Review of MiFID II and MiFIR

MiFID/MiFIR In the News

MFA on MiFID/MiFIR

Industry Views on MiFID/MiFIR

Background

In 2007, the European Commission implemented the Markets in Financial Instruments Directive (MiFID) in an attempt to integrate the European Union’s financial markets and to increase the amount of cross border investment orders.

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In late 2009, after the Financial Crisis, European officials agreed to a process to review and amend MiFID, known as MiFID II, as part of their comprehensive overhaul of the EU financial regulatory regime (similar to Dodd-Frank), and in October 2011, released a draft legislative proposal.  At its core MiFID II addresses issues related to pre- and post-trade transparency requirements, as well as issues relating to technical advances in the markets, such as high-frequency trading (HFT) and algorithmic trading. MiFID II was also released with an accompanying regulation (MiFIR).

MiFID II amends specific requirements regarding, among other topics, high frequency trading, position limits and reporting, powers available to competent authorities, organizational requirements for trading venues, data reporting and rules applicable to third-country firms.

MiFIR introduces provisions among other topics, on transparency for trading venues, transparency for investment firms trading OTC including systematic internalizers, transaction reporting, derivatives, non-discriminatory clearing access for financial instruments, provision of services without a branch by third country firms.

Current Status

On January 14, 2014, after almost 3 years of consultations and negotiations policy makers from the Council of the EU, European Commission, and European Parliament reached a tentative agreement on the major political issues in the MiFID II/MiFIR dossiers.  In the Spring, the European Parliament and the Council of the EU approved the dossiers in their respective institutions.   The European Securities and Markets Authority (ESMA), as well as EU Member State Competent Authorities, have begun the Level 2 implementation process, which is expected to continue into 2015.

Issues Affecting the Policy Debate

The revision of MiFID was driven by a number of policy issues, including:

  1. Improving transparency and oversight of less regulated markets;
  2. Improving general oversight in light of recent technological developments;
  3. Addressing the issues of excessive price volatility in commodity derivatives; and,
  4. Increasing investor protection

MFA Key Issues

Some key areas for MFA include:

  1. Position limits: MiFID II could require strict position limits on commodity derivatives.  MFA is concerned that strict position limits could be too rigid, and if set inappropriately, could raise commodity prices and costs for market participants who use commodity markets for risk mitigation.  Language in the final text appears to allow Member State Competent Authorities to  set position limits, based on certain criteria developed by ESMA.
  2. Third Country Registration: MFA held concerns regarding potential equivalency issues in arising from new registration requirements of third country firms.  As such, MFA remained supportive of retaining the current EU Member State private placement regime.  The final draft of MiFID II appears to retain the current Member State private placement regime, with the potential for a full-EU passport over time.
  3. Straight through processing (STP): STP allows parties in a derivative transaction to be informed in real-time, or as close to real time as technologically practicable, whether or not their trade has been accepted for clearing, thus improving overall market function and reducing potential systemic risk.  MFA had been supportive of the inclusion of language requiring STP.  ESMA, as well, endorsed the concept, and had recommended it in advice presented to the European Commission on other financial dossiers.  After months of discussions, language on STP has been retained in the MiFID II/MiFIR dossiers.
  4. Coordination on EMIR: MFA recommends a reviewing MiFID II/MiFIR on OTC issues in light of the recent implementation of the European Market Infrastructure Regulation (EMIR).

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