The Bulgarian Council of Ministers recently introduced a bill (the “Bill”) to the Bulgarian National Parliament, implementing Directive 2014/65/EU of the European Parliament and Council on markets in financial instruments (“MiFID 2”). The Bill amends the Markets in Financial Instruments Act (“MFIA”), the current Bulgarian legislation. The transposed Directive is part of the wider MiFID/MiFIR package, which together with the second level legislation (Delegated Acts and Regulatory Technical Standards) produced by the European Securities and Markets Authority, will be applicable from the start of next year in the European Economic Area (“EEA”).
The Bill strictly follows the provisions of MiFID 2 and introduces the following main features to the Bulgarian financial services industry:
- New trading venues – the Organised Trading Facility which regulates the so-called “dark pools” and provides more transparency to this part of the market and a new type of Multilateral Trading Facility, “SME Growth Markets”, 50% of the issuers whose financial instruments are traded here will be SMEs;
- Increased scope of MFIA – under the Bill, emission allowances, physically settled commodity derivatives, as well as the investment advice and sale of structured deposits fall under the scope of MFIA;
- Additional requirements for financial intermediaries – the Bill contains new requirements for joint representation and management of the financial intermediary, aimed at providing a higher level of internal governance;
- The tied agent regime, which was optional under the old MiFID, will now apply in Bulgaria;
- The government did not opt in under art. 39 of the MiFID 2 and has kept the prior license requirement for establishing a Bulgarian branch of a non-EU investment intermediary;
- Record keeping obligations – under the Bill, transparency and data quality requirements for investment intermediaries include the mandatory documentation and storage of all means of communication regarding transactions, including pending transactions;
- A new chapter implementing the EEA wide push for creation of a consolidated tape of all financial transactions in the EEA with the introductions of Data Reporting Services Providers (function which could be included in the license of the financial intermediary);
- Revision of the investor protection regime – including, revamping of the rules for inducements (including a complete ban on some occasions), a higher standard for firms to qualify their advice as “independent” and periodic reporting obligations provided to the portfolio client by the investment intermediary in connection with the maintenance of the suitability and appropriateness criteria;
- Enhancement of the best execution regime for retail clients – art. 82 par.1 of the Bill requires that financial intermediaries take “all sufficient steps” when executing a trade order by a retail client, as opposed to “all reasonable steps” as required under the current law. The bill also shifts from the concept of best price to a more complex mix of price, and intrinsic costs (cost for execution on a specific venue, compared to others in order to determine if the standard has been met);
- Introduction of a definition and the first statutory regulation of “high frequency trading” into Bulgarian legislation.
The relevant parliamentary commissions are currently discussing the Bill, which must pass two votes before it can be enacted. We expect the approval process to be completed before 3 January 2018, MiFID 2’s deadline for transposition.