Thank you

    MiFID III:
    Back with a Vengeance

    Published: March 4, 2024

    As we reflect on the crisp winter of Christmas 2017, some of you may also still remember the intensity of preparing for the impending MiFID II compliance date of 3rd January 2018. Amidst the festive cheer and twinkling lights, the financial landscape was abuzz with meticulous planning and final adjustments, anticipating the regulatory upheaval that lay ahead.

    While others revelled in holiday festivities, our team were immersed in final preparation, navigating through the intricacies of regulatory requirements, diligently striving to meet the rigorous standards set forth by MiFID II and ready to move on with our lives.

    Until now…

    The European Securities and Markets Authority (ESMA) will be publishing final text in the EU Official Journal in Q1 2024, which looks to amend and refine their existing governance of financial markets under MiFID II / MiFIR. For lack of a better name, we are referring to these amendments as “MiFID III”, which I’m sure will be met with a mixture of excitement and apprehension across the industry. The expected compliance date is late 2025.

    Building upon its predecessors, MiFID III endeavours to rectify identified deficiencies, especially in areas like market surveillance, investor safeguards, and the oversight of algorithmic trading. It is anticipated to impose more rigorous obligations on market participants, including heightened transaction reporting requirements and enhanced scrutiny of high-frequency trading strategies.

    Additionally, it may extend its scope to encompass a broader range of financial instruments, emerging technologies such as distributed ledger technology and new financial entity types such as UCITS and AIFMs.

    Regulatory Timelines:

    Below, we share some more detailed insights on MiFID III to help you stay ahead

    Transaction Reporting:

    There will be a strengthening of reporting requirements, including the expansion of data fields and more granular reporting to regulatory authorities.

    Whilst details of new fields being introduced under MiFID III have not been published just yet, key aspects may include the following:

    • Introduction of new data fields
    • Harmonisation with global reporting standards
    • Introduction of the ‘Unique Product Identifier’ (UPI)
    • Additional identification data for both TR and Transparency
    • Removal of the short selling flag and pre-trade waivers

    Increased Market Transparency:

    MiFID III proposes to streamline and standardise non-equity reporting deferral periods for post-trade reports distributed to the public, aiming to improve efficiency and consistency in reporting practices.

    MiFIR’s mandate regarding ‘Reasonable Commercial Basis’ (RCB) data provision means market operators and investment firms operating a trading venue (TV) can expect enhanced clarity and consistency in the provision of market data. This in turn allows for fair access to market information for all stakeholders.

    Investor Protection:

    There will be a continued focus on investor protection measures, including the disclosure of costs and charges, suitability assessments, and product governance.

    Furthermore, enhanced regulatory data will be used to help keep investors informed of key events such as system outages or financial instrument suspensions / trading halts.

    The following regulatory data will need to be provided:

    • Status of system matching orders e.g., if a power outage occurs; and
    • Status of financial instruments e.g., suspensions or trading halts.

    There is also a proposal to ban payments for forwarding client orders for execution, prohibiting investment firms from receiving any payment for routing client orders to third parties for execution. This will help to mitigate any conflicts of interest and uphold integrity of client order handling process.

    Best Execution Reporting:

    MiFID III mandates investment firms to meticulously document and disclose the methodologies employed in executing client orders, to achieve optimal outcomes and will need to include the following:

    • Selection criteria for trading venues;
    • Order execution strategies; and
    • Execution process consideration such as price, cost, speed, execution likelihood.

    The European Commission has suggested permanently eliminating the obligation for ‘Trading Venues’ (TVs) and ‘Systematic Internalisers’ (SIs) to publish periodic best execution reports.

    Trading Obligation Changes:

    There will be increased control requirements for firms engaging in algorithmic and high-frequency trading, including risk management measures and more data fields to be reported.

    MiFID III brings in limitations to dark trading, triggering suspension of dark trading activities upon breach of the below thresholds for on-venue dark trading in an equity instrument:

    1. individuals must not exceed 4% of the total trading volume within the EU,
    2. along with an overarching EU-wide threshold of 8%.

    A new single volume cap will rely on the EU-wide threshold set at 7% in respect of the reference price waiver and not cover the negotiated trade waiver.

    Consolidated Tape Provider (CTP):

    One of the focuses of MiFID III is that a centralised database is established, known as a consolidated tape. This database should provide a comprehensive view on prices and volumes of equity and equity like financial instruments traded across multiple venues and thereby providing price transparency. 9 months after go-live, ESMA will open the application process for entities to become a CTP (Consolidated Tape Provider). ESMA is due to draft the technical standards in relation to the CTP selection and prepare the selection documents by December 2024.

    Client quandaries ahead!

    Like every regulatory change, MiFID III will pose challenges for many reasons. Below highlights some of these challenges that are anticipated:

    1. Compliance

    • Additional costs due to technology, training and additional compliance monitoring.
    • Implementation of new systems.
    • Hiring of professional with necessary skillset.
    • Smaller banks may face significant challenges due to smaller budgets.

    2. Data Management

    • MiFID III likely to introduce stricter requirements for data collection, storage and reporting.
    • Vast amounts of data requiring analysis.
    • Banks must ensure data accuracy, integrity and security.
    • Establish robust data governance frameworks.

    3. Regulatory Uncertainty

    • Uncertainty can manifest due to interpretation, implementation, deadlines and potential revisions.
    • Any delays in finalisation of regulatory standards, delays to existing rules and unforeseen regulatory developments can cause planning issues.

    4. Market Structure Changes

    • MiFID III drives significant market structure changes, impacting trading practices and product offerings.
    • Financial institutions need to adapt trading strategies, risk frameworks, and business models accordingly.

    Curious to know more?
    First Derivative is available to help

    As more is revealed about MiFID III over the coming months, First Derivative is eager to help you navigate your MiFID journey and provide the support and expertise to comprehend the complexities and challenges that this new version of the regulation will bring.

    Stop by today for a chat and let First Derivative help plan your MiFID III future!

    Contact us today

    Alison Sherry, Senior Business Analyst, Regulatory Solutions - First Derivative

    Alison Sherry
    Senior Business Analyst
    First Derivative – Regulatory Solutions

    First Derivative LinkedIn profile

    Alison Sherry, Senior Business Analyst, Regulatory Solutions - First Derivative

    Adam Thomas
    Senior Leadership Team
    First Derivative – Regulatory Solutions

    First Derivative LinkedIn profile


    More Insights

    Your rate of change

    Starts here