MiFID II Cometh…What You Need to Know
Before we look into the details regarding the changes brought about by MiFID II, let’s clarify what MiFID really is. MiFID is short for the Markets in Financial Instruments Directive, and it is the framework of EU law for the regulation of investment intermediaries (among them online forex and options brokerages) that offer financial services involving derivatives, collective investment schemes, bonds and shares.
The organized trading of financial instruments is also covered by MiFID. Though in its current form, MiFID has been proven useful and quite effective, the financial crisis and the unprecedented proliferation of various investment-centered scams, have made it clear that MiFID was in dire need of an upgrade. This is what MiFID II is aiming to accomplish, with a clear focus on the protection of investors, on overall transparency and on the improvement of the functioning of financial markets. Needless to say, from January 2018, investment operations will have to emerge fully MiFID compliant, or go the way of the dinosaurs. Indeed, January 2018 is the MiFID II/MiFIR compliance deadline, so there’s just no way around it all. Those willing to comply are running out of time to whip their operation into shape.
MiFID II is essentially the upgraded directive, while MiFIR denotes the set of regulations that come with it.
The MiFID II changes encompass a wide range of operational aspects, from basic functions, all the way to HR and IT departments and client services. Here’s a brief rundown of the operational areas MiFID II will impact:
- Data reporting service providers
- Applications and notifications
- Market data regimes
- Structured deposits
- Trading venue ID codes
- Legal Entity identifier update
- Transparency calculations
- Introduction of position limits and reporting regime on commodity derivatives.
MiFID II features two levels of EU law. The first of these levels is the framework which was first adopted in 2014 and which is made up of the revised and updated MiFID directive, and MiFIR (Markets in Financial Instruments Regulation).
This basic framework can then be fleshed out through various level 2 measures, which take the form of delegated acts, handed down by the European Commission, on advice/recommendation from the ESMA (European Securities and Markets Authority). ESMA will also be required to work out a series of technical standards, which will then be approved by the EC too.
While some of the MiFID changes will require EEA countries to adapt their domestic laws and regulations, most of the regulations delivered by the updated directive are directly applicable, and will thus only require industry participants to adapt to them.
Changes Regarding Commodity Derivatives
As said above, position limits and position reporting will be the most change-affected areas. Technical details regarding position limits which shall be instituted on trading contracts, will be set through level 2 methodology. While there will be exemptions for non-financial firms in this regard, these exemptions will be seriously narrowed down.
Position reporting will require trading venues to deliver position details to the ESMA on a weekly basis. The ESMA will then proceed to publish aggregate reports for commercial firms and financial firms.
Position limits and position reporting will obviously have far-reaching implications for trading venues and their clients.
Currently, there is a pre- and post-trade transparency regime in place under MiFID, but it is limited to shares trading on the regulated market only. The new regime will be expanded to cover non-equities too. Details concerning the exact implementation of this new transparency regime will be set through level 2 measures.
Conduct of Business
The MiFID II changes impacting this category are focused on client protection. under MiFID II for instance, firms providing independent portfolio management and trading advice, will not be allowed to accept payments from 3rd parties in any shape or form.
When it comes to best execution claims, trading venues will need to provide “additional information”. Most of the details concerning conduct of business will be hammered out through the level 2 implementing measures mentioned above.
Transaction reporting is extended way beyond the currently covered instruments which are admitted on regulated markets. The new reporting requirements will cover MTFs, OTFs and derivatives which use various venue-traded instruments as underlying assets.
The Bottom Line
To make a long story short: MiFID II will up transparency and client protection, clearly aiming to make scammers’ lives miserable. MiFID II will trump its predecessor in every one of the above detailed operational categories, and it will become the golden standard for regulation. It will impact Private/Retail banking as well as Transaction/Investment banking, handing out higher sanctions for misconduct, requiring higher criteria for qualified management and implementing a ban on the distribution of various marketing products, among other things.