On 20 October 2011, the European Commission published a proposed Directive and Regulation to revise the Markets in Financial Instruments Directive (MiFID).  The main objectives of the revised framework are to ensure a level playing field between market participants, increase and reinforce market transparency, increase the powers of regulators (including increasing co-ordination at European level), raising investor protection and addressing organisational deficiencies and excessive risk-taking by market operators.

The proposed legislation introduces a number of new provisions and extends the scope of MiFID generally.  The key features of the new regime are as follows:

  • More robust and efficient market structures and increased transparency: The proposed revisions to MiFID will bring Organised Trading Facilities (which are currently not regulated) under its remit and will ensure that all trading venues adhere to the same transparency rules.  New trade transparency rules will apply to bonds, derivatives and structured finance products (i.e. non-equities markets) and ensure that conflicts of interest are mitigated.  The proposals create a special regime for small and medium-sized enterprises (SMEs) by introducing new rules for SME markets.
  • Taking account of technological innovations: The proposed legislation introduces safeguards for algorithmic and high frequency trading activities that pose possible systemic risks.  The proposed safeguards require algorithmic traders to become regulated, to provide appropriate liquidity and to adhere to rules that will prevent them from frequently moving in and out of markets.  In addition, new requirements for post-trade services will be introduced to increase competition between trading venues.
  • Additional supervisory powers: Under the new regime supervisors will be empowered to ban specific products, services or practices in instances where the financial stability, the orderly functioning of markets or the protection of investors are under threat.  These powers however, are limited to being exercised in defined circumstances and in co-ordination with the European Securities and Markets Authority.  In addition, there will be stronger supervision of commodity derivatives markets and traders will be required to report by category.
  • Stronger investor protection: More stringent requirements have been introduced in order to protect investors in respect of portfolio management, investment advice and the offer of complex financial products.  New rules have also been introduced to prevent conflict of interests and prohibit independent advisors and portfolio managers from making or receiving any monetary gains from third parties. In addition, new corporate governance rules will be introduced for investment firms.

The proposed Directive and Regulation revising MiFID has been passed on to the European Parliament and the Council for negotiation and once adopted, it is envisaged that both the proposed Directive and Regulation will come into force on the same date.