HM Treasury has published its Policy Statement regarding the transposition of MiFID II. The Policy Statement follows HM Treasury’s earlier Consultation Paper that was published in March 2015.
HM Treasury also sets out three updated draft statutory instruments which give effect to transposition:
- the Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2017 (MiFID II Regulations);
- the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2017; and
- the Data Reporting Services Regulations 2017 (DRRs).
HM Treasury states that further technical refinements will be made to the above draft statutory instruments. Once the draft statutory instruments have come into force, market participants will be able to formally apply to the FCA or PRA for new authorisations or variations of permission where necessary. The statutory instruments will come into force in the ‘early part’ of 2017 to allow such applications. In January 2017 the FCA published a MiFID II application and notification user guide (our blog is here).
The HM Treasury Policy Statement contains feedback on the following:
- third countries;
- data reporting services;
- position limits and reporting;
- unauthorised persons;
- structured deposits;
- power to remove board members;
- organised trading facilities;
- binary options; and
- further issues.
In relation to third countries, the Government will maintain the current third country regime, including the overseas person exclusion. It will not implement Article 39 MiFID II. Notwithstanding this the Government notes that a number of consequential changes need to be made to enable, in particular, an Article 39 MiFID II branch in another Member State and a third country firm registered with the European Securities and Markets Authority, to navigate the general prohibition so that they can provide services to UK clients. Amendments have been made to the MiFID II Regulations.
Jonathan Herbst, partner in the financial services group, commented:
“The government has followed the approach outlined in the Consultation of not seeking to implement the Article 39 MiFID branch regime. This is not a surprise given the concerns expressed by parts of the market about whether this regime would undermine the UK’s current approach to the overseas persons exclusion. This means that the current domestic UK regime for third country branches will continue. The more significant point in the implicit decision to carry on the overseas persons exclusion regime which has played an important part in the access of third country firms to the London market. The MiFID discussion is of course separate to the Brexit one but the potential read across is obvious and significant in the light of the fact that the overseas persons regime is a uniquely open approach to access not shared by most other EU member states.”
Data reporting services
The Government will also maintain its original proposal to create a standalone regime for data reporting service providers (DSRPs) rather than include them as regulated activities under the Financial Services and Markets Act’s Regulated Activities Order (RAO). The Government considers this to be appropriate in light of the inherent difference between activities carried out by DRSPs and activities carried out under the RAO.
The Government noted that respondents agreed to the point made in its earlier consultation that the definitions set out in MiFID II in respect of consolidated tape providers (CTPs), approved reporting mechanisms (ARMs) and approved publication arrangements (APAs) are circular in nature and may create uncertainty. However, the Government will maintain a direct copy out approach in relation to the definitions of CTPs, ARMs and APAs but to reduce the element of circularity it has amended the definition of “data reporting service” to refer directly to the services.
The Government also maintains the view that a data reporting service which provides trade data with respect to 100% of equity and equity-like instruments traded on all trading venues is a CTP. Entities providing a consolidated tape for 100% of trading all equity and equity like instruments must obtain authorisation under regulation 7 of the DRRs.
The Government will not be creating offences akin to sections 89 and 90 of the Financial Services Act 2012 (FSA 2012) in relation to market manipulation by DRSPs. The Government believes that the existing sections 89 and 90 of the FSA 2012 will already apply to misleading statements or impressions made or given by DRSPs (for example, when reporting or publishing trades of financial instruments) in order to mislead market participants into buying or selling these instruments.
The Government has also changed the 5pm deadline in relation to Article 26 of MiFIR. This Article provides that ARMs report transactions “as quickly as possible, and no later than the close of the following working day.” The Government accepts that its original consultation position of 5pm is not the close of working day for all markets and the DRRs have been amended to reflect that an ARM should have adequate policies and arrangements in place to provide the service to an investment firm of reporting the information specified by Article 26 MiFIR as quickly as possible, and no later than 11.59pm of the next working day following the transaction.
Position limits and reporting
The Government states that the scope of the position limits regime remains the same as per its consultation. The Government is of the view that MiFID II is clear that the position limit regime applies to all persons holding positions in contracts covered by regulation 14 of the MiFID II Regulations, unless a persons’ positions are exempt by virtue of the second subparagraph of Article 57(1) MiFID II.
The Government has maintained its consultation proposal that firms will not need to obtain additional permission to “deal in investments as principal” in addition to being authorised as an organised trading facility, when undertaking matched principal trading as an operator. A notification regime will be provided for in FCA rules. The FCA consulted on the notification regime in Consultation Paper 15/43: Markets in Financial Instruments Directive II implementation – Consultation Paper I.
Among other things, the Government has changed its amendments to Article 85 RAO. The Government’s original consultation amendment to Article 85 was that a binary option should be “a derivative contract of a binary nature”. However, the Government now understands that contracts sold as binary options can have more than two pay outs and therefore may not be clearly caught within the proposed amendments to Article 85 but could fall within the definition of MiFID financial instrument. In light of this, the amendments to Article 85 RAO in relation to binary options has been changed to specify that a binary option should be a “derivative contract of a binary or other fixed outcomes nature”. Contracts for difference that are not binary options and have a variable pay out are already a specified investment under Article 85(1) RAO.
View HM Treasury policy statement on MiFID II transposition, 9 February 2017
View Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2017, 9 February 2017
View Data Reporting Services Regulations 2017, 9 February 2017