ESMA sets out "practically applicable rules" for EU financial markets in final MiFID consultation

The European Securities and Markets Authority (ESMA) is now consulting until 2 March 2015 on draft regulatory technical and implementing standards which, once approved, will apply to the implementation of the revised Markets in Financial Instruments Directive (MiFID) and Regulation (MiFIR). The EU's market regulator has also published its final technical advice to the European Commission, which makes a number of new recommendations for improved investor protection.

ESMA chair Steven Maijoor said that the documents translated the new requirements into practically applicable rules for both market participants and national supervisors.

"[The] implementing rules on both secondary markets and investor protection issues reflect ESMA's desire to achieve the best outcome for market users and investors, taking into account the extensive submissions received from our stakeholders," he said. "The advice now goes to the European Commission to use in preparation of its delegated legislation, while our technical standards are open for a second round of consultation."

"Once fully implemented, MiFID II will have a significant impact on the EU's securities markets, its users and infrastructure providers. It will bring greater transparency and improve the overall functioning of markets thus strengthening investors' trust in the financial sector," he said.

Once in force, MiFID II will revise and update the existing Markets in Financial Instruments Directive, which came into force on 1 November 2007 with the aim of creating a harmonised regulatory regime for investment services across the European Economic Area (EEA). The revised MiFID package was adopted by the Commission in October 2011, partly in response to the financial crisis. The new framework is designed to take into account developments in the trading environment since the original directive came into force, but also covers a broader range of investments and widens the scope of investment services needing authorisation from national regulators.

The framework set out in MiFID II and its accompanying directly-applicable regulation will apply to a wide range of financial instruments, trading venues and techniques; from global investment banks trading complex securities to fund managers, stockbrokers and independent high street financial advisers providing advice to the general public. Stricter rules will also apply to 'third countries' from outside the EEA wishing to provide financial services within the trading bloc. The new regime is due to be phased in from 3 January 2017, although transition periods will apply to some of the rules.

Changes set out in MiFID II include the introduction of a new 'trading obligation' to ensure that derivative trades take place on a regulated platform, in line with requirements agreed by the G20; new trading controls and liquidity requirements for algorithmic and high-frequency trading; and investor protection measures including restrictions on certain types of fees and remuneration that could interfere with adviser independence. The legislation would also introduce trading caps on alternative trading markets, known as 'dark pools'; and new supervisory tools and reporting requirements for commodity derivatives.

ESMA's final technical advice to the Commission deals primarily with measures designed to improve the protection of investors, particularly retail investors. The main proposals include restrictions on the circumstances in which portfolio managers can receive research for third parties; new governance requirements for those investment firms that manufacture or distribute financial instruments; and requirements for firms to provide clients with details of all costs and charges relating to their investment up front. It also introduces new transparency requirements when dealing commissions are used to pay for research.