Pegasus - European Commission - Legislative Proposals and Responses

This section contains the European Commission’s legislative proposals on, and responses to, the MiFID review.

Government response to House of Lords EU Committee report

On 12 November 2012, the Government published its response to the House of Lords European Union Committee report entitled MiFID II: Getting it right for the City and EU financial services industry.

Whilst the Government noted that there was much to welcome in the European Commission's legislative proposals there were also a number of areas of concern including:

Organised trading facilities (OTFs). The Government acknowledged the Commission’s rationale in proposing the introduction of the OTF category in order to bring trading onto more organised electronic venues. However, it has concerns as to the amount of detail about the operation of OTFs that has been left at Level 2. It is also concerned that the expansion of organised electronic venues that would result from the OTF category would lead to an overly complex regulatory framework which does not distinguish clearly between organised venues and over-the-counter.
Pre- and post-trade transparency. The Government stated that the proposals relating to post-trade transparency are likely to be beneficial for investors and regulators. However, the Government argued that the pre-trade transparency proposals are flawed. It stated that a one-size-fits-all approach to pre-trade transparency must be avoided and that the Commission needs to keep in mind the potential of a negative impact on the sovereign bond markets and the corporate bond markets in the current economic climate.
Algorithmic and high-frequency trading (HFT). The Government believed that further research is needed in order to determine with any certainty the impact of HFT on financial markets and on the economy as a whole. The Government also has concerns that the scope of the Commission’s proposals is too broad and that the distinction between algorithmic trading and HFT needs to be more carefully drawn. In particular, the proposal to require algorithmic trading strategies to be in operation throughout the trading day is likely to have a detrimental effect on financial markets.
Third country access. The Government argued that there is a risk that, if introduced, the third country provisions could lock third country firms out of EU markets, which taking into account the risk of regulatory retaliation, would have an extremely damaging effect on European financial markets.
Regulation of commodities markets. The Government noted that there is a divergence of views on the proposals concerning the regulation of commodities markets. The Government stated that whilst the proposals could be a useful deterrent to market manipulation, there is the potential for serious negative impact on liquidity, investor choice and price formation.
Investor protection and corporate governance. The Government agreed with the Commission that steps need to be taken to strengthen investor protection. However, it also concluded that the proposals, as drafted, are flawed in that restricting the ban on inducements to independent advisers will be unworkable, since advisers will simply take steps to avoid being classified as independent.

View Government response to House of Lords EU Committee report, 12 November 2012

Lords’ Committee publishes report on MiFID II

On 10 July 2012, the House of Lords’ Economic and Financial Affairs EU Sub-Committee (the Lords’ Committee) published a report on the European Commission's legislative proposals concerning the review of the Markets in Financial Instruments Directive (MiFID II proposals).

The Lords’ Committee concluded that the MiFID II proposals had been rushed, and risked creating confusion rather than providing clarity in terms of the regulatory framework for investment. In particular the Lords’ Committee stated that:

The proposals in relation to third country access were ill-conceived. There is a risk that, if introduced, the provisions could lock third country firms out of the EU markets.
There was considerable uncertainty regarding the implications of the proposals for Organised Trading Facilities (OTFs) and in the proposal to increase regulation of algorithmic and high frequency trading.
Whilst the Commission’s desire for greater transparency was to be welcomed, an unsophisticated, "one-size-fits-all" approach that ignores the sensitivity of information before a trade is made (pre-trade transparency) not only risks damaging liquidity and reducing competition, but could also have a serious effect on market innovation.

View Lords’ Committee publishes report on MiFID II, 10 July 2012

ISDA response MiFID/MiFIR and transparency for OTC derivatives

On 15 February 2012, the International Swaps and Derivatives Association (ISDA) published a paper which described the nature of trading structure and liquidity formation in over-the-counter (OTC) derivatives markets and the implications for framing pre-trade transparency obligations under the MiFID review proposals.

In summary the ISDA made the following points:

Exchange trading relies on the existence of large number of buyers and sellers.
OTC derivatives are traded infrequently. Trading is overwhelmingly bilateral.
Pre-trade transparency differs according to the nature of a given trading model.
Pricing is very competitive for liquid OTC derivatives products.
Pre-trade transparency should be calibrated by trading model.
Request for Quote trading systems should be adequately accommodated.
The systematic internaliser (SI) regime is inconsistent in respect of different asset classes.
The SI regime could undermine liquidity provision and the quote sharing obligation should be removed.
Effective price formation can be supported through better targeted measures, specifically a requirement that firms establish quoting policies.

ISDA recommended:

Redrafting or replacing Article 7 of the proposed Markets in Financial Instruments Regulation (MiFIR) to accommodate trading systems other than order book systems without relying on the waiver process.
Removing the quote-sharing obligation from Article 17 of MiFIR and put in place measures that support competitive pricing.

View ISDA response MiFID/MiFIR and transparency for OTC derivatives, 15 February 2012

FESE position on the MiFID II proposal

On 31 January 2012, the Federation of European Securities Exchanges (FESE) published a position paper concerning the European Commission’s legislative proposals revising the Markets in Financial Instruments Directive (MiFID).

FESE reported that its members generally welcome the Commission’s proposals and in particular they support:

Recognition that Europe’s main legislation on trading should ensure that all the market participants active in trading ultimately serve the real economy.
The Commission’s overall approach to ensure that qualifying over-the-counter (OTC) derivatives are traded in a well regulated environment.
Proposals to extend transparency requirements to bonds and derivatives.
Measures to ensure the transparency and supervisory oversight of commodity markets.
That the proposals accept technological advances in trading speed as fact, and includes mostly sensible solutions to reduce systemic risks, counter the potential for market abuse and ensure fair treatment of clients.

However, FESE called for certain changes to the proposals including that:

There should be a clear definition of OTC.
The MiFID review should maintain the existing protections designed for all types of trading platforms. In particular, multilateral trading of equities, bonds and standardised derivatives should only happen on platforms that provide identical transparency, non-discretionary execution, non-discretionary access, and full market surveillance capabilities.
Systematic Internalisers should remain classified as “regulated” trading venues and not move into the OTC classification.
Conflicts of interest arising from the combination of roles of investment firms should be better managed.

View FESE position on the MiFID II proposal, 31 January 2012

CLLS response to MiFID review questionnaire

On 16 January 2012, the City of London Law Society (CLLS) published its response to the questionnaire issued by Markus Ferber MEP on the MiFID review.

Comments in the response included:

That the European Commission has not justified the proposed deletion of the exemption contained in Article 2.1(k) MiFID.
To the extent that emission allowances are brought into the scope of MiFID, that a mechanism needs to be found to ensure that in the negotiations the specific merits of extending individual provisions of MiFID are considered fully in each case and the European Parliament is urged to facilitate such consideration.
Greater certainty concerning the scope of the activity “safekeeping and administration” is needed if it is to become a core service.
Extending the MiFID authorisation requirements in the way that the Commission proposes would significantly damage the ability of EU investors and firms to access the services of third country firms.
That there are at least two fundamental problems with the proposed definition of “Organised Trading Facility”.
That the proposed definition of algorithmic trading is too wide, capable of capturing any trading which makes use of computer technology.
That it does not agree that an absolute prohibition on inducements as suggested by draft Article 24(6) works for the benefit of consumers in every case.

View CLLS response to Markus Ferber MEP’s questionnaire on the European Commission’s proposals for MiFID II/MiFIR, 16 January 2012

Opinion of the Consultative Working Party of the Legal Services of the European Parliament, the Council and the Commission

On 16 January 2012, the Council of the European Union published an opinion by the Consultative Working Party of the Legal Services of the European Parliament, the Council and the Commission on the legislative proposals for the MiFID review.

Comments in the opinion included:

That the explanatory memorandum to the proposals should have specified which provisions of the current legislation remain unchanged.
Certain amendments in the proposals should have been identified by using the grey-shaded type generally used for marking substantive changes. The specific amendments are set out in the opinion.
The proposed recast Directive should have included a correlation table and that certain wording should have been used in the repealing article.

The working party also stated that the proposal does not comprise any substantive amendments other than those identified in the opinion.

View Opinion of the Consultative Working Party of the Legal Services of the European Parliament, the Council and the Commission - MiFID review proposal, 16 January 2012

BBA response to MiFID review questionnaire

On 13 January 2012, the British Bankers’ Association (BBA) published its response to the MiFID review questionnaire issued by Markus Ferber MEP.

The BBA’s response to the questionnaire included:

That its members do not agree with the proposal to include custody as a core service. The BBA argues that if custody is to be included as a core service there needs to be a clear definition of this service and clarity on which provisions apply.
An EU passport for third country firms has the potential to improve EU investors’ and issuers’ access to third country markets. However, it needs to be carefully designed not to limit or discourage third country participation in EU markets or routine professional and counterparty interactions with third country firms to the detriment of EU investors and corporates, or the access of third country issuers to funds in the EU markets. The proposals as they stand may seriously hinder global trade.
That its members support a well calibrated definition of Organised Trading Facility. However, the definition in its current form is too high level.
The proposals define high frequency trading and algorithmic trading but does not distinguish the two concepts.
That its members are concerned that an outright ban on inducements for portfolio managers is inappropriate. The existing MiFID requirements on inducements provide sufficient safeguards as all investment advisors are already under an obligation to recommend products that are suitable for consumers and to disclose inducements. Any concerns around conflicts of interest would be better addressed by requiring firms that offer inducement-based services to obtain explicit consent from clients for the fees.
That its members feel that the revised best execution requirements are generally workable.
That its members believe that the revised rules on pre-trade transparency could cause drastic structural change (with unintended consequences) if not appropriately considered and defined with clear objectives in the text.

View BBA response to Questionnaire on MiFID/MiFIR 2 by Markus Ferber MEP, 13 January 2012

EBF position on the review of MiFID

On 4 January 2012, the European Banking Federation (EBF) published a position paper on the review of the Markets in Financial Instruments Directive (MiFID).

Overall, the EBF is pleased with the proposed changes to the MiFID framework. However, the EBF stated that there are significant areas of concern, which need to be addressed to ensure the legislation is well adapted to the needs of investors and issuers who use the markets.

Areas of specific concern for the EBF include:

The Commission’s proposal for a new category of Organised Trading Facilities (OTFs). The EBF stated that OTFs should be regulated in way that permits OTFs and existing venues to compete fairly for business.
The Commission’s proposal to extend the Systematic Internaliser regime to non-equities.
The imposition of market-making obligations on algorithmic traders.
The Commission’s proposed extension of transparency obligations to depositary receipts, exchange traded funds and certificates issued by companies.
The extension of transaction reporting. The EBF stated that the transaction reporting regime should not include transactions in all commodity derivatives as position reports may be more appropriate.
The conduct of business rules. In particular, the EBF is concerned about the proposed labelling of different kinds of advice (i.e. independent versus non independent).
The application of equivalence requirements to third-country legislation.

View EBF position on the review of MiFID, 4 January 2012

Consultation on the review of MiFID

On 22 November 2011, the European Parliament announced that the Rapporteur for the MiFID review, Markus Ferber, had launched a consultation questionnaire to inform the work to be conducted by the Economic and Monetary Affairs Committee.

The questionnaire focused on the following key themes:

Scope.
Corporate governance.
Organisation of markets and trading.
Investor protection.
Transparency.
Horizontal issues.

The questionnaire also provided for detailed comments on specific articles of both the draft recast Directive and draft Regulation.

The consultation period for the European Parliament’s questionnaire on the MiFID review ended on 13 January 2012.

View Consultation on the review of MiFID, 13 January 2012

View Questionnaire on the review of MiFID for responses by 13 January 2012, 22 November 2012

MiFID review proposals

On 20 October 2011, the European Commission published legislative proposals for the review of the Markets in Financial Instruments Directive (MiFID). The proposals consisted of a recast MiFID framework Directive and a new Regulation which partly replaces the original MiFID framework Directive. The Commission estimates that the MiFID review will impose one-off compliance costs of between €512 and €732 million and ongoing costs of between €312 and €586 million per year.

The key objectives of the legislative proposals are:

More robust and efficient market structures. MiFID currently covers multilateral trading facilities (MTFs) and regulated markets (RMs). The proposals introduce a further type of trading venue into the regulatory framework: the organised trading facility (OTF). These are organised platforms that are not currently regulated but play an increasingly important role. For example standardised derivatives contracts are increasingly traded on these platforms. The proposals seek to close this loophole. In addition the proposals also introduce the creation of a specific label for SME markets. This is intended to provide a quality label for platforms that aim to meet SME’s needs.
Technological innovations. The proposals introduce new safeguards for algorithmic and high frequency trading activities. The safeguards include the requirement for all algorithmic traders to become properly regulated, provide appropriate liquidity and rules to prevent them from adding to volatility by moving in and out of markets.
Increased transparency. The proposals introduce a new trade transparency regime for non-equities markets (i.e. bonds, structured finance products and derivatives).
Reinforced supervisory powers. The proposals provide that in coordination with the European Securities and Markets Authority and under defined circumstances, national supervisors will be able to ban specific products, services or practices in case of threats to investor protection, financial stability or the orderly functioning of markets.
Stronger investor protection. The proposals set stricter requirements for portfolio management, investment advice and the offer of complex financial products such as structured products. In order to prevent potential conflicts of interest, independent advisers and portfolio managers are prohibited from making or receiving third party payments or other monetary gains.
Stronger corporate governance. The proposals introduce new rules on corporate governance and senior management responsibility for all investment firms.
A stricter framework for commodity derivatives markets. The proposals increase transparency of trading activity on all organised trading venues by introducing a position reporting obligation by category of trader. They also give harmonised and comprehensive powers to financial regulators to monitor and intervene at any stage in trading activity in all commodity derivatives including in the shape of position limits if there are concerns in terms of market integrity or orderly functioning of markets. The proposals will also mean that fewer commodity firms will be exempt from MiFID when they deal on their own account in financial instruments or provide investment services in commodity derivatives on an ancillary basis as part of their main business and when they are not subsidiaries of financial groups. The proposals applicable to other derivatives regarding increasing pre and post trade transparency and mandatory trading on organised venues will also apply to commodity derivatives.

The proposals now pass to the European Parliament and the Council of the European Union for negotiation and adoption. Once adopted the Regulation, the recast MiFID framework Directive and the technical rules implementing them will apply as of the same date.

View Proposal for a Directive

View Proposal for a Regulation

View Press release

View Frequently asked questions on the proposals

View Frequently asked questions on emission allowances

View Impact assessment

View Summary of impact assessment