On 12 June 2014, the Directive on Markets in Financial Instruments (MiFID II) repealing Directive 2004/39/EC and the Regulation on Markets in Financial Instruments (MiFIR) were published in the Official Journal of the European Union. Original implementation of MiFID II/MiFIR was delayed by one year and applied from 3 January 2018 with the exception of provisions transposing Article 65(2)of MiFID II on consolidated tape providers which applied from 3 September 2019 (Part V on data reporting was subsequently deleted) .
On 17 February 2020, the European Commission published a consultation to gather stakeholders' views regarding the existing MiFID/MiFIR regime. ESMA has also published several consultations/final reports covering mandates for reviewing MiFID/MiFIR provisions which will inform the Commission's review report required under the legislation and any legislative proposals where necessary. See Key documents for further details.
The legislative package (collectively MiFID II) fundamentally changed the way securities markets operate in the EU. MiFID II aims to make financial markets more efficient, resilient and transparent, and to strengthen the protection of investors. The framework also increases the supervisory powers of regulators and provide clear operating rules for all trading activities.
MiFID II sets out to:
-introduce a market structure framework which closes loopholes and ensures that trading, wherever appropriate, takes place on regulated platforms,
-introduce pre- and post-trade transparency requirements for other instruments, shares and non-equity instruments will be subjected to a trading obligation,
-deliver on MiFID’s original objectives regarding the straightforward "consolidation of data with similar data from other sources" by proposing a mandatory consolidated tape providing a consistent and reliable record of trades to be established by data providers authorised to do so under harmonised standards set out in MiFID,
-bring a new type of trading venue into its regulatory framework: the Organised Trading Facility (OTF) - organised platforms which are currently not regulated but are playing an increasingly important role. Whilst the MiFID II will allow for different business models, it will ensure all trading venues play by the same transparency rules and that conflicts of interest are mitigated,
-improve the transparency of trading activities in equity markets and also introduce a new trade transparency regime for non-equities markets,
-undertake several proposals regarding commodity derivatives:
-increase transparency of trading activity on all organised trading venues by introducing a position reporting obligation category of trader.
-financial regulators given powers to monitor and intervene at any stage in trading activity in all commodity derivatives,
-narrowing down existing exemptions in the interests of greater regulatory oversight and transparency, thus fewer commodity firms will be exempt from MiFID when they deal on their own account in financial instruments, and
-proposals applicable to other derivatives regarding increasing pre- and post-trade transparency and mandatory trading on organised venues will also apply to commodity derivatives.
-establish a harmonised EU regime for non-discriminatory access to trading venues and central counterparties (CCPs).Smaller trading venues and newly established CCPs will benefit from optional transition periods.
-introduce trading controls for algorithmic trading activities which have dramatically increased the speed of trading and can cause systemic risks - include the requirement for all algorithmic traders to be properly regulated and to provide liquidity when pursuing a market-making strategy. Investment firms providing direct electronic access to a trading venue will be required to have in place systems and risk controls to prevent trading that may contribute to a disorderly market or involve market abuse.
-extend the scope of transaction reporting to all financial instruments (except those instruments not susceptible to or cannot be used for market abuse). In addition the Commission will have powers to propose technical standards on a common European transaction reporting format and content further harmonising the requirements (MiFID requirements need to mirror those of MAD).
-broaden the scope of the Directive in order to protect investors in the context of the provision of investment services - will cover financial products, services and entities which are currently not covered. Also, rules for investment advice should be improved both when advice is provided on an independent basis and in the long term.
MiFID II consists of:
-a Regulation (MiFIR) which is directly applicable, deals inter alia with transparency and access to trading venues. It sets out requirements 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.
-a Directive MIFID II which governs authorisation and organisation of trading venues and investor protection. It:
-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;
-sets out authorisation and organisational rules applicable to different types of trading venue, providers of market data and other reporting services, as well as the complete powers to be granted by Member States to national competent authorities, including the framework of sanctions for breaches of the rules.
Investment firms authorised under MiFID II are subject to prudential requirements set out in the Capital Requirements Regulation (CRD IV) and Capital Regulations Requirements (CRR).
New prudential risk-sensitive rules
As part of its work to strengthen capital markets, the Commission announced in its Mid-Term Review of the Capital Markets Union Action Plan that it would propose a more effective prudential and supervisory framework for investment firms. On 20 December 2017, the Commission set out its proposals for a two-track overhaul for smaller investment firms which would entail a new categorisation for investment firms and also apply a new risk-responsive methodology built around a range of factors, called K-Factors, that define regulatory capital levels.
The new prudential regime consisting of the Investment Firms Directive (IFD) and the Investment Firms Regulation (IFR) was published in the Official Journal of the EU on 5 December 2019.
The legislation aims to ensure that investment firms are subject to key prudential requirements and corresponding supervisory arrangements that are adapted to their risk profile and business model, without compromising financial stability. The current prudential rules in the CRR/CRDIV (to which investment firms are subject) were developed for banks, based on standards developed by the Basel Committee on Banking Supervision (BCBS) for large banks. The rules have become increasingly more complex, without taking into account the different business profiles and risks of investment firms.
The new regime means that investment firms will be divided into three classes, each of those capturing different risk profiles. This will ensure that prudential requirements are tailored to the size, nature and complexity of the firm:
-The largest "bank-like" systemic investment firms would be reclassified as credit institutions and remain under the prudential regime of CRR/CRDIV, supervised as significant credit institutions (Class 1)
-Smaller firms would be subject to a new regime with simpler dedicated prudential requirements which in most cases, would be different from those applicable to banks. In areas where risks of credit institutions and investment firms are similar, the proposal introduces a simplified version of some of the current prudential requirements into the new regime.
Non-systemic investment firms will be split into two groups:
Class 2 would encompass other large non-systemic investment firms above certain thresholds;
Class 3 would consist of smaller and non-interconnected entities.
The capital requirements for the smallest and least risky investment firms will be set in a simpler way. The rules will be comprehensive and robust enough to capture the risks of investment firms, yet flexible enough to cater to various business models and ensure that these firms can remain commercially-viable. These firms would not be subject to any additional requirements on corporate governance or remuneration. For larger firms, the rules introduce a new way of measuring their risks based on their business models. For firms which trade financial instruments, these will be combined with a simplified version of existing rules.
The EC FAQ document sets out the revised framework in more detail.
The legislative package
Directive of the European Parliament and of the Council on the prudential supervision of investment firms and amending Directives 2013/36/EU and 2014/65/EU (2017/0358 (COD)) Investment Firms Directive (IFD)
Regulation of the European Parliament and of the Council on the prudential requirements of investment firms and amending Regulations (EU) No 575/2013, (EU) No 600/2014 and (EU) No 1093/2010 (2017/0359 (COD)) Investment Firms Regulation (IFR)
See separate IFD/IFR topic for more detail.
MiFID II/MIFIR Review
There are various initiatives underway to revise MiFID/MiFIR as mandated under the legislation. ESMA began the process in December 2019 launching its first report regarding the development in prices for pre- and post- trade market data and the consolidated tape for equity instruments (ESMA70-156-1606). Several consultations on specific areas have followed which will feed into the European Commission's reports. The Commission's first consultation on the review of the MiFID framework was published in February 2020.
The paper is divided between priority areas and non-priority areas for review along with general questions on the overall functioning of the MiFIDMiFIR regulatory framework.
Priority areas include:
-Establishing an EU consolidated tape
-Research unbundling and SME research coverage
N0n-priority areas include:
-Derivatives trading obligation
-Double volume cap
-Non-discriminatory access to clearing
-Digitisation and new technologies
The consultation closed on 20 April with the Commission intending to publish legislative proposals in the second half of 2020.