MiFID II: How Did We Get Here and What Does It Mean?

Discussion in 'Announcements' started by TT News, Jun 13, 2017.

  1. TT News

    TT News ET Sponsor

    The following was originally published on Trading Technologies Trade Talk blog.

    MiFID II: How Did We Get Here and What Does It Mean?
    By: Andrew Gibbins, Director of Product & Marketing Strategy, EU & Asia/Pac


    As the industry has been preparing for the implementation of MiFID II (Markets in Financial Instruments Directive II) in 2018, so too has Trading Technologies been working closely with our clients on planning and executing compliance solutions. Over the next few months, I will be sharing my thoughts and TT’s point of view on MiFID II and industry implications. We begin the first in a series of blog posts with what is MiFID, how did we get here and what does it all mean?

    MiFID II is a consequential and reactionary financial regulation born from MiFID I and the same G20 Pittsburgh meeting in 2009 that instigated the blueprints of its older siblings, Dodd-Frank, EMIR, REITS and, recently, the seemingly stalled Regulation Automated Trading (Reg AT), post the 2008 financial crash.

    Dodd-Frank accompanied with the Commodity Futures Trading Commission (CFTC) regulations and the European Market Infrastructure Regulation (EMIR) are derivatives reporting transparency requirements pursuing similar purposes, yet they have differing approaches in the U.S. and EU respectively. Sounding first on July 21, 2010, the U.S. regulatory starting pistol fired into staggered effect the requirement that historical interest and index credit default swaps transactions be reported by Direct Clearing Organisations (DCOs) to a trade repository. Incrementally, further types of contributors transaction reported additional asset classes over a successive period of time in stark contrast to EMIR.

    By comparison, EMIR’s ambitions sounded via regulatory multi asset class blunderbuss, commencing with equity, foreign exchange, credit, commodities and interest rate swaps from the outset on August 16 2012. Contrary to the U.S., where only one counterparty can be deemed responsible for transaction reporting, EMIR requires that both counterparties report or permit third-party reporting delegation to a clearing broker et al. Dodd-Frank stipulates reporting obligations for swaps, EMIR captures both exchange traded derivatives and over-the-counter (OTC) transactions respectively. The use of collateral is weighted more significantly to form part of the extensive reporting information captured by EMIR. Both transatlantic regulatory initiatives target similar high-level outcomes, but each was arguably fed by differing market compositions, abilities to normalize existing transactional data and respective legislative oversights.

    The European Securities and Markets Authority (ESMA), adhering to political pressure, drew up an extensive family tree of proposed regulatory recitals and articles in its efforts to protect the investor and, arguably, the markets from themselves against systemic risk and algorithmically caused disorder. The modi operandi comprises two legal conduits, MiFID II and MiFIR (Markets in Financial Instruments Regulation).

    MiFID II and MiFIR come into effect January 3, 2018 across the EU.

    Since the publication of ESMA’s Technical Advice to the European Commission on December 19, 2014, this regulatory framework has undergone a tri-tiered equivalence to fractional distillation, exposing articles to the heat of marketplace scrutiny during rounds of consultation papers and subsequent questions and answers into a more universally and palatably accepted tonic.

    Tactically, ESMA’s new-build regulation diverges from its equities-centric MiFID I foundations. Implementation is focused squarely and equally by all EU Members States’ National Competent Authorities across almost all financial instruments traded in European markets, OTC or listed, cash or derivatives.

    The core principles of MiFID II regulation are to:

    • Improve investor protection
    • Reduce the risks of a disorderly market
    • Reduce systemic risks
    • Increase the efficiency of financial markets and reduce unnecessary costs for participants
    Investor protection is brought into effect by a swath of measures to ensure investment firms treat their customers fairly, adhere to improved transparency, and implement these changes at the center of their business and corporate models. The legislation seeks to improve clarity of product design and investment information to customers, apply best execution monitoring and reporting across asset classes, and bolster protection against investment research (RDR-style) rules on inducements to portfolio managers, to name a few.

    MiFID II and MiFIR transparency requirements significantly enhance EMIR’s transactional reporting foundations. This framework targets listed and OTC markets in financial instruments, including economically equivalent contracts (EEOTC) for pre-trade and post-trade order and execution disclosures respectively submitted on trading venues. MiFIR extends MiFID I’s equity-centric pre-trade transparency product requirements to include:

    • Emission allowances
    • Derivatives
    • Exchange traded funds (ETFs)
    • Depository receipts
    • Bonds
    • Structured products on a regulated market
    Microstructural changes introduce and expand trading venues to include regulated markets (RM), multilateral trading facilities (MTFs) and organized trading facilities (OTFs) to cater for these newly included asset classes. Transparency requirements pertaining to MiFID II instruments comprise two key components:

    • Pre- and post-trade order disclosure on trading venues
    • Transaction reporting to National Competent Authorities
    In the former case, transactional disclosure will vary across differing instruments and trading types (e.g., central listed order book, quote-driven, hybrid and auction trading systems) to provide greater depth of market clarity and support monitoring systemic risks, respectively. Pre-trade and post-trade public disclosure of orders, quotes, indications of interest (IOIs) and executions on trading venues will be subject to NCA waive discretion dependent on normal market size and instrument liquidity. Post-trade execution data outside of fair commercial arrangements is to be made publically available after 15 minutes without charge.

    Investment firms will be subject to transactional reporting obligations on a T+1 basis to the relevant NCA. In addition, position reports in commodity derivatives, emission allowances and their EEOTCs are to be disclosed in aggregation by trade businesses conforming to pre-defined ancillary tests to determine and segregate genuine market hedgers from speculators.

    MiFID II requires 65 transactional reporting fields with respective tags to be implemented where applicable in order and execution API and FIX protocol messaging. Identification of the client, investment decision maker and trader (human or algorithm) are amongst the Legal Identifier tags including Direct Electronic Access (DEA), waivers and their abbreviated short codes that are included for reconciliation between investment firms, trading venues and CCPs. HFT authorized businesses will require relevant order and transactional reporting to be measured in one microsecond, UTC GPS precision.

    The above is simply a snapshot as to MiFID II’s origins and some of the issues investment firms and market participants will face come next January.

    In my next blog post, I will dive deeper into implications and effects of MiFID II on algos.
  2. Thanks for posting this
  3. MIFID 2 is an idiocy and another layer of regulatory costs that financial companies will bear.

    The stupidity of the financial industry to support this piece of crap is just breath taking!

    It will lead to the destruction of another 1 Million finance jobs in Europe. Higher costs = higher entry level and higher cost burden.

    Another example of why the European Union needs to be dissolved asap.
    kmiklas likes this.
  4. Mtrader


    MIFID 1 (2007) was a good thing. It protected clients against the banks and against "investmentadvisors". Too many clients were pushed into dangerous products just for the commissions they generated. Nowadays banks and "investmentadvisors" can (and were already) held responsible for clients losses thanks to MIFID.

    Maybe it destructed a number of (crooked) jobs but it saved also many clients from total wipe outs or at least from heavy losses. The only business banks and "investmentadvisors" lost were those who were too risky to be sold deontological.

    When I wiped out an account many years ago, my broker asked me to sign a document that would take away all their responsibilities. So they knew they were doing things that might get them in trouble.

    500:1 leverage might soon explode in the face of the brokers.
  5. thaitye


    500:1 leverage is never feasible. Even the best traders will not excel under those conditions. Only forex brokers provide this leverage, and you can bet your ass that they are taking the opposite side of those trades.
    Mtrader likes this.
  6. Mtrader


    MIFID is protecting these "traders" (rather idiots) against themselves. So MIFID is good.

    And there is no extra cost as suggested. The only thing that changes is that now,proposing investments should be done more carefully. But that should have been done from start.
  7. It's just cost me about EUR 100 for my LEI and there is a renewal fee - so your claim of no cost isn't stricitly accurate. Maybe the cost is minimal.

    I don't know enough about it to really comment but I am suspicious that it actually helps anyone having started off my career in regulation. It appears to me that the LEI scheme is a nonsense - they could have just had a country code + Company Registration Number for a unique identifier for incorporated entities.
  8. Mtrader


    I did several investments with 4 banks in different European countries. I NEVER paid anything. Might depend of the amount of money involved, but I don't even believe that. I only had to answer a questionnaire and received a letter with my MIFID profile on it. That's all.
  9. Mtrader


    #10     Jun 23, 2017