A brief run-through of the key changes in MiFID II as it is currently drafted, with a view to their impact on derivatives trading and the buy-side.

1. MiFID II: Impact on OTC derivatives trading
OTC FM
12 November 2013
PJ Di Giammarino, CEO, JWG
Tom White, Analyst, JWG
© JWG 2013
Confidential

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3. Key themes
►
MiFID II is not yet finalised and still subject to change
►
With around 20,000 pages of regulation affecting them in 2013,
the buy-side face an increasingly complex wave of
requirements going into next year
►
Foundations laid for OTC trading under EMIR and MiFID I may
need to be dug up again and re-laid for MiFID II
►
MiFID II impacts the whole market, but the shape of the impact
depends on who you are and what you are trading
►
The buy-side can no longer rely on the sell-side or a single
service provider, meaning more tough decisions have to be
made
►
A proactive strategy will be required going forward
© JWG 2013
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4. MiFID II/MAD implementation timeline
as at Q4 2013
MiFID/R
EP plenary
date
Parliament
cut-off date
MiFID/R
Must be implemented 24 months after entry into force ►
National implementation of Markets in Financial Instruments Directive
May already
be drafted
40+ technical
standards
MAR
adopted
MAD/R
Parliament
cut-off date
Final adoption
after MiFID
KEY:
Likely timeline
Possible delay
MAD/R
Must be implemented 24 months after entry into force ►
National implementation of Market Abuse Directive
Analysis and
design
Planning
Implementation
Firm implementation
S
O
N
2013
© JWG 2013
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J
F
M
A
M
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J
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S
O
N
D
J
F
M
A
M
J
J
A
2015
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5. MiFID II firm impact league table
Topic
Technical
standards
pending
Change
Key provisions
High
►
►
Authorisation, testing and business continuity planning
Ad hoc requests requiring identification and record keeping
On-exchange trading
Yes
High
►
Some instruments must be traded on exchange (i.e., no longer OTC)
3
Pre-trade transparency
Yes
High
►
►
More instruments in scope
Publication of ‘actionable interests’
4
Post-trade transparency
Yes
High
►
As close to real-time as possible
Transaction reporting
Yes
High
►
►
►
More instruments in scope
New identifiers will be required
New requirement to report open orders
6
Client classification
No
Medium
►
Municipalities can no longer be classified as eligible counterparties
or professional clients
7
Suitability and
appropriateness
Yes
Medium
Modified list of instruments exempted from suitability checks for
‘execution only’ businesses
► Professional clients cannot be assumed to have knowledge of
certain complex instruments
8
Best execution
Yes
Medium
►
►
Closer tracking and measuring of trade execution
More disclosure to clients and the public
9
Client disclosures
Yes
Medium
►
More disclosure regarding basis for suitability decisions
10
Client assets
No
Medium
►
Prohibition on title transfer arrangements
11
Consumer protection
Yes
5
Firm
Algorithmic trading
2
Trading
1
Marketing
No
Low
►
Requirements extend to ECPs
12
Governance
Yes
Low
►
►
Managers require approval and training
Limit on number of positions executives can hold
13
Record keeping
No
Medium
►
►
Must be kept for an additional two years depending on jurisdiction
Now includes telephone records
►
Source: JWG research 2013
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6. Putting your MiFID tradeflow into context
Impacts on your derivatives tradeflow post-MiFID II
Pre-trade
►
New dynamic
reference data and
documentation
►
Reclassification of
existing clients
►
New client disclosures
around research
►
Closer tracking of
executions
Trade
►
More exchange-trading
means more trade
volume,
documentation and
market fragmentation
More transparency
means changes to pretrade analytics and
execution strategy
► Regulatory/market risk
controls
►
►
Infrastructure-intensive
operational risk controls
for trading systems
Post-trade
►
More instruments and
open orders now in
scope for reporting
►
More complex to
delegate reporting
►
More identifiers
►
Compulsory clearing
►
Dual reporting
3rd country rules
Governance/MI
Outsourcing
AIFMD passporting rules
Record keeping
Accuracy and tracking
EMIR
© JWG 2013
MiFID
Confidential
AiFMD
6

7. Pre-trade: onboarding and pre-execution
►
Client classification:
municipalities no longer
automatically ECPs/PCs
►
Must demonstrate
‘independence’ of research
and reasoning behind choice
of suitable instruments
►
More detailed disclosure to
clients of method of execution
►
Public disclosure of top five
venues executed on in previous
year
No more caveat emptor. How will you prove your controls work?
© JWG 2013
Confidential
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8. Trade: the end of OTC?
►
Some OTC instruments must
be traded on exchanges
►
Only those defined as
‘liquid’ by ESMA will be
mandated
What impact will MiFID II have on your
implementation of EMIR?
Low
Medium
High
►
Not yet sure where the line
will be drawn
►
Watch out for technical
standards/consultations in
this space
Source: RegTech readers’ poll November 2013
Operational fragmentation within the firm; changes to EMIR work
© JWG 2013
Confidential
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9. Trade: transparency and waivers for
derivatives
►
Derivatives traded on
exchanges now in scope for pretrade transparency (including
actionable indications of
interest)
►
Some derivatives traded OTC
and on SIs also subject to pretrade transparency
►
Waivers do exist but limited to
certain circumstances:
-
Large-scale orders
-
Indications of interest in RFQ and
voice systems that are above a
certain size
More micro-analysis and macro-evaluation of trading strategy
© JWG 2013
Confidential
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10. Trade: risk and operational risk
New risk requirements:
►
-
Position limits in commodity
derivatives enforced by
trading venues
New operational risk
requirements:
►
-
Testing and registration of
algorithms with regulators
-
‘Robust’ controls in place to
prevent malfunction/misuse of
algorithms
More external risk limits and internal op. risk controls needed
© JWG 2013
Confidential
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11. Post-trade: more transactions in reporting
scope
►
Exchange-traded (‘liquid’)
derivatives
MiFID II
►
Derivatives based on
exchange-traded products
“Financial instruments admitted to trading,
pending admission to trading, where the
underlying is a financial instrument, or where
the underlying is an index of financial
instruments.
►
FX forwards and rolling spot
contracts
This shall apply whether or not such
transactions are carried out on the venue.”
►
Records have to be kept for up
to 7 years depending on
member States
“… any financial
instruments admitted to
trading on a regulated
market.”
MiFID I
Reporting extended to most instruments. Expect big reporting fines in 2016
© JWG 2013
Confidential
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12. Post-trade: ARMs and delegated reporting
►
Can only report through Approved Reporting Mechanisms (ARMs),
subject to MiFID requirements
►
Many issues have yet to be resolved with delegated reporting:
-
ESMA have said submission of default fields is a possibility but still has to
be accurate …
-
… and accuracy is more important than timeliness, but still has to be
within T+1
►
No dual reporting with EMIR
►
BUT firms must still report under MiFID and AIFMD
►
Different reporting standards for all three regulations
More work to be done in-house before reports can be passed to a 3rd party
© JWG 2013
Confidential
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13. Final thoughts: a proactive strategy is required
►
►
Is MiFID II on your firm's budget yet?
Much of the legislation is
predicted to stay as it is already
drafted
Equities transparency and third
country rules remain key area of
disagreement
►
No
Firms have the opportunity to
get ahead on implementation
and help to shape standards
►
Yes
But requires budget allocation,
gap analysis, roadmap to
implementation
Source: RegTech readers’ poll November 2013
Now is the time to get ahead
© JWG 2013
Confidential
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14. Thank you
JWG Group Ltd: admin@jwg-it.eu
www.jwg-it.eu
Join the RegTechFS discussion
www.regtechfs.com
Customer Data Management Group
www.The-CDMG.org
@jwg_group
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15. Disclaimer
JWG has taken all reasonable care and skill in the
compilation of this report, however, JWG shall not be
under any liability for loss or damage (including
consequential loss) whatsoever or howsoever arising
as a result of errors or omissions or the use of this
publication by the customer, his servants, agents or
any third party
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