Out-Law News 3 min. read

New rules for market trading move a step closer as European lawmakers reach "agreement in principle" on MiFID II

The European Parliament and member states have informally agreed to changes to EU-wide market trading rules, intended to strengthen investor protections and improve the oversight of trades in financial instruments.

The European Commission, which first proposed the changes to the Markets in Financial Instruments Directive (MiFID) in October 2011, welcomed the agreement, the final text of which must now be voted on by the European Parliament in full. However Internal Markets Commissioner Michel Barnier said that it would have preferred a "more ambitious implementation period".

"These new rules will improve the way capital markets function to the benefit of the real economy," he said. "They are a key step towards establishing a safer, more open and more responsible financial system and restoring investor confidence in the wake of the financial crisis."

"The MiFID II reform means that organised trading of financial instruments must shift to multilateral and well-regulated trading platforms. Strict transparency rules will ensure that dark trading of shares and other equity instruments which undermine efficient and fair price formation will no longer be allowed. Although I regret that the Commission's proposed ambitious transparency regime for non-equity instruments, such as bonds and derivatives, has not been fully achieved, MiFID II represents an important step in the right direction towards greater transparency in this area," he said.

The first MiFID directive was implemented on 1 November 2007 and created a harmonised regulatory regime for investment services across the European Economic Area (EEA). It created a 'passport' system allowing trading venues and investment firms to operate throughout Europe once they had obtained authorisation in their home state, as well as various competition and investor protection measures.

The European Commission adopted the revised MiFID package 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, including advances in technology and gaps in trade transparency to investors and regulators. It widens the scope of investment services needing authorisation from national regulators, as well as the range of investments covered

Once the legislation is finally approved, the European Securities and Markets Authority (ESMA) will develop detailed guidance before the measures are adopted by member states. The new framework will apply to a wide range of investment services; 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 that territory.

MiFID II incorporates a 'trading obligation' to ensure that derivatives trades take place on a regulated platform. This would complement the compulsory clearing requirements currently being introduced under the European Markets Infrastructure Regulation (EMIR). It introduces a cap to limit the use of reference price waivers and extends transparency requirements to non-equity instruments, such as bonds and derivatives, for the first time. It also seeks to establish a harmonised EU framework for non-discriminatory access to trading venues, central counterparties and benchmarks, in order to improve competition and access to markets by firms for the benefit of investors.

Investor protection measures set out in the framework include stricter standards for investment firms, with restrictions on certain types of fees and remuneration structures to ensure that advice is independent and impartial. MiFID II will also ensure that the legislation keeps pace with technological developments by introducing trading controls and liquidity requirements for high-frequency algorithmic trading, and by introducing regulation for the provision of direct electronic market access.

Financial regulation expert Monica Gogna of Pinsent Masons, the law firm behind Out-Law.com, said that the announcement built on the "ongoing discussion" on investor protection taking place in Europe.

"It is good to see progress on the trilogue process for MiFID II, which has been a long-anticipated wait for much of the industry," she said. "Now the real process begins for firms to try and review how MiFID II will impact their systems, and the inevitable costs they will incur whilst implementing these updated rules."

"It is also interesting to see the agreement to move towards opening up the 'passport' process for third country firms in relation to cross-border activities with professional and eligible counterparties, as it is a clear indicator that Europe remains 'open for business'," she said.

Currently, access to European financial markets by firms based in third countries is determined on a country-by-country, rather than an EU-wide, basis. MiFID II includes a harmonised regime for granting access to the markets by third country firms providing cross-border investment services or services to "professional and eligible", based on an 'equivalence' assessment of the rules applicable in these jurisdictions by the Commission. National rules will continue to apply for a transitional period of three years, and then pending equivalence decisions by the Commission. 

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