The markets in financial instruments directive (“MiFID”) increases the transparency across the European Union’s financial markets and standardises the regulatory disclosures required for particular markets. MiFID has been applicable within the European Union since November 2007.
In June 2014, after more than two years of debate, two new pieces of legislation were approved: a revised directive (“MiFID II”) and a new regulation (“MiFIR”). Both MiFID II and MiFIR ensure a safer and more transparent financial market and are now fully operative.
Disclaimer: Readers of this newsletter should note that at the date of circulation of this article, the laws and regulations to which this newsletter makes reference to may be subject to further amendments which will not be reflected in this newsletter.
DIFFERENCES AND SIMILARITIES BETWEEN MIFID II AND MIFIR
MiFID II is aimed to establish a new regulatory framework in the context of financial markets, fostering a culture of transparency and investor protection. It prescribes rules and requirements for authorisation and operation of those who operate in Regulated Markets, Multilateral Trading Facilities (“MTF”) and Organised Trading Facilities (“OTF”). It also lays down limits and controls for management positions in the context of commodity derivatives.
MiFIR focuses mainly on reporting requirements, disclosures and cooperation with public authorities, transaction execution (pre, but also post, trade transparency), transaction reporting, clearing obligations and the like.
From a legal point of view, the main difference between a directive and a regulation is that MiFIR, being a regulation, does not require any implementing measures as it is directly applicable in the Member States of the European Union (the “EU”), whilst MiFID II, being a directive, needs to be transposed into each Member State’s legislation.
Both MiFID II and MiFIR, address the same matters which mainly apply to investment firms, market operators, data reporting services providers, and third-country firms providing investment services or performing investment activities in the EU.
In many cases MiFIR refers to MiFID II as they are linked to one another. An example of such strong link between the two can be commonly seen in the fact that they are very often referred to jointly.
SCOPE, MANDATORY AND OPTIONAL EXCEPTIONS
MiFID I dealt with only bonds and equities. However, due to the economic turmoil of the last decade, MiFID II broadened the scope to include commodities, currencies, credit products and their derivatives.
MiFID II sets forth, specifically in article 2, many mandatory exceptions either general (e.g. insurance, collective investment undertakings or pension funds) or national related exceptions (e.g. associations set up by Danish or Finnish pension and funds that manage assets solely for the associates, Italian “Agenti di Cambio”).
Moreover, it gives Member States the possibility to broaden the exceptions if they wish to regulate the activities established under article. 3.
The MiFIR follows the scope given by the MiFID II and provides specific rules for companies that have been authorised under MiFID II rules.
However, it is not clear whether the exceptions in MiFID II fall outside the scope of the regulation.
RULES FOR INVESTMENT FIRMS
MiFID II lays down that investment firms must ensure to provide “fair, clear and not misleading” information or advice to clients. They also need to ensure “the best possible result for their clients taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration”. MiFID II also sets forth that the execution of such client’s order shall be “prompt, fair and expeditious”. Last, they have to ensure the responsibility for actions or omissions of agents appointed by the firms as well as their skills and knowledge.
Moreover, if the firm undertakes certain activities involving algorithmic trading, they must guarantee the quality (especially in case of high-frequency trading), and prevent the risks as well as adhering to the technical standards.
When authorised, the firms hold the right to freely conduct the provisions of investments without having additional requirements imposed. They have the right to be freely established into a Member State and to operate, either directly or remotely, in the regulated market of a European country. Lastly, Investment firms have the right to designate a system to settle disputes (e.g. CCP, arbitration and so forth).
RULES FOR THIRD COUNTRY FIRMS
With respect to third country firms, the MiFID II sets forth the requirements for reciprocity and when a Member State can ask a firm to establish a branch in its territory. The firms must provide the authority with all the information needed in relation to the operation conducted and the authority should neither impose more requirements to them nor treat them in a more favourable manner (than a European company).
Once an authorisation is issued, they can operate according to the relevant laws.
OTF AND MTFS
MiFID II introduces the notion of an OTF. An OTF is a trader in non-equity instruments which previously fell outside the scope of MiFID. Furthermore, the provisions about Regulated Markets and MTFs have been harmonised. The rules that are now applying to Regulated Markets and MTFs have been extended to OTFs.
Moreover, the OTFs and MTFs have duties to report transactions, according to the criteria established under article 26 of MiFIR, They are also obliged to follow the technical standard and guidelines written by the European Securities and Markets Authority (as established under article 28).
DOUBLE VOLUME CAP
Article 5 of MiFIR sets forth a mechanism that caps the amount of trading carried out under:
- systems matching orders based on a trading methodology by which the price is determined in accordance with a reference price; and
- negotiated transactions in liquid instruments carried out under article 4(1)(b) of MiFIR.
These were thought to ensure that the use of waivers from pre-trade transparency do not unduly harm price formation.
In the last years, the financial market sector has been increasingly regulated.
It is foreseeable that such tendency will not decrease in the near future.
As seen, the EU is strengthening the reporting channels to the appropriate national authority. At the same time, it is trying to promote common rules for the sector that balance consumer protection and market behaviour.