MiFID II: Events Beyond the Effective Date

A couple of months have passed since the launch of the MiFID II requirements, and the market has begun to discern this new trading landscape. Many are beginning to wonder whether the regulatory goals have been achieved or not.

Originally, MiFID II was set to launch in 2017, but the EU commission delayed MiFID II by one year, due to the technical implementation challenges facing financial market participants and national regulators. With all the interconnections it was necessary to allow time for the entire trading and market ecosystem to implement the changes in an effective way.

In retrospect, this extra time was appreciated by most market participants who have been struggling to finalize their comprehensive implementation projects in order to be compliant by January 3, 2018.

Since its launch, the MiFID II regulatory adherence has been better than was expected considering the magnitude of changes to the rules and the broad range of asset classes that were impacted by the new regulations.

However, the implementation hasn’t gone perfectly. There have been disturbances related to parts of the data reporting streams that were changed by the new regulatory requirements. In addition, there are countries who have not yet implemented all elements of MiFID II. According to the European Commission, there are still ten countries that need to transpose the requirements in the directive into national law.

Looking Forward: Postponed Provision and Other Important Dates

Due to the lack of data and practical issues, some provisions have been postponed or delayed. Just before Christmas 2017, ESMA and National Competent Authorities (NCA’s) published a note restating the “No Lei, No trade” policy which was communicated earlier that year. According to the note, investment firms are temporarily allowed to execute transactions for clients that don´t have a LEI code as long as they are able to obtain the necessary documentation from clients to apply for an LEI code on their behalf. They may then submit transaction reports when the LEI code has been obtained. ESMA will allow for this temporary reporting up to July 3, 2018 when investment firms are expected to report full records. This was a welcome relief, which also made it possible to focus on other parts of the implementation during the crucial final weeks leading up to January 3rd.

The first Double Volume Cap (DVC) suspensions applicable to liquid equity instruments were supposed to be effective in January, shortly after the rules were implemented. In the first week of MiFID II, ESMA postponed the implementation of the Double Volume Caps until March 12th, due to issues with the data needed for the calculations. ESMA and NCA have engaged with trading venues to align reporting streams and corrected any rejected reports. The first DVC calculations were published on March 7th with effective date March 12th. The next publication of applicable DVC data is expected from ESMA on April 9th.

Moreover, according to MiFID II, investment firms must assess if they are systematic internalizers in financial instruments. The assessment shall be concluded by comparing investment firm’s own OTC transactions to the transactions made in the EU in total per instrument during a period of six months. Investment firms have been able to opt into the systematic internalizer regime since MiFID II became effective. ESMA delayed the timeframe for the first assessment from January 3rd until no later than September 1st. Before this date, investment firms also have to comply with the systematic internalizer obligations and notifying their NCA that they are SI. By August 1st, ESMA will publish EU-wide data covering the period from January 3 to June 30, 2018, necessary for investment firms to perform the calculations.

During 2018 there are several additional dates to keep in mind that will be of importance to markets participants and investors.

At the end of April, investment firms and trading venues must report with relevant data summarizing the outcomes achieved by firms when executing client orders along with the top five venues where they have executed these orders. The first report should cover the full calendar year of 2017, but ESMA has clarified that this might not be possible due to the fact that the data is not available or usable in relation to the preceding year as that data was not tied to the new provisions that stem from MiFID II or MiFIR.

The first post-MiFID II liquidity assessment of bonds will be published May 1st. It will state the bond’s applicable waivers or deferrals that can be applied two weeks later. The transparency data used in this assessment will properly, in terms of instruments covered and amount of data reported, differ compared with the data ESMA used for the transitional calculations. From a market’s perspective it will be interesting to see if more bonds will be viewed by ESMA as liquid, as they then must be transacted in public and transparent ways.

One factor that will impact the calculations is the reporting of OTC trades which post-MiFID II will be published by APAs (Approved Publication Arrangements) and included in the calculations of ESMA. The new version of the liquidity assessments will then be applied after May 15th.

The objective of MiFID II is to improve transparency, efficiency of financial markets and ensure a competitive and level playing field between trading platforms and to bring liquidity from the OTC space into regulated environments. In late January, the response period to ESMA consultation on proposed amendments to Commission Delegated Regulation (EU) 2017/587 (MiFID II RTS1) ended. The final report and ESMA´s proposal was published on March 27th with no additional changes following the consultation.

The amendments proposed by ESMA are intended to create a level playing field between trading venues and executions offered on a bilateral basis by investment firms by clarifying that systematic internalizers’ quotes would only reflect prevailing market conditions where the price levels could be traded on a trading venue at the time of publication.

In practice, the proposal implies that both multilateral and bilateral trade execution services have to use the same price increment when offering execution prices. It is difficult to predict the timeline for the adoption of the modified RTS1 but as this is a prioritized matter for both ESMA and the European Commission. ESMA has submitted their final report to the Commission, who will consider whether or not to endorse ESMA’s proposal. The text adopted by the Commission will also need the Council’s and the Parliament’s non-objection. If there is no political objection and all parties are in agreement, a decision could be in place by the beginning of the summer.

Trading venues and other execution venues shall publish their first best execution reports June 30th. The reports cover a reporting period that is representative of the first quarter of 2018 and will provide transparency on the execution quality and cost of client’s orders. The report will be of interest to the buy-side community which now is receiving data to evaluate the treatment of their order flow.

The reports will include execution fees, fees related to use and access to market data as well as details about transaction price and time needed to execute trades. The ongoing schedule for publishing reports by the execution venues will be on a quarterly basis on the last day of every quarter.

ESMA published the transitional transparency calculations for equity and non-equity instruments at the end of 2017. New versions of the transparency calculations will be published on different occasions during 2019 depending on asset class. Recalculation related to the transparency regime for equity which includes liquid instruments, and Large in Scale (LIS) and Standard Markets Size (SMS) thresholds will be performed during 2019. The results of the recalculation, which reoccurs yearly, will be published on 1 March 2019 and be applicable one month later to March 21, 2020.

The current liquidity assessment for derivatives, securitized derivatives, ETCs and ETNs, SFPs and emission allowances as well as the Large In Scale (LIS) and Size Specific to the Instrument (SSTI) thresholds for bonds will be applicable until May 30, 2019. The next version of the transparency calculations is to be published by ESMA on April 30, 2019 and applicable from June 1, 2019 to May 31, 2020. The frequency of the calculations is the same as for equity instruments and will ahead be published on a year-by-year basis.

Besides the events mentioned above, ESMA and NCA are still working on clarifying outstanding issues in Q&As and have started to look into different interpretations of the legislation and whether they may have created competitive disadvantages between market participants in different jurisdictions or given rise to loopholes that obstruct the aim of the regulation.

The effects on non-equity market transparency from differences in granted transparency waiver and deferrals in different countries, as well as the development of the growing systematic internalizer regime and transaction reporting issues are all areas that regulators have stated that they will monitor closely and act on if necessary.

Market participants should expect that there will be legal updates and further clarifications from regulators, making 2018 yet another challenging year given there are still MiFID II adaptations to take into consideration from a business perspective.

All information contained herein is obtained by Nasdaq from sources believed to be accurate and reliable. However, even if the markets in financial instruments directive and regulation and related level 2 and level 3 texts (“MiFID II/R”) have been adopted and entered into force there are still clarifications published and updates made to the legal text which might not be reflected in the content of this presentation.

Neither Nasdaq any of its affiliates or subsidiaries (collectively “Nasdaq”) assumes any responsibility for any errors or omission contained herein. The information herein is not intended to provide legal advice on any matter, nor is it intended to be comprehensive. all information is provided “AS IS” without warranty of any kind. while the information has been prepared on the basis of the best information available, Nasdaq accepts no liability for decisions taken by any party, based on this information.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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