FCA on MiFID II and the Future of European Trading

24 09 2014

Directive 2004/39/EC, the Markets in Financial Instruments Directive (MiFID), governing the provision of investment services in financial instruments by banks and investment firms and the operation of traditional stock exchanges and alternative trading venues, has been in force since November 2007. Considered to be a core pillar in EU financial market integration, MiFID has been credited with creating competition between these services and bringing increased choice and lower prices for investors. However, the financial crisis revealed weaknesses and with the aim of making financial markets more efficient, resilient and transparent, and to strengthen the protection of investors, the European Commission published its legislative proposals regarding MiFID II and Markets in Financial Instruments Regulation (MiFIR) in October 2011. These entail wholesale reform that will change financial markets, banking services and the bank-customer relationship.

In April 2014, MiFID II and MiFIR were endorsed by the European Parliament. In May 2014, the Council of the European Union adopted the legislation. Subsequently, the MiFID II legislation came to be published in the Official Journal of the European Union in June 2014. In July 2014, MiFID II and MiFIR entered into force. They must generally apply within Member States by January 2017. It is therefore unsurprising that the Financial Conduct Authority (FCA) considers this legislation to be “the future of European trading in the balance” and has hosted a conference on it.

MiFID II covers seven core areas. These are (i) authorisation and organisational requirements (ii) development in market structures (iii) OTC derivates and commodities (iv) investor protection and provision of investment services (v) transparency (vi) miscellaneous and (vi) supervisors.

The legislation imposes new obligations for a range of firms providing investment services and introduces a wide-ranging package of important reforms covering both retail and wholesale investment markets.

In his recent address MiFID II: The future of European trading in the balance, the FCA’s Director of Markets, David Lawton advanced a threefold rationale in relation to why it is important to debate these issues now in advance of the January 2017 deadline:

  • The hard work is far from over because there still remains a significant exercise for the European Securities and Markets Authority (ESMA) to consult, and then finalise advice to the Commission on, around 95 technical standards in the next two years. 800+ pages of consultation and discussion papers have been released by ESMA;
  • Moreover, once these policy discussions have been conducted and decisions are made, the FCA faces the task to incorporate MiFID II obligations into the national regulatory regime and for firms to implement the requirements. Although the rules will derive directly from the EU text, ESMA technical standards and ESMA guidance, the FCA wants to ensure that there is no confusion;
  • And furthermore, once firms have understood the standards expected of them, they must change their businesses to implement MiFID II.

“A lot of heavy lifting that needs to be done” by January 2017 and Mr Lawton said that the FCA shall consult on changes to its own rules after ESMA publishes its second Consultation Paper at the end of this year, and its recommendations to the European Commission, Parliament and Council in mid-2015. Essentially ESMA would lead the way and the FCA would follow.

In his address, Mr Lawton stressed that the MiFID II regime (i) promoted transparency in wholesale markets (ii) introduced a whole new regulatory regime as regards commodity markets (iii) gives enhanced scrutiny to computerised trading (iv) focuses on wholesale conduct (v) improves firms’ best execution policies (v) takes steps to remove the incentives on asset managers that could influence their decisions to trade, against the interest of their clients, when purchasing research from pots of money generated by that trading and (vi) contains a number of provisions that learn the lessons from MiFID I and the rules implemented in different EU Member States to enhance retail investor protection.

Mr Lawton emphasised that it was important to get things right from the outset because a lot hangs in the balance; he numerically made his point by noting that:

    • Between March 2013 and March 2014, €19.2 trillion of equity market activity took place on European exchanges and multilateral trading facilities.
    • Among major EU country issuers of debt securities at September 2013, there were amounts outstanding totalling $25.5 trillion.
    • As of the end of June 2013, there was $621.5 trillion of notional amount outstanding in global over-the-counter derivative markets.

The Director of Markets stressed that “MiFID II is a massive project both for regulators and industry” – the challenges are great and the clock is ticking – and everyone would need to work together to make it all work. Mr Lawton concluded that:

  • There are numerous issues that still need resolving in MiFID II and now is the right time for collaboration to find answers. It is important that stakeholders remain engaged in the policy-making process, especially given that a second large consultation from ESMA is expected at the end of the year.
  • Firms cannot hold back on developing their implementation plans until all the details are available. Efforts are required now, and firms must make sure they understand the FCA’s expectations and are planning towards January 2017.
  • The FCA recognises the challenges for industry and will be on hand to help. It will do its best to explain the new requirements, what is required of the industry and set out the authority’s expectations clearly.

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