MiFID II took seven years from consultation to implementation and generated 30,000 pages of rules.1 Nine months have passed since the go-live date on 3 January. Firms could be forgiven for finally wanting to tick it off their “To Do” lists. However, they can’t take that red pen out yet – we haven’t yet reached our destination on the MiFID journey. As with all things regulation, there is always more to do. And where there are rules, more often follow.Our Financial Markets Regulatory Outlook 2018 mid-year update took stock of capital markets developments under MiFID II as of the first half of the year. Based on regulatory publications and statements, this blog highlights (i) the key areas of MiFID II on which supervisors are expected to focus (which may be subject to change); (ii) areas where revisions to MiFID II are already planned or underway; and finally (iii) areas where medium-term revisions to MiFID II are possible. We do not look at outstanding areas of MiFID II that are still being implemented.
Expected supervisory focus areas for 2018-19
We have undertaken a review of planned MiFID II supervisory activities for 2018-19 across ten EU countries, as well as the European Securities and Markets Authority (ESMA). We identified eleven supervisory priorities across the different countries,2 with many of the topics being looked at by regulators in more than one country. Taking the top spots in terms of the number of regulators focusing on them were transaction reporting and payment for research and inducements. In next place was retail investment distribution (covering areas such as suitability, appropriateness, client reporting and product governance).
The diagram above provides an overview of the MiFID II supervisory topics being looked at by ESMA and in the ten EU countries we surveyed. Further detail on each country’s planned supervisory activities can be found in the Annex.
Areas where revisions to MiFID II are already planned or underway
- A new regulatory capital regime for MiFID Investment Firms (PRIF) and revised third country rules: the European Commission published its plans for a Regulation and Directive to amend the prudential rules for investment firms. In response to Brexit, it has also proposed changes to the MiFID II third country regime.3 The package is currently being negotiated in the European Parliament and Council. See our previous blog for further details.
- Tick size regime: Steven Maijoor, ESMA Chair, has commented that the tick size regime, based on liquidity in the EU, does not work properly when applied to shares that have their main pool of liquidity outside of the EU,4 resulting in a drop in market share of EU trading venues to non-EU trading venues. Consequently, ESMA has proposed an amendment to the tick size methodology to address this.5
- Systematic Internaliser (SI) regime: Steven Maijoor has noted concerns about a “lack of level playing field between SIs and trading venues that may result in changes in the market structure away from trading venues to SIs”.6 The Commission has set out its intention to endorse ESMA’s amendment to RTS 1, and has taken a view that SIs quoting for shares and depositary receipts below the standard market size should respect tick size increments.7
- Sustainability: in May, the European Commission proposed new rules on how Environmental, Social and Governance preferences should be taken into account as part of MiFID II suitability assessments.8
- Crowdfunding: as part of its FinTech Action Plan, the European Commission has published a proposal to amend MiFID II to exempt crowdfunding services providers authorised under its proposed new Crowdfunding Regulation from the scope of MiFID II.9
Areas where medium-term revisions to MiFID II are possible
- Third-country regime: Steven Maijoor, ESMA Chair, has spoken about the need for a “comprehensive regime for third-country trading venues”, as about 40% of trading in shares issued in the EU27 currently takes place on UK trading venues. While MiFID II creates specific equivalence regimes for third-country venues for the purposes of the trading obligations, it does not provide harmonisation for some areas of remote access, including the conditions under which third-country venues may access EU liquidity through the placing of trading screens. As such, Maijoor would “welcome an initiative by the Commission with respect to third country trading venues”.10 The French national regulator, the Autorité des Marchés financiers (AMF), has also voiced support for mandating the application of a subset of MiFID II and MiFIR rules, including investor protection and market transparency requirements, to third-country firms operating in the EU, as well as “supervision of these firms in the EU”.11
- Payment for research: the AMF12 and the European Commission13 have launched and intend to launch respectively impact assessments on the payment for research rules, looking in particular at the impact on fixed income instruments and SMEs’ access to finance. Natasha Cazenave, AMF Managing Director, spoke about how they had “sought to limit the damaging consequences” of the rules during MiFID II negotiations and how they may now pursue, if deemed necessary, “possible adjustments” to the rules, with the European authorities “likely to take initiatives”, notably through the work on “the financing of SMEs through financial markets”. She also highlighted concerns regarding European players’ competitiveness with North America and Asia. The UK FCA is also conducting a multi-firm review of how firms are complying with the rules and whether research markets are functioning well. See our blog for further details.
- Double volume cap (DVC) and periodic auctions: Steven Maijoor, ESMA Chair, has spoken about his concern that “some periodic auction systems may be designed with the intention” of circumventing the DVC and how, “if deemed necessary”, there may be “further ESMA measures or recommendations” in this area.14 While the UK FCA has also looked into periodic auctions, it concludes that their use has grown from “being tiny to being very small” and does not conclude that there should be any rule changes at this stage.15 However, the UK FCA will continue to look at the impact of the rules on the equity trading landscape.
- Consolidated Tape Providers (CTPs): Noting how no CTPs have yet emerged in the market, Steven Maijoor has referenced the clause in MiFID II that if no CTPs emerge in the market, then a single CTP may be appointed by ESMA. We will hear more from ESMA on this issue “in the not too distant future”.16
MiFID I was covered in a relatively modest 44 pages of Level 1 text, while MiFID II took 30,000 pages. Going by that trajectory, how many more pages of rules, guidance and Q&As may emerge in future? The MiFID journey continues.
1Speech by Andrew Bailey, Chief Executive of the Financial Conduct Authority (FCA), at the Association for Financial Markets in Europe (AFME), International Capital Market Association (ICMA) and International Swaps and Derivatives Association (ISDA) breakfast briefing, March 2018.
2Belgium, Cyprus, Czech Republic, France, Germany, Ireland, Luxembourg, Spain, Sweden and the UK. The Czech, Luxembourg and Swedish regulators have so far not indicated publicly areas of planned MiFID II supervisory activities, although the Luxembourg regulator has now started firm visits.
3Review of the prudential framework for investment firms, December 2017.
4Speech by Steven Maijoor, ESMA Chair, MiFID II Implementation – Achievements and Current Priorities, June 2018.
5Consultation Paper, Amendment to RTS 11, ESMA, July 2018.
6Speech by Steven Maijoor, ESMA Chair, MiFID II Implementation – Achievements and Current Priorities, June 2018.
7Communication to the Commission, European Commission, August 2018.
8Draft delegated regulation, Amendment to Regulation 2017/565 supplementing Directive 2014/65/EU, European Commission, May 2018.
9Directive amending MiFID II, EU Commission, March 2018.
10Speech by Steven Maijoor, ESMA Chair, MiFID II Implementation – Achievements and Current Priorities, June 2018.
11Speech by Robert Ophèle, AMF Chairman, March 2018.
12Speech by Natasha Cazenave, AMF Managing Director, Investment research, June 2018.
13Study on the impact of MiFID II rules on SME and Fixed Income Investment Research, June 2018.
14Speech by Steven Maijoor, ESMA Chair, MiFID II Implementation – Achievements and Current Priorities, June 2018.
15Periodic auctions, FCA webpage, June 2018.
16Speech by Steven Maijoor, ESMA Chair, MiFID II Implementation – Achievements and Current Priorities, June 2018.