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Company Law

Analysis - guidance - compliance

Eversheds , 02 JUN 2015

MiFID II: New Themes to Deal With Old Problems

MiFID II: New Themes to Deal With Old Problems
Directive 2014/65/EU and Regulation 600/2014 (together, “MiFID II”) will come into effect on 3 January 2017 and change much of Directive 2004/39/EC (“MiFID I”). Coming after the financial crisis, MiFID II incorporates concepts designed to prevent a reoccurrence of the crisis. As a result, MiFID II is best examined through core themes.

First, there is a greater attention given to managing risk. This can be seen in the changes to market infrastructure, for example the requirement, with the creation of organised trading facilities, that both equity and non-equity trades be executed on a trading venue. Arrangements are also put in place to deal with new forms of algorithmic trading, such as high frequency trading, requiring investment firms to have in place effective systems and risk controls with respect to their trading systems, and to maintain records of their transactions.

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Secondly, there are more stringent transparency and reporting requirements. Transparency is generally encouraged, as the view is taken that this aids proper market conduct. As a result the existing MiFID I transparency obligations on shares trading on regulated markets are widened to include instruments traded on any trading venue. Another way in which transparency is increased is through greater use of reporting obligations. There are various different reporting requirements, such as:

  • public reporting of pre-trade quoted prices, post-trade transactional data and position management data, and
  • reporting to competent authorities of post-trade transactional data and data regarding possible market abuse.

Thirdly, there will be a new possibility for greater intervention by the authorities in the markets. This is shown by the introduction of new position limits obligations, which require competent authorities to impose position limits in line with the methodology set by the European Securities and Markets Authority (“ESMA”) in conjunction with the European Commission. Where objectively justified, the competent authority may go beyond these limits, and in some scenarios the authorities may actually ban certain financial activity.

Fourthly, there has also been a move to increase investor protection. The conduct of business rules have been altered to achieve this aim. This has predominately been achieved through a mixture of greater disclosure, for example more information to certain clients when dealing with complex products, restrictions regarding fees, commissions and non-monetary benefits, and limiting the use of execution-only services.

Finally, there is a greater onus on the need to provide access, and that access to be non-discriminatory. Market operators will have to provide non-discriminatory access to trading venues, clearing services and benchmarks. Uniform rules are to be put in place to control the treatment of third country firms accessing European Union markets. Once the European Commission has made an equivalence decision in favour of a third country firm, and it has been registered by ESMA, it is able to access professional clients and eligible counterparties within the Union, without having to set up a branch in the relevant member state. 

Andrew Henderson
Partner
London office
Eversheds LLP
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