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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.




Transatlantic Derivatives Consensus: Landmark Step for EC/US Cooperation

by Simone Goligorsky and David McDonnell

On 11 July 2013, the European Commission (EC) and the United States Commodity Futures Trading Commission (CFTC) announced a high-level joint understanding, known as the “Path Forward”, which details the shared future vision on the cross-border regulation of over-the-counter (OTC) derivatives (click here for the full announcement). This is a welcome announcement, given the concerns that many market participants had regarding the possibility of certain derivative transactions being subject to regulation on both sides of the Atlantic. The Path Forward has been produced as part of the package that was developed in order to promote the transparency of OTC derivatives markets and to lower the risks associated with them. 

At the core of the Path Forward is the objective of avoiding what was viewed by some market participants as the ‘double treatment’ of derivatives, whereby the derivatives would have been subject to the simultaneous application of both European and US legislative requirements, potentially leading to inconsistency, conflicts of law, and legal uncertainty. Considering the level of similarity between the European and US regimes, the EC and CFTC have agreed that such a duplicative approach may be, to the greatest extent possible, avoided. 

Instead, the EC and CFTC will, where appropriate, defer to the regulatory requirements in either Europe or the United States, as applicable. For example, under the European Market Infrastructure Regulation (EMIR), the EC has adopted risk mitigation rules that have a high-degree of similarity to the CFTC’s business conduct standards. Important action has been taken on bilateral, uncleared swaps, so that the regulatory rules in both jurisdictions will be viewed as comparable and as comprehensive as one another. The net result is that market participants are likely to now benefit from these equivalence rules.

In addition to the progress made to date, the EC, CFTC, and the European Securities and Markets Authority (ESMA) will continue to work together, and with other global regulators, on the harmonisation of international rules on posted margins for uncleared swaps, with a view to implementing a uniform system across as many jurisdictions as possible. 

It is worth noting that while the Path Forward heralds a significant step for enhanced cross-border regulation, market stability, and confidence, it was relatively light on concrete details. As such, market participants subject to European regulations, as well as US counterparties governed by Dodd-Frank, should continue to monitor collaboration between both regulatory authorities closely.

 



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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