With the implementation of MiFID II drawing closer every day, the Financial Conduct Authority (FCA) organized a conference dedicated to the matter to educate the parties involved about the EU text, the technical standards and guidance of the European Securities and Markets Authority (ESMA) and the challenges arising from the upcoming regulatory revamp of the industry.
The first level of the text of MiFID II has been agreed upon earlier this year, with new EU legislation aiming to deliver important reforms for both retail and wholesale investment markets. A list of new obligations will apply to a wide range of firms providing investment services.
The process has already begun with the ESMA releasing more than 800 pages of consultation and discussion papers over the summer. With a touch above 800 days remaining until implementation in 2017 the FCA’s Director stressed, “There is a lot of heavy lifting that needs to be done.”
Second MiFID II Consultation Paper at the End of 2014
Mr. Lawton stressed that the ESMA will publish its second CP at the end of this year, and its recommendations to the European Commission, Parliament and Council in mid-2015, followed by technical standards publications in late 2015 or early 2016.
He proceeded by outlining some of the changes that are taking place and the remaining policy questions and implementation challenges in the view of the FCA.
According to MiFID II, market transparency is one of the main issues discussed, particularly in wholesale markets. Mr. Lawton stated, “Overall, MiFID II weighs in favour of more lit, on venue, transparent trading. But important questions remain about how this is done, and in particular how to increase transparency without reducing liquidity.”
He outlined that the idea behind MiFID II is to establish how the reforms that have been created for the equity markets can be exported to the non-equity markets. The desirability of greater transparency is obvious – greater information, improving price discovery and liquidity in the markets at least in theory.
Bond and Derivatives Trading
Mr. Lawton explained that the first two markets to be in focus are bond and derivatives. Changes relating to the pre- and post-trade stages of a transaction are imminent.
He went on to explain about the part derivatives play, “There is provision for specified derivative contracts, that hitherto have been privately negotiated with very little visibility to the market, to be mandated to trade on exchanges or similar venues, such as new Organised Trading Facilities (OTFs) created by this legislation. The equity transparency regime will be extended from shares to other equity-like instruments, such as certificates, GDRs and ETFs.”
Elaborating on the type of orders, Mr. Lawton said, “While overall, MiFID II will favor more lit, on venue, transparent trading, questions remain about how exactly will this be implemented without reducing liquidity.”
“The granularity of application of the rules, the calibration of thresholds for large in scale, and publication delays and the definition of ‘liquid’ instruments are key components of the thinking that must now be done,” he concluded.
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The FCA’s Director of Markets explained, “In commodity derivatives, MiFID II brings a whole new regulatory regime, including pre- and post-trade transparency and commodity position reporting requirements, and a system of position limits – the details of which are all to be worked out.”
He elaborated, “The methodology that ESMA chooses to set position limits will be one of the greatest challenges in this space, but we are confident that both physical and financial markets can continue to operate effectively within the new regime.”
EU Aims to Deliver a Tough Package of HFT Regulations
European regulators will be particularly strict about computerized trading – both widely used algorithmic trading and high-frequency trading (HFT). Mr. Lawton explained, “New rules will tackle a range of concerns about market integrity, protection of ordinary investors and prevention of market abuse – what has been referred to by the European Commission as the toughest package of messages in the world to address HFT.”
“Key components of the regime to regulate this space include direct regulation of HFT firms, subjecting market-making strategies to market-making obligations, testing of algorithms before their execution and formalization of the ESMA automated trading guidelines,” he clarified.
He explained, “Requirements for market circuit breakers, standards on ‘tick sizes’ and synchronization of exchange clocks can allow better monitoring, detection and prosecution of abuse and bring safer and fairer markets.”
Retail Investor Protection
Mr. Lawton, outlined, “Revised conduct of business rules (particularly addressing inducements and suitability requirements), new requirements around product governance and disclosure of costs and charges to investors when purchasing financial instruments and services, and a number of organizational requirements (telephone taping, remuneration of staff and conflicts management),” are all on the line to deliver universally better protection for retail investors across the EU.
“Efforts Are Required Now, Don’t Hold Back for the Full Details”
The plea by Mr. Lawton concluded his speech. He said, “MiFID II is a massive project both for regulators and industry. We know that across the industry, implementing MiFID II will be a major exercise and we recognize the scale of the challenge posed.”
He stressed saying, “2017 will come round quickly and there is plenty of hard work to be done before we all dip at the finishing flag.”
FCA’s Director of Markets asked the industry to work together on MiFID II and “collectively put our heads together to find answers. It is important that stakeholders remain engaged in the policy-making process, especially given that we can expect a second large consultation from ESMA at the end of the year.”
He urged companies not to hold back in implementation plans stating, “Efforts are required now, and firms must make sure they understand our expectations and are planning towards January 2017.”
He concluded his speech by stating, “The FCA will do our best to explain the new requirements, what is required of you and set out our expectations clearly.”
The full interview with Mr. Lawton is available on the FCA’s website.