The Markets in Financial Instruments Directive II (MiFID II) entered into force on 2 July 2014, and must generally apply within Member States by 3 January 2017. It is the cornerstone of the EU financial regulatory landscape and will drive fundamental changes in the EU securities markets across the full lifecycle of products and services. It is expected that no business or operating model of relevant financial firms will remain unaffected. Through Kinetic Partners’ detailed knowledge in MiFID II/R, we can guide you safely through the challenges and opportunities this far reaching regulation presents.
Organizations such as investment banks, retail and private banks, asset managers and commodity trading firms will face key challenges in areas including:
Transparency in wholesale markets
It is intended that the existing transparency regime will be extended to the debt and derivative markets at both the pre- and post-trade stages of a transaction with the intention to improve price discovery and liquidity in markets.
The equity transparency regime will be extended from shares to other equity-like instruments, such as certificates, GDRs and ETFs.
The granularity of application of the rules, the calibration of thresholds for “large in scale” when delaying publication and the definition of ‘liquid’ instruments are issues that both regulators and firms will need to come to terms with.
Firms should be examining how the changes will affect their business model and seeking regulatory consulting advice as required.
As well as bringing new firms into the scope of regulation, including extending regulation to emission allowances, MiFID II will also include pre- and post-trade transparency, position reporting requirements, and a system of position limits. The aim is to ensure that underlying supply and demand in physical commodity markets which sets the prices there is not distorted by financial speculation.
There will be enhanced scrutiny by regulators of High Frequency Trading including the direct regulation of firms engaged in such activities. Key areas that will come into force are:
- subjecting market making strategies to market making obligations
- testing of algorithms before their execution
- the formalization of the ESMA automated trading guidelines
The aim here is that markets are safe for all market users.
The aim here is to improve firms’ execution policies and disclosures to ensure that clients can analyse execution quality. Challenges exist in developing methodologies for measuring execution quality across a diverse range of financial instruments and market models.
MiFID II takes steps to remove the incentives for asset managers to trade, against the interest of their clients, when purchasing research from dealing commission generated by that trading. The proposal would lead to a market in which all valuable research must be paid for by fund managers themselves, rather than paid unseen by their clients within transaction fees.
Retail investor protection
Suitability and appropriateness will be a big issue here as well as processes around the distribution of manufactured financial products. The requirements when disclosing costs and charges to customers will be a lot more prescriptive. The FCA is already operating some of the proposals by making use of its ability to ban the sale of certain high risk products to retail investors.
How can we help?
Our highly qualified compliance and regulatory consulting team can provide assistance with:
- authorizations under the new regulatory regime for commodity firms and firms dealing in emissions, and provide regulatory experience as required relating to transparency
- authorizations and regulatory consultancy services specifically relating to processes and procedures around HFT
- advising on Best Execution, dealing commission and the procedures around retail investor protection
- advising on strategic and customer-related challenges generated as a result of MiFID II
- developing enhanced data infrastructure, systems and controls, as well as documentation and compliance infrastructure