Interviewer: Welcome to the latest Financial Services Fireside Friday. Recently the European Commission published its long awaited legislative proposals for the MiFID Review. Starting off, Imogen what form do the proposals take?
Interviewee: Well, what we’ve got is an amending Directive and a Regulation and there are quite a few quite interesting things about that particular choice of instrument. There’s been an increasing use of Regulations in
Europe recently to try and seek greater harmonisation and certainty across the piece in a number of areas relating to FS Regulation and so that's what we’re seeing continued here.
Interviewee: Being a Regulation will obviously give the relevant authorities less scope for implementing those provisions in slightly different ways.
Interviewee: That's right and the other thing to note is that MiFID as you know at the moment is currently implemented through one Regulation and one Level 2 Directive. What we haven’t seen at the moment are any suggestions about amendments to the Level 2 Directive and that contains quite a lot of the detail in say conduct of business, so there's still a lot of unknown territory.
Interviewer: When you look at the proposals you can certainly see that ESMA is again given a pivotal role in the legislation. What are your thoughts on this Imogen?
Interviewee: I think that's absolutely right, you can see there are a number of areas where for example, ESMA has power to write technical and regulatory standards that are going to determine really the way the rules operate in practice.
Interviewee: And I think also on a continuing basis there are various provisions where if the competent authority doesn’t do something that ESMA thinks should have been done, then ESMA can then step in and do it themselves. And that for example would apply in relation to position limits.
Interviewer: Moving now to scope, what are the key messages Hannah?
Interviewee: We've got new instruments coming into MiFID, so some of the provisions will apply to structured deposits and also emissions allowances will also be subject to the rules. Secondly, we've got changes to the types of investment service and investment activity that are covered. So operating an organised trading facility, which I'll mention again later on, will become an investment service and providing custody will be promoted to being an investment service from being an ancillary service. Then we've also got some changes to the exemptions, mostly in the form of restrictions, so there will be restrictions to the own account dealing and the ancillary business exemption and the commodity dealer exemption will be completely deleted.
Interviewer: And there's been changes made also to third-country provisions as well.
Interviewee: That's right and that's going to be a big change in scope for third-country firms who are wanting to do business in the EU. At the moment, Member States have got discretion as to way they allow third-country firms to have access to their markets. That's going to change. If you're a third-country firm and you want to do business with retail clients in the EU you're going to have to establish a branch, become authorised in the EU and comply with a number of Directive requirements. If you're just limited to ECP business, what you'll have to do is register with ESMA and you wont be subject to Directive requirements. But in both cases there are going to be some quite detailed and onerous equivalence tests that the Commission has to decide that your home jurisdiction is equivalent to the EU in terms of a number of areas of Regulation.
Interviewer: And lets turn now to conduct of business, starting with best execution, where do we stand at the moment?
Interviewee: There are going to be some clarifications on firms and execution venues obligations around the information that they publish about best execution. Some of the detail of that is going to be left for the Level 2 implementing Directive so we don’t really have it yet. Another issue that firms are going to have to take note of relates to the ability to do execution-only business. We're not seeing a complete ban, which was once muted but what we are seeing is limitation of the range of products in which you can do execution-only business, so structured UCIS for example are going to be out, as well as any securities that embed a derivative or are otherwise difficult for clients to understand in terms of risk.
Interviewer: And in relation to inducements and information for clients, where do we stand at the moment?
Interviewee: The Commission is going to limit the ability for independent investment advisers and portfolio managers to accept inducements. There were also in the Commission’s December consultation papers some ideas about ex-post disclosure of inducements and the ability of firms to give summary disclosure and that's an area we don't yet know about. It’s going to be dealt with when the Level 2 implementing Directive comes to be reviewed.
Interviewer: And Hannah, what about the markets aspects of the proposals?
Interviewee: There are several markets aspects and I think they follow two main themes. The first is this idea of a level playing field between different types of trading platform and the second is trying to make sure that MiFID is kept up with various technological changes. So the first proposal as I mentioned earlier, is the creation of a new category of trading platform called organised trading facilities or OTFs. If you run/operate an OTF then you'll need to be licensed to do that and you'll have to comply with various new requirements that are very similar to some of the other requirements that apply to both regulated markets and MTFs.
The second very big proposal is to do with mandatory trading on platforms. So going forward if you want to trade derivatives or at least certain types of derivatives, those which have been declared eligible for clearing and which are considered to be sufficiently liquid, then you'll need to trade those on a regulated market, an MTF, an OTF or potentially some third-country platforms and that is directly implementing a G-20 requirement. You've then got a whole raft of proposals relating to high frequency trading so algorithmic trading or any kind of direct electronic access to various markets. There will be all sorts of kind of systems and control requirements that both the markets themselves but also the investment firms would need to put in place for that kind of trading.
Interviewer: And Hannah, in relation to transparency and transaction reporting, where have we got to?
Interviewee: Well the transparency and transaction reporting requirements have been moved into the Regulation and both of them have been expanded quite extensively. So for example, transparency requirements will now apply not just to shares but also to other types of equity instrument as well as to bonds and derivatives and the transaction reporting requirements will be more detailed in scope. So for example, the proposals in relation to client and trader identifiers have been included in the text and also receivers and transmitters will be under more obligations in relation to passing on that kind of information.
Interviewer: There's an awful lot for firms to take in at the moment, what should they be doing now?
Interviewee: I think the most important first step for firms is to take a look at the proposals and try and understand how what's proposed might effect their businesses. The next thing for them to do, if they think there are changes that are important for them, is to engage with their trade associations as part of the lobbying process. There’s going to be an extensive negotiation of the text so we want it to end up in a place that works best for firms.
Interviewer: I think the other important thing is to keep on top of all the papers which are going to be produced by the industry bodies and an easy way to do that is to log on to our Pegasus website.
That concludes this Financial Services Fireside Friday. Catch us next time.
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