Esma Releases Mifid II Implementing Rules

Weighing in at a combined 1,611 pages, the three documents represent the next phase in the largest structural overhaul of European securities markets.

Esma was mandated to provide this guidance to the European Commission six months after Mifid II/Mifir came into force on July 2, 2014. The documents aim to provide practical implementations for the rules, which were agreed earlier this year by European Union political authorities.

While all parties are still digesting the document, Esma says that key proposals fall under a number of areas.

These include transparency requirements for derivatives, bonds, structured products and other non-equity instruments.

Once these provisions enter into force, market participants will be obligated to trade derivatives on Mifid-compliant venues, such as regulated markets, multilateral trading facilities, or organized trading facilities. Commodity derivatives will also be subject to position limits and reporting requirements.

Access to central counterparties (CCPs) is included in the release, along with trading venues and benchmarks. Requirements for a consolidated tape, along with associated areas have also been included.

Investment firms that engage in high-frequency trading (HFT) have also been given "strict organizational requirements" in the text, with venues also subject to the obligations.

Esma makes it clear that there is a distinct difference between algorithmic trading and HFT, and goes into some detail regarding how it identifies firms using HFT, saying that initially, identification should be based only on proprietary order flow.

Finally, out of the key pillars, there will be a trading obligation and a double volume-cap mechanism for shares and equity-like instruments.

The texts also include substantial sections dedicated to investor protection, covering areas such as research and best execution.

"Today's implementing rules on both secondary markets and investor protection issues reflect Esma's desire to achieve the best outcome for market users and investors, taking into account the extensive submissions received from our stakeholders," says Steven Maijoor, chair of Esma. "The advice now goes to the European Commission to use in preparation of its delegated legislation, while our technical standards are open for a second round of consultation."

The implementing rules can be found here, while the two parts of the consultation can be found here.

Further analysis on WatersTechnology.com will appear over the coming days and in the New Year.