Wolters Kluwer Financial Services: MIFID II The Trilogue Waiting Game
Posted: 8 November 2013 | Author: Sara Evans | Source: Wolters Kluwer Financial Services
Back in October 2011, The European Commission (EC) announced its proposal to revise the Markets in Financial Instruments Directive (MiFID), the wide-ranging legislation to promote a single market for wholesale and retail transactions in financial instruments. In their announcement in 2011, the EC stated that their aim for this revised legislation – labelled MiFID II – was to “to make financial markets more efficient, resilient and transparent, and to strengthen the protection of investors”. On top of this, the new framework looks to increase the supervisory powers of regulators and provide clear operating rules for all trading activities.
Since then, the EC’s proposals have been discussed and adopted by both the European Parliament and the Council. Further iterations made by the European Parliament, over 2000 in all, have been adopted and 18 months of negotiations by the Council to arrive at an agreed general approach has resulted in the finalization of Level 1 measures being delayed.
At present the European Parliament, the Council of EU Finance Ministers and the EC has re-engaged in trilogue negotiations to hammer out the final shape of the MiFID II package. It is unlikely that the final text will be agreed until December 2013 or even later. This time lag means implementation is now highly unlikely to be before 2016, as the estimated timeline below demonstrates:
July 2013-December 2013/January 2014 Trilogue negotiations between European Commission, European Parliament and the Council.
December2013/January 2014 Final Level 1 texts expected.
January 2014 Proposals for Level 2 measures expected.
Q1-Q4 2014 Consultation and development of ESMA technical standards and Commission Level 2 measures.
January 2015 Level 2 measures expected to be published.
January 2015 ESMA Level 3 guidance developed for national competent authorities, to ensure consistent implementation.
Q1-2014-Q4 2015 UK consultations on statutory amendments (FMSA, Regulated Activities Order, any proposed secondary implementing legislation) and regulatory rule changes (MAR, COBS, SYSC, SUP rulebooks in particular, and likely the TRUP).
January 2016 (or later) IMPLEMENTATION
Which firms will be affected by MiFID II?
It is first important to understand the scope of the directive. The MiFID reforms will affect all firms engaged in brokerage, advice, dealing, portfolio management and underwriting. The heaviest impact will be on sales and trading activities. Further practice notes published by Wolters Kluwer Financial Services will outline the potential impact of the finalized provisions on particular firms and activities.
The MiFID review and the Commission’s MiFID II proposals
MiFID was always intended to be reviewed post-implementation, as provided for in Article 65 of the original directive (2004/39/EC). However the Pittsburgh G20 summit in September 2009 has added an urgency to the timeline as it introduced commitments to tackle the less regulated and more opaque areas of the financial system by the end of 2012. MiFID II will be the means by which many of these G20 commitments will be implemented in Europe. The Commission’s proposals also seek to tackle growing problems that have emerged following implementation of MiFID in 2007:
- Market fragmentation – the proliferation of new trading venues and the lack of transparency in some trading
- Competition issues – the problem that the benefits of increased competition have not necessarily flowed to end-investors
- Market and technological developments – the impact of product complexity and the explosion of algorithmic trading and its controversial subset, high frequency trading
- Weaknesses in the regulation of financial instruments other than shares
- A need to tighten investor protection provisions due to the ever-growing complexity of financial instruments
The Developing Proposals
Below outlines the developing Level 1 measures which are currently being drawn out during the trilogue discussions:
-Provisions affecting market structures:
- Organized Trading Facilities
- Systemic Internalizers
- Algorithmic Trading
-Pre-and-post trade transparency obligations:
- Pre-Trade Transparency
- Post-Trade Transparency
- Trading obligation for derivatives
- Overlap with EMIR
-Regulation of commodities derivatives markets:
- EU-wide position limits and position management
-Third country access:
- New harmonized rules for third country investment firms establishing branches or providing services
-Competition in clearing and settlement:
- Non-discriminatory access for CCPs and trading venues
-Investor protection provisions
- Bringing structured products within MiFID scope
- Amendments to the appropriateness requirements which will reduce the number of types of product which could be provided on an “execution-only” basis Enhanced obligations around best execution
- A ban on the payment of inducements to independent advisers providing investment advice
- Strengthened suitability and appropriateness requirements as they apply to professional clients
- Management body of investment firms and market operators
Overall MiFID I has been successful in creating greater competition between venues in the trading of financial instruments and creating more choice for investors. The House of Lords European Union Committee, which scrutinized the Commission proposals, was of the view that given the complexity and importance of MiFID II, it has been more important to get the legislation right than to get it passed quickly. If it is not fit for purpose then this could be intensely damaging to both the EU financial sector and the economy as a whole.