The Paris-based European Securities and Markets Authority issued separate Q&As for the revised Markets in Financial Instruments Directive on October 2 and October 10 – as well as a 289-page guidance document on October 10.
Mifid II, which comes into force in January 2018, was meant to be an update of the 2007 directive but turned into a mammoth undertaking following the crash of 2008. The result is a set of rules that will fundamentally change the way securities trade in Europe, forcing new transparency across fixed income markets for the first time and placing new reporting obligations on the buyside.
Given its scale and complexity, European regulators have turned to Q&A-style documents to help the industry with implementation. Esma’s Q&As are regarded as the last stage in the process for implementing new European legislation.
James Hughes, a director at lobbyist at Cicero Group, said: “Q&As have become the accepted approach since 2008. They make sure different regulators apply the rules in the same way. They also allow Esma to adapt to issues that are emerging and they are updated indefinitely, even after the rules come into force.”
The Q&A issued by Esma on October 10 covered areas including best execution – an investor protection measure designed to ensure asset managers get the best trading deals for their clients. Mifid II ups the ante on best execution by forcing managers to take all “sufficient” steps rather than “reasonable” steps, to obtain the best execution.
In the Q&A, Esma said this new definition “sets a higher bar for compliance” and was “likely to involve the strengthening of front-office accountability and systems and controls”. However, it said the rules “should not be interpreted to mean that a firm must obtain the best possible results for its clients on every single occasion”. Instead firms should review their best execution on an “ongoing basis”.
The October 10 guidance note also covered the mechanics of transaction reporting, order record keeping and clock synchronisation. Mifid II will require all trades to be time-stamped – some to within 100 microseconds – as well as records of all orders to be stored for up to five years.
Under Mifid II, the number of reportable fields in transaction reports will increase from 26 to 65, including the personal information of the person that approved the transaction. Buyside firms will also be required to make separate transaction reports to regulators for the first time.
Andrew Bowley, head of regulatory response and market structure at Nomura, said: “The level of information required in new transaction reports is such that it is probably above the threshold buyside firms would happily accept delegating to brokers. I think most buyside firms are saying they need to do their own transaction reporting.”
Esma is expected to produce more Q&As in the coming weeks, including key definitions and permitted activities for multilateral trading facilities, organised trading facilities and systematic internalisers.