The second Markets in Financial Infrastructure Directive (MiFID II), and its accompanying regulation the Markets in Financial Infrastructure Regulation (MiFIR), are set to take effect tomorrow (3 January 2018) – some four and a half years after first being approved by the Council of the European Union (and after a year-long delay intended to allow for the development of the complex technical infrastructure required by firms for compliance with the incoming changes).
Those of you directly impacted by the changes will have no doubt been preparing for months on end for this, so it must feel like the end of a (very) long beginning!
We fully understand that it is all too easy to be overwhelmed by the scale and complexity of the regulations – the full document (including ESMA addendums etc) reportedly numbers close to 7,000 pages long. Also, it is easy to question the feasibility of the regulation, particularly amid speculation of a lack of preparedness across the board (a speculation not entirely renounced by the recent announcement by the European Authorities of a 6-month deferral on the prohibition of trades with counterparties who do not have an LEI number, for example).
Our position here is to advocate the approach taken by many our clients, which is to ‘stay focussed and keep a sense of perspective’.
Stay focussed on the objective of the regulation
From your preparatory work, you will know the impact that MiFID II will have on your business. The extent of the burden will, of course, vary from firm to firm and from business model to business model (for instance, over-the-counter derivatives, which do not share the same reference data details as derivatives traded on a trading venue, are exempt from the MiFIR transparency and transaction reporting requirements. Exchange-traded derivatives are not).
So, whatever it is you have prepared for; concentrate on doing it…now.
In some areas, MiFID is quite explicit, thereby leaving little room for ambiguity – for example you can no longer reuse margin taken from retail clients for regulated products as collateral for your own obligations. In other areas, where there may be less clarity, it may be useful to retain focus on the objectives of the regulation to stay safely on the right side of compliance.
Remember the intention is to promote ‘fairer, safer and more efficient markets’ and to ‘facilitate greater transparency for all participants’, which, in summary, we interpret as meaning that if you continue to treat your customers fairly you won’t go too far wrong.
As mentioned earlier, MiFID II is a remarkably extensive piece of legislation and it has been our experience that the regulators have generally been very supportive in the lead up to implementation.
A case in point for this is the FCA’s approach to the interpretation of the ‘goods and services’ criterion required for exemption of FX Forwards from regulation. Here the Authority engaged constructively with the industry and collaboratively produced extensive guidance to help explain the circumstances where a FX forward is exempt from regulation.
Post-implementation, it would be surprising if this approach did not continue in earnest towards any firm that seeks to address the incoming regulations in a responsible manner (N.B. in this context we would characterise responsibility as comprising appropriate levels of documentation and good governance).
What happens next?
So, we would therefore encourage you, over the next few days and weeks, to stay focussed and keep a sense of perspective. Ignore the external noise on ill-preparedness and implement your new policies, procedures and systems with confidence.
And if you would like any help regarding MiFID II, or indeed advice on any other regulatory matter, please don’t hesitate to get in touch with us.
This post contains a general summary of advice and is not a complete or definitive statement of the law. Specific advice should be obtained where appropriate.