In his speech at the FCA MiFID II Conference on 18 September 2014, David Lawton addressed a number of key areas where the new directive will seek to achieve a balance between regulation and effectiveness. The FCA Director of Markets explained that although agreement has already been reached regarding MiFID II, the obligations do not take effect until 2017 and there is a lot of progress to be done in the upcoming two years.
The key areas addressed were as follows:
Transparency in the wholesale markets
- The new directive will extend transparency into two large new markets – bond and derivative trading.
- The equity transparency regime will also be extended from shares to other instruments, such as GDRs and ETFs.
- There will be a cap on dark trading – 8% of total trading in the EU and 4% of total trading per venue in one stock.
- MiFID II will bring a whole new regulatory regime, which includes pre- and post-trading transparency and commodity position reporting requirements. This will help ensure that commodity markets set prices that are not distorted by financial speculations.
HFT and micro-structural issues
- There will be enhanced scrutiny on algorithmic trading and high-frequency trading (“HFT”). The new rules will aim to protect investors, prevent market abuse and preserve market integrity.
- Mr Lawton emphasized that a balanced regime regarding HFT is essential to a stable market. While safety and fairness are priorities, the regulator also needs to embrace developing technologies in the market.
- A number of challenges remain at level 2 on developing metrics for execution quality, which could be applicable to a diverse range of financial instruments and market models.
- The FCA remains conscious that more disclosure and transparency is not an ultimate goal, but a tool for achieving an efficient market. Mr Lawton stated that the FCA have to get the right balance and provide market participants with data that they both want and need.
- MiFID II aims to remove incentives given to asset managers that could influence their decisions to trade against the interest of their clients when purchasing research from pots of money generated by that trading.
- ESMA has made a proposal, which would lead to a market where all valuable research must be paid for by fund managers and not taken out from clients in the form of transaction fees. The FCA is supportive of this proposal.
Retail investor protection
- Retail investor protection will be enhanced in MiFID II through: i) revised business rules; and ii)new requirements around product governance and disclosure of costs and charges to investors when purchasing financial instruments and services.
In his conclusion, Mr Lawton pointed out that although there is a long way to go until the finalized version of MiFID II is released, firms cannot hold back on developing their implementation plans. Firms must make sure they understand the expectations of the new directive and are planning towards January 2017 (MiFID II Implementation date). The FCA will aim to assist firms regarding any lack of clarity surrounding the upcoming legislation.
Should you require any advice or information on MiFID II, Cleveland & Co, your external in-house counsel, are here to help.