European Commission publishes MiFID II legislative proposals | Practical Law

European Commission publishes MiFID II legislative proposals | Practical Law

The European Commission has published legislative proposals to amend the Markets in Financial Instruments Directive (2004/39/EC). The proposals (referred to as MiFID II) consist of a Directive and a Regulation. They are intended to make financial markets more efficient, resilient and transparent, strengthen investor protection, increase the supervisory powers of regulators and provide clear operating rules for all trading activities. (Free access)

European Commission publishes MiFID II legislative proposals

Practical Law UK Legal Update 6-509-4420 (Approx. 8 pages)

European Commission publishes MiFID II legislative proposals

by PLC Financial Services
Published on 20 Oct 2011 • European Union
The European Commission has published legislative proposals to amend the Markets in Financial Instruments Directive (2004/39/EC). The proposals (referred to as MiFID II) consist of a Directive and a Regulation. They are intended to make financial markets more efficient, resilient and transparent, strengthen investor protection, increase the supervisory powers of regulators and provide clear operating rules for all trading activities. (Free access)
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On 20 October 2011, the European Commission published legislative proposals to amend the Markets in Financial Instruments Directive (2004/39/EC) (MiFID). The proposals (referred to in this update as the MiFID II proposals) consist of:
  • A Directive on markets in financial instruments repealing Directive 2004/39/EC.
  • A Regulation on markets in financial instruments and amending Regulation [EMIR] on OTC derivatives, central counterparties and trade repositories (MiFIR).
The Commission's use of a Directive and a Regulation to give effect to its proposals reflects the need to achieve a uniform set of rules in some areas (covered by the Regulation), while allowing for differences in national markets, legal structures and investor profiles in other areas (covered by the Directive).
The MiFID II proposals are intended to:
  • Make financial markets more efficient and resilient.
  • Take account of technological developments since MiFID was implemented in November 2007.
  • Increase transparency of both equity and non-equity markets.
  • Reinforce supervisory powers and introduce a stricter framework for commodity derivatives markets.
  • Strengthen investor protection.
On the publication of the proposals, Michel Barnier, European Commissioner on Internal Market and Services, said:
"The crisis serves as a grim reminder of how complex and opaque some financial activities and products have become. This has to change. Today's proposals will help lead to a better, safer and more open financial markets".
The MiFID II proposals will now pass to the European Parliament and the Council of the European Union for negotiation and adoption. Once adopted the proposed Regulation and Directive, and the necessary technical rules implementing these requirements, will apply on the same date.
The MiFID II proposals have been informed by the Commission's review of MIFID, which includes a December 2010 consultation on proposals to substantially amend the Directive. For more detail on the MiFID review, see Practice notes, Hot topics: European Commission's MiFID review, MiFID II: markets and trading platforms and MiFID II: investor protection and provision of investment services. PLC Financial Services will update these notes to reflect the MiFID II proposals.
On 20 October 2011, the European Commission published legislative proposals to amend the Markets in Financial Instruments Directive ( 2004/39/EC) (MiFID). The proposals consist of a Regulation and a Directive.
The Commission has published the following documents on the MiFID reforms:

Background

MiFID came into force on 1 November 2007, and is made up of a framework Directive (2004/39/EC), an implementing Directive (2006/73/EC ) and an implementing Regulation (1287/2006). MiFID repealed the Investment Services Directive (93/22/EEC) (ISD) and introduced wide-ranging changes to the regulation of firms conducting investment business throughout the EEA.
Many of the original objectives of MiFID have been met. In particular, MiFID resulted in increased investor protection and competition (including the emergence of new trading systems and opportunities for pan-European trading) and increased market transparency. However, the financial crisis highlighted shortcomings that need to be addressed. Modifications to the MiFID framework are also considered necessary to take account of technological developments and trading patterns that have significantly changed the structure of equity secondary markets since implementation, in particular the emergence of new trading venues that fall outside the current MiFID requirements.
For an overview of the purpose and key provisions of MiFID, see Practice note, MiFID: overview.

A Regulation and a Directive

The Commission's proposals to amend MiFID consist of a Regulation and a Directive. This reflects the need to achieve a uniform set of rules in some areas (covered by the Regulation), while allowing for differences in national markets, legal structures and investor profiles in other areas (covered by the Directive).

Proposed Regulation

The proposed Regulation (referred to in the proposal as MiFIR) sets out requirements relating to:
  • Publication of trade transparency data to the public.
  • Disclosure of transaction data to competent authorities (that is, transaction reporting).
  • Removing barriers to non-discriminatory access to clearing facilities.
  • Mandatory trading of derivatives on organised venues.
  • Specific supervisory actions regarding financial instruments and positions in derivatives.
  • Provision of services by third-country firms without a branch.
It is considered necessary to implement these requirements through a regulation to ensure that they are directly applicable to investment firms, and to promote a level-playing field by preventing diverging national requirements, which might occur if member states were left to transpose a directive. A regulation is also expected to enhance legal certainty by creating a uniform legal framework, prevent harmful regulatory arbitrage between member states, and ease the operations of firms active in numerous jurisdictions.

Proposed Directive

The proposed Directive recasts Directive 2004/39/EC and amend existing requirements on the:
  • Authorisation and organisational requirements for providers of investment services.
  • Scope of exemptions from the current Directive.
  • Organisational and conduct of business requirements for investment firms.
  • Authorisation and organisational requirements for different types of trading venue.
  • Authorisation and ongoing obligations for providers of market data and other reporting services.
  • Powers available to national competent authorities.
  • Sanctions for breaches of the rules.
  • Rules for third-country firms operating via a branch.

Summary of key proposals

The MiFID II proposals are intended to:
  • Make financial markets more efficient, and resilient.
  • Strengthen investor protection.
  • Increase transparency.
  • Reinforce the supervisory powers of regulators.
  • Provide clear operating rules for all trading activities (including for commodity derivatives markets).
The key proposals include:
  • Organised trading facilities. Creation of a new type of trading venue within the regulatory framework: the organised trading facility (OTF). OTFs are organised trading platforms that are not currently regulated, but have an increasingly important role (for example, in the trading of standardised derivatives contracts). The definition of OTFs captures all forms of organised trading that do not match existing categories.
  • High frequency trading (HFT). New safeguards for algorithmic and HFT activities. These include the need to be properly regulated, requirements to provide appropriate liquidity and rules to prevent the movement in and out of markets (to address market volatility).
  • New requirements for trading venues. Trading venues will be required to publish annual data on execution quality.
  • Equity market transparency. OFTs will be subjected to the same transparency rules as other trading venues, to improve trading transparency in equity markets. Dark pools (that, is trading volumes of liquidity that are not available on public platforms) will continue to be allowed, but only where they do not cause competitive distortions and reduce the overall efficiency of the price discovery process.
  • Non-equity market transparency. Introduction of a new trading transparency regime for non-equity markets (that is bonds, structured finance products and derivatives). The exact transparency regime will be tailored to the instrument in question.
  • Transaction reporting. Extension of the scope of the transaction reporting requirements to all financial instruments (expect those that cannot be used for market abuse) to ensure that the MiFID requirements mirror those of the Market Abuse Directive (2003/6/EC) (MAD). The Commission will be empowered to propose technical standards on a common European transaction reporting format and content. Double reporting of the same information under MiFID and the European Market Infrastructure Regulation (EMIR) will be avoided (and EMIR will be amended to that effect).
  • Consolidation of market data. Introduction of a consolidated tape for trade data to ensure data quality and consistency.
  • Reinforced supervisory powers. These include the ability of supervisors to ban specific products, services or practices where there are threats to investor protection, financial stability or the orderly functioning of markets.
  • Commodity derivatives markets. Facilitating the stronger supervision of these markets by introducing a position reporting obligation by category of trader, among other things. Regulators will be empowered to monitor and intervene at any stage in trading activity in all commodity derivatives (including the shape of position limits where there are concerns about disorderly markets). Existing exemptions will be narrowed for commodity firms.
  • Corporate governance. Introduction of rules on corporate governance and managers' responsibility for all firms.
  • Extension of scope. Broadening of scope of MiFID to cover financial products (such as structured deposits), services and entities not currently covered.
  • Conduct of business requirements. Enhanced conduct of business requirements will provide additional protection to investors. These include:
    • new requirements for advisors wishing to describe themselves as "independent";
    • a ban on independent advisers and portfolio managers making or receiving third-party payments or other monetary gains;
    • enhanced information disclosure to different categories of client (in particular, eligible counterparties) especially where complex products are involved.
  • SME markets. Creation of a new sub-category of market, known as SME growth markets.
  • Sanctions. Introduction of minimum rules to ensure that member states apply appropriate administrative sanctions and measures to breaches of MiFID.
  • Emissions allowances. Emissions allowances trading is brought within the MiFID framework.
  • Third-country firms. Introduction of a harmonised third country equivalence regime for the access of third country investment firms and market operators to the EU.

Link to other EU proposals

The MiFID II proposals are designed to fit with the Commission's proposals to amend MAD, which were also published by the Commission on 20 October 2011 (see Legal update, Commission publishes legislative proposals for Regulation on market abuse and Directive on criminal sanctions for market abuse). The Commission's approach is to update the MAD and MiFID regimes "in tandem to ensure they are fully coherent and support each other's objectives and principles". The Commission also considers that the pan-EU competition which MiFID has facilitated has given rise to new challenges in the area of cross-border supervision, meaning harmonisation of the rules and competent authorities' powers is necessary.
The EU legislation on over-the-counter (OTC) derivatives, central counterparties and trade repositories (also known as EMIR), and on short-selling and credit default swaps on the other, both complement MiFID. EMIR aims to minimise counterparty credit risk and operational risk (see Practice note, Hot topics: European Market Infrastructure Regulation). The proposed Regulation on short selling and certain aspects of credit default swaps is intended to increase harmonisation and transparency, and mitigate risks associated with short selling and the use of credit default swaps (see Practice note Short selling: key regulatory developments tracker).
The issue of commodity derivatives will also be addressed at the G20 Summit in Cannes on 3 and 4 November.

Next steps

The MiFID II proposals will now pass to the European Parliament and the Council of the European Union for negotiation and adoption. Once adopted it is intended that the Regulation and the Directive, and the necessary technical rules implementing these requirements, will apply on the same date.

PLC resources

For more information on Commission's MiFID review and its December 2010 consultation, see Practice notes, Hot topics: European Commission's MiFID review, MiFID review consultation: markets and trading platforms and MiFID review consultation: investor protection and provision of investment services. PLC Financial Services will be updating its MiFID-related materials, as necessary, to reflect the publication of the legislative proposals.
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