The three legislative institutions of the European Union reached agreement on MiFID II / MiFIR on 14th January 2014. The European Securities and Markets Authority (ESMA) has now commenced work on implementing both the directive and regulation but, given
the size of the task, it is anticipated that the rules won’t come into effect until late 2016 or even early 2017.
Assuming this timetable, banks and market participants would be forgiven for thinking that they had plenty of time to position themselves and make the necessary preparations to be ready for the changes. However, contrary to popular belief, MiFID II is far
more than just an extension of MiFID I, which was designed to promote greater transparency and harmonisation for market participants. MiFID II introduces some fundamental changes to the way OTC markets operate and will impact a broader spectrum of institutions.
The key areas that the directive and regulation will impact are:
- Market structure
- Price transparency
- Commodities position reporting
- Conduct of business
- Organisational governance
Changes to these key areas will potentially result in huge changes to the operating models and revenue streams of banks. For OTC derivatives it is likely that the requirements for central trade execution and price reporting will be wider than for Dodd Frank
as the legislative text introduces the concept of ‘liquid markets’ for eligible products. The definition of what constitutes a ‘liquid market’ in the eyes of ESMA is bound to result in a lengthy and fractious debate amongst market players. Banks will need
to split their businesses into systemic internalisers and multilateral trading facilities (MTFs) / organised trading facilities (OTFs) depending on whether they are acting as an agent or principal to the trade.
MiFID II / MiFIR will impact everyone engaged in the dealing and processing of financial instruments and will fundamentally change the shape of the industry. The intricacies of the legislation have yet to be ironed out, but its broad scope and depth are
clear indications that MiFID II is a regulatory monster in the making. Firms wishing to placate this beast will need to start work now as once it is fully formed it will be very difficult to work with.