European Parliament Adopts Updated Rules for Markets in Financial Instruments (MiFID II) (with Damianova Comment)

The European Parliament voted to adopt updated rules for markets in financial instruments (MiFID II). In response to the vote, Internal Market and Services Commissioner Michel Barnier stated that the new rules will establish "a safer, more transparent and more responsible financial system and restore investor confidence in the wake of the financial crisis." Key elements of the MiFID II include:

1. a market structure framework that closes loopholes and ensures that trading, wherever appropriate, takes place on regulated platforms;
2. increased equity market transparency and, for the first time, an established principle of transparency for non-equity instruments such as bonds and derivatives. (This includes rules to enhance the effective consolidation and disclosure of trading data through the obligation of trading venues to make pre- and post-trade data available on a reasonable commercial basis, and through the establishment, for post-trade data, of a consolidated tape mechanism);
3. strengthened supervisory powers and a harmonized position-limits regime for commodity derivatives in order to improve transparency, support orderly pricing and prevent market abuse;
4. a new framework to improve conditions for competition in the trading and clearing of financial instruments;
5. trading controls for algorithmic trading activities that have increased the speed of trading dramatically and can cause systemic risks;
6. stronger investor protection through better organizational requirements, such as client asset protection and product governance;
7. a bolstering of the existing regime to ensure effective and harmonized administrative sanctions; and
8. a harmonized regime, for granting access to EU markets for firms from third countries, which is based on an equivalence assessment of third-country jurisdictions by the Commission.

Damianova Comment: The revised directive, MiFID II, is designed to address perceived gaps in the regulation of the EU financial markets. Its aims (among others) are to ensure that trading takes place on regulated platforms, to increase transparency in the equity market, to establish transparency rules for bonds and derivatives, to set position limits for commodity derivatives, and to introduce controls of algorithmic trading activities.

The European Commission sees the benefits of the revised directive as improved transparency and investor protection. As a consequence of such sweeping reforms, many market participants will face greater compliance costs, and third-country firms might find it more difficult to provide services in the EU.

Note that adoption by the European Parliament is only one of the stages of the EU rulemaking process. A significant number of additional rules have yet to be negotiated and adopted before final implementation. It is expected that member states will have to transpose the rules into national laws by mid-2016, with MiFID becoming effective at the beginning of 2017.

See: European Commission Press Release; MiFID II: Frequently Asked Questions.