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MiFID II: How Did We Get Here and What Does It Mean?

Traders Magazine Online News, June 22, 2017

Andrew Gibbins

As the industry has been preparing for the implementation of MiFID II (Markets in Financial Instruments Directive II)†in 2018, so too has Trading Technologies been working closely with our clients on planning and executing compliance solutions. Over the next few months, I will be sharing my thoughts and TTís point of view on MiFID II and industry implications. We begin the first in a series of blog posts with what is MiFID, how did we get here and what does it all mean?

MiFID II is a consequential and reactionary financial regulation born from MiFID I and the same G20 Pittsburgh meeting in 2009 that instigated the blueprints of its older siblings, Dodd-Frank, EMIR, REITS and, recently, the seemingly stalled Regulation Automated Trading (Reg AT), post the 2008 financial crash.

Dodd-Frank accompanied with the Commodity Futures Trading Commission (CFTC) regulations and the European Market Infrastructure Regulation (EMIR) are derivatives reporting transparency requirements pursuing similar purposes, yet they have differing approaches in the U.S. and EU respectively. Sounding first on July 21, 2010, the U.S. regulatory starting pistol fired into staggered effect the requirement that historical interest and index credit default swaps transactions be reported by Direct Clearing Organisations (DCOs) to a trade repository. Incrementally, further types of contributors transaction reported additional asset classes over a successive period of time in stark contrast to EMIR.

By comparison, EMIRís ambitions sounded via regulatory multi asset class blunderbuss, commencing with equity, foreign exchange, credit, commodities and interest rate swaps from the outset on August 16 2012. Contrary to the U.S., where only one counterparty can be deemed responsible for transaction reporting, EMIR requires that both counterparties report or permit third-party reporting delegation to a clearing broker et al. Dodd-Frank stipulates reporting obligations for swaps, EMIR captures both exchange traded derivatives and over-the-counter (OTC) transactions respectively. The use of collateral is weighted more significantly to form part of the extensive reporting information captured by EMIR. Both transatlantic regulatory initiatives target similar high-level outcomes, but each was arguably fed by differing market compositions, abilities to normalize existing transactional data and respective legislative oversights.

Continuing from EMIRís granularity: MIFID II

The European Securities and Markets Authority (ESMA), adhering to political pressure, drew up an extensive family tree of proposed regulatory recitals and articles in its efforts to protect the investor and, arguably, the markets from themselves against systemic risk and algorithmically caused disorder. The modi operandi comprises two legal conduits, MiFID II and MiFIR (Markets in Financial Instruments Regulation).

MiFID II and MiFIR come into effect January 3, 2018 across the EU.

Since the publication of ESMAís Technical Advice to the European Commission on December 19, 2014, this regulatory framework has undergone a tri-tiered equivalence to fractional distillation, exposing articles to the heat of marketplace scrutiny during rounds of consultation papers and subsequent questions and answers into a more universally and palatably accepted tonic.

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