The Markets in Financial Instruments Regulation (MiFIR) introduced transparency requirements for non-equity asset classes such as bonds and derivatives and introduced a derivatives trading obligation (DTO) requiring the most liquid derivatives to be traded on EU trading venues or equivalent non-EU venues. Similar requirements have been retained in the UK as part of the onshoring of EU law following the UK's exit from the EU.

Both the EU, through the European Commission's proposal for a regulation amending MiFIR (MiFIR2), and the UK, through HM Treasury's (HMT) Wholesale Markets Review (WMR), are considering changes to these requirements including:

Transparency requirements

• Scope: The WMR proposes to move away from the challenging concept of 'traded on a trading venue' (ToTV) to determine the scope of OTC derivatives subject to the UK transparency regime. The UK considers that a better test would be whether a transaction is centrally cleared. The UK is also considering whether the UK pre-trade transparency regime should be limited to certain types of trading systems (e.g., electronic order books and periodic auctions) and/or to certain asset classes. If these changes are pursued, this may mean that bespoke bilaterally executed trades fall outside the scope of UK pre-trade transparency requirements. In contrast, MiFIR2 does not propose any scoping changes to EU transparency requirements.
• The waiver regime for pre-trade transparency: MiFIR2 proposes to remove the waiver for actionable indications of interest that are above the 'size specific to the instrument' (SSTI) threshold. This is intended to reduce the current complexity of the waiver regime and ensure a level-playing field between different types of trading venues. Whilst the WMR notes that the UK waiver regime could be simplified, HMT will wait for industry feedback on the pre-trade transparency regime more broadly before consulting on specific proposals.
• The deferral regime for post-trade transparency: Both MiFIR2 and the WMR propose simplifying the current deferral regime for post-trade transparency. Whilst both propose to remove the deferral for transactions above the SSTI threshold, the WMR also proposes to remove the deferrals for package orders and exchange for physical transactions. MiFIR2 also seeks to harmonise and simplify the current EU regime which is complicated by national competent authority (NCA) discretions and the variety of deferrals and supplementary deferrals available. MiFIR2 will harmonize deferrals across the EU by providing for deferred publication of the price of transactions until the end of the trading day and the volume of transactions for up to two weeks (with additional deferrals available for sovereign debt). The WMR does not set out detailed changes to the UK deferral regime yet, but it does indicate that the large-in-scale and illiquid deferrals would be retained and that there will be comprehensive volume masking.

DTO

• Re-alignment of scope: Both the EU and the UK propose to formally re-align the counterparty scope of their DTOs with their derivative clearing obligations (CO), fixing an issue created by the EMIR Refit changes to the CO.
• Standalone power to suspend or modify the DTO: Whilst the UK intends to grant the FCA a permanent power to suspend or modify the DTO on a standalone basis, MiFIR2 envisage a narrower power for the Commission to suspend (but not modify) the DTO, at the request of an NCA, for certain investment firms acting as market-makers with non-EEA counterparties which do not have access to EU trading venues. The purpose of this narrower power is to mitigate the impact of overlapping DTOs. The FCA's power could potentially be invoked in a wider range of circumstances and may prove to be more flexible that the Commission's power.  

Assuming a quick, 15-month legislative process, MiFIR2 could become law in early 2023. The MiFIR2 proposals described above may be amended by the European Parliament and the Council during the legislative process. The timing of the changes proposed by the WMR is less clear as HMT has not yet published its final proposals. These will need to be implemented through a mixture of legislative amendments (requiring Parliamentary time) and changes to the FCA's rules / technical standards.

Author: Stephanie Peacock