In Europe, the second Markets in Financial Instruments Directive and Regulation (MiFID II/MiFIR) have been with us since January 2018. In the preceding months, market participants completed multi-year programs of work to implement huge swathes of required
changes. After the heavy lift of MiFID II for 2018, the industry is preparing to bear the cost of additional amendments.
But with review cycles ready-baked into the rule makers’ frameworks, MiFID II is currently under examination. The UK regulator is also reviewing its rulebook, post-Brexit.
Now that a negotiating position has been reached in Europe, and the so-called trialogues have commenced between the co-legislators, it is a good time to focus on the horizon and look towards the next set of changes for financial markets.
How did we get here?
The European regulator ESMA has undertaken an extensive review of MiFID II/MiFIR over the course of 2019 to 2021, resulting in the delivery of several reports to the European Commission (EC). These reports cover the whole scope of the current regulations and,
notably, the MiFIR transparency regime.
ESMA’s review followed two main objectives:
- To assess whether current MiFID provisions have delivered on their objectives, and;
- To propose any necessary targeted amendments.
The main takeaway from the review around transparency was that, while progress has been made, MiFIR has not fully delivered on its ambitions. ESMA therefore made several recommendations, such as replacing some of the overly complex rules with something more
streamlined and effective. They also recommended the establishment of a consolidated tape, for equities and bonds.
To take the MiFID II review forward
The European Commission (EC) picked up on several of ESMA’s recommendations and put forward their proposals. These proposals are
aimed at enhancing market data transparency, removing obstacles to the emergence of a European consolidated tape, clarifying the trading obligation, and prohibiting receiving payments for forwarding client orders.
Subsequently, the European Parliament published its draft report in July 2022, making a few adjustments to the EC proposals. Including
a suspension of the DVC (double volume cap), and a Designated Reporting Entity regime, which the UK has separately proposed. The EP adopted its position on changes to MiFID/MiFIR at first reading on 1 March 2023.
As the third piece of the puzzle, the Council of the European Union published its mandate for negotiations on amendments to MiFID/MiFIR in December 2022. Further variations are included.
What happens now?
Each of the three co-legislators have agreed on their negotiating positions, and the trialogues have now commenced. Final legislative changes could be agreed as soon as Q3 2023 which in turn, will trigger further ESMA activity on related RTS.
Lower-level changes (RTS)
Separately, a review of regulatory technical standards (RTS) is progressing. ESMA published RTS 1&2 proposals at the end of March 2022. At the end of November 2022, the EC notified ESMA of its intention to endorse the proposed RTS, subject to some specified
changes. For a subset of the changes, this includes a postponed application date of 1st January 2024. The texts were then adopted on 17th January 2023 (subject to no further objections), paving the way for implementation in the near future.
We should expect piecemeal amendments to other RTS in due course.
In parallel, post-Brexit, HM Treasury is assessing the UK’s future regulatory framework and the regulator is reviewing their rulebook.
On top of hefty changes for MiFID II/MiFIR, the UK left the EU on 31st December 2020. This required implementation effort across financial markets in 2019/20 to cater for Brexit. Now in parallel with the EU MiFID II review, the UK regulator is also reviewing
their rule book.
Both the UK and the EU are starting from the same place having implemented MiFID II in January 2018. The UK Financial Conduct Authority (FCA) has indicated a pragmatic approach and wants to avoid change for the sake of it. They are, however, seeking the
best outcome for the UK now outside the EU. From a trading platform perspective, in the interests of reduced cost and greater efficiency, no one wants divergence of the EU and UK rules. Coordination on implementation dates is also highly desirable.
The MiFID II / MiFIR Review will impact both EU and UK regulated market participants and requires solutions development. The final scope of change and exact dates of application are yet to be confirmed by each jurisdiction. For financial markets, it’s crucial
to scan the horizon and keep on top of developments, as and when they arrive.