It is now over three years since MiFID came into force, the requirements being reflected in the relevant parts of the FSA handbook.
In recognition of market developments since that time, the European Commission (EC) has launched a MiFID Review consultation.
Areas under consideration (and as the paper is 83 pages it will be appreciated that the following are only highlights) include the proposed power of the EC to ‘ban the provision of investment services and the carrying out of investment activities in certain financial instruments’ in ‘clearly specified conditions’. Power would also be given to national regulators to ban or restrict the trading/distribution of a product or the provision of an activity – and should it be deemed that they have not acted appropriately then the EU will step in(see section 9.1).
As will be appreciated, SYSC 4.3.2 concerns the need for a firm’s senior personnel to receive frequent (at least annually) written reports which can be broadly summarised as concerning compliance, internal audit(subject to proportionality) and risk. The MiFID Review (section 7.3.2) proposes that these functions should report directly to the board and that the removal of any of those responsible for these internal control functions would be subject to prior board approval and notification to the supervisor.
The same section also proposes that the compliance function has a specific involvement in complaint handling and that the compliance report to the board – as per the above – should specifically summarise complaints received and their treatment.
High Frequency Trading gets a mention (section 2.3), including those entities that currently do not need to be authorised. Article 2.1(d) of MiFID allows certain entities to escape the need for authorisation – PERG 13.5 Q40 covers this exemption. The proposal is that subject to a minimum threshold all persons involved in HFT would need to be authorised as an investment firm.HFT is a subcategory of automated trading. Firms involved in the latter will need to have in place robust risk controls to mitigate potential trading system errors, and any firm providing sponsored access to automated traders would also have to have in place robust controls and filters to detect errors or attempts to misuse facilities.
Transaction reporting is also under the microscope (section 6). Currently, under FSA rules (SUP 17.1.4), reportable transactions are those transactions executed in either a financial instrument admitted to trading on a regulated/prescribed market (even if the transaction was not carried out on such a market) or transactions in OTC derivatives where the value depends upon an instrument admitted to trading on a regulated/prescribed market.
It is proposed that the scope is extended to include transactions in instruments that are traded on an MTF or on an organised trading facility (OTF).A similar extension would be applied to those financial instruments which themselves depend upon the value of an instrument traded on an MTF or OTF.
In addition, commodity derivatives that are not admitted to trading on a regulated market or MTF or organised trading facility will also be captured, as will be depositary receipts if they are related to instruments trading on a regulated market, MTF or OTF.
The consultation ends 2 February. It is expected that the EC will present a proposal for amending MiFID in mid-May.