2014 TOP STORIES: Done Deal for MiFID II. What You Need to Know

Europe finally agreed on the terms of MiFID II in 2014, extending its regulatory reach into fixed income, FX, OTC trading and commodity speculation. TABB's Rebecca Healey highlights seven details you need to know as implementation continues.

This article originally was published on Jan. 15, 2014.

To push MiFID/R over the line, Michel Barnier, European commissioner for internal market and services, and European Parliament member Markus Ferber were brought to the negotiating table to battle out the issues that have plagued the regulation’s progress since the start – namely, commodity derivatives scope definition and access. As a result, Europe finally has agreed the text to overhaul all financial markets, extending MiFID’s regulatory reach into fixed income, FX, OTC trading and commodity speculation.

While those in the Trialogue process should be commended, there is still much to be done. It is anticipated that MiFID/R will enter into force some time in Q2 2014, with full rules in place by 2017, according to Mr. Ferber.

What You Now Need to Know

We still have technical meetings to go through to finalize details, but here is what we understand so far:

1.  HFT will be restricted through greater testing of algorithms, but there will be no 500 m/s rule.

  • Final organizational requirements for investment firms engaged in algorithmic trading have been passed to ESMA Technical Guidelines for greater analysis concerning the risks potentially raised by technology-advanced trading practices.

2.  Dark Pools will be subject to a volume cap.

  • 4%/8% cap for RPW and NTW (for liquid names only).
  • National Regulators can chose to withdraw the waivers if they believe they are being abused.
  • However, final calibrations around what will/will not be applied also will fall under ESMA technical guidelines.

3.  All trading to be conducted on RMs, MTFs, SIs or OTFs –OTF is non-equities only, and not using own capital.

  • Less transparent exchanges, or organized trading facilities (OTFs), will be prevented from carrying out matched principal trading (intermediating between buyer and seller), except in instruments that typically suffer from a lack of liquidity.
  • The list has yet to be finalized and again will go down to ESMA Technical Guidelines to establish. But most noticeably, it currently excludes equities.

4. Access Provisions for Exchange Traded Derivatives.

  • Europe’s largest futures exchanges face meaningful competition for the first time. It has been a particularly divisive issue, with the UK opposing efforts from Germany to water down current proposals for more open access to derivatives markets.
  • ETDs are now transitional after two and a half years (instead of two years, previously) and can be renewable once.
  • This means that while open access won the day – it is a day some way off; provisions to allow access to trading and clearing exchange-traded derivatives can be deferred by exchanges operating vertical silos for up to five years if approved by their national authority.
  • New paragraph 6 added to Article 7 of Regulation (EU) No. 648/2012 as follows:

“The conditions in paragraph 1 regarding non-discriminatory treatment in terms of how contracts traded on that trading venue are treated in terms of collateral requirements and netting of economically equivalent contracts and cross-margining with correlated contracts cleared by the same CCP shall be those that are specified by the technical standards adopted pursuant to Article 28(1) of MiFIR.”

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