These rules are designed to close the loopholes in the existing legislation, ensuring that financial markets are safer as well as more efficient, investors are better protected, speculative commodity trading is curbed and high-frequency trading is regulated.
The new rules will apply to investment firms, market operators and services providing post-trade transparency information in the EU. They are set out in two pieces of legislation, a directly applicable regulation dealing inter alia with transparency and access to trading venues and a directive governing authorisation and organisation of trading venues and investor protection.
Market structure
All systems enabling market players to buy and sell financial instruments would have to operate as Regulated Markets (RMs) like stock exchanges, Multilateral Trading Facilities (MTFs) - such as NYSE EURONEXT or Organised Trading Facilities (OTFs) designed to make sure that all trading venues are captured by the Market in Financial Instruments Directive (MiFID). Trading on OTFs would be restricted to non-equities, such as interests in bonds, structured finance products, emission allowances or derivatives.
The trading obligation would ensure that investment firms do their trades in shares on organised trading venues such as RMs or MTFs. Transactions in derivatives subject to this obligation would have to be concluded on RMs, MTFs, or OTFs.
Investor protection
Under the new rules, the duty of firms providing investment services to act in clients’ best interests would also include designing investment products for specified groups of clients according to their needs, withdrawing “toxic” products from trading and ensuring that any marketing information is clearly identifiable as such and not misleading. Clients should also be informed whether the advice offered is independent or not and about the risks associated with proposed investment products and strategies.
Commodities
Parliament’s negotiators ensured that for the first time, the competent authorities would be empowered to limit the size of a net position which a person may hold in commodity derivatives, given their potential impact on food and energy prices. Under the new rules, positions in commodity derivatives (traded on trading venues and over the counter), would be limited, to support orderly pricing and prevent market distorting positions and market abuse. The European Securities and Markets Authority should determine the methodology for calculating these limits, to be applied by the competent authorities.
Position limits would not apply to positions that are objectively measurable as reducing the risks directly related to the commercial activity.
High-frequency algorithmic trading
Parliament also introduced, for the first time at EU level, rules on algorithmic trading in financial instruments. As defined by these rules, such trading takes place where a computer algorithm automatically determines individual parameters of orders, such as whether to initiate the order, the timing, price or quantity. Any investment firm engaging in it would have to have effective systems and controls in place, such as “circuit breakers” that stop the trading process if price volatility gets too high. To minimize systemic risk, the algorithms used would have to be tested on venues and authorized by regulators. Moreover; records of all placed orders and cancellations of orders would have to be stored and made available to the competent authority upon request.
Third country regime
Third countries whose rules are equivalent to the new EU rules would be able to benefit from the “EU passport” when providing services to professionals.
Next steps
The details of this deal will be now fine-tuned in technical meetings.
Press release
Commissioner Michel Barnier welcomes agreement in trilogue on revised European rules
"I welcome the agreement in principle reached today by the European Parliament and the Council on updated rules for markets in financial instruments (MiFID II). These new rules will improve the way capital markets function to the benefit of the real economy. They are a key step towards establishing a safer, more open and more responsible financial system and restoring investor confidence in the wake of the financial crisis. The Commission would, however, have preferred a more ambitious implementation period.
The MiFID II reform means that organised trading of financial instruments must shift to multilateral and well-regulated trading platforms. Strict transparency rules will ensure that dark trading of shares and other equity instruments which undermine efficient and fair price formation will no longer be allowed. Although I regret that the Commission’s proposed ambitious transparency regime for non-equity instruments, such as bonds and derivatives, has not been fully achieved, MiFID II represents an important step in the right direction towards greater transparency in this area.
In fulfilment of our G-20 commitments, the introduction of a trading obligation for derivatives will make trading safer and more efficient and will complement the compulsory clearing requirements under the European Markets Infrastructure Regulation. By introducing a harmonised EU system setting limits on the positions held in commodity derivatives, MIFID II will contribute to orderly pricing and prevent market abuse, thus curbing speculation on commodities and the disastrous impacts it can have on the world's poorest populations.
The establishment of a harmonised EU framework for non-discriminatory access to trading venues and central counterparties, as well as to benchmarks for trading and clearing purposes, will lead to improved competition and more effective, integrated and safe capital markets for the benefit of investors. Transitional rules will ensure that the shift is made in a smooth way.
MiFID II will also strengthen investor protection. Investment firms will have to meet stricter standards to ensure that investors can trust that they are being offered products which are suitable to them and that their assets are well protected. Investors will also be able to rely on independent and neutral advice and fee and remuneration structures must not conflict with this requirement.
MiFID II will also ensure that legislation keeps pace with technological developments. The dramatic increase in the speed and volumes of order flows can pose systemic risks. The new rules ensure safe and orderly markets and financial stability through the introduction of trading controls, an appropriate liquidity provision obligation for high-frequency traders pursuing market-making strategies and by regulating the provision of direct electronic market access.
Today’s agreement also strengthens the existing rules to ensure effective cooperation between authorities and harmonised administrative sanctions in order to detect and deter of breaches of MiFID. Throughout the EU investment firms must be well supervised and, where necessary, properly sanctioned.
Last but not least, through the creation of a harmonised legal framework for EU market access of third-country firms for professional clients, MiFID II will deepen the single market and improve the EU's ability to speak with one voice at international level."
Press release (containing key elements of the agreement)
Greek Presidency
“The political agreement with the European Parliament on updated rules for markets in financial instruments constitutes an important step aimed at establishing a safer, sounder, more transparent and more responsible financial system. With the revised rules, the European Union, in response to the financial crisis, acquires a significant tool to reduce systemic risk and to ensure financial markets stability as well as adequate investor protection", said Greek Finance Minister Yannis Stournaras, the President of ECOFIN.
Press release
ESMA's role
Now that the three European legislators have reached an accord, the final text must be translated into all EU languages before facing a final vote among all MEPs. Regulatory body the European Securities and Markets Authority will then develop the crucial detail that will underpin the new rules and determine how they work in practice. A spokesman for ESMA said: “We have already started the preparatory work on MiFID II but we will need a complete and final legal text before the starter gun on ESMA’s work can be fired".
ESMA’s work will consist of an initial call for general market comment on the issues it needs to tackle, followed by a set of draft technical standards based on the market feedback it receives. A set of final technical standards will eventually be issued and this document will likely be published at well over 200 pages, according to the ESMA spokesman.
Before Christmas, ESMA selected three organisations - the Centre for European Policy Studies, Insead OEE Data Services and capital markets consultancy Tabb Group – to help craft the technical details for MiFID. Rebecca Healey, senior analyst at Tabb, said: “The most important factor is that we have moved onto the next stage and we can now work with the market to ensure we are providing a full impact assessment that will help achieve the best results for the underlying investor. Our work will be a mix of academic and industry practice to ensure we are investigation all potential solutions that will be beneficial for the industry overall.”
ESMA’s work will have some involvement in pre and post-trade transparency for equity and bond markets as well as the framework that will determine the overall positions that firms can hold in commodities and their derivatives
Further reporting (© FN - subscription required)
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