Markets in Financial Instrument Directive

Quick answer

The amended Markets in Financial Instruments Directive (MiFID) and accompanying Regulation (MiFIR, together MiFID II) is a European regulation to enhance the effectiveness of the regulatory framework for Investment Firms. It will enter into application on 3 January 2018.

Detailed answer

The amended Markets in Financial Instruments Directive (MiFID) and accompanying Regulation (MiFIR, together MiFID II) is a European regulation to enhance the effectiveness of the regulatory framework for Investment Firms. It will enter into application on 3 January 2018.

This reform aims to enhance investor protection by refining the protections provided to smaller clients and extend those protections to a wider range of larger, more sophisticated clients. The new rules also improve the transparency of European financial markets with rules for new and existing trading venues (e.g. Regulated Markets such as the London Stock Exchange, Multilateral Trading Facilities or Organised Trading Facilities). New transparency obligations will ensure efficient and fair price formation for OTC transactions in both equity and non-equity financial instruments.

MiFID II aims at addressing the gaps and deficiencies of the original legislation that came into light during the Financial Crisis in 2008 only one year after MiFID came into application. MiFID II therefore takes into account the commitments made by the Pittsburgh G20 in 2009. It mandates venue trading for certain derivatives which are subject to EMIR clearing requirements.

Quick answer

The key objectives of MiFID II are:

1. Improving Investment Firms’ Organisational Controls
2. Harmonising Investor Protection across Europe
3. Improving Financial Market Transparency

Detailed answer

MiFID II addresses three main objectives:

1. Improving Investment Firms’ Organisational Controls
   MiFID II increases Senior Management responsibility for the day-to-day operation of investment firms. It extends requirements on processes, controls, record keeping and similar across the business
2. Harmonising Investor Protection across Europe
   MiFID II reinforces the duty to treat clients fairly by considering the needs of clients as part of product design and distributions and requiring Investment Firms to provide more information on costs incurred and the quality of execution when handling clients’ orders. It enhances existing obligations on suitability and appropriateness and best execution
3. Improving Financial Markets Transparency
   MiFID II aims to increase price transparency, particularly for non-equity instruments. A new regime for multilateral discretionary trading venues or ‘Organised Trading Facilities’ will make trading in non-equity instruments more transparent. For bilateral trading, MiFID II expands the existing Systematic Internaliser (SI) regime to all types of financial instruments. Investment Firms which, on an organised, frequent systematic and substantial basis, deal on own account when executing client orders outside a trading venue will be required to mimic the pre- and post-trade transparency of venues

Quick answer

Any financial institutions either based within the EU or elsewhere when:

• providing an investment service as defined by MiFID to a European Client/ Counterparty, and/or
• operating on European Markets or transacting financial instruments listed on European trading venues.

Detailed answer

Any investment firm¹, regulated market, data reporting service providers and third country firms providing investment service or activities through the establishment of a branch in the European Union².

Investment services and activities should be understood as follows³:

• reception and transmission of orders in relation to one or more financial instruments
• execution of orders on behalf of clients
• dealing on own account
• portfolio management
• investment advice
• underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis
• placing of financial instruments without a firm commitment basis
• operation of an Multilateral Trading Facility
• operation of an Organised Trading Facility.
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1. ‘Investment firm’ means any legal person whose regular occupation or business is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis. (Article 4, MiFID II Directive)
2. Title I ‘Scope and Definitions’, Article 1, MiFID II Directive.
3. Annex I, Section A, MiFID II Directive.

Quick answer

The major requirements imposed by MiFID II are as followed:

1. New market structure and trading obligations to ensure that more transactions occur on a Regulated market1,
2. Enhanced market transparency principles for transactions in equity instruments,
3. New market transparency obligations for transactions in non-equity instruments such as bonds and derivatives,
4. New controls to monitor trading in commodities instruments,
5. New framework to improve competitiveness in the trading and clearing of financial instrument,
6. Introduction of trading controls for algorithmic trading, high frequency trading and provision of Direct Electronic
7. Access to trading venues,
8. Enhanced investor protection rules
9. Harmonised regime to facilitate third country firms access to EU markets when providing investment services to professional client & eligible counterparties

Detailed answer

There are 7 key requirements as part of MiFID II:

1. Market structure and trading obligations
   MiFID II introduces new trading obligation for shares and liquid derivatives instruments subject to clearing obligation under EMIR. These transactions will now be required to be executed on a regulated platform such as a classic stock exchange, a multilateral trading facility or, for derivatives only, an organised trading facility
2. Market transparency
   MiFID II increases the already-existing transparency requirements imposed on equity transactions with the implementation of a double volume cap mechanism to limit the use of reference price waivers and negotiated price waivers.
   MiFID II extends the pre-trade transparency requirements to non-equity instruments such as bonds and derivatives, RFQ and voice trading. Details around the trade execution of this transaction in non-equity instrument will also need to be disclosed on a quasi real time basis to the public. The objective is to make the price formation process more transparent
3. Trading in commodity instruments
   A new position-limit regime is introduced for transactions in commodity derivatives to improve transparency and to prevent speculation from having a detrimental impact on the price of the underlying commodities. An associated position reporting obligation will enable regulators to monitor that position limit
4. Competitiveness in the trading and clearing of financial instruments
   MiFID II introduces a regime to ensure non-discriminatory access to trading venues and Central Counterparties (CPPs)
5. Trading controls for algorithmic trading, high frequency trading (HFT) & direct electronic access (DEA)
   New controls are introduced to regulate algorithmic traders and make sure that they provide liquidity when they pursue a market making strategy. When providing DEA service to clients, investment firms need to have adequate systems and risk controls in place to prevent market abuses
6. Investor Protection
   MiFID II harmonises investor protection requirements across Europe by:
   • reinforcing clients’ assets protection
   • strengthening the rules on Product Governance
   • improving the Appropriateness & Suitability tests
   • imposing new restrictions on third party commissions, and
   • improving the transparency on the costs & charges and the information disclosed to clients
7. Third country firms access to EU markets
   A new regime is established to facilitate the access to European markets for Third-Country firms providing investment services or activities to professional clients and eligible counterparties. Firms from equivalent third country jurisdictions are allowed to apply for a passport to provide these cross boarder services without establishing a branch within the EU (except if they intend to serve retail clients)

Quick answer

MiFID requires increased interaction between Standard Chartered Bank and our clients. Both the clients and the Bank will have to provide additional information, to each other and the regulator. MiFID obligations to clients will be extended to any client opening a Financial Market, Wealth or Private Banking account with Standard Chartered London and any entity based in Europe.

Some requirements will also extend to clients based outside of the European Economic Area, where they have an EU nexus. These obligations include but are not limited to extra client on-boarding documentation checks, new disclosures to clients on charges for transactions and services provided, further evidence of best execution of client orders, greater duty of care based on client’s requests.

Detailed answer

MiFID requires increased interaction between Standard Chartered Bank and our clients. Both the clients and the Bank will have to provide additional information, to each other and the regulator.

MiFID obligations to clients will be extended to any client opening a Financial Market, Wealth or Private Banking account with Standard Chartered London or an entity based in Europe. Some requirement will also extend to client based outside of the European Economic Area, where they have an EU nexus. These obligations include but are not limited to extra client on-boarding documentation checks, new disclosures to clients on charges for transactions and services provided, further evidence of best execution of client orders, greater duty of care based on client’s requests.

MiFID II creates an opportunity for professional and institutional investors to review their organisation and reshape their business services while adapting to the requirements. It also calls for significant system and operational changes to comply with the rules around trade publications in real time, position limit regime for commodity derivatives, data storage for record keeping purpose or transaction reporting at T+1.

Standard Chartered Bank recommends its clients to:

• apply for a Legal Entity Identifier to be able to continue to transact with Standard Chartered after 1 November 2017
• gather information from their own clients (from both individual and legal entities ) to make sure that you have the required CONCAT and LEI to transact with them after 1 November 2017
• identify the individuals and algorithms which may execute transaction for their firm or end clients
• make sure they are ready to provide the full list of information they need to provide their clients with to comply with MiFID II Investor Protection rules