European Union: An Update On MiFID II

Last Updated: 4 March 2014
Article by Robert Cain

The purpose of this briefing is to update you on developments in relation to MiFID II, which is expected to be implemented across the EEA in 2016.

The Markets in Financial Instruments Directive (2004/39/EC) (MiFID) came into force on 1 November 2007 and was implemented in Ireland through the European Communities (Markets in Financial Instruments) Regulations 2007 (the MiFID Regulations).

MiFID was subject to a mandatory post-implementation review and the European Commission (the Commission) published a paper consulting on amendments to MiFID in December 2010. On 20 October 2011, following the consultation, the Commission published draft legislative proposals in the form of a draft directive dealing with, inter alia, investor protection, authorisation and organisation of trading venues (the Directive) and a draft regulation dealing with, inter alia, transparency and access to trading venues (the Regulation), together referred to as "MiFID II".

The aim of MiFID II is to introduce new post-financial crisis conduct of business requirements and seek to improve the transparency, stability and regulation of the financial markets. It will lead to a more harmonised conduct of business and systems and controls framework for the investment services sector in Europe.

In October 2012, the European Parliament (the Parliament) adopted amendments to MiFID II which had been proposed by its Economic and Monetary Affairs Committee and, following the publication of a number of compromise proposals by various EU Council Presidencies, the Parliament announced on 14 January 2014 that informal agreement had finally been reached in trialogue. Parliament is now expected to formally consider MiFID II in its 10-13 March 2014 plenary session, with a view to the texts of both the Directive and Regulation being finalised before the Parliamentary elections in May 2014.

The provisional texts to be put before the Parliament next month were made available on 18 February 2014 (dated 17 February 2014) and this update is based on those provisional texts.

In a number of key areas the European Securities and Markets Authority (ESMA) has been asked to prepare accompanying technical standards, which have not yet been published. Until these standards are available the full practical impact of MiFID II is difficult to assess. In its 2014 Regulatory Work Programme, published on 12 February 2014, ESMA highlighted over 50 regulatory technical standards, 16 implementing technical standards, and a number of sets of recommendations, guidelines and pieces of technical advice in respect of which it intends to issue consultation papers throughout 2014 with a view to finalising those draft technical standards.

Some of the key changes to be introduced by MiFID II are discussed in more detail below.

KEY CHANGES

SCOPE

MiFID II will be broader than MiFID in terms of the range of firms covered. For example, a wider range of commodities firms will be covered than is the case at present and certain data providers will fall within the scope of regulation for the first time. In addition, a broader range of products will be covered, including structured deposits and emissions allowances. We understand that MiFID II will also amend the existing Insurance Mediation Directive (2002/92/EC) to introduce rules for insurance-based investment products. ESMA will have powers to prohibit or limit the marketing and distribution of certain types of financial instruments in particular circumstances, and the European Banking Authority (EBA) may have similar powers in relation to structured deposits.

In the Commission's initial draft of the Directive, custody (i.e. safekeeping and administration of financial instruments) was to become a core investment service instead of an ancillary service, which would bring standalone custodians in Ireland within the scope of the MiFID Regulations instead of the Investment Intermediaries Act 1995. However, the text of the Directive as provisionally agreed with the Parliament and published on 18 February 2014 reinstated custody services as an ancillary service rather than a core investment service.

NEW TRADING VENUE

A new regulated category of trading venue called OTFs (organised trading facilities) will be introduced; this is broadly intended to capture broker crossing systems and inter dealer broker systems.

PASSPORT

In a fundamental development, it is also proposed to permit third country firms (i.e. non-EEA firms) that wish to provide cross-border investment services across the EEA to do so on the basis of a "passport". Under the proposals, the passport will be exercised either:

  • by establishing an EEA branch (which will be mandatory if the intention is to deal with retail clients and professional clients within the meaning of Section II of Annex II to the Directive (clients who request to be treated as professional clients)) and gaining authorisation for the branch; or
  • by becoming licensed by an EEA competent authority to provide services from outside the EEA on a cross-border basis (this is possible where the firm only intends to provide services to professional clients within the meaning of Section I of Annex II to the Directive (deemed professional clients) and eligible counterparties).

In the second case the non-EEA firm must pass an equivalency test to be devised by the Commission. It is also envisaged that persons within the EEA will be able to receive services cross border from non-EEA firms that are not authorised in the EEA where the person in the EEA requests services from the non-EEA firm at their "own exclusive initiative", i.e. on an unsolicited basis. The proposed new regime for non-EEA firms will inevitably lead to a re-write of the cross-border business "safe harbour" in Regulation 8 of the MiFID Regulations and the introduction of a formal "unsolicited business" exemption.

CONDUCT OF BUSINESS REQUIREMENTS

MiFID introduced a harmonised set of conduct of business rules for investment services across the EEA. MiFID II will introduce significant changes to some of these requirements, for example:

  • additional restrictions on the receipt of third-party payments (i.e. inducements) by portfolio managers and providers of independent advice;
  • additional requirements in relation to the provision of investment advice (e.g. requirements to notify whether the advice is "independent" and whether the firm will conduct an ongoing suitability assessment);
  • best execution requirements will be amended (e.g. firms will be required to disclose their top five execution venues for each class of financial instrument);
  • additional client asset requirements in respect of retail clients;
  • a broader scope for appropriateness tests;
  • product intervention powers – ESMA, the EBA and national regulators, such as the Central Bank of Ireland, will be permitted to ban or restrict products in certain circumstances. Position limits for products such as commodity derivatives will also be introduced (save where the positions can be objectively measured as reducing risks directly related to the relevant commercial activity). ESMA will be responsible for setting the methodology to be used to calculate these limits, which methodology must then be applied by the national regulators.

TRANSPARENCY AND TRANSACTION REPORTING

New pre and post-trade transparency requirements will be introduced, coupled with an extension of those requirements beyond equities to cover equity-like instruments, bonds and derivatives. The requirements will also apply to a broader range of execution venues.

Trading venues will also be required to make pre and post-trade data available on a reasonable commercial basis, and a related approved reporting mechanism and an authorised publication arrangement will be established.

The transaction reporting regime is expected to be extended to cover:

  • financial instruments which are admitted to trading or traded on a trading venue or for which a request for admission to trading has been made;
  • financial instruments where the underlying is a financial instrument traded on a trading venue; and
  • financial instruments where the underlying is an index or a basket composed of financial instruments traded on a trading venue.

ELECTRONIC AND EXCHANGE TRADING

MiFID II will require firms engaged in algorithmic trading to comply with specific systems and control requirements designed to ensure that their trading systems are suitably resilient and include appropriate risk controls. The algorithms will have to be tested on venues and information relating to algorithmic trading strategies must be provided to regulators. Firms will also have to maintain records of orders placed and orders cancelled, and provide these to the relevant regulator on request.

In accordance with the wishes of the G20, there will be a mandatory requirement for certain derivatives contracts which are eligible for clearing under the European Market Infrastructure Regulation (Regulation (EU) No. 648/2012) to be traded on a regulated market, an MTF or an OTF.

MiFID II will also introduce a framework whereby competition in the trading and clearing of financial instruments is improved via the establishment of a harmonised regime for access to trading venues and central counterparties on a non-discriminatory basis. Transitional periods are expected to facilitate a smooth transition to the new framework.

ADMINISTRATIVE SANCTIONS

MiFID II will also introduce harmonised administrative sanctions across Member States, setting out the types of breaches in respect of which Member States must provide for sanctions and also setting out a non-exclusive list of the types of sanctions which Member States may empower competent authorities to impose.

TIMETABLE

The implementation timeline is becoming clearer and it is expected that national implementation of the Directive will be required by mid/late-2016 (the Regulation will not have to be implemented at national level and will be directly effective from a date to be specified in the Regulation itself).

An estimated timetable is as follows:

March 2014 – Text voted on by Parliament

May/June 2014 – Text finalised and published in Official Journal (parts of the Regulation may become effective)

Q3 2014 onwards ESMA begins to issue consultation papers together with draft regulatory and implementing technical standards (ESMA is expected cooperate closely with the EBA and the European Insurance and Occupational Pensions Authority in developing these)

2016 – MiFID implementation at national level (although implementation of certain provisions may take longer, or may be subject to transitional arrangements)

Arthur Cox will provide a further update once MiFID II is approved by the Parliament in plenary session.

In the meantime, please contact Robert Cain at Arthur Cox if you require advice on how MiFID II will impact your business in Ireland.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.