High time to implement the MAR/MiFID II legislative frameworks

By Christer Wennerberg, Senior VP Market Structure Strategy
May 28, 2016
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The legislative frameworks of both MAR and MiFID II are in effect (i e decided upon and published in the EU’s Official Journal).

Framework Application date Regulation Directive
MAD II Jul 3rd 2016 MAR 596/2014 CSMAD 2014/57/EU
MiFID II Jan 3rd 2018 MiFIR 600/2014 MiFID II 2014/65/EU

MAR/CSMAD legislation process

The MAR provisions set out in the Regulation will apply from July 3rd 2016, with the exceptions of some sections that are dependent upon MiFID II (e g OTFs).

On the same date, the Directive (CSMAD) should be transposed to national law, and the current Directive 6/EU/2003 will be repealed. The Regulation does not need to be transposed, only “translated”, since it applies all over EU with direct effect. However, the UK has decided to opt out (they can opt-in on a case-by-case basis). The Swedish FSA (“Finansinspektionen”) has informed that the Swedish Government will not be able to transpose the Directive into Swedish law by that date. A target date for the Swedish transposition is set to Feb 1st 2017.

Sell-side view

Prevent and detect market abuse and orders that may cause disruptions on the market

Sell-side firms have already since some time been adressing requirements concerning the monitoring of order flow. The requirements on a sell-side firm are not only driven by regulatory minimum requirements. As a comparison, Best Execution requirements today do not constitute the minimum level of which sell-side firms operates their execution. The requirements (on the best possible result when executing client orders) are much higher in practice. This also true for systems and processes aimed at preventing and detecting market abuse (note: there is already a Market Abuse Directive in application today, together with ESMA Guidelines). 

In practice, for firms with a large algorithmic order flow, the requirements are much higher than the minimum requirements stipulated by the legislation. Some examples:  

  • Additional requirements set forth by the venues. Example: orders submitted in the closing call must not push the price (even if the order was OK when it was submitted).
  • Additional requirements from compliance (depending on the nature of the business). Example: prevention and detection of spoofing or quote stuffing in real time.
  • Additional requirements from trading (depending on the nature of the business). Example: monitoring of algorithms in real time to detect algos that do not behave OK from a technical standpoint rather than performance.

Economies of scope and scale

MAR and MiFID II will increase the requirements, both from a hygiene perspective (compliance) and from a competitive perspective (trading-performance). MAR is the most urgent from a timing perspective, but with MiFID II on the horizon the sell-side must also weigh in Best Execution, TCA and algo monitoring in their technology investment decision.

Choosing the best way forward

Obviously, there are a number of possible approaches a firm can have to the upcoming regulatory changes. Some firms will prefer to wait and see; others will want to make sure they have all bases covered. The more common approaches include:

  1. Wait and see”. Postpone investment as much as possible, and bet that the regulators will not verify that systems are in place that fulfill minimum requirements in MAR.
  2. Fulfill minimum requirements in the legislation text”. E.g. a decision to invest in a system that meets what can be assumed to be the base requirements.
  3. Fulfill requirements that also meet practical requirements of trading”. A system that can prevent and detect Market Abuse and orders that may cause disruptions on the market. 
  4. Full-fledged system prepared for MIFID II direct and indirect requirements”. Clearly the most costly option, but also the most secure if the aim is to stay up and running without interruptions after MAR and MiFID II apply.

Clearly, we have reached a point where banks and investment firms have to make a choice, and the time to act is now. 

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