Table of Contents

Background

Since the collapse of Lehman Brothers in 2010, politicians have wanted to bring the Over The Counter (OTC) derivatives markets under greater control. Their approach to this in the US Congress was to pass a long and complex reform law now referred to as the Dodd Frank Act, named after Chris Dodd and Barney Frank, the two senators who sponsored the bill. Having approved the Dodd Frank Act, the two major regulators, the Securities and Exchanges Commission (SEC) and the Commodities and Futures Trading Commission (CFTC) have been transforming the 2300 page law into practical rules to be implemented by banks and financial institutions.

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These 13 Currencies comprise the 13 most liquid currencies (excluding the Korean won, which is a restricted currency) of the set of 17 currencies settled on CLS.

Summary:

• Makers must provide a Market Mid Rate on FX NDF quotes.
• Makers may need to provide a Market Mid Rate on FX Blocks, FX Swaps and FX Forwards quotes. This will be either be because they cannot meet the terms of the no-action letter noted above, because the quote is for an illiquid currency pair, or because the FX Block or FX Swap includes a non-deliverable component.
• Makers do not need to provide a Market Mid Rate on FX Spot quotes.
• TBD - How do we provide a Market Mid Rate for a Cross? There is more than one ‘market’ here. Presumably we compute the cross based on the mkt rates of each component, and take the mid of that?

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• All FX Derivatives are in scope (TBD).
• Trading compliance required in 2014 (TBD).

MiFIDII

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MiFIDII

MiFID a Brief History

The Markets in Financial Instruments Directive (commonly referred to under the acronym MiFID) is a legislative regulation directive, composed by the European Union (EU) on the basis of advice provided by the European Securities and Markets Authority (ESMA). The directive is intended for application by the European Member States, their regulatory authorities, and financial firms and institutions registered within the European Economic Area (EEA). The legislation is for:

• Investment intermediaries providing services to clients in the areas of shares, bonds, units in collective investment schemes and derivatives (known collectively as 'financial instruments'), and
• The trading of these financial instruments

MiFID first appeared on the UK statute book from November 2007. However, in light of the financial crisis of 2008, the legislation went under additional revision to strengthen what was seen at the time as the failures of woefully lax regulations.

The revisions to the original MiFID legislation are scheduled to take effect on 03 January 2018, with the new legislation being named MiFID II.

The MiFID II Framework

MiFID II will contain a framework separated into two parts, the 'level 1' framework was established in 2014, and contains the following areas:

• a revised MiFID
• The Markets in Financial Instruments Regulation (MiFIR)

Level 1 can then be supplemented by a number of implementing measures, (referred to as 'level 2' legislation) These measures will take two forms;

• 'Delegated acts', drafted by the European Commission (EC) on the advice of ESMA
• 'Technical Standards', drafted by ESMA and approved by the EC.

The Main Changes to MiFID

MiFID II will establish provisions that the author's state is aimed to ensure that High-Frequency Trading (HFT) does not have an effect on market 'quality or integrity' by implementing the following requirements as a general overview:

• MiFID II will compel HFT firms engaged in proprietary trading to be authorised under MiFID. 
• Introduce system and control requirements on the use of algorithms, HFT firms that are also making into trading venues using automated strategies will be required to enter into market making agreements with the venues. This measure is an attempt to ensure that market participants provide liquidity on a consistent basis.
• Trading venues will be compelled to set limits on the maximum number of order messages that any market participant can send relative to transactions they undertake.
• Trading venues will be compelled to set a minimum incremental 'tick size' this is presently done on a venue by venue voluntary basis (It should be noted that this is presently widespread within FX).
• There will be an introduction of controls on venue pricing to ensure transparency and the levelling of any discriminatory or penalising practices, in addition to controls on excessive order messaging.

MiFID Requirements (Draft)

MarketFactory will play a role in the reporting regimes that the regulations impose on market participants, as the customers do not retain the original protocol messages from the venues. The Financial Conduct Authority (FCA) draws attention to this under article (26) of MiFIR:

• MiFID II authorised firms will be required to report transactions, providing complete and accurate details for financial instruments to the competent authorities directly, through Approved Reporting Mechanisms (ARMS) or the trading venue. 
• Further, under article (50) MiFID II requires clock synchronisation for trading venues and their participants, MarketFactory as a connectivity provider will likely have to synchronise clocks also to ensure straight through compatibility.
• MiFID II also introduces a requirement for firms and/or entities wishing to provide a Data Reporting Service as a business offering to be authorised by the local authority in the case of the UK the FCA.

MarketFactory along with other venues and market participants will need to add a series of new fields for reporting purposes on;

• New Orders (New Order Singles)
  venues will look to add a Legal Entity Identifier (LEI) MiFID II requires that firms will not be able to execute a trade on behalf of a client who is eligible for a LEI and does not have one.
  Execution Venue MIC (A market identifier code which is unique in its ability to identify securities trading exchange).
  Finally the requirement for a pre-Trade Waiver Indicators (Used for orders that are large in scale, held in an order management facility pending disclosure, actionable indications of interest in request-for-quote waiver indicators are likely to be the illiquid instrument and the specific size).
• Quote Messages (Snapshots and Incremental Refresh)
  New fields may include Execution Decision Maker containing the decision maker and likely to contain the algo shortcode, this field will be mandatory for in-scope products.
• Outbound Executions (Execution reports)
  Must contain a LEI
  Execution Decision Maker
  Algorithmic Order Flag, set if the order was algorithmic.