FSA consults on MiFID rules for firms and markets

The Financial Services Authority (FSA) has today published a consultation paper on implementing the Markets in Financial Instruments Directive (MiFID) for FSA-regulated firms and markets.

MiFID is designed to foster competition and a level-playing field between Europe's trading venues for financial instruments, and to provide appropriate levels of protection for investors and consumers of investment services across Europe. It sets the initial authorisation conditions and ongoing regulatory requirements for investment firms, Regulated Markets (RMs) and Multilateral Trading Facilities (MTFs). It introduces pre- and post-trade transparency requirements for equity markets, and sets more extensive transaction reporting requirements. It also expands the range of investment services and financial instruments that firms can offer under a 'passport' between EU states.

In drawing up its proposals, the FSA has followed the pragmatic and proportionate approach set out in its Better Regulation Action Plan and the Joint Implementation Plan for MiFID, published with the Treasury in May 2006. The proposals only go beyond the wording of the Directive in areas where the Directive itself provides for this, and where necessary as supported by cost-benefit analysis, to enable the FSA to meet its objectives of protecting consumers and promoting clean markets.

Hector Sants, FSA Managing Director of Wholesale Business, said:

"This consultation paper is an important step towards introducing MiFID next year and follows extensive informal consultation with the industry on the key areas of change.

"We believe we have stuck to our commitment to minimise the burden on firms by adopting a proportionate approach to implementation."

The consultation paper is in three parts as follows:

• Part I explains the proposed changes to FSA rules, guidance or procedures arising from the implementation of MiFID requirements relating to the scope of UK regulation; the authorisation of investment firms and their passporting rights; the registration of tied agents; and the enforcement powers and regulatory cooperation obligations of competent authorities;
• Part II sets out the FSA's proposals for implementing the MiFID requirements on client assets, together with the prudential requirements and capital adequacy data requirements for MiFID firms that are exempt from the Capital Adequacy Directive; and
• Part III explains how the FSA intends to implement MiFID's provisions governing RMs and MTFs, where they are not already covered by proposed Treasury legislation. It also deals with pre- and post-trade transparency for transactions in shares admitted to trading on a RM and concluded either on RMs, MTFs or by investment firms trading outside an RM or an MTF, including those acting as systematic internalisers; and the MiFID provisions on transaction reporting.
  
  The more significant areas of change to existing FSA requirements arising from MiFID in areas covered by this consultation paper are:
  
• a tightening of the tied agents regime, such that agents will in future be restricted to a single investment firm principal for their business with all categories of client, and not solely, as now, with private clients;
• the replacement of the current opt-out from client money protection rules for professional clients with an alternative set of arrangements having broadly similar economic effects. Other amendments will make the client money regime more flexible for firms, particularly when performing reconciliations;
• the provision of an option for those UK firms that are exempt from the Capital Adequacy Directive of having capital or professional indemnity insurance (PII) or a combination of the two;
• the replacement of the current Alternative Trading Systems requirements with MiFID authorisation and compliance requirements for MTFs. MTFs will also be brought within the scope of the Capital Requirements Directive;
• the introduction of the MiFID pre- and post-trade transparency regime for transactions in shares admitted to trading on a RM, which will apply to deals done on RMs and MTFs, and to investment firms trading outside RMs and MTFs; and
• the proposed extension of transaction reporting to include commodity, interest rate, and foreign exchange derivatives contracts that are admitted to trading on RMs - in order to comply with the Directive - and other requirements, not expressly required by MiFID, in relation to the definition of a reportable transaction and the content of a transaction report.

The proposals in this paper apply principally to firms that fall within the scope of MiFID. In general, MiFID will apply to all firms currently subject to the Investment Services Directive, plus some firms providing investment advice or investment services related to commodity derivatives.

Broadly speaking, the types of firm likely to fall within MiFID scope include:

• retail banks;
• investment banks;
• portfolio managers (excluding firms acting as managers of collective investment schemes);
• stockbrokers and broker-dealers;
• many futures and options firms;
• corporate finance firms;
• wholesale market brokers;
• operators of RMs and MTFs;
• providers of custody services; and
• some commodities and venture capital firms.

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