What is MiFID II?
The European Commission (EC) released in October 2011 its proposal to amend and extend the Markets in Financial Instrument Directive (MiFID), referred to as MIFID II. After intense discussions between the Commission, Council and Parliament (the “Trialogue”), debates are approaching the end of the process.
While primary objectives of the initial directive (“MiFID I”) were to increase the competition, improve investor protection and EU passporting, MIFID II introduces a range of measures which seek to address issues raised by the financial crisis, such as improving investor protection, as well as the commitments made by the G20 to improve the transparency and regulation of more opaque markets, such as derivatives.
Key areas of impact in the MiFID II proposal include:
- The scope of MiFID will be extended to more firms, such as certain commodity firms, data providers and third country firms.
- Additional instruments will be brought into the scope of MiFID, such as structured deposits/products and emissions allowances.
- Derivatives, which are sufficiently liquid and eligible for clearing, will need to be traded on eligible platforms.
- New category of trading venue, called Organised Trading Facilities (OTFs), will be introduced.
- Requirements will be imposed on operators of OTFs and the operation of OTFs will be introduced as a separate permission.
|Transparency and transaction reporting
- Transparency requirements will be extended to additional instruments, such as bonds and derivatives.
- Trade reports will need to be published through Approved Publication Arrangement (APA) firms, which will also be subject to authorisation and certain organisational requirements.
- Transaction reports will need to capture additional information.
|Third country firms
- An equivalence decision will need to be made by the EC in respect of third countries before firms from these jurisdictions can request to provide services.
- As a minimum, third country firms seeking to access the retail market will be required to establish branches.
|Investor protection & Inducements
- Receipt of monetary inducements by certain firms, such as portfolio managers and firms giving independent investment advice, will be banned.
- Advice must meet certain criteria in order to be classified as “independent” (including the assessment a sufficient range of financial assets). Additional information will need to be provided to clients.
- Definition of non-complex instruments will be updated to remove “structured UCITS”, which will prevent these funds from being sold on an “execution-only” basis.
- National regulators will have powers to permanently ban products, in coordination with ESMA. ESMA will also be able to temporarily ban products.
- Position limits for products, such as commodity derivatives, will be introduced. This will include powers for regulators to require existing positions to be reduced.
Deloitte MiFID services
Though MiFID II will probably not come into effect before end 2015 / early 2016, impacts are expected to be significant, especially with the ban of inducements. Certain countries in Europe (UK, NL) have already implemented such ban in their national legislation. Other countries plan to follow (DE, S).
It is now time for the industry (credit institutions, investment firms, investment funds) to assess impacts on this forthcoming text, by estimating which of their revenue is at risk and how this loss of revenue can be compensated.
Deloitte Luxembourg can help you understand and assess potential impacts that MiFID II will have on your business. In fact, some of the proposals may radically change the current target operating / remuneration model of investment firms.
Those firms that go through this assessment exercise sooner rather than later will find that they are well positioned to plan for the necessary changes to their business model and their operations, minimising business disruption and compliance costs.