MiFID II and MifIR Regulation Review: What will happen?

In 2024, the European Securities and Markets Authority (ESMA) will transform the EU's MiFIR review, which was decided upon in the political framework in 2023, into enforceable regulations[1]. The establishment of a real-time pre- and post-trade consolidated tape (CT) for stocks is a crucial component of these regulations[1]. Notwithstanding, it will be imperative to meticulously evaluate the precise particulars and ramifications of these regulations, given that complications might emerge throughout the execution phase[1].

Source

[1]

UK/EU Investment Management Update (January 2024)

Sidley Austin LLP

[2]

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Evolving Landscape of MiFID II and MiFIR Regulations

With the amendment of the MiFID II and MiFIR legislation, the financial regulatory framework of the European Union is experiencing a considerable upheaval. This change is a calculated reaction to the changing global financial market environment, and it will pick up steam in late 2022. These amendments seek to strengthen the EU's competitiveness, create fair trading practices, and increase market transparency in order to better prepare the financial sector for the difficulties posed by rising interest rates and inflation. Maintaining the EU's economic development and stability will need this transition from traditional bank-based financing to a strong market-based financing system.

Progressive Milestones in Financial Market Regulations

The process of updating the MiFID II and MiFIR regimes has reached a number of significant turning points. The compromise texts' dissemination by the European Council in June 2023 marks an important turning point in the review procedure. This significant accomplishment demonstrates the breadth of cooperation and political agreement reached with the European Parliament. The goal is to increase capital markets' efficiency, which will strengthen their contribution to the financial stability and expansion of the EU.

Enhancing Market Stability: The Critical Role of European Stock Exchanges

The stability and effectiveness of the financial markets are significantly influenced by European stock exchanges. They play a crucial role in promoting new listings, assisting with SME finance, and funding the real economy. Because of their increased impact on price formation and market strength, these exchanges are especially important when the market is volatile. These exchanges boost regional financial markets and increase the European Union's overall economic resilience by drawing in foreign capital.

Key Focus Areas in the Regulatory Review Process

A number of crucial areas have been the focus of the MiFID II and MiFIR review process in order to improve the financial regulatory framework:

• The creation of a Consolidated Tape (CT) to promote increased market transparency is the main objective, with the goal of giving investors and market players thorough access to transaction data.

• Payment for Order Flow (PFOF) is prohibited in order to guarantee fair trading procedures and shield small investors from possible conflicts of interest.

• Maintaining a fair and competitive market environment requires striking a balance between lit and dark trading as well as efficient regulatory control for Systematic Internalisers (SIs).

Comprehensive Proposals for Refining MiFID II/MiFIR

The extensive revisions to MiFID II and MiFIR are intended to significantly enhance the regulatory framework:

• It is anticipated that the Consolidated Tape Provider (CTP) will enhance accessibility and market data gathering.

• To protect investor interests, a restriction on Payments for Order Flow (PFOF) is in line with international best practices.

• To strike a compromise between trading efficiency and market openness, changes to the double volume cap on dark trading are suggested.

• The deferral regime is being adjusted with the intention of improving post-trade transparency while taking market liquidity into account.

In-Depth Review and Reporting Mechanism in MiFID II Regulation

The evaluation and reporting system of MiFID II demonstrates the European Union's dedication to a flexible and efficient regulatory framework. This procedure entails thorough evaluations to guarantee that the rule is successful in accomplishing its goals. The European Commission's endeavor, encompassing public consultations and cooperation with ESMA, plays a crucial role in obtaining perspectives and input from many stakeholders, consequently enabling well-informed and calculated adjustments to the regulatory structure.

The Legislative Journey and Anticipated Future Developments

With the tentative agreement in June 2023, the legislative road for the MiFID II and MiFIR changes reached a significant point. The European Union's financial regulatory architecture will enter a new phase with the official ratification of these legislative acts by the European Parliament and Council. The EU's financial markets should become more open, equitable, and competitive as a result of these advances, improving the region's status in the global financial arena.

Adapting to Regulatory Changes: Implications for Financial Firms in the EU and UK

Financial firms operating in the UK and the EU face both possibilities and challenges as a result of the changing regulatory landscape. Following Brexit, the UK is blazing its own trail, departing from EU law in several areas. Businesses must remain knowledgeable and flexible, modifying their operations and tactics to align with the ever-evolving regulatory landscape. In a volatile financial market, this flexibility is essential to preserving competitiveness and operational effectiveness.

MiFID II and MiFIR Regulations: European Financial Market Transparency and Efficiency

Significant changes to the European financial sector have been brought about by the MiFID II and MiFIR laws. Comprehensive Level 2 measures have been adopted by these laws with the aim of improving market transparency and operational efficiency.

ESMA's Integral Role in Enforcing MiFID II and MiFIR

1. Comprehensive Volume Cap Analysis and Market Transparency (Article 5)

• Goal and Effect: This legislation aims to improve market transparency by requiring the annual trading volumes of all financial instruments traded in the EU to be disclosed. The objective is to offer a more comprehensive understanding of market operations through an analysis of trading under waivers and the methods employed for these computations.

• Implementation Strategy: Within five working days after the end of each quarter, ESMA is in charge of publishing this extensive data. For the advantage of both investors and regulators, this fast reporting guarantees timely access to crucial market information.

2. Ensuring Pre-Trade Transparency in OTC Derivatives (Article 8a)

• Task and Importance: According to the regulation, ESMA must make available a list of OTC derivatives that are subject to pre-trade disclosure. This project is essential for providing transparency to a hitherto opaque area of the financial system and assisting in the making of well-informed investment decisions.

• Deadline and Compliance: It is undeniable that this work is crucial for improving market integrity, even though MiFID II does not provide a specific deadline for its publication.

3. Defining Waivers for Diverse Financial Instruments (Article 9)

• Scope and Significance: ESMA's creation of the draft RTS, which defines waivers for trading derivatives, emission allowances, structured finance instruments, and bonds, is an important step. It strikes a compromise between the necessity of openness and the realities of trading specific instruments.

• Deadline and Expectations: This legislation was expected to offer clear guidelines, supporting the seamless operation of financial markets, with a draft submission deadline of July 3, 2015.

4. Opinions on Post-Trade Transparency (Article 10)

• Impact and Role: It is critical that ESMA voice its opinions regarding the suspension or renewal of the post-trade transparency requirements. This takes into account the pragmatics of trading venues while simultaneously guaranteeing that the markets function in an equitable and transparent manner.

5. Setting Deferred Publication Rules (Articles 11 and 11a)

• Focus and Utility: A thorough analysis of trades involving bonds, structured finance products, emission allowances, and derivatives is required in order to build RTS for postponed trade posting. This method preserves general market transparency while honoring the anonymity of specific trades.

• Timeline and Challenges: This measure requires ESMA to strike a compromise between the urgency of market openness and the intricacies involved in diverse financial instruments. There was a 9-month deadline after the official publication of the act.

6. Establishing Standards for Data Availability (Article 13)

• Goal and Structure: Accessible and reasonably priced market data must be ensured by defining what a legitimate commercial basis for data availability is. In order to ensure consistent understanding throughout the industry, standards for language, content, and structure must be established.

7. Enhanced Disclosure Rules for Investment Firms (Article 21)

• Task and Necessity: Creating RTS to classify various transaction types under MiFID is a big step toward investment firms' transparent disclosure policies. This promotes investor knowledge and regulatory supervision by helping to differentiate between different trading operations.

8. Regulation of Market Data and Publishing Entities (Articles 21a and 22a)

• Accountability and Outcome: ESMA made a calculated decision to create and keep a list of approved publishing companies and regulated markets. It guarantees the distribution of trustworthy and accurate market data, which is essential to preserving the integrity of the market.

9. Guidance on Market Data Quality (Article 22b)

• Involvement and Expertise: ESMA is at the forefront of guaranteeing good data standards because it is a member of an expert group that provides advice on the quality of market data. The primary goal of this partnership is to improve market data quality and dependability, which is essential to the effectiveness of the financial system.

10. Synchronisation of Business Clocks for Trading Accuracy (Article 22c)

• Need and Accuracy: The creation of RTS for clock synchronization is an essential but technical step. It guarantees trade timestamp accuracy, which is essential for fair trade procedures and dispute settlement.

11. Streamlined Selection Process for Consolidated Tape Providers (CTPs) (Article 27da)

• Procedure and Openness: One of the most important first steps in the CTP selection process is to start with bonds, stocks, ETFs, and derivatives. This time-bound procedure seeks to create a single source of market data, improving accessibility and transparency.

12. Advancing Post-Trade Risk Reduction Services (Article 31)

• Action and Safety: Improving the security and stability of post-trade procedures is the goal of the implementation of Delegated Acts for post-trade risk reduction services. In order to reduce operational risks in the post-trade world, this step is essential.

13. Monitoring Derivative Trading Obligations (Article 32)

• Capability and Oversight: ESMA is a dynamic regulatory tool that can recognize derivative contracts for trading obligations and request suspension when needed. It permits flexibility in market situations while guaranteeing adherence to trading standards.

14. Evaluating the Effectiveness of Regulations (Article 52)

• Analysis and Evolution: An important first step in evaluating the effects of these regulations is the Commission's evaluation of the consolidated tape's efficacy three years after it was authorized. It permits modifications and enhancements, guaranteeing that the rules change in response to changes in the market.

MiFID II and MiFIR: Fortifying the EU's Financial Market Framework

The considerable efforts made to strengthen market transparency and operational efficiency are highlighted in this enlarged overview of the Level 2 provisions under the MiFID II and MiFIR regulations. It emphasizes the EU's dedication to a strong, open financial sector ecosystem with an emphasis on maintaining market integrity and investor protection. To achieve the main goals of these laws and to make a substantial contribution to the development of the European financial markets, ESMA's proactive participation in putting these measures into action is essential.