Mar 20, 2015

Navigating the regulatory terrain has become increasingly complex and costly, as numerous regimes come into force across multiple jurisdictions. As a consequence, firms are committing significant resources to ensure regulatory compliance. Leveraging previous experience and identifying areas of commonality across different regulatory regimes allows institutions to utilise existing infrastructure, resources and technology, thereby reducing costs.

Changes to MiFID I

The crash of 2008 highlighted that the Markets in Financial Instruments Directive (MiFID I) failed to adequately address certain key issues and challenges affecting the financial services industry. This lead to a review of the provisions which culminated in the Markets in Financial Instruments Directive II (MiFID II) and Markets in Financial Instruments Regulations (MiFIR). The new legislation seeks to promote and enhance transparency and openness in financial markets.

In contrast to the original Directive, which focused predominantly on equities markets, MiFID II/MiFIR has cross asset class application. The scope of MiFID II/MiFIR will be extended to include commodity markets (including cash and physically settled commodities), OTC derivatives markets, high frequency trading and algorithmic trading. The extension of the definition of financial instruments will also include emissions allowances.

MiFID II/MiFIR therefore seeks to close the loopholes of MiFID I.

MiFID II/MiFIR: Overview

The new reforms will lead to a reshaping of the financial markets, the products and services that banks provide and the relationship between banks and their customers. The areas addressed by MiFID II/MiFIR are:

  1. Market structure
  2. Pre- and post-trade transparency
  3. Data consolidations
  4. Transaction reporting
  5. Investor protection
  6. Organisational structure
  7. Conduct of business

The key objective of the new regulations is to create a more transparent, safe, sound and responsible financial system. MiFID II/MiFIR has a clear focus on the supervision of derivatives and financial instruments and will form the legal framework governing the requirements applicable to investment firms, trading venues, data reporting service providers and third-country firms providing investment services or activities in the EU.

What do the new reforms mean?

MiFID II mandates that organised trading of financial instruments must take place on regulated multilateral trading facilities (MTFs). Where financial instruments trade over-the-counter (OTC), these will be subject to increased transparency requirements.

The transparency rules will also cap dark pool trading of shares and other equity instruments.

Who is affected by MiFID II/MiFIR?

MiFID II/ MiFIR applies to all MiFID I firms which are those Financial Services firms undertaking MiFID business anywhere in the European Economic Area (EEA). The MiFID I scope will also be extended to include commodity firms and market makers.

 2015: getting the “house in order”

 2014 marked the introduction of the revised MiFID II/MiFIR text and the beginning of the consultation process. The process of providing definitions and outlining the practical consequences of the new legislation will continue into 2015, with the Regulatory Technical Standards (RTS) text expected to be published in July.

2015 will therefore be about getting the “house in order”. Firms will need to:

  1. Identify and cleanse the necessary static data;
  2. Conduct an impact and gap analysis covering people, processes and technology;
  3. Plan and design processes to convert the regulatory requirements into business processes;
  4. Obtain clarity regarding the product and client taxonomies before applying the taxonomies to businesses, clients they serve, and products they provide.

2015 will be a pivotal year for financial institutions. If getting the “house in order” tasks are not completed successfully in 2015, then doing the actual compliance work in 2016 will be very difficult to achieve.