MiFID II—How It Affects Proprietary Traders And Algorithmic Traders

Author:Ms Janet Angstadt, Edward B. Black, Sam Tyfield, Ross Pazzol, James Van De Graaff, Daren R. Domina, Kenneth M. Rosenzweig, Kevin M. Foley, Lance A. Zinman, Arthur Hahn, Maureen C. Guilfoile and Carolyn H. Jackson
Profession:Katten Muchin Rosenman LLP

Background The European Commission's final draft proposals for the revised Markets in Financial Instruments Directive (MiFID II) along with a related regulation (MiFIR) were published 20 October 2011. The objective of the original MiFID, which was passed in 2004 and came into force in 2007, was to improve investor protection and promote cross-border market access across the EU. As proposed, MiFID II is designed to further that objective and to address issues which have been exposed by market developments since the onset of the financial crisis from 2008 to date. Various previous drafts have been leaked and there is not much in the final draft that was not anticipated. It is to be expected that there will be amendments to MiFID II prior to its final adoption (see below under the heading "European Legislative Process"). Once it is adopted, which likely will be in mid- to late-2012, member states will then be required to implement MiFID II's provisions into their own national laws. The period allowed for this generally is two years after the adoption of a Directive. For those familiar with the rules coming into force in the US under Dodd-Frank, MiFID II's significant proposals will affect market participants in similar ways. For example, MiFID II proposes that member states impose position limits and position reporting and central clearing for OTC derivatives. Above all, regulators and market participants hope that any real or perceived differences between US and EU approaches to regulation and market stability are smoothed out in the forthcoming process. Why MiFID II is important Several proposals in MiFID II relate to or expand on the guidelines set forth in the consultation paper on high frequency trading issued by the European Securities and Markets Authority (ESMA) in July 2011. The consultation period on ESMA's proposal ended earlier this month, and final guidelines are expected by year end. ESMA has described the guidelines as "best practice" but, if adopted as part of MiFID II, they will be binding. A more detailed discussion of ESMA's proposed guidelines is available in Katten's August 2011 Client Advisory on this subject. In addition, in its press release, the European Commission stated that MiFID II would "introduce new safeguards for algorithmic and high frequency trading activities which have drastically increased the speed of trading and pose possible systemic risks." Current draft proposals for proprietary trading firms Under current...

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