Markets in Financial Instruments Directive and Regulation (MiFID II/MiFIR) – regulation memo

MiFID II / MiFIR entered into force on 3 January 2018 and is primarily aiming at creating greater market transparency and increasing investor protection.

About MiFID II/R

  • The Markets in Financial Instruments Directive 2004/39/EC (MiFID I) was adopted in 2004, entered into force in 2007, and is regarded as the constitution for European financial markets
  • The revision of MiFID comprises 2 texts: MiFID II, a directive requiring national transposition, and MiFIR, a regulation that is directly applicable. MiFID II/R primarily aims to create greater market transparency (partly by redressing the unintended consequences of MiFID, such as fragmentation of the trading environment and dark trading) and to increase investor protection
  • The provisions of MiFID II are far-reaching. They include harmonised rules on the authorisation and supervision of investment firms, an EU-passport regime for investment firms, rules on the conduct of business, on investor protection, market transparency and the functioning of trading platforms
  • Entry into force was on 3 January 2018
  • On 17 February 2020, the European Commission launched a long-waiting public consultation on the review of MiFID II/R. Commission priorities for this “quick fix” are given to some items such as the establishment of an EU consolidated tape, investor protection (easier access to simple and transparent products, adequate information, client profiling and classification, inducements, reporting on best execution etc.), research unbundling and SME research coverage and commodity markets.

Scope

  • MiFID II applies to a broad range of financial services firms providing investment services in the EU, including investment firms, market operators, and data reporting services providers. It also applies to other financial entities engaging in the provision of investment services, such as banks, insurers and asset managers. These other types of entities are explicitly scoped-in if they perform any MiFID activities
  • MiFID II provides an exhaustive list of regulated activities. These are divided into investment services and ancillary services. Investment services include execution of orders, trading on own account, reception and transmission of orders (RTO), investment advice and portfolio management. Custody and safekeeping of assets are defined as ancillary services to investment services
  • MiFID II provides an exhaustive list of financial instruments to which it applies, including all securities credited to securities accounts (shares, debt securities, etc.), virtually all types of derivative contracts (swaps, options, futures, etc.), as well as structured deposits

Industry implications

  • In the context of the MiFID II/R review through a “quick fix”, more flexibility should be given to market participants notably when they apply conduct of business rules which are seen as burdensome. In this context, priorities could be:
    • to simplify the product governance requirements,
    • to benefit from (1) an opt out from ex ante costs and charges disclosures for professional clients and (2) an exemption for eligible counterparties,
    • to recalibrate complex vs non-complex products split,
    • to amend the criteria for opting into professional client status,
    • to propose alleviations for ex-post reporting.
  • In addition, with regard to open access to clearing, all markets have not yet implemented open access requirements and CCP Recovery & Resolution regulation should delay the MiFIR open access by one year (until 4 July 2021). We encourage open access as it spurred competition among market infrastructures and should lead to an overall decrease of costs. However, as regards clearing, open access has also raised significant costs for clearing members, in terms of collateral. Grounds for denying access (a trading venue to a CCP or vice versa) will only be permitted on the basis of risk to the orderly functioning of the market, liquidity fragmentation, or a lack of commercial viability.
  • Transaction reporting: we should take the opportunity of the MiFID II/R review and CMU to advocate for streamlined reporting requirements to mutualise reporting requirements among MiFID II/R, EMIR etc.

BNP Paribas Securities Services’ view

MiFID II/R represents a drastic change for all market participants. Without doubt, it represents a regulatory push towards more transparency. This has yet to reveal whether it will oil or stall overall market liquidity and efficiency.

MiFID II/R cannot be viewed in isolation of other EU regulations, as these are often interrelated. Thus, MiFID II is activity-related to: PRIIPs (product-related); UCITS and AIFMD, which regulate collective investments management; and EMIR where transaction reporting of all derivatives is required, whereas only certain derivatives must be reported under MiFIR. It is therefore crucial to navigate the complete web of EU financial regulations.

MiFID II/R aim at generalising safeguards and protections for all categories of clients, whether retail or professional. This requires far-reaching changes not only from entities dealing directly with end investors, but also from providers working with institutional clients and peers, who are usually “professional”.

Key dates

November 2007 – MiFID enters into force

October 2011 – The EC publishes legislative proposals for the MiFID review

June 2014 – The final MiFID II and MiFIR texts published in the EU Official Journal

Throughout 2016 – Publication of most delegated acts by the European Commission on technical standards (for implementing measures)

Q3 2016-Q2 2017 – Publication of ESMA Guidelines

July 2017 – Deadline for the national transposition of MiFID by the Member States

January 2018 – Official effective date of MiFID II

Q1 2020, ESMA issued clarifications for best execution reports under MiFID II.

July 2020 – Official entry into force of open access provisions (further postponement of the transitional period to July 2021 upon specific requests by CCPs to their Resolution Authorities)