10/11 The Markets in Financial Instruments Directive II is published

Financial services email alert

Thursday 20 October 2011

Today, the European Commission published the proposed final text of the Markets in Financial Instruments Directive ("MiFID") II and accompanying regulation, the Markets in Financial Instruments Regulation ("MiFIR").

MiFID II builds on the MiFID I Directive that came into force in 2007 and seeks to enhance transparency within the financial system. There has been much speculation surrounding the new rules, however the final text has exceeded industry expectations.

A number of notable changes and provisions are contained within the new rules, including:

  • a liquidity requirement for high frequency trading ("HFT") firms to post their algorithms continuously during trading hours. Under the previous rules, HFT firms were only required to run algorithms during specific market conditions;
  • a ban on organised trading facilities ("OTFs") trading against their own proprietary capital. Systematic internalisers ("SIs") can continue to do this; however, they will be subject to a distinct pre-trade transparency regime compared to the other regulated trading venues;
  • a ban on independent investment firms providing portfolio management services from accepting and receiving fees and commissions paid by a third party on behalf of a client;
  • an extension of the transparency rules for share trading under MiFID I to apply to bonds and commodities;
  • the introduction of a position-reporting obligation, by category of trader, in commodity derivatives markets; and
  • the power for supervisors to intervene at any stage of commodity derivatives trading, up to the point of imposing position limits, to prevent a disorderly market.

Initial reaction

The prescriptive rules contained in MiFIR do not leave Member States with much room for flexibility. Already, concerns have been raised that without this flexibility, Member States will not be able to protect their own markets – an increasingly important consideration within the European Union. Only time will tell whether these concerns are justified.

Next steps

We will continue to monitor developments and the industry reaction to MiFID II and keep you updated.