New MiFID Directive and Regulation “to make financial markets more efficient, resilient and transparent”
On 20 October 2011 the European Commission published a draft Directive and draft Regulation (the Proposals) that, if adopted, will revise and replace the existing Markets in Financial Instruments Directive (MiFID). The MiFID revision page of the Commission’s website is here (and contains the draft text of the Proposals); the press release on the Proposals is here and the Commission’s useful and full FAQs on the Proposals are here.
MiFID has been in force since 1 November 2007. The Commission argues that since then:
“…financial markets have changed enormously. New trading venues and products have come onto the scene and technological developments such as high frequency trading have altered the landscape…In response to this, the European Commission has today tabled [the Proposals which] aim to make financial markets more efficient, resilient and transparent, and to strengthen the protection of investors. The new framework will also increase the supervisory powers of regulators and provide clear operating rules for all trading activities.”
The Proposals are part of a reform package put forward by the Commission to ”guarantee the competitiveness, efficiency and integrity of EU financial markets”. The Commission’s recent publication of a draft Regulation and Directive on Market Abuse and Insider Trading – which we discussed in this post – are part of that package. The Proposals also complement the Commission’s:
- Proposed European Market Infrastructure Regulation on over-the-counter derivatives, central counterparties and trade repositories; and
- Regulation on Short Selling and Credit Default Swaps.
If enacted, the Proposals would replace the current MiFID (and so are referred to as “MiFID II”). The Commission’s reason for introducing both a new Directive and a new Regulation is a result of its desire to achieve a uniform set of rules in some areas (i.e. by the Regulation), while allowing for national specificities, such as differences in national markets and legal structures as well as the profile of local investors (i.e. by the Directive).
The objective of the Proposals
The Commission’s FAQs on the Proposals summarises the aims of this revision of MiFID:
“More robust and efficient market structures: MiFID already covered Multilateral Trading Facilities and regulated markets, but the revision will now bring a new type of trading venue into its regulatory framework: the Organised Trading Facility (OTF). These are organised platforms which are currently not regulated but are playing an increasingly important role. For example, standardised derivatives contracts are increasingly traded on these platforms. The new proposal will close this loophole. The revised MiFID will continue to allow for different business models, but will ensure all trading venues have to play by the same transparency rules and that conflicts of interest are mitigated.
In order to facilitate better access to capital markets for small- and medium-sized enterprises (SMEs), the proposals will also introduce the creation of a specific label for SME markets. This will provide a quality label for platforms that aim to meet SMEs’ needs.
Taking account of technological innovations: Furthermore, an updated MiFID will introduce new safeguards for algorithmic and high frequency trading activities which have drastically increased the speed of trading and pose possible systemic risks. These safeguards include the requirement for all algorithmic traders to become properly regulated, provide appropriate liquidity and rules to prevent them from adding to volatility by moving in and out of markets. Finally, the proposals will improve conditions for competition in essential post-trade services such as clearing, which may otherwise frustrate competition between trading venues.
Increased transparency: By introducing the OTF category, the proposals will improve the transparency of trading activities in equity markets, including “dark pools” (trading volumes or liquidity that are not available on public platforms). Exemptions would only be allowed under prescribed circumstances. It will also introduce a new trade transparency regime for non-equities markets (i.e. bonds, structured finance products and derivatives). In addition, thanks to newly introduced requirements to gather all market data in one place, investors will have an overview of all trading activities in the EU, helping them make a more informed choice.
Reinforced supervisory powers and a stricter framework for commodity derivatives markets: The proposals will reinforce the role and powers of regulators. In coordination with the European Securities and Markets Authority (ESMA) and under defined circumstances, supervisors will be able to ban specific products, services or practices in case of threats to investor protection, financial stability or the orderly functioning of markets. The proposals also foresee stronger supervision of commodity derivatives markets. It introduces a position reporting obligation by category of trader. This will help regulators and market participants to better assess the role of speculation in these markets. In addition, the Commission proposes to empower financial regulators to monitor and intervene at any stage in trading activity in all commodity derivatives, including in the shape of position limits if there are concerns about disorderly markets.
Stronger investor protection: Building on a comprehensive set of rules already in place, the revised MiFID sets stricter requirements for portfolio management, investment advice and the offer of complex financial products such as structured products. In order to prevent potential conflict of interest, independent advisors and portfolio managers will be prohibited from making or receiving third-party payments or other monetary gains. Finally, rules on corporate governance and managers’ responsibility are introduced for all investment firms.”
The Proposals: The Regulation
The draft Regulation sets out proposals on:
- The disclosure of data on trading activity to the public and transaction data to regulators and supervisors;
- The mandatory trading of derivatives on organised venues;
- Removing barriers between trading venues and providers of clearing services to ensure more competition; and
- Specific supervisory actions regarding financial instruments and positions in derivatives.
The Proposals: The Directive
- Amends existing provisions on authorisation and organisational requirements for providers of investment services, and all rules regarding investor protection, including for firms located in third countries but actively engaged in EU markets;
- Contains the authorisation and organisational rules applicable to different types of trading venue, providers of market data and other reporting services; and
- Describes the complete powers to be granted by EU Member States to national competent authorities, including the framework of sanctions for breaches of the rules.
Next steps
The Proposals now pass to the European Parliament and the Council for negotiation and adoption – so agreement on and implementation of the Proposals is some way off.
See also: MiFID review: Briefing notes for non-specialists.
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