As the UK and EU versions of MiFID diverge, regulated firms must monitor changes carefully to understand the impact and ensure sustainable compliance.
The UK Markets in Financial Instruments Amendment is a collection of UK laws derived from the EU’s MiFID2, which took effect in 2018. The UK’s Wholesale Markets Review proposes changes to MiFID that aim to reduce the unnecessary compliance burden on UK firms and better align with the needs of its markets. In parallel, the EU is making its own changes to MiFID2.
The latest developments
This has become a complex area of regulation, so let’s recap.
The UK’s July 2021 Treasury Consultation paper and March 2022 response focussed on eight areas of MiFID – trading venues, Systematic Internalisers (SIs), equity, fixed income and derivatives markets, commodity derivatives, market data, reporting, and cross-cutting rules.
The Treasury proposed various delivery methods for its revised regime – Financial Conduct Authority (FCA) rules or guidance, primary legislation, secondary legislation, or the Future Regulatory Framework (FRF) Review.
The Financial Services and Markets Bill implemented some of the primary legislation changes. One major shift is the removal of the share trading obligation (STO) and the double volume cap (DVC) mechanism, which limited the volume of dark trading.
In contrast, the EU will apply the trading obligation to any shares with a European Economic Area international securities identification number (ISIN). It will also amend the STO exemption rules and create a single volume cap to replace the DVC. As in the EU, the UK’s FSMB realigns the counterparty scope of the derivatives trading obligation with the European Market Infrastructure Regulation (EMIR) clearing obligation.
The UK government has also sought to empower the FCA to make requirements of consolidated tape providers – persons authorised to collect trade reports for certain financial instruments – and support the development of tapes. The government proposed several legislated changes that will enable a private sector tape to emerge, saying it “agrees with the need to improve the quality and usability of market data.” The EU is seeking a single consolidated tape provider for each asset class.
The FCA has consulted on improving equity secondary markets. This included proposals for all financial instruments – not just equities – on a new designated reporter regime for over-the-counter post-trade reporting and market-wide resilience to outages. The new designated reporter regime seeks to remove operational complexity so that firms no longer need to take a transaction by-transaction approach to determine whether they are required to report a trade. Firms will be able to elect themselves as designated trade reporters by notifying the FCA and without needing to be an SI in any instrument.
Recently, the FCA also consulted on guidance for the trading venue perimeter. This consultation seeks to clarify which types of firms need to be authorised as multilateral trading facilities (MTF) and addresses industry concerns expressed as part of the HMT consultation. Key concerns were that “new platforms are emerging that facilitate or support the bringing together of buyers and sellers and it is not clear if these firms need to be authorised to operate an MTF”; about “the behaviour of order management systems”; and “the blurred lines between bilateral and multilateral trading” [HMT Consultation response: 2.2]
What firms need to consider
As a firm that may be regulated in this field, you need to monitor the final agreed primary legislation from the UK government, and check implementation dates to plan changes to systems and processes. The FSMB implementing these changes (STO removal, DVC removal, DTO alignment with EMIR and SI mid-point crossing) is currently planned to continue to go through legislative scrutiny at least until November [Financial Services and Markets Bill – All Events – Committees – UK Parliament]. The FSMB will make these changes as soon as HMT makes regulations to bring the contents of the Bill into force.
You need to consider the FCA’s guidance on trading venue perimeters, which may clarify whether you are in the scope of the MTF obligations – potentially due to technological advances since MiFID2 was established. For example, the proposed guidance for technology providers clarifies the distinction between general purpose communications systems and multilateral systems. The current consultation ends on the 25th of November. Firms should be aware that the FCA’s final guidance will replace some of ESMA’s Market Structures Q&As dealing with the trading venue perimeter and the EU Q&As will not form part of their supervisory expectations.
Systematic internalisers and other firms will need to understand the impacts on their post-trade reporting processes if the FCA goes ahead with the designated reporter regime and changes to post-trade fields and flags. SIs should be ready to assess the implications of the proposed SI definition change from the quarterly quantitative asset class level assessment to a qualitative evaluation at legal entity level.
UK and EU-based firms should review any significant divergence from the EU MiFID2 regulations, so they can make appropriate changes to their operating models and systems and ensure compliance in all jurisdictions.
How Delta Capita can help
Our regulatory services team have a wealth of experience in helping financial services clients prepare for market change and achieve sustainable regulatory compliance.
Our subject matter experts and senior change professionals have expertise in project management and PMO change practitioners to shape, manage and deliver against new compliance measures. This includes end-to-end testing and quality assurance services.
We provide business, data, and functional analysis to help client change teams understand the impact of regulatory requirements. DC provides data and architecture analysis to establish the requisite process for changes to reportable fields. Our team has experience on large-scale regulatory projects from within reporting vendors and tier 1 and 2 companies.
We can design and deploy optimal operating models around people, processes and technology to support legislated changes. DC runs independent readiness assessments to provide objective views of progress and likely readiness. We also offer resourcing and implementation support to manage go-live.
Contact us to find out more and speak to one of our experts.