FIXNETIXThe ultimate trading advantage

Managing Director

Jefferson Young Part of the InterQuest Group

MiFID & MiFIR Update

Matthew Argent

Editor FT trading Room

Financial Times

MiFID & MiFIR Update

Philip Stafford

Chief Administration Officer

Fixnetix Limited

bob.fuller@fixnetix.com

Major changes in EU

trading regulation & how it

might affect you

Bob Fuller

Where is the London market now?

Five Stages of Grief

• Denial – This can’t be happening to me.

• Anger – Why me?

• Bargaining – Attempting to make deals.

• Depression – Feelings of hopelessness.

• Acceptance – Getting on with life.

EU Regulations, where are we?

• EMIR – Passed

• OTC Derivatives – Passed

• MAD 2 Directive – Passed

• MAD 2 Regulation – Passed

• MiFID 2 Directive – Will be passed 16th April 2014

• MiFIR 2 Regulation – Will be passed 16th April 2014

Latest/almost final versions of MiFID 2 and MiFIR dated the 17th February 2014

Under EU law

Directives

• must be transposed into each Member State’s

national law by secondary legislation

• ample scope for incorrect/incomplete porting

Regulations

• ‘binding in their entirety & directly applicable in all

Member States’

What is the difference between a

Directive and a Regulation?

Where are we in the MiFID II process?

For the US to recognise the EU withing

the Dodd Frank regime MiFID 2 and

MiFIR 2 MUST be passed before the EU

parliament retires in April

(for the May Elections)

• MiFID 1 is NOT repealed but a lot of the definitions

are changed i.e. It’s not just about Equities, but

about everything except FX.

• No mixing of the prop book with customer orders

unless you are an Systematic Internaliser. The end

of Broker Crossing Networks as we know them.

• Much more transparency, with increased restrictions

on trading ‘in the Dark’ ( 8% in market total for any

instrument and 4% for any market venue – then 6

months of NO dark activity!)

Main Market Structure items 1

• The Equity model is to be used as the base model

for ALL instrument types.

• This will inevitably move ALL instrument types to

electronic trading (the demise of voice trading)

which will require more connectivity and less

traders.

• Greater emphasis on Best Execution so more

historic proof of what you did and why.

• Mandatory Clearing of new instruments.

Main Market Structure Items 2

Main Market Structure Items 3

• Controls and constraints on High Frequency

Trading. Including prior approval by a regulator!

• Both firms and individuals will be subject to fines

and/or other sanctions given any ‘ignoring of the

rules’.

• Non Equity Clearing open to competition over

time.

MiFID 196 pages

MiFID 2 464 pages

MiFIR 60 pages

MiFIR 2 243 pages

Original total 256 pages

New total 707 pages

Overall very nearly 3 times the size.

Note how much bigger MiFIR is over 4 times the size

Some Statistics to ponder

MiFID II’s much more reliance on Regulation rather

than Directive plus the new sanction regime

characterises the significantly altered risk/reward

balance.

A big change from the much lighter touch framework

that has been in place since competition in equities

trading was first opened up five years ago by MiFID

What is the main structural difference

between MiFID and MiFID 2?

Financial Transaction Tax

Still being proposed by 11 EU countries with

Equities being set at 0.1% and Derivatives at

0.01%. Due soon?

• Extra Territoriality

• Definition of when it is due

• Competitiveness of EU institutions

May include FX (see recent EU legal challenge!)

What other EU rules may affect Trading?

German HFT rules

Now in place

• Need to have a capitalised presence in

Germany to Algo/HFT trade

• May move flow to London

Local EU laws

What Structural Changes may this cause?

• Reduction/removal of margin income on customer flow

• Dramatic reduction in voice trading, more electronic

trading – smaller trading rooms?

• Potential reduction in liquidity for some instruments

• Increased IT costs / reduction in revenues

This is very likely to lead to:

• More specialisation within an entity, only concentrate on

what you are good at.

• Increased IT spend and increased IT risk.

• More outsourcing or use of utilities

Any Other Structural Changes?

All of these changes are moving formally Back Office End of Day functions

to be more Front Office Real-Time ones.

For example there will be a need to move collateral in real-time, due to:

• More transactions being cleared requiring more initial margin.

• As the CCP’s will be more regulated they will not be able to offer so

much intra day credit so to carry out the next trade they will need to

have control of the collateral.

• This will lead to:

• The need to settle transactions quicker to enable the proceeds to be

used as collateral.

• The lack of available collateral putting a stop to trading activity!

All of which will require major changes to systems and communications

infrastructure for these current Back Office functions.

Where is the market?

Five Stages of Grief

• Denial – This can’t be happening to me.

• Anger – Why me?

• Bargaining – Attempting to make deals.

• Depression – Feelings of hopelessness.

• Acceptance – Getting on with life.

Immediate Preparations for you

• Speak with your compliance departments

• Read all the regulations

• Attend conferences and events on regulations

• Discuss with peer group and industry associations

Most of all, these regulations will need significant Senior

Management involvement as they will affect what you

trade and how you trade it.

20 MARCH 2014

Richard Kemp

MiFID II Sanctions

Regime

Title VI, Chapter 1 – Articles 69 to 82

Designation, Powers and Redress Procedures of Competent

Authorities

– Article 71 – Supervisory Powers

– Article 75 – Sanctions for Infringements

– Article 75a – Publication of Sanctions and Measures

– Article 76 - Exercise of Supervisory and Sanctioning Powers

– Article 79 – Right of Appeal

MiFID II’s Sanctions Regime

Recitals 95 and 96

“In order to ensure compliance by investment firms, [etc …] and to

ensure that they are subject to similar treatment across the European

Union, Member States should be required to provide for ▌sanctions

and measures which are effective, proportionate and

dissuasive.”

“In particular, competent authorities should be empowered to impose

pecuniary sanctions which are sufficiently high to

offset the benefits that can be expected and to be dissuasive

even for larger institutions and their managers.”

MiFID II’s Sanctions Regime

• broad powers for regulators

• consolidates enhancements of regulators’ powers from earlier drafts with:

• extended information access and investigation powers (71(2)(a) to (d))

• power to require the freezing and/or sequestration of assets (71(2)(da))

• specific and intrusive powers to ban, permanently or temporarily, for

example:

• practices the regulator considers unlawful (71(2)(ia))

• trading in a financial instrument (71(2)(ic))

• the entering into of a derivative, including by position limits (71(2)(if))

• sales and marketing of financial instruments or structured deposits

(71(2)(2nd ih))

• an individual from sitting on the management board of an IF or MO

(71(2)(ij))

MiFID II’s Sanctions Regime –

Article 71: Supervisory Powers

broad powers for regulators – without affecting criminal sanctions, under national law -

including:

• temporary/permanent ban on an individual responsible for IF management function

(72(2a)(da))

• the greater of (i)

• for companies, ‘maximum administrative fines of at least €5m or up to 10% of

relevant annual turnover’ (72(2a)(e)) or

• for individuals, ‘maximum administrative pecuniary sanctions of at least €5m’

(72(2a)(f))

and (ii)

• ‘maximum administrative pecuniary sanctions of at least 2x the amount of the benefit

derived’ … ‘even if it exceeds the maximum in (i)

• regulators can be empowered to go higher or impose additional types of sanction

(72(2nd 2a)

MiFID II’s Sanctions Regime –

Article 72: Sanctions for Infringements

British Bankers’ Association

Markets in Financial Services Regulation

(MiFIR) & Directive (MiFID)

Vivienne Bannigan

Policy Director, Capital Markets

Why MiFID Review

Needs updating: requirements to adapt to more complex

markets and increased diversity of instruments and methods of

trading

Structural reform in aftermath of financial crisis

G20 to tackle less regulated and more opaque areas of financial

system

Response to technological development

Further strengthen investor protection

Contribute to establishing a single rulebook for EU financial

markets: help level the playing field between Member States.

International Regulatory Change

MiFIR/ MiFID

UCITS

AIFMD

EMIR

Securities Law Directive

MAR/ MAD

Investor Compensation

Scheme Directive

Retail Distribution

Review

PRIPS Directive

The Framework

Organisations

•Investment firms

•Credit institutions

•Portfolio managers

•Broker-dealers

•Stock brokers

•Corporate finance companies

•Commodity firms

•Market operators

•Central counterparties

•Data Service Providers

Activities

•Reception & transmission of orders (in relation to finance instruments)

•Execution of orders on behalf of the client

•Dealing on own account

•Portfolio management

•Investment advice

•Underwriting of financial instruments &/or placing of financial instruments on a firm commitment basis

•Placing of financial instruments without a firm commitment basis

•Operation of a Multilateral Trading Facility

•Safekeeping and administration of financial instruments for the account of clients, including custodianship and released services such as cash/ collateral management

Financial instruments

•Transferable securities

•Money market instruments

•Undertakings for Collective Investment in Transferable Securities (UCITS) funds

•Emission allowances

•Financial derivatives

•Financial contracts for differences (CFDs)

•Commodity derivatives which may be settled in cash or physically; are not for commercial purposes and have the characteristics of other derivatives; relate to climatic variables, freight rates, or inflation rates or other official economic statistics; and any other derivatives contracts not mentioned in Section C of Annex 1

Transparency & Reporting

ESMA

Competent

Authorities

Trading Venues

MTFs, OTFs, RM,

SIs

Investors

ECP, Professional, Retail

Approved

Reporting

Mechanism

ARM

Investment

Firms

British Bankers’ Association

February w/c 3rd Technical Trilogue end

w/c 10th Possible for political group to approve

March Further to Commission Legal Services possible that English text available

April • EP to first reading plenary vote is anticipated the week of 15 April

• Adoption by the Council will most likely take place as an A point (and therefore can be in any Council

agenda, following translation into all EU language and jurists linguists)

• Formal approval triggers the Level 2 process where the European Commission mandates ESMA to start

work.

May • (Last Plenary session on the 22nd - 25th May before the E.Parl elections, should there be delays)

• L1 text due to be published in the EU's Official Journal, following M/States have 24mths to transpose the

directive. This is delayed from the original deadline of Q1/Q2 2013.

• The BoS meeting is 19-20 May (as the subsequent meeting is not until 9 July, the late delivery of the

mandates would substantially delay the draft CP and DP, unless an additional emergency BoS is called.)

June Expected publication of Discussion paper and Consultation I paper – there may be a slight delay between the

two (3 month consultation period would suggest a mid to early September deadline)

Q4 ESMA to deliver by December first set of technical advice to the European Commission

Expected publication of Consultation paper II

2016 Entry into force June 2016

2017 Full Application

Timetable

Thank You

British Bankers’ Association

Panel Q&A

Moderator

Phil Stafford Financial Times

Vivienne Bannigan – Policy Director, Capital Markets, BBA

Bob Fuller - CAO, Fixnetix

Richard Kemp - Senior Partner, Kemp Little

Elizabeth Callaghan – Capital Markets Regulatory Specialist