In the past decade, the volume of new EU financial regulation has come to be measured in acronyms. One of the newest and most significant additions – to be implemented by 3 January by financial firms – is the monumental MiFID II, which recasts the Markets in Financial Instruments Directive (in force since 2007).

The EU legal framework for financial markets comes in the shape of directives, regulations and ‘soft law’ instruments, and is based on global standards. Following the financial crisis, the primary regulatory objective of creating a single market for financial services was superseded by the need to ensure financial stability, and safeguard investors and depositors, as agreed at the G20 Washington DC summit in 2008.

Post-crisis EU reforms derive from international standards developed by the Basel Committee on Banking Supervision, the International Organization of Securities Commissions and the Financial Stability Board. Among them are the Capital Requirements Directive IV (CRD IV) and the Capital Requirements Regulation (CRR); the Alternative Investment Managers Directive (AIFMD); and the European Markets and Infrastructure Regulation (EMIR).

Swelling the list of recent EU-sponsored acronyms are, among others, the BRRD (to avoid the bailout of banks); CSDR (tightening the regulation and supervision of central securities depositories); PRIIPs (to protect retail investors); PSD2 (for payment services); and GDPR (for data protection).

Under the ‘Lamfalussy process’, European financial regulation is developed in four successive phases. First come the directives and regulations, then the technical standards developed by the European Commission in cooperation with the relevant European supervisory authority – the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA). In the third phase, authorities issue ‘soft law instruments’, such as guidelines, recommendations and Q&As to foster cooperation among national authorities. Fourth and last comes commission law enforcement.

The glut of regulation and the complex implementation process put lawyers centre-stage. Take ESMA, which develops regulatory technical standards (RTS) and implements technical standards (ITS) – detailing what the requirements are, and how companies subject to the regulations are expected to comply with them. It then publishes Q&As to tackle any areas of uncertainty. Simon Puleston Jones, head of Europe at the Futures Industry Association (FIA), says: ‘[ESMA] is just not able to answer every question that is out there and that’s where lawyers in the City and elsewhere come in. [Financial] firms that are subject to these regulations have no choice but to implement them, and to use their best efforts to be 100%-compliant on the first day those rules go live.’

MiFID II and friends

Of all the new financial legislation coming in from the EU, securities and derivatives markets reforms are generating the most instructions for regulatory lawyers.

Since the fall of Lehman, global regulators have pushed for tighter regulation of the complex market for derivatives that contributed to the 2008 crisis.

Directive MiFID II and MiFIR – Regulation on Markets in Financial Instruments – came into force in June 2014 to revise the Markets in Financial Instruments Directive. Their initial application date of 3 January 2017 was deferred by one year due to the monumental implementation task. MiFID II is much broader in scope than its predecessor, covering equities, futures, derivatives, currencies and commodities. It moves a significant part of over-the-counter (OTC) trading on to regulated platforms and affects all market players, including banks, traders, pension funds, fund managers, brokers and exchanges.

The new rules follow another major piece of EU law, which implements various G20 commitments to reform OTC derivatives markets in an effort to promote greater stability and transparency. This is EMIR, which came into effect in March 2013, laying down the rules on OTC derivatives, central counterparties (CCPs) (also known as clearing houses) and trade repositories.

‘EMIR is the bedrock European regulation for what we do in terms of swaps clearing, and it also imposes obligations on reporting,’ Puleston Jones says. Under EMIR, all standardised OTC derivatives contracts must be centrally cleared through CCPs. Detailed information on each derivative contract has to be reported to trade repositories (central data centres for collecting and maintaining the records of derivatives) and made available to supervisory authorities.

Puleston Jones explains: ‘[MiFID ll] is focused on everything, from the creation of a trade, to submitting an order for a trade on to an exchange, all the way through to the clearing of that trade on a clearing house. And the difference between EMIR and MiFID II/MiFIR is that EMIR is predominantly looking at swaps, whereas MiFID II/MiFIR is looking at an enormous list of financial instruments.’

Hannah Meakin, a partner at Norton Rose Fulbright, says: ‘Implementation has certainly been very challenging.’ She has spent more than half of the past six months advising financial firms on the new EU rules.

MiFID II and MiFIR introduce a third category of ‘trading venue’ – the organised trading facility (OTF), alongside regulated markets (RMs) and multilateral trading facilities (MTFs).

Clients need to decide whether they need to register as an MTF, OTF, or a ‘systematic internaliser’, an investment firm that executes client orders outside a trading venue ‘on an organised, frequent, systematic and substantial basis’. A systematic internaliser will have transparency obligations before undertaking trading under MiFID II/MiFIR.

But because of the complex interdependence between financial market participants, Meakin says: ‘It’s a little bit catch-22. In order to really understand [where you fit in] you have to understand what those with whom you deal are doing, and how they are going to be affected by MiFID II.’

Mathew Keshav Lewis, co-head of global banking practice at Axiom, a technology-based provider of legal services, says there are ‘huge efforts in technology and operational changes to ensure compliance’. He adds: ‘There is a material amount of client repapering required, particularly to terms of business, and about 20 other documents exchanged between deals and their clients to support a broad mix of transaction activity.’

Azad Ali, a financial services regulatory partner at Fieldfisher in London, has been advising on commodity derivatives markets related to MiFID II. ‘I have been acting for currently unregulated commodity houses that have to navigate the recast regulatory perimeter, which determines whether they are within the scope of MiFID II or not, as well as other aspects of MiFID II.’ That includes advice on the new ‘position limits’ regime, which imposes mandatory restriction across the EU on the size of commercial trading of commodities derivatives; ESMA’s new ‘position management’ powers (to request all relevant information about the size and purpose of a position or exposure entered into via a derivative); and the recast ‘best execution’ regime, requiring firms carrying on investment business to obtain the best possible result for their clients.

One of the most high-profile requirements of MiFID II has been the unbundling of research – the cost of analyst research produced by investment banks has until now been part of brokers’ fees and commissions. ‘That whole research industry is undergoing quite significant change,’ Ali says. ‘Effectively, research has to be carved out [and] siloed into a standalone business line.’

Andrew Procter, a partner in the financial services regulation team of Herbert Smith Freehills, argues that product governance requirements under MiFID II for both ‘manufacturers’ (firms which create, develop and issue investment products) and ‘distributors’ (those which offer or recommend them to clients), including how properly to assess target markets, ‘will make the biggest difference’ in the longer term. The new requirements ‘could quite radically change the cost of distribution and the risks of manufacture and distribution’, Procter says.

Meinertz caroline colour cropped 2015 (1)

Caroline Meinertz

Clifford Chance

While readying themselves for MiFID II, financial sector clients have also had to implement the new EMIR margin requirements for uncleared OTC derivatives. These took effect from 4 February 2017 and are being phased in based on firms’ category and derivatives volumes. The margin is collateral pledged or deposited with the trade counterparty.

‘[That] has given people a huge implementation challenge because they have had to amend thousands of collateral agreements and contracts in order to reflect those requirements,’ Clifford Chance partner Caroline Meinertz says.

These obligations implement in Europe the commitments made in 2011 by the G20 group of countries to add margin requirements on non-centrally cleared derivatives to their 2009 reform programme to reduce the systemic risk from OTC derivatives, with supranational BCBS-IOSCO setting out the framework.

‘Regulators co-ordinated globally with the introduction of more robust margin requirements affecting the vast majority of derivatives contracts, both in Europe and globally,’ Keshav Lewis says. ‘The goal of the regulation was to increase the amount of margin held across the industry to reduce the risk associated with derivative contracts. Across 22 of our derivatives clients, we deployed north of 300 people and robust technology to support 50 senior derivatives experts. Our clients deployed at least as many team members alongside us to meet the deadlines,’ he says.

Clients have also had to grapple with the Securities Financing Transaction Regulation (SFTR), which came into force on 12 January 2016, although many requirements were subject to transitional provisions. ‘[SFTR] is in some ways similar to EMIR, except that it bites on securities financing transactions rather than derivatives. It has required implementation in a staggered way over the last couple of years,’ Meinertz says. This meant clients had to look at the different class of contracts and products to make changes to their documentation.

Another securities and derivatives market reform that is causing clients ‘headaches’ is the European Central Securities Depositories Regulation (CSDR). This came into force on 17 September 2014, although many of its requirements will not apply until technical standards are adopted and, in some cases, until the CSDs have been reauthorised under the new regime, according to the Financial Conduct Authority. The CSDR ‘is the mirror image of EMIR, but it applies to central securities depositories instead of clearing houses’, Meinertz says. It harmonises the authorisation and supervision of EU central securities depositories, and lays down market conduct rules and penalties to tackle settlement fails. Like clearing houses, CSDs proved resilient during the 2008 financial crisis, and regulators around the globe have been keen to use them as a tool to ensure markets function smoothly.

No more bailouts

EU rules on prudential requirements have also been a focus. The Bank Resolution Recovery Directive (BRRD) reflects regulators’ objectives to prevent another taxpayer bailout by establishing a common EU-wide approach to the recovery and resolution of banks and investment firms. This, Meinertz says, has had ‘enormous ramifications’ for banks, which had to draft resolution and recovery plans, revise existing contracts, and set up capital raising plans. Most of the BRRD provisions were implemented in the UK in January 2015; in November last year, the commission proposed to revise the BRRD to ensure, among other things, that rules are proportional to risk and consistent.

‘The primary challenge [of our clients] is to meet the implementation deadline of the various pieces of EU financial regulation,’ Ali says. He points to the EU Benchmarks Regulation, which is the commission’s response to the high-profile investigations into alleged manipulations of key financial benchmarks such as Libor. It introduces a regime for benchmark administrators to ensure the accuracy and integrity of benchmarks. The new rules will apply on 1 January 2018, subject to transitional arrangements for existing EU benchmarks administrators, which will have until 1 January 2020 to apply to their national authorities for authorisation or registration.

Of more immediate impact is the Second Payment Services Directive, effective from 13 January 2018. PSD2 obliges firms offering online payment accounts, including banks, to open-up their infrastructure to third-party providers to access users’ accounts, explains Bird & Bird partner Scott McInnes. These third-party providers of ‘payment initiation services’ and ‘account information services’ will be regulated by the FCA under the Payment Services Regulations 2017, the legislation which implements PSD2.

Financial services firms also have the mammoth task of dealing with the General Data Protection Regulation (GDPR), which will apply from 25 May 2018. Puleston Jones says: ‘One of the big changes we have seen this decade is a massive increase in regulators’ desire for transparency and access to information, and as a result they have put reporting obligations into half a dozen different major European regulations. All of those reporting obligations will have to be assessed in light of the new requirements of GDPR to ascertain whether there is anything in GDPR that potentially conflicts with firms’ obligations to report certain data under EMIR, MiFID II or anything else.’ For instance, under MiFID II/MiFIR traders of any EU asset class are required to provide passport numbers to every European exchange they trade on.

With all regulation, there is a risk it may eventually dampen banking and economic activity, which will inevitably have a knock-on effect on lawyers advising the sector. Procter says: ‘There has been an enormous implementation burden on firms… but it is difficult to pick out any of the reforms and say “that doesn’t make sense”. They have come in a rush… but do I think it has stifled creativity and growth? I don’t think so. It has probably made banks more conservative, but regulators would probably argue that’s not a bad thing.’

‘Since 2009, the cost of compliance across the financial industry has skyrocketed. Billions of additional dollars spent, thousands of additional compliance staff added and endless complexity. We are now at a tipping point,’ Keshav Lewis observes. But he argues that the use of technology will ‘dramatically reduce the cost of compliance and improve the risk profile of the entire financial services industry’.

The G20 concluded in the midst of the crisis that ‘systemically important financial institutions’ should develop Recovery and Resolution Plans, or RRPs, to avoid a repeat.

Keshav Lewis says: ‘Much like the uncleared derivative margin reform, the sheer scale of the challenge [of the RRPs] forced banks to think differently about how the work needed to be done, calling upon tools like artificial intelligence and automation.’

The European iteration, the BRRD, ‘created similar requirements’, adds Keshav Lewis.

‘Organisations must retain and be able to quickly report on a defined set of data fields related to qualified financial contracts, including netting amounts, collateral requirements and key contract terms such as termination events and cross default provisions,’ he says.

Scenario planning for Brexit

In addition to advising on the plethora of EU financial regulation, lawyers are at the same time helping clients on ‘scenario planning’ for Brexit.

‘The defining characteristic of Brexit that everyone agrees upon is the maddening level of uncertainty that currently accompanies it,’ Keshav Lewis says.

A top issue for financial firms is ‘passporting’. By leaving the single market, the UK will no longer benefit from the system that allows banks and other financial services companies that are authorised in any EU/EEA state ‘to trade freely in any other with minimum additional authorisation’, according to the British Bankers Association.

‘Banks are thinking that they may need to re-authorise branches they have here,’ Meakin says.

Financial firms are hoping for the best but planning for the worst – that is, a ‘hard’ Brexit. ‘What we have been tending to suggest to clients is realistic worst-case scenarios – just no passporting. So the UK is the same as New York, it’s just a third country,’ Meakin says. ‘But we have had some clients who want to go further than that.’

One version of ‘hard Brexit’ is based on ‘equivalence’. The UK would be considered a ‘third country’ under EU financial legislation, but the commission could grant partial access to the EU single market to UK firms, if it considers the UK regulatory regime to be ‘equivalent’ to EU standards.

So, what will Brexit mean for EU financial regulation? Will all this effort have been for nothing? Through the European Union (Withdrawal) Bill, the government will copy across into domestic law all existing EU legislation. But the devil is in the detail, lawyers say. ‘A lot of the European legislation is predicated on the European structures and frameworks,’ Procter says, pointing to ESMA, EBA and the EIOPA. ‘So, it is not going to be straightforward in some areas to translate the European approach into UK law in the absence of those supporting structures.’

Regulation regimes may diverge

Moreover, UK and EU financial regulation regimes may be equivalent on exit, but diverge over time. ‘Then a business model based on equivalence assessment becomes less and less certain,’ Procter says. That is because the commission, in cooperation with the relevant European supervisory authority, ‘unilaterally’ decides whether a third-country regulatory regime is equivalent to the EU regime, a 2017 commission report to the European Parliament stated. Equivalence is often conditional on reciprocity by the third-country, and so the UK ‘will also need formal systems for recognising the equivalence of EU rules with its own’, according to the BBA.

Equivalence is now part and parcel of the advice lawyers give to clients implementing EU financial regulation: ‘In the context of the Benchmarks Regulation, for example, those issues have cropped up because many benchmarks [that] are administered out of the UK, will then be deemed to be administered out of a third country, and not usable within the EU, unless certain things are achieved,’ Ali says. That includes equivalence, recognition or endorsement for non-EU administrators.

For instance, MiFID II/MiFIR, EMIR, the AIFMD and Solvency II ‘provide for a limited access to the single market for third-country financial services providers, under strict conditions and in order to service wholesale clients only’, according to a briefing document by the Economic Governance Support Unit of the European Parliament.

In June, the commission introduced a proposal to amend EMIR to ‘make the process to recognise and supervise third-country CCPs more rigorous for those which are of key systemic importance for the EU’. The commission could decide, upon request of ESMA and in agreement with the relevant central bank, that third-country CCPs that are of ‘such systemic importance’ will only be able to provide services in the EU if they establish themselves there.

Acting as middleman

CCPs, also known as clearing houses, act as a middleman between the buyers and sellers of derivatives contracts, guaranteeing both sides against the default of the other. Since the financial crisis, regulators around the globe have encouraged and required their use.

Currently, over 95% of all euro-denominated derivatives are cleared in LCH, a unit of the London Stock Exchange. This is a very lucrative market. ‘Clearing is one of the top impacted areas within financial services,’ says Puleston Jones, who gave evidence to the House of Lords EU Financial Affairs Sub-Committee on the UK’s CCP sector regarding Brexit in October.

The risk, following Brexit, is that euro-denominated derivative clearing is repatriated across the Channel in moves reported to be led by France. FIA’s core message is to ‘minimise disruption, avoid fragmentation and maintain global access to markets’, Puleston Jones says.

Contributing to an uncertain future is the timing of decisions by finance houses to move any resources from the UK to the continent. As Meinertz concludes: ‘This is entirely dependent on the political process, which makes it all the more frustrating from the lawyer’s perspective.’

In principles


Regulators require ready access to wide range of transaction data


Derivatives trades require a bigger collateral pledge or deposit


Clearing houses proved robust in the crisis – their role in many transactions is strengthened

Recovery plans

Banks are required to draft resolution and recovery plans 

Marialuisa Taddia is a freelance journalist