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Legal Shorts 15.12.17 including MiFID II: FCA publishes letter on payment for order flow

Published: 15 Dec 2017

Welcome to Legal Shorts, a short briefing on some of the week’s developments in the financial services industry.

If you would like to discuss any of the points we raise below, please contact me or one of our other lawyers. 

Claire Cummings

020 7585 1406




MiFID II: FCA publishes letter on payment for order flow

The FCA has published a “Dear CEO” letter on payment for order flow (PFOF). The FCA's view is that the practice of brokers demanding payments from counterparties as a condition for conducting client business with them substantially undermines a broker's ability to act as a good agent. In the letter, the FCA reiterates that firms continuing to charge PFOF will breach the new requirements under MiFID II. MiFID II reinforces the restrictions on third-party payments when executing orders on behalf of retail and professional clients. It also strengthens the conflicts of interest requirements, which will be significant for firms providing investment services to eligible counterparties, but are also equally relevant to professional and retail client business. These enhanced requirements place explicit emphasis on the obligation on firms to avoid or prevent conflicts from arising in the first place. The FCA reminds firms that they must take action now to ensure compliance. It also warns against any attempted models that seek to avoid these new rules. This will be a priority area of FCA supervisory focus after January 2018.


MiFID II: FSMA 2000 Regulations 2017 published

The Financial Services and Markets Act 2000 (Markets in Financial Instruments) (No 2) Regulations 2017, which were made on 12 December 2017, have been published. The Regulations are the final piece of UK legislation required to complete the implementation of MiFID II. Apart from addressing minor drafting points and omissions, the Regulations also contain the following two substantively new provisions: (i) Regulation 4(3) amends the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) to create a new exclusion from various specified activities. The exclusion applies to persons dealing in commodity derivatives or emission allowances on their own account or providing investment services relating to such instruments in an ancillary capacity. These activities are not treated as regulated activities until the appropriate regulator can determine whether or not they fall within the exemption under Article 2.1(j) of MiFID II for this type of activity; and (ii) Regulation 10 extends the transitional provision in article 16 of the RAO Amendment Order 2017 relating to structured deposits from 3 January 2018 to 1 April 2018 and also allows all firms to take advantage of the transitional arrangement until 1 April 2018.


MiFID II: ESMA update on MiFiD II registers

ESMA will update existing registers and provide for new registers under MiFID II from 3 January 2018. However, a new register release will not be fully available because of IT functionality until later in Q1 2018. As an interim solution, ESMA will publish registers information on a fortnightly basis. The affected registers include: regulated markets (RMs); multilateral trading facilities (MTFs); organised trading facilities (OTFs); systematic internalisers (SIs); approved publication arrangements (APAs); consolidated tape providers (CTPs); approved reporting mechanisms (ARMs); and suspension and restorations (SARIS). A list of CCPs will be removed and the list of shares admitted to trading on EU regulated markets will be replaced.


MiFID II: EC adopts Implementing Decisions re third-country equities markets

The European  Commission  has adopted Implementing Decisions on the equivalence of the legal and supervisory frameworks in Australia, Hong Kong and the USA. MiFIR requires investment firms to undertake trades in certain shares only on RMs, MTFs, SIs or third-country trading venues that have been assessed by the Commission as equivalent in accordance with Article 25(4)(a) of MiFID II. The Implementing Decisions deem the legal and supervisory frameworks of Australia, Hong Kong and the US applicable to the markets specified in each of the Annexes to be equivalent to the EU's frameworks for the purposes of Article 25(4)(a). The Implementing Decisions will enter into force on the day after they are published in the Official Journal.


MiFID II: Transitional transparency calculations for equities and bonds

ESMA has published transitional transparency calculations for equity and bond instruments under MiFID II. MiFID II requires firms to perform various transparency calculations in respect of equity and non-equity instruments. The calculations must be done both for the transition from the MiFID to MiFID II and afterwards on an ongoing basis once MiFID II applies.


EMIR: FCA confirms VM requirements for physically settled FX forwards

The FCA has confirmed that it supports the statement made by the European Supervisory Authorities (ESAs) in November 2017 on the variation margin requirements under EMIR for physically settled FX forwards. The ESAs stated that they were reviewing the RTS on risk mitigation techniques for OTC derivatives not cleared by a CCP. The FCA states that the amendments to the RTS should become increasingly clear over time and it expects firms to make their plans as a result. Even though it is not currently completely clear how the RTS will be amended, the FCA advises that it will not require firms whose physically settled FX forwards are likely to be outside the scope of the amended requirements to continue putting processes in place to exchange variation margin. However, this approach is subject to any further statements that may be issued by the ESAs or the FCA.


EMIR: Update on proposed amending Regulation

HM Treasury has provided the House of Lords EU Committee with information relating to the proposed Regulation amending EMIR as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivatives contracts not cleared by a CCP, the registration and supervision of TRs and the requirements for TRs. According to the Treasury’s letter, the government's priority is to ensure that any revised text continues to promote financial stability both within the EU and globally, while also ensuring that EMIR is proportionate, in particular to non-systemic market participants. The letter also provides some detail on the following topics: (i) the classification of securities special purpose entities (SSPEs) and AIFs as financial counterparties; (ii) how the provisions in the proposed Regulation concerning insolvency estate changes interact with the UK insolvency regime; and (iii) transition arrangements. The European Commission adopted its legislative proposal to amend in May 2017.


FCA policy statement on FAMR implementation and further consultation

The FCA has published a policy statement (PS17/25) on the second part of its implementation of the recommendations made by the Financial Advice Market Review (FAMR) final report. In PS17/25, the FCA confirms: (i) FCA Handbook changes arising from recent amendments to the definition of advice on investments in RAO; (ii) guidance arising from experiences of the FCA’s advice unit; and (iii) guidance on insistent clients designed to address concerns raised by firms. The above changes will take effect on 3 January 2018. PS17/25 also includes a further consultation on retiring the finalised guidance on inducements and conflicts of interest (FG14/1) and on independent and restricted advice (FG12/15). The deadline for responses to these proposals is 19 January 2018. The FCA consulted on the proposed rules changes covered in PS17/25 in an August 2017 consultation paper.


FCA Market Watch issue 55

The FCA has published issue 55 of Market Watch, its newsletter on market conduct and transaction reporting issues. Issue 55 contains articles that provide a useful reminder to firms in the following areas: (i) transaction reporting at the block or allocation level under MiFID II; (ii) transitional arrangements relating to transaction reporting on T+1 under MiFID; (iii) Data Reporting Service Provider (DRSP) supervision forms, which firms must complete to allow the FCA to supervise DRSPs under MiFID II; and (iv) application of MAR to emission allowance market participants (EAMPs), including a summary of the FCA's expectations of EAMPs re notifying delayed disclosure of inside information and the notification of transactions by persons discharging managerial responsibilities (PDMRs).


FCA consultation on its approach to authorisation and competition

The FCA has published two mission documents setting out its approach to authorisation and its approach to competition, namely FCA Mission: Our Future Approach to Authorisation  and FCA Mission: Our Future Approach to Competition. In the authorisation document, the FCA explains the purpose of authorisation and the changes it is making to improve its approach. In the competition document, the FCA looks at how it delivers competition objective i.e. to promote competition in the interests of consumers and not for its own sake. Both approach documents are open for comments until 12 March 2018. The FCA aims to publish final approach documents in summer 2018.



This week, Kevin Cummings, Asset Management Tax Partner at Deloitte LLP, updates us on the draft legislation amending UK anti-hybrids legislation and its impact on US managers with UK operations, as follows:

“The Government has now released draft legislation (trailed at last month’s Autumn Budget 2017) to amend the UK’s new anti-hybrids legislation.  The purpose behind the draft legislation is to rectify the adverse impact of the UK anti-hybrid rules upon US-headquartered managers with UK subsidiary operations.  In broad terms, the legislation (which has been in force since 1 January 2017) seeks to deny tax benefits arising from double deductions for a single economic cost or from structures giving rise to tax relief in one place but with no tax pick-up elsewhere.  Some US managers with UK operations (where the UK entity is disregarded for US tax purposes) have been adversely impacted by the legislation, as tax relief for costs borne in the UK ( and also relieved in the US) seem to be disallowed in full, meaning UK subsidiaries are taxed on their gross UK revenues rather than net profits.  As it stands, however, the draft legislation seems only to alleviate the issue for very vanilla US-UK structures and the problem, therefore, remains for US-managed groups with anything other than vanilla fact patterns.  It is considered that the draft legislation is perhaps inadvertently narrow in effect and it is hoped that its scope will be broadened before it hits the statute book. Affected management groups will need to assess their options accordingly.”

If you would like to receive further information regarding the UK anti-hybrids legislation or any other related matters, please contact Kevin Cummings at: kcummings@deloitte.co.uk.


Tel: + 44 20 7585 1406

Mob: + 44 7734 057 327

Cummings Law

42 Brook Street

London Greater London W1K 5DB

United Kingdom


14 12 2017

Claire Cummings

Firm: Cummings Law Ltd
Country: United Kingdom - England

Practice Area: Investment Funds

  • 42 Brook Street
    W1K 5DB

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