MiFID & You –
The commodity trader’s guide to the EU’s Markets in Financial Instruments Directive
This article provides a framework under which trading companies can plan for compliance. It focuses specifically on MiFID II. However the framework is equally applicable to any regulation.
By Andy Williams
THE EUROPEAN UNION’S Markets in Financial Instruments Directive (MiFID I which came into effect in November 2007) aimed to increase the competitiveness of EU financial markets and to facilitate competition between traditional exchanges and alternative venues. It gave commodity trading companies a relatively easy ride – exemptions meant they remained unregulated. The forthcoming MiFID II, however, fundamentally alters the regulatory landscape and many commodity trading companies will now come under regulation. Trading companies need to act now to assess the impact of these changes and plan their response.
Do You Need to Worry About MiFID? In a nutshell, yes! MiFID II means that companies
which offer similar services to investment banks will be subject to the same rules. This applies to many of the activities of commodity trading companies, meaning that many will now come under greater regulatory scrutiny. The removal of three exemptions will bring many commodity trading companies within the framework: 1. If your company is a member or participant in a regulated market or a multilateral trading facility, then you will become regulated
2. If your company provides investment services in commodity derivatives to clients of your company’s “main business”, then you may no longer be exempt. Unless you can demonstrate that every derivatives trade that you enter into is a hedge trade, then you will be regulated. If you hedge on a portfolio basis, then you will probably be regulated.
3. Finally, the removal of the ‘Commodities Dealer Exemption’ means that companies whose main business is trading commodities or commodity derivatives will be regulated under MiFID II.
When Will it Happen? The final version of MiFID II is scheduled to be published in early 2013 followed by detailed rules later in 2013. Implementation is scheduled to start
in the latter part of 2013 with full compliance required sometime in 2014. However, these timescales are very optimistic and it is quite likely that the final version will be delayed until mid- 2013. There is significant political will within the various European agencies to make this happen, strengthened by a G20 commitment to introduce
“MiFID II means that companies which offer similar services to investment banks will be subject to the same rules”
some of the changes by the end of 2012. Trading companies should assume that it is happening and that it is imminent.
Other Changes to Worry About? Under the existing MiFID regime there is a
direct link between MiFID compliance and the Capital Requirements Directive (CRD) – companies currently regulated under MiFID have to comply with CRD including all of the financial, process and systems burden CRD entails. As currently drafted, CRD IV will apply to all MiFID II regulated organisations.
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