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Council of Europe adopts MiFID II

by Simone Goligorsky and Robert Coward

In October 2011, the European Commission released a proposal to amend and extend the Markets in Financial Instruments Directive (MiFID), referred to as MiFID II. The MiFID II proposals consist of revisions to MiFID, along with the introduction of the Markets in Financial Instruments Regulation (MiFIR).

Whilst MiFID sought to increase competition and consumer protection, the purpose of MiFID II is to make financial markets more efficient, resilient and transparent and to improve investor protection, with the reform being driven by commitments made by the EU to tackle less regulated and more opaque parts of the financial system at the G20 summit in Pittsburgh in 2009.

MiFID II will impose a series of changes, including, inter alia:

  • creating of a new type of trading venue, the organised trading facility (OTF);
  • extending the scope of products and activities that are subject to regulation;
  • prohibiting the use of inducements for discretionary asset management and ‘independent’ advice;
  • introducing stricter corporate governance requirements; and
  • extending market transparency and transaction reporting requirements.

On 13 May 2014, the Council of the European Union announced that MiFID II had been adopted, following on from the adoption of MiFID II in April 2014 by the European Parliament. Both MiFID II and MiFIR are expected to be published in the Official Journal of the European Union in the second quarter of 2014 and will, for the most part, become applicable 30 months later. It is expected that the European Securities and Markets Authority (ESMA) will publish a discussion paper on the technical standards shortly. Following the responses to the discussion paper, ESMA will publish a consultation paper on draft technical standards later in 2014 or early in 2015. Market participants are encouraged to respond both to the discussion paper and the consultation paper.

MiFID II is being introduced in a climate of wider regulatory reform, and implementation will overlap with numerous other legislative changes, including the Capital Requirements Directive IV, the proposals for Benchmarks regulations, the European Market Infrastructure Regulation and the Market Abuse Directive II. Given this comprehensive spread of regulatory reform, and the magnitude of commercial and operational impacts that MiFID II will have, successful implementation will require early involvement and a thorough impact assessment.




Agreement Reached on Revised European Rules for Markets in Financial Instruments

by Prajakt Samant and Simone Goligorsky

The European Commission announced on 14 January 2014 that the European Parliament and Council had reached an agreement in principle on revised rules for markets in financial instruments (MiFID II). Under the revised regime, limits will be placed on taking financial positions in commodity derivatives, with a view to preventing market abuse and helping to restore investor confidence following the financial crisis.

Background

The current Markets in Financial Instruments Directive (MiFID) governs the provision of investment services in financial instruments and the operation of stock exchanges and multilateral trading facilities (MTFs). MiFID has long been regarded as not being fit for purpose—both in light of the fallout from the financial crisis and the evolution of international financial markets—hence the Commission’s proposals to revise the regime.

In the wake of major changes in financial markets through new trading products and practices, coupled with issues relating to the price volatility of commodity derivatives, it was decided that a revision was required in order to, according to the Commission, increase the efficiency, resilience and transparency of protection for investors.

Agreed Revised Rules

The Commission has identified the following as the key elements of the agreed text of MiFID II:

  1. The introduction of a market structure framework to close existing loopholes, in order to ensure trading is undertaken on regulated platforms and to increase equality between Regulated Markets and MTFs. Under the revised regime, it is proposed that, inter alia, shares should be subjected to a trading obligation, certain investment firms should be authorised as MTFs, and an organised trading facility (OTF) should be created as a venue for trading non-equity instruments, such as derivatives and bonds.
  2. The creation of position limits for commodity derivatives by national competent authorities on the basis of calculation methodologies/technical standards set by the European Securities and Markets Authority (ESMA), in order to strengthen supervisory regulation and prevent market abuse. There will be a hedging exemption for positions held by, or on behalf of, a non-financial entity, that are objectively measurable as reducing risks directly related to the commercial activity of the non-financial entity.
  3. The establishment of transparency for non-equity markets and increased equity market transparency. Under MiFID II, the use of reference and negotiated price waivers for equities will be capped and the transparency regime will be broadened to include non-equities. New rules will also require trading venues to make pre- and post-trade data available on a commercial basis.
  4. Increased competition for the trading and clearing of financial instruments. The revised rules will facilitate access to trading venues and central counterparties (CCPs) and include the introduction of transition periods for smaller trading venues and new CCPs.
  5. The introduction of rules and controls relating to algorithms used in relation to high frequency trading. Under the new rules, algorithmic traders will be required to be regulated and subject to liquidity controls.
  6. Increased investor protection through client asset protection, product governance, other organisation requirements and conduct rules. The agreed text of MiFID [...]

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