The MiFID II/MiFIR framework has been recently evolving. The new MiFID ‘Quick Fix’ Directive was adopted and the European Commission (EC) published a new proposal on 25th November 2021.
In a nutshell, Directive (EU) 2021/338 (MiFID ‘Quick Fix’ Directive) was adopted on 16 February 2021 to remove unnecessary red tape and to mitigate the economic turmoil caused by Covid-19. EU Member States are required to transpose the MiFID ‘Quick Fix’ amendments into their national frameworks by 28 November 2021 and apply them by 28 February 2022.
In parallel, the scheduled MiFID II/MiFIR review continues. The European Commission has published a legislative proposal on 25th November 2021.
We will describe the MiFID II/MiFIR framework (1), before providing some insights on the new MiFID ‘Quick Fix’ Directive (2) and the new MiFID II/MiFIR legislative proposal on 25th November 2021 (3).
1. MiFID II / MiFIR Framework
MiFID II is the Directive on Markets in Financial Instruments and MiFIR is the Regulation on Markets in Financial Instruments. MiFID II and MiFIR entered into force on 3rd of January 2018.
The rationale behind the MiFID II/MiFIR legislative framework is, as mentioned by the European Securities and Markets Authority (ESMA), “to strengthens investor protection and improve the functioning of financial markets making them more efficient, resilient and transparent”. According to ESMA, a greater market transparency was to be achieved through the new reporting requirements, in order to increase information symmetry and reduce the use of dark pools and over-the-counter (OTC) trading. The protection of investors was strengthened through the new requirements inter alia on product governance, best execution and information and reporting to clients.
2. MiFID ‘Quick Fix’ Directive
Following the economic turmoil caused by Covid-19, the The MiFID ‘Quick Fix’ Directive adopted in February 2021, needs to be applied by February 28th 2022 at the latest.
The rationale behind is to continue safeguarding investor protection, while simplifying certain existing requirements in a targeted manner to remove unnecessary red tape in some important areas as follows:
– Information and reporting requirements (e.g. best executions reports suspended, ex-ante costs and charges exemption, the default method to communicate with clients will be electronic communication)
– Product governance
– Research requirements
– Commodity derivatives requirements
In Luxembourg, the MiFID Quick Fix Directive was transposed by Law of 21 July 2021.
3. Legislative proposal on 25th November 2021
Alongside the MiFID Quick Fix Directive, the scheduled MiFID II/MiFIR review continues. The European Commission (EC) has published a legislative proposal to amend MiFID II/MiFIR on 25 November 2021.
This proposal is one of a series of measures implementing the Capital Markets Unions (CMU). The objectives of the CMU are to protect and empower investors, particularly the non-professionals, and making EU market infrastructures more robust, increase market liquidity, facilitate companies’ funding from the capital markets and to achieve an efficient, well-functioning, liquid and single not fragmented market for trading.
The EC has identified several issues, derived from a lack of correct and timely information on prices and available trading volumes, that need to be tackled, such as:
– The cost of “slippage”: informational inefficiencies, i.e. not having a complete and accurate view of market data.
– Liquidity risk: the risk that there is not enough depth of market (i.e. buyers and sellers willing to trade),
– Trade execution risk: the inability to execute at a given price limit or in a given time period.
– Risk that insufficient transparency affects the share trading landscape and the competitiveness of the EU as a financial hub.
The EC has identified the following priority areas for the review:
– Improving transparency and availability of market data
– Improving the level-playing field between execution venues, and
– Ensuring that EU market infrastructures can remain competitive at international level and strengthen the international role of the Euro.
The new legislative measures are mainly related to MiFIR and are targeted changes, such as, to name a few: mandatory contributions of market data to the consolidated tape (CT) (consolidation of market data that trading venues generate across EU), enhancing thus the data quality including by harmonizing the synchronization of the business clock beyond trading venues to systematic internalisers, APAs (approved publication arrangements) and CTPs, recourse to possibilities to waive pre-trade transparency is reduced for systematic internalisers, double volume cap is replaced with a single volume cap set at 7% of trades that are executed under the reference price waiver or the negotiated trade waiver, enhancements to the trading obligations and the prohibition of the practice of receiving payment for forwarding client orders for execution.
The CT, which is particularly impacted by the proposal, is a useful tool that would improve transparency and availability of market data, incentivize asset and portfolio managers to include in the portfolios the most optimal (combination of) instruments available in the EU and not just the instrument available on the fragmented venues whose market data they currently subscribe to. The EC further mentions that they would have the information allowing them to decide if they need to become member of (other) venues, when these venues provide the optimal products for their purpose. It will function as an important guide to the buy-side trader on assessing and making their trading decisions and setting up their algorithmic parameters.
The EC stipulates that the CT will not have an impact on the EU budget and that the “the consolidated tape will be provided by the private sector, under the supervision of ESMA”.
The provisions regarding the CT are moved from MiFID II to MiFIR, making them thus directly applicable and ensuring an harmonized approach across the EU. This indicates the importance that the EC attaches to these provisions.
The feedback period will be open by the EC until 10 March 2022.
Taleo is following closely the next steps of the legislative procedure and the various feedbacks.
Taleo can help its clients to formulate and consolidate feedbacks that would be submitted to the EC before 10 March 2022.