The Commission presented its proposals for the revision of MiFID (MiFID 2) on 20 October. The proposal takes the form of a revised version of the current MiFID Directive and a separate Regulation (MiFIR).
The proposal for the revised Directive makes several key changes:
- Scope: As expected the exemptions for commodity firms have been cut back significantly and now exemption 2(1)(d) will not exempt own account dealers who deal as members of regulated markets or multilateral trading facilities (MTFs) in relation to commodity derivatives or emission allowances (which becomes a defined term) or their derivatives. Exemption 2(1)(i) will exempt only those who (a) deal on their own account (but do not execute client orders), (b) provide other investment services only to their affiliates or (c) provide services other than dealing on own account in commodity derivatives, other derivatives falling within MiFID Class C10, emission allowances or derivatives on those, in each case as an ancillary activity to the group's main business, which is not investment business. And the exemption formerly in article 2(1)(k) for commodity derivatives dealers who are part of a non-financial group has been deleted completely. The proposal is also drafted in an attempt to ensure all high-frequency trading and activities related to it falls within the scope of MiFID, by introducing specific requirements related to algorithmic trading and trading processes.
- OTFs: The Directive introduces the concept of Organised Trading Facilities (OTFs) with the operation of an OTF inserted as an investment service or activity. It does this to level the playing field between all types of trading venue (regulated markets, MTFs, systematic internalisers and OTFs) and will apply the same rules on transparency and many of the same rules on supervision and operation across venues. However, other rules will be different to reflect the nature of the facility – for example, OTF operators will have a degree of discretion that regulated market and MTF operators do not have, so will be subject to similar investor protection rules as other investment firms. The broad definition will catch broker crossing systems and systems eligible for clearing liquid derivatives and is intended to be wide enough to cover any other future organised trading and execution venue. The definition excludes bulletin boards, post-trade confirmation services, services that aggregate interests or other services that do not arrange trading or execution.
- Consistency of application: The changes are intended to give greater clarity to MiFID in respect of non-advised sales. They will extend key rules, such as those on conflicts and conduct of business, to advised and non-advised sales of structured deposits and will apply MiFID to investment firms and credit institutions that sell their own securities without giving advice. Member States must also apply MiFID-like requirements on authorisation and conduct of business to locally-based entities that fall within an exemption from MiFID.
- Corporate governance: MiFID 2 will strengthen standards of corporate governance within firms, concentrating on executive and non-executive directors and management boards.
- Investor protection: The proposals do not change the customer categorisation conditions. But they introduce new protections for customers receiving investment advice and portfolio management and rules on inducements and on cross-selling. Disclosures will be improved and the basis on which firms will provide independent advice will be clarified. The proposals also suggest better high-level protections for eligible counterparties (ECPs) and highlight the importance of client asset protection by moving the safeguarding activity from being an ancillary activity to being an investment activity.
- Third country equivalence: Like other recent Directives, the proposals seek to introduce an equivalence test for third countries whose investment firms wish to provide services in the EU. These firms would be able to passport services under certain conditions (including having a branch in the EU if dealing with retail clients).
- Trading venue information: The proposals introduce a requirement for trading venues to publish annual data on execution quality and, where they trade commodity derivatives, to adopt appropriate limits and publish information in a useful format to regulators and to market participants.
- Data quality: Both the Directive and MiFIR make changes to improve the quality and consistency of data, and attempt to address the current criticisms of data fragmentation. Regulators will also have specific powers to seek information about derivative positions and emission allowances. The Directive includes provisions on the authorisation and conditions for operation of data reporting service providers, approved publication arrangements, consolidated tape providers and approved reporting mechanisms.
- Sanctions: The Directive will require Member States to impose minimum administrative sanctions for breaches of provisions of any part of the MiFID 2 framework and to publish them.
MiFIR then sets the requirements for:
- Disclosure of trade data to the public: This part looks at pre-trade transparency on shares, depository receipts, exchange-traded funds, certificates and similar financial instruments.
- Reporting of transactions to authorities.
- Trading of derivatives on organised venues.
- Access to clearing and trading (with appropriate references to the provisions of the Regulation on OTC Derivatives, Central Counterparties and Trade Repositories (EMIR)).
- Product intervention and position management: This includes the controversial provisions on ESMA's powers to ban sales or practices under certain conditions.
- Bringing emission allowances trading within the scope of regulation.
- Provision of investment services and activities without a branch by third country firms.