MiFID II FAQs
MiFID II FAQs
Frequently asked questions
Please note this information does not represent in any form legal or regulatory advice. Firms are required to seek their own professional advice to ensure compliance with MiFID II.
1. What is MiFID II and why does it matter to me?
MiFID II is the revised Markets in Financial Instrument Directive and is accompanied by the Markets in Financial Instruments Regulation (MiFIR). These European laws will replace the existing regulatory regime, MiFID I, when they come into force on 3rd January 2018.
MiFID II will introduce pre- and post-trade transparency requirements to the non-equities world, both with respect to activity on trading venues and Over-the-Counter (OTC). Beyond this, MiFiD II also provides for new customer protections, controls in areas such as algorithmic trading, and the implementation of the G-20 obligations as a result of the 2008 financial crisis and the US ‘flash crash’ of 2010.
2. How will MiFID II affect transparency in the fixed income?
MiFID II introduces a pre- and post-trade transparency regime to the non-equities world with respect to both trades on a trading venue and to OTC trades.
There is a requirement to publish both orders submitted to, and trades executed on, a trading venue. The obligation to publish orders is waived in the case of a pre-trade transparency waiver and the obligation to publish trades is deferred in the case of a post-trade transparency deferral. More information regarding the non-equities pre- and post-trade transparency regime and the MTS approach to this can be found under Transparency Requirements and Waivers.
For trades executed in non-equities outside of a trading venue, there is an obligation on investment firms which deal on their own account on an organised, frequent systematic and substantial basis when executing client orders (so called systematic internalisers, or SIs) to publish firm quotes which they make to their clients. More extensive is the obligation on investment firms to report OTC trades in non-equity instruments to an Approved Publication Arrangement (APA) as close to real time as is technically possible, and initially no later than 15 minutes after the OTC trade occured. For more information please visit Reporting and Data.
3. What is the difference between trade and transaction reporting?
Trade reporting refers to the obligation on investment firms to report OTC trades as soon as technically possible, and no later than 15 minutes after the trade, to an Approved Publication Arrangement (APA). For on-venue trades, the trading venue will make public trades executed under its rules. This is to achieve transparency to the market.
Transaction reporting refers to the obligation on investment firms to report trades no later than the close of the following working day to the relevant national competent authority, directly, through an ARM, or through a trading venue. This is for market abuse monitoring.
4. When will investment firms need to report trades?
In the non-equities world, investment firms which trade OTC are subject to an obligation to report trades to an Approved Publication Arrangement (APA) as soon as technically possible, and no later than 15 minutes after the trade.
There may be times when even Buyside firms (depending on their regulatory status) may have to report OTC trades to an APA.
Trades on a trading venue (Regulated Market, MTF, or OTF), however, are not subject to this obligation, as the transparency obligations under MiFID II fall upon the trading venue. Therefore, trades on the MTS trading venues will not have to be reported to an APA.
To assist market participants with meeting their OTC trade reporting obligations, TRADEcho has been launched by the London Stock Exchange Group (LSEG), in partnership with Boat Services Limited, to provide MiFID II compliant OTC trade reporting across all asset classes. For more information please visit www.tradecho.com
5. When will investment firms need to transaction report?
Transaction reporting refers to the obligation on investment firms to report trades no later than the close of the following working day to the relevant national competent authority, directly, through an ARM, or through a trading venue.
Trading venues, however, face an obligation to transaction report for trades performed on their venues by firms which fall outside the scope of MiFID II (non-MiFID firms), such as non-EEA firms and firms which are exempt from MiFID II. For more information on the MTS aproach to transaction reporting for non-MiFID firms please visit Reporting and Data.
6. Algorithmic trading: Algo IDs and Algo testing
Trading venues face a number of obligations in relation to algorithmic trading, including order record keeping (RTS 24), reporting transactions on their venues by non-MiFID firms (RTS 22), and systems and controls (RTS 7).
MTS provides a test environment as one of the facilities market participants may use to test their algorithms before deployment. Members will be required to self-certify to MTS that the algorithms they deploy have been appropriately tested with an explanation of the means of testing.
MTS will be required to associate algorithms associated with the investment decision or execution as part of its order record keeping and transaction reporting requirements. For more information on the MTS approach to algo testing and algo IDs please visit Trading Venue and Microstructure Requirements.
7. What are the Short and Long codes for Algo IDs and National IDs?
As mentioned above, trading venues are required to collect, store and, where relevant, report information about Algo IDs and National IDs for the purposes of order records keeping (RTS 24) and transactions reporting for non MiFID members (RTS 22).
In order to minimize the information which has to travel with the orders and the quotes in the market and to ensure appropriate security standards of confidential information, MTS intends developing a process by which member firms are required to register the relevant Algo ID and National ID codes (the so-called long codes) in the market and can then associate to each of them a short code, which is the actual information that will be attached to each order message of the market.
Algo ID and National ID long codes will have to comply with the MiFID II formatting requirements, while short codes are created and maintained by the member firms and will need not to be longer than a specific number of characters as set by the trading venue. For more information, please visit Trading Venue and Microstructure Requirements.
8. Best execution reports
Execution venues, defined in RTS 27 as trading venues (Regulated Markets, MTFs, and OTFs), systematic internalisers, market makers, and other liquidity providers are required under MiFID II Article 27 to publicly provide quarterly quality of execution reports free of charge. These will cover areas including price, costs, speed and likelihood of execution to assist firms in choosing venues for best execution purposes.
9. I am a firm not subject to MiFID II but member of a European venue, how am I impacted by the new rules?
Members of MTS trading venues which are not subject to MiFID II – including non-EEA firms and EEA firms which are exempt – will nonetheless be impacted by certain requirements of MiFID II, by virtue of being a member of a European Trading Venue. Among other things, Members will be required to provide specific information to the trading venue, including for the purposes of orders records keeping, transactions reporting and algo testing. The extent of the information required will vary on the trading capacity (dealing on own account, dealing as agent or matched principal) under which the firm will undertake trading activity on MTS markets.
10. What is the impact of MiFID II on my contractual relationship with MTS?
All onboarding documentation (including application to participate and the terms and conditions) will be updated to include and reflect new and additional requirements dictated by the new regulation and therefore participants will be asked to sign the new contractual documentation.