MIFD II + MIFR [EU]

Table of Contents

Better regulated and transparent financial markets

Directive 2014/65/EU on markets in financial instruments

It aims at making financial markets in the European Union (EU) more robust and transparent.
It creates a new legal framework that better regulates trading activities on financial markets and enhances investor protection. The new rules, called ‘MiFID 2’, revise the legislation currently in place and will apply from January 2018.

Key Points

1.Ensuring financial products are traded on regulated venues

The aim is to close loopholes in the structure of financial markets. A new regulated trading platform is established to capture a maximum of unregulated trades. This is the so-called Organised Trading Facility (OTF), which will exist alongside existing trading platforms such as regulated markets.

2.Increased transparency

The rules strengthen the transparency requirements that apply before and after financial instruments are traded, for instance when market participants have to publish information regarding the prices of financial instruments. These requirements are calibrated differently depending on the type of financial instrument.

3.Limiting speculation on commodities

Speculation on commodities — a financial practice that can lead to the prices of basic products (such as agricultural products) soaring — is restricted by introducing a harmonised EU system setting limits on the positions held in commodity derivatives. National authorities may limit the size of a position that market participants can hold in commodity derivatives.

4.Adapting rules to new technologies

Under the new rules, controls must be established for trading activities which are performed electronically at a very high speed, such as ‘high-frequency trading’ (a type of trading which uses computer programs to perform trades at high speed using rapidly updating financial data). Potential risks from increased use of technology are mitigated by a combination of rules aiming to ensure these trading techniques do not create disorderly markets.

5.Reinforcing investor protection

Investment firms should act in accordance with the best interests of their clients when providing them with investment services. These firms should safeguard their clients’ assets or ensure the products they intend to launch are designed to meet the needs of final clients. Investors will also be provided with increased information on products and services offered or sold to them. Moreover, firms must ensure that staff remuneration and performance assessments are not organised in a way that goes against clients’ interests. For instance, this may happen when remuneration or performance targets provide an incentive for staff to recommend a particular financial product instead of another that would better meet clients’ needs.

Delegated acts

In April 2016, the European Commission adopted a delegated directive which deals with aspects of investor protection:
safeguarding clients’ funds and financial instruments;
product governance (this ensures that firms which manufacture and distribute financial instruments and structured deposits act in their clients’ best interests); and
monetary and non-monetary compensation.
It also adopted a delegated regulation on organisational requirements and operating conditions for investment firms.
Implementing Regulation (EU) 2016/824 lays down technical standards for the description of the functioning of multilateral trading facilities and organised trading facilities and the notification to the European Securities and Markets Authority (ESMA).
FROM WHEN DOES THE DIRECTIVE APPLY?

It applies from 3 January 2018 (i.e. postponed by one year by Directive (EU) 2016/1034). EU countries have to incorporate it into national law by 3 July 2017.

BACKGROUND

For more information, see:

Updated rules for markets in financial instruments: MiFID 2 on the European Commission’s website.
MAIN DOCUMENT

Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (recast) (OJ L 173, 12.6.2014, pp. 349-496)

Successive amendments to Directive 2014/65/EU have been incorporated in the original text. This consolidated version is of documentary value only.

Amendments to Directive 2014/65/EU

Directive (EU) 2019/2034 concerns the prudential supervision of investment firms and amends Directive 2014/65/EU to harmonise the required level of initial capital of investment firms operating OTFs and multilateral trading facilities* (MTFs).

Amendments introduced by Directive (EU) 2019/2177 transfer the competences previously granted to competent authorities to the European Securities and Markets Authority (ESMA), which becomes responsible for authorising and supervising undertakings that intend to provide data communication services.
Directive (EU) 2020/1504 concerns an amendment adopted in relation to Regulation (EU) 2020/1503 on crowdfunding services providers for business (see summary). To avoid a situation where the same activity is subject to multiple authorisations within the EU, legal persons authorised as crowdfunding service providers under Regulation (EU) 2020/1503 are excluded from the scope of Directive 2014/65/EU.

Regulation (EU) 2019/2115 introduces new rules to actively promote the use of SME growth markets, a new type of trading venue created under Directive 2014/65/EU and a subcategory of MTFs. These are designed to improve SMEs’ access to capital and enable them to grow, and to encourage the development of specialist markets catering to the needs of SME issuers with growth potential.

Amending Directive (EU) 2021/338 was introduced to help recovery from the COVID-19 pandemic. It simplifies the MiFID rules that appeared not useful or too burdensome, reducing, for example, the information on costs and charges to be provided to professional investors and eligible counterparties. Paper-based investment information is to be phased out, except for retail clients if they request to continue to receive it.

Banks and financial firms will also be able to bundle research and execution costs in relation to research on small and mid-cap issuers. The periodic reporting due to be published by trading and execution venues and systematic internalisers* is suspended until February 2023. There are also some changes to the position limit regime for commodity derivatives to support the emergence and growth of euro-denominated commodity derivatives markets.

Delegated and implementing acts

The European Commission has adopted a series of delegated and implementing acts, including the following.

Delegated Directive (EU) 2017/593 as amended by Delegated Directive (EU) 2021/1269, which deals with aspects of investor protection:
safeguarding clients’ funds and financial instruments;
product governance*;
monetary and non-monetary compensation; and
integration of sustainability factors into the product governance obligations.
Delegated Regulation (EU) 2017/565 on organisational requirements and operating conditions for investment firms, as amended by Delegated Regulation (EU) 2021/1253 as regards the integration of sustainability factors, risks and preferences.
Implementing Regulation (EU) 2016/824 on technical standards for describing the functioning of MTFs and OTFs and their notification to ESMA.

Application & Background

It has applied since 3 January 2018 (postponed by 1 year by Directive (EU) 2016/1034) and had to become law in the Member States by 3 July 2017.

For more information, see:

Investment services and regulated markets – Markets in financial instruments directive (MiFID) (European Commission)
Markets in Financial Instruments (MiFID II) – Directive 2014/65/EU (European Commission).

High-frequency trading. A type of trading that uses computer programs to perform trades at high speed using rapidly updating financial data.
Multilateral trading facility. A facility in which multiple third-party buying and selling trading interests in financial instruments are able to interact in the system.
Systematic Internaliser (SI). SIs are investment firms which on an organised, frequent, systematic and substantial basis, deal on own account when executing client orders outside a regulated market, MTF or OTF without operating a multilateral system.
Product governance. This ensures that firms that manufacture and distribute financial instruments and structured deposits act in their clients’ best interests.

MAIN DOCUMENT

Successive amendments to Directive 2014/65/EU have been incorporated in the original text. This consolidated version is of documentary value only.

RELATED DOCUMENTS
Regulation (EU) 2020/1503 of the European Parliament and of the Council of 7 October 2020 on European crowdfunding service providers for business, and amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937 (OJ L 347, 20.10.2020, pp. 1–49).

See consolidated version

Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC (OJ L 331, 15.12.2010, pp. 84–119).

Markets in financial instruments regulation

Regulation (EU) No 600/2014 on markets in financial instruments

It updates earlier legislation on markets in financial instruments* to ensure that these:

are more transparent;
work more efficiently; and
provide investors with more protection.

It covers:

disclosure of trade data to the public;
reporting of transactions to the relevant authorities;
trading of derivatives* on organised venues;
non-discriminatory access to clearing* and trading in benchmarks*;
powers for national authorities, the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA);
investment services and activities by non-EU firms.

Key Points

The legislation applies to:

investment firms and credit institutions such as banks;
insurance, assurance and reinsurance companies or alternative investment funds (known as ‘financial counterparties’);
non-EU firms with the necessary authorisation from the European Commission.

Transparency rules:

aim to ensure trading takes place on organised and appropriately regulated trading venues*;
require market operators and investment firms to make public, both before and after trading (the latter in as close to real time as technically possible), information such as bid and offer prices and the volumes involved;
allow for limited exemptions from the above requirement;
state the information be available to the public on a reasonable commercial basis, in a non-discriminatory way and free 15 minutes after publication;
set out specific requirements for systematic internalisers* and investment firms which trade over the counter (OTC) without the supervision of an exchange.

Transaction rules require:

investment firms:
to keep all relevant data on orders and transactions carried out for themselves or for a client for 5 years
to report complete and accurate details of all transactions to the relevant national authority as quickly as possible and no later than close of the following working day;
trading venues:
to keep all data on financial instruments advertised through their systems for 5 years.

Trading in derivatives must:

take place in:
regulated markets
a multilateral trading facility
an organised trading facility
a non-EU trading facility that the Commission has authorised;
be cleared by a central counterparty* as quickly as technologically possible.
Central counterparties must clear financial transactions in a non-discriminatory and transparent manner.

Institutions

ESMA:

drafts certain technical standards, notably for derivatives and central counterparties;
monitors the financial instruments marketed, distributed or sold in the EU.
ESMA, the EBA and national authorities work closely together and have the power to temporarily ban or restrict the use of financial instruments considered a threat to investors or the financial system.

The Commission:

has adopted more than 20 implementing and delegated acts;
must, after consulting ESMA, submit reports to the European Parliament and the Council on various aspects of the legislation between March 2020 and July 2022.
Coordinated by ESMA, national authorities monitor investment firms to ensure they act honestly, fairly and professionally.

Application & Background

It has applied since 3 January 2018.

The 2008 financial crisis exposed weaknesses in EU rules for financial instruments other than shares, which are mainly traded among professional investors.
It amends Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories.
Alongside Directive 2014/65/EU on markets in financial instruments (MiFID II), this regulation sets up a new framework establishing uniform requirements for various financial instruments.

KEY TERMS

Financial instrument: asset, or evidence of ownership of an asset, or a contractual agreement between 2 parties to receive or deliver another financial instrument.
Derivative: a financial instrument whose value is based on the change in value of an underlying asset.
Clearing: the process used to manage the risk of open positions by checking that securities, cash or both are available.
Benchmarks: any publicly available rate, index or figure determined by a formula or value of underlying assets.
Trading venue: an official venue, such as multilateral trading facilities, organised trading facilities or regulated markets, where securities are exchanged.
Systematic internaliser: an investment firm that on an organised, frequent, systematic and substantial basis deals on its own account outside a regulated market.
Central counterparty: an entity acting as intermediary between trading counterparties and absorbing some of the settlement risk.

MAIN DOCUMENT

Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (OJ L 173, 12.6.2014, pp. 84-148)

Successive amendments to Regulation (EU) No 600/2014 have been incorporated into the original text. This consolidated version is of documentary value only.

MIFD II + MIFR [EU]

Better regulated and transparent financial markets

Amendments to Directive 2014/65/EU

Application & Background

MAIN DOCUMENT

Markets in financial instruments regulation

Key Points

Transparency rules:

Transaction rules require:

Institutions

Application & Background

MAIN DOCUMENT

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