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Final preparations underway as MiFID deadline looms Back  
With the deadline for the implementation of the Markets in Financial Instruments Directive (MiFID) looming, Kevin O’Doherty looks at the preparations member states are putting in place to meet the November 30th D-day. He also looks at the effects of implementation for financial services companies with cross border interests, noting the good work of the Financial Regulator in its approach to MiFiD.
The Markets in Financial Instruments Directive (MiFID) is a strange beast. For a start, it is two Directives, not one – there’s the Directive itself [2004/39/EC] and an Implementing Directive [2006/73/EC], as well as an Implementing Regulation [1287/2006/EC] which has direct application and doesn’t require national transposition.

Status of national transpositions
The Commission published a further progress update on the transpositions into national law in early July. Ireland, Romania and the United Kingdom were the only three member states to meet the original transposition deadline. The difficulties of attempting to ensure timely and uniform pan-European legislation are becoming very apparent to all involved. While the staggered implementation process (possibly running right up to the very live date of the process, if not beyond) might allow the various national administrations to claim that they had played their part in the project, it has led to significant difficulties for financial services businesses operating on a cross-border basis as they attempt to define what is being asked of them, let alone implement suitable policies and procedures. While the majority of the requirements are well known and understood from the Directives, it is the nuances at national level as well as interpretations of general concepts that cause difficulty in implementation.

As a solution, financial institutions have been adopting the UK regulations as a default choice for their European procedures manuals, since the regulations are already strongly defined and the majority of pan-European businesses would have an operational presence in the City.

Notwithstanding Irish success in transposing the Directives by the initial deadline as statutory instruments, additional primary legislation will be required in order to create indictable criminal offences for MiFID breaches. The timing of this bill is currently uncertain.

National gold plating
Despite the ‘Maximum Harmonisation’ nature of the Directives, there is scope to seek the Commission’s permission to add national gold plating measures, where sufficient cause can be shown. Both Ireland and the United Kingdom have made such ‘Article 4’ requests. The Irish request is to retain the existing client money rules developed in the aftermath of the WR Murrough collapse. The rationale for this is that it didn’t make sense for the Irish industry to operate two different client money regimes depending on whether they were providing MiFID services (such as investment advice) or non-MiFID services (such as acting as a mortgage intermediary).

Unusually, given the Financial Regulator’s recent openness, it declined to make public the Article 4 request, despite freely admitting the request had been made and divulging the general nature of the submission. As the Financial Regulator is exempted from the Freedom of Information Act, such reluctance might have meant Ireland’s request to vary a key element of financial services law would have remained ‘secret’, had the European Commission not published the submission received on its website.

Implementation in Ireland
The Financial Regulator has taken its key role in implementing the Directive and assisting Irish industry in getting to grips with what is a very wide-reaching piece of legislation very seriously. The Financial Regulator has identified 14 separate areas and established teams inside the Financial Regulator with named contacts for each. This dedication and attention to detail is recognised and applauded.

Transaction reporting
One of the key concepts of MiFID is transaction reporting to the national regulator - recognition of the fragmentation of financial markets and a move away from old concepts of nationally-traded securities. In part, this is also a spur to create a single pan-European financial trading space unburdened by national exchange membership requirements. The idea is that an instrument could, regardless of domicile or listing location, be traded by two parties located anywhere in the European Union in any suitable forum.

In order to preserve the price discovery function currently provided by stock exchanges and recognised markets, the market-facing firms would report the transaction to their home country regulator. This regulator would then route the transaction information to the securities ‘home’ country for publication by that nation’s regulator on their website. The flexibility to trade anywhere would be complimented by the emergence of a single information portal containing details of all trades. Irish market-facing firms are being required to report their transactions as an XML file by close of business the day following the trade date.

Organisational requirements
The Financial Regulator has published MiFID and Non-MiFID versions of the Handbook for Investment and Stockbroking Firms. The regulatory architecture envisages financial services businesses being governed either by the Consumer Protection Code or by the MiFID Regulations. The Client Money Regulations have already been identified as an area where those two regimes do not line up exactly, and it is in this middle ground that practitioners expect the majority of future issues to arise.

The state of play
To borrow a local political expression, there’s a lot done, more to do. A lot of the infrastructure has been put in place, yet some remains worryingly absent given the closeness of the live date. There will inevitably be teething problems, but the Financial Regulator is to be congratulated for the hands-on manner in which they have tackled the project, to the extent of publishing FAQ documents with guidance for quite detailed scenarios. Lest MiFID soak up all the attention, let’s not forget that December 1st is also the deadline for adoption by industry of its sister directive, the Capital Requirements Directive, which is no less complex a document.

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