Reference documents: The proposal (20/10/2011) for a Directive (MiFID II) concerning the financial instruments markets, repealing Directive 2004/39/EC, and the proposal for a Regulation (MiFIR) concerning the financial instruments markets amending the European Market Infrastructure Regulation (EMIR) on OTC derivatives, CCPs and trade repositories.
- Legislative procedure underway at the European level. We can now expect a transposition within 2 years and implementation in the first quarter 2015
The proposed texts are a revision of the Markets in Financial Instruments Directive (MiFID), which came into force in November 2007. After 3 and a half years of implementation, this update had been expected, especially since the current MiFID had given rise to various interpretations in its transposition into national laws, resulting in over-regulation in certain Member States.
Moreover, the Commission wanted to adapt the Directive to the changes having taken place in the financial markets over recent years: new trading venues, new products, innovations stemming from technological developments such as high-frequency trading.
It also wanted to draw the lessons from the 2008 financial crisis and integrate the recommendations made by the G20 in Pittsburg in September 2009 concerning the need to improve the transparency and surveillance of certain markets, which were less regulated at the time, such as OTC derivatives markets.
As a reminder, the initial version of MiFID laid down a regulatory framework for the provision of investment services to investors (such as brokerage, consulting, trading, portfolio management, underwriting, etc.) by banks and investment companies (investment service providers), but also for the operation of regulated markets, in particular equity markets, by market operators. It also aimed to promote and control the provision of cross-border investment services via the granting of a European passport to investment companies, enabling them to provide their services across the EU either through the free provision of services or through the set-up of a branch. Another significant provision – the rule concerning the concentration of orders on a particular regulated market – authorises investment companies to choose their preferred trading venue(s), in particular the one enabling them to offer their clients the best execution guarantee.
The proposed revision consists of a Regulation (MiFIR) which will be applicable directly and "as is" in the Member States, and a Directive (MiFID II) which will require transposition in the Member States.
The 2 texts (the Directive and the Regulation) must be read jointly as they jointly form the legal framework governing the requirements applicable to Investment Companies (ICs), Regulated Markets (RMs) and providers of data reporting services.
he proposed changes are numerous and significant. The main provisions contained in the 2 texts are the following:
- Extension of the rules to equity-equivalent securities (certificates of deposit, etc.) and financial instruments other than shares (bonds, emission allowances, packaged financial products, etc.)
- Reinforcement of pre-trade and post-trade transparency rules for trading venues
- Reinforcement of pre-trade and post-trade transparency rules for investment companies trading OTC instruments, including Systemic Internalisers (SIs) (e.g. obligation to publish firm quotes)
- Extension of the scope of transaction reporting by ICs, RMs, Multilateral Trading Facilities (MTFs) and Organised Trading Facilities (OTFs) comprising an obligation for ICs to keep 5-year records of the transactions carried out on their own account or on behalf of clients and an obligation for trading venues to keep records of all trading orders for 5 years. The scope of the post-trade reporting of transactions has been extended (currently limited to financial instruments traded on a regulated market, it has been extended to financial instruments traded on MTFs and OTFs), as well as the amount of information which must be transmitted with the trade order (introduction of a Trader ID and Client ID)
- New: For derivative instruments: introduction of the obligation to trade on electronic venues (RM, MTF or OTF) and clear the derivatives traded on RMs (OTC derivatives will need to be traded on RMs: this obligation will apply to financial and non-financial counterparties exceeding the clearing threshold set by EMIR)
- New: Interoperability: non-discriminatory access to the flows of financial instrument trading venues for market infrastructures, clearing houses and CSDs
- New: Rules applicable to the services provided by ICs from third countries without a local branch, and thus under Free Provision of Services (FPS) (for transactions with eligible counterparties but limited to RTO, the execution of orders and dealing on own account)
- Different presentation: the body of MiFID I has been kept and modified through deletions / additional details; new concepts have also been added concerning consolidated tape providers (CTPs), the creation of a new type of organised trading facilities (OTFs), a provision on algorithmic trading including requirements concerning risk control and the information to be provided to the regulator)
- Further detailing of certain conduct-of-business rules: modification of client classification (certain public bodies will no longer automatically be considered as eligible counterparties, e.g. municipalities)
- The list of complex products has been extended: certain products usually considered as simple products under MiFID I (such as shares, bonds or funds) may be considered as complex if they include a derivative.
- New: Retrocession ban for independent investment and portfolio management
- New: Recording of telephone conversations and electronic communications
- New: Prohibition on Title Transfer Collateral Agreements with retail clients
- New: TCC becomes a full-fledged investment service
- Publication of both EP reports (from Markus Ferber) on 16 March 2012 (MIFID II) and 27 March 2012 (MIFIR)
- Vote in ECON on 26 September 2012
- Vote in plenary on 26 October 2012 (no legislative resolution has been voter in order to let some latitude to the negotiations with the Council and the Commission (Trilogues)
- Deadlocks in Council which could possibly refer the text to the next Presidency (Lithuania)
Find out more
Investment Services Directive – Markets in Financial Instruments Directive (MiFID)
Source: SGSS' Regulatory Review - Main Market Initiatives