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

24/04/2019


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

The revision 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

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, as well as individual portfolio management. Custody and safekeeping of assets are defined as ancillary services
  • MiFID II provides an exhaustive list of financial instruments to which it applies, including all securities credited to securities accounts and virtually all types of derivative contracts, as well as structured deposits

Industry implications

  • Market Infrastructure: new trading obligations for equities and derivatives intend to restrict OTC trading, which impacts price formation and market liquidity. BCNs (Brokers Crossing Networks) and other OTC dark pools have to convert into MTFs (Multilateral Trading Facilities), OTFs (Organised Trading Facilities) or SIs (Systemic Internalisers). Entities involved in international trade may rely on equivalence decisions for third country trading venues in instruments subject to the trading obligation in the EU (e.g. Equivalence decision with the US on 16 November 2017)
  • Distribution: MiFID II distinguishes between independent and non-independent investment advice. Inducements may still be used for the latter, but only under strict conditions. As a result, both manufacturers and distributors need to review the structure of their value chain for any hidden or obvious inducements and ensure that they meet strict format requirements (e.g. the KID should be no longer than three sides of A4 paper). Manufacturers and distributors have to ensure that a series of relevant product information, including detailed disclosures on ex-ante and ex-post costs and charges, are timely disclosed to investors. Also, each product must have a pre-determined target market and should essentially not be distributed outside that target market.
  • Transaction reporting: the scope of reportable transactions (to national authorities) is significantly extended and also includes derivatives. This may result in double reporting requirements under EMIR and MiFIR
  • Open access to clearing: open access provisions will be fully in force after the end of the transitional period. Thereafter, 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

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 in itself is quite revolutionary and 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, PRIIPs is product-related; UCITS and AIFMD regulate collective investments management, transaction reporting of all derivatives is required under EMIR, 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, be they 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”.

We are now in the implementation phase as MIFID II/R went live in January 2018.

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 bare published in the 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

July 2020 - Official entry into force of open access provisions

 

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