MiFID II is the EU’s second Market in Financial Instruments Directive and MiFIR is the Market in Financial Instruments Regulation. MiFID’s objective is to harmonize investment services across the EU in order to increase competition and consumer protection. MiFID II came into effect in July 2014 and extends the scope of the first Directive into fixed income markets. MiFIR came into effect at the same time. The regulatory technical standards (RTS) and implementing technical standards (ITS) for MiFID II and MiFIR were implemented in 2018.
When MiFID II and MiFIR were published, it was unclear which provisions would apply to repo and other securities financing transactions (SFT). It has been argued that the authors of the legislation did not seem to be aware of the existence of repo. Some questions about the application of the legislation to repo still remain to be answered. At this stage, the sections of MiFID II and MiFIR relevant to repos would seem to be as followss:
Pre- and post-trade transparency (trade reporting) obligations under MiFIR Article 1
This requires trading venues and systematic internalizers (SI) to continuously publish current bid and offer prices, the depth of trading interest and of actionable indications of interest (requests for quotes), and data on executed trades in fixed income securities. However, an amendment to MiFIR in June 2017 exempted repos and other SFT.
Transaction reporting under MiFIR Article 26
There is a requirement to report each MiFID/MiFIR-regulated transaction in detail to the relevant regulatory bodies. However, MiFIR excludes transactions that are to be reported under the Securities Financing Transaction Regulation (SFTR). But, as SFTR does not require the reporting of repos transacted with the European System of Central Banks (ESCB), such central bank repos have to be reported under MiFID/MiFIR. This will present a challenge as the MiFID reporting template is not designed for repos.
Best execution reporting under MiFIR RTS Articles 27 and 28
Under RTS Article 27, execution venues are required to publish a wide range of relevant statistics on the quality of execution of client orders including price, costs, speed and likelihood of execution. Repos and other SFTs are exempted from this publication requirement but, as SFTs are subject to best execution rules, proof of best execution must still be collected for SFTs, even though it does not have to be reported.
Under RTS Article 28, investment firms are required to annually publish summaries of the volumes of each type of client order and quality of execution on their top five execution venues. Best execution data for repos and other SFTs does have to be reported.
Costs and charges disclosure under MiFID Article 24
Investment firms are required to report to each client the total execution costs charged for orders transacted on their behalf, whether the firm was acting as agent or principal, when it executed the order and an itemisation of costs. It is unclear how cost and charge disclosure will apply to repo and other SFTs.
Disclosure under MiFID Article 32
In a provision that mirrors the information and consent provisions applied by Article 15 of SFTR to the re-use of collateral, MiFID requires investment firms are required to highlight to clients the risks involved and the effect on the client’s assets of repos and other title transfer collateral arrangements.
Protection of client assets under MiFID Article 16
MiFID prohibits the use of repo and other title transfer collateral arrangements with retail clients, including local authorities.
There is also a requirement under MiFID Article 6 that investment firms should consider the appropriateness of repo and other title transfer collateral arrangements for non-retail clients.
Record-keeping under MiFID Article 16
MiFID requires firms to ‘maintain relevant data relating to all orders and all transactions in financial instruments which have been carried out, on own account and on behalf of a client’ for at least five years. Record-keeping requirements apply to repo.
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