OK, second time this month I have had this “isn’t MiFIR part of EMIR” conversation, least of all the number of times I have had it this year, so let’s have a go at clearing this up.
It’s probably easier to understand how this all came about if you wind back the clock to April 2010 when CESR issued technical advice to the Commission recommending possible revisions to the Markets in Financial Instruments Directive (MiFID) that was implemented way back in November 2007.
This formed the basis of what was to be known as the ‘MiFID Review’.
The primary objective of the MiFID Review was to bring areas of the market that had escaped the MiFID net, such as broker crossing networks and dark pools, into scope, as well as update the regulation to capture market advancements in technology, such as automated trading and high frequency trading.
Now wind forward the clock, and in stumbles EMIR, which clearly had some overlap with what was trying to be achieved with the MiFID Review.
At this point, it is worth noting the difference in the legislative process between a regulation (that has direct effect on all Member States) and a directive (which requires transposition into a Member State’s domestic law, under a separate domestic instrument) because you can’t use one to manage the other and vice versa.
And therein laid the problem – we had a directive (MiFID) that was up for review and a regulation (EMIR) that had already been cast in stone, but already needed changing.
The solution – drum roll! – was to introduce a directive (MiFID II) that repealed MiFID and a regulation (MiFIR) that would amend EMIR.
Talk about confusing!
As I think about this, what’s particularly ironic is that MiFIR won’t even be binding until 2015, maybe even 2016, which is then a year or two after the central clearing obligation of EMIR has actually come into force!
So what should you know about MiFIR and the MiFID Review, if you are currently involved with EMIR and OTC swap reform, and how could this be built into your processes? Let’s call this a kind of ‘preemptive-need-to-do-even-though-the-regulation-hasn’t-even-been-passed-yet’ sort of strategy.
Firstly, there’s the introduction of the Organised Trading Facility (OTF), an important measure that is designed to be a ‘catch-all’ category of regulated trading venue. This is a sort of ‘lite’ version of the Multilateral Trading Facility (MTF), although what was ever wrong with just sticking with the MTF I’ll never know – if it ain’t broken…
Secondly, there is the requirement that all standardised OTC derivatives must be traded on a Regulated Market (RM), a MTF or an OTF. This is the other important measure for EMIR as it implements the key G20 requirement that “all standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms”.
Thirdly, pre-trade and post-trade transparency reporting requirements that evolved from MiFID will now be extended to many other instruments. RMs, MTFs and now OTFs will have to report on a continuous basis the current bid and offer prices and depth of trading interest, including indications of interest.
And finally, there will be an extension of the MiFID transaction reporting requirements, making them more complex in terms of scope and reporting content and bringing a significant expansion in the range of reportable instruments, including:
- All derivatives admitted to trading on RMs will become reportable i.e. the currently exempted interest rate, commodity and FX derivatives will be caught.
- All instruments traded on MTFs and OTFs will become reportable, introducing OTC derivatives to the reporting regime as well as significantly increasing the number of cash instruments that will need to be reported.
- Any instrument that could have an impact on the value of instruments trading on a trading venue will be reportable.
There will also be an increase in the number of fields making up a transaction report and there are likely to be many new additions, including:
- Trader or Algo identifier to identify the individual trader executing the transaction or the algorithm used.
- A field to identify when the trader is short selling.
Importantly, this is all in addition to the EMIR trade reporting obligation and so will result in the duplication of trade reporting for many trades, under both regimes.
ESMA will also be responsible for formulating a common European transaction reporting format and content. This may lead to changes in the way firms report to competent authorities. For example, Swaps ‘business events’ may become reportable and there may be new reference data standards that advance on the introduction of the Legal Entity Identifier (LEI).