The Review of the Markets in Financial Instruments Directive: the European Commission publishes legislative proposals
The Markets in Financial Instruments Directive (2004/39/EC) ("MiFID") and implementing legislation, in force since November 2007, sets out a framework for regulating investment services in financial instruments provided by investment firms and credit institutions. MiFID also provides a framework for the regulation of trading venues together with a pre- and post trade price transparency regime for equities. Its aim was to promote the integration, efficiency and competitiveness of EU financial markets while ensuring adequate protection for investors in financial instruments.
The review of MiFID launched by the European Commission (the "Commission") in 2010 resulted in the publication on 20 October 2011 of some very wide ranging proposals that have significant implications for market participants. The Commission cites a number of reasons to explain why these changes are necessary, including the failure of MiFID adequately to deliver its promised benefits, changes in technology and trading behaviours and the high level governmental responses to the financial crisis. Accordingly the proposals seek to address the objectives originally set for MiFID while responding to new regulatory challenges posed by changes in the financial markets and some aspects of the financial crisis. The proposals rely heavily on the role of the European Securities and Markets Authority ("ESMA") on which significant new powers and responsibilities would be conferred. The proposals would also require ESMA to develop advice on a very wide range of detailed technical and implementing measures.
The Commission's MiFID review proposals should be read together with the parallel proposals for the review of the Market Abuse Directive. The Commission's review of the regulation of market infrastructure as proposed in the draft European Market Infrastructure Regulation (EMIR)1 is also relevant. Together these proposals contribute to the Commission's wider ambition to create a single European rule book for significant elements of financial regulation.
The timeline for the eventual adoption of the proposals is, in view of their length, complexity and radical nature, likely to be prolonged. There will now follow a 'trialogue' involving consideration of the proposals by the European Parliament, the Commission and the Council, a process of negotiation and discussion that could last until the end of 2012 or beyond. Once that process has been completed, the final texts of the instruments will be adopted and enter into law following their publication in the Official Journal and are expected to become effective in Member States two years later. Accordingly the timetable could stretch to the beginning of 2015. A number of the proposals also suggest the need for transitional provisions.
It can be expected that the proposals will be the focus of intensive lobbying and it should be assumed that the final text will reflect a number of changes. Nevertheless clients will want to start considering the implications for their businesses.
We would in particular draw attention to the potential impact for financial firms that are established outside of the European Economic Area (EEA) but which may currently be providing investment services in the EEA under existing national laws, for example under the 'overseas persons exclusion' in the UK. The proposals would see those national regimes swept away and replaced by a potentially more restrictive approach which could exclude firms in countries that are not judged by the Commission to have equivalent regulatory regimes or to offer full reciprocity of treatment for EU based firms.
Other changes we headline which are likely to impact upon business models are the possibility of position limits for commodity derivatives, mandating the trading of standardized derivatives on trading venues and the application of pre- and post-trade price transparency for firms trading in bonds and derivatives.
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