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The revised Markets in Financial Instruments Directive (MiFID II) and new Regulation (MiFIR) were published yesterday in the Official Journal and will enter into force on 2 July. This is an important milestone as it officially starts the countdown to the 2017 go-live date, establishing the various deadlines that firms, member states, national competent authorities (NCAs) and the European Securities and Markets Authority (ESMA) will need to meet.

But while the so-called level one text is now final, work on the implementing measures that will underpin it is still in its early stages. On 22 May 2014, ESMA formally kicked-off the consultation process on implementing measures, publishing a discussion paper (DP) on technical standards and a consultation paper (CP) on technical advice. Together, these documents run to over 800 pages and contain 860 consultation and discussion questions. Finalising the implementing measures will be one of ESMA’s biggest challenges to date.

In addition to the significant strategic and operational challenges posed by MiFID II / MiFIR, firms will have their work cut out for them in responding to the documents and ensuring they influence the consultation process effectively.

ESMA’s CP and DP: what are they and what’s in them?

The differences between technical advice and technical standards are largely procedural. While ESMA’s technical advice will be used by the European Commission to draft delegated acts, ESMA’s technical standards will be directly endorsed and adopted by the European Commission. In practical terms, the process in relation to technical standards tends to be more transparent for firms and timings between the two processes differ.

While the DP only sets out ESMA’s initial thinking on the MiFID II / MiFIR measures, the CP is more developed, containing draft advice for the Commission. The DP focuses mainly on the capital markets aspects of the reforms, such as transparency, transaction reporting, the trading obligation, commodities and high-frequency algorithmic trading (see our paper for further detail on these MiFID II / MiFIR rules and their implications). The CP focuses on the conduct of business rules, as well as definitions of key terms. Below we discuss a few of the key issues from the DP and CP.

Trading and transparency 

The CP and DP set out further detail on the calibration of the pre- and post-trade transparency regimes, including the use of waivers and conditions for deferred publication; the systematic internaliser (SI) regime; the trading obligation; and rules on data publication and access. These rules are designed to move trading away from OTC and on to venues and significantly increase transparency in capital markets. One of the biggest challenges that ESMA faces will be on ensuring that these rules don’t also damage liquidity. In this, the concept of liquidity is crucial as it will affect how the transparency regime applies and whether clearing eligible derivatives will be subject to the trading obligation. For equity markets, ESMA proposes expanding the definition of liquidity to bring more instruments into the transparency regime (i.e. by lowering the quantitative thresholds that underpin the definition). For non-equity markets, ESMA has proposed some metrics for calculating liquidity per asset or sub-asset class, but is yet to set out quantitative parameters, making an assessment of the potential impact of the proposals on liquidity difficult at this stage.

Transaction reporting

Under MiFIR, investment firms may need to submit a greater volume of transaction reports due to an increase in regulatory scope. For example, there are now reporting obligations on financial instruments admitted to trading or traded on a trading venue, whereas MiFID I applies to instruments admitted to trading on a regulated market. Firms will also be tasked with having to populate a greater number of data attributes as part of their reports, including information on short selling and trader ID. The DP sets out 93 data attributes which firms may need to populate when submitting a transaction report, an increase from the current 25 attributes. This will likely prove a significant challenge for firms as previous experience from MiFID I implementation demonstrated the difficulties firms can face in reporting accurately. There will be an increased dependency on static data for reporting (e.g. the identification of the trader or the algorithm). Firms should be thinking about the adequacy of their existing data systems now.

Commodity derivatives

Proposals on commodity derivatives, intended to support orderly markets and increase transparency, are split between the CP and DP. They set out further detail on the firms and financial instruments in scope of MiFID II / MiFIR, position limits, position reporting and ESMA position management powers. Firms exempt from MiFID II / MiFIR may still face requirements under these rules. Under MiFID II, NCAs must establish and apply position limits on the size of a person’s net position in a commodity derivative based on a methodology determined by ESMA (with exemptions for non-financial entities for hedging purposes). ESMA has proposed that the deliverable supply that is available in the commodity underlying the particular commodity derivative contract is used to determine the baseline for the position limits methodology; the baseline could then be adjusted upwards or downwards by up to 15% depending on the specific characteristics of the market.

Investor protection

MiFID II / MiFIR strengthen investor protection rules, focusing on product governance, inducements, remuneration, conflicts of interest and disclosure. Product governance proposals are extensive, applying “where relevant” to the provision of investment services in addition to investment products and setting out separate obligations for both product manufacturers and distributors. These are likely to be particularly challenging for distributors with respect to non-advised sales. Manufacturers and distributors will both be required to identify a target market that is sufficiently granular, but it is unclear what happens if these are not aligned. There will be increased information sharing between manufacturers and distributors so that distributors receive adequate information (e.g. on the target market assessment) and to support manufacturers’ product reviews. Specific requirements are also proposed for when non-EEA firms are involved in the manufacturing of the product.

Information firms must disclose on costs and associated charges is set to increase. Whereas MiFID I rules on disclosure of costs and charges only apply to retail clients, ESMA proposes expanding the scope of these rules to professional clients and eligible counterparties (with clients permitted to opt-out of receiving information in certain situations). ESMA sets out examples of the costs and charges related to investment services, ancillary services and financial instruments that should be disclosed to clients, which should include third party payments received by investment firms in connection with the investment service. There are also requirements on aggregating costs and charges, with investment firms expected to disclose a single figure, both as a cash amount and as a percentage.

What’s next?

The deadline for responses to both the CP and DP is 1 August. While this is a challenging deadline, it is vital that firms ensure their voices are heard and taken into account, either directly or through relevant trade associations. Data and evidence, as well as making common cause across national boundaries, are the most persuasive ways to do this. ESMA has scheduled public hearings on 7 and 8 July where questions can be raised on the secondary markets, investor protection and derivatives issues.

ESMA will deliver its final technical advice by December 2014. The delegated acts that follow will likely enter into force in about Q1 2016 and then member states will need to transpose them into national law. ESMA will consult on the technical standards in Q4 2014 / Q1 2015 (the follow-up to the DP) and must deliver the final draft technical standards between July 2015 and January 2016, which are then expected to enter into force in about Q2 2016.

While getting through and responding to the extensive MiFID II / MiFIR required reading will be a challenge in itself, firms should not lose sight of the ticking countdown to the Q1 2017 go-live date. Now the level one requirements are final, firms should use these to assess key impact areas and to build out a robust and timely implementation plan. Firms should also understand the implications the level two proposals will have on their businesses, using scenario analysis where appropriate. 


Rosalind Fergusson 5Rosalind Fergusson - Manager, EMEA Centre for Regulatory Strategy
Rosalind works in the EMEA Centre for Regulatory Strategy, with a focus on cross-sector conduct and investment management regulatory initiatives. She has seven years of experience in financial services. Before joining Deloitte in January 2012, she worked in financial services policy at HM Treasury and also has experience in the asset management industry. LinkedIn

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