European Commission Adopts MiFID II and MiFIR Delegated Regulations
On June 13, the European Commission (Commission) adopted three delegated acts in relation to the amended and restated Markets in Financial Instruments Directive (MiFID II) and Markets in Financial Instruments Regulation (MiFIR). The delegated acts each take the form of a directly applicable regulation (together, Delegated Regulations). They cover: (1) the direct, substantial and foreseeable effect of derivative contracts in the European Union and the prevention of the evasion of rules and obligations (Derivatives Delegated Regulation); (2) requirements on market making agreements and schemes (Market Making Delegated Regulation); and (3) the volume cap mechanism and the provision of information for the purposes of transparency and other calculations (Volume Cap Delegated Regulation).
- Derivatives Delegated Regulation
MiFIR introduces a “trading obligation,” which broadly requires certain counterparties, as in the European Market Infrastructure Regulation, to only trade on regulated markets, multilateral trading facilities, organized trading facilities and/or third-country trading venues deemed equivalent. Under MiFIR, the trading obligation applies to transactions between in-scope EU entities and third-country entities (TCEs), where those TCEs would be caught by clearing obligations were they to be established in the European Union. The Derivatives Delegated Regulation extends the application of the “trading obligation” to transactions between TCEs and other TCEs, where those TCE’s would be caught by clearing obligations were they established in the European Union and where those contracts have a “direct, substantial and foreseeable effect in the EU” or where the obligation is necessary to prevent evasion of the rules and obligations. The Derivatives Delegated Regulation confirms that an over-the-counter (OTC) derivative contract will have a direct, substantial and foreseeable effect in the European Union where at least one TCE is guaranteed by an EU financial counterparty for an aggregate value of EUR 8 billion and where that guarantee is at least 5 percent of current total exposures in OTC derivative contracts of the EU financial counterparty issuing the guarantee.
- Market Making Delegated Regulation
The Market Making Delegated Regulation is made under MiFID II, and specifies requirements for firms conducting algorithmic trading as part of market making strategies (in addition to associated requirements for trading venues). The Market Making Delegated Regulation confirms when a market making agreement should be executed and its contents. It also sets out the exceptional circumstances where investment firms are not required to provide liquidity on a regular and predictable basis (including, for example, in situations of extreme volatility, war or industrial action, or disorderly trading conditions on a trading venue from delays or interruptions). It further specifies the requirement for trading venues to publish details of the market making schemes, names of the firms that it has entered into market making agreements with and the financial instruments covered, on their websites (among other things).
- Volume Cap Delegated Regulation
The Volume Cap Delegated Regulation is made under MiFIR and specifies requirements in relation to data requests from competent authorities to trading venues, approved publication arrangements (APAs) and consolidated tape providers (CTPs). This is to further allow competent authorities to make accurate calculations for pre- and post-trade transparency requirements, including, for example, to determine if certain classes of derivatives are “sufficiently liquid” for the trading obligation, and to identify firms as systematic internalisers. The Volume Cap Delegated Regulation specifies that trading venues, APAs and CTPs are required to respond to an “ad hoc” data request within four weeks of receipt (among other things).
As mentioned in previous updates, the European Council and European Parliament will consider the Delegated Regulations and, once formally approved, the Delegated Regulations will go into effect 20 days following their publication in the Official Journal of the European Union.