Markets in Financial Instruments Directive II (Mifid II)

Who is creating the regulation?
European Commission

The objective
To move organised trading of financial instruments to well-regulated, multilateral platforms, and bring greater transparency for market participants. It is split into several areas, including:
    Organised trading facilities (OTFs)
    Mandatory venue trading
    Third-country access
    The transparency regime
    Commodity markets
    Algorithmic trading
    Product intervention
    Inducements

Who will it affect?
The biggest impact will be on banks, broker dealers, trading venues and the regulators themselves, but no one -; especially in the over-the-counter (OTC) space -; will remain untouched.

Steps for firms to take

• Complete a full analysis of the likely impact on the firm’s trading and agency operations, including of transparency.
• Look to the restrictions on third-country access.
• Prepare to publish trade reports through approved publication arrangements for all asset classes of Mifid II and much increased transaction reporting.
• Consider the impact of the new inducements and best-execution rules.

Timescale
Most likely the end of 2015 and early 2016. Watch for level 2 ESMA detailed standards.

Fourth Money Laundering Directive (MLD 4)

Who is creating the regulation?
European Commission

The objective
To strengthen customer due diligence and provide consistent, reliable information on the ownership and control of business entities, foreign/private financial institutions, and offshore companies and trusts.

Who will it affect?
Most financial and credit businesses, as well as law and accountancy firms. Bodies that have responsibilities as Anti-Money Laundering Supervisors (as set out in the UK’s Money Laundering Regulations 2007), such as HM Revenue & Customs, will also be covered.

Steps for firms to take

• Ensure that client due diligence and money-laundering measures will include all persons dealing in goods or providing services for cash payments of €7,500 or more.
• Take note of the impact on counter-terrorism funding and anti-money laundering regulation in the UK.

Timescale
Changes to UK law are likely to happen later in 2014. In the meantime, watch MLD 4 negotiations by the EU.

Foreign Account Tax Compliance Act (FATCA)

Who is creating the regulation?
US Internal Revenue Service

The objective
To shift the onus of tax reporting and compliance onto any company holding or trading US assets on behalf of others. There will be rigorous client-identification processes and those deemed not to be compliant will suffer 30% withholding tax.

Who will it affect?
Every person or entity that has any interest in US assets -; in capital value or income arising from them. Even firms with no US clients or investors will come under its remit.

Steps for firms to take

• To decide whether to register as foreign financial institutions and, if so, prepare to collect the extra necessary information from new clients from 1 July 2014.
• Those with any US links need to consider registering, and prepare for the US FATCA regime, including collecting greater information from clients and extra work in making returns under it.

Timescale
A staggered implementation, started in 2013. The cut-off date for the favourable pre-existing client treatment is now 1 July 2014.

Capital Requirements Directive IV(CRD IV)

Who is creating the regulation?
European Commission

The objective
To bring the regulatory standards on bank capital adequacy and liquidity of the Basel Committee on Banking Supervision into EU law.

Who will it affect?
Credit institutions and investment firms falling under Mifid II. Some Mifid investment firms carrying out agency activities are excluded.

Steps for firms to take

• Firms must meet the minimum requirement for Tier 1 capital, which is increased from 4% to 6%, and the minimum requirement for Common Equity Tier 1, which is increased from 2% to 4.5%.
• Prepare for a new default leverage ratio.
• Follow tough new liquidity requirements.

Timescale
CRD IV came into effect on 1 January 2014. Staggered implementation of requirements.

Alternative Investment Fund Managers Directive (AIFMD)

Who is creating the regulation?
European Commission

The objective
To create a harmonised EU-wide framework for monitoring and supervising risks posed by Alternative Investment Fund Managers (AIFMs), and for strengthening the internal market in alternative funds.

Who will it affect?
Most hedge fund and private equity managers who manage funds or have investors in the EU, if they are the AIFM of a particular fund or funds, and the funds themselves.

Steps for firms to take

• Alternative fund managers (and investors in their funds) will have extra burdens in respect of registration, responsible individuals, capital, systems and controls, fundraising and remuneration.
• Be aware of an EU passport that may be available to raise new funds.

Timescale
AIFMD came into force in July 2013. Long-established AIFMs have until 22 July 2014 to apply for authorisation by their regulator.

European Market Infrastructure Regulation (EMIR)

Who is creating the regulation?
European Securities and Markets Authority

The objective
To move liquid OTC derivatives from OTC to on-exchange. To improve the solvency of central counterparties (CCPs). Qualifying CCPs will be permitted to draw upon a default fund in certain circumstances. Clearing members and their buy-side clients will incur extra requirements and costs regarding accounts.

Who will it affect?
EU-based firms entering into OTC derivative contracts (and their non-EU counterparties). Some OTC derivative contracts between non-EU counterparties.

Steps for firms to take

• Relevant counterparties must ensure they meet the clearing, risk-mitigation and reporting obligations.
• CCPs must prepare for requirements on their own capital, and prepare for individual client segregation in their accounts.

Timescale
Came into force in 2012 with implementation completing in 2014.

Market Abuse Directive II (MAD II)

Who is creating the regulation?
European Commission

The objective
To expand the scope of the first directive to commodity derivatives and to create a new offence of attempted market manipulation – trying to manipulate the market without executing an order or placing a transaction. Also, to stop the manipulation of benchmarks, such as LIBOR.

Who will it affect?
All firms and individuals who participate in a regulated market, and financial instruments traded on a multilateral trading facility, OTF and OTC basis.

Steps for firms to take
Make further investments in systems, controls and ‘look-through’ processes. Consider automating transaction monitoring.

Timescale
Expected in 2015.

Client AssetsWho is creating the regulation?
Financial Conduct Authority (FCA)

The objective
To protect client money and expedite the resolution of payments if a financial institution collapses, even if legal rights are lost.

Who will it affect?
Any firm holding assets on behalf of clients, including banks and private wealth managers, or arranging this.

Steps for firms to take
Ensure the safety of client assets and appropriately account for them. New-form bank trust letters and their acknowledgement must be obtained with great diligence - even from third-country banks and money market funds.

Timescale
Following consultation, the FCA plans to publish a policy statement in the first half of 2014.
 

Recovery and Resolution Plans

Who is creating the regulation?
Prudential Regulation Authority (PRA)

The objective
To ensure any failure of a firm is orderly. This means it will be feasible to wind up the firm without severe systemic disruption and exposing taxpayers to loss.

Who will it affect?
Global and Domestic Systemically Important Banks, building societies and designated investment firms.

Steps for firms to take

• Maintain and develop resolution packs and recovery plans. Both must be lodged with the PRA.
• Be aware that the PRA may require simplification of group structure.

Timescale
The rules came into effect in January 2014. These may change according to the EU Bank Recovery and Resolution Directive, currently under negotiation.

Firms are busy with many more regulatory changes than these. Others include conduct risk, outsourcing, Dodd-Frank, the Financial Transaction Tax and Packaged Retail Investment Products. As great a challenge to firms is maintaining and extending normal compliance monitoring and record-keeping beyond high-to-medium risks. At least technology and increased compliance resources help in this. For more detailed regulatory information, see the CISI's Change; the regulatory update