Update

European Regulation

	The Markets in Financial Instruments Directive (“MiFID”)

MiFID Implementation

The failure by many member states to transpose MiFID requirements on time and, in many cases, in time for this Update, together with the continuing deliberations of CESR means that the vast majority of EU-regulated firms are highly unlikely to be compliant with all the new MiFID requirements. The FOA (and MiFID Connect) have raised this matter with the European Commission and the FSA, but, as yet, the legal consequences and the inevitable level of regulatory risk continue to be unclear (and there should be no assumption that regulatory pragmatism in the area of enforcement will be an adequate answer to legal risk).

MiFID Connect is currently collating and will be passing on to HM Treasury and FSA firms' concerns as regards implementation issues and priorities in the run-up to November with a view to ascertaining the extent to which they can (or cannot) be resolved in terms of transitionals, “grandfathering”, regulatory practice, etc. As a result, any firm with specific areas of implementation concern should let Anthony Belchambers know as soon as possible . MiFID Connect is not a lobbying organisation, but, nevertheless, has addressed with the Commission, CESR, HM Treasury and FSA key implementation issues and concerns (particularly, the scope and application of the new MiFID best execution requirements). It has now taken up the issue of transaction reporting, both directly with the FSA (see the letter from FOA on behalf of MiFID Connect http://www.foa.co.uk/regulation/mifid/papers_resources.jsp, and at two separate meetings, organised by FESE, firstly, with the European Commission and CESR and, secondly, with CESRTech representatives. While it is anticipated that CESR will not require ISINs in connection with commodity derivatives, the issue regarding their application to other derivatives is still under debate (see circular to members http://www.foa.co.uk/regulation/european/index.jsp

One option might be for CESR [is this correct or its it competent authorities] to undertake the necessary systems changes centrally and apply ISINs itself (which should be significantly cheaper for firms). Could FSA adopt a similar approach towards recovering cost as SFA did in relation to its own transaction reporting system (DRS) (i.e. through a small charge per transaction over an extended period of time)? Member firms are invited to submit their observations as to the feasibility of this option, at least in principle, to Anthony Belchambers as soon as possible. Finally, it can be anticipated that many of the EU competent authorities will not be in a position to comply with the proposed CESR Level 3 guidance regarding exchange of transaction reporting data by the implementation date and, while MiFID Connect is urging that public confirmation of the real position be given as regards the timetable and that it will be “switched off” as regards some aspects of transaction reporting as soon as possible, the fact is that firms cannot meet the implementation date and that needs to be recognised publicly.

Looking forward:

• Clifford Chance will be issuing and distributing the second volume of the MiFID Connect Survival Guide (which will take the form of a comprehensive “checklist”) in early June;

• MiFID Connect will be holding an open meeting for members of the MiFID Connect participating industry associations on Monday, 18th June between 9am - 1pm at Clifford Chance in Canary Wharf, E14, which will focus on the current state of the MiFID Connect guidelines and will provide an update on the Commission policies and FSA work (NB. Full details, including the agenda, can be viewed at www.mifidconnect.com and anyone wishing to attend should make sure that they register directly with Clifford Chance);

• in terms of the guidelines, have finalised the outsourcing guideline (which has now received “approval” from the FSA); hopes to be able to issue the guidelines on research, suitability and appropriateness and conflicts of interest management (currently being reviewed by the FSA) by the end of June; and is redrafting the best execution guideline to accord with the recent Commission letter on scope (and this has been the subject of a review meeting by practitioners on 17th May);

• will be posting on the MiFID Connect website in about two weeks' time a revised version of the specimen paragraphs which, at firms' discretion, could be included in their best execution disclosure statements.

Copies of the guidelines in their latest form can be viewed on the MiFID Connect website (www.mifidconnect.com).

	Transaction reporting

An informal update on transaction reporting; in particular the proposed use of ISINS and derivatives, was sent to members on 29th May. The FOA will be arranging a briefing shortly, hopefully at the July Compliance Forum, which is scheduled for 11th July.

	The European Commission's Commodities Review

The joint association response (i.e. by EFET, FOA and ISDA) to the Commission's Call for Evidence has now been finalised and submitted to the Commission - see here for this reponse paper (please note you will need to be logged on the website in order to view this).

In summary, it argues for:

• the need to avoid over-regulation in order to sustain the international competitiveness of the EU's commodity markets and market participants;

• own-account dealing between professional market participants to be exempted from MiFID;

• member states adopting a common approach towards the exemptions and avoiding any super-equivalence in terms of establishing a remit for their financial authorities that goes beyond the scope of MiFID;

• commodity firms to be subject to a special risk-adjusted prudential supervision regime based on systems, controls and disclosure;

• no change in the current MiFID definition of commodity derivatives and no extension to cover any form of spot or forward physical dealings.

The FOA has appointed Simmons & Simmons and Denton Wilde Sapte to produce between them a set of legal opinions which will cover the rights and conditions of market / trading access in commodity derivatives in twenty-six EU and non-EU jurisdictions and, in particular, to respond to a number of questions which have been raised by practitioners involved in commodity markets. Details of the email inviting tenders can viewed at [website ref] . It is open to any member firm of the FOA to subscribe to these opinions, which will, of course, be kept up to date to ensure their reliability, particularly at time of significant change in the EU. Any firm wishing to find out more details about this project should contact Anthony Belchambers.

	EU/US Financial Services Regulatory Dialogue

The EU/US Coalition on Financial Regulation, working with Clifford Chance, has circulated to interested member firms a draft of its proposed second report and will be holding three practitioner “roundtables” to discuss the report and receive any amendments to the text as follows:

•  Zurich: June 11th , 1.30pm - Zurich

•  London: June 13th , 3pm, Clifford Chance, 10 Upper Bank St, E14. Full details have already been sent out for this event, if you would like to attend or if you require further information, please email Sally Hughes.

•  New York: Date, time and place to be agreed

It is intended that separate briefings and “roundtables” will be held for key regulatory authorities on the draft proposals to gauge reaction and receive additional comments before final publication of the report, currently scheduled to take place at the end of June / early July.

Briefly, the report:

•  notes that mutual regulatory recognition in the area of transatlantic financial services has now been given much higher priority in the US and that there have been a significant number of high-level statements and reports focussing on the need to commence the process;

•  urges that the negotiating process should be governed by an overarching objective of delivering mutual recognition, notwithstanding that there may be some rules' differentiation (to avoid unnecessary change);

•  takes into account the fact that there are thousands of regulatory institutions, both in the US and the EU, which have no appetite for embarking on another round of regulatory change, particularly where, for them, there is no perceived commercial advantage for them (i.e. they are either very small or solely domestic institutions) – and will argue strongly therefore against changing rules where there is no direct and identified benefit for market participants;

•  the true negotiating hurdles can really only be identified once the process of rules' review has started and, for that reason, a review should be commenced forthwith.

For information, the Coalition which started on June 2005, issued its first report in September 2005, details of which can be found here. The Coalition currently comprises the following trade associations:

The ABA Securities Association (ABASA)

The Bankers' Association for Finance and Trade (BAFT)

The British Bankers' Association (BBA)

The Futures Industry Association (FIA)

The Futures and Options Association (FOA)

The International Capital Markets Association (ICMA)

London Investment Banking Association (LIBA)

The Securities Industry and Financial Markets Association (SIFMA)

The Swiss Bankers Association (SBA)

The Secretariat of the Coalition is based at the offices of the FOA and a briefing note on the Coalition can be viewed here.