Proposed updates to MiFIR II & MiFID III could improve reporting & market structure.

Background & purpose of these revisions

Context

In December 2022, the EU proposed revisions to the Markets in Financial Instruments Regulation (MiFIR) and Markets in Financial Instruments Directive (MiFID). These revisions were subject to review before the updated version was released on 18 October 2023. This last proposal represents a significant stride in boosting transparency and strengthening the competitiveness of EU financial markets.

Concurrently, the European Commission released a legislative package on retail investment strategy in May 2023, contributing to the MiFID II amendments. This strategy aims to empower retail investors by providing free access to crucial market and regulatory data for informed decision-making by investors, academics, civil society organizations, and competent authorities.

Main objectives of the anticipated updates

The proposed measures aim to enhance market data transparency, empowering investors with increased access to information about investment products and services. Simultaneously, they seek to reduce regulatory burdens on investment firms, streamline requirements, and enhance the resilience of the EU financial system by strengthening central counterparty (CCP) requirements and preventing market abuse. Overall, these efforts aim to create a more transparent, investor-friendly, and resilient financial environment in the European Union.

What changes can you expect with this revision?

When comparing the very first version of the amended laws (which were still in the proposal stage and for which Deloitte published a dedicated alert “MiFID/R III is finally coming”), this latest iteration of the MiFIR/D frameworks will provide promising changes once approved by the European Parliament and Council:

Key amendments to MiFIR

Transaction and transparency reporting

• MiFIR reporting expansion: Article 26 requirements may extend to alternative investment fund managers (AIFMs) and management companies. A study by ESMA will assess the inclusion of collective fund managers in transaction reporting over a span of 12 months. 
• Enhanced transaction reporting scope: The instrument’s scope of derivatives subject to the clearing obligation under MiFIR II will be broadened across all participants for improved accuracy and timeliness in reporting.
• Greater consistency in transaction reporting: Data fields will be introduced, modified, and deleted to harmonize transaction reporting among EMIR, SFTR, and MiFIR regimes and international standards. Details will be confirmed upon RTS publication.
• Transparency in organizational change: With adjustments to the systematic internalizer (SI) regime, "designated reporting entities" will be relied on to clarify reporting responsibility and prevent double reporting. These entities will be listed in a dedicated ESMA list, providing identity and designated instrument information.

Market structure enhancement

• Market structure enhancements: Trading venues will be mandated to enhance transparency on costs and execution quality, facilitating the selection of investment brokers and fostering competition.
• Reform of commodity derivative market: Oversight of commodity derivatives exchanges will be strengthened through improved disclosure of trading data, addressing speculative use on food and energy prices. Banks in commodity derivatives trading will disclose more information for enhanced market transparency and regulatory oversight with the goal of improving market resilience to shocks, simplifying energy transition, and ensuring resource safety.
• Modification of double volume cap rules: The framework to regulate dark pools will be reviewed, mitigating market abuse risks and improving execution quality; the threshold for dark trading in EU equity instruments will be updated to 7% to ensure fair and transparent operation, protecting investors from manipulation.
• Exemptions for transparency requirements: Smaller participants will be exempt from specific transparency requirements to reduce compliance burdens and enhance operational efficiency..

Key amendments to MiFID II

Main changes would streamline and align MiFID II with MiFIR’s amendments.

• Systematic internalizer (SI) requirements: New provisions on quote sizes and order matching would enhance pricing for investors and reduce market fragmentation. SIs will be mandated to quote competitive prices more frequently, providing better access for investors and closer monitoring for compliance. The mandatory SI regime will not apply to non-equity asset classes, with firms having the option to opt-in.
• Payment for order flow (PFOF) ban: Firms would be prohibited from receiving payments for routing orders to specific venues. This would help promote a level playing field and ensure best execution for investors, potentially resulting in lower commissions.

Additional points addressed by the Commission

• Data quality standards: Data quality standards will be mandated in multilateral and organized trading facilities and in EU member state markets. Banks and financial institutions must adhere to these standards for improved market data accuracy and reliability, benefiting all participants.
• Sanctions for violations: To help enforce compliance, sanctions will be introduced for violations in areas like volume caps, contributions to consolidated tape providers (CTPs), and data quality standards.
• Enhanced retail investor protection: Investment firms will be required to provide retail investors with comprehensive information about the risks associated with complex products and services, ensuring improved protection of retail investors.
• Algorithmic trading oversight: Certain measures will be implemented to enhance oversight of algorithmic trading for fair and orderly market conduct; this will help prevent manipulation and ensure fair use by all participants.
• Consolidated tape providers (CTPs): The role and standards for CTPs will be defined, including clock synchronization and reporting provisions. This would require trading venues to provide data to CTPs, creating a unified market data source and simplifying price comparison for investors.
• Reduced compliance burden: The compliance burden would be eased for small and medium-sized enterprises (SMEs) and other market participants; this would reduce costs and more easily facilitate compliance among smaller banks and institutions.
• Facilitation of innovative technologies: The use of technologies like blockchain and artificial intelligence will be promoted in financial markets to foster innovation and enhance competitiveness.

Next steps

The revised MiFID II and MiFIR texts are on track for approval by the European Parliament and Council in early 2024. Following its approval, an 18-month implementation period will commence with the updated regulations likely taking effect across all EU member states in 2025. Simultaneously, the European Commission will be developing regulatory and technical standards based on the amendments.

Deloitte’s advisory specialists and dedicated services will help you design and implement your business strategy considering the future evolution of the regulatory framework and market trends.

In addition, Deloitte can help you :

• Review the proposed changes and assess their impact on your business.
• Identify any gaps in your current compliance framework and develop a plan to address them.
• Update your policies and procedures to reflect the new requirements.
• Train your staff on the new requirements.
• Test your systems and controls to ensure that they are ready to comply with the new requirements.

With our Regulatory Watch service, Deloitte can also help you stay ahead of the regulatory curve to better manage and plan upcoming regulations.