MiFID : Beyond Implementation Sofia, Bulgaria

Overview MiFID post-implementation MiFID reviews Further developments MiFID enforcement/application Impacts of MiFID Market changes MiFID reviews Non-equity transparency Commodity derivatives Other reports Further developments The international dimension Financial turmoil

MiFID Transposition checking Core Commission function (Level 4 Lamfalussy) First phase: completeness check Have the provisions been implemented? State of completeness check shown in the ‘Lamfalussy league table’ on COM’s website Second phase: quality check How have the provisions been implemented? We intend to consult with trade associations Ask them to identify known instances of inconsistent application or transposition Help us to focus on real, practical issues

Intended impacts of MiFID A catalyst for significant innovation and market structure changes Increase competition between trading venues and cross-border Increase trading volumes and financial information flows Will make full electronic trading more attractive Create deeper, more liquid integrated capital markets Lower costs for issuers and investors

Market changes so far Very encouraging A range of new trading venues and services have already been announced Trading: Project Turquoise, Chi-X, Equiduct, SmartPool, Plus Markets, etc… Existing exchange services upgraded (cheaper, faster) New trade/transaction reporting services : Markit Boat, Omgeo, ICMA TRAX2, LSE, Reuters, Deutsche Börse, etc… Other services for firms to assist in compliance/service delivery Consolidation among major exchanges picks up pace LSE-Borsa Italiana NYSE-Euronext Nasdaq-Dubai-OMX

Non-equities market transparency Detailed transparency provisions apply to shares only Trading venues (regulated markets, MTFs and systematic internalisers) Firms subject to post-trade obligations for OTC trades Pre-trade exemptions available e.g. crossing networks Delayed publication of post-trade information possible for large trades under a ‘sliding scale’ Article 65(1) MiFID – Commission to report on whether to extend beyond shares

Non-equities market transparency Report published 4 April No need to extend MiFID beyond shares Market best placed to address concerns re retail access to bond prices Self-regulatory solutions from ICMA and SIFMA COM will monitor developments

Commodities review – main issues Exemptions for non-investment firm commodities companies Articles 2.1.i, 2.1.k Parallel exemptions for commodities houses from Basel II rules Scope of Market Abuse Directive Third Energy Package (September 2007) Review of transparency for spot and derivatives Review of record-keeping for spot Reports due mid and end-2008

Commodities - issues at stake Level playing field Between businesses dealing in same instruments Between Member States (uneven transposition) Appropriate level of regulation for commodities business Prudential (less systemic risk) Conduct of business (little retail involvement) Benefit of greater transparency in energy?

Some early messages Early consensus on: Timetable Need for exemption for own-account hedging Need to avoid extending financial regulation to physical market (retain MiFID definitions of financial instruments) Timetable Mandates due mid-2008 Public hearing 25 September 2008 Report end-2008

Other MiFID reports Report Legal base Initial Date Transparency Extension L1 Art. 65.1 31/10/2007 Article 27 Mifid L1 Art. 65.2 31/10/2008 Consolidation of information L1 Art. 65.4 30/4/2008 Best Execution data L2 Dir. Art. 44.5 31/10/2008 Block Trades L2 Reg. Art. 40.3 31/10/2009 Definition of transaction criteria for liquid shares L2 Reg. Art. 40.1 At least every two years Tied agents L1 Art. 65.3 c) 30/4/2008 Telephone recording L2 Dir. 51 31/12/2009  New target date: one single report – mid 2010

International dimension Why ? Globalisation: trade, investment and capital movement are booming More efficient global allocation of capital Avoid spillover effects of legislations Promote EU regulatory model Support global expansion of EU FS industry Convergence towards international standards Have an offensive position in multilateral or bilateral negotiations

International dimension cont. How ? Informal regulatory dialogues : Commissioner and DG level With Min Fin, Central Banks and regulatory agencies US: Started in 2003 with SEC, FED and Treasury SOX, deregistration, reinsurance collateral Basel II, audit et accounting Japan et China : started in 2005 Russia et India : started in 2006

International dimension cont. Results US: Deregistration, accounting road map, Basel II, 1st step for audit oversight equivalence China : retail banking market opening, accounting convergence Japan: convergence between Japanese GAAP and IFRS Russia : approximation of EU legislation, preferential access for EU companies India : exchange of information, follow-up of FS liberalisation

Mutual recognition G7/G8, SEC have both raised this possibility We are strongly supportive, so long as our ‘red lines’ are maintained: Open and transparent criteria for granting of market access COM plays the leading role for EU EU States to grant market access only to firms/exchanges from comparably regulated jurisdictions EU rules apply to EU financial markets No regulatory spill-overs

Mutual recognition with the US Joint SEC/COM statement on 1/2/08 Issues to be clarified Mutual recognition process – allocation of responsibilities between COM, SEC, CESR Principles Scope (entities, products, investors) Mutual recognition in practice (MoUs)

Implications of financial instability for financial regulation Important to have a globally convergent approach to regulation Importance of lifetime financial education Risk transfers sometimes not effective More work needed on capital calibration for complex products and on banks’ ability to identify risk concentrations Role of credit ratings agencies

More information Commission MiFID web pages: tinyurl.com/yyulyz MiFID texts, transposition info, Q&A CESR MiFID databases: mifiddatabase.cesr.eu CESR MiFID Level 3 (guidance): tinyurl.com/2bj2oq

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