The Financial Services and Markets Act 2000 (Markets in Financial Instruments) (No. 2) Regulations 2017 have been published, and will take effect mainly from January 3, 2018. Some technical provisions will come into force a day earlier, on January 2, 2018, for the purpose of making corrections to other legislation in advance of the implementation date for the revised Markets in Financial Instruments Directive.

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The Financial Conduct Authority has published a Policy Statement setting out new Handbook rules and guidance to implement some of the recommendations arising from the Financial Advice Market Review launched by the FCA jointly with HM Treasury in August 2015.

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The European Commission has adopted a Commission Implementing Decision on the equivalence of the legal and supervisory framework applicable to designated contract markets and swap execution facilities in the United States for the purposes of the trading obligation for derivatives under the Markets in Financial Instruments Regulation. From January 3, 2018 MiFIR will require that derivatives declared subject to the trading obligation must be traded on EU trading venues or third-country trading venues recognized by the European Commission as equivalent. Derivatives that will be subject to the trading obligation are euro, dollar and pound interest rate swaps in the most common benchmark tenors, as well as index-based credit default swaps.

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A Commission Delegated Regulation has been published in the Official Journal of the European Union, on the criteria for identifying a liquid market for package orders under the Markets in Financial Instrument Regulation.

The Delegated Regulation sets out criteria for identifying package orders for which there is a liquid market as a whole and provides further asset-class specific criteria to be met where a package order consists exclusively of interest rate derivatives, equity derivatives, credit derivatives or commodity derivatives.

View the Commission Delegated Regulation.

The final Regulatory Technical Standards under the Markets in Financial Instruments Regulation on indirect clearing arrangements for exchange-traded derivatives and amending RTS under the European Market Infrastructure Regulation on indirect clearing arrangements for OTC derivatives have been published in the Official Journal of the European Union. The versions published are equal to those which were adopted by the European Commission on September 22, 2017. Indirect clearing refers to a situation where two or more entities are intermediaries standing between a client and a CCP in a contractual chain. EMIR established RTS on indirect clearing arrangements applicable to OTC products and MiFID extends these rules and principles to exchange-traded products. The EMIR RTS is now being revised to align with the new MiFIR RTS. Both pieces of legislation allow for indirect clearing arrangements to be established, and establish structures intended to result in equivalent protections for indirect clearing to those available for direct clearing (where only one intermediary exists). Various requirements in relation to segregation and portability at client, clearing member and CCP level are established and new required procedures to manage client defaults apply at clearing member level. Two new kinds of accounts must be established at client, clearing member and CCP level which enable such persons to distinguish indirect client positions and collateral from own account client positions and collateral.

The RTS and the amending RTS will enter into force on December 11, 2017 and will apply from January 3, 2018.

View the RTS on indirect clearing under MiFIR.

View the amending RTS on indirect clearing under EMIR.

View the existing RTS on indirect clearing under EMIR.

The Court of Justice of the European Union has given a preliminary ruling on the meaning and scope of "regulated market" under the Markets in Financial Instruments Directive following a referral by the Dutch Administrative Court of Appeal for Trade and Industry. A regulated market is defined in MiFID I as "a multilateral system operated and/or managed by a market operator, which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments - in the system and in accordance with its non-discretionary rules - in a way that results in a contract, in respect of the financial instruments admitted to trading under its rules and/or systems, and which is authorised and functions regularly and in accordance with the provisions of Title IIII". The definition is unchanged in MiFID II which will replace MiFID I from January 3, 2018.

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The European Securities and Markets Authority has published a statement alerting investors about the high risks of investment in Initial Coin Offerings, including the risk of total loss of their investment. The statement is accompanied by an alert to EU firms involved in ICOs reminding them of their regulatory obligations.

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The European Securities and Markets Authority has published a consultation proposing amendments to the Regulatory Technical Standards on the equity transparency obligations of trading venues and investment firms (Commission Delegated Regulation (EU) 2017/587, known as 'RTS 1') under the Markets for Financial Instruments Regulation. MiFIR requires Systematic Internalisers to make public firm quotes in equity instruments. The quotes must: (i) be at least equivalent of 10% of the standard market size for the quoted instrument; (ii) include both a bid and offer price; and (iii) reflect the prevailing market conditions for that instrument. RTS 1 specifies the concept of 'prices reflecting prevailing market conditions' as being 'close in price, at the time of publication, to quotes of equivalent sizes for the same financial instrument on the most relevant market in terms of liquidity'. ESMA is of the view that this specification needs to be amended because the quotes of an SI can only adequately reflect prevailing market conditions when the quotes reflect the minimum price increments ('tick sizes') quoted for a financial instrument on a trading venue.

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A Commission Delegated Regulation with Regulatory Technical Standards on information and requirements for the authorization of investment firms under the revised Markets in Financial Instruments Directive has been published in the Official Journal of the European Union. MiFID II provides the requirements and conditions for authorization of an investment firm. The RTS set out the information that a firm applying for authorization as an investment firm must submit to the relevant national regulator. The information includes general corporate information, information on the applicant's sources of capital and financial situation, information on the applicant's shareholders, management body and persons who direct the business and information on the organization of the firm.

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A Commission Delegated Regulation with Regulatory Technical Standards on the information requirements for notification by a proposed acquirer of its proposed acquisition of a qualifying holding of an investment firm under the Markets in Financial Instruments Directive and the revised Markets in Financial Instruments Directive has been published in the Official Journal of the European Union. Both MiFID and MiFID II require that acquisitions of an investment firm or a qualifying holding in an investment firm are subject to prior approval by the relevant regulator. A qualifying holding is a direct or indirect holding in an investment firm of 10% or more of the capital or voting rights. The RTS set out the information that an acquirer must submit to a national regulator so that it can assess the proposed acquisition. The information includes that of the proposed acquirer, the persons who will direct the business of the target entity, the new proposed group structure and its impact on supervision and financing of the acquisition. The RTS also provide for the information requirements to be reduced where the proposed acquirer is an EU authorized entity and where the target entity does not hold client assets, is not authorized to undertake proprietary trading or underwriting of financial instruments and, if the target is authorized as a portfolio manager, the assets under management by the target are less than EUR 500 million.

Read more. 

The European Securities and Markets Authority has announced the launch of the second phase of its Financial Instrument Reference Database (FIRDS). FIRDS covers the requirements under both the Markets in Financial Instruments Regulation and the Market Abuse Regulation for reference data collection, transparency reporting obligations, submission of the Double Volume Cap data and the transaction exchange reporting mechanism. With the launch, ESMA is providing access to the database holding the currently available reference data that market participants will use to identify instruments subject to the reference data reporting requirements. The aim of the launch is to assist market participants in preparing their systems in advance of the obligation coming into effect on January 3, 2018.

View ESMA's announcement.

The European Commission and the US Commodity Futures Trading Commission have published a joint statement announcing a common approach for recognizing certain derivatives trading venues authorized in the EU and the US for the purposes of the trading obligation. The Markets in Financial Instruments Regulation imposes a trading obligation on EU financial counterparties and non-financial counterparties for transactions in derivatives that: (i) have been declared subject to the clearing obligation under the European Market Infrastructure Regulation; (ii) are admitted to trading or traded on at least one EU trading venue (a regulated market, multilateral trading facility or organized trading facility) or a third-country equivalent trading venue; and (iii) are sufficiently liquid. The European Commission may adopt an equivalence decision declaring that certain third-country trading venues are subject to an equivalent legal, supervisory and enforcement regime to the EU requirements under MiFID II and the Market Abuse Regulation. The common approach signifies that it is intended that the European Commission will adopt an equivalence decision for swap execution facilities and designated contract markets regulated by the CFTC. Similarly, the CFTC will exempt MTFs and OTFs from the requirement to register as SEFs.

Read more. 

The European Securities and Markets Authority has published a briefing on the Legal Entity Identifier for compliance with the revised Markets in Financial Instruments package. MiFID II has applied across the EU since January 3, 2018. The LEI provides a clear and unique identification of legal entities participating in financial instruments. Firms need an LEI to ensure compliance with their reporting obligations under a number of existing EU regulations and directives, including the European Market Infrastructure Regulation, the Market Abuse Regulation and the Securities Financing Transactions Regulation. The purpose of ESMA's briefing is to flag to investment firms, investment firm clients, trading venues, issuers and Approved Reporting Mechanism firms that they will need an LEI to fulfil their obligations under MiFID II. In addition, the use of the LEI is required, or is in the process of being implemented, in other jurisdictions, including the United States, Canada and Asia-Pacific.

View the briefing.

A Commission Delegated Regulation exempting compliance with the pre- and post-transparency requirements for non-equity transactions with the Bank for International Settlements and the central banks of 12 third countries has been published in the Official Journal of the European Union. The Market in Financial Instruments Regulation, which applies from January 3, 2018, exempts transactions from the trade transparency rules where a member of the European System of Central Banks is a counterparty to the transaction, provided that the transaction is entered into in the performance of monetary, foreign exchange or financial stability policy and the central bank notifies its counterparty that the exemption applies. The exemption does not apply to transactions entered into by a member of the ESCB in the performance of their investment operations. MiFIR allows the European Commission to extend the exemption to other central banks. The Delegated Regulation provides for the exemption to be extended to the BIS and to central banks in Australia, Brazil, Canada, Hong Kong, India, Japan, Mexico, the Republic of Korea, Singapore, Switzerland, Turkey and the US. The list may be amended in the future to add or remove a central bank. The Delegated Regulation enters into force on October 27, 2017, and will apply from January 3, 2018.

View the Delegated Regulation.

The European Securities and Markets Authority has published final Guidelines on the requirements for the management body of market operators and Data Reporting Services Providers. The revised Markets in Financial Instruments Directive requires all members of the management body of any market operator to be of sufficiently good repute, possess sufficient knowledge, skills and experience to perform their duties, to commit sufficient time to perform their functions and to act with honesty, integrity and independence of mind. Market operators must also promote diversity and allocate adequate human and financial resources to the induction and training of the management body. Similar requirements are placed on the management body of DRSPs, but DRSPs are not required to promote diversity and allocate adequate human and financial resources to the induction and training of the management body.

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The European Securities and Markets Authority has published a final Report and final draft Regulatory Technical Standards on the trading obligation for derivatives under the Markets in Financial Instruments Regulation. The trading obligation is applicable to classes of derivatives that: (i) have been declared subject to the clearing obligation under the European Market Infrastructure Regulation, (ii) are admitted to trading or traded on at least one EU trading venue (a regulated market, multilateral trading facility, organized trading facility or a third country equivalent trading venue) and (iii) are sufficiently liquid. The trading obligation will apply to financial counterparties and to non-financial counterparties. Where ESMA determines that a class of derivatives should be subject to the MiFIR trading obligation, third country trading venues would only be permissible for trading by EU entities when determined to be equivalent by the European Commission.

The final draft RTS on the trading obligation provide for the trading obligation to apply to fixed-to-float interest rate swaps denominated in euros, US dollars and pound sterling and to index credit default swaps (iTraxx Europe Main and iTraxx Europe Crossover). The trading obligation for both IRS and CDS will apply from January 3, 2018, unless the clearing obligation for a particular class of derivatives has not yet entered into force.

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The European Securities and Markets Authority has made a public statement on the joint work plan of ESMA and national regulators for opinions on pre-trade transparency waivers and position limits under the revised Markets in Financial Instruments package. MiFID II will apply from January 3, 2018.

MiFID II introduces a new position limit regime for commodity derivatives. National regulators will be required to establish and apply position limits on the size of a net position in commodity derivatives traded on trading venues and economically equivalent OTC contracts. The limits will apply to the size of a position that a person can hold. Position limits set by a national regulator must be confirmed in an opinion issued by ESMA.

The pre-trade transparency obligations require market operators and investment firms operating a trading venue to make public current bid and offer prices and the depth of trading interests at those prices which are advertised through their systems for equity and non-equity financial instruments.

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The Financial Conduct Authority has devoted the September 2017 issue of its Market Watch newsletter to a discussion of aspects of FCA reporting functionality and the means by which firms can meet their reporting obligations under MiFID II from January 3, 2018. Market Watch issue 53 provides details of: (i) the requirement for firms subject to MiFID II transaction reporting obligations (and their eligible clients) to have a Legal Entity Identifier and what firms need to do to obtain one; (ii) how firms can apply to become a submitting entity to make submissions of market data via the FCA's Market Data Processor; (iii) the requirements external users will need to meet to be able to request extracts of transaction reports from the FCA via the MDP entity portal, which goes live on January 3, 2018; (iv) the ways in which operators of trading venues and investment firms can fulfill their market data reporting obligations by using outsourcing arrangements with third parties; and (v) clarification that Systematic Internalisers must submit instrument reference data to the FCA for financial instruments where the underlying instrument is a financial instrument traded on a trading venue, or an index or a basket composed of financial instruments traded on a trading venue.
 

View FCA Newsletter (Market Watch Issue 53).

The Financial Conduct Authority has issued a press release informing firms that applications to the regulator for authorization or variation of permission in time for MiFID II implementation are now urgent. The FCA has previously issued statements warning that firms requiring either new authorization or a variation to existing permissions needed to submit applications to the FCA by July 3, 2017, and that any submissions made after that date ran the risk that the FCA would not be able to determine the application in time for January 3, 2018.
 
The FCA considers that it has made good progress. However, any firms that have not yet submitted applications, or that have been contacted by the FCA for more information on a submitted application, must act without delay. Firms that have not yet submitted complete applications for new permissions must now also include contingency plans to allow for the possibility that permissions may not be in place by January 3, 2018. 
 
The press release also highlights that some proprietary traders which are not currently authorized may need authorization under MiFID II, for example, proprietary traders that access trading venues by means of direct electronic access (DEA) provided by a regulated firm or which engage in algorithmic trading. Firms that provide DEA have a duty under MiFID II to carry out due diligence on their prospective DEA clients and the FCA suggests that these firms work closely with their clients to ensure they are aware of the potential need to be authorized.
 
View the Press Release.
 
View Client Briefing: Deadline Looms for Regulated Firms to Vary Their Permissions to Comply With MiFID II.
 

The European Commission has published a Report to the European Parliament and the Council recommending that Exchange-Traded Derivatives (ETDs) do not need to be excluded from the scope of the provisions of the Markets in Financial Instruments Regulation that provide for open and non-discriminatory access to CCPs and to trading venues.

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The Financial Conduct Authority has launched a consultation on changes to its client money rules (CASS 7) to amend the existing 30-Day Rule under which firms are prevented from placing client money in bank accounts with unbreakable terms of longer than 30 days. The FCA introduced the 30-Day Rule in July 2014 to restrict the practice of some firms of depositing client money in unbreakable deposits for periods of up to years. The placing of client money in lengthy unbreakable terms attracts the risk of diminution if a firm is unable to withdraw that money in response to market events and the risk that client money may not be available for distribution in the case of a firm insolvency. Therefore, the FCA was (and remains) of the view that placing client money in unbreakable deposits for long periods is incompatible with the purpose of the client money regime. However, it is now proposing to allow the use of 31-90 day unbreakable deposits following feedback from firms about an increasing reluctance of banks to provide 30-day unbreakable deposits.

The reduced appetite from banks appears to have arisen due to the interaction between the 30-Day rule and the liquidity requirements of the prudential regime. All client money is subject to the Liquidity Coverage Ratio which requires banks to have highly liquid assets to cover 100% of their potential net cash outflows over 30 days. Unbreakable deposits of a maximum of 30 days are therefore capital inefficient.

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The European Securities and Markets Authority has published a document formalizing a common standard and procedure for national regulators to follow when reporting to ESMA the details of the circuit breakers and trading halts used by the trading venues in their jurisdiction. This will assist national regulators with their MiFID II obligations to report to ESMA the details provided to them by trading venues operating in their territory. The common standard and procedure is designed to ensure consistency and comparability of reported parameters.

View the Procedure and Template.

The European Securities and Markets Authority has published three Opinions setting out sector-specific principles for Brexit-related relocations in the sectors of investment management, investment firms and for secondary markets. These sector-specific Opinions build on a cross-sector Opinion published in May 2017. The principles do not set out any new legal requirements, but they are intended to serve as practical tools to support supervisory convergence among national regulators in EU27 countries when approached by UK market participants seeking to relocate in the content of the UK's exit from the EU. The Opinions have been published in the wake of reports that some member state regulators have been marketing their jurisdictions as locations for business and it has been thought that some regulators may have been offering a lighter-touch form of regulatory and especially "presence" standards than others.

The Opinions, which assume (without prejudice to ongoing negotiations) that the UK will become a third country on exit from the EU, highlight particular issues national regulators in EU27 should consider when considering applications from relocating market participants. Factors for close consideration include governance structure and internal control, the impact and influence of group membership, the nature and extent of proposed outsourcing arrangements and the need to mitigate the risk of letter-box entities. ESMA also recommends that national regulators consider co-operation arrangements with third country regulators where appropriate.

View Opinion on Investment Firms.

View Opinion on Investment Management.

View Opinion on Secondary Markets.

The European Securities and Markets Authority has published for consultation draft Guidelines to enhance clarity and foster convergence in the implementation of certain aspects of the MiFID II suitability requirements. Whilst the requirements for firms offering financial advice or portfolio management to assess the suitability of products for their clients are not new, MiFID II's provisions enhance and strengthen the MiFID I requirements. ESMA has therefore built on the suitability Guidelines it issued in 2012, with clarifications, refinements and updates where necessary to reflect the MiFID II provisions. Annex IV to the consultation paper contains a correlation table between the proposed draft Guidelines and the corresponding 2012 Guidelines. The proposed draft Guidelines also take into account the results of supervisory activities conducted by national regulators on the application of suitability requirements as well as the technological evolution of the advisory markets (for example automated advice) and recent studies on behavioural finance.

ESMA invites comments on the draft Guidelines by October 13, 2017. It expects to publish a final report and final Guidelines in Q1/Q2 2018.

View the consultation paper.

The European Securities and Markets Authority has published proposed amendments to its Regulatory Technical Standards under the European Markets Infrastructure Regulation, following a public consultation between December 2016 and February 2017. ESMA provided final draft RTS to the European Commission in 2012 specifying the frequency and the details of the information to be made available by Trade Repositories to the relevant authorities and the information to be published by TRs. The RTS also specified the operational standards required to aggregate and compare data across TRs and for the relevant authorities to have access to information as necessary.

Read more.

The Financial Conduct Authority has published the final report of the Asset Management Market Study it launched in November 2015. The object of the AMMS was to investigate three core areas: (i) how asset managers compete to deliver value; (ii) whether asset managers are willing and able to control costs and quality along the value chain; and (iii) how investment consultants affect competition for institutional asset management. Furthermore, the FCA wanted to look at whether there are any barriers to innovation that prevent investors from obtaining better results. The FCA published an interim AMMS report in November 2016 which set out the FCA's provisional assessment of the way competition works for asset management services, the consequences for investors and the FCA's proposed remedies to tackle the issues.

The final AMMS report confirms the FCA's interim findings and proposes a package of remedies. The FCA has divided the remedies into three buckets: (i) remedies on which it has published a consultation alongside the final report; (ii) final remedies; and (iii) remedies on which it intends to consult later.

Read more.

The Financial Conduct Authority has published the results of a review into the suitability of advice and quality of disclosure in the financial services sector.

Read more.

The European Securities and Markets Authority has published a follow-up report analyzing the actions taken by ten national regulators to address their inadequate application of ESMA's good practices on applying the rules on the provision of fair, clear and not misleading information by regulated firms to clients under the Markets in Financial Instruments Directive. ESMA's assessment forms part of its preparation for the implementation of the MiFID II rules which come into effect on January 3, 2018.

The assessment used the same criteria as the original peer review: (a) organisation; (b) supervisory approach; (c) monitoring; (d) thematic work; and (e) complaints. Of the ten regulators, those in Lithuania, Lativia, Malta, Poland, Portugal and Romania had addressed all the deficiencies previously identified. For the remaining four, Denmark, Estonia, Greece and Cyprus, deficiencies remain, although ESMA has welcomed the efforts made to address them.

View the Report.

The Prudential Regulation Authority has published a second Policy Statement and final rules implementing certain aspects of the Markets in Financial Instruments legislative package.

Read more.

The European Securities and Markets Authority has published Guidelines on the calibration of circuit breakers and the publication of trading halts under the revised Markets in Financial Instruments Directive. MiFID II requires regulated markets temporarily to halt or constrain trading if there is a significant price movement in a financial instrument (equity, equity-like and debt instruments) on that market or a related market in a short period. Regulated markets must also, in exceptional cases, cancel, vary or correct any transaction. ESMA is required to develop guidelines on the calibration of those trading halts, taking into account the liquidity of the different asset classes and sub-classes, the nature of the market model and types of users. The Final Guidelines outline further details on the parameters that trading venues should consider when calibrating their circuit breakers. ESMA emphasizes that consideration should be given not only to trading halts, but also order price collars. Trading venues should also immediately make public details of the activation of a trading halt, the type of trading halt, the trading phase in which it was triggered, the eventual extension and the end of the halt. National regulators have until two months from date of publication in all EU official languages to advise ESMA of whether or not they intend to comply with the final Guidelines.

View the Guidelines.

The European Securities and Markets Authority has published its Final Report and final draft Regulatory Technical Standards under the revised Markets in Financial Instruments Directive specifying the scope of the consolidated tape for non-equity products (i.e., bonds, structured finance products, emission allowances and derivatives).

Under MiFID II, consolidated tape providers will collect post-trade information published by trading venues and approved publication arrangements (APAs) and consolidate this into a continuous live data stream made available to the public, both for equity instruments and non-equity products. Given the additional complexity involved in providing a non-equity consolidated tape, the relevant MiFID II provisions for the non-equity tape will not enter into effect until September 3, 2019.

The draft RTS will amend the existing Delegated Regulation 2017/571 (previously RTS 13) on authorization, organizational requirements and the publication of transactions for data reporting services providers, which sets out the scope of the equity tape, by adding provisions:

• permitting non-equity consolidated tape providers to specialize in one or more asset classes to increase the likelihood of a viable business case for non-equity consolidated tape provision; and
• specifying the APAs and trading venues that have to be included in the non-equity consolidated tape based on the required consolidated tape coverage ratio of 80% of all transactions published in an asset class in the EU.

The final draft amending RTS have been provided to the European Commission which has three months to decide whether to endorse the draft RTS.

View ESMA's press release.

The Financial Conduct Authority has published its first Policy Statement on Markets in Financial Instruments Directive II Implementation. The Policy Statement sets out near final rules in the areas consulted on in previous consultation papers, covering, requirements for Regulated Markets, Multilateral Trading Facilities, Organised Trading Facilities, Systematic Internalisers, transparency, market data, algorithmic and high frequency trading requirements, passporting and branches of non-European Economic Area (EEA) firms, Principles for businesses, rules relating to commodity derivatives, supervision, prudential rules, systems and controls, including remuneration and whistleblowing and fees.

It also covers a small number of issues relating to the use of approved reporting mechanisms and the new authorisation category of data reporting service providers and an update on the FCA's proposals for recording of telephone conversations.

In June, the FCA plans to finalize the MiFID II rules in a further policy statement. This will cover remaining issues which include conduct of business, perimeter guidance and client asset protections.

The FCA stated that it does not intend to substantively amend the rules published in the Policy Statement prior to their entry into force. Firms impacted by the changes to the activities and instruments covered by MiFID II should now apply for authorization or for variations of permission, in order to continue being able to operate in the UK after January 3, 2018, when MiFID II takes effect.

View the Policy Statement and related webpage.

The Financial Conduct Authority has published its fifth Consultation Paper on the Markets in Financial Instruments Directive II Implementation. The consultation deals with changes to the FCA's decision procedure and penalties manual (DEPP) and the enforcement guide (EG), consequential and miscellaneous changes to the FCA Handbook and new guidance on the use of third parties where firms are required to provide financial instrument reference data or commodity derivative position reports to the FCA. It also sets out the FCA's proposals for new conduct rules dealing with the non-MiFID business of occupational pension scheme firms.

The proposals will affect a wide range of authorized firms, recognized bodies and unregulated entities trading commodity derivatives. In particular, it will be of interest to banks, investment firms, recognized investment exchanges, Multilateral Trading Facilities, prospective Data Reporting Service Providers and occupational pension scheme firms.

Comments on the proposals relating to DEPP, EG and consequential changes to the Handbook are due by May 12, 2017. The FCA intends to publish the final rules for these areas in its June policy statement. Comments on the proposed conduct rules for occupational pension scheme firms are due by June 23, 2017. The final rules for these areas will be published in a later policy statement.

View the Consultation Paper and related webpage.

View the online response form.

Level II legislation under the revised Markets in Financial Instruments Directive was published in the Official Journal of the European Union. The legislation published includes 26 Regulatory Technical Standards, two Commission Delegated Regulations and one Commission Delegated Directive. The legislation will enter into force on April 20, 2017.

The Official Journal publication is available here.

The Financial Conduct Authority published a statement on the use of dealing commission by investment management firms, including asset managers and wealth managers. The FCA conducted a review of firms' practices from 2012 and 2015 and found that the majority of firms are falling short of the FCA's rules and expectations on their use of dealing commission. Some firms have made improvements and the result has been a reduction in dealing commission spent on research and better investment performance for their consumers. The FCA intends to continue focusing on the use of dealing commission, in particular during the implementation of MiFID II which applies from January 3, 2018. Where the FCA identifies a breach of the requirements, it will take appropriate action, including referring firms, individuals or practices for further investigation.

View the FCA's statement.

The Financial Conduct Authority published a statement on best execution compliance by investment firms. The statement sets out the FCA's findings from supervisory work on how investment managers deliver best execution for their clients. Best execution refers to the requirement on firms to obtain the best possible result for their clients when executing client orders. The FCA has found that many firms have not conducted a robust gap analysis since 2014 and have not addressed the issues highlighted in the FCA's thematic review on best execution and payment order flows (published in 2014). The FCA stated that it expects firms to take into account the findings in its thematic review as well as the asset management market study. The FCA intends to reconsider best execution in 2017 and will assess the steps that firms have taken to address gaps in achieving compliance with best execution requirements and how firms are intending to show that funds and client portfolios are not paying too much for execution. The FCA will consider taking further action against firms and/or individuals where best execution obligations are not being fulfilled.

In January 2017, the European Securities and Markets Authority stressed the importance of continued efforts to reach a high level of supervision with regards to best execution requirements, and urged national regulators to make every effort to ensure that firms would be compliant with the revised best execution requirements under MiFID II. MiFID II applies from January 3, 2018.

View the FCA's announcement.

View the FCA's thematic review on best execution and payment order flows.

View the FCA's asset management market study.

View ESMA's follow-up report.

The European Securities and Markets Authority has published a final report and final draft Regulatory Technical Standards on pre-trade transparency rules for package orders under the Markets in Financial Instruments Regulation. Package transactions are transactions executed by investment firms, either on their own account or on behalf of clients, which are made up of a number of interlinked, contingent components. Their aim is to reduce transaction costs and assist in risk management. The legislation delaying the implementation of the MiFID II package also revised MiFIR to specifically require public disclosure of bid and offer prices for package orders. Definitions for package orders and package transactions were also added. National regulators are able to waive the obligation for package orders which meet certain conditions, such as where the package order includes a financial instrument for which there is no liquid market (unless there is a liquid market for the package order as a whole).

Read more.

HM Treasury published its response to its late 2016 consultation on amending the definition of regulated advice under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 to bring it in line with the definition of "investment advice" set out in the Markets in Financial Instruments Directive. HMT is proceeding with the change as consulted on and will lay draft legislation before Parliament to give effect to the change. The Financial Conduct Authority published a statement about the change, setting out what the change will mean for firms advising on investments or providing a personal recommendation.

Read more.

The European Securities and Markets Authority published a letter, dated February 1, 2017, from it to the European Commission about the potential for loopholes to be exploited in the revised Markets in Financial Instruments package, known as MiFID II. MiFID II comes into effect on January 3, 2018. Part of the aim of MiFID II is to close some of the loopholes that were identified in the existing MiFID I legislation, including by ensuring that investment firms that operate internal matching systems and execute client orders on a multilateral basis become authorized as a trading venue. ESMA expresses the concern that certain investment firms that currently operate broker-crossing networks might seek to circumvent the provisions of MiFID II by setting up networks of interconnected systematic internalisers. ESMA commits itself to monitoring developments closely and states that it may consider clarifying the scope of the permitted activities of SIs as well as the characteristics of multilateral systems via Q&As. ESMA requests the Commission to consider whether it should adopt any legislation that might further clarify the definitions and concepts in MiFID II to prevent the loophole being exploited. 

View the letter. 

HM Treasury published a paper summarizing responses to its consultation on the transposition of the revised Markets in Financial Instruments Directive and three draft statutory instruments to facilitate transposition. Member States are required to adopt measures transposing MiFID II by July 3, 2017 and to apply the provisions from January 3, 2018. HM Treasury consulted on MiFID II transposition in March 2015 and sought feedback on draft legislation to facilitate transposition and its proposed policy approach to access for third country firms, data reporting services, position limits and reporting, unauthorised persons, structured deposits, the power to remove board members, organised trading facilities and binary options. Most respondents broadly agreed with the proposed measures for transposition. However, further guidance has been provided on numerous aspects of the proposed legislation. Since the consultation, a number of further issues in MiFID II requiring further legislative amendments as part of transposition have been identified and are included in the draft legislation and detailed in the report. HM Treasury notes that despite the UK voting to leave the EU, until exit negotiations are concluded, the UK remains a full member of the EU and must comply with MiFID II accordingly. 
 

The European Securities and Markets Authority published revised final draft Implementing Technical Standards on the format of position reports by market operators and investment firms. The revised Markets in Financial Instruments Directive requires national regulators to establish and apply position limits on the size of a net position in commodity derivatives traded on trading venues and economically equivalent OTC contracts. The limits will apply to the size of a position that a person can hold, including any other positions held on behalf of that person by group entities. Market operators and investment firms will be subject to certain position reporting requirements. The position reporting regime is intended to support the application and enforcement of position limits.

ESMA has revised the ITS that it submitted to the European Commission for endorsement in December 2015 because of difficulties experienced in implementing the original ITS in practice. Among other things, the revised ITS remove the obligation for positions to be reported gross. ESMA has submitted the revised ITS to the European Commission for endorsement. The MiFID II package will apply from January 3, 2018. 

View the revised ITS.

The Financial Conduct Authority published a guide on applications and notifications under the Markets in Financial Instruments Directive and the Markets in Financial Instruments Regulation, together the MiFID II package. MiFID II will apply from January 3, 2018. It will introduce, among other things, new processes and forms for authorizing investment firms and new activities, such as operating an Organised Trading Facility. It will also require notifications to be made to the FCA. The FCA's guide covers applications for investment firm authorizations, new data reporting service providers authorizations, recognition of investment exchanges and variation permission as well as the notifications required by authorized firms and exchanges, including passporting notifications. 

In particular, investment firms should note that the FCA will be using new forms for authorizations and variation of permission for investment services and activities from January 30, 2017, and the new passporting notifications from July 31, 2017. All applications for authorization of investment firms and DRSPs or variation of permission must be submitted by July 3, 2017 to allow the FCA time to assess the applications before the MiFID II implementation date. Passporting notifications must be submitted by December 2, 2017 so that the FCA can send them to other EU regulators before January 3, 2018. 

The information in the guide is currently up to date. The FCA intends to provide updates on processes for applications and notifications, where necessary, through its website. 

View the guide.

The European Securities and Market Authority published an Opinion on the scope of the product intervention powers under the Markets in Financial Instruments Regulation. The Opinion focuses on the impact of the exclusion for fund managers from the scope of the MiFIR intervention powers. MiFIR gives national regulators the power to temporarily prohibit or restrict the marketing, distribution or sale of certain financial instruments (such as units or shares in Undertakings in Collective Investment in Transferable Securities or Alternative Investment Funds) in the EU by investment firms and banks, whether the UCITS or AIF is internally or externally managed, or financial instruments with certain specified features or a type of financial activity or practice. The intervention power only applies to banks authorized under the Capital Requirements Directive and to investment firms authorized under the revised Markets in Financial Instruments Directive (known as "MiFID Firms"), when providing investment services and/or performing investment activities and to market operators including any trading venues they operate. The intervention powers will apply from January 3, 2018, in accordance with the application date of MiFIR.

Read more. 

The European Securities and Markets Authority published a follow-up report to the 2015 peer review on best execution. The Markets in Financial Instrument Directive requires investment firms to provide best execution for their clients when executing their clients' orders. ESMA conducted a peer review on how national regulators supervised and enforced the requirements in 2011 and 2012 and published the results in February 2015, recommending, amongst other things: (i) prioritization of best execution by national regulators; (ii) the allocation of supervisory resources; and (iii) the adoption of a proactive approach to monitoring compliance with best execution requirements, including through onsite inspections. In 2016, ESMA began to assess whether national regulators had taken steps to address the shortcomings identified in the peer review. The 2017 report shows that national regulators are being more proactive in their supervision of best execution. However, there are still some deficiencies that need to be addressed as some national regulators were not able to show progress in relationship to deficiencies previously identified. ESMA's view is that regular and proactive supervision and monitoring of compliance with the best execution requirements is the only way to ensure investor protection in this area. Firms will continue to be subject to best execution requirements when the MiFID II package comes into effect on January 3, 2018 and ESMA urges national regulators to act to ensure that there is compliance with best execution requirements by investment firms.

View ESMA's 2017 follow-up report.

View the 2015 peer review report.

The Financial Conduct Authority published its fourth consultation paper on the implementation of the revised Markets in Financial Instruments Directive in the UK. MiFID II regulates retail and wholesale investment business. The consultation covers technical matters that were outside the scope of previous consultations and includes proposed changes to the FCA Handbook on specialist regimes, tied agents, market data, SME growth markets and transitional fees. 

The FCA is proposing to update section 18 of the Conduct of Business sourcebook of the Handbook by updating cross-references to correspond to the FCA's proposed changes to other sections of COBS. COBS 18 contains a number of tailored conduct regimes covering both MiFID and non-MiFID business, for specialist types of designated investment business. 

The FCA is proposing amendments to Handbook rules on appointed representatives to reflect the technical changes in MiFID II and the tied agents regime. The proposals are particularly relevant to firms undertaking MiFID or equivalent third country business. Under MiFID II, all Member States will be required to maintain tied agents regimes, whereas they currently have an option as to whether to do so. As a result, the FCA is seeking to clarify the territorial application of the appointed representative rules. MiFID II also changes the scope of permitted activities relating to structured products for tied agents and the FCA is proposing to introduce new definitions of “MiFID optional exemption AR” and “structured deposit AR”. The new terms will define the new populations of authorised representatives to which MiFID tied agent requirements will also apply.

Read more.

The Fixed Income, Currency and Commodities Markets Standard Board published guidelines on surveillance and training in wholesale markets. The guidance is outlined in the FMSB's Statement of Good Practice for Surveillance in Foreign Exchange Markets and Statement of Good Practice for Conduct Training. The Statement of Good Practice for Surveillance highlights the FMSB's Core Principles that firms should consider in advance of designing and implementing their surveillance measures in the foreign exchange markets, such as ensuring that: (i) the surveillance function is independent of front office; (ii) there are effective governance controls; and (iii) there is a regular review of surveillance systems to ensure that they are fit for purpose given the element of constant change in risk. It also identifies emerging practices to combat the risk of insider dealing and market manipulation, including the use of automated voice surveillance systems using techniques such as Natural Language Processing.

Read more.

The Financial Conduct Authority published a consultation paper setting out its proposals to enhance the conduct of business rules for firms providing contract for difference products to retail clients and to limit the risks of CfDs for retail clients. The FCA is proposing to change its current rules because of increasing evidence of poor conduct by relevant firms and risks posed to retail customers. Amongst other things, the FCA is proposing to require all CfD firms to provide a standardized risk warning and mandatory profit-loss disclosures, to impose lower leverage limits for inexperienced retail clients (i.e. those with less than 12 months of active trading experience) and higher leverage limits for experienced retail clients, and to prohibit bonus and account opening promotions for their retail CfD products and platforms. 

The FCA also sets out its policy proposals for the regulation of binary bets. Binary bets are expected to be brought within the UK regulatory perimeter as part of the UK implementation of the revised Markets in Financial Instruments Directive. The FCA is considering its policy approach for the protection of retail clients in relation to binary bets and is seeking feedback on its approach before it consults on formal proposals. 

The consultation closes on March 7, 2017. The FCA expects to publish a Policy Statement and final rules in Q2 2017, with the expectation that the rules will come into force shortly afterwards. 

View the consultation paper. 

The Commission adopted Regulatory Technical Standards supplementing the revised Markets in Financial Instruments Directive, setting out when an activity is “ancillary” to a firm’s main business. MiFID II provides an exemption from the requirement for authorization as an investment firm when dealing on own account, or providing investment services to clients in commodity derivatives, emission allowances or derivatives thereof, provided that the activity is an ancillary activity to their main business on a group basis and the main business is not the provision of investment services within the meaning of MiFID II or banking activities under the Capital Requirements Directive. Adoption of the RTS follows the consultation by the European Securities and Markets Authority on the draft RTS. The Commission proposed changes to ESMA's final draft RTS, which was submitted on September 28, 2015, including a capital test to distinguish a group’s main activates from its ancillary activities. The Commission requested a methodology to specify the allocation of capital between the main business activity and the ancillary activity to enable groups to demonstrate, based on the capital employed, where the group’s main business activity resides. On May 30, 2016, ESMA responded by way of formal opinion and revised draft RTS. Rather than a single capital based methodology, ESMA proposed five options for speculative trading and three for a group’s main activity. ESMA did not stipulate which of the options was to be preferred and did not specify a threshold for determining the percentage of speculative trading by a group‘s main activity that would trigger the requirement for authorization under MiFID II. 

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The Prudential Regulation Authority launched its second consultation on implementing certain aspects of the Markets in Financial Instruments legislative package, which comprises the Markets in Financial Instruments Directive and the Markets in Financial Instruments Regulation, collectively known as MiFID II. The consultation relates to requirements for a firm's management body and organizational requirements as well as to the new regulated activity of operating an Organised Trading Facility and the new financial instrument of "emission allowances" and structured products. The PRA consulted on its approach to passporting and algorithmic trading earlier in 2016 and has published its final rules for those areas. The PRA will consult on other aspects related to MiFID II in due course.

Read more. 

Regulatory Technical Standards on the required information for registration of third country firms and the format of information provided to clients was published in the Official Journal of the European Union. The RTS supplement the Markets in Financial Instruments Regulation on the provision of services and performance of activities by third country firms following an equivalence decision with or without a branch. The RTS specifies the information necessary for registration with the European Securities and Markets Authority. The RTS requires firms to update ESMA, within 30 days, of any changes to the information provided in its application.  MiFIR requires third country firms, before providing investment services for clients in the EU, to inform such clients that they are not permitted to perform services for clients other than eligible counterparties and professional clients within the definition of the revised Markets in Financial Instruments Directive and, furthermore, that they are not subject to supervision in the EU. The RTS provides that the notice must be provided in a “durable medium” (which includes electronic media); such that, amongst other things, it is in English or the in the official language, or one of the official languages, of the Member State where the services are to be provided. 

View the RTS on application by third country firms for permission to provide investment services.