In last month’s Funds e-zine we reported that the European Parliament had voted to adopt the MiFID II proposals. The Council has now given its formal approval to the proposals. Both the Directive and Regulation will become operative 30 months after entry into force, which will be 20 days after their publication in the official journal. 

Level 2 Measures – ESMA’s Consultation and Discussion Papers

ESMA has launched the consultation process for the implementation of MiFID II and MiFIR. This is the first step in the process of translating the MiFID II/MiFIR requirements into practically applicable rules and regulations to address the effects of the financial crisis and to improve financial market transparency and strengthen investor protection.

In order to ensure that MIFID II achieves its objectives in practice, ESMA has published the following documents:

  • Consultation Paper on MiFID/MiFIR Technical Advice – ESMA needs to deliver this advice to the European Commission by December 2014 and is therefore subject to a condensed consultation process for this paper
  • Discussion Paper on MiFID/MiFIR draft RTS/ITS – this will provide the basis for a further consultation paper on the draft RTS/ITS which is expected to be issued in late 2014/early 2015

The main issues covered in the Discussion and Consultation Paper are divided into those addressing the structure, transparency and regulation of financial markets, and those aimed at strengthening investor protection.

Financial Markets Structure, Transparency and Regulation

The main proposals in this area cover the following issues:

  • Enhanced transparency and trading obligations - increasing pre- and post-trade transparency for many categories of instruments, e.g. shares, ETFs, certificates, bonds and derivatives, limitations to trade shares OTC and new obligations to trade derivatives on trading venues
  • Micro-structural issues – refining the definition of high frequency trading and direct electronic access and specifying the requirements for operating in the market using algorithmic techniques
  • Data publication and access – issues related to the development of the consolidated tape including requirements for tape providers, approved publication arrangements and reporting mechanisms, and the definition of a reasonable commercial basis for data sales; and the access to CCPs,  trading venues and benchmarks
  • Other organisational requirements for trading venues
  • Commodity derivatives – new regulatory tools, including position limits

Investor Protection

The main proposals relating to the improved protection of retail investors include technical advice on:

  • Inducements – new limitations on the receipt of commissions (inducements)
  • Independent advice – clearly distinguishing independent from non-independent advice
  • Product governance – requirements on the manufacture and distribution of financial products including target market and risk identification
  • Product intervention/banning - introducing powers for both ESMA and national regulators to prohibit or restrict the marketing and distribution of certain financial instruments
  • Improved information on costs and charges – requirements to provide clients with details of all charges related to their investment (relating to both the investment service and the financial instrument provided) so they can understand the overall cost and its effect on their investment’s return

In addition, the draft regulatory technical standards in the investor protection area relate to the authorisation of investment firms, passporting, and certain best execution obligations.

Next Steps

The closing date for responses to both papers is Friday 1 August 2014. In addition, ESMA will hold three public hearings about secondary markets, investor protection and commodity derivatives issues on Monday 7 and Tuesday 8 July 2014. Further details on the hearings will be published on ESMA’s website.


On 15 April, the European Commission published a memo addressing frequently asked questions in relation to MiFID II. The memo sets out the background and main elements, costs and benefits of reform along with specific answers to some of the finer points of the legislation. The FAQ describe the main elements of the reform as introducing a market structure framework (which closes loopholes and ensures trading takes place on regulated markets), increasing equity market transparency, strengthening supervisory powers and increasing investor protection. The memo describes the benefits of MiFID II as “very tangible, but not readily quantifiable”.

The memo also answers questions in relation to the following:

  • More robust and efficient market structures - describing how developments in trading outside of venues categorised in MiFID II will be dealt with
  • Technological innovation – including how issues raised by algorithmic and high frequency trading have been addressed
  • Increased transparency – describing the proposals for enhancing equity market transparency, including the issue of “dark pools” (platforms where trading interests interact without full pre-trade disclosure to other users or the public)
  • Reinforced supervisory powers and a stricter framework for commodity derivative markets – including how MiFID II will regulate commodity derivatives and what energy contracts will now be covered
  • Stronger investor protection – describing how MiFID II will better protect investors and whether UCITS will be included under MiFID
  • Relationship with other pieces of financial regulation – setting out how the revision of MiFID will fit with other European legislation such as the Market Abuse Directive and PRIIPs