Tag Archives: MiFIR

MiFID II: Jargon-buster

The EU Markets in Financial Instruments Regulation EU/600/2014 (MiFIR) and Markets in Financial Instruments Directive 2014/65/EU (together referred to as MiFID II) will apply from 3 January 2018.  This date is much closer than it seems and banks and investment firms are currently scrambling to implement MiFID II-compliant measures in their systems, controls and client documentation.

MiFID II replaces and partially recasts the existing MiFID regime under the directive 2004/39/EC (MiFID I) and in many places introduces new concepts or extends the meaning of existing concepts.

In this piece, I consider some of the main new MiFID II concepts and the inevitable jargon that goes with them.

Algorithmic or high-frequency trading (HFT): trading in financial instruments by a computer algorithm with limited or no human intervention.  MiFID II will require such trading to be conducted by authorised investment firms, be supervised and have controls and other safeguards to ensure it does not cause any disruption in the market.

APA (Approved Publication Arrangement): MiFID II introduces the concept of an APA who will assist in price discovery by publishing post-trade transparency data.  An APA could be a new market participant or a new activity conducted by Trading Venues such as exchanges.  An APA will be subject to authorisation and organisational requirements.

ARM (Approved Reporting Mechanism): a new concept introduced by MiFID II for enabling transaction reporting by investment firms to regulators.  An ARM will be subject to authorisation and organisational requirements.

CTP (Consolidated Tape Provider): MiFID II envisages a new provider that will consolidate post-trade disclosures and make them publicly available (a continuous electronic live data stream providing price and volume data).  A CTP  will be subject to authorisation and organisational requirements.

DRSP (Data Reporting Service Provider): an APA, ARM or CTP.

Financial Instruments: this is a wider concept under MiFID II and refers not only to shares and other “transferable securities” but also to money-market instruments, units in collective investment schemes, emission allowances and derivatives such as options, futures, swaps and forward rate agreements.

Independent Advice: the provision of personal recommendations to a client.  MiFID II will oblige firms to ensure that staff are not remunerated or assessed in a way that could conflict with the duty to act in a client’s best interest.

OTF (Organised Trading Facility): a trading venue for bonds, structured products or derivatives (i.e. non-equity financial instruments).  This is a new concept and MiFID II will now regulate OTF platforms (e.g. broker crossing networks).

MTF (Multilateral Trading Facility): a venue where financial instruments can trade outside of a regulated market e.g. an internal matching system at a firm that executes client orders in shares.  This is a MiFID I concept but MTFs (as also OTFs) will now need enhanced financial resources, measures for risk management and conflicts of interest identification.

Post-trade transparency: publication of transaction data via an APA by the operators of Trading Venues or SIs immediately following a trade – to be available on commercial terms immediately or for free after 15 minutes.

Pre-trade transparency: continuous publication of bid and offer prices of financial instruments by operators of Trading Venues (e.g. exchanges) or publication of firm quotes by SIs, in either case, before a trade takes place.

Regulated Market: a stock market or exchange regulated by an EU member state for trading in publicly-listed financial instruments e.g. the London Stock Exchange.

SME Growth Market: a new category of MTF that will enable small and medium-sized entities (SMEs) to access capital.  At least 50% of the issuers on such an MTF must be SMEs.

SI (Systematic Internaliser): traditionally called “market maker” this is an investment firm which routinely deals on its own account by executing customer orders in shares outside a Trading Venue such as an exchange.  MiFID II will extend this concept to cover all financial instruments not just shares.  SIs will also need to publish firm quotes and post-trade data.

Trading Venue: an OTF, MTF or Regulated Market.  MiFID II will require Trading Venues to have better systems, controls and circuit-breakers and there will be rules on minimum tick size (price increments).  They will also need to publish annual data on execution quality.

Transaction Reporting: MiFID II envisages the reporting of transaction data by investment firms that execute transactions in financial instruments to the regulator (e.g. the FCA) within 1 day of the trade via an ARM.

TTCA (Title Transfer Collateral Arrangement): this not a MiFID concept as such but MiFID II prohibits firms from entering into TTCAs with retail clients and obliges firms to consider the appropriateness of a TTCA for the other categories of clients – i.e. professional clients or eligible counterparties.




MiFIR & MiFID II: where do things stand?

The Markets in Financial Instruments Regulation (Regulation 600/2014) (MiFIR) and Markets in Financial Instruments Directive (Directive 2014/65/EU) (MiFID II) will be the new EU legal framework (replacing MiFID I) governing the requirements applicable to investment firms, trading venues, data reporting service providers and third-country firms providing investment services or activities in the EU.  Although the MiFIR & MiFID II regime doesn’t come into effect until 3 January 2017, there are a number of measures that are currently being taken in relation to them.  We look at some of these below.

  • Many elements of the MiFIR & MiFID II regime need to be further specified in delegated acts to be adopted by the European Commission and it has therefore requested the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) to provide technical input.  On 19 December 2014, ESMA published final technical advice to the European Commission under MiFIR & MiFID II (ESMA/2014/1569).
  • On the same date, ESMA also put out a consultation paper (ESMA/2014/1570) that consults on regulatory technical standards (RTS) and implementing technical standards (ITS) including in relation to Investor Protection and Transparency under the new regime.  This Consultation is open until 2 March 2015.
  • ESMA has published a list of responses to its September 2014 consultation on draft guidelines clarifying the definition of derivatives under MiFID II, which closed on 5 January 2015.
  • Following the publication of the text of MiFIR & MiFID II in the Official Journal of the EU on 12 June 2014 (coming into force on 2 July 2014), Member States need to adopt and publish by 3 July 2016 the measures transposing the MiFID II Directive into national law to apply from the aforementioned 3 January 2017 deadline.  MiFIR being an EU Regulation has direct effect and does not need to be transposed into law by Member States.

A number of further measures are expected by mid-2015 and will be covered in further updates to The Flaw.