Markets in Financial Instruments Directive (MiFID) II Update

After two years of discussion and negotiation, it was announced on 14 January 2014 that the European Commission, European Parliament and the Council of the European Union have reached informal political agreement on “MiFID II”, the package of reforms and amendments to the Markets in Financial Instruments Directive which establishes the framework for the regulation of financial markets and securities across the European Union.

It is understood that the most significant changes to the existing legislation will include:

• The creation of a new type of regulated trading venue for non-equity instruments. It is expected that existing broker-crossing networks operating in the fixed-income market, amongst others, will fall to be regulated as an “Organised Trading Facility” or “OTF”;
• Authorised firms will be required to trade derivatives which are subject to the existing clearing requirement in EMIR on a regulated trading venue, thus curtailing the OTC derivatives markets. We also anticipate trading venue requirements in respect of some other forms of liquid securities; 
• Commodity derivative transactions will become subject to position limits and position reporting requirements; 
• Firms conducting algorithmic trading will be subject to new requirements (e.g., testing and documentation of the algorithms). There may also be a requirement for firms to notify their home regulators of certain information relating to the algorithms used; and 
• A new regime will be introduced in respect of the provision of investment services into the EU by third country firms which may, subject to certain conditions and eligibility criteria, allow non-EU firms to freely provide investment services to professional clients across the EU on a passported basis. This new regime may have an impact upon the future availability of the existing UK overseas person exemption.

Next Steps

It is expected that the MiFID II texts will be finalised within the next couple of months. After which, the relevant European bodies shall begin work on the level 2 legislation, bringing the necessary substance and detail to the requirements to be set out in MiFID II.

Once MiFID II is finalised, an implementation period of at least two years before MiFID II comes into effect is expected. MiFID II will therefore likely come into effect during late 2016 or 2017.

We will be issuing alerts on the developments set out above and other provisions of MiFID II as more details become available.

If you would like assistance in understanding how MiFID II may impact your business, please do not hesitate to contact any of the authors of this alert or your usual Bingham contact.

A link to the European Parliament Press Release, announcing that informal political agreement on MiFID II has been reached, can be accessed here.