PURPOSE: to adopt new rules for more
sound, transparent and efficient EU financial markets (recast of the Markets
in Financial Instruments Directive (MiFID).
PROPOSED ACT: Directive of the European
Parliament and of the Council.
BACKGROUND: the Markets in Financial
Instruments Directive (MiFID) (Directive 2004/39/EC), in force since
November 2007, is a core pillar in EU financial market integration. It establishes
a regulatory framework for the provision of investment services in financial
instruments (such as brokerage, advice, dealing, portfolio management, underwriting
etc.) by banks and investment firms and for the operation of regulated
markets by market operators. It also establishes the powers and duties of
national competent authorities in relation to these activities.
The result
after 3.5 years in force is more competition
between venues in the trading of financial instruments, and more choice for
investors in terms of service providers and available financial instruments,
progress which has been compounded by technological advances. Overall,
transaction costs have decreased and integration has increased.
However, some
problems have surfaced:
- the
benefits from this increased competition have not flowed equally to all market
participants and have not always been passed on to the end investors,
retail or wholesale;
- the market
fragmentation implied by competition has also made the trading
environment more complex;
- market and
technological developments have outpaced various provisions in MiFID;
- the
financial crisis has exposed weaknesses in the regulation of instruments
other than shares, traded mostly between professional investors.
In line with the recommendations from the
de Larosière group and the conclusions of the ECOFIN Council of June 2009, the
revision of MiFID therefore constitutes an integral part of the reforms aimed
at establishing a safer, sounder, more transparent and more responsible
financial system. It is also an essential vehicle for delivering on
the G20commitment to tackle less regulated
and more opaque parts of the financial system, and improve the organisation,
transparency and oversight of various market segments, especially in those
instruments traded mostly over the counter (OTC), complementing the legislative proposal on OTC derivatives,
central counterparties and trade repositories.
The review of MiFID will contribute to establishing a single rulebook for EU
financial markets, help further develop a level playing field for Member
States and market participants, improve supervision and enforcement, reduce
costs for market participants, and improve conditions of access and enhance
the global competitiveness of the EU financial industry.
The proposal
amending MiFID is divided in two:
- this proposed
Directive on markets in financial instruments, repealing Directive
2004/39/EC of the European Parliament and of the Council;
- the draft Regulationon markets in financial instruments and amending Regulation
[EMIR] on OTC derivatives, central counterparties and trade repositories.
IMPACT
ASSESSMENT: policy options were assessed against different criteria:
transparency of market operations for regulators and market participants,
investor protection and confidence, level playing field for market venues and
trading systems in the EU, and cost-effectiveness. Overall, the review of
MiFID is estimated to generate one-off compliance costs of between EUR 512
and EUR 732 million and ongoing costs of between EUR 312 and EUR 586 million.
This represents one-off and ongoing cost impacts of respectively 0.10% to
0.15% and 0.06% to 0.12% of total operating spending of the EU banking
sector. This is far less than the costs imposed at the time of the
introduction of MiFID.
LEGAL BASIS: Article 53(1) of the Treaty
on the Functioning of the European Union (TFEU).
CONTENT: the proposed Directive amends
specific requirements regarding the provision of investment services, the
scope of exemptions from the current Directive, organisational and conduct of
business requirements for investment firms, organisational requirements for
trading venues, the authorisation and ongoing obligations applicable to
providers of data services, powers available to competent authorities,
sanctions, and rules applicable to third-country firms operating via a
branch.
A central aim of the proposal is to ensure
that all organised trading is conducted on regulated trading venues: regulated
markets, multilateral trading facilities (MTFs) and organised trading
facilities (OTFs). Identical pre and post trade transparency requirements
will apply to all of these venues. Likewise, the requirements in terms of
organisational aspects and market surveillance applicable to all three venues
are nearly identical. This will ensure a level playing field where there are
functionally similar activities bringing together third-party trading
interests. Importantly however, the transparency requirements will be
calibrated for different types of instruments, notably equity, bonds, and
derivatives, and for different types of trading, notably order book and quote
driven systems.
The main elements of the proposed
Directive are as follows:
- Extension of MiFID rules to like
products and services: the proposals extend
MiFID requirements, and particularly conduct of business and conflicts
of interest rules, to the advised and non-advised sale of structured
deposits by credit institutions, specify that MiFID also applies to
investment firms and credit institutions selling their own securities
when not providing any advice, and require Member States to apply
authorisation and conduct of business requirements analogous to MiFID in
national legislation applicable to locally-based entities.
- Revision of exemptions from MiFID: the proposal therefore limits the exemptions more clearly
to activities which are less central to MiFID and primarily proprietary
or commercial in nature, or which do not constitute high-frequency
trading.
- Upgrades to the market structure
framework: the proposal creates a new
category for organised trading facilities which do not correspond to any
of the existing categories, underpinned by strong organisational
requirements and identical transparency rules, and upgrade key
requirements across all venues to account for the greater competition
and cross-border trading generated together by technological advances
and MiFID.
- Improvements to corporate governance: the proposals seek to ensure members of the management body
possess the sufficient knowledge and skills and comprehend the risks
associated with the activity of the firm in order to ensure the firm is
managed in a sound and prudent way in the interests of investors and
market integrity.
- Enhanced organisational requirements
to safeguard the efficient functioning and integrity of markets: the proposals aim to bring all entities engaged in
high-frequency trading into MiFID, require appropriate organisational
safeguards from these firms and those offering market access to other
high-frequency traders, and require venues to adopt appropriate risk
controls to mitigate disorderly trading and ensure the resiliency of
their platforms.
- Enhancement of the investor
protection framework: the proposal
strengthens the regulatory framework for the provision of investment
advice and portfolio management and the possibility for investment firms
to accept incentive by third parties (inducements) as well as it
clarifies the conditions and arrangements under which investors are able
to transact freely in the market in certain non-complex instruments with
minimal duties or protections afforded on behalf of their investment
firm. Furthermore, it reinforces the requirements concerning the
handling of funds or instruments belonging to clients by investment firms
and their agents and classifies as an investment service the safekeeping
of financial instruments on behalf of clients. The proposal helps
improving the information to clients in relation to the services
provided to them and to the execution of their orders.
- Heightened protection in the
provision of investment services to non-retail clients: the overarching high level principle to act honestly,
fairly and professionally and the obligation to be fair, clear and not
misleading should apply irrespective of client categorization. Finally,
it is proposed that eligible counterparties benefit from better
information and documentation for services provided.
- New requirements for trading venues: the proposal therefore introduces a requirement for trading
venues to publish annual data on execution quality. Second, commodity
derivative contracts traded on trading venues frequently attract the
broadest participation by users and investors and can often serve as a
benchmark price discovery venues feeding into, for example, retail
energy and food prices. It is therefore proposed that all trading venues
on which commodity derivative contracts are traded adopt appropriate
limits or alternative arrangements to ensure the orderly functioning of
the market.
- An improved regime for SME markets: it is proposed to create a new subcategory of markets known
as SME growth markets. An operator of such a market (which are usually
operated as MTFs) could elect to apply to have the MTF also registered
as an SME growth market if it meets certain conditions.
- Third country regime: the proposal creates a harmonised framework for granting
access to EU markets for firms and market operators based in third
countries in order to overcome the current fragmentation into national
third country regimes and to ensure a level playing field for all
financial services actors in the EU territory. It introduces a regime
based on a preliminary equivalence assessment of third country
jurisdictions by the Commission. Third country firms from third
countries for which an equivalence decision has been adopted would be
able to request to provide services in the Union. Services provided to
eligible counterparties would not require the establishment of a branch;
third country firms could provide them subject to ESMA registration.
They would be supervised in their country. Appropriate cooperation
agreement between the supervisors in third countries and national
competent authorities and ESMA would be necessary.
- Increased and more efficient data
consolidation: the proposals improve the
quality and consistency of data by requiring that all firms publish
their trade reports through Approved Publication Arrangement (APA). The
provisions set procedures for competent authority to authorise the APAs
and set organisational requirements for the APAs.
- Heightened powers over
derivative-positions for competent authorities: the regulators would be bestowed with explicit powers to
demand information from any person regarding the positions held in the
derivative instruments concerned as well as in emission allowances. The
supervisory authorities would be able to intervene at any stage during
the life of a derivative contract and take action that a position be
reduced. This heightened position management would be complemented by the
possibility to limit positions in an ex-ante, non-discriminatory
fashion. All actions should be notified to ESMA.
- Effective sanctions: Member States should provide that appropriate
administrative sanctions and measures can be applied to breaches of
MiFID. To this end, the Directive will require them to comply with the
following minimum rules. The maximum level of administrative pecuniary
sanctions laid down in national legislation should exceed the benefits
derived from the breach if they can be determined and, in any case,
should not be lower than the level provided for by the Directive. Criminal
sanctions are not covered by this proposal.
- Emission allowances: unlike trading in derivatives, spot secondary markets in EU
emission allowances (EUAs) are largely unregulated. A range of
fraudulent practices have occurred in spot markets which could undermine
trust in the emissions trading scheme (ETS), set up by the EU ETS
Directive. In parallel to measures within the EU ETS Directive to
reinforce the system of EUA registries and conditions for opening an
account to trade EUAs, the proposal would render the entire EUA market
subject to financial market regulation. Both spot and derivative markets
would be under a single supervisor. MiFID and the Directive 2003/6/EC on
market abuse would apply, thereby comprehensively upgrading the security
of the market without interfering with its purpose, which remains
emissions reduction. Moreover, this will ensure coherence with the rules
already applying to EUA derivatives and lead to greater security as
banks and investment firms, entities obliged to monitor trading activity
for fraud, abuse or money laundering, would assume a bigger role in
vetting prospective spot traders.
BUDGETARY IMPLICATIONS: the specific
budget implications of the proposal relate to task allocated to ESMA. Total
appropriations are estimated at EUR 1 744 million from 2013 to 2015.
DELEGATED ACTS: the proposal contains
provisions empowering the Commission to adopt delegated acts in accordance
with Article 290 TFEU.