The minutes of the latest MiFID II implementation roundtable, on 17 July, were published in August. At the meeting, the FCA spoke with a number of industry trade bodies, including the Association for Financial Markets in Europe (AFME), the International Swaps and Derivatives Association (ISDA) and the International Capital Markets Association (ICMA), to discuss certain MiFID II industry implementation challenges.
The minutes from the roundtable have provided market participants with some clarity over particular areas of the MiFID II regulation, which will be hitting the UK financial services industry on 3 January 2017.
At the meeting, the FCA stated that, although they understood the difficulties that firms were facing in “the transition from MiFID to MiFID II”, because of the size of the market and the new structures under MiFID II only being fully understood once the industry was up and running under the new regime, the importance for firms to “plan effectively for implementation” was paramount.
Below, we outline 10 key topics examined at the roundtable.
1. Energy Market Participants (EMPs)
The uncertainty over the ancillary exemption under the new rules means the FCA has been unable to make a decision on the UK’s post-MiFID II regulatory boundary. Consequently, the regime for EMPs who are not MiFID firms is still unknown.
The FCA provided more information on the authorisation process that firms would be subject to. Excluding applications in relation to the operating of an OTF, and those undertaking regulated activities related to emission allowances or structured deposits, any firm applying for authorisation under MiFID II would be subject to the standard provisions in the Financial Services and Markets Act (2000). The FCA has suggested that there might be a case for extending the transitional provisions to applications by commodity derivatives firms, although this would be dependent on the details regarding the ancillary exemption in the RTS.
3. Market-wide data
There is currently widespread concern that the regulations will pose challenges surrounding the authorisation of commodity derivative firms and the identification of SIs. This is due to the implication that the size of the market, in terms of financial instruments in the EU, is required. To ensure consistency in approach across the EU, ESMA has been considering whether it would be able to assist firms in this respect.
4. Golden source of reference data
The FCA have clarified that ESMA is required to publish information on reference data so firms will have access to the same information (on instruments being trading on trading venues across the EU) as national competent authorities.
5. Over reporting of transaction reports
The FCA agreed that the over reporting of transaction reports is a potential outcome because of the current lack of available data.
The requirement for LEIs has left the industry questioning the practical implications. The FCA suggested that it might be able to provide some help, setting out the need for this information on its website.
7. Taping conversations
Earlier this year, in June, the FCA ‘lost the debate’ on telephone recordings. From 3 January 2017, under the MiFID II rules, anyone recommending products or conducting transactions over the phone must record the call and keep that recording for five years. The FCA fought against this the rule, arguing that those subject to the rule should only be required to keep recorded calls for six months, but the fight was, ultimately, lost.
However, at the roundtable, the FCA stated that the taping obligations did not include the taping of face-to-face conversations. It was also indicated that the requirements on the accessibility of information and monitoring of calls would be similar to those under the existing taping rules. In addition, firms would be expected to respond to client requests for copies of tapes without charge and within a reasonable timeframe, although no specific period was confirmed.
8. Product governance
Many market participants agree that greater clarity regarding the identification of a product’s target market is needed, as a result of a lack of consistency in the approaches used by different firms and jurisdictions. ESMA indicated, within its technical standards, that there is scope for future Level 3 work within this area. In addition, the FCA highlighted the importance of remaining consistent with PRIIPs.
9. Disclosure of costs
The FCA verified that the MiFID II disclosure of costs obligation applies to execution-only business. Furthermore, when discussing the aggregation requirement, which does not distinguish between known and unknown volatile costs, the FCA noted that ESMA’s technical advice specifies that volatile costs should be estimated on a best efforts and reasonable assumptions basis.
10. ESMA Level 3
The FCA updated participants on current discussions being held within ESMA on the possibility of Level 3 work, such as guidelines and Q&As. It was mentioned that, although the work was not particularly advanced at this stage, the pace should quicken once the technical standards had been completed.
Hopefully, market participants will be able to obtain greater clarification on the new regulations when the draft RTS are published later this year.