FRG Breakfast Briefing 219 Thursday 15 October 2015
Breakfast Briefings 2015 We will provide an overview of the final technical standards in relation to the Markets in Financial Instruments Directive (MiFID II) We will consider the impact of MiFID II on market structure and transparency, with a particular focus on the recently published technical standards We will review the new Market Abuse Regulation coming into force next July in light of the recently published Final Report
Contents 1 Agenda 2 Speakers biographies 3 Presentation 4 Regulatory events table September/October 2015 5 The Linklaters Knowledge Portal
Agenda 1. MiFID II and MiFIR 2. MiFID II and MiFIR RTS/ITS 3. MiFID II/MiFIR Timeline What s next? 4. Overview: Market Structures and Transparency 5. Market Structures under MiFID I and MiFID II 6. Market structures wrap-up: RMs, MTFs, OTFs, Sis and OTC 7. Market structures wrap-up: RMs, MTFs, OTFs, Sis and OTC (cont d) 8. Do you qualify as a Systematic Internaliser? 9. Systematic Internalisers: proposed thresholds 10. Non-Equities: Pre-trade transparency (Trading Venues) 11. Non-Equities: Level 2 Transparency: RTS 2 12. Non-Equities: SIs: pre-trade transparency (Art. 18 MiFIR) 13. Pre-trade transparency: non-equity (Summary) 14. Equity and Equity Like: Pre-trade transparency: Trading Venues 15. Equities: Level 2 Transparency: RTS 1 and 3 16. Equity & Equity Like: SIs: pre-trade transparency (Art. 14-17 MiFIR) 17. Pre-trade transparency: equity & equity-like (General) 18. Post-trade transparency: equity, equity-like & non-equity 19. MAD II = MAR + CSMAD 20. MAD II - Timeline 21. Scope 22. Market Soundings 23. STORs 24. Insider Lists 25. Investment Recommendations
Speakers Biographies Peter Bevan Partner Peter is a partner in Linklaters Financial Regulation Group with close working relationships with banking and investment management clients. His practice includes all aspects of financial markets regulatory advice for broker-dealers and investment banks, as well as investment managers and private banks. Peter has particular experience of new product development and marketing, trading issues such as market abuse (including in an enforcement context) and regulatory structuring advice. Telephone: +44 20 7456 3776 Email: peter.bevan@linklaters.com Daniel Csefalvay Partner Daniel is a Partner in our Financial Regulation Group and has experience in advising investment banks, investment managers (including hedge fund managers) and market infrastructure providers (such as trading platforms and clearing houses) on all aspects of financial markets regulation, both domestic and cross border, including licensing and structuring, compliance with regulatory rules and drafting documentation, investment management (including distribution of funds and collective investment scheme analysis), issues relating to clearing and settlement, corporate M&A involving the financial services sector, shareholding disclosure analysis and queries relating to marketing and distribution of financial products. Daniel has also previously worked in the Financial Services Enforcement Division of the Australian Securities & Investments Commission on regulatory enforcement matters. Telephone: +44 20 7456 5955 Email: daniel.csefalvay@linklaters.com
Speakers Biographies Harry Eddis Partner Harry is a Partner in the Financial Regulatory Group in London. Harry practices all aspects of financial markets regulatory advice for banks, broker-dealers, investment managers and other financial services institutions. Harry has recently advised on a number of buy-backs involving UK listed companies, including a number of innovative arrangements. Harry has particular expertise in market infrastructure and is a market leading expert on clearing platforms. Harry has advised various bank consortia on a number of projects involving clearing arrangements, covering IRS, CDS and FX product base as well as principal and agency (FCM) client clearing structures. Harry also spent over four years at Morgan Stanley in an in-house role, acting as Executive Director covering equity derivatives. His work involved advising on equity structured finance transactions, including negotiating appropriate documentation and advising on the legal and regulatory implications. His experience at Morgan Stanley has given Harry a deep understanding of the way in which financial services institutions operate. Telephone: +44 20 7456 3724 Email: harry.eddis@linklaters.com
MiFID II and MiFIR Diagram 1
MiFID II and MiFIR RTS/ITS Diagram 2
MiFID II/MiFIR Timeline What s next? Diagram 3
Overview: Market Structures and Transparency Diagram 4 > Outstanding issues / interpretative ambiguities and industry concerns apparent at many points in the decision making process in this area > Problems with the Level 1 and Level 2 > Will Level 3 guidance clarify these matters and if so, when? > What is the industry expected to do in terms of implementation and compliance? > Seek to identify the key issues that will drive the decision making process and impact analysis
Market Structures under MiFID I and MiFID II Diagram 5
Market structures wrap-up: RMs, MTFs, OTFs, Sis and OTC Diagram 6
Market structures wrap-up: RMs, MTFs, OTFs, Sis and OTC (cont d) Diagram 7
Do you qualify as a Systematic Internaliser? Diagram 8
Systematic Internalisers: proposed thresholds Diagram 9
Non-Equities: Pre-trade transparency (Trading Venues) Diagram 10
Non-Equities: Level 2 Transparency: RTS 2 Diagram 11 > RTS sets out the calculation methodology for liquidity, SSTI and LIS for non-equities (amongst other things) > ESMA has opted for the instrument-by-instrument approach (IBIA) to calculating liquidity for bonds instead of the class of financial instrument approach (COFIA) > A more granular COFIA approach for other instruments, including derivatives > Article 13 sets out methodology for performing transparency calculations (Liquidity, SSTI and LIS) Static determination of liquidity for some derivatives e.g. All FX derivatives deemed illiquid Periodic dynamic assessment for bonds and certain asset classes of derivatives (NCA s to publish data) ESMA proposes a dynamic methodology for calculating size-specific-to-the-instrument (SSTI) and large-in-scale (LIS) thresholds for pre- and post-trade transparency Thresholds for liquid instruments will for most asset classes - be calculated annually as the greater of a trade percentile, a pre-set threshold floor and, for post-trade thresholds only, a volume percentile Thresholds for most illiquid instruments, the pre-set threshold values will be used > Firms need to look at the thresholds and assess how their trading behaviour is affected BUT the data to run these assessments will not be available for some time. Eg. Bonds. This is a major industry concern and leads to questions about implementation planning and the ability to comply from 3 July 2017
Non-Equities: SIs: pre-trade transparency (Art. 18 MiFIR) Diagram 12
Pre-trade transparency: non-equity (Summary) - Diagram 13
Equity and Equity Like: Pre-trade transparency: Trading Venues - Diagram 14
Equities: Level 2 Transparency: RTS 1 and 3 - Diagram 15 > RTS 1 sets out (amongst other things): the calculation methodology for: the most relevant market in terms of liquidity LIS: based on average daily turnover of transactions metric SMS: based on average value of transactions metric characteristics of negotiated transactions to be eligible for the negotiated trade waiver meaning of prevailing market conditions close in price to quotes of equivalent size for the same instrument on the most relevant market in terms of liquidity regarding the mandatory trading obligation for shares admitted to trading on a regulated market sets out trades not contributing to the price discovery process these are not subject to mandatory trading obligation. BUT no guidance on what amounts to non-systematic, ad-hoc, irregular and infrequent no ESMA mandate under Level 1. > RTS 3 deals with the calculation methodology for the double volume cap mechanism > NB: liquid market for equity & equity like is covered in the Delegated Acts - the financial instrument must be traded daily and must meet the quantitative thresholds set for that type of instrument
Equity & Equity Like: SIs: pre-trade transparency (Art. 14-17 MiFIR) - Diagram 16
Pre-trade transparency: equity & equity-like (General) - Diagram 17
Post-trade transparency: equity, equity-like & non-equity - Diagram 18
MAD II = MAR + CSMAD - Diagram 19 Scope of market abuse regime Criminal Sanctions Requirements on insider lists Exemptions and accepted market practice Prohibition on insider dealing (including unlawful disclosure of inside information) and market manipulation A fresh take on existing standards Public disclosure of inside information Managers transactions Market Soundings Prevention and detection of market abuse Competent authority powers Investment recommendations
MAD II - Timeline - Diagram 20 2003 June 2014 2 July 2014 15 July 2014 February 2015 September 2015 July 2016 MAD originally implemented MAR and CSMAD published in Official Journal MAR and CSMAD come into force Final Report on delegated acts published MAD II due to take effect CPs published on draft delegated acts and draft regulatory technical standards Final Report on regulatory technical standards published
Scope - Diagram 21 Reasonable investor test has replaced the significant effect on price test. In relation to information being precise, intermediate steps are also caught. Presumption of use is formalised. Insider Dealing Financial instruments that are covered by requirements have been extended to include: financial instruments traded on an OTF; emission allowances; spot commodity (in relation to market manipulation); and makes clear that any instrument having an effect on a financial instrument caught by MAR Basic requirements relating to insider dealing, unlawful disclosure of inside information and market manipulation much as currently, but some changes in emphasis. Benchmarks specifically brought within market manipulation provisions Market Manipulation Orders specifically caught Algo/HFT specific examples in relation to market manipulation have been included Attempted market manipulation is caught Cancelling an order on the basis of the inside information is potentially inside information. (i) TO DOs: undertake gap analysis of differences between regimes (ii) update procedures as appropriate (iii) training
Market Soundings - Diagram 22 Disclosure of inside information relating to a takeover bid in relation to assessing interest in participating in such takeover offer also caught. A market sounding will not be an unlawful disclosure of inside information if: - the disclosing participant has specifically considered whether the disclosure will involve inside information and kept a written record of its conclusions - prior to the disclosure, it has obtained the consent of the recipient and provided appropriate warnings to the recipient about its use of the relevant information. A communication of information prior to the announcement of a transaction in order to gauge the interest of potential investors in a possible transaction and the conditions relating to it by the issuer, a secondary offeror, emission allowance market participant or a third party acting on behalf of the foregoing. A disclosing participant must retain a written record of its disclosures (i) TO DOs: review procedures on undertaking market soundings and update as necessary (ii) put in place procedures to identify when information provided through a market sounding no longer is inside information (iii) require appropriate recordkeeping by staff of disclosures made Where inside information that has been disclosed pursuant to a market sounding ceases to be inside information, the disclosing participant must inform the recipient as soon as possible. (iv) training of private side staff
STORs - Diagram 23 Arrangements to be appropriate, and proportionate be regularly assessed and must be documented. All staff should be trained. Arrangement must allow for individual and comparative analysis of each and every order and transaction placed, modified, cancelled or rejected and produce alerts indicating activities requiring further analysis AND there must be appropriate level of human analysis. Arrangements to be put in place that ensure effective and ongoing monitoring of all orders received and transmitted and all transactions in order to detect suspicious orders/transactions. Market operators/trading venue quarters and persons arranging/executing transactions shall have in place effective arrangements for [preventing and] detecting market abuse and attempted market abuse Reports must be submitted without delay once a reasonable suspicion has been formed. Reports shall be made providing standard content. Arrangements may be delegated to group entity and data analysis may be delegated to third party subject to appropriate oversight. Any suspicious order or transaction must be reported to competent authority.
Insider Lists - Diagram 24 Reasonable steps must be taken to ensure that persons on the insider list acknowledge in writing the legal and regulatory duties entailed and are aware of the sanctions applicable to insider dealing and unlawful disclosure of inside information. Insider list to include the identity of any person having access to inside information and the reason for including that person on the list - the RTS set out the format for such lists and provide for permanent insiders to be named. Issuers or any person acting on their behalf shall: (a) draw up a list of all persons who have access to inside information and who are working for them or performing tasks through which they have access to inside information (e.g. advisers, accountants) (b) keep such lists updated (c) provide the insider list to the competent authority as soon as possible upon request The insider list must be updated where there is a change in the reason for including a person already on the list, when there is a new person who has access to the information or where a person ceases to have that information. Issuers in the SME market are exempt from drawing up an insider list provided that any person having access to such information acknowledges their legal and regulatory duties and is aware of the sanctions and the issuer is able to provide the competent authority with an insider list upon request (i) TO DOs: agree arrangements with issuers for keeping insider lists (ii) revise procedures to ensure all information kept up-to-date (iii) training
Investment Recommendations - Diagram 25 An investment recommendation is information recommending or suggesting an investment strategy, explicitly or implicitly, concerning financial instruments, intended for distribution channels or for the public. Territorial application? Information recommending or suggesting an investment strategy means information produced by an investment firm, independent analyst or a person working for them which, directly or indirectly, expresses a particular investment proposal in respect of a financial instrument or an issuer. Persons who produce or disseminate investment recommendations or other information recommending or suggesting an investment strategy shall take reasonable care to ensure that such information is objectively presented and to disclose their interests or indicate conflicts of interest concerning the financial instruments to which that information relates. A number of disclosures will need to be made in relation to recommendations, such as the identity of the persons involved in the production of the recommendation. Recommendations must be objectively presented. Interests in the relevant shares must be disclosed, as must any conflicts of interest. Additional requirements placed on those who disseminate recommendations produced by a third party, in particular identifying any substantial alterations. (i) TO DOs: identify what constitutes investment recommendations caught by the requirements (ii) identify any instances where third party material is disseminated and confirm whether substantial alterations may be made (iii) put in place procedures to ensure disclosures are made and relevant interests are made (iv) training of front office staff involved in producing or disseminating investment recommendations