As the implementation of the recast Markets in Financial Instruments Directive (MiFID II) draws ever nearer, Michael McKee, partner, and Chris Whittaker, associate, of DLA Piper UK LLP, take a look at the Financial Conduct Authority’s (FCA) recently published near-final rules for firms that will be affected by the forthcoming changes.
What do the FCA’s rules entail?
On 31 March 2017, the FCA published Policy Statement 17/5 (PS 17/5) which contained near-final rules implementing MiFID II.
These near-final rules give the financial services industry a post-consultation look at the MiFID II regulatory framework that will apply from 3 January 2018. The rules in PS 17/5 are near-final form rules, which the FCA advised firms should rely on, as any further changes will be minor and will mainly refer to EU and other measures which have not yet been finalised.
The publication of the near-final rules comes after the FCA published its applications and notifications guide for MiFID II in January 2017.
The near-final rules will apply to trading venues including regulated markets, multilateral trading facilities, a new type of regulated market known as organised trading facilities, and systematic internalisers, as well covering market data and transparency obligations.
The near-final rules also cover:
- a new category of regulated firm: data reporting services providers (DRSPs)
- position limits and reporting for commodity derivatives
- systems and control requirements for firms providing MiFID II investment services
How do the rules differ from the FCA’s consultation?
Many of the measures under MiFID II take direct effect under UK law, meaning that the FCA has limited or no discretion over many areas raised in previous consultations. The near-final rules therefore contained few surprises for industry following the consultation. For example, the FCA consulted on signposting references to applicable EU law provisions on regulated markets as opposed to reproducing EU law provisions in the FCA Handbook. In PS 17/5, the FCA confirmed this approach.
What are the key issues of the FCA’s near-final rules?
Key issues addressed in the near final rules include:
Multilateral trading facilities (MTFs)
The FCA considers that an MTF classification under MiFID II will apply to more and different types of trading venues than currently under the first MiFID. The FCA intends to publish perimeter guidance on this, but is awaiting guidance from the European Securities and Markets Authority before it decides how to address its own interpretation. Trading venues should be aware of this potential expanding regulatory perimeter.
Post-trade transparency deferrals
The FCA has decided to permit trading venues to the maximum permitted deferrals for the post-trade transparency requirements. This preparedness reflects the industry’s strong support for the FCA granting waivers to UK trading venues on the grounds that the waivers provided in the Markets in Financial Instruments Regulation (MiFIR) to non-equity financial instruments would support liquidity in those markets.
Transaction reporting and collective portfolio managers and pension funds
The FCA consulted on, and confirmed in PS 17/5, that it will remove the current requirement for collective portfolio managers and pension funds to transaction report because it does not consider the benefits of requiring them to report transactions under MiFID II would outweigh the costs.
Transaction reporting and third parties
The FCA near-final rules confirmed that trading venues may use approved reporting mechanisms to report transactions to the FCA. For firms in a corporate group, the FCA’s near-final rules also permit the aggregation of transactions and reporting to the FCA via a central hub. The near-final rules also contain a regulatory framework for DRSPs, including authorisation procedures.
The near-final rules contain a new section in the FCA Handbook setting out guidance and directions on MiFID II’s regime for position limits, position management and position reporting for commodity derivative contracts. The near-final rules do not, however, contain the exact position limits that will be set. These will be set out in due course.
The FCA has decided to require art 3 retail financial advisers either to tape all relevant conversations or keep a contemporaneous written note of them. The FCA acknowledged that the business model of many of these firms means a full taping obligation may not always be appropriate. It is still considering other feedback it received on its taping proposals.
Asset management market study
The FCA has confirmed its remedies for the problems identified in this market study will be consistent with MiFID II.
What is the FCA proposing in its latest consultation?
At the same time as publishing PS 17/5, the FCA also published its fifth Consultation Paper 17/8 (CP 17/8) on the UK implementation of MiFID II. CP 17/8 proposes changes in the FCA Handbook in the following areas:
OPS firms are exempt from the first MiFID and this will not change under MiFID II. But OPS firms are subject to conduct rules as implemented by MiFID. The FCA proposes to apply the revised conduct standards in MiFID II to OPS firms as the FCA has done for other investment managers not subject to MiFID II.
DEPP and EG
The FCA proposes to change DEPP and EG to reflect various aspects of MiFID II, including extending the FCA’s enforcement powers to cover persons subject to the UK’s MiFID II implementing legislation. The FCA already has the majority of the enforcement powers conferred by MiFID II, the main exception being the power to require regulated firms to remove persons from their management boards. The FCA’s approach to the use of this new power will be reasonable and proportionate, taking into account all relevant circumstances.
Consequential changes to the FCA Handbook and reporting financial instrument reference data and position in commodity derivatives
The FCA also proposes some consequential changes to the Handbook and guidance on third parties where firms are using third parties to send the FCA financial instrument reference data or commodity derivative position reports.
What are the next steps and what should lawyers and their clients do now to prepare for these changes?
Industry participants wishing to respond to CP 17/8 have until 23 June 2017 to make submissions in respect of the proposed rules for OPS firms and until 12 May 2017 for the remaining aspects of CP 17/8.
The next FCA policy statement on MiFID II covering all matters not covered in PS 17/5 is expected to be published in June 2017. MiFID II applies in the UK from 3 January 2018. National law transposition measures must be in place six months before this time (ie 3 July 2017).
Lawyers should continue to monitor and advise their clients on the implementation of MiFID II and ensure that firms are actively considering whether they need to make any notifications in respect of the scope of their business before 3 January 2018. For example, 3 July 2017 is the deadline for submission of complete applications for authorisation of investment firms/DRSPs or any variation of permissions applications to guarantee the FCA will determine them by 3 January 2018.
Interviewed by Robert Matthews.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.