EU: MiFID Review - phase two begins

The European Securities and Markets Authority (ESMA) is consulting on the implementation of the revised Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR).  MiFID II and MiFIR are expected to come into application by end 2016/early 2017, and will apply across the European Union, extending also to member states of the European Economic Area under the European Economic Area Agreement.    For a more detailed briefing, click here. 

The implementation of MiFID II/MiFIR will significantly impact EU financial markets, introducing (inter alia) increased protection for retail investors, disclosure of costs and charges, enhanced governance requirements relating to the composition of management bodies of regulated firms and to the design and distribution of products, product intervention powers, transparency requirements for a broader range of asset classes, a requirement to trade derivatives on-exchange, requirements in respect of algorithmic and high-frequency-trading, provisions enhancing access to CCPs, trading venues and benchmarks, other organisational requirements for trading venues, and new supervisory tools for commodity derivatives. 

Firms will already be considering how MiFID II and MiFIR will impact on their business systems, strategies, processes, compliance policies, client documentation, and on their non-EU operations and clients.  National regulators, too, will need to consult on national implementation measures, and face their own implementation challenges, particularly around how to deal with the collection of transparency data, and the very significant increase in the number of reports (to include position reporting as well as transaction reporting), and with the significant increase in the number of required data fields for those reports.

ESMA's chairman has described this as an important part of the biggest overhaul of financial markets regulation in the EU for a decade, and strongly encourages all those affected by these reforms to provide their views to ensure that ESMA takes them into account in its final proposals.

Background

Political agreement was reached on a compromise text for MiFID II/MiFIR in January this year, and the final legislative texts were agreed by the European Parliament in April, and the European Council in May  (MiFID II / MiFIR).  They are expected to come into force in June, and into application 30 months later.  MiFID II/MiFIR included more than 100 requirements for ESMA to draft Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS), and to provide Technical Advice to the European Commission to allow it to adopt delegated acts.  The European Commission mandated ESMA on 23 April 2014  to provide technical advice to assist the Commission on the possible content of the delegated acts required by several provisions of MiFID II and MiFIR. 

ESMA has now published:

• a Consultation Paper on Technical Advice (CP) which ESMA must deliver to the European Commission in final form by December 2014 - hence a condensed consultation process); and
• a Discussion Paper on the draft RTS/ITS (DP) which will provide the basis for a further consultation paper on the draft RTS/ITS - likely to be issued late 2014/early 2015.

The Consultation Paper

The CP poses 245 questions and covers, in 311 pages, the topics on which the Commission has requested ESMA to provide that technical advice, namely

• investor protection (including suitability and appropriateness, information to clients, independence of advice, inducements, best execution, client assets, product governance, product intervention, record-keeping, conflicts of interest, the compliance function);
• markets (including , transparency, data publication, micro-structural issues, requirements applying on and to trading venues, commodity derivatives and portfolio compression).

A more detailed list of the topics covered is available here. 

ESMA will be advising on MiFID II implementing measures relating to organisational requirements and operating conditions for investment firms.  ESMA considers some of the existing requirements in the current MiFID Implementing Directive to be in line with the MiFID II framework and adequate in the new regulatory context, and proposes that these should be confirmed in the MiFID II implementing measures.  The CP therefore focuses on those areas in which new requirements or modifications to the MiFID Implementing Directive are proposed. 

The Discussion Paper

The DP touches on a selected number of "more innovative or technically complex" topics in order to receive initial feedback from stakeholders for the preparation of ESMA technical standards.  It poses 615 questions covering, in 533 pages, topics on which ESMA is empowered to draft technical standards, namely:

• investor protection (authorisation, freedom to provide investment services and activities, establishment of a branch and best execution) and
• financial markets (including transparency, data publication and access, micro-structural issues, requirements applying on and to trading venues, commodity derivatives and market data reporting). 

A fuller list of the topics covered is available here. 

Next steps

ESMA will hold open hearings on the published DP and CP on 7 and 8 July 2014 in Paris.  Responses to the ESMA Consultation paper and Discussion paper must be submitted by 1 August 2014.  ESMA will then consider responses to the CP, and will finalise its technical advice for submission to the Commission by end 2014. 

The DP relating to the RTS and ITS will be followed by a more detailed consultation paper, which is expected to be issued in late 2014/early 2015, covering all the areas for which MiFID II and MiFIR require ESMA to adopt technical standards, before those standards are finally submitted to the Commission during the course of 2015.

The legislation is due to come into application in late 2016/early 2017.  Both MiFID II and MiFIR mandate a number of reviews post implementation, the majority of which are due to be undertaken within 56 months of the date the legislation enters into force.