EU Proposes Revision Of MiFID

by Ulrika Lomas, LawAndTax-News.com, Brussels

25 October 2011

In response to changes in financial markets since it was introduced in November 2007, the European Commission has tabled proposals to revise the Markets in Financial Instruments Directive (MiFID), which aims to make those markets more efficient, resilient and transparent, and to strengthen the protection of investors.

It was pointed out that new trading venues and products have come onto the scene, while technological developments such as high frequency trading have altered the functioning of the financial markets. In addition, the G20 agreed at the 2009 Pittsburgh summit on the need to improve the transparency and oversight of less regulated markets - including derivatives markets – and, as a result, similar discussions are taking place in the United States and other major global financial centres.

The Commissioner for Internal Market and Services, Michel Barnier, said: "Markets have been transformed over the years and our legislation needs to keep pace. The crisis serves as a grim reminder of how complex and opaque some financial activities and products have become. This has to change. Today's proposals will help lead to better, safer and more open financial markets."

The original MiFID currently governs the provision of investment services in financial instruments (such as brokerage, advice, dealing, portfolio management and underwriting) by banks and investment firms, and the operation of traditional stock exchanges and alternative trading venues – the so-called multilateral trading facilities.

The revision will bring a new type of trading venue into MiFID’s regulatory framework: the organised trading facility (OTF). These are organised platforms which are currently not regulated but are playing an increasingly important role. For example, standardised derivatives contracts are increasingly traded on these platforms. The new proposal aims to close this loophole, and should ensure that all trading venues have to play by the same rules and that conflicts of interest are mitigated.

Furthermore, an updated MiFID will introduce new safeguards for algorithmic and high frequency trading activities which, it was said, have drastically increased the speed of trading and pose possible systemic risks. These safeguards include the requirement for all algorithmic traders to become properly regulated, and provide appropriate liquidity and rules to prevent them from adding to volatility by moving in and out of markets.

The proposals would also target improved conditions for competition in essential post-trade services, such as clearing.

By introducing the OTF category, the proposals should improve the transparency of trading activities in equity markets, including "dark pools" (trading volumes or liquidity that are not available on public platforms). Exemptions would only be allowed under prescribed circumstances.

Furthermore, it would introduce a new trade transparency regime for non-equities markets (that is, bonds, structured finance products and derivatives). In addition, thanks to new requirements to gather all market data in one place, investors will have an overview of all trading activities in the European Union, helping them make a more informed choice.

The role and powers of regulators would also be reinforced. In coordination with the European Securities and Markets Authority and under defined circumstances, supervisors would be able to ban specific products, services or practices in case of threats to investor protection, financial stability or the orderly functioning of markets. The proposals also foresee a stronger supervision of commodity derivatives markets.

Finally, the revised MiFID would set stricter requirements for portfolio management, investment advice and the offer of complex financial products such as structured products. In order to prevent potential conflict of interest, independent advisors and portfolio managers would be prohibited from making or receiving third-party payments or other monetary gains.

The proposals now pass to the European Parliament and the European Council of member states for negotiation and adoption.

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