Directive 214/65/EU on Markets in Financial Instruments repealing Directive 2004/39/EC (“MiFID I”) and Regulation (EU) 600/2014 on Markets in Financial Instruments (both “MiFID II”) have been published in the European Official Journal on 12 June 2014. The new rules will enter into force thirty months later, meaning that all European firms engaged in investment business or providing investment services to clients should comply with MiFID II by 2 January 2017. The updated rules for markets in financial instruments are available here.
The new framework aims to make financial markets more efficient, resilient and transparent and will have a significant impact on the governance and business organisation of investment firms and banks providing investment services or engaging in investment activities. Building on the rules already in place, MiFID II extends the scope of products and activities covered, and:
§ introduces a market structure framework which ensures that trading, wherever appropriate, takes place on regulated platforms. In order to capture “dark pool” operators and other similar trading systems, in addition to regulated markets or Multilateral trading Facilities (“MFTs”), MiFID II introduces a new multilateral trading venue, the organised trading facility (“OTF”) for non-equity instruments (e.g. bonds, derivatives and structured products). Strict requirements are imposed on operators of OTFs (e.g. client orders on an OTF cannot be executed against proprietary capital) and OTF operators should meet ‘best execution’ obligations towards their clients as order execution on an OTF takes place on a discretionary basis;
§ introduces trading control for algorithmic trading activities. Dealers on own account applying high-frequency algorithmic trading techniques will no longer be exempted from licence requirements and supervision. Internal control, business conduct rules, obligations to provide information to supervisors – including data on algorithms and strategies used – administrative requirements and compliance monitoring will apply. Additional conditions are imposed on investment firms providing their clients with direct electronic access to trading platforms;
§ increases equity and derivatives market transparency by introducing extensive transaction reporting requirements. The scope of existing pre-trade and post-trade transparency obligations is also extended to ‘equity-like’ instruments and to non-equity capital instruments such as bonds and derivatives. The use of pre-trade transparency waivers is limited and mandatory reporting to supervisors of executed transactions is further detailed and extended to instruments traded on any trading platform or the underlying value of which is such instrument or an index or basket composed of such financial instruments. These rules are accompanied by the establishment of approved reporting mechanism (ARM) and authorised publication arrangement (APA) for trade reporting and publication;
§ strengthens investor protection by introducing robust organisational and conduct requirements and by strengthening the role of management bodies (new requirements for corporate governance are introduced). MiFID II also reinforces the duty to provide fair, clear and not misleading information to clients. It requires that investment services or financial instruments should clearly indicate the risks involved and introduces an obligation to inform clients about all costs connected with an investment service or ancillary service, including the cost of advice and the cost of a financial instrument that is recommended or marketed. Further, if investment advice is provided on an independent basis, the financial instruments included in the advice must not be limited to instruments of entities that have close links with the investment firm. In this case, even if the client is a professional investor, providers of independent investment advice or asset management must not be paid or receive any commission. Finally, advisory and portfolio management clients will receive a detailed suitability assessment in a periodic performance report and the scope of appropriateness test is extended;
§ improves conditions for competition in the trading and clearing of financial instruments and establishes a harmonised European regime for non-discriminatory access to trading venues and central counterparties;
§ addresses the issue of excessive price volatility in commodity derivatives markets. Parties that are active in commodities markets and trade in commodity derivatives fall more easily under the licence and supervision regime for investment firms;
§ increases the role and supervisory powers of regulators and establishes powers to prohibit or restrict the marketing and distribution of specific products in defined circumstances;
§ strengthens the existing regime to ensure effective and stricter harmonised administrative sanctions; and
§ introduces a harmonised regime for granting access to European professional markets for firms from third countries based on an equivalence assessment of third country jurisdictions by the European Commission.
MiFID II sets out the high level rules and consists of ‘Level 1’ texts. Detailed ‘Level 2’ rules will be developed over the next 18 months by the European Securities and Markets Authority and the European Commission.