Proposed Modifications to the Financial Markets Act: Transposition of MiFID II and Implementation of MiFIR

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The MFSA has issued a circular declaring that a new framework has been formulated which strives to strengthen the transparency and to improve the functioning of the internal market for financial instruments. Such framework provides a more harmonised and coherent set of financial regulation. Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (“MiFID”) was partly recast as “MiFIR”/“the Regulation” and partly as “MiFID II”/“the Directive”. These two were published in the Official Journal of the European Union on 12th of June of 2014.

Together, both these legal instruments will form the legal framework governing the requirements applicable to investment firms, regulated markets, data reporting services providers and third country firms providing investment services or activities in the Union. MiFIR and MiFID II should thus be considered in conjunction with each other.

MiFIR establishes, inter alia, uniform regulations in relation to:

  1.  Disclosure of trade data to the public;
  2.  Reporting of transactions to the competent authorities;
  3.  Trading of derivatives on organised venues;
  4.  Non-discriminatory access to clearing and non-discriminatory access to trading in benchmarks;
  5.  Product intervention powers of competent authorities, the European Securities and Markets Authority (“ESMA”) and the European Banking Authority (“EBA”) and powers of ESMA on position management controls and position limits; and
  6.  Provision of investment services or activities by third country firms following an applicable equivalence decision by the Commission with or without the establishment of a branch.

 

Furthermore it should be noted that MiFIR also amends Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories.

Proposed Amendments to Legislation

  • The relevant definitions put forward in MiFIR will be transposed into the Financial Markets Act (“FMA”), including, inter alia:  ‘commodity derivatives’, ‘dealing on own account’, ‘home Member State’, ‘host Member State’, ‘management body’, ‘market maker’, ‘multilateral trading facility’ (‘MTF’), ‘organised trading facility’, ‘OTF’ ‘SME Growth Market’, ‘SME’ and ‘trading venue’. The definitions of ‘market operator’, ‘multilateral system’ and ‘regulated market’ shall be amended to reflect the definitions prescribed in MiFID II.
  • The Malta Financial Services Authority (“MFSA”) will be identified as the competent authority for the purposes of the Regulation and it shall exercise all the functions, obligations and powers and shall satisfy all the requirements imposed on competent authorities by MiFIR.
  • It is being proposed that the Financial Markets Act (Transparency) Regulations, 2007 be revoked since their subject matter is now being catered for by MiFIR, which is directly applicable.

 

A number of requirements have also been established in MiFID II. These are in relation to:

  1. Authorisation and operating conditions for investment firms;
  2. Provision of investment services or activities by third-country firms through the establishment of a branch;
  3. Authorisation and operation of regulated markets;
  4. Authorisation and operation of data reporting services providers; and
  5. Supervision, cooperation and enforcement by competent authorities.

 

In line with Article 47(2) of the Directive, it is being proposed that a new article disallowing market operators from executing client orders against proprietary capital, or engaging in matched principal trading on any of the regulated markets they operate, is added to the FMA.

As per the correlation table in Annex IV to MIFID II, Article 48 is a new addition to the MiFID regime. In this light, it is being proposed that a new article will establish certain requirements for regulated markets. These requirements are essential in order to, inter alia:

  • Have in place effective systems, procedures and arrangements which ensure continuity of its services in cases where there is any failure of its trading systems
  • Have procedures and arrangements to reject orders that exceed pre-determined volume and price thresholds or are clearly erroneous
  • Have the ability to temporarily halt or constrain trading if there is a significant price movement in a financial instrument on that market or a related market during a short period and, in exceptional cases, to be able to cancel, vary or correct any transaction;
  • Ensure that co-location services and fee structures are transparent, fair and non-discriminatory

 

Other proposals which have been brought forward include that:

  • The FMA requires regulated markets to adopt tick size regimes in shares, depositary receipts, exchange-traded funds, certificates and other similar financial instruments and in any other financial instrument for which regulatory technical standards are developed;
  • The FMA requires that all trading venues synchronise the business clocks they use to record the date and time of any reportable event; and
  • The market operator regularly communicates the list of the members of participants of the regulated market to the competent authority of the regulated market.
  • Article 32 (1) of the FMA is extended to include any data reporting services provider that appears to be in possession of relevant information.
  • A number of sub-articles are added to Article 37 of the FMA to provide further for instances where the MFSA would be obliged to cooperate with other competent authorities and/or ESMA.
  • A new sub-article empowering the MFSA to conclude cooperation agreements with third country authorities in certain circumstances is being proposed.
  • A new article, granting the possibility to the competent authority to refer situations to ESMA where a request relating to either [i] the carrying out of a supervisory activity, on-the-spot verification, or an investigation; or [ii] to exchange information has not been acted upon within reasonable time or has been rejected.
  • In cases where a market operator suspends or removes a financial instrument from trading, any derivatives shall likewise be suspended or removed.

 

Furthermore, it is being proposed that the competent authority shall require other regulated markets, MTFs, OTFs and systematic internalisers which fall under its jurisdiction and trade the same financial instrument or derivatives thereof to also suspend or remove that financial instrument or derivative instrument from trading, except where such suspension or removal could cause significant damage to the interests of investors or the orderly functioning of the market.

Where the provisions of MiFIR and MiFID are infringed, a distinction must be made between natural persons and legal persons. In the case of natural persons, the maximum administrative fines are increased to €5,000,000 while in the case of legal persons, they are either increased to €5,000,000 or they are given an administrative fine of up to 10% of the total annual turnover of the legal person according to the last available accounts approved by the management body. Where the benefit for the infringement can be ascertained, the competent authority shall impose an administrative fine of at least twice the amount of the benefit derived from the infringement even if it exceeds the maximum amounts mentioned above.

The proposed amendments also set out:

  • A new Part VIII addressing SME Growth Markets as well as new regulations providing for access to CCPs are being proposed. The Schedule (Regulation 3) Authorisation requirements will be brought in line with the MiFID II provisions which delineate the functions and obligations of the management body of a regulated market. The management body shall be required to possess adequate collective knowledge, skills and experience to be able to understand the market operator’s activities, including the main risks and market operators shall be obliged to devote adequate human and financial resources to the induction and training of members of this body.
  • An obligation of market operators which are significant in terms of their size, internal organisation and the nature, scope and complexity of their activities to establish a nomination committee composed of members of the management body who do not perform any executive function in the market operator concerned. The functions of the nomination committee will also be set out.
  • A new obligation for competent authorities to establish proportionate cooperation arrangements is added to the European Rights for Regulated Markets Regulations.
  • New regulations for data reporting services. Data reporting services shall include the operation of an approved publication arrangement (“APA”), consolidated tape provider (“CTP”) or approved reporting mechanism (“ARM”). The authorisation and organisational requirements for data reporting services providers shall be set out in this new Legal Notice.
  • New regulations on position limits and position management controls in commodity derivatives and reporting regulations.
  • On the 23rd December, 2015, a public consultation on guidelines regarding the MiFIR was launched by the European Securities and Markets Authority (ESMA). This consultation paper seeks stakeholders’ feedback on future guidance vis-à-vis (i) transaction reporting, (ii) reference data, (iii) order record keeping and (iv) clock synchronisation.

 

The transposition deadline for MiFID II has been set to 3rd July 2016 while the MiFIR shall be directly applicable in Malta and in all EU member States on 3rd January, 2017, the corollary to this being that certain amendments are being proposed to local legislation. Whilst specific provisions of MiFIR are already directly enforceable, a number of other articles are yet to come into effect or will only enter into force following the adoption of Delegated Acts by the European Commission.