CHAPTER 2: MiFID II: An overview
10. The main changes set out in MiFID II are
outlined in Box 2.
BOX 2
The main changes introduced in MiFID II[16]
- Trading obligation for derivatives: The Commission proposes a requirement for transactions in derivatives that have been declared subject to the trading obligation to be concluded only on regulated markets, Multilateral Trading Facilities (MTFs), Organised Trading Facilities (OTFs) or certain third country venues.
- OTFs: The Commission proposes to introduce a new category of Organised Trading Facilities (OTFs).
- Transparency: The Commission proposes new pre-trade transparency rules for equities, applying to shares, depositary receipts, exchange traded funds, certificates and other similar instruments traded on an MTF or OTF, and the extension of pre-trade transparency requirements to non-equities, specifically bonds and structured products admitted to trading on a regulated market, emission allowances, and derivatives admitted to trading or which are traded on an MTF or OTF.
- Systematic Internalisers (SIs): The Commission proposes extending certain pre-trade transparency and trading requirements to SIs.
- Algorithmic trading: the Commission proposes to introduce certain systems and risk controls, and to require algorithmic trading strategies to be in continuous operation during trading hours and to post firm quotes at competitive prices. These proposals would apply equally to the use of algorithmic trading in the context of high-frequency trading (HFT).
- Third country access: The Commission proposes new rules and requirements for the establishment of branches and the provision of services without a branch by third country firms. The proposal also makes provision for certain reciprocity and equivalence requirements.
- Regulation of commodities derivatives markets: The Commission proposes rules to support liquidity, prevent market abuse and provide for orderly functioning of commodity derivatives markets, including the power to introduce position limits, or alternative arrangements with equivalent effect, on the number of commodity contracts which any person can hold. The European Securities and Markets Authority (ESMA) is given certain intervention powers in order to preserve market integrity and orderliness.
- Competition in clearing and trading: Central Counterparties (CCPs) and trading venues are given a right of access to trading venues and CCPs respectively so that access cannot be restricted to parties within the same corporate structures.
- Transaction reporting: The Regulation widens the range of instruments subject to a regulatory transaction reporting obligation from transactions in financial instruments admitted to trading on a regulated market to transactions in all financial instruments traded on a regulated venue.
- Investor protection: The Commission proposes a requirement for investment advisers to make it clear on what basis they provide advice, specifying whether it is on an independent basis and whether it is based on a broad or restricted analysis of the market. Restrictions are placed on commission payments to firms providing investment advice.
- Corporate governance: The Commission proposes certain rules on corporate governance, including restrictions on the holding of multiple directorships, and taking diversity into account.
- Product intervention: National authorities and ESMA are given certain powers to prohibit or restrict the marketing, distribution or sale of certain financial instruments or types of financial activity, if there are significant investor protection concerns, or a serious threat to the orderly functioning and integrity of financial markets or to the stability of the financial system.
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11. We asked our witnesses to outline their overall
assessment of MiFID II. In Christian Krohn's view, MiFID was one
of the most far-reaching and important reform proposals made in
the EU since the financial crisis began. AFME supported much of
what the Commission is seeking to achieve, but had concerns about
some specific proposals.[17]
Professor Moloney thought that MiFID II was a broadly good
measure, because it "is all about fixing the regulatory perimeter
for financial regulation".[18]
Yet she feared that it was "moving away from the big debate
... whether financial markets, and in particular equity markets,
are doing a good job in moving capital from companies through
to investors and vice versa."[19]
12. Dr Swinburne described the Commission's
proposals as a good starting point for deliberation. In her view
it was a strong document compared to some previous legislative
proposals, although she conceded that it had weaknesses as currently
drafted.[20] Dr Swinburne
also highlighted the link between MiFID and the European Market
Infrastructure Regulation (EMIR) legislative package (previously
scrutinised by the Committee),[21]
describing them as "two sides of the same coin". The
first two elements of the G20 commitment on derivatives transactions,
the requirement for all derivative instruments that could be centrally
cleared to be treated as such, and the requirement for derivatives
trades, wherever they were conducted, to be reported to a central
repository, were dealt with in EMIR, which she said was well advanced.
MiFID II deals with the third leg of the G20 commitment, namely
to move those derivatives instruments that were currently traded
over-the-counter on to electronic platforms where appropriate.
In comparison, the USA had tackled the G20 commitment in a single
piece of legislation, the Dodd-Frank Act. She stressed the need
to ensure consistency across the two dossiers to make sure that
derivative instruments across the board were treated similarly.[22]
13. We also explored the scope of the proposal.
Thierry Philipponnat warned of the danger of making legislation
too prescriptive. He told us that "if we try to get into
the detail of every single product we can be assured that we will
miss the next product invented one or two years down the road."
In his view, it was better to ensure that the general framework
operated for the benefit of wider society.[23]
In Dr Swinburne's view, the balance between the provisions
set out in Level 1 and Level 2[24]
of the proposal was critical, since getting the details correct
in Level 1 would allow the implementation to be more flexible.
She had significant doubts about the balance between Level 1 and
Level 2 in the Commission's proposal, and told us that there were
"lots of grey areas left in Level 1". She again made
the comparison with EMIR, where much more detail had been set
out in Level 1, and expressed the hope that this imbalance could
be corrected by amendments from the European Parliament.[25]
14. Both Dr Swinburne and Mr Philipponnat
believed that future market developments meant that a MiFID III
package was inevitable.[26]
Professor Moloney agreed that "the lesson from MiFID
I is that whatever the market looks like in five years' time will
not be what people thought in drafting MiFID II."[27]
Professor Avgouleas told us that regulation will always lag
behind market developments, because "clever people will find
more ways to trade more effectively, with lower margins and at
a profit." He too preferred to build a system based on general
principles rather than to regulate the micro-structure of the
market.[28]
15. The view has been expressed to us that
the Commission's proposals are a "good starting point"
for negotiations. Yet, as we explore in detail in Chapter 3, significant
improvements in the text are required before it is implemented,
and we welcome the steps taken thus far in the European Parliament
and in the Council to address these issues. Broadly speaking,
the Commission needs to ensure that MiFID II is consistent with
other legislative packages, in particular EMIR. It is also important
to ensure that as much clarity as possible is set out in the detail
of the Level 1 framework text.
16. We further note that there is a tension
between a rules-based and a principles-based approach in terms
of how to structure the regulatory system in order to anticipate
market developments, in seeking to balance flexibility with accountability
in the exercise of delegated powers, and in providing sufficient
legal certainty to satisfy market participants. In our view, MiFID
II does not resolve that tension. Furthermore, there needs to
be a recognition that MiFID II, however well it is drafted, will
not be the final word in financial market regulation. The single
market in financial services is constantly evolving, and it is
impossible to predict with any certainty how it will do so in
the future. We therefore conclude that further packages of legislative
reforms are inevitable.
16 See EMs 15938/11 and 15939/11, paras 8-36. Back
17
Q 1. Back
18
Q 33. Back
19
Q 41. Back
20
Q 18. Back
21
See EM 13917/10 and Correspondence with Ministers, http://www.parliament.uk/business/committees/committees-a-z/lords-select/eu-economic-and-financial-affairs-and-international-trade-sub-committee-a/scrutiny-work1/parliament-2010/correspondence-with-ministers/.
EMIR seeks to address the G20 commitment to require clearing of
designated derivatives through a central counterparty. It is expected
to enter into force shortly following adoption by the European
Parliament in March. Back
22
Q 17. Back
23
Q 19. Back
24
According to the Commission, the MiFID review is based on the
"Lamfalussy process" (a four-level regulatory approach
recommended by the Lamfalussy Committee on the Regulation of European
Securities Markets) and since developed further by EU regulation,
whereby at Level 1, the European Parliament and the Council adopt
a directive in co-decision which contains framework principles
and which empowers the Commission acting at Level 2 to adopt delegated
acts. In the preparation of the delegated acts the Commission
will consult experts appointed by Member States. At the request
of the Commission, ESMA can advise the Commission on the technical
details to be included in Level 2 legislation. In addition, Level
1 legislation may empower ESMA to develop draft regulatory or
implementing technical standards. See COM (2011) 652 final, footnote
1. Back
25
Q 19. Back
26
Q 20. Back
27
Q 42. Back
28
Ibid. Back
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