• wblogo
  • wblogo
  • wblogo

UK fleshes out its MiFID II regulatory plans

Chris Hamblin, Editor, London, 22 February 2017

articleimage

HM Treasury consulted interested parties about the transposition of the European Union's second Markets in Financial Instruments Directive (MiFID II) into British law in 2015. At long last, it has now responded to the exercise.

MiFID II and its accompanying regulation, MiFIR, will replace the current EU law. They will change the structure of markets, the 'transparency regime' for the trading of financial instruments, the commodity derivative markets, the reporting of transactions to regulators, the powers and practices of regulators and the ways in which the law protects investors from their own ignorance and from sharp practice.

Some time after the consultative document went out, the European Union decided on 10 February last year to delay the application of MiFID II and MiFIR by one year to 3 January 2018 and the 'transposition' deadline for MiFID II also by one year to 3 July 2017. In EU law, 'transposition' is a process by which EU states enshrine a directive in their domestic laws, typically by either primary or secondary legislation. The EU can sue recalcitrant countries in the European Court of Justice.

With transposition in mind, HM Treasury has set out three updated draft statutory instruments as annexes to its document, which will eventually have the following titles:  

  • the Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2017, which it calls the “Main Regulations”;  
  • the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2017; and
  • the Data Reporting Services Regulations 2017.

The Government will present Parliament with the finalised statutory instruments (containing technical amendments) shortly and firms will then be able to apply to the regulators for permission to carry out new functions in plenty of time for the due date of 3rd January 2018. This exercise is separate from the rule-changes about which the Financial Conduct Authority and the Prudential Regulation Authority are consulting the markets.

In EU jargon, “third country firms” are entities incorporated outside the EU. MiFID II leaves it up to each EU country to decide whether (as in the UK now) to allow such firms to do business over the border or whether to insist on them establishing branches within their borders. HM Government evidently prefers the former but in its consultative paper it asked firms to send it evidence to support its preference. Retail (i.e. HNW-oriented) businesses were its special concern here and the Government has decided to change nothing. It has, however, added amendments in the statutory instruments to allow "third country firms" licensed by the European Securities and Markets Authority or with offices in other EU countries to trade in the UK.

Data reporting services

The Financial Conduct Authority authorises myriad firms to carry on business. The Government has decided, however, to create an entirely new regime for authorising data reporting service providers as described in article 59(1) of MiFID II. This is despite the fact that some of them exist only to report investment firms’ relevant transactions to the FCA.

When they became law, sections 89-95 Financial Services Act 2012 made changes to section 397 Financial Services and Markets Act 2000 in respect of misleading statements and practices. They make it an offence for a person to make a statement that he knows (or should know) to be false or misleading or dishonestly conceals facts with the intention of inducing someone else to sign or refrain from signing a relevant agreement or to exercise or refrain from exercising any rights conferred by one. They also make it an offence for anyone to do anything that creates a false impression about the price of any relevant financial instruments if he intends to induce someone to acquire, dispose of, subscribe for or underwrite the investments and/or if he knows that the impression is likely to help him make money or make someone else lose money. The Government, importantly, does not intend to apply any new offences akin to the ones in these sections to the behaviour of data reporting service providers, despite this finding favour with some respondents to its paper. It feels that DRSPs, as it calls them, do not originate data and would not be in a position to spot omissions or errors. It also believes that the two sections already apply to some misleading statements or impressions that DRSPs might make or give (for example, when reporting or publishing trades of financial instruments) in order to mislead market participants into buying or selling these instruments. It does not intend to provide the FCA with specific competition powers in relation to the provision of data reporting services on a reasonable commercial basis.

The "five o'clock" rule

Entities that provide a consolidated tape for 100% of trading all equities must obtain authorisation under regulation 7 (which, the Government claims, was previously regulation 5) in the Data Reporting Regulations 2016. Article 26 of MIFIR exhorts ARMs to report transactions “as quickly as possible, and no later than the close of the following working day.” Originally, the Government wanted to set 5pm as the deadline but now acknowledges that this is not the close of the working day for all markets. It says that it has amended the Data Reporting Regulations to make 'approved reporting mechanisms' (which must send data to the FCA) to report the information specified by article 26 as quickly as possible and no later than 11.59pm on the next working day after the transaction, but actually it has only amended the current draft.

Position limits and reporting

MiFID II requires the FCA to set the maximum size of net position that a person may hold in commodity derivatives traded on trading venues and economically equivalent over-the-counter (OTC) contracts according to methods prescribed by the EU. All of the responses to the Government's survey agreed that the position reporting and management regime established by articles 57 and 58 of MiFID II for investment firms and credit institutions operating trading venues should be detailed in FCA rules. HM Government agrees with this. The FCA has already produced a consultative document, CP 16/19, about its power to impose reporting obligations and will eventually publish the resulting rules.

Binary options

The Government will legislate to ensure that binary options are 'financial instruments' for the purposes of MiFID II. This will compel British regulators to protect investors who take part in these contracts from sharp practice in the same way as they protect the signatories to similar derivative contracts. A binary option is a form of financial contract which typically pays a fixed sum if it is exercised or expires in the money, or nothing at all if it is exercised or expires out of the money.

Information about our upcoming MiFID II conference in London can be accessed here.

Latest Comment and Analysis

Latest News

Award Winners

Most Read

More Stories

Latest Poll