More transparent and safer financial markets
16 Apr 2014 04:31 PM
The
European Parliament have adopted in plenary session updated rules for markets
in financial instruments (MiFID II).
Internal Market and Services Commissioner Michel Barnier
said: “I welcome today’s adoption of MiFID II by the
European Parliament. Our legislation needs to keep pace with the changes in
financial markets and implement our G20 commitments. The new rules will improve
the way markets function in order to serve the real economy. They will
establish a safer, more transparent and more responsible financial system and
restore investor confidence in the wake of the financial crisis. I would like
to congratulate the European Parliament - especially the rapporteur, Markus
Ferber, and the shadow rapporteurs - for their hard work and commitment on this
important file."
Key
elements of the new legislation:
(1)
MiFID II introduces a market structure
framework which closes loopholes and ensures that trading,
wherever appropriate, takes place on regulated platforms. To this end, it
subjects shares and non-equity instruments to a trading obligation. It further
ensures that investment firms operating an internal matching system which
executes client orders in shares, depositary receipts, exchange-traded funds,
certificates and other similar financial instruments on a multilateral basis
have to be authorised as a Multilateral trading facility (MTF). It also
introduces a new multilateral trading venue, the Organised Trading Facility
(OTF), for non-equity instruments to trade on organised multilateral trading
platforms.
These rules ensure a level playing field with Regulated
Markets (RMs) and MTFs. The neutrality of OTF operators is ensured through
restrictions on the use of own capital, including matched principal trading,
and discretion in their execution policy. MiFID II introduces a trading
obligation for shares as well as a trading obligation for derivatives which are
eligible for clearing under the European Markets Infrastructure Regulation
(EMIR) (MEMO/12/232) and are sufficiently liquid. This will
move trading in these instruments onto multilateral and well regulated
platforms in accordance with the G20 commitments.
(2)
MIFID II increases equity market transparency and
for the first time establishes a principle of transparency for non-equity
instruments such as bonds and derivatives. For equities a double volume cap
mechanism limits the use of reference price waivers and negotiated price
waivers (4% per venue cap and 8% global cap) together with a requirement for
price improvement at the mid-point for the former. Large-in-scale waivers and
order management waivers remain the same as under MiFID I. MiFID II
also broadens the pre- and post-trade transparency regime to include non-equity
instruments, although in view of the specificities of non-equity instruments,
pre-trade transparency waivers are available for large orders, request for
quote and voice trading. Post trade transparency is provided for all financial
instruments with the possibility of deferred publication or volume masking as
appropriate.
Rules have also been established to enhance the
effective consolidation and disclosure of trading data through the obligation
for trading venues to make pre- and post-trade data available on a reasonable
commercial basis and through the establishment of a consolidated tape mechanism
for post-trade data. These rules are accompanied by the establishment of
approved reporting mechanism (ARM) and authorised publication arrangement (APA)
for trade reporting and publication.
(3)
To meet the G20 commitments, MiFID II provides
for strengthened supervisory powers and a harmonised
position-limits regime for commodity derivatives to improve transparency,
support orderly pricing and prevent market abuse. Under this system competent
authorities will impose limits on positions in accordance with a methodology
for calculation set by the European Securities and Markets Authority (ESMA). It
also introduces a position-reporting obligation by category of trader. This
will help regulators and market participants to have better information on the
functioning of these markets.
(4)
A new framework will improve conditions for competition in the
trading and clearing of financial instruments. This is essential for
the integration of efficient and safe EU capital markets. For this purpose,
MiFID II establishes 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. The
non-discriminatory access regime will also apply to benchmarks for trading and
clearing purposes. Transitional rules will ensure the smooth application of
these provisions.
(5)
MiFID II will introduce trading controls for algorithmic
trading activities which have dramatically increased the speed of
trading and can cause systemic risks. These safeguards include the requirement
for all algorithmic traders to be properly regulated and to provide liquidity
when pursuing a market-making strategy. In addition, investment firms which
provide 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.
(6) Stronger investor
protection is achieved by introducing better organisational
requirements, such as client asset protection or product governance, which also
strengthen the role of management bodies. The new regime also provides for
strengthened conduct rules such as an extended scope for the appropriateness
tests and reinforced information to clients. Independent advice is clearly
distinguished from non-independent advice and limitations are imposed on the
receipt of commissions (inducements). MiFID II also introduces harmonised
powers and conditions for ESMA to prohibit or restrict the marketing and
distribution of certain financial instruments in well-defined circumstances and
similar powers for the European Banking Authority (EBA) in the case of
structured deposits. Concerning Packaged Retail Investment Products (PRIPS),
the new framework also covers structured deposits and amends the Insurance
Mediation Directive (IMD) to introduce some rules for insurance-based
investment products.
(7)
The agreement strengthens the existing regime to ensure effective
and harmonised administrative sanctions. The use
of criminal sanctions is framed so as to ensure the cooperation between
authorities and the transparency of sanctions. A harmonised system of
strengthened cooperation will improve the effective detection of breaches of
MIFID.
(8)
A harmonised regime for granting access to EU markets for firms
from third countries is based on an equivalence assessment of
third-country jurisdictions by the Commission. The regime applies only to the
cross-border provision of investment services and activities provided to
professional and eligible counterparties. For a transitional period of three
years and pending equivalence decisions by the Commission, national
third-country regimes continue to apply.
Next steps:
Following a recent vote in plenary, MiFID II must be
formally adopted by the Council. The publication of the new rules in the
Official Journal of the European Union is foreseen for the second quarter of
2014 with entry into application 30 months later.
Background
In
October 2011, the European Commission tabled proposals to revise the Markets in
Financial Instruments Directive (MiFID II) with the aim of making financial
markets more efficient, resilient and transparent, and to strengthen the
protection of investors (see IP/11/1219).A political agreement between the
European Parliament and the Council endorsing the Commission proposal was
reached on 14 January 2014 (MEMO/14/15). MIFID II is accompanied by the
Regulation on insider dealing and market manipulation (i.e. market abuse)
(“MAR”) and the Directive on criminal sanctions for market abuse
(“CSMAD”) which were adopted by the European Parliament
respectively, on 10 September 2013 and 4 February 2014 and by the Council
on 14 April (IP/14/424).
See
also MEMO/14/305
More information:
http://ec.europa.eu/internal_market/securities/isd/mifid/index_en.htm