The legislation amending the implementation deadline to January 2018 passed key hurdles in the European Parliament and Council. Meanwhile, the remaining MiFID II delegated acts have been submitted by the European Commission to the European Parliament and Council, adding to the first set of Level 2 delegated acts published earlier last month.
In last month’s update we reported on progress, with the publication of delegated acts covering safeguarding of client assets, product governance and inducements, which take the form of a directive.
The latest delegated acts take the form of a regulation, as expected, which does not give Member States scope to interpret the rules to suit country-specific conditions. Key areas covered include: exemptions; organizational requirements; data reporting services providers; conduct of business obligations in the provision of investment services; the execution of orders on terms most favorable to the client; the handling of client orders; the small medium enterprise growth markets; the thresholds above which the position reporting obligations apply; data obligations for trading venues and SIs; derivatives: product interventions; and the criteria under which the operations of a trading venue in a host Member State could be considered as of substantial importance for the functioning of the securities markets and the protection of the investors.
The rules include the definition of non-complex instruments, which allows alternative investment funds to be individually assessed against the criteria (i.e. they are not automatically deemed complex, as originally proposed be European Securities and Markets Authority (ESMA) in its technical advice).
The organization requirements are largely drawn from the existing Revised Markets in Financial Instruments Directive (MiFID) I Implementation and cover a number of areas, including client categorization, information on costs and charges, suitability and appropriateness, best execution and record-keeping. The industry has been waiting the rules on costs and charges in particular, as there is a critical link with these rules and the draft RTS for the PRIIP KID, on which we reported in last month’s update. There is a specific requirement for distributors to seek from Undertakings for Collective Investments in Transferable Securities (UCITS) managers information that is not available in the UCITS Key Investor Information Document (KIID), further undermining the exemption for UCITS in the Packaged Retail Investment and Insurance-based Products (PRIIP) Key Information Document (KID) Regulation.
On the more contentious RTS for non-equity transparency, ancillary activities for commodity firms and position limits for commodity trading, the European Commission had requested ESMA to make certain changes before they could adopt them. The industry is concerned that the rules for non-equity transparency should be phased-in to mitigate any potential adverse effects on bond market liquidity. The Commission supports this concern, within the context of Capital Markets Union, and proposed a time-based phasing-in. In response, ESMA published on 2 May alternative proposals to meet the requests for non-equity transparency and position limits, with amendments on ancillary services to follow. It proposes an automated phasing-in once certain liquidity criteria are reached, arguing that this approach meets the broad transparency requirements defined in the level 1 text and gives greater legal certainty.
On position limits, ESMA suggests lowering the limits on foodstuffs to address the concerns that rules would negatively affect food prices and, in addition, to provide ability to adjust position limits in response to deliverable supply. Also, the definition of ‘OTC only’ has been widened to avoid circumventing rules by OTC trading.
On packaged transactions, reports from negotiations in trialogue on the deadline delay legislation, which also covered changes to excluded packaged transactions from pre-trade transparency requirements, indicate that an exemption will only be available if all components of the package are above the size specific to the instrument (SSTI) threshold.
With all but the remaining RTS to come, this recent progress means most of the technical details firms require to push ahead with implementation is now final. However, a long list of ‘implementing’ technical standards and FAQs remain and the coming weeks will be crucial. If the Commission does not agree to ESMA’s suggested approach, any further reworking will add to uncertainty and risk the overall implementation timetable.