With MiFID II deadline not far out, the Malta Financial Services Authority (MFSA) has published a circular on possible impacts of implementing Directive 2014/65/EU on the Investment Services Licence held by firms operating in the country.
The MFSA’s statement concerns existing licence holders of a Category 2 Investment Services licence, which among many other operators includes firms that offer contracts for differences (CFDs) and spot forex contracts under the MiFID regime in and from the Mediterranean island.
More specifically, the purpose of this circular is to draw attention of this segment to evaluate the upcoming rules and determine whether their activities would still remain in line with their licence and the provisions of MiFID II.
What are these changes?
The purpose of this circular is to address the regulatory challenges brought by the introduction of the systematic internaliser (SI) regime in respect of several financial markets including the derivatives, thus it covers the CFDs products. An investment firm will be an SI if it executes client orders on its own account or through a Multilateral Trading Facilities (MTF) outside a regulated market on an organised, frequent and systematic basis.
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By extension, the Recital 19 of the Commission Delegated Regulation (EU) 2017/565 indicates that “(…) systematic internalisers should not be allowed to bring together third party buying and selling interests in functionally the same way as a trading venue. (…)”
According to the circular, the Recital 19 is not limited to internal matching of client orders through matched principal trading, but more generally prevents SIs from operating any system that would bring together third party buying and selling interests in functionally the same way as a trading venue.
What’s the potential impact?
The Category 2 license in Malta allows the licensee to provide all investment services, including the holding of clients’ funds, but not to deal on its own account, which can be performed only with a category 3 license. As such, the regulator requires licence holders which operate on a matched principle basis and which will be deemed to undertake the activity of ‘dealing on own account’ following the implementation of MiFID II to apply for the necessary extension of the current Investment Services Licence to a Category 3.
The MFSA’s statement assumes that licence holders of a Category 2 could be underestimating if they will qualify for SIs status and how this could affect their compliance requirements. As an example, if a forex or CFDs brokerage firm is deemed to be an SI for a specific product, this will bring further requirements to provide its competent authority with reference data relating to financial instruments admitted to trading or traded on its system.
While it’s difficult to predict how forex and CFDs providers in Malta, with most of them are small and medium size firms, will react once MiFID II is implemented, it’s reasonable to assume that they will carefully review their trading behaviour to limit any unnecessary exposure as a result of becoming an SI which may lead to minimizing the product portfolio offered to their clients.
One thing is certain, the proposed rules present greater operational complexity in meeting the challenge of determining SI status. Further, it has become critical for investment firms to maintain relationships with regulated trading facilities to ensure they meet their transparency obligations.