
  • A new type of trading venue, an “Organised Trading Facility” has been defined which allows the handing of discretionary quotes.
  • There are tighter controls over the management, ownership and operation of trading venues.
  • There are specific relaxations in the rules to allow markets for small and start-up ventures to operate more easily.
  • There are rules specifying tick sizes for equities and equity like instruments.
  • Firms selling financial data are subject to tighter rules over access and the disaggregation of data (so that pricing is equitable and purchasers are not forced to buy data they do not want).
  • The are new specific reporting, disclosure, and regulatory position controls for commodity and commodity derivatives to prevent market abuse.
  • There are new rules covering Investment Firms’ duties to their Clients, in particular on Best Execution and the choice of execution venues.
  • Investment firms must publish annual reports on the execution venues they use and the quality of execution they achieve.
  • Investment firms must disclose much more information to client on fees and commissions.
  • Charges for in-house Research cannot be bundled inside trading commissions.
  • Automatic trading routines and high-frequency trading programmes are now subject to tighter controls and registration.
  • Non-EU investment firms can provide services directly or via the establishment of a branch subject to the regulations.

Not all the technical standards have been finalised and ESMA is also issuing a regular Q&A to clarify aspects of the rules.  As MiFID2’s implementation has already been put back a year by the EU I think it is unlikely that any further delay is likely.  To the extent that some parts are incomplete I think the EC will turn a blind eye to the impact which is much easier to arrange as practical compliance is in the hands of national regulators.