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MiFID II

The Markets in Financial Instruments Directive (MiFID II) and Markets in Financial Instruments Regulation (MiFIR)

The LME and LME Clear have established a joint  programme to manage the changes across both businesses enabling compliance with MiFID II. This change programme is expected to affect many parts of our market from trading and matching through to clearing and regulatory reporting. LME Members are offered the opportunity to engage in our ongoing series of Town Hall meetings outlining these changes.

Most of the obligations contained in MiFID II and MiFIR will take effect on 3 January 2017. The Directive and the Regulation, commonly referred to as the “Level 1” texts, are supported by Regulatory and Implementing Technical Standards (“Level 2”) and Rules, Guidance and Q&A from the European Securities & Markets Authority (“ESMA”) and National Competent Authorities, including the UK’s Financial Conduct Authority (“FCA”) (“Level 3”). These are expected to be formulated on the following approximate timeline:

Level 1: Directive & Regulation: Finalised and published 17 January 2014
Level 2: Regulatory & Implementing Technical Standards: To commission from September to December 2015
Level 3: Rules, Guidelines and Q&A from ESMA and FCA during 2016

Introduction & application
The Markets in Financial Instruments Directive (MiFID) currently governs the European financial markets. Its second iteration, MiFID II, will draw a greater range of firms within its reach – including many in the metals industry, such as commodity traders.  Many such firms will not be subject to authorisation under the existing legislation, but may now be required to obtain authorisation under MiFID II.  MiFID II is designed to reduce systemic risk in all financial markets by implementing a number of transparency measures, as well as improving investor protection and controls on trading venues such as the LME. The LME has begun an implementation programme for MiFID II, which is focussed on minimising disruption to core functionalities for its members. The new rules both expand the scope of “MiFID business” to capture many new markets in the EU and reduce exemptions that firms were previously able to rely on.  For example, firms undertaking proprietary trading in commodity derivatives were previously able to rely on an exemption under MiFID I, however this has been removed under MiFID II. This could bring many proprietary trading commodity firms within the regulation’s remit.

MiFID II retains exemptions for non-financial business trading for risk management purposes. However, the scope of the exemption has been narrowed such that firms may engage in commodities trading or investment services only where it is ancillary to the main business. MiFID II will apply a quantitative methodology to determine whether trading is “ancillary”. This will be determined as a percentage of group trading and overall market activity of the relevant asset class. Firms will be obliged to notify EU member state regulators annually that they are claiming an exemption, and regulators will ultimately determine whether this is permissible. In addition, where firms are able to continue to benefit from an exemption there may still be situations where the products they are trading come under the new legislation. 

Firms that are currently exempt from the scope of regulation should begin to consider how they will be affected by these changes and, where appropriate, begin planning for prospective authorisation.

Resources
 View MiFID II Level I
 View MiFIR Level I
 View RTS Level II
 View FCA MiFID II website 
 Download the latest LME & LME Clear Town Hall slides

If you have additional questions about MIFID implementation please email us. For all other regulatory change related questions please contact our Head of Regulatory Strategy and Government Affairs.