The Markets in Financial Instruments Directive (MiFID) sets out which investment services and activities should be licensed across the EU and the organisational and conduct standards that those providing such services should comply with. In 2011, the European Commission published legislative proposals to amend MiFID by recasting it as a new Directive MiDIF II and a new Regulation (MiFIR). After a long political debate the final texts were published on 12 June 2014 and entered into force 20 days later on 2 July 2014. Entry into application will follow 30 months after entry into force on 3 January 2017.
The Markets in Financial Instruments Directive (MiFID) sets out which investment services and activities should be licensed across the EU and the organisational and conduct standards that those providing such services should comply with. In 2011, the European Commission published legislative proposals to amend MiFID by recasting it as a new Directive MiDIF II and a new Regulation (MiFIR). After a long political debate the final texts were published on 12 June 2014 and entered into force 20 days later on 2 July 2014. Entry into application will follow 30 months after entry into force on 3 January 2017.
MiFID II and MiFIR introduce a new category of trading venue, the organised trading facility (OTF). Alongside regulated markets (RMs) and multilateral trading facilities (MTFs), this will be a third type of multilateral system in which multiple buying and selling interests can interact in a way that results in contracts.
The differences between RM and MTFs, and OTFs are:
1) OTFs will only relate to bonds, structured finance products, emission allowances or derivatives.
2) The execution of orders on an OTF is carried out on a discretionary basis. There are two different levels of discretion for the operator of an OTF: (i) when deciding to place or retract an order on the OTF, and (ii) when deciding not to match a specific client order with another order available in the system at a given time, provided it is in compliance with specific instructions received from a client and best execution obligations.
As a result of this discretion, the operator of an OTF will owe certain conduct of business duties to its clients including acting in accordance with their best interests, appropriateness, best execution and so on.
In relation to Derivatives
MiFID II and MiFIR introduce a new category of trading venue, the organised trading facility (OTF). Alongside regulated markets (RMs) and multilateral trading facilities (MTFs), this will be a third type of multilateral system in which multiple buying and selling interests can interact in a way that results in contracts.
The differences between RM and MTFs, and OTFs are:
1) OTFs will only relate to bonds, structured finance products, emission allowances or derivatives.
2) The execution of orders on an OTF is carried out on a discretionary basis. There are two different levels of discretion for the operator of an OTF: (i) when deciding to place or retract an order on the OTF, and (ii) when deciding not to match a specific client order with another order available in the system at a given time, provided it is in compliance with specific instructions received from a client and best execution obligations.
As a result of this discretion, the operator of an OTF will owe certain conduct of business duties to its clients including acting in accordance with their best interests, appropriateness, best execution and so on.
In relation to Derivatives
MiFIR complements EMIR in the sense that it will implement the G20 commitment to mandate the trading of standardised derivatives on exchanges and electronic platforms by requiring certain derivatives to be traded on a RM, MTF or OTF or certain trading venues in third countries that have been considered equivalent for that purpose and reciprocate by recognising EU trading venues.
The obligation applies to financial and non-financial counterparties that are subject to the clearing obligation in EMIR, as well as third country entities that would be subject to it if they were established in the EU and either trade with in-scope EU entities or other third country entities where their transactions could have a direct, substantial and foreseeable effect within the EU or it is appropriate to prevent evasion of MiFIR.
Regulatory technical standards will be developed to determine which derivatives will be subject to this trading obligation. The European Securities and Markets Authority (ESMA) may specify additional characteristics and requirements in this matter.
To be mandated for trading, the derivatives must also be traded on at least one trading venue and be considered to be sufficiently liquid, taking into account the average frequency and size of trades over a range of market conditions, the number and type of active market participants and the average size of spreads.
In this point, ESMA will take into consideration the impact of listing a derivative on its liquidity and the interest of end users. Similarly, ESMA will identify classes of derivatives that should be subject to the trading obligation but which no central counterparty (CCP) has been authorised to clear or which are not admitted to trading on a trading venue.
Relationships between trading venues and Central Counterparties CCPs
CCPs are required to clear financial instruments regardless of the trading venue on which a transaction is executed, although the CCP may require the trading venue to meet operational and technical requirements.
The CCP may only grant access if a relevant Member State competent authority considers that this would not threaten the smooth and orderly functioning of the markets or, in certain cases relating to derivatives, where it would not require an interoperability arrangement. The CCP can only deny access under certain conditions to be defined in regulatory technical standards (likely to be in force in October 2015).
Likewise, a trading venue must, on request, provide trade feeds on a non-discriminatory and transparent basis to a CCP that wishes to clear transactions that are concluded on that trading venue.
In order to ensure that CCPs and trading venues have access to relevant price and data feeds and information composition, there are also requirements on persons with proprietary rights in benchmarks.
Non-EU (Third Country) trading venues that are recognised for the purposes of the derivatives trading obligation and non-EU CCPs that are recognised as such under EMIR are permitted to make use of these access rights if the Commission has concluded that the relevant third country provides reciprocal access to its trading and clearing infrastructure to foreign trading venues and CCPs.
MiFID II and MiFIR will introduce new requirements for firms wishing to carry on investment activities with and provide investment services to clients in the EU. In most cases, these will require third country entities to establish a branch and become licensed in the relevant Member States for business with retail and elective professional clients or to register with ESMA for business with per se professional clients and eligible counterparties.
MiFIR complements EMIR in the sense that it will implement the G20 commitment to mandate the trading of standardised derivatives on exchanges and electronic platforms by requiring certain derivatives to be traded on a RM, MTF or OTF or certain trading venues in third countries that have been considered equivalent for that purpose and reciprocate by recognising EU trading venues.
The obligation applies to financial and non-financial counterparties that are subject to the clearing obligation in EMIR, as well as third country entities that would be subject to it if they were established in the EU and either trade with in-scope EU entities or other third country entities where their transactions could have a direct, substantial and foreseeable effect within the EU or it is appropriate to prevent evasion of MiFIR.
Regulatory technical standards will be developed to determine which derivatives will be subject to this trading obligation. The European Securities and Markets Authority (ESMA) may specify additional characteristics and requirements in this matter.
To be mandated for trading, the derivatives must also be traded on at least one trading venue and be considered to be sufficiently liquid, taking into account the average frequency and size of trades over a range of market conditions, the number and type of active market participants and the average size of spreads.
In this point, ESMA will take into consideration the impact of listing a derivative on its liquidity and the interest of end users. Similarly, ESMA will identify classes of derivatives that should be subject to the trading obligation but which no central counterparty (CCP) has been authorised to clear or which are not admitted to trading on a trading venue.
Relationships between trading venues and Central Counterparties CCPs
CCPs are required to clear financial instruments regardless of the trading venue on which a transaction is executed, although the CCP may require the trading venue to meet operational and technical requirements.
The CCP may only grant access if a relevant Member State competent authority considers that this would not threaten the smooth and orderly functioning of the markets or, in certain cases relating to derivatives, where it would not require an interoperability arrangement. The CCP can only deny access under certain conditions to be defined in regulatory technical standards (likely to be in force in October 2015).
Likewise, a trading venue must, on request, provide trade feeds on a non-discriminatory and transparent basis to a CCP that wishes to clear transactions that are concluded on that trading venue.
In order to ensure that CCPs and trading venues have access to relevant price and data feeds and information composition, there are also requirements on persons with proprietary rights in benchmarks.
Non-EU (Third Country) trading venues that are recognised for the purposes of the derivatives trading obligation and non-EU CCPs that are recognised as such under EMIR are permitted to make use of these access rights if the Commission has concluded that the relevant third country provides reciprocal access to its trading and clearing infrastructure to foreign trading venues and CCPs.
MiFID II and MiFIR will introduce new requirements for firms wishing to carry on investment activities with and provide investment services to clients in the EU. In most cases, these will require third country entities to establish a branch and become licensed in the relevant Member States for business with retail and elective professional clients or to register with ESMA for business with per se professional clients and eligible counterparties.
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