MiFID II will apply from 3 January 2017. EU Member States are required to adopt and publish measures transposing MiFID II and delegated acts into national law by 3 July 2016.
MiFID II will be implemented in the Netherlands through amendments to the Dutch Financial Supervision Act. On 5 June 2015, the Dutch Ministry of Finance published a consultation paper and its first legislative proposal for the MiFID II Implementation Act 2014 (Wet implementatie richtlijn markten voor financiële instrumenten 2014). In general, MiFID II extends the scope of MiFID, contains more detailed regulation, and provides regulatory authorities with the power to impose much stricter penalties and enforcement thereof.
Through the consultation, the Dutch legislator wishes to inform stakeholders about the proposed changes to the Dutch Financial Supervision Act (Wet op het financieel toezicht, the "Wft"), and invite them to comment and provide feedback thereon. The consultation concerns all elements of the legislative proposal and the explanatory memorandum.
Key topics legislative proposal
The recast directive of 15 May 2014 on markets in financial instruments (Directive 2014/65/EU, "MiFID II") aims to strengthen the supervision and regulatory framework in relation to financial instruments to ensure more transparency, provide better protection for investors, address non-regulated areas and ensure that supervising authorities have sufficient authority to perform their tasks. The legislative proposal therefore mainly focuses on the following topics:
- Investor Protection
MiFID II seeks to promote investor protection; the purpose of the legislative proposal is to intensify and strengthen the conduct of business obligations that apply to investment firms. For instance, investment firms will have to disclose the total costs of an investment service and the total costs of a structured financial instrument prior to providing the investment service, to enable the client to assess the cumulative effect on the return of such product. Investment Firms that manufacture financial instruments for sale to clients will be required to maintain a product approval process.
- Trading platforms
MiFID II introduces a new type of trading venue: the organized trading facility ("OTF"). On an OTF, third parties are only allowed to trade bonds, structured finance products, emission allowances or derivatives. The execution of orders on an OTF is carried out on a discretionary basis, which differs from multilateral trading facilities ("MTFs") or regulated markets . Furthermore, MiFID II introduces the obligation to execute transactions in standardized derivatives (i.e. derivatives suitable for clearing, as determined in Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories, "EMIR") on a trading platform: a regulated market, MTF or an OTF.
- Commodity derivatives
MiFID II also extends transparency obligations to the trade of commodity derivatives, including provisions to prevent market abuse. A general exemption for traders in commodity derivatives will therefore no longer exist. In principle, commodity derivative traders will only be exempted if they trade in extension to their non-financial main activity (physical trade) and do not apply high frequency trading ("HFT"). The consequences for a trader that no longer qualifies for an exemption are far-reaching: the relevant party will have to apply for a licence as an investment firm pursuant to MiFID II. Moreover, these parties will also qualify differently under EMIR and they will become subject to the capital requirements set out in the Capital Requirements Regulation (EU) 575/2013).
- High frequency algorithmic trading
Firms that apply algorithmic trading such as HFT and that currently take advantage of exemptions set out in MiFID, will no longer be exempted from licence requirements and supervision. Investment firms using HFT will have to comply with extensive internal control and business conduct supervision by the regulatory authorities.
- Direct electronic access
Direct electronic access arrangements permit customers of market members to enter orders into a market’s trade matching system for execution using that market member’s trading code, whether or not the market member’s trading infrastructure is used. Firms that offer direct electronic access will have to assess and review the suitability of clients using the service, and guarantee that the use of the service is subject to proper monitoring and appropriate risk controls designed to prevent trading that may create risks to the firm itself or that could create or contribute to a disorderly market.
- Third state policy
Investment firms with their registered office in a third party state with a legal framework and supervision that has been acknowledged as equivalent by the European Commission according to Regulation (EU) no. 600/2014 of the European Parliament and the Council of 15 May 2014 on markets in financial instruments (MiFIR), can freely provide investment services and perform investment activities to eligible counterparties and professional investors in the EU, subject to their registration with the European Securities and Markets Authority.
MiFID II intensifies corporate governance rules concerning members of management bodies of investment firms and operators of regulated markets.
The deadline for the consultation was 6 July 2015. At present, it is not known when the MiFID II Implementation Act 2014 will enter into effect. As a result of the implementation of MiFID II in the Netherlands, underlying legislation to the Wft will also have to be amended. Legislative proposals for the underlying legislation are not yet available.