Markets in Financial Instruments Directive

Markets in Financial Instruments Directive (MiFID) in Europe

Markets in Financial Instruments Directive Regulations

The European Communities (Markets in Financial Instruments) Regulations 2007 (as amended) and Commission Regulation (EC) No 1287/2006 of 10 August 2006 (‘Regulation’), together are called the ‘MiFID legislation’.

The Markets in Financial Instruments Directive directive and the Implementing Regulation 1287/200614, has been part of the implementation of the Action Plan for Financial Services (Financial Services Action Plan – FSAP). The FSAP was based on the Lamfalussy process.

There is a broad consensus that Markets in Financial Instruments Directive has been successful in the establishment of a comprehensive regulatory framework that has increased efficiency and competition in European financial markets. Before MiFID Directive came into force, however, it was unclear how the markets would adapt to this new framework. Most notably, it is still unclear whether the current state of European financial markets is coherent with the Markets in Financial Instruments Directive framework, as was intended by the Markets in Financial Instruments Directive architects.

To put it differently, while most market participants agree on the positive effects of these new rules, many argue that there is a lack of enforcement and fragmentation in the national implementation. Two factors may have contributed to the ambiguity of the actual implementation of Markets in Financial Instruments Directive (before the review) provisions:

  • the principle-based structure of the Directive, as was constructed at Level 1 according
    to the Lamfalussy procedure; and
  • the insufficiently coordinated action and control over the enforcement of the Directive
    by the competent national authorities, which led to divergent interpretations in its
    implementation and enforcement.

The new supervisory architecture designed by De Larosiere, however, will try to address
these ambiguities.

Taking into consideration the abovementioned points, the implementation of the Directive
has been largely based on:

  • the interpretation of the Markets in Financial Instruments Directive, by market participants; and
  • the form and level of supervision and enforcement by the national regulatory
    authorities.

Consequently, this has led, to divergent interpretations, implementation and
enforcement of the Markets in Financial Instruments Directive’s provisions by different member states.

Recitals 2 to 6 of the Markets in Financial Instruments Directive provide that given the increasing number of investors and the growing offer of more and more sophisticated financial instruments, owing to the need for enhanced levels of consumer protection, the adoption of the new directive was necessary in order to expand the scope of regulated activities in the provision of investment services and the demand for the acquisition
regulation of commodity derivatives.

Freedom of Services

A key element of the Markets in Financial Instruments Directive is that it enables investment firms to carry on business covered by their authorisation throughout the EEA (by opening a branch or passporting services) without seeking further authorisation in another member state.

Scope

The Markets in Financial Instruments Directive has increased the scope of investment products, services coverage and organise dealing on new trading platforms. Furthermore, the directive has created a comprehensive regulatory regime in the field of execution of transactions and in the field of provision of investment services (J.-P. Casey, K. Lannoo, The MiFID Revolution, New York 2009). The regulatory scope is defined in article 1 of the Markets in Financial Instruments Directive: “1. This Directive shall apply to investment firms and regulated markets.”

Commission Proposal

Detailed explanation of the proposal, based on COM(2011) 656:

Corporate governance

The Markets in Financial Instruments Directive (MiFID) requires persons who effectively direct the business of an investment firm to be of sufficiently good repute and sufficiently experienced as to ensure the sound and prudent management of the investment firm. In line with the Commission’s work on corporate governance in the financial sector, it is proposed to strengthen these provisions with regard to the profile, role, responsibilities of both executive and non-executive directors and balance in the composition of management bodies.

In particular, 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.

Non-retail clients

The MiFID classification of clients into retail, professional and eligible counterparties
provides an adequate and satisfactory degree of flexibility and should thus largely remain
unchanged. Nonetheless, extensive examples concerning transactions in complex instruments by local authorities and municipalities have demonstrated that their classification is inadequately reflected in the Markets in Financial Instruments Directive (MiFID) framework.

Second, while many detailed conduct of business requirements are not meaningful in the relationship between eligible counterparties in their multiple daily dealings, 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.

Requirements for trading venues

Assessing best execution in the Markets in Financial Instruments Directive (MiFID) today hinges on the availability of pre- and post-trade transparency data. Nevertheless, other information such as the number of orders cancelled prior to execution or the speed of execution can also be relevant.

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 and settlement conditions for physically delivered commodities, and provide systematic, granular and standardised information on positions by different types of financial and commercial traders to regulators (including the category and identity of the end-client) and market participants (including only aggregate positions of categories of end-clients).

The limits to be adopted by these venues may be harmonised in delegated acts by the Commission, and neither they nor any alternative arrangements are without prejudice to the ability of competent authorities and ESMA, pursuant to this Directive and MiFIR, to impose additional measures when necessary.

Third country regime

The proposal creates a harmonised framework for granting access to European Union 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. The proposal 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.

The provision of services to retail clients would require the establishment of a branch; the third country firm should be authorised in the Member State where the branch is established and the branch would be subject to European Union requirements in some areas (organisational requirements, conduct of business rules, conflicts of interest, transparency and others). 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.

Further Reading

Investor Protection in Europe: Corporate Law Making, The MiFID and Beyond. Contributors to this volume – E. Wymeersch D. Langevoort R. Davies A. Dufour B. Scott-Quinn B. Alemanni G. Lusignani M. Onado M. Tison N. Moloney P. O. Mulbert L. Enriques G. Ferrarini F. Recine J. Kondgen E. Theissen A. Pietrancosta F. Denozza P. Salmon E. Kamar G. Hertig J. A. Mc Cahery G. Ferrarini P. Giudici J. Dammann H. Hansmann.

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Benaim M., Raimond O., ‘Self-interacting difusions II: Convergence in Law’, [2003] 6 Annales I.H. Poincarè-PR
Casey J.-P., Lannoo K., The MiFID Revolution, New York 2009
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