MiFID I was implemented on 1 November 2007.
MiFID II updates MiFID I as from 3 January 2018, to take account of market changes and developing technology while also responding to the fallout from the financial crisis of 2008.
Over 2000 pages of draft technical advice and consultation papers were published by ESMA in the run up to Christmas 2014. Following substantial changes to UK legislation the FCA has, after extensive consultation, updated its Handbook of Rules and Guidance.
It is important that businesses understand what the changes are and how they impact businesses.
- Restrictions on Chairpersons also being CEOs and, subject to size, limits on the number of directorships held.
- Recording of telephone conversations and electronic communications to be maintained in respect of order transmission and execution.
- Currently exempt; may become subject to the same recording obligations.
- Records will need to be kept at least 5 years rather than 6 months (in some cases 7 years).
- Requires effective systems and risk controls to ensure resiliency of trading systems and the prevention of disorderly markets.
- Is loosely algorithmic trading without human intervention. Previously the own account exemption would have exempted such trading; this activity now generally comes within MiFID II.
- Must ensure financial instruments are designed to meet the needs of the identified target market, while taking reasonable steps to ensure that those instruments are distributed accordingly.
- Clearer rules on disclosure where advice is provided: is it independent (based on a broad view of the marketplace) or restricted? If advisers have connections, conflicts of interest must be disclosed.
- Clarity again on whether or not these are provided.
Advice where independent
- Fees or commissions in relation to the service are prohibited (except for minor non-monetary benefits that enhance the service).
- Where it is possible, clients must be informed that it is an option to purchase components separately, with disclosure of unbundled charges.
- Applying to non-advised business, has a broader scope, encompassing shares with embedded derivatives and shares in non-UCITS collectives. The current UCITS exemption will exclude structured UCITS.
- Payment for routing orders is banned. Firms must publish details of their top 5 execution venues together with information on quality of execution.
- In Thematic Review TR15/12– Suitability or not of Investment Portfolios, on the suitability of retail investment portfolios provided by wealth management and private banking firms, the FCA found 60% of files to be unsuitable.
Third Country Firms
- Third Country Firms dealing with professional clients and eligible counterparties (but not retail clients) do not need to establish a branch if registered with ESMA.
- ESMA will satisfy itself equivalent regulation applies to those on the register.
- If non-EU and providing services to retail or professional clients, Third Country Firms may be required to establish a branch subject to rules made by the Member State. Branches require authorisation so will have to meet regulatory requirements.
Organised Trading Facility (OTF)
- Venues that can exercise discretion when placing and retracting orders, for example a broker crossing system, will require authorisation (note that an OTF cannot trade in equities).
- Shares admitted to trading on a regulated market or traded on a trading venue and derivatives under “the trading obligation” (excluding intragroup transactions), subject to limited exemptions, should be traded on a regulated market, a Multilateral Trading Facility or Systematic Internaliser (the latter not applicable to derivatives) or equivalent third-party trading venue.
- Apply in respect of various instruments with waivers limited to avoid market distortions.
Trade reporting Requirements
- May be extended and are likely to include additional data to identify persons responsible for the investment decisions.
- Need to make pre- and post-trade data public on a commercial basis and also free of charge 15 minutes after publication, the aim being to provide a stream of live data giving prices and volume.
- Set on net positions of commodity derivatives and economically equivalent OTC contracts.
Trading Venues Reporting
- Standards set to report to the authorities on a daily basis, and weekly to the public.
Powers to Intervene
- ESMA and EBA will monitor the market for financial instruments and structured deposits and, for the purposes of investor protection, may temporarily restrict or prohibit marketing of such instruments.
Clearly there is a lot of detail on the operational aspects of MiFID II.
Complyport monitors all papers and consultations as they are published.
Organisations need to understand the impact of MiFID II and allocate responsibilities so that appropriate systems and controls can be integrated into the business. Such attention to detail is essential.