On 20 October 2011, the European Commission published two proposals, one calling for an amendment ("MiFID II") to the Markets in Financial Instruments Directive ("MiFID") and another for the adoption of a new regulation (known as "MiFIR"). MiFID has been implemented in Belgium by two royal decrees: the Royal Decree of 27 April 2007 amending several Belgian acts, notably the Financial Sector Act of 2 August 2002 (Loi relative à la surveillance du secteur financier et aux services d'investissement/Wet betreffende het toezicht op de financiële sector en de financiële diensten), and the Royal Decree of 3 June 2007.
The proposals provide for the revision of certain MiFID rules and introduce new rules. The proposals must now be approved by the European Parliament and the Council. The intention is for MiFID II and MiFIR to enter into force in 2013. The resulting amendments to MiFID will subsequently have to be implemented into Belgian law, while MiFIR will be directly applicable in Belgium.
MiFID II and MiFIR contain a large number of general provisions, pursuant to which the European Commission and ESMA will set out more detailed rules. This means that the precise impact of the proposals is not clear at this stage.
Please find below an overview of the most important changes introduced by the proposals:
The scope of MiFID will be expanded:
- MiFID will also apply to the advised and non-advised sale of structured deposits by credit institutions (Article 1(2) MiFID II).
- MiFID will apply to all transactions (including spot transactions) in emission allowances (currently, only certain derivative transactions in emission allowances fall within the scope of MiFID) (Annex I, Section C(4) and (11) MiFID II).
- MiFID II clarifies that the MiFID rules also apply to investment firms and credit institutions selling their own securities at the time of issuance, when not providing advice (Article 4(1)(4) MiFID II).
- The scope of the existing exceptions for investment firms that deal on their own account will be narrowed. For instance, investment firms that deal on their own account will require a license if they are a member of a regulated market or MTF (Article 2(1)(d)(ii) MiFID II).
- The scope of the existing exceptions for entities active in commodity derivatives trading will be narrowed (Article 2(1)(i) and (k) MiFID II). ◦Custody of financial instruments will become an investment service. Currently, this is only an ancillary activity. This means that entities that provide custody services without other MiFID services will need to obtain a license (Annex I, Section A(9) MiFID II).
- The proposals create a new system for investment firms based in non-EU/EEA countries. Pursuant to this system, investment firms based in non-EU/EEA countries will be able to benefit from a European passport, provided, amongst other things, that they are required to establish a branch in the EU/EEA when offering services to non-professional clients (Articles 41-50 MiFID II).
Amendment of the rules on client classification:
- The proposals state that municipalities and other local authorities do not qualify as professional investors (Annex II MiFID II).
- Additional obligations will apply with respect to services offered to eligible counterparties (Article 30 MiFID II).
New rules with respect to investor protection:
- Firms providing investment advice will be required to disclose whether (i) the advice is provided on an independent basis, (ii) it is based on a broad or more restricted analysis of the market, and (iii) the firm will provide the client with an on-going assessment of the suitability of the recommended financial instruments. In order to qualify as "advice provided on an independent basis", the firm must meet certain requirements (Article 24(3) and (5) MiFID II).
- Investment firms providing advice on an independent basis or asset management services may not receive fees, commissions or other monetary benefits from a third party in relation to provision of the services to clients (Article 24(5) and (5) MiFID II).
- The exception to the know-your-customer requirement for execution-only business will be narrowed with respect to the categories of qualifying financial instruments (Article 25(3) MiFID II). ◦The proposals introduce specific information obligations with respect to bundled products (Article 24(7) MiFID II).
- The proposals contain additional information obligations with respect to order execution policies (Article 27(4) and (5) MiFID II).
- The proposals prohibit the conclusion of title transfer financial collateral arrangements with non-professional clients (Article 16(10) MiFID II).
Additional corporate governance requirements will be imposed on investment firms, including requirements with respect to members of the management body:
- The current requirement of having sufficiently experienced members will be expanded: members will be required to devote sufficient time to their duties. The proposals include limits on the number of directorships a person can hold at any given time. (Article 9(1)(a) MiFID II).
- The proposals require, where appropriate, the establishment of a nomination committee (Article 9(2) MiFID II).
- Investment firms must take into account diversity when selecting members of the management body (Article 9(3) MiFID II).
- The proposals provide that investment firms must record certain telephone conversations and electronic communications (for instance e-mail messages) (Article 16(7) MiFID II).
The proposals introduce new rules with respect to the infrastructure of trading venues:
- Provision is made for a new trading venue - the OTF or organized trading facility. This is a trading venue other than a regulated market or MTF that brings together multiple third-party buying and selling interests (an example is a broker crossing system). OTFs must be authorized by the regulator and meet certain ongoing requirements which also apply to regulated markets and MTFs. However, OTFs will also be subject to certain investor protection rules and may not execute orders against their own capital (Article 2(1)(7) MiFIR and Articles 5(2), 18 and 20 MiFID II).
- The rules on systematic internalisers will no longer apply only to shares, but will be extended to other financial instruments. In addition, the proposals introduce new rules for systematic internalisers (Articles 2(1)(3), 13-19 MiFIR).
- Additional requirements will apply with respect to regulated markets, MTFs (and OTFs), including requirements pertaining to the provision of annual information on execution quality (Article 27(2) MiFID II), greater transparency (Articles 3-10 MiFIR) and reporting obligations (Articles 21-23 MiFIR), and rules with respect to data consolidation (Articles 11 and 12 MiFIR).
- The proposals introduce rules with respect to algorithmic trading: investment firms that engage in algorithmic trading must meet additional requirements (Article 17 MiFID II).
- Mandatory exchange trading of derivatives: in keeping with EMIR, MiFIR provides that transactions in derivatives that have been identified by ESMA must, in principle, take place on a regulated market, MTF, OTF or equivalent third-country trading venue (Article 24(1) MiFIR).
- The proposals grant additional powers to the regulators: the regulators will now be empowered to request any person holding a derivatives position to reduce the size of its position or, with respect to commodity derivatives, limit the ability of any person from entering into a commodity derivative (Article 72 MiFID II). In addition, the regulators will have the power to prohibit or restrict the marketing, distribution or sale of a particular financial instrument or type of activity (Articles 31 and 32 MiFID).
- The proposals introduce new rules with respect to sanctions: the Member States must implement minimum requirements, including a maximum penalty of at least 10% of total annual turnover for a legal entity and EUR 5,000,000 for a natural person or twice the profit derived from the violation (Article 75 MiFID II).