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Council of Europe adopts MiFID II

by Simone Goligorsky and Robert Coward

In October 2011, the European Commission released a proposal to amend and extend the Markets in Financial Instruments Directive (MiFID), referred to as MiFID II. The MiFID II proposals consist of revisions to MiFID, along with the introduction of the Markets in Financial Instruments Regulation (MiFIR).

Whilst MiFID sought to increase competition and consumer protection, the purpose of MiFID II is to make financial markets more efficient, resilient and transparent and to improve investor protection, with the reform being driven by commitments made by the EU to tackle less regulated and more opaque parts of the financial system at the G20 summit in Pittsburgh in 2009.

MiFID II will impose a series of changes, including, inter alia:

  • creating of a new type of trading venue, the organised trading facility (OTF);
  • extending the scope of products and activities that are subject to regulation;
  • prohibiting the use of inducements for discretionary asset management and ‘independent’ advice;
  • introducing stricter corporate governance requirements; and
  • extending market transparency and transaction reporting requirements.

On 13 May 2014, the Council of the European Union announced that MiFID II had been adopted, following on from the adoption of MiFID II in April 2014 by the European Parliament. Both MiFID II and MiFIR are expected to be published in the Official Journal of the European Union in the second quarter of 2014 and will, for the most part, become applicable 30 months later. It is expected that the European Securities and Markets Authority (ESMA) will publish a discussion paper on the technical standards shortly. Following the responses to the discussion paper, ESMA will publish a consultation paper on draft technical standards later in 2014 or early in 2015. Market participants are encouraged to respond both to the discussion paper and the consultation paper.

MiFID II is being introduced in a climate of wider regulatory reform, and implementation will overlap with numerous other legislative changes, including the Capital Requirements Directive IV, the proposals for Benchmarks regulations, the European Market Infrastructure Regulation and the Market Abuse Directive II. Given this comprehensive spread of regulatory reform, and the magnitude of commercial and operational impacts that MiFID II will have, successful implementation will require early involvement and a thorough impact assessment.




EMIR Trade Reporting Requirements Come Into Effect 12 February 2014

by Prajakt Samant and Simone Goligorsky

Following the European Securities and Markets Authority’s (ESMA’s) approval and registration of the first four trade repositories (TRs) in November 2013, counterparties to all types of over-the-counter (OTC) and exchange-traded derivatives contracts will be required, from 12 February 2014, to report certain details of their trades to a registered or recognised TR.

All counterparties, even those exempt from the clearing obligation, should take note that they will not be exempt from the reporting obligation. To facilitate the process, counterparties will, however, be permitted to delegate trade reporting requirements to third parties or their respective counterparties.

Background

The reporting obligation forms part of the requirements imposed by the EU Regulation on OTC derivative transactions, central counterparties (CCPs) and TRs (Regulation 648/2012), also known as the European Market Infrastructure Regulation or EMIR. EMIR aims to establish within the European Union the G-20 leaders’ commitment to improve transparency in derivatives markets, mitigate systemic risk and prevent market abuse.

The primary obligations imposed by EMIR relate to clearing, reporting and risk mitigation of derivatives trades. Such obligations are imposed on both financial counterparties (FCs) and non-financial counterparties (NFCs), to varying degrees.

Whilst the scope of these obligations is aimed at EU entities, non-EU entities should not ignore EMIR’s territorial application, as they may still be caught by its requirements. In particular, a non-EU entity may be required to comply with obligations under EMIR where either its trading counterparty is established in the European Union, or the derivatives transaction has a direct, substantial and foreseeable effect within the European Union.

The Reporting Obligation

Despite a request from ESMA that the reporting obligation in respect of exchange traded derivatives be delayed by one year, in order to give market participants sufficient time to put in place the necessary systems and procedures, the reporting obligation will come into full effect on 12 February 2014.

Under Article 9 of EMIR, all counterparties to all derivatives contracts and CCPs are required to report particular details of any derivatives contract they have concluded, modified or terminated (including lifecycle events such as give-ups and partial terminations), to a TR. ESMA guidance suggests that, in respect of terminations, a report is only required to be made where termination takes place on a date different to that originally provided for in the relevant contract.

Whilst the clearing and risk mitigation obligations are restricted to OTC derivatives contracts, the reporting obligation applies to all derivatives contracts, irrespective of whether they are traded on-exchange or OTC. In addition, although the clearing obligation only applies to FCs and non-financial counterparties that exceed the relevant clearing threshold (NFC+s), the reporting obligation also applies to non-financial counterparties below the clearing threshold (NFC-s). The clearing threshold, as prescribed in the technical standards to EMIR, differs depending on type of derivative contract. The clearing thresholds are as follows:

  • Credit derivatives: €1bn in gross notional value
  • Equity derivatives: €1bn in gross notional value
  • Interest-rate, currency and commodity derivatives: €3bn in gross notional [...]

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Agreement Reached on Revised European Rules for Markets in Financial Instruments

by Prajakt Samant and Simone Goligorsky

The European Commission announced on 14 January 2014 that the European Parliament and Council had reached an agreement in principle on revised rules for markets in financial instruments (MiFID II). Under the revised regime, limits will be placed on taking financial positions in commodity derivatives, with a view to preventing market abuse and helping to restore investor confidence following the financial crisis.

Background

The current Markets in Financial Instruments Directive (MiFID) governs the provision of investment services in financial instruments and the operation of stock exchanges and multilateral trading facilities (MTFs). MiFID has long been regarded as not being fit for purpose—both in light of the fallout from the financial crisis and the evolution of international financial markets—hence the Commission’s proposals to revise the regime.

In the wake of major changes in financial markets through new trading products and practices, coupled with issues relating to the price volatility of commodity derivatives, it was decided that a revision was required in order to, according to the Commission, increase the efficiency, resilience and transparency of protection for investors.

Agreed Revised Rules

The Commission has identified the following as the key elements of the agreed text of MiFID II:

  1. The introduction of a market structure framework to close existing loopholes, in order to ensure trading is undertaken on regulated platforms and to increase equality between Regulated Markets and MTFs. Under the revised regime, it is proposed that, inter alia, shares should be subjected to a trading obligation, certain investment firms should be authorised as MTFs, and an organised trading facility (OTF) should be created as a venue for trading non-equity instruments, such as derivatives and bonds.
  2. The creation of position limits for commodity derivatives by national competent authorities on the basis of calculation methodologies/technical standards set by the European Securities and Markets Authority (ESMA), in order to strengthen supervisory regulation and prevent market abuse. There will be a hedging exemption for positions held by, or on behalf of, a non-financial entity, that are objectively measurable as reducing risks directly related to the commercial activity of the non-financial entity.
  3. The establishment of transparency for non-equity markets and increased equity market transparency. Under MiFID II, the use of reference and negotiated price waivers for equities will be capped and the transparency regime will be broadened to include non-equities. New rules will also require trading venues to make pre- and post-trade data available on a commercial basis.
  4. Increased competition for the trading and clearing of financial instruments. The revised rules will facilitate access to trading venues and central counterparties (CCPs) and include the introduction of transition periods for smaller trading venues and new CCPs.
  5. The introduction of rules and controls relating to algorithms used in relation to high frequency trading. Under the new rules, algorithmic traders will be required to be regulated and subject to liquidity controls.
  6. Increased investor protection through client asset protection, product governance, other organisation requirements and conduct rules. The agreed text of MiFID [...]

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EMIR Enters into Force

by Prajakt Samant and Simone Goligorsky

On August 16, 2012, the European Market Infrastructure Regulation (EMIR) came into force, 20 days after the final text was published in the Official Journal of the European Union.  The Level 1 text will be supplemented with technical standards, which are due to be published later this year, and expected to come into force next year.  It is the technical standards that will define who exactly will be affected by EMIR, and how. 

The European Securities and Markets Association (ESMA) has also published the responses that it received from market participants to the June 2012 consultation on the draft technical standards.  Responses were received from, inter alia, asset managers, banks, government regulatory and enforcement bodies, insurance and pension funds, investment services, issuers, and regulated markets, exchanges and trading systems.

These responses will be taken into account when ESMA submits its proposals on the technical standards to the European Commission (the Commission) by September 30, 2012.  Following this submission, the Commission will have three months during which it must adopt the final technical standards.  The technical standards will cover matters including:

  • The threshold that non-financial counterparties will have to cross before their trades have to be cleared;

  • The exemptions for intragroup transfers;

  • The data to be reported regarding each trade; and

  • Data that will have to be provided by trade repositories to the relevant authorities and regulators. 

 The various provisions of EMIR are due to come into force at different times.  For example, the first clearing obligations are expected to be imposed from summer 2013.  Derivative contracts are expected to have to be reported from July 1, 2013.  By the end of December 2014, ESMA is expected to submit reports to the Commission on the functioning of EMIR.

With the final text of EMIR edging closer to completion, market participants are advised to ensure that they have the requisite systems in place, to guarantee that their trading activities are fully compliant with the requirements of EMIR.  




ACER and ESMA Publish Respective Consultations on REMIT and EMIR

by Prajakt Samant and Simone Goligorsky

In the last two weeks, both the Agency for the Cooperation of Energy Regulations (ACER) and the European Securities and Markets Authority (ESMA) have published consultations for market participants on the Regulation on wholesale energy market integrity and transparency (REMIT) and the European Market Infrastructure Regulation (EMIR), respectively.  This article considers some of the issues that have been raised by both consultation papers and outlines the areas where the input of markets participants has been sought.

To read the full article, click here.




Trialogue Discussions Lead to Agreement on Final Text of EMIR

by Prajakt Samant

On February 9, 2012, following a series of trialogue discussions between the European Commission (EC), the European Parliament (EP) and the Council of Ministers (CM), the final text for the European Market Infrastructure Regulation (EMIR) was agreed.  The agreed text will now be voted on by the EP and the CM, although these votes are unlikely to lead to any changes of the text.  The final text of EMIR has not yet been published, but this is due to be circulated in the coming days. 

The agreement follows several weeks of trialogue discussions and non-agreement on several points in the regulation, particularly on issues concerning central counterparties, frontloading of contracts and intragroup transactions. Had an agreement not been reached by mid-February, it was likely that the text would have been subject to a second reading, leading to further delays in the publication of the final text.

The European Securities and Markets Authority (ESMA), along with the European Banking Authority (EBA), must now start drafting the technical standards which will be included in the text of EMIR.  The original deadline for the publication of these standards had been June 30, 2012, however, as a result of the delays in agreeing the final text, this deadline has been pushed back to September 30, 2012.  

By pushing back the deadline, ESMA and the EBA will be given sufficient time to seek the views of market participants on the levels of technical standards that should be adopted.  A public consultation on these standards is due to be launched around the end of February or beginning of March 2012, to which all market participants are strongly encouraged to contribute.  The technical standards concern matters including, inter alia, the clearing and reporting thresholds to be imposed on non-financial counterparties and the publication, by trade repositories, of aggregate positions by class of derivatives.   

With the deadline of the publication of technical standards being pushed back to the end of September, the 27 Member States of the European Union and market participants will then have less than three months to ensure that they have in place all the adequate systems to ensure full compliance with the regulation.  EMIR is due to come into force at the end of 2012, thus meeting the deadline set by the Group of 20 Summit in Pittsburgh in 2009. There has not yet been any formal indication that this implementation date will be pushed back, despite the delays in agreeing the final text. 




Impact of the MiFID II Proposals on Commodities Businesses

by Thomas Morgan

The Markets in Financial Instruments Directive (MiFID) came into force in November 2007 and aimed to enhance investor protection, improve cross-border market access and promote financial market competition across the European Union (EU).  In December 2010 the European Commission (EC) published an expansive review of MiFID.  The EC unveiled its package of legislative proposals revising MiFID in October 2011.  These proposals are more comprehensive than initially expected.

The amended text of MiFID and the new Markets in Financial Instruments Regulation (MiFIR), together are referred to as MiFID II.  The proposals extend the scope of the original legislation in terms of the types of instruments and businesses affected.  The prospective legislation subjects EU commodity market participants to significant compliance challenges and increased scrutiny of their energy trading businesses.

Commodities businesses will be some of the most heavily impacted by the introduction of MiFID II. In its current form, MiFID II will:

  • Extend regulations to commodities and commodity derivatives trading, by removing or narrowing current exemptions, notably in relation to commodity firms who are currently exempt from MiFID when dealing on their own account in financial instruments.
  • Extend regulations to Organised Trading Facilities (OFTs). The definition of OTFs is broad, capturing organised trading platforms that are not currently regulated under existing categories.
  • Introduce new safeguards for algorithmic and high frequency trading.
  • Increase the transparency of trading activities by imposing position reporting obligations on trading venues. Such information must be available to the regulator upon request and, upon exceeding certain thresholds, to the public each week.
  • Allow stronger supervision of commodity derivatives markets. The proposals give national regulators and the European Securities and Markets Authority (ESMA) greater powers to monitor trading activity and allow them to ban specific products, services or practices to support liquidity and prevent market abuse.
  • Give power to ESMA to move standardised over-the-counter (OTC) derivatives contracts to exchange-traded platforms and/or clearing through central counterparties.

The EC estimates one-off compliance costs of MiFID II across all sectors to be in the region of €512 to €732 million, in addition to ongoing costs ranging from €312 to €586 million.  Firms should ensure that any synergies in processes required by MiFID II and other regulatory legislation coming into force are identified to minimise cumulative implementation costs.

The MiFID II package of proposals is currently under negotiation by the EC, European Council and European Parliament.  This means there is still an opportunity for firms to present the concerns and objections of their businesses to regulators and law makers before the text is finalised.  There is no published timetable for these negotiations, although it is unlikely that such negotiations will be concluded before the text of the European Market Infrastructure Regulation is finalised.




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