MiFIR in the MiFID II Debates

Introduction

MiFID II is much discussed, and rightly so. It is a major capital markets Directive affecting a large chunk of the world’s financial system, with effects that will be felt across the world. How this will play out in a practical sense is one of the unknowns of these coming months and longer. Market professionals appreciate that its precursor, MiFID, came to have a major influence on the way capital markets trading takes place, notably in the fragmentation of Europe’s national equity markets.

And with just over three months before MiFID II comes into force at the start of January, there is indeed much hard preparatory work underway, head-scratching, confusion, repositioning of businesses, and human resources redeployment. Given the changes in trade reporting, the IT component is heavy – and it was difficulties with IT preparations that led to a one-year reprieve.

And yet there is also MiFIR. It is likely that the press articles and preparations referring to the MiFID sequel are using a short-hand, broad term that is inclusive of the legal Articles in MiFIR, the Regulation that will accompany the Directive. This posting will question the extent to which MiFIR’s status and content merit a close examination in their own right.

A Regulation that Complements a Directive, but...

In European Union legal arrangements, Regulations have binding legal force throughout every Member State and enter into force on a set date in all the Member States. Directives lay down certain results that must be achieved, but each Member State is free to decide how to transpose directives into national laws.

The implementation and enforcement of the first MiFID showed the significance of this distinction: MiFID was put into effect progressively by some states, and certainly unevenly. This posting is not an invitation to prevaricate or hamper the authorities’ work; the point is that one may expect capital markets actors affected by MiFID II to be on different schedules as implementation occurs.

Why was a Regulation needed? The ESMA website uses the term MiFID/MiFIR as a single, bundled unit. Finally, after considerable searching, in Article 21 of the European Commission’s announcement on MiFID II, dated 15 April 2014, the explanation is delivered:

“As in other pieces of EU financial services regulation, the split reflects the need to achieve a uniform set of rules in some areas, while allowing for national specificities in others. The De Larosière report highlighted that one of the problems leading to the crisis was an inconsistent implementation of financial services rules leading to a fragmented internal market.

As a result, a Regulation (MiFIR) sets out requirements on:

  • the disclosure of data on trading activity to the public and transaction data to regulators and supervisors;
  • the mandatory trading of derivatives on organised venues;
  • removing barriers between trading venues and providers of clearing services to ensure more competition; and
  • specific supervisory actions regarding financial instruments and positions in derivatives.

Such a harmonised approach will help avoid confusion in the daily functioning of markets, and minimise opportunities for harmful regulatory arbitrage between Member States.”

The Directive was meant to be transposed into national law by July 2017, which essentially means the legal distinction would have disappeared at some now-forgotten point in EU recent history – unless the transposition was done unevenly, and the Regulation at least gives an immediate commonality for the critical, specific elements of the bundle, though how they will mesh with national particularities has to be unclear. This is not black and white.

The Objectives of MiFID II / MiFIR

Clearly, the regulatory perimeter is being extended: the majority of non-equity products should fall under a regulatory regime, and a significant part of OTC trading will move onto regulated platforms. More specifically, as ESMA explains it the key rules are meant to introduce:

“Fairer, safer and more efficient markets through:

  • tests to determine whether a non-financial firm’s speculative investment activities are so great that it should be subject to MiFID II;
  • ranges for the new EU-wide commodity derivatives position limits regime;
  • rules governing high-frequency-trading, imposing a strict set of organisational requirements on investment firms and trading venues;
  • provisions regulating the non-discriminatory access to central counterparties (CCPs), trading venues and benchmarks, designed to increase competition;
  • provisions requiring trading venues to offer disaggregated data on a reasonable commercial basis.

Greater transparency through use of:

  • thresholds for the pre-trade and post-trade transparency regimes extended to equity-like instruments, bonds, derivatives, structured finance products and emission allowances;
  • a newly-introduced liquidity assessment for non-equity instruments;
  • a newly-introduced trading obligation for shares and certain derivatives to be traded only on regulated platforms and, in the case of shares, systematic internalisers, instead of over-the-counter;
  • a double volume cap mechanism to limit dark trading and reshape the use of waivers for shares and equity-like instruments;
  • newly-introduced reporting requirements for commodity derivatives.

Stronger investor protection by:

  • improved disclosure to strengthen the best execution regime.”

So much for theory: for starters, what is a fair commercial basis for offering data? What does it mean to separate clearing from the trading venue where the transaction took place – for the value of price discovery as well as the certainty of managing settlement risk? What kind of computing power does it take, and what qualitative assumptions have to be made, to evaluate best execution of trade transactions?

What MiFIR is Supposed to do

This is the straightforward part of this opinion piece: MiFIR is supposed to give a common, immediate legal basis for MiFID in the 28 Member States in four key areas of MiFID II, without awaiting an assessment of the exact and fair transposition of the Directive into the laws of the 28 countries.

Will it? The question needs asking, because regulatory discipline across these national markets is a tough task, as the public saw with the original MiFID.

The four focus areas of MiFIR will be given the attention their special status merits, notably on clearing and its associated risk management.

The relevance of Thomas Murray’s services

Monitoring – independent, third-party verified assessments of capital markets processes have been the red thread woven through the firm’s work since its founding. And more banks and asset managers have come to rely on the firm for monitoring, with the increasing complexity of daily business and the regulatory framework for it. It is also efficient, given the scale Thomas Murray Data Services can bring to this work.

As MiFID II/MiFIR come into being imminently, the Directive gives market professionals a bit of time to settle into new habits that meet new obligations. The new needs will soon become even more apparent – even now, with the separation of research from transactions, firms are having to choose which side of that line will end up being the better bet for their commercial futures.

Simply enough, besides maintaining its information relationships with regulators, relaying what the firm finds in the field as regulation changes and gets implemented, the best service TMDS can provide is being available to clients to meet their monitoring needs – with the concentration being on post-trade businesses where the firm’s areas of expertise lie

Conclusion

Coming postings on the Thomas Murray Data Services website will include reports on the MiFID II countdown, and what it portends for the firm’s services and clients. As it comes into effect and the reality of the new environment starts to become apparent, we will see how well this sequel suits the European markets. We do not know any better than any other keen observer how the market will react. We do know that increasing complexity makes trading and enforcement harder, and in that sense increases costs for the users of financial services.

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The author, Thomas Krantz, is Senior Advisor, Capital markets, in the firm of Thomas Murray; and served as Secretary General of the World Federation of Exchanges (2000-2012). The views expressed are his own, and not necessarily those of the firm.

Tags: MiFIRMiFID IIMiFIDRegulationTrade ReportingESMAEuropean CommissionOTC tradingmonitoringCapital Marketspost-trade

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