The meaning of MiFID II

The meaning of MiFID II

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1. Don’t underestimate challenges associated with MiFID II implementation. Firms already supervised by the UK’s Financial Conduct Authority (FCA) will need to work on being compliant with the Markets in Financial Instruments Directive II (MiFID II), even though there is significant cross-over between their requirements and policies, according to Tracey McDermott, Acting Chief Executive of the FCA. “Firms shouldn’t underestimate the extent of the changes involved, nor the importance of carefully managing future compliance,” with MiFID II, said McDermott. Similarly, the expected 12-month delay for the introduction of MiFID II to January 2018 is not a signal for companies to rest on their laurels. “If there is a delay to the implementation of MiFID II, the purpose will be to allow time for those changes to be made in a more effective way, not to provide an excuse to reduce the intensity of the preparation for implementation.” said McDermott.

2. Get on top of transaction reporting processes. Gary Stone, Chief Strategy Officer at Bloomberg Trading Solutions, highlighted the need for firms to have trade capture systems that are aligned with the way regulators plan to track trades. “Transaction reporting is actually a really big deal for firms and I would strongly encourage you to map out your processes now,” said Stone. “Some of these posttrade requirements are going to affect processes pre-trade and during trading.” The FCA’s McDermott confirmed transaction reporting is one of the key elements of the legislation. “Having firms zeroed in on getting their transaction reporting right will be one of our supervisory priorities,” McDermott said. “Particularly when it comes to seeing how successfully firms are implementing the legislation.”

3. Explore the implications and opportunities in budgeting for research costs. Regulators are keen to separate trading activity from research as part of the push towards greater transparency. While the final requirements haven’t been decided yet, companies should start discussing with their clients how they are going to budget for these research costs in future. “The communication with the clients about those budgets – what if you overrun or underspend – is a whole new area of practicality that we haven’t had to deal with before,” said Rob Alster, Head of Research at Close Brothers Asset Management. At the same time, firms should be examining ways to maximize their spending, says Neil Scarth, Principal at Frost Consulting. “For an asset manager, this really is a brave new world,” Scarth says. “How do I as an asset manager with a finite research budget create the most value for my dollar spend in a more multi-polar research world, where I’m getting research from different sources?”

4. Prepare to deal with a difficult regulatory environment with regards to instrument identifiers. A vital part of transaction reporting and trade transparency is the availability of identifiers that cover all asset classes in an appropriate way. The current draft MiFID II rules mandate International Securities Identification Numbers (ISINs) as the single solution for instrument identification. This is against the advice of global industry groups including ISDA and the GFMA (see their letter to the European Commission). While it is unclear what the final rule will look like, market participants should anticipate difficulties, particularly for the identification of derivatives for post trade transparency and for transaction reporting. “Serious questions remain about how ISINs can work in the context of derivatives which are trading on MiFID venues and traded by Systematic Internalisers. ISINs do not easily lend themselves to identifying all the economic terms of a derivatives contract, yet MiFID requires that they be obtained before any trading takes place. It is particularly unclear how ISINs can be issued in sufficient quantities, and in a timely enough manner, to meet the demands of derivatives trading,” said Richard Young, Head of Regulatory Initiatives and Strategy at the Open Symbology Group1 at Bloomberg L.P

5. Keep innovating to increase market transparency and effectiveness. Governments and regulators are looking for new tools to enhance transparency and firm-level surveillance for misconduct, according to Harriet Baldwin, Member of Parliament and Economic Secretary to the Treasury in the UK. The increasing use of electronic trading platforms has been a step in the right direction. “Misconduct in the market has damaged trust and impaired effectiveness,” said Baldwin. “Innovation led by new technology has and will continue to enhance the effectiveness of markets and reduce opportunity for misconduct in the future.”

For more information and guidance please email Michalaki, Pitsillidou & Co LLC – iMPK Global Business Law Firm – Cyprus Lawyers, at or visit our website at +357 25660092 – Fax +357 25 660097.

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