After five years in practice, the European regulators are on the final stretch to agreeing changes to certain aspects of Mifid II. Anne Plested, MCSI, EU regulation, ION Markets, delves into the key milestones and implications of the imminent decisions.
Following Mifid II in January 2018, the European Commission put forward proposals in November 2021 to enhance market data transparency further, remove obstacles to establishing a European consolidated tape, and clarify the trading obligations. Slowly but steadily taking this forward, each of the three European co-legislators has since agreed on their negotiating positions, and the trialogues began in April 2023. It is a long, carefully debated process to arrive at a new set of rules to see markets through the next few years.
The Council and the Parliament reached some agreement in June as the Swedish presidency ended, and recently achieved some further agreement in mid-October through close co-operation by representatives of the EU Council. With a view to finalising matters, a draft version of a compromise text was sent to the chair of the European Parliament Committee on economic and monetary affairs. All of this brings us ever closer to a final text, potentially by early-2024. Once published in the official journal, an 18-month transposition countdown will likely be triggered.
The next phase
Then, the next phase of work commences, and ESMA will focus on drafting all the related regulatory technical standards (RTS). Based on the October draft text, RTS to establish the EU consolidated tape (starting with a tape for bonds) is first on the list for drafting, with a nine-month due date. Next, RTS will set the rules for the revised EU double volume cap (DVC), SI organisational requirements. and SI quote size, within 12 months. Several other RTS will be revised, resulting in many moving parts for EU firms to monitor.
Separately, transparency-related changes (RTS 1&2) are already underway for 2024. For EU firms, some rule changes are already progressing towards implementation for 1 January 2024. Similar transparency-related updates are coming to the UK in April next year. Overall pan-EU trading compliance is a complicated landscape, with many variables in play. For example, post-trade flag application across jurisdictions does not align precisely. The rules for determining trade reporting responsibility for off-exchange trades also differ. The UK will see the introduction of a designated reporter regime in April, potentially followed by the EU – but each jurisdiction will have their own timelines.
For January, the initial round of EU changes comprises low-level detail adjustments aimed at tidying up post-trade data quality. This approach is primarily to ease data consolidation once any EU tape potentially gets off the ground in the next few years. These regulatory amendments typically take the form of mandatory and optional exchange interface changes requiring build effort across all impacted venues and their broad membership base. In this case, trade reporting and market data interfaces are affected.
Solutions development
As with every roll-out of regulation change, the final scope and exact application dates are usually revealed late in the day – often after the implementation countdown clock has already started ticking. The upcoming Mifid II/ Mifir review will require solutions development. If financial firms are to meet the deadlines, it’s crucial for them to constantly scan a wide horizon and keep on top of developments as and when they happen. Crucially, for them to stay compliant, they will need to consider three key aspects.
Firstly, the creation of a consolidated tape – starting to assess the risks and opportunities around creating a European consolidated tape in each asset class, and what applications this could have for trading platforms. Secondly, changes in market structure – system changes should be made to reflect new SI minimum quote size rules, changes to the DVC (double volume cap), and to the EU share trading obligation (STO). Thirdly, changes to post-trade transparency. Adapt systems to cater for changes to post-trade transparency. Technical Standards are set to be aligned across several different regulations Emir, Mifir and SFTR regards reporting especially RTS 22 transaction reporting.
Conclusion
It’s a relief to see the EU edge one step closer to an agreement on EU trading laws – Mifir and Mifid – a draft overall compromise text was approved at the ambassadors’ level of the European Council recently. For traders and investors this is welcome news, improving access to the market data necessary to invest in financial instruments more easily, in turn increasing the global competitiveness of the EU’s capital markets.
There is always more detail to be worked out, not least ESMA activity on the related RTS over what could be a favorable transposition period of 18 months according to the draft text. It will be crucial for buy-side and sell-side firms to engage with legal and compliance experts, stay updated on regulatory developments, and continuously assess and adjust their practices to ensure ongoing Mifid II compliance.