The European Securities and Markets Authority (ESMA) has issued its first consultation papers on implementing the "MiFID 2" package. Although the adopted legislation has not yet been published in the EU Official Journal, ESMA has so much to do it needs to start the process now.

The MiFID 2 package, comprising the revised Markets in Financial Instruments Directive (MiFID 2) and Regulation (MiFIR) is likely to take effect in late 2016.

Key to the changes regulated firms and markets will have to make to their policies and procedures, and sometimes more fundamentally to their business models, are standards that ESMA will issue.

Regulated firms and markets should take note of all ESMA proposals as early in the process as possible as now is the time to raise views and concerns.

What has happened?

On 22 May 2014, ESMA published a consultation paper and a discussion paper on implementation of the MiFID 2 package. The MiFID 2 package includes over 100 requirements for ESMA to draft regulatory and implementing technical standards (RTS and ITS) and provide advice to the European Commission (the Commission). The papers are:

  • a consultation paper on technical advice ESMA is to deliver to the Commission by December; and
  • a discussion paper on various draft RTS and ITS, which will provide the basis for a further consultation paper later this year or early next.

ESMA will hold public hearings on the proposals in early July and needs comments by 1 August.

The consultation paper

The consultation paper is divided into seven sections, covering:

Investor protection

This part of the paper addresses 24 separate issues including:

  • interpretation of when firms carry on activities "in an incidental manner";
  • clarification on investment advice and the use of distribution channels;
  • guidance on the compliance function and complaints handling;
  • record keeping and the content of records;
  • product governance, with separate guidance for providers and distributors;
  • safeguarding of client assets including the role of the client assets oversight function;
  • conflicts of interest, and specific conflict management requirements for underwriting and placing;
  • remuneration policies and the requirement to act in the best interests of clients;
  • conditions for information to be fair, clear and not misleading;
  • provision and content of information to clients on investment advice, financial instruments, costs and charges;
  • permitted inducements from or to a third party;
  • requirements for firms providing "independent" investment advice;
  • criteria for establishing suitability and appropriateness of services and financial instruments for clients;
  • content of client agreements;
  • content and timing of reporting to clients; 
  • policies and disclosures for best execution;
  • ensuring the best client order handling;
  • procedures for firms when dealing with eligible counterparties; and
  • use of regulators' product intervention powers.


This part of the paper addresses:

  • how to specify when a market is liquid;
  • definitions of bonds, structured finance products and money market instruments, so as to clearly delineate between products;
  • the quantitative elements of the definition of "systematic internaliser";
  • conditions relating to circumstances where execution is in several securities or is subject to conditions other than current market price;
  • what should be "exceptional market circumstances" and when orders "considerably exceed the norm";
  • when prices will fall within a public range close to market conditions; and
  • pre-trade transparency for systematic internalisers in non-equity instruments.

Data publication

This section addresses:

  • criteria for access to systematic internalisers' quotes;
  • publication of unexecuted client limit orders on shares traded on a venue; and
  • what is a "reasonable commercial basis" in accordance with five provisions of MiFID 2 and MiFIR.

Micro-structural issues

This part of the paper looks at:

  • the distinctions between algorithmic and high-frequency trading; and
  • the definition of "direct electronic access".

Requirements applying on and to trading structures

This considers:

  • the conditions SME growth markets must meet to benefit from the special regime proposed for them;
  • examples of situations that would justify suspension and removal of financial instruments from trading;
  • what will make trading venue operations "substantial" in a host Member State; and
  • monitoring of compliance of trading venue information and reports of abusive behaviour.

Commodity derivatives

This part covers:

  • the definition of derivatives contracts that are financial instruments under Section C 6, 7 and 10 of Annex 1 of MiFID 2;
  • position reporting thresholds; and
  • ESMA's position management powers.

Portfolio compression

The last section of the consultation looks at what portfolio compression is and the scope of the publication requirements relating to it.

The discussion paper

The discussion paper covers many of the same topics as the consultation paper, while looking at additional issues within those topics. The paper focuses on the RTS and ITS that ESMA will produce.

Investor protection

This part considers:

  • the authorisation requirement for investment firms;
  • carrying on business through a branch or by freedom of services; and
  • the content, format and timing of execution data publication by trading venues and investment firms.


ESMA considers:

  • pre-trade transparency requirements for equities including waivers for equity instruments and trading models;
  • post-trade transparency for equities including deferred publication and information to be made public;
  • operation of the systematic internaliser regime in relation to equities;
  • the trading obligation for shares admitted to trading on a regulated market or traded on a trading venue;
  • the scope of obligations relating to non-equities and of non-equity financial instruments;
  • the liquid market definition for non-equity financial instruments;
  • pre- and post-trade transparency requirements for non-equity financial instruments and the transparency regime of non-equity "large in scale" orders and transactions;
  • specification of the size specific to instruments;
  • trading obligations for derivatives, with reference to the European Market Infrastructure Regulation (EMIR);
  • transparency requirements for the members of the European System of Central Banks; and
  • the information firms must provide so regulators and ESMA can carry out calculations that MiFIR requires.

Micro-structural issues

This part considers:

  • key definitions, especially those not included in existing ESMA advice;
  • organisational requirements for investment firms, focusing on algorithmic trading, direct electronic access and requirements on firms acting as general clearing members;
  • organisational requirements for trading venues including those on capacity, resilience and pre-trade controls;
  • market-making strategies, agreements and schemes;
  • the order-to-transaction ratio, how to determine it and relevant instruments;
  • ensuring that rules on co-location services are transparent, fair and non-discriminatory;
  • fee structures to ensure they are fair and non-discriminatory and do not incentivise disorderly trading or market abuse; and
  • harmonisation of regimes on tick sizes.

Data publication and access

ESMA considers:

  • general authorisation and organisational requirements for data reporting services;
  • additional requirements for certain providers and differences between approved publication arrangements (APAs), consolidated tape providers (CTPs) and approved reporting mechanisms (ARMs);
  • the criteria for "machine-readability" of technical arrangements for information dissemination;
  • technical standards for CTPs;
  • data disaggregation levels;
  • how to identify the firm responsible for publication of transaction details;
  • access requests to central counterparties (CCPs) and trading venues and criteria for allowing and denying access; and
  • non-discriminatory access to benchmarks and conditions for licensing them.

Requirements applying on and to trading venues

This part looks at:

  • basic requirements for admitting financial instruments to trading; and
  • suspension and removal of instruments from trading, in particular the connection between derivatives and the underlying financial instrument and how to determine formats and timings of communications.

Commodity derivatives

This section focuses on:

  • how to determine whether activities in commodity derivatives are ancillary to the main group business;
  • standards for setting position limits; and
  • requirements on position reporting.

Market data reporting

This part looks at:

  • technical standards on what information is reportable, including the definition of a transaction and its execution;
  • the obligation to supply financial instrument reference data and to keep records of orders;
  • specific requirements for firms using high-frequency algorithmic trading techniques; and
  • the accuracy of synchronised business clocks in accordance with international standards.

Post-trading issues

The final section addresses:

  • the obligation to clear derivatives traded on regulated markets and the timing of acceptance for clearing; and
  • indirect clearing arrangements.

What next?

All firms and markets affected by the MiFID 2 reform package should consider those parts of ESMA's proposals that concern them and their business. There may be a small window of opportunity to influence ESMA's advice to the Commission or the contents of its technical standards.

Our Financial Regulatory Developments Newsletter (FReD) will keep you up to date with the progress of implementation.

Please contact our team if you would like further information on any aspect of implementation or to discuss the effects of the MiFID 2 package on your business.