The Markets in Financial Instruments Directive ("MiFID") came into force on 1 November 2007 and was implemented in Ireland by the European Communities (Markets in Financial Instruments) Regulations, 2007 as amended (the "MiFID Regulations")1. MiFID established a regulatory framework for the provision of investment services by investment firms and in this way established for the first time an effective single financial services market in the EEA.
The terms of MiFID made provision for a mandatory post implementation review2 and the European Commission (the "Commission") published a paper consulting on amendments to MiFID in December 2010. Following that consultation period, the Commission published draft legislative proposals in the form of
(i) a revised Directive which will be an amendment and restatement of MiFID, (the "MiFID II Directive") and;
(ii) a new Regulation which will set out requirements relating to trade transparency and the mandatory trading of derivatives on organised venues, (the "MiFID II Regulation"), (hereinafter collectively referred to as "MiFID II").
The financial crisis demonstrated weaknesses in some of the underlying principles of MiFID and highlighted areas needing reinforcement or revision in order to strengthen investor protection and to strengthen investor confidence. In addition, financial markets have changed enormously over the past few years. For example, it is generally agreed that MiFID led to the development of new trading platforms and activities which fell outside the scope of regulation. Furthermore MiFID had to be revised in order to deal with rapid technological changes such as the growth of automated trading. The proposals contained in MiFID II are therefore regarded as an essential part of on-going structural reforms in the aftermath of the financial crisis.
On 15 April 2014, the European Parliament adopted the MiFID II proposals. MiFID II was then formally approved by the European Council on 13 May 2014. The text which was approved by both the European Council and the European Parliament reflects what had previously been agreed between the various institutions3. It is expected that MiFID II will enter into force 20 days after its publication in the Official Journal of the European Union. All going to plan it is expected that the text of MiFID II will be published in the Official Journal of the European Union in June 2014.
The MiFID II Directive will require national implementation within a 30 month timeframe after its publication in the Official Journal of the European Union. The MiFID Regulation will not require national implementation and will apply from a date yet to be specified in the MiFID II Regulation itself. In this regard the implementation date for the bulk of the requirements contained in the MiFID II Regulation is 30 months after it enters into force, however certain provisions of the MiFID II Regulation will apply immediately following its entry into force. The MiFID II Regulation will be directly applicable in all Member States and it is hoped that this will minimise the scope for divergences in the interpretation of its requirements.
Separately the European Securities Markets Authority ("ESMA") has been asked by the European Commission to draft technical advice and to prepare regulatory technical standards and implementing technical standards (the "Level 2 Measures"). On 22 May 2014, ESMA launched a consultation paper (the "Consultation Paper") and a discussion paper (the "Discussion Paper") on MiFID II. This is the first step with regards to the preparation of the Level 2 Measures and represents an important part of the process of translating the MiFID II requirements into practically applicable rules and regulations.
The Consultation Paper covers all of the topics on which the European Commission has formally requested ESMA to provide technical advice for the adoption of delegated acts by the European Commission. Therefore the Consultation Paper focuses on; (i) investor protection; (ii) transparency; (iii) data publication; (iv) micro-structural issues; (v) requirements applying on and to trading venues; (vi) commodity derivatives; and (vii) portfolio compression. As ESMA is required to deliver its technical advice to the European Commission by December 2014 it is therefore subjected to a condensed consultation process. On the other hand, the Discussion Paper focuses on more innovative or technically complex topics in order to receive feedback from stakeholders for the preparation of regulatory technical standards and implementing technical standards. The feedback received on the Discussion Paper will provide the basis of a further consultation on the issues raised in the Discussion Paper.
This briefing seeks to look at the key changes which will be introduced by MiFID II which is expected to be implemented by the end of 2016/early 2017.
MiFID II will have implications for existing investment firms which are authorised under the MiFID Regulations and for firms that will be brought within the scope of the regulatory regime as a result of the changes contained in MiFID II.
MiFID II will expand the scope of MiFID at firm level as a larger number of investment firms will now fall within the scope of MiFID II for the first time. For example a broader range of commodities firms will now fall within the scope of MiFID II as the MiFID II Directive seeks to restrict the exemptions that a number of commodities firms currently rely on in order to ensure that they are outside the scope of MiFID.
Article 2(1)(d) of MiFID contains an exemption from authorisation for persons who do not provide any investment services or activities other than dealing on own accounts unless they are market makers or deal on own account outside a regulated market ("RM") or a multilateral trading facility ("MTF") on an organised, frequent and systematic basis by providing a system accessible to third parties in order to engage in dealings with them. Article 2(1)(d) of the MiFID II Directive restricts this "dealing on own account exemption" and provides that a firm will no longer be able to rely on this exemption if it is either (a) a member of or participant in a RM or MTF; or (b) if it deals on own account by executing client orders. In addition, Article 2(1)(i) of the MiFID Directive contains an exemption from authorisation for persons who provide to clients investment services in commodity derivatives, provided this is an ancillary activity to their main business when considered on a group basis and that the main business is not the provision of investment services within the meaning of MiFID or banking services under Directive 2000/12/EC. The MiFID II Directive seeks to restrict this exemption and provides that it will not apply to persons who deal on their own account by executing client orders.
Any firms which currently avail of these exemptions should monitor the new developments of MiFID II closely to understand whether they will need to become authorised to carry out MiFID business. In particular, it is likely that these changes are likely to have implications for many utilities, oil companies, metal traders, energy and commodity businesses and others that are active in commodity derivatives.
Interestingly, in the Commission's initial draft of the MiFID II Directive, custody was to become a core investment service (instead of an ancillary service). As such, this would have brought standalone custodians within the scope of MiFID. However, the text of the MiFID II Directive which was published on 18 February 2014 reinstates this service as an ancillary service. Therefore, it appears that standalone Irish custodians will continue to be authorised under the Investment Intermediaries Act 1995 (as amended) and will not be required to seek authorisation under MiFID II. In addition, MiFID II will expand the scope of MiFID at product level as a larger number of products will be covered by the new legislation. MiFID II brings emission allowances within the scope of MiFID by re-classifying them as financial instruments. This will have the effect of bringing spot carbon trading within the scope of MiFID.
In addition, non-advised sales of structured deposits will be subject to certain of MiFID's conduct of business rules.
The Commission wants all forms of organised trading to take place on platforms subject to regulation and supervision. To this end, MiFID II introduces the concept of a new trading venue; Organised Trading Facility ("OTF") which is defined in the MiFID II Directive as meaning "a multilateral system which is not a regulated market or MTF and in which multiple third party buying and selling interests in bonds, structured finance products, emission allowances or derivatives are able to interact in the system in a way that results in a contract". OTFs are broadly designed to capture broker crossing systems and inter dealing systems. It is intended that facilities on which no trade execution or arranging takes place, such as order routing systems and pure OTC trading (direct trades between counterparties on an ad hoc basis) will be excluded from this definition.
The MiFID II Directive requires that an investment firm or a market operator operating an OTF establish arrangements preventing the execution of client orders in an OTF against the proprietary capital of the investment firm or market operator operating the OTF. This factor is likely to be the key factor in distinguishing an OTF from a systematic internaliser ("SI").
The operator of an OTF will require authorisation under MiFID II and in this way will be required to adhere to the same conduct of business rules as MTFs, RM's and SIs. In addition, MiFID II sets a number of specific OTF organisational requirements. A request for authorisation must include a detailed explanation as to why the system does not correspond to and cannot operate as a MTF, RM or SI. This requirement implicitly recognises the scope for overlap between an OTF MTF, RM and a SI.
1 MiFID comprises three main pieces of legislation; the Level 1 MiFID Directive being Directive 2004/39/EC and the Level 2 measures implementing MiFID being the Commission Directive (2006/73/EC) and Commission Regulation 1287/2006, collectively referred to as MiFID.
2 Article 65 of MiFID.
3 On 14 January 2014, the European Commission published a Memo confirming that the European Parliament and the European Council had reached an agreement in principle on MiFID II.
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