The MiFID II regulations which were expected to come in last Friday are now anticipated to be delayed for at least of 3 months as the regulator looks to work with trading venues to compile the data necessary to make the measure successful.
MiFID II an extensive piece of legislation. It’s an updated version of the Markets in Financial Instruments Directive and is intended to offer better protection for investors and bring further transparency into all asset classes: from equities to fixed income, exchange traded funds and foreign exchange.
When MiFID II comes in, dark pools will be looking at a twin volume cap. During a continuing 1 year period, only 4% of the total trading in an single stock can occur in any one dark pool. Simultaneously, trading of any stock across dark pools is capped to 8% of total volume. Violating each of these new rules means trading in that security is banned for the next six months.
Industry analysts have predicted that London will be predominantly hit by the caps as the majority of daily equity trading in Europe takes place in the UK. The effect of MiFID II will depend on the type of business you undertake and the structure of your fund. If you are a MiFID investment advisory firm the key areas of MiFID II which will be applicable to you are:
- Client classification: Pension schemes will not be routinely classified as professional clients and therefore will need to be changed to professional status;
- Client disclosures: Further admissions will have to be made to your clients, the offshore GP or manager.
- Product governance: New rules are being brought in in relation to product governance. These rules could mean further disclosures to your clients;
- Telephone taping: There is an exclusion to these new rules which will apply to PE fund managers. Nevertheless, these rules will still apply to an advisor.
- Inducements: There are further instructions on inducements, especially in relation to third party research.
- Knowledge and competence: MiFID II enforces requirements which will possibly necessitate further training and assessment;
- Remuneration: Firms will be required to have a compensation policy in place. These policies will not be as strict as those for fund managers although will entail modifications to your current policies.
When MiFID II comes into force you will have to update some of your policies, procedures and possibly agreements. Some of the new rules will be hard to put in to practice, so it will be vital to make sure that you take a fitting approach appropriate to the asset class as opposed to using non-tailored policies.
Managers or advisers who are currently fundraising or planning to begin fundraising in the close future must make sure that their fund documents and investment management/advisory agreements have captured the increased disclosure required. Client categorisation procedures must be restructured and policies around telephone recording should be developed for any relevant business.