Truth be told, I’ve got a soft spot for MiFID – the Markets in Financial Instruments Directive that was introduced back in November 2007 to shake up Europe’s equity markets and create a common set of rules for a single market.
I cut my teeth on the regulation when I tore the thing apart to understand the impact that the introduction of MTFs would have on buy-side trading desks. I didn’t care too much about the regulation at the time per se because all I was focused on was designing trade execution algorithms, but it sure did give me an introduction into how regulations were coming of age!
Six years down the road and the same regulation is still paying my way :-), this time courtesy of the MiFID Review. The folks that are responsible for writing this stuff typically stick a date in the diary for ‘T+5 years’ to rectify things that didn’t quite play out first time round.
To be clear, the MiFID Review is a complex piece of legislation. It is made up of MiFID II, a huge overhaul of the original regulation, because technologically a lot has changed, and MiFIR, an amendment to EMIR, because the launch of the MiFID Review collided head on with the European response to global OTC swap reform.
I first looked at how this ‘MiFID-Review-meets-EMIR’ collision was going to play out in a blog from August last year and it’s well worth a quick read as you really want to understand just what’s at stake here.
In the bigger scheme of things, the MiFID Review should most definitely now be on your to-do list because the overall scale of it is mind boggling.
I say mind boggling from a multi-dimensional perspective. The first dimension being its complexity, the second dimension being its scope and the third dimension being the sheer volume of the legislation itself.
Let me explain what I’m looking at.
In terms of complexity the MiFID Review focuses on four key themes:
1. Market Structure:
- Introduction of a new category of trading venue – the Organised Trading Facility (OTF) – for non-equity instruments
- Obligation to trade derivatives on a RM, MTF or OTF, in line with G20 commitments
- New treatment for single and multi-dealer platforms and dark pools
- Change in scope of regulatory perimeter for commodities business, including harmonised position limits and trading restrictions on commodity derivatives to improve transparency, support orderly pricing and prevent market abuse
- Trading obligation for shares and a double volume cap mechanism for shares and equity-like instruments, introducing a major change to the framework for trading these instruments
- A more restrictive regime for High Frequency Trading, imposing a strict set of organisational requirements on investment firms and trading venues
- New requirements for algorithmic trading and direct electronic access
- Provisions regulating access to central counterparties, trading venues and benchmarks, designed to increase competition in the Union
2. Market Transparency & Transaction Reporting:
- Pre and post-trade transparency and firm quote requirements extended to MTFs, OTFs and SIs
- Increased pre and post-trade transparency regime for equities and extension to non-equity instruments such as bonds, derivatives, commodities/energy and structured finance products, tailored across each asset class
- Significant increase in transaction reporting requirements and extension to all asset classes
- Limits to the use of reference price waivers, whilst conditions for waivers to be tailored across each asset class
- Increased transparency requirements on received commissions
- Introduction of a European Consolidated Tape for post-trade data, including rules for tape providers, reporting, publication and sales of data
3. Investor Protection & Conduct of Business:
- Stronger investor protection through better organisational requirements and strengthened conduct rules
- Extension of conduct of business rules across further asset classes whilst the execution-only regime will be limited to non-complex products
- Enhanced organisational and conduct of business requirements for investment firms providing advice
- Appropriateness and suitability for marketing & sales material applicable across all asset classes, specifically complex products
- Requirements for investment firms manufacturing or distributing financial instruments and structured deposits to have product governance arrangements in place in order to assess their robustness
- Increased reporting requirements for all investors, not just retail
- Firms to provide clients with more comprehensive view of all costs and charges related to their investment
- Increased best execution requirements for firms and execution venues, whilst regime extended across quote-driven and OTC markets
- Ban on inducements removed and replaced with a stringent disclosure regime
4. Internal & External Controls:
- Governance/strengthening of internal Compliance function
- Passporting extended to other asset classes and new services
- Product intervention powers for ESMA and national regulators with regards to prohibiting or restricting the marketing and distribution of financial instruments
- New harmonised regime for third-country firms operating via branches in EU
These four key themes impact the buy-side, sell-side and every intermediary-that-I-could-think-of-in-between and will change pretty much the entire marketplace as we know it today. The regulations will need to be worked into any business or operating model that interfaces with dealing or trade processing.
In terms of scope the extension of MiFID to all asset classes means that virtually anyone who is involved in financial instruments will be impacted by the regulations and so it doesn’t get much more ‘scopey’ than that!
And in terms of sheer volume, the best way that I could think of at looking at this was to compare it with something that we’re already familiar with, so let’s take EMIR, as it’s sitting here right in front of me.
The Level 1 text of MiFID II and MiFIR was finalised back in April and the Level 2 text is a work-in-progress, so I’ll take you back to the same place in time with EMIR, so I’m comparing apples with apples:
- When the Level 1 text of EMIR first landed on your desk – the stuff that tells you “what you’ve got to do” – it was 59 pages. Doable.
- When the Level 1 text of MiFID II and MiFIR lands on your desk, it’s going to be 550 pages! I’m not kidding.
Now that we have the Level 1 text, the folks that write this stuff are busy knocking out the Level 2 text – the stuff that tells you “how you’ve got to do it”.
At the heart of this is an ‘iterative consultation process’ that works with the industry and working groups to evolve the detail – each group, of course, being solely aligned to shaping the regulations to best suit their own needs! 😉
- When the consultative Level 2 text of EMIR first landed on your desk, it was 368 pages. Challenging.
- When the consultative Level 2 text of MiFID II and MiFIR lands on your desk, it’s going to be 844 pages! I’m not kidding. Again.
No wonder ESMA’ s servers crashed on the day of release!
For those of you that need a clearer message to justify additional head count, here it is. EMIR on the left, MiFID II and MiFIR on the right:
If you have ever been involved in a reg change project, you’ll know that this is complex subject matter and takes real time and effort to work through and that without systematic methodologies for processing all of this stuff, you’re really going to come unstuck.
When I launched the concept of Regulatory Architecture, along with this blog, the goal was to solve exactly this problem – “how do you process 1,000’s of pages of regulations and analysis and turn them into deliverables that you can work with?”
With the compliance date for MiFID II and MiFIR kicked right out to early 2017, I’m sure the easy action is to file this regulation in the ‘low priority’ tray, but given the scale of it, can you really afford to do that?
As a Consultant, you get to see the ‘supply and demand’ for implementing all of this stuff and if I can pass on to you what I’ve seen so far, it’s that the more active houses were already mobilising programmes as early as November last year.