MiFID II is approaching!

Five years ago the regulations for investment firms and stock markets and other marketplaces was changed substantially as a result of the coming into effect of MiFID. Now the first evaluations concerning the MiFID have been done it is time to correct omissions and flaws and also to incorporate new developments, such as the rise of ‘high frequency trading’. To this end the European Commission tabled a proposal at the end of 2011. Although the main objective of this proposal is to partially adapt the MiFID Directive and the underlying implementation directive and regulation, the proposal was named MiFID II, market-wide, as if it were an entire new Guideline.

In this news item we will take a look at the current situation of MiFID II, the status of the proposed modifications and what is yet to come. In the coming period Charco & Dique will have additional news items, in which we will specifically delve into topics touched by MiFID II. Our focus will be on the subjects that are most relevant to investment companies as banks, asset managers and independent asset managers.

Current situation
A first proposition for MiFID II was presented on 20 October 2011 by Michel Barnier, the EU Commissioner for Internal market and Services. These propositions included the amendment of the MiFID directive and the introduction of a regulation to make the financial markets more efficient, resilient and transparent and to better protect the investors. It was also meant to give the supervisors more authority and to have more clear rules for all trading activities. The proposition concerns in particular amendments at the highest level (level 1) of the regulation, propositions for adjustments of additional regulations (level 2) will only materialise after the level 1 adjustments have been finalised.

After the European Commission has completed the proposition it is up to the European Council (and if need be the Ministries of Finances of the different member states) and the European Parliament to discuss the proposition and to suggest amendments or improvements. The route through the European Council is a particularly lengthy one, partially because the member states are often not on the same wavelength. Especially with regard to the legislation aimed at financial markets the Anglo-Saxon vision (United Kingdom and Ireland) often differs substantially from the Latin vision (Italy, France) or the Rhineland vision (Germany, Poland). Nevertheless, expectations are that agreement will be reached in late summer of 2012, in the European Council as well as in the European Parliament, finalising the so-called ‘level 1’ amendments of the MiFID.

The level 2 regulation under the current MiFID consists of a so-called Implementing Regulation and an Implementing Directive. Due to the modifications on level 1, this regulation will also have to be adjusted. The realisation of these changes has not started yet. Expectations are that agreement on the texts at level 2 will be reached in the middle of 2013 at the earliest. As soon as the level 2 regulation (additional regulation) has been finalised, the implementation of the European regulations into the national legislations of the different EU countries can be started. In the Netherlands this will imply that the Dutch Financial Supervision Act in particular and the supervision of the conduct of financial institutes provisions will be modified. Expectations are that these modifications will not be done before 2014, possibly not even before 2015 and that MiFID II will therefore only then come into effect. MiFIR however is assumed to come into effect earlier, because MiFIR is a new regulation with a direct effect, which for that very reason doesn’t have to be converted into the national legislations.

The long turnaround time before the implementation of the new regulations does not mean that the regulations the investment companies deal with will remain unchanged in the meantime! The ESMA, (European supervisory authority) established in 2011, gets into its stride with the issuing of so-called Directives. Directives are a type of pseudo-regulations, which explain in detail how ESMA interprets rules for specific subjects. On the basis of European regulations market parties and national supervisory authorities will ‘make every effort’ to meet with these Directives. In the event of non-compliance, investment companies can therefore be sanctioned by the AFM. This past period ESMA has already issued Directives for three subjects related to MiFID. These concern rules surrounding:

  • Controlling the electronic processing and execution of orders
  • Suitability of the service (including the content of the client profile)
  • The organisation and realisation of the compliance function.

Apart from Directives ESMA also has the possibility to issue so-called Regulatory Technical Standards. Directives can more or less be considered as interpretations from which partial deviations can be made if there is a good motivation, but Regulatory Technical Standards consist of ‘hard’ rules for specific subjects. ESMA is only authorised to issue Regulatory Technical Standards for MiFID II topics when they are specifically requested by the European Commission. The draft text of MiFID II by the European Commission in November 2011, covered more than twenty topics!

Changes under MiFID II
Although until now only a proposal for the modification of the MiFID on level 1 is available, MiFID II seems to entail a great deal of new and modified rules. Not all rules will however affect all the different market parties.
In short, the most important objectives and changes:

More robust and efficient
market structures
  • The introduction of the organised trading facility (OTF). The objective is to submit all organised platforms to the same transparency rules and to prevent possible conflicts of interests.
  • The storage of securities becomes an investment service.
Attention for technological innovations
  • Introduction of new safeguards for algorithmic and high frequency trading.
  • Improved competition conditions for essential transaction processing activities such as clearing.
Enhanced transparency
  • Improved transparency of trading activities on the stock markets, including ‘dark pools’.
  • New transparency regulations for trading on non-equity markets (i.e. bonds, structured financing products and derivatives).
Enhanced powers for supervisors & structure
for raw derivatives
  • Products or services may be prohibited if the investor, the financial stability or the orderly operation of the markets are at risk.
  • Introduction position reporting obligation per stockbroker.
  • Compulsory retention of tapes and data when orders are given by telephone or electronically.
Better protection
of investors
  • Stricter requirements for asset management, investment consultancy and the sale of complex financial products.
  • Tightening the know-your-customer test.
  • Prohibition on commission for independent consultants and asset managers.
  • Introduction of rules in the field of corporate governance and the responsibility of management.
  • Adjustment of criteria for qualification as professional investor.
  • Extra information obligation when selling more products (tying).

In following news items, we will elaborate more on these important changes.

What to do?
The coming into force of MiFID II seems and is still far away. Given the scale and impact of MiFID II it is advisable to latch on to developments in time. This can be done by familiarising yourself with the information already available on MiFID, including new items from Charco & Dique, and by actively contributing to consultations with ESMA, for instance.

In addition, you need to be well aware of the importance of the timely implementation of the several Directives issued by ESMA. For instance, at the end of 2012 you must have implemented the Directives concerning the suitability of the service (including the content of the client profile) and the organisation and realisation of the compliance function. Charco & Dique can help you with this.

Furthermore, it is wise to conduct an impact analysis and draw up an implementation plan as soon as the level 1 and level 2 texts from MiFID II are definitive. Again, Charco & Dique can be of service to you with this.

We will keenly follow the developments around MiFID II. In the coming newsletters we will delve into specific topics from MiFID II.

For more information please contact Charco & Dique at 020-4165403 or send an e-mail to