Today is the 3rd January 2018, the day when MiFID II and MiFIR finally come into effect. The financial services industry has been gearing up for this day long before the original date was set in mid 2014 and then delayed to today. The start of MiFID II has been widely reported in the general press, for example this article on the Guardian’s web site looks at the extensive preparations in the financial sector.
Any entity that is authorised as an Investment Firm at any level will have had a great deal of work to carry out to be ready. Streams of work include several types of reporting, for example Transaction Reporting as per Regulatory Technical Standard (RTS) 22, and others. Rules around best execution, record keeping, reference data, the trading obligation and many others have occupied financial institutions for many months. And those who are classified as systematic internalisers have other requirements to meet.
The rules around the structures of markets have required many changes from venue operators. In addition to changes in how Regulated Markets and Multilateral Trading Faculties(MTF) work, MiFID II introduces the Organised Trading Facility (OTF), a status which many previously less regulated multilateral platforms will now have. The “open access” arrangements required by MiFIR also start today, unless exemptions are granted by the National Competent Authority(NCA). The UK’s FCA issued one such exemption this morning, as announced here. Venues have been approved over the past weeks as OTFs as the deadline draws near (for example, see this post on the Financial technologies Forum).
For most in energy and commodities, only a subset of these rules will apply for now. This is because the majority of market participants will be relying on any exemption from MiFID II, most likely the Ancillary Activity exemption found under Article 2(1)j and further specified under RTS 20 (see here). Some however will either fail this test, or more likely be carrying out “regulated activity” which requires such authorisation. The reclassification of Emissions Allowances under the ETS scheme as financial instruments will widen the number of people considered as such.
For those staying out of MiFID, there are still several requirements to consider, most notably those around position limits and position reporting, which apply to any company with positions in commodity derivatives on a trading venue, or an Economically Equivalent OTC position. There have been many announcements of limits, opinions and questions and answers relatively recently, which has caused issues for many companies. Investment Firms and venues are also required to report positions to NCAs, as specified in MiFID II Article 58 and also Implementing Technical Standard 4. However even those exempted are required to provide data to the venues on which they hold positions. This requirement has led to a great deal of work for many companies, and the requirements continue to evolve.
Those in energy and commodities will also be aware of the change to the definition of a financial instrument as specified in Annex I Section C. The so called “REMIT carve out” in section C6, means that particular attention will be paid to the OTF status of the platforms on which physical forwards are traded.
In addition, exempted counterparties are subject to certain other rules, such as those on algorithmic trading in financial instruments found in RTS 6 (although those engaging in “high frequency” trading may not use an exemption). Companies wishing to remain exempt must ensure that they do not undertake “regulated activity” that does not permit exemption.
It should also not be forgotten that the “Emissions Allowance Market Participant” regime under MAR starts today (see here). We will likely see more about this over the coming weeks.
It will be interesting to see how the day goes. This article on the ICIS web site looks at previous “rule start” outcomes, and predicts that as with all such “go lives”, there will be issues but “no disasters”. While the new world starts today, it will be some time before the rules bed in. As this article on the Telegraph web site states, the passing of the deadline does not mean “mission accomplished”.