The Markets In Financial Instruments Directive 2014/65/EU (MiFID II ) and the Markets in Financial Instruments Regulation 600/2014 (MiFIR) will come into effect on 3 January 2017 replacing the existing MiFID Directive. Member states must adopt the measures transposing the MiFID II Directive into national law by 3 July 2016, and must apply those provisions from 3 January 2017.
These provisions will be further fleshed out by level 2 measures in the form of regulatory technical standards (RTS) and implementing technical standards (ITS) to be published by ESMA .
This note summarises some of the key areas which regulated firms will need to start considering in order to plan ahead and prepare for the implementation of the new rules.
The new rules recognise a new type of trading venue, being the organised trading facility (“OTF”). OTFs are defined as a multilateral system which is not a regulated market or an MTF and in which multiple third-party buying and selling interests in bonds, structured finance products, emission allowances or derivatives are able to interact in the system in a way that results in a contract. Regulated entities will need to consider whether any of their trading systems constitute OFTs.
The new rules widen the definition of “Systematic Internaliser” (SI). A Systematic Internaliser is defined as an investment firm which, on an organised, frequent systematic and substantial basis, deals on own account when executing client orders outside a regulated market, an MTF or an OTF without operating a multilateral system; The frequent and systematic basis must be measured by the number of OTC trades in the financial instrument carried out by the investment firm on own account when executing client orders. The substantial basis must be measured either by the size of the OTC trading carried out by the investment firm in relation to the total trading of the investment firm in a specific financial instrument or by the size of the OTC trading carried out by the investment firm in relation to the total trading in the European Union in a specific financial instrument. The definition of a systematic internaliser shall apply only where the pre-set limits for a frequent and systematic basis and for a substantial basis are both crossed or where an investment firm chooses to opt-in under the systematic internaliser regime. The widening of the definition comes with an obligation of firms falling within this definition, to make available to the public, without any charges, data relating to the quality of execution of transactions on that venue on at least an annual basis and that following execution of a transaction on behalf of a client the investment firm must inform the client where the order was executed. Periodic reports must include details about price, costs, speed and likelihood of execution for individual financial instruments.
New safeguards are introduced in relation to high frequency algorithmic trading which has attracted the attention of regulators over the past years. Firms which engage in algorithmic trading must implement systems and controls in order to minimise the risks arising from high frequency trading and in order to safeguard the integrity of the market and in order to avoid market abuse.
Furthermore, the pre- and post-trade reporting obligations of firms will apply to a much wider range of financial instruments and new obligations will apply for trading venues (regulated markets (RMs), multilateral trading facilities (MTFs) and OTFs), including systems and controls, circuit breakers and rules relating to minimum tick size. Trading venues will be required to publish annual data on execution quality.
The new rules impose a ban on firms concluding title transfer financial collateral arrangements with retail clients for the purpose of securing or covering present or future, actual or contingent or prospective obligations of clients.
Also, new requirements apply in the cases in which firms sell manufactured products. In particular, investment firms which manufacture financial instruments for sale to clients are required to ensure that those financial instruments are designed to meet the needs of an identified target market of end clients within the relevant category of clients, the strategy for distribution of the financial instruments is compatible with the identified target market, and the investment firm takes reasonable steps to ensure that the financial instrument is distributed to the identified target market. Investment firms are required to understand the financial instruments they offer or recommend, assess the compatibility of the financial instruments with the needs of the clients to whom they provide investment services, and ensure that financial instruments are offered or recommended only when this is in the interest of the client.
Further, stricter rules will apply in relation to investment advice and portfolio management. In particular, where an investment firm informs the client that investment advice is provided on an independent basis, that investment firm must: (a) assess a sufficient range of financial instruments available on the market which must be sufficiently diverse with regard to their type and issuers or product providers to ensure that the client’s investment objectives can be suitably met and must not be limited to financial instruments issued or provided by: (i) the investment firm itself or by entities having close links with the investment firm; or (ii) other entities with which the investment firm has such close legal or economic relationships, such as contractual relationships, as to pose a risk of impairing the independent basis of the advice provided; (b) not accept and retain fees, commissions or any monetary or non-monetary benefits paid or provided by any third party or a person acting on behalf of a third party in relation to the provision of the service to clients. Minor nonmonetary benefits that are capable of enhancing the quality of service provided to a client and are of a scale and nature such that they could not be judged to impair compliance with the investment firm’s duty to act in the best interest of the client must be clearly disclosed and are excluded from this point.
When providing portfolio management the investment firm must not accept and retain fees, commissions or any monetary or non-monetary benefits paid or provided by any third party or a person acting on behalf of a third party in relation to the provision of the service to clients. Minor non-monetary benefits that are capable of enhancing the quality of service provided to a client and are of a scale and nature such that they could not be judged to impair compliance with the investment firm’s duty to act in the best interest of the client must be clearly disclosed.
