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European Parliament and European Council Agree "In Principle" on MiFID II

News Developments Between Bridges

Published Date: January 14, 2014

The European Parliament and European Council (heads of European Union member states) agreed today "in principle" to updated rules for markets in financial instruments – so called MiFID II. This new regime is aimed, among other things, at requiring a shift in the trading of financial instruments to multilateral, regulated trading platforms; imposing a harmonized EU-wide system for position limits on commodity derivatives; and strengthening investor protection. Restrictions on certain high frequency trading will occur too.

Non-EU market access by third-country firms to professional and eligible counterparties will be based on an equivalence assessment of the third-country. A transitional period will apply for three years for this international aspect.

According to Michel Barnier, European Commissioner for Internal Market and Services,

"[t]hese new rules will improve the way capital markets function to the benefit of the real economy. They are a key step towards establishing a safer, more open and more responsible financial system and restoring investor confidence in the wake of the [2008] financial crisis."

Specifically, the principal elements of the agreement are that:

trading, "wherever appropriate" will occur on regulated platforms. Among other things, investment firms that operate internal matching systems to execute client orders involving shares, depository receipts, exchange-traded funds, certificates and similar financial instruments on a multilateral basis will have to be authorized formally as a Multilateral Trading Facility. Non-equity instruments will be traded on an Organized Trading Facility;
equity market transparency will be broadened to include pre- and post-trade transparency for non-equity instruments. However, pre-transparency waivers will be available for large orders, request for quote and voice trading. Post trade transparency will be required for all financial instruments; however deferred publication or volume masking may be available. Trading venues will be required to make pre- and post-trade data available on "a reasonable commercial basis, including through the establishment of a consolidated tape mechanism for post-trade data;"
there will be a harmonized position limits regime for commodity derivatives traded on regulated markets or Over the Counter across the EU. Individual country regulators will impose limits according to a methodology established by the European Securities and Markets Authority (ESMA). There will also be a position-reporting obligation by type of trader. Position limits will not apply to risk reduction activities related to commercial activity;
there will be a harmonized EU regime "for non-discriminatory access to trading venues and central counterparties," as well as to benchmarks for trading and clearing purposes;
investor protection will be enhanced through various measures, including tougher conduct rules and enhanced client asset protection. Limitations will be imposed on the receipt of inducements that may create conflicts of interest;
trading controls will be introduced (e.g., circuit breakers that stop trading when volatility is too high) and an "appropriate" liquidity provision obligation will be imposed for high frequency traders engaging in market-making strategies. Direct electronic market access will also be regulated;
cooperation among authorities will be strengthened to improve the detection of MiFID breaches as well as the imposition of harmonized administrative sanctions across the EU; and
a harmonized regime for granting access to EU markets from third countries for professional and eligible counterparties will be based on an equivalence assessment of such countries by the EC. For three years, nothing will change pending EC equivalence determinations.

Final language must now formally be adopted by the European Parliament and the Council (member states). Once adopted the elements of MiFID II (the relevant Regulation (MiFIR), the Directive (MiFID), and the necessary technical rules will be effective as of the same date. No schedule was provided today officially by the EC for these final actions.

For further information, see:

European Parliament Press Release:
http://www.europarl.europa.eu/news/en/news-room/content/20140110IPR32414/html/Deal-to-regulate-financial-markets-and-products-and-curb-high-frequency-trading
Michel Barnier Statement:
http://europa.eu/rapid/press-release_MEMO-14-15_en.htm?locale=en
See also for additional background:
http://europa.eu/rapid/press-release_IP-11-1219_en.htm?locale=en

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 January 14, 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.