The European Parliament ("EP") approved new measures on April 15, 2014, that, once finally implemented, will increase regulation of European financial markets, including imposing new requirements on certain algorithmic trading.
The new measures, known as the Markets in Financial Instruments Directive (MiFID II) and Regulation (MIFIR), will impact investment firms; certain large traders on stock, financial and commodity derivative markets; and trading venues, among others. The measures potentially will have a cross-border impact for non-EU based persons doing business within the EU.
MiFID II and MIFIR are still subject to additional legislative steps prior to formal adoption, and implementation is not expected until 2016 because of these steps and other requirements too.
The principle elements of these new obligations require:
The new measures also endeavor to:
Introduction of the requirement to provide non-discriminatory access to clearinghouses is meant to eradicate the model where trading and clearing are mandatorily linked. According to the EC,
“The issue at stake is about competition, stability and the integration of EU market infrastructures. Although the vertical integration model of trading and post-trading infrastructures may present advantages in terms of coordination, it may also introduce inefficiencies with respect to competition and price transparency. …Trading venues will be required to provide access, including data feeds on a non-discriminatory basis to [CCPs] that wish to clear transactions executed on the trading venue and CCPs will be required to clear transactions executed in different trading venues subject to certain well-defined conditions being fulfilled.”
The elimination of mandatorily linked execution and clearing relationships in connection with exchange-traded derivatives are subject to transition arrangements.
In addition to other requirements, certain algorithmic traders will be obligated to register as investment firms and be subject to an enhanced requirement to disclose to regulators information regarding their trading strategies. Trading venues will be required to maintain “robust controls” to help ensure against disorderly trading, erratic price movements, and capacity overload.
Originally, all commodity contracts traded on any type of trading venue that was physically settled were to be covered by MiFID II. However, the final version excludes wholesale energy contracts. Physically settled oil and coal contracts are included, however, except that the mandatory obligation to trade such products on an OTF is deferred for at least six years after the applicable provisions of MiFID II are effective.
According to the EC, the adoption of MiFID II is aimed to help implement the EU’s G-20 commitments in connection with derivatives. Says the EC,
“The US and EU approaches and legislation are very much aligned in terms of achieving the same objectives. For example, the revised MiFID complements the regulation on OTC derivatives, central counterparties and trade repositories (EMIR).”
MIFID II amends MIFID that initially was enacted in 2007. In January 2014, the EP and the European Council agreed “in principle” regarding provisions of MiFID II (see “European Parliament and European Council Agree ‘In Principle” on MIFID II” on this website; click Here to access).
The EP-approved drafts of MiFID II and MIFIR must now be formally approved by the Council of the EU. When (if) the Council finally approves these measures, they become effective 20 days after their publication in the various languages of the EU in the EU Official Journal. However, after that, individual EU countries must harmonize their local law to incorporate MIFID II and many of the technical details regarding these new measures must be determined by ESMA. As a result of all these processes MIFID II is not expected to take effect until late 2016.
(The Council of the EU is a legislative body composed of EU member states’ government representatives. It does not have fixed members. The composition of meetings depends on the topic. The Council is different than the European Council where EU leaders meet approximately four times yearly to discuss political priorities of the EU. For details regarding the EU legislative process, click Here to access relevant information.)
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The information contained in this article is not legal advice. For legal advice, please consult with your attorney. The information in this article is derived from sources believed to be reliable as of April 16, 2014, but no representation or warranty is made regarding the accuracy of any statement. To ensure compliance with requirements imposed by U.S. Treasury Regulations, Gary DeWaal and Associates LLC informs you that any U.S. tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Gary DeWaal and Associates may represent one or more entities mentioned in this article.
Gary DeWaal is currently Special Counsel with Katten Muchin Rosenman LLP in its New York office.
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