Overview

The review of MiFID I commenced in 2010 and has focused on the areas of MiFID I considered in need of improvement, in particular investor protection, transparency and the stability and functioning of the EU financial system. It has also sought to take account of market structural developments and new methods of trading, for example dark pool trading of equities and high frequency trading (HFT). Many issues have been heavily politicised, including the introduction of new rules on position limits and reporting for commodity derivative contracts.

The European Commission issued proposals for an amended Directive and a new Regulation in late 2011. After two years of inter-institutional negotiation, the Level 1 texts of MiFID II (Directive 2014/65/EU on markets in financial instruments) and MiFIR (Regulation (EU) No. 600/2014 on markets in financial instruments) were finalised and published in the Official Journal of the EU in 2014.

The Level 1 texts entered into force on 2 July 2014 and will take effect on 3 January 2018. Member States must transpose MiFID II into their national legislation by 3 July 2017. MiFIR is a directly applicable Regulation so does not require transposition.

Member States, including the UK, are currently undertaking their own MiFIDII/R implementation projects. In the UK, a number of areas of the text are likely to be gold-plated to apply to the collective portfolio management activities of AIFMs and UCITS management companies, including rules for investment research, best execution, and retention of telephone conversations and electronic communications.

If you have any questions or would like to get involved in AIMA's policy work on MiFIDII/MiFIR please contact Adam Jacobs-Dean, Oliver Robinson or Adele Rentsch.  


AIMA's Guide to Mifid


AIMA responses and other policy documents


MiFID / MiFIR webinars


MiFID 2 / MiFIR: what they mean for alternative asset managers

Relevant developments contained within MiFIDII/R include:

  • Algorithmic trading/HFT and market microstructure  – introducing new notification, organisational and transparency requirements for firms utilising an algorithmic trading technique, including an EU definition of HFT. Trading venues are also subject to stricter systems and controls requirements regarding testing and systems resiliency, as well as rules for maximum order to trade ratios and minimum tick sizes;

  • Commodities – the narrowing of exemptions for commodity derivatives traders, the broadening of what constitutes a ‘financial instrument’ and the introduction of quantitative position limits and reporting for venue traded commodity derivatives and economically equivalent OTC contracts;

  • Derivatives and STP – the trading obligation for venue traded derivatives, the clearing obligation for non-OTC derivatives and a requirement for the straight-through-processing (STP) of all cleared derivatives;

  • Investor protection – strengthened investor protection rules, including heightened standards for best execution and related disclosures. Portfolio management firms are also prohibited from accepting any monetary or non-monetary payments from third parties - with the narrow exception of certain minor non-monetary benefits - and the requirement that remuneration and performance assessment policies do not conflict with the duty to act in the best interests of clients. The use of dealing commissions to pay for investment research is covered here;

  • Third-countries regime – provides rules for third country investment firms, CCPs and trading venues to provide services on the same regulatory terms as EU established entities, subject to the European Commission determining that their third country jurisdictions’ rules and supervisory frameworks are ‘equivalent’;

  • Transparency and transaction reporting – increased transparency requirements for trading venues and investment firms, in particular, introducing new pre- and post-trade transparency for non-equity instruments, a volume cap on equity transparency waivers, greater information to included within transaction reports (including flags for algorithmic trading and the use of waivers) and organisational rules for data services providers.

Other developments include:

  • Execution only services - narrowing of the list of products that investment firms may provide on an execution-only basis, thus preventing structured UCITS from being sold execution only;

  • Management bodies – the requirements on management introduced for banks under CRR are now being extended to investment firms under MiFIDII, among other things, requiring members of management bodies to be of the requisite calibre, limited in their number of directorships and to act with honesty and integrity.

  • Open access – new rules for the transparent and non-discriminatory access by trading venues to CCPs and vice versa, including access to information and licences for benchmarks;

  • Product governance – all investment firms that manufacture or sell products will be expected to have explicit arrangements for product governance, such that firms understand the nature of the products they are manufacturing and/or selling and that they are suitable for the clients to which they are sold;

  • Trading venues – the introduction of a new trading venue for non-equity instruments – the Organised Trading Facility – and expansion of the role of systematic internalisers to cover all equity and non-equity instruments.


Legislation

Level 1

Directive 2014/65/EU on markets in financial instruments (June 2014)

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

Level 2

Commission Delegated Directive with regard to safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits (April 2016)

Commission Delegated Regulation as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive (April 2016)

European Commission tables with links to adopted technical standards under MiFID II


External Resources

FCA MiFID II home page

ESMA MiFID II home page

European Commission MiFID II home page