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By Emma Radmore
Following on from previous articles on the “Level 2” legislation, which took the form of a Delegated Directive and a Delegated Regulation under the revised Markets in Financial Instruments Directive, on 18 May 2016, the Commission adopted what may be the final piece of Level 2 legislation—the Delegated Regulation under the Markets in Financial Instruments Regulation (MiFIR). It is based on 11 “empowerments” in MiFIR all of which are “shall” empowerments, and therefore oblige the Commission to act. The Delegated Regulation addresses, primarily, the rules on:
The Regulation sets the criteria that, if an instrument meets them all, it will mean a market is liquid in respect of the following instruments that are traded daily:
The criteria are based on specified amounts of free float, average daily number of transactions and average daily turnover, taking into account the specifics of each instrument. For each instrument, the Regulation gives guidance on how authorities should make their calculations, and what to do where fewer than five instruments are considered to have liquid markets. It also sets out how the competent authority of the most relevant market should assess liquidity against the main criteria when instruments are first traded, between the end of the first four and first six weeks of trading, between the end of every calendar year and before 1 March of the following year for instruments traded in the previous year and immediately after a previous assessment changes because of a corporate action. It also covers the provision of information by trading venues (and further specifies this in an Annex to the Regulation), and the way in which relevant information must be used.
The Regulation imposes conditions for market operators, investment firms operating a trading venue and systematic internalisers to provide information, with some exceptions for information they provide free. The conditions relate to cost of production (including a reasonable margin), provision of market data on a non-discriminatory basis, charging for use of market data, the obligation to make data available unbundled and to charge on the basis of disaggregation of data. The Regulation also imposes a transparency obligation, with specific data to be included in any disclosure. The Commission says the aim of the requirement is to allow a uniform application while taking into account difference business models and costs structures.
The Regulation specifies what is meant by the requirement for systematic internalisers to make public their quotes on a regular and continuous basis, and how they should make them easily accessible. It also covers, in relation to execution of orders by systematic internalisers, when exceptional circumstances exist that would make it contrary to prudent risk management to impose an obligation to provide firm quotes. The Regulation also covers when orders will be considered to considerably exceed the norm, and how to assess the size specific to the instrument.
Investment firms and market operators that provide portfolio compression must have an agreement with participants to it including relevant details, and must require each participant to specify their risk tolerance and provide them with a proposal, before initiating each compression process. This part also sets out what information firms and market operators should make available through an approved publication arrangement for each portfolio compression cycle.
The Regulation sets out in detail the criteria that ESMA and EBA must take into account when considering whether to exercise relevant product intervention powers. The Regulation includes a long list of criteria, including:
For structured products, the criteria show slight amendments, reflecting the features of the product.
Finally, the Regulation looks at the criteria and factors that will determine the existence of a threat to the orderly functioning and integrity of the financial markets, including existence of serious financial problems, a significant rating action, substantial selling pressures or volatility, disruptions to systems, significant and abrupt change in supply of a relevant commodity, significant positions being held by one, or several linked, persons and the inability of a trading venue to exercise its own position management powers because of a business continuity event.
For some elements of MiFID 2, the EU-level requirements are now final. But for many more, we still await the final technical standards. The Commission has now started to adopt these, and these will be the focus of a separate article. Then, of course, national implementing measures. There is still some way to go, but firms should study these new Delegated Acts carefully and assess what changes the requirements may require them to make to their current policies and procedures.
Emma Radmore is a Managing Associate at Dentons UKMEA LLP, London. She is also a member of the World Securities Law Report Advisory Board. She may be contacted at firstname.lastname@example.org.
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