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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.




Impact of the MiFID II Proposals on Commodities Businesses

by Thomas Morgan

The Markets in Financial Instruments Directive (MiFID) came into force in November 2007 and aimed to enhance investor protection, improve cross-border market access and promote financial market competition across the European Union (EU).  In December 2010 the European Commission (EC) published an expansive review of MiFID.  The EC unveiled its package of legislative proposals revising MiFID in October 2011.  These proposals are more comprehensive than initially expected.

The amended text of MiFID and the new Markets in Financial Instruments Regulation (MiFIR), together are referred to as MiFID II.  The proposals extend the scope of the original legislation in terms of the types of instruments and businesses affected.  The prospective legislation subjects EU commodity market participants to significant compliance challenges and increased scrutiny of their energy trading businesses.

Commodities businesses will be some of the most heavily impacted by the introduction of MiFID II. In its current form, MiFID II will:

  • Extend regulations to commodities and commodity derivatives trading, by removing or narrowing current exemptions, notably in relation to commodity firms who are currently exempt from MiFID when dealing on their own account in financial instruments.
  • Extend regulations to Organised Trading Facilities (OFTs). The definition of OTFs is broad, capturing organised trading platforms that are not currently regulated under existing categories.
  • Introduce new safeguards for algorithmic and high frequency trading.
  • Increase the transparency of trading activities by imposing position reporting obligations on trading venues. Such information must be available to the regulator upon request and, upon exceeding certain thresholds, to the public each week.
  • Allow stronger supervision of commodity derivatives markets. The proposals give national regulators and the European Securities and Markets Authority (ESMA) greater powers to monitor trading activity and allow them to ban specific products, services or practices to support liquidity and prevent market abuse.
  • Give power to ESMA to move standardised over-the-counter (OTC) derivatives contracts to exchange-traded platforms and/or clearing through central counterparties.

The EC estimates one-off compliance costs of MiFID II across all sectors to be in the region of €512 to €732 million, in addition to ongoing costs ranging from €312 to €586 million.  Firms should ensure that any synergies in processes required by MiFID II and other regulatory legislation coming into force are identified to minimise cumulative implementation costs.

The MiFID II package of proposals is currently under negotiation by the EC, European Council and European Parliament.  This means there is still an opportunity for firms to present the concerns and objections of their businesses to regulators and law makers before the text is finalised.  There is no published timetable for these negotiations, although it is unlikely that such negotiations will be concluded before the text of the European Market Infrastructure Regulation is finalised.




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