General FAQs About MiFID II

June 8, 2017

The following general MiFID II FAQs will attempt to clarify some of the key issues surrounding  MiFID II.

This page is intended to be continually edited and updated as and when new questions are received. The date on which the page was last amended is included for ease of reference.

  1. What is the MiFID II/MiFIR regulation?
  2. Why is there a new legislation?
  3. What are the core objectives of MiFID II?
  4. To whom does the MiFID II apply?
  5. What is the timeline for the MiFID II legislation?
  6. What are the key changes to the legislation?
  7. What is the impact of MiFID II legislation to Pershing and its clients?
  8. What is Pershing doing to prepare for the new legislation?
  9. What do firms need to be doing to prepare for MiFID II?
  10. How will MiFID II affect other regulations?
  11. What does Brexit mean for MiFID II?

 

    1. What is the MiFID II/MiFIR regulation?

      In 2014, the original MiFID regime was repealed and gave way to the adoption of MiFID II, a legislative framework comprising of both the Directive (MiFID II) and the Regulation (MiFIR). The Markets in Financial Instruments Directive (MiFID II) is one of the most significant regulatory changes faced by our industry in 2017. The directive impacts the entire investments lifecycle as it enhances and expands regulation of financial institutions within the European Economic Area (EEA) as well as those providing services cross-border.

    2. Why is there a new legislation?

      The new MiFID regime is a response to the unanticipated consequences of the original MiFID legislation, taking into account the developments within the trading environment since MiFID I’s implementation as well as the lessons learnt from the 2008 financial crisis. The revised regime significantly enhances the current MiFID requirements.

    3. What are the core objectives of MiFID II?

      • Increased market transparency
      • Increased investor protection
      • Increased integrity of the market and financial stability
      • Increased supervisory powers
      • Technological innovations
      • Increased oversight of commodity markets
      • High standards for managerial competence
      • Increased harmonisation of administrative sanctions
      • Increased alignment of regulation across the European Union (EU)


    4. To whom does the MiFID II apply?

      MiFID II applies to those financial services businesses undertaking MiFID business anywhere in the EU as well as those providing services cross-border. This includes investment firms, trading venues, data reporting service providers and third-country firms providing investment services or performing investment activities into the EU (either on a services basis or via a branch). MiFID II impacts all areas of Pershing and provides clients, and particularly wealth managers, with increased obligations.

    5.  What is the timeline for the MiFID II legislation?

      MiFID II will take effect from 3 January 2018. EU member states have until 3 July 2017 to transpose the new rules into national law.

    6. What are the key changes to the legislation?

      • Market Structure
        MiFID II seeks to move as much trading as possible onto organised venues (away from over-the-counter). It will mandate the trading of certain instruments on organised venues and introduces the Organised Trading Facility, a new type of market venue.
      • Governance and Organisation
        MiFID II brings in additional measures for product governance and increased supervisory roles. MiFID II re-emphasises the importance of control functions, specifically in relation to the product approval process. It also seeks to establish more robust requirements for management functions.
      • Investor Protection
        MiFID II lays out a number of requirements that serve to re-shape the way in which services are developed, communicated, sold and delivered to clients. MiFID II enhances the information to clients, installs heavy restrictions on inducements for independent advisors and portfolio managers (including access to research), product stability and appropriateness checks for retail clients.
      • Conduct of Business
        MiFID II mandates enhanced conduct of business requirements including unbundling of research and conflicts of interest.
      • Re-Papering
        Pricing, workflow and business conduct adjustments will lead to changes to terms of business, client agreements and confirmations.
      • Algorithmic Trading
        MiFID II introduces a number of specific requirements that seek to control the way in which firms utilise algorithmic execution tools in the marketplace.
      • Best Execution
        Best execution requirements extended, requiring firms to disclose their top five execution venues used for each class of financial instrument and publication data.
      • Pre-Post Trade Transparency
        MiFID II extends to scope for the publication of quotes and transactions to the market to other ‘equity like instruments (e.g. exchange-traded funds) and non-equity instruments (e.g. bonds, structured finance products, derivatives).

        All trades must be reported to an Approved Reporting Mechanism (within one minute for equities).
      • Transaction Reporting
        The new transaction reporting regime places increased demands on financial institutions to report information on transactions that they have executed.

        The scope of instruments to be reported is extended to any financial instrument traded, or admitted to trading on a venue or which a request of admission to trading has been made.

        The number of data fields is significantly increased from 24 to 65.

        The scope of reportable transactions (to national competent authorities) is significantly extended in terms of:

        • Firms that transmit orders to other firms for execution
        • Reportable instruments
        • Reportable events (extended to include certain corporate actions and off market transfers)

        Reportable data is extended to provide greater transparency. This includes the reporting of the Marketing and Communications investment and execution decision makers which may include algorithms and new fields that will identify individuals and entities.

        A transaction report may now be submitted directly to a competent authority by an investment firm, sent via an Approved Reporting Mechanism (ARM) or submitted by the trading venue through which the transaction was completed.

      • Commodities
        In an effort to enhance scrutiny of speculative commodities trading, MiFID II provides the ad hoc introduction of position limits and requires that details of positions must be reported to the trading venue on a daily basis.
      • Trading Rules for Derivatives
        MiFID II introduces mandatory on exchange trading, position limits and reporting rules.
      • Third-Country Access/Supervisory Powers
        MiFID II introduces additional and reinforced powers of supervision. Interventions will be permitted on a pre-execution basis, in relation to product development, and on post-execution basis in relation to sales.


    7. What is the impact of MiFID II legislation to Pershing and its clients?

      MiFID II is a complex piece of legislation that introduces more regulation and has a wider scope than the current regime. MiFID II impacts all areas of Pershing and provides clients, particularly wealth managers, with increased obligations. The changes introduced by MiFID II will reshape European financial markets, posing technological and commercial challenges to how investment firms and trading venues conduct business.



    8. What is Pershing doing to prepare for the new legislation?

      Pershing launched the MiFID II programme in 2015 and is also a part of the wider BNY Mellon Programme. Dedicated work streams have been established. Compliance SMEs have completed gap analyses for each work stream. Business Viability Assessments have been completed to identify system, process and employee requirements. Initial high level technical requirements have been released and detailed technical requirements for transaction reporting will be released in Q2:17.

      Pershing has reviewed the detailed requirements set out in the delegated acts, Regulatory Technical Standards (RTS), European Securities and Markets Authority (ESMA) guidance, Financial Conduct Authority (FCA) consultation papers and the Operational and Technical Arrangements issued by the Central Bank of Ireland (CBI). The Compliance team is closely following both the national as well as European developments in order to ensure that we are compliant with the amended MIFID II regime come 3 January 2018, and are able to support our clients in the fulfilment of their own MiFID II obligations.

      Whilst waiting for the final FCA and CBI policy statements and the ESMA guidance to be released, Pershing is liaising with various Trade Associations on a number of areas which require greater clarity, including costs and charges and investor reporting.

    9. What do firms need to be doing to prepare for MiFID II?

      The general orientations of the reform are now clear therefore, over the coming months you should consider MiFID II in light of the following:

      General:

      • Review: Get to grips with the detailed requirements set out in the delegated acts, RTS, ESMA guidance, FCA consultation papers and CBI Operational and Technical Arrangements for transaction reporting. Understand your data and system requirements so that you can plan for any new builds, system upgrades, and interfaces with Pershing. Perform gap analysis to highlight which static data you may not have currently and are required to obtain from your Marketing and Communications clients

      • Plan: Formulate your strategy to identify any business threats and strategic opportunities. Analyse your revenue impacts. Establish an internal framework to co-ordinate initial activity and get the right people involved. Commence high-level planning to help gauge key timings and 'must do now' activities

      Transaction Reporting:

      • Obtain your Legal Entity Identifier: From 3 January 2018 firms subject to MiFID II transaction reporting obligations will not be able to report a trade on behalf of a client who is eligible for a Legal Entity Identifier (LEI) if they do not have one. Pershing clients will therefore need to ensure they have applied for and been issued with an LEI. For further information on how to obtain your LEI, please visit the Global Legal Entity Identifier (GLEIF)  website

      • Gather information from your clients:
        • From individuals — obtain missing static data i.e. national insurance numbers, date of birth

        • From legal entities — ensure they obtain an LEI

      • Identify decision makers: Be able to identify individuals or algorithms which make or execute the decisions for your firm and client.

      Repapering:

      • MiFID II brings in changes to both contracts and investor documentation. Although Pershing will not require investors to provide affirmative/positive consent to their terms of business, firms will need to agree new and updated legal documentation with each of their own investors


    10. How will MiFID II affect other regulations?

      MiFID II is only one part of the regulatory landscape. Many of the current regulations have inter-related or overlapping objectives and impacts such as European Market Infrastructure (EMIR), Dodd-Frank, Market Abuse Regulation (MAR). Both Dodd-Frank and MiFID II contain similar requirements for OTC derivatives to be traded on exchange, originating from the G20 requirements. For EMIR, the main area of interaction between MiFID and EMIR concerns reporting obligations in respect of derivatives transactions. The scope of the MAR regime is to be extended to cover all financial instruments covered by MiFID, and to those traded on an MTF as well as a regulated market, there is an overlapping regulatory requirement which firms must adhere to.

      Please refer to the ESMA , FCA , and CBI  websites for further information.



    11. What does Brexit mean for MiFID II?

      The UK financial regulator, the Financial Conduct Authority (FCA) stated, “Firms must continue to abide by their obligations under UK law, including those derived from EU law, and continue with implementation plans for legislation that is still to come into effect”. The FCA has clarified that irrespective of Brexit, MiFID II will become law in 2018 and firms need to make sure they are prepared.