The FCA has published its first consultation paper on the implementation of the Markets in Financial Instruments Directive II (Consultation Paper 15/43: Markets in Financial Instruments Directive II implementation – Consultation Paper I (CP15/43)).

What does the FCA consultation cover?

In CP15/43 the FCA consults on issues concerning the regulation of secondary trading of financial instruments. It covers:

  • trading venues: (i) regulated markets (RMs) – issues around new obligations relating to algorithmic and high frequency trading, direct electronic access, tick sizes, business continuity and systems and controls. The FCA proposes to make changes to the Recognised Investment Exchanges sourcebook (REC); (ii) multilateral trading facilities (MTFs) – changes to the requirements for MTFs. The FCA proposes changes to chapter 5 of the Market Conduct sourcebook (MAR 5); and (iii) organised trading facilities (OTFs) – the FCA is proposing to introduce a new MAR 5A that will cover issues around the requirements for this new category of trading venue;
  • systematic internalisers: whilst much of the changes to the systematic internaliser regime is being introduced by MiFIR the FCA proposes amendments to MAR 6;
  • transparency: the expansion of transparency requirements to equity like and non-equity markets, including the approach to pre-trade transparency waivers and post-trade transparency deferrals. The FCA is proposing changes to certain sections of the Handbook including REC, MAR 5 and the new MAR 5A;
  • market data: the introduction of the new Data Reporting Services Providers (DRSP) category of firms and their responsibilities, and transaction reporting. The FCA is seeking views on proposals within a new chapter of the Handbook, MAR 9 on DRSPs, and whether it should apply MiFID II’s transaction reporting obligations to managers of collective investment undertakings and pension funds;
  • algorithmic and high frequency trading requirements: the controls for MTFs and OTFs in MAR 5 and 5A, and those for trading firms in the new MAR 7A. The FCA’s proposals cover, among other things, business continuity, systems and controls, financial crime and market abuse, direct electronic access and tick sizes;
  • passporting and UK branches of non-European Economic Area (EEA) firms: the FCA addresses the technical changes it feels are necessary to make the correct references to the new MiFID II provisions and highlights the harmonised forms required for passporting notifications. The proposed changes predominantly apply to the Supervision manual (SUP). The FCA also makes a proposal to ensure that UK branches of non-EEA firms are subject to the same rules as investment firms when undertaking investment services and activities;
  • Principles for Businesses: the FCA takes account of the extension in MiFID II of some conduct of business obligations and proposes extending the application of some of the principles, to include firms that conduct business with clients categorised as Eligible Counterparties;
  • the Perimeter Guidance manual: MiFID II introduces some changes to the scope of investment services and activities and financial instruments, requiring the FCA to make proposals to revise parts of PERG 13.

What does the FCA consultation not cover?

The FCA notes that MiFIR and the Regulatory and Implementing Technical Standards apply directly in the UK and generally do not require changes to UK law or rules to have effect. Whilst the following measures are significant market issues, the FCA is not consulting on them:

  • the double volume cap mechanism to restrict the ‘dark’ trading of equity and equity-like financial instruments (article 5 MiFIR);
  • the trading obligation in shares (article 23 MiFIR);
  • the obligation of investment firms to maintain records of transactions, and of trading venues to keep data relating to orders (article 25 MiFIR);
  • transaction reporting (article 26 MiFIR);
  • the obligation to supply instrument reference data (article 27 MiFIR);
  • the obligation to trade on an RM, MTF or OTF (article 28 MiFIR);
  • the clearing obligation for derivatives traded on an RM and the timing of acceptance for clearing (article 29 MiFIR);
  • portfolio compression (article 31 MiFIR); and
  • non-discriminatory access to central counterparties and trading venues and non-discriminatory access to, and obligation to, licenced benchmarks (articles 35 to 38 MiFIR).

The deadline for comments

The deadline for comments on CP15/43 is 8 March 2016.

FCA MiFID II Handbook Guide

Appendix II of CP15/43 contains a draft MiFID II Handbook Guide that will eventually sit alongside the Handbook changes. The guide is intended to clarify how the FCA’s approach to implementing MiFID II is addressed through its sourcebooks. The draft Guide can be expanded to cover other firms and other areas of MiFID II when the FCA issues further consultations if respondents think that it is helpful.

FCA consultation on conduct issues

The FCA states that it will consult on the other MiFID II changes that it needs to make to its Handbook, including the conduct issues covered in its earlier discussion paper, in the first half of next year. The FCA understands that the PRA will also consult next year on the changes it needs to make to its Rulebook.

Further FCA consultation on PERG

The FCA also states that there will be changes to PERG to reflect issues related to certain exemptions and definitions of financial instruments being dealt with in the implementing measures. The FCA will consult on those changes in 2016.

MiFID II timing

The FCA notes that discussion is currently taking place between the European Commission, the European Parliament and the Council of the European Union about whether the date of application of MiFID II should be delayed by a year. The FCA states that if “there is a change to the legislated timetable, our implementation plans will take that into account.”

View FCA consults on aspects of the Markets in Financial Instruments Directive II implementation, 15 December 2015