Markets in Financial Instruments Directive / Regulation
MiFID II and MiFIR are two elements of the legislation that are beginning to control the financial markets. The Markets in Financial Instruments Directive and Markets in Financial Instruments Regulation will replace and extend the original MiFID which came into force from 2006. The new MiFID/R (adopted into law by parliament 15th April 2014) has had to digest the publication of Delegated Acts (level 2 text) having previously seen the relevant Regulatory Technical Standards published (2015-2016), to allow implementation of the legislation for 3rd January 2018. Whilst protracted regulatory implementation timelines are becoming a reality transpire, the core legislation is now implemented like a massive train down the track - so a very real focus on managing this workload is VITAL.
MiFIR has attracted most attention from the front office as this Regulation defines the mandatory trading venues that the vast majority of OTC transactions will have to pass through. Regulated Markets (RM) - think exchanges - are joined by Multilateral Trading Facilities (MTF), Organised Trading Facilities (OTF) and Systematic Internalisers (SI).
MiFID II and MiFIR
Whilst there has been much noise and discussion around OTF, the simplest way of considering this new structure is that it allows the broker model to persist - think MTF but with an allowed discretion at the point of trade where the transaction has to be adjusted to allow both counterparties to agree the trade - and no it does not make sense for a bank to run an OTF. While the SI model never really took off under MiFID I, the new legislation will mean that SI captures most of the bilateral OTC business that banks currently transact with their customers. This new SI regime will profoundly change the bilateral trading model that currently operates and is likely to impact many firms - not only a few large ones.
The new transparency regime will mean that most trades (allowance for exclusion of large in scale trades to protect liquidity) are reported immediately to the general public at a reasonable charge, and in any case free after 15 minutes. However whilst MiFIR will certainly change the underlying market structure, MiFID will have at least as profound an effect. With one eye on conduct risk imagine that all trades will now be subject to a 'retail like' process around duty of care to the customer... All customers will be treated under a far more stringent regime, and when one considers the significantly stronger approach being taken by regulators on non-compliance in this area, there are likely to be some hefty fines being handed out in the coming years.
Looking at the Directive, MiFID will have the most profound effects on the industry. There is an entire section on investor protection, with which UK institutions will be familiar if considering the current UK approach to retail protection. Best Execution rules will involve four significant levels of work in planning and management; Policy, Execution, Monitoring and Reporting. The burden of compliance with this new approach to protection of non-banks will involve significant planning and IT development, to enable demonstration of the cross-checks and process changes that fulfil these protections.
There are many areas of MiFID that remain to be clarified, either due to text being unclear at the detailed implementation level, or because one section of MiFID contradicts another.
The forbearance shown by regulators towards firms for not complying with the entirety of MiFID as we entered 2018 is no more than a temporary reprieve
FMR Advisory has been helping providers of current trading technologies with how to split their client workflows into the MTF or SI regimes. Whilst the two technologies can appear very similar, the workflows that define the two regimes have subtle but significant differences that impact the firm and their client's obligations under MiFID