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Managing DirectorJefferson Young

MiFID & MiFIR Update

Matthew Argent

Editor FT trading RoomFinancial Times

MiFID & MiFIR Update

Philip Stafford

Chief Administration OfficerFixnetix Limited

bob.fuller@fixnetix.com

Major changes in EU trading regulation & how it

might affect you

Bob Fuller

Where is the London market now?

Five Stages of Grief

• Denial – This can’t be happening to me.

• Anger – Why me?

• Bargaining – Attempting to make deals.

• Depression – Feelings of hopelessness.

• Acceptance – Getting on with life.

EU Regulations, where are we?

• EMIR – Passed

• OTC Derivatives – Passed

• MAD 2 Directive – Passed

• MAD 2 Regulation – Passed

• MiFID 2 Directive – Will be passed 16th April 2014

• MiFIR 2 Regulation – Will be passed 16th April 2014

Latest/almost final versions of MiFID 2 and MiFIR dated the 17th February 2014

Under EU law

Directives

• must be transposed into each Member State’s national law by secondary legislation

• ample scope for incorrect/incomplete porting

Regulations

• ‘binding in their entirety & directly applicable in all Member States’

What is the difference between a Directive and a Regulation?

Where are we in the MiFID II process?

For the US to recognise the EU withing the Dodd Frank regime MiFID 2 and

MiFIR 2 MUST be passed before the EU parliament retires in April

(for the May Elections)

• MiFID 1 is NOT repealed but a lot of the definitions are changed i.e. It’s not just about Equities, but about everything except FX.

• No mixing of the prop book with customer orders unless you are an Systematic Internaliser. The end of Broker Crossing Networks as we know them.

• Much more transparency, with increased restrictions on trading ‘in the Dark’ ( 8% in market total for any instrument and 4% for any market venue – then 6 months of NO dark activity!)

Main Market Structure items 1

• The Equity model is to be used as the base model for ALL instrument types.

• This will inevitably move ALL instrument types to electronic trading (the demise of voice trading) which will require more connectivity and less traders.

• Greater emphasis on Best Execution so more historic proof of what you did and why.

• Mandatory Clearing of new instruments.

Main Market Structure Items 2

Main Market Structure Items 3

• Controls and constraints on High Frequency Trading. Including prior approval by a regulator!

• Both firms and individuals will be subject to fines and/or other sanctions given any ‘ignoring of the rules’.

• Non Equity Clearing open to competition over time.

MiFID 196 pagesMiFID 2 464 pages

MiFIR 60 pagesMiFIR 2 243 pages

Original total 256 pagesNew total 707 pages

Overall very nearly 3 times the size.

Note how much bigger MiFIR is over 4 times the size

Some Statistics to ponder

MiFID II’s much more reliance on Regulation rather than Directive plus the new sanction regime characterises the significantly altered risk/reward balance.

A big change from the much lighter touch framework that has been in place since competition in equities trading was first opened up five years ago by MiFID

What is the main structural difference between MiFID and MiFID 2?

Financial Transaction Tax

Still being proposed by 11 EU countries with Equities being set at 0.1% and Derivatives at 0.01%. Due soon?

• Extra Territoriality • Definition of when it is due• Competitiveness of EU institutions

May include FX (see recent EU legal challenge!)

What other EU rules may affect Trading?

German HFT rules

Now in place

• Need to have a capitalised presence in Germany to Algo/HFT trade

• May move flow to London

Local EU laws

What Structural Changes may this cause?

• Reduction/removal of margin income on customer flow• Dramatic reduction in voice trading, more electronic

trading – smaller trading rooms?• Potential reduction in liquidity for some instruments• Increased IT costs / reduction in revenues

This is very likely to lead to:

• More specialisation within an entity, only concentrate on what you are good at.

• Increased IT spend and increased IT risk.• More outsourcing or use of utilities

Any Other Structural Changes?

All of these changes are moving formally Back Office End of Day functions to be more Front Office Real-Time ones.

For example there will be a need to move collateral in real-time, due to:

• More transactions being cleared requiring more initial margin. • As the CCP’s will be more regulated they will not be able to offer so

much intra day credit so to carry out the next trade they will need to have control of the collateral.

• This will lead to:• The need to settle transactions quicker to enable the proceeds to be

used as collateral.• The lack of available collateral putting a stop to trading activity!

All of which will require major changes to systems and communications infrastructure for these current Back Office functions.

Where is the market?

Five Stages of Grief

• Denial – This can’t be happening to me.

• Anger – Why me?

• Bargaining – Attempting to make deals.

• Depression – Feelings of hopelessness.

• Acceptance – Getting on with life.

Immediate Preparations for you

• Speak with your compliance departments

• Read all the regulations

• Attend conferences and events on regulations

• Discuss with peer group and industry associations

Most of all, these regulations will need significant Senior

Management involvement as they will affect what you

trade and how you trade it.

Panel Q&AModerator

Phil StaffordFinancial Times

Vivienne Bannigan – Policy Director, Capital Markets, BBABob Fuller - CAO, FixnetixRichard Kemp - Senior Partner, Kemp LittleElizabeth Callaghan – Capital Markets Regulatory Specialist

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