INVESTMENT FIRMS QUARTERLY LEGAL AND REGULATORY UPDATE
MiFID II - Irish Developments
(i) Markets in Financial Instruments Act 2018
On 29 October 2018, the Markets in Financial Instruments Act 2018 (the "2018 Act") was enacted. The 2018 Act sets out the maximum sanctions available for certain offences under the European Union (Markets in Financial Instruments) Regulations 2017 (as amended) (the "MiFID Regulations") where a person is convicted on indictment. The sanctions set out in the 2018 Act are higher than those provided for under the European Communities Act 1972 (as amended) (the "1972 Act").
Summary proceedings for offences under the MiFID Regulations may be brought and prosecuted by the Central Bank, whereas the Director of Public Prosecutions is responsible for prosecuting indictable offences.
Firms should be aware that breaches of the MiFID Regulations also fall within the remit of the Central Bank's Administrative Sanctions Procedure and that administrative sanctions can also be applied to entities which are not "regulated financial service providers" in certain circumstances.
The 1972 Act provides that where an offence is committed under regulations made pursuant to the 1972 Act, the maximum sanctions available on conviction on indictment shall be a fine of €500,000 and a prison term of up to three years.
The 2018 Act, lists various provisions of the MiFID Regulations, a contravention of which will constitute a "relevant offence". The 2018 Act states that a person who is guilty of a "relevant offence" shall be liable, on conviction on indictment, to a fine not exceeding €10 million and/or to a prison term not exceeding ten years. This is a continuation of the criminal sanctions regime that existed in Irish law under the MiFID I regime. The maximum available sanctions for a conviction on indictment for a "relevant offence" are therefore significantly greater than the maximum sanctions for indictment, provided for under the 1972 Act.
The 2018 Act also seeks to make an amendment to the definition of "long term contract" under the Financial Services and Pensions Ombudsman Act 2017, as well as seeking to amend certain definitions provided for under the Credit Reporting Act 2013.
A copy of the 2018 Act can be found here.
For further information regarding the 'Markets in Financial Instruments Act 2018 - sanctions specified for certain offences under the MiFID Regulations' the full Dillon Eustace article can be accessed here.
MiFID II - European Developments
(i) ESMA updates Q&A on Commodity Derivatives
On 2 October 2018, ESMA published an updated version of its questions and answers publication "on MiFID II and MiFIR commodity derivatives topics" ("Q&A on Commodity Derivatives"). The updates to the Q&A on Commodity Derivatives are as follows:
- Question ID: Part 2 – Question 18 (as updated on 2 October 2018) which relates to whether position limits also apply to positions in contracts that have been entered into prior to 3 January 2018 and are traded on a trading venue, including an organised trading facility ("OTF"), or are economically equivalent over the counter ("OTC") contracts to those traded on a trading venue;
- Question ID: Part 3 – Question 3 (as modified on 2 October 2018) which asks can the parent undertaking notify its national competent authority ("NCA") for the whole group or do the subsidiary undertakings also have to notify their local NCA;
- Question ID: Part 3 – Question 10 (as modified on 2 October 2018) which asks should the denominator in the capital test under Article 3(9) of the Delegated Regulation (EU) 2017/592 ("RTS 20") be calculated using consolidated accounts and whether firms should use capital on a worldwide basis or just capital employed within the European Union ("EU");
- Question ID: Part 3 – Question 13 (as modified on 2 October 2018) this question has now been removed; and
- Question ID: Part 4 – Question 22 (as updated on 2 October 2018) asks what types of firm fall within each of the Implementing Regulation (EU) 2017/1093 ("ITS 4") categories for the purposes of the weekly Commitment of Trader reports.
A copy of the updated Q&A on Commodity Derivatives can be accessed here.
(ii) ESMA publish Opinion on Calculating Market Size of ancillary activity under MiFID II
On 2 October 2018, ESMA published an opinion on calculating the overall market trading activity under MiFID II (the "Opinion"). The Opinion is a response to a request from NCAs and market participants for guidance from ESMA on how to determine the market size figures to ensure the correct application of Article 2(3) of RTS 20.
By way of background RTS 20 sets out the criteria to determine whether an activity is ancillary under Article 2(1)(j) of the MiFID II Directive (2014/65/EU) (the "MiFID II Directive"), which provides for an exemption for persons dealing on own account or providing investment services in specific areas, only insofar as the activity which they are engaging in, is ancillary to their main business.
The Opinion provides an estimate of the market size of different commodity derivatives such as metals, oil and coal, as well as emission allowances by using data collected from trading venues and data reported to trade repositories.
A copy of the Opinion can be found here.
(iii) ESMA publishes speech on MiFID II Implementation and preparing for Brexit
On 3 October 2018, ESMA published a speech given by its Chair, Stephen Maijoor, relating to Brexit preparations and the implementation of MiFID II. Some of the following points were discussed:
- The importance of a coordinated and consistent EU system for third country trading venues under MiFID II and the methods which could best achieve this;
- An overview of the changes brought about by MiFID II, specifically in relation to secondary markets, in terms of transparency, the double volume cap, trading obligation derivatives and systematic internalisers;
- The fact that ESMA is working to identify the effects on the EU financial markets of a no-deal Brexit arising from the impact of MiFID II calculations performed at the EU level and also is seeking to find the most efficient way to limit the potential impact on the markets; and
- In terms of Brexit, the efficient introduction of regulatory and supervisory standards to the relocation of undertakings and their activities from the UK to the rest of the EU was looked at, as was the need to improve third country regimes in securities markets legislation. The consequences of a no-deal Brexit was also discussed. It was pointed out that ESMA had in July of this year reminded UK-based regulated entities of the importance of the timely submission of authorisation requests to be able to continue providing services in the EU.
A copy of the speech can be viewed here.
(iv) ESMA updates Q&A on Investor Protection
On 3 October 2018, ESMA published an updated version of its questions and answers publication "on MiFID II and MiFIR investor protection and intermediaries topics" ("Q&A on Investor Protection"). The updates to the Q&A on Investor Protection are as follows:
- Question ID: Part 1 – Question 19 (as updated on 3 October 2018) which relates to cases where investment firms use the request for quote ("RFQ") system of a trading venue and deals with where an investment firm agrees to trade via such systems, and asks should the investment firm identify the counterparty with whom the transaction was agreed with or the trading venue used to ultimately conclude the transaction for its Delegated Regulation (EU) 2017/576 ("RTS 28") reporting; and
- Question ID: Part 5 – Question 2 (as updated on 3 October 2018) which relates to the circumstances in which an investment firm can hold itself out as providing investment advice on an independent basis.
A copy of the updated Q&A on Investor Protection can be accessed here.
(v) ESMA Chair highlights progress on MiFID II implementation at ECON hearing
On 8 October 2018, Steven Maijoor the Chair of ESMA delivered a statement to the Economic & Monetary Affair Committee ("ECON") at the European Parliament as part of the annual hearing of the Chairs of the three European Supervisory Authorities ("ESAs"). In his speech, Mr. Maijoor focused on the work of ESMA in progressing the implementation of MiFID II, which has included:
- Providing around 400 opinions to NCAs on both pre-trade transparency waivers and position limits in commodity contracts;
- The assignment of new product intervention powers to ESMA regarding Binary Options and Contracts for Differences ("CFDs") as well as ESMAs overall contribution to investor protection; and
- Working on preparing for the withdrawal of the United Kingdom from the EU – as was set out in the Mr. Maijoor's speech, ESMA as the supervisor of Credit Rating Agencies and Trade Repositories in the EU, with a number of them headquartered in London, has required appropriate contingency planning be undertaken by the relevant individual supervised entities in order that they meet all requirements in case of a no deal Brexit by the end of March 2019.
A copy of the speech can be accessed here.
(vi) ESMA publishes decisions on Assessments of Third Country Trading Venues under MiFID II
On 11 October 2018, ESMA issued two decisions made by the Board of Supervisors in relation to the delegation to the ESMA Chair of assessments of third country trading venues.
These two decisions are listed below:
- Decision on the assessment regarding third country trading venues for the purposes of Articles 20 and 21 of MiFIR; and
- Decision on the assessment regarding third country trading venues for the purposes of Article 57(4) of the MiFID II Directive.
The decisions relate specifically to how the assessment of third country trading venues for the purposes of these provisions are to take place. The decisions also lay down specific criteria that the Chair of ESMA will use for assessing whether to consider a third-country entity as a trading venue for the purpose of the relevant provisions set out in MiFIR and the MiFID II Directive. Please note, however, that the assessment of controversial assessments of third country trading venues will remain with ESMA's Board of Supervisors.
(vii) Contact points of National Supervisory Authorities for communication in the MiFID II framework on Supervisory Cooperation, Authorisation, Acquisitions and Passporting
On 15 October 2018, ESMA published a list of the contact points of national competent authorities ("NCAs") for communication in the MiFID II framework on supervisory cooperation, authorisation, acquisitions and passporting (the "List"). The List provides information on contact points to facilitate communication on the following topics:
- Cooperation and exchange of information between NCAs;
- Consultation of other competent authorities prior to the authorisation of an investment firm;
- The consultation process between the relevant competent authorities in relation to a proposed acquisition of a qualifying holding in an investment firm; and
- Passporting of investment services.
The List provides that the relevant information relating to the NCAs which is set out in Annex 1 of the document, will be updated by ESMA to reflect any changes made.
A copy of the List can be accessed here.
In order to ensure that the use of waivers from pre-trade transparency does not unduly harm price formation, MiFIR introduces, in Article 5, the double volume cap mechanism that caps the amount of trading as measured by the volume, carried out under:
Systems matching orders based on a trading methodology by which the price is determined in accordance with a reference price; and
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.