On 20 October 2011, the European Commission published proposals for "MiFID II". In November 2007, the rules implementing the Markets in Financial Instruments Directive ("MiFID") came into force in the Netherlands. These rules have been implemented in the Dutch Financial Supervision Act (Wet op het financieel toezicht, "Wft"). The proposals of the European Commission provide for a revision of certain MiFID-rules and the introduction of new rules. (On the same day, the European Commission published its proposal for amendment of the Market Abuse Directive; please click here for our newsletter on this proposal.)

The proposals consist of an amendment of MiFID itself by a directive as well as a proposal for a new regulation (referred to as "MiFIR"). These proposals will now go to the European Parliament and the European Council. It is the intention that MiFID II and MiFIR will enter into force in 2013. The amendments to MiFID will subsequently have to be implemented into Dutch law; MiFIR will be directly applicable in the Netherlands.

MiFID II and MiFIR contain a large number of provisions authorising the European Commission and ESMA to produce more detailed rules. This means that the precise impact of the proposed rules is not fully clear at this stage.

An overview of the main elements of the proposals is set out below:

  • The scope of MiFID will be expanded:
    • MiFID will also apply to the advised and non-advised sale of structured deposits by credit institutions
    • MiFID will apply to all transactions (including spot transactions) in emission allowances (until now only certain derivative transactions in emission allowances fell within the scope of MiFID) ◦MiFID II clarifies that the MiFID-rules also apply to investment firms and credit institutions selling their own securities at the moment of their issuance when not providing advice
    • The scope of the existing exceptions for investment firms that deal on own account will be narrowed. For instance, investment firms that deal on own account will require a license if they are a member of a regulated market or MTF
    • The scope of the existing exceptions for entities active in commodity derivatives-trading will be narrowed ◦Custody of financial instruments will become an investment service. Currently, this is merely an ancillary activity. This means that entities that provide custody services without providing other MiFID-services will require a license
  • The proposals create a new regime for investment firms based in non-EU/EEA-countries. Pursuant to this regime, investment firms based in non-EU/EEA-countries would be able to benefit from a European passport. This requires, amongst other things, the establishment of a branch in the EU/EEA when offering services to non-professional clients
  • Amendment of the rules regarding client classification:
    • The proposals provide that municipalities and other local authorities do not qualify as professional investors
    • Additional obligations will apply with respect to services offered to eligible counterparties

 

  • New rules with respect to investor protection:
    • Firms giving investment advice will be required to disclose whether the advice is provided on an independent basis, whether it is based on a broad or on a more restricted analysis of the market and whether the firm will provide the client with the on-going assessment of the suitability of the financial instruments recommended. In order to qualify as "advice provided on an independent basis", the firm must meet certain requirements
    • Investment firms providing advice on an independent basis or providing asset management services may not receive fees, commissions or other monetary benefits from a third party in relation to the provision of the service to clients
    • The exception with respect to the know-your-customer requirement for execution-only business will be narrowed by limiting the categories of financial instruments for which this is permissible
    • The proposals introduce specific information obligations in respect of bundled products
    • The proposals contain additional information obligations with respect to order execution policies
    • The proposals prohibit the conclusion of title transfer financial collateral arrangements with non-professional clients
  • Additional corporate governance requirements will be imposed on investment firms, including requirements with respect to the members of the management board and the supervisory board:
    • The existing requirement to have sufficiently experienced members is expanded: members will pursuant to the proposals be required to commit sufficient time to discharge their duties. The proposals include limits on the number of directorships a person can have at any one time
    • The proposals require, where appropriate, the establishment of a nomination committee
    • Investment firms must take into account diversity as one of the criteria for selection of members of the management board and the supervisory board
  • The proposals provide that investment firms must record certain telephone conversations and electronic communications (for instance e-mail)
  • The proposals introduce new rules with respect to the infrastructure of trading venues:
    • A new trading venue is to be provided for: the OTF, the organised trading facility. This is a trading venue other than a regulated market or MTF that brings together multiple third party buying and selling interests (an example of an OTF is a broker crossing system). OTFs require authorisation from the regulator. In addition thereto, OTFs must meet certain ongoing requirements that also apply to regulated markets and MTFs, but will also be subject to certain investor protection rules. OTFs may not execute orders against their own capital
    • The regime for systematic internalisers will no longer be limited to shares, but will also extend to other financial instruments. In addition thereto, the proposals contain additional rules for systematic internalisers
    • Additional requirements will apply with respect to regulated markets, MTFs (and OTFs), including the requirement to provide annual information on the execution quality, more extensive transparency and reporting obligations and rules with respect to data consolidation

 

  • The proposals introduce rules with respect to algorithmic trading: investment firms that engage in algorithmic trading must comply with additional requirements
  • Mandatory exchange trading of derivatives: in line with EMIR, MiFIR requires that transactions in derivatives that have been identified by ESMA may in principle occur only on a regulated market, MTF, OTF or equivalent third country trading venue
  • The proposals provide for additional powers for the regulators: regulators will have the power to require any person to reduce its derivatives position, or with respect to commodity derivatives, to limit the ability of any person from entering into a commodity derivative. In addition, regulators will have the power to prohibit or restrict the marketing, distribution or sale of particular financial instruments or a type of activity
  • The proposals introduce new rules with respect to sanctions: there will be minimum requirements that the Member States must implement, including the provision that the maximum penalty must be at least 10% of the total annual turnover in case of a legal entity and EUR 5,000,000 in case of a natural person or twice the amount of benefit derived from the violation