The updated Markets in Financial Instruments Directive, or Mifid II for short, will transform Europe’s trading industry when it comes into force on January 3, 2018, affecting everything from bond trading to the way investment research is produced.
National regulators, such as the Financial Conduct Authority, are required to transpose the rules into national law by the end of July 2017.
To aid this process, the FCA published its fourth consultation on Mifid II on December 16, providing guidance on the rulebook’s provisions for areas such as its specialist conduct of business regimes, SME growth markets and the transaction reporting regime.
The FCA is also proposing some changes to what fund managers must report to clients about the payments they make to banks and brokers for research on stocks, and their efforts to secure the best trading terms from banks – known as “best execution”.
Fund managers should include this in their fund prospectus documents – given to investors on launch – and in annual reports, the regulator said.
Transaction reporting is a topic where efforts are expected to focus over the next year. Transaction reports are the detailed end-of-day reports that firms must publish for trades which help regulators spot market abuse. Mifid II beefs up this process significantly, with the number of reportable fields increasing from 26 to 63, with many buyside firms expected to do this reporting themselves for the first time.
Speaking to FN, David Lawton, a former head of markets at the FCA and now a managing director at consultancy Alvarez & Marsal, said there were areas in Mifid II “like transaction and trade reporting, where it will be highly visible if firms are not compliant from day one”.
That said, he added: “You do not typically see enforcement actions simply for a missed implementation deadline. Regulators would never say ex-ante that firms should not worry about compliance, but they might signal what their initial supervisory priorities will be.”
Many firms are awaiting key details on the reforms, which are likely to come from the European Securities and Markets Authority, the Paris-based body responsible for Mifid’s practical guidelines. Esma is due to publish a Mifid II Q&A document on December 19, addressing key issues such as its systematic internaliser regime.
The UK will have to implement the Mifid II rulebook despite Brexit, because its 2018 start date will come before the UK has officially left the EU. That has not stopped some firms calling for a review of the rules.
Atlanta-based Intercontinental Exchange, which operates a major derivatives exchange and clearing business in London, said in a position paper published on December 15 that the UK and the EU “should use Brexit as a catalyst to review existing and proposed regulation”.
It said there were “a number of specific rules within the forthcoming Mifid II directive which go beyond internationally recognised global standards without any concurrent improvement to customers, fairness or effectiveness”.
ICE specifically cited Mifid II’s commodity position limits and open access rules in derivatives markets as examples of “poorly targeted EU regulation”.