MiFiD II: out of the starting-gate

A surprising outbreak of harmony has seen the European trilogue partners reaching agreement on MifiD II. The EC, EU and the Parliament finally concluded over three years of negotiation late Tuesday evening, producing a definitive outline version of the fundamental reform legislation. The post-2008 sequel to MiFiD/MiFiR is intended to update regulations, dealing with recent developments such as dark pool and high-frequency trading. The text has to be translated into all 24 official EU languages before a final vote by MEP’s.  It will then devolve to ESMA and its pre-selected partners[1] to craft the devil’s domicile of practical technical standards. This process will involve extensive end-user dialogue and is unlikely to be concluded during 2014. Commissioner Michel Barnier broadly welcomed the agreement, while conceding that the Commission would have preferred tighter regulation of bonds and derivatives, as well as quicker implementation. A brief summary follows (the constant use of “harmonised” has been excerpted, readers may take it as granted):

• The migration of trading activity onto regulated platforms. Equity and related instruments will trade on an authorised Multilateral Trading Facility (MTF). Non-equity instruments (at least those eligible for clearing under EMIR) will be traded on a (slightly) less-regulated Organised Trading Facility (OTF).
• Increased equity market transparency via a double volume cap on reference and negotiated price waivers- 4% per venue and 8% global. The inclusion of non-equity instruments in pre- and post-trade transparency reporting requirements, subject to trade size. Trading venues will be obliged to publish all trade data in an approved format at a reasonable commercial price.
• The imposition of a position-limits regime for commodity derivatives. Authorities will impose limits on positions in accordance with an ESMA calculation methodology. The limits regime is enhanced by a position-reporting obligation by category of trader.
• Competition in the trading and clearing of financial instruments via an EU-wide EU regime ensuring non-discriminatory access to trading venues and CCP’s.
• Controls for algorithmic and HFT trading. Enhanced regulation and an obligation to provide liquidity. Firms providing direct electronic access to a trading venue will be required to prevent trading that may contribute to a disorderly market or involve market abuse.
• Stronger investor protection via client asset protection or product governance. A clear split between independent and non-independent advice and clearer client information. Enhanced authority for ESMA\EBA to prohibit or restrict the marketing of certain financial instruments\structured deposits.
• A regime of effective EU-wide administrative and criminal sanctions.
• Cross-border access to EU markets for 3^rd country firms will be based on an equivalence assessment.  Pending such decisions, a transitional period of three years will allow national third-country regimes to apply. Cross-border regulations will only apply to trades with professional customers.

As always, the fine-grained detail of implementation will decide the extent of the challenge represented by regulatory change. However, MiFiD\MiFiR II is now clearly on its way- a fundamental set of reforms which are extremely wide-ranging in scope and inevitably complex in their intersection with pre-existing national and supra-national legislation.

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