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16 March 2012

ECON Committee published draft report on MiFID II/MiFIR


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Rapporteur Ferber supports the Commission's proposal to extend the scope of the MiFID rules and limit the exemptions, as he is in favour of closing all gaps in the regulatory framework in order not to have parts of the market left unregulated.


Explanatory statement

To ensure that the exemptions are not misused, the rapporteur proposes a reporting obligation for persons to explain why their activity is ancillary to their main business. ESMA should draft regulatory technical standards to specify the criteria for ancillary activities further.

The Commission strengthens the regulatory framework for investor protection in order to provide improved information to clients about the services and the execution of their orders. The rapporteur supports this aim. Nevertheless he is not in favour of the proposed new obligation to specify whether the investment advice is independent and if it is based on a broad or a more restricted analysis of the market, as restricting the use of the word "independent" may mean that other forms of advice have a negative connotation. Therefore the rapporteur has chosen a more neutral wording and proposes that clients should be informed before investment advice is given if there have been third party payments and if the advice is given on a limited number of instruments. Clients should also be informed about the frequency of the periodic assessment of the suitability of financial instruments. Portfolio managers should not be prohibited from accepting inducements, but this acceptance of any inducements should be fully transparent and information on this should be given to the client prior to the agreement. Furthermore the rapporteur introduces a new obligation that investment firms shall, when designing a new product, specify a target group within the retail or professional client category and ensure that the product is designed to meet those customers’ needs and marketed to clients within the target group. Finally, the rapporteur believes that information which has to be obtained about clients should also contain information about the clients’ risk tolerance.

When it comes to record keeping, the Commission proposes that these should also contain records of telephone conversations or electronic communications. However as requiring access to these kind of records could conflict with national law on protection of data or personal privacy, the rapporteur proposes that Member States could also recognise alternatives such as minutes as an adequate means of documentation.

Whilst MiFID I differentiated between three categories of organised execution venues - RMs, MTFs and SIs - the Commission is now introducing a fourth category called Organised Trading Facilities (OTF). For all trading venues there are identical pre- and post-trade requirements and nearly identical requirements regarding organisational aspects and market surveillance. The main difference between RMs and MTFs on the one hand and OTFs on the other hand is that for OTFs there is a degree of discretion over how a transaction should be executed. The rapporteur questions whether the creation of a new category is the right way to capture organised venues which are not caught by the already existing categories. In order not to create new loopholes, he proposes to limit the OTF category to non-equities, and consequently adjusts the review clause to ensure that the need for and effect of this new category are reviewed.

The proposals on MiFID II contain specific obligations imposed on anyone who is carrying out algorithmic trading whilst defining algorithmic trading broadly. The rapporteur suggests a more differentiated approach and proposes definitions for high frequency trading and a high frequency trading strategy to identify a particular subset of algorithmic trading, and in addition a ban of direct electronic access. Furthermore, the rapporteur acknowledges the Commission's proposals for RMs, MTFs and OTFs to ensure that they are resilient in extreme market situations and that they have in place proper circuit breakers and business continuity arrangements. The rapporteur welcomes this approach but makes three proposals to strengthen it:

  • first, to slow down trading and order flows he proposes that all orders should be valid for at least 500 milliseconds;
  • second, for all trading venues there should be parameters for halting trading which should be reported to the competent authorities and ESMA who should publish these on its website;
  • third, to require trading venues to ensure their fee structures contain higher fees for placing an order which is cancelled than for an order which is executed and higher fees for market participants who place a high ratio of cancelled orders.

The Commission proposes that the corporate governance provisions should be strengthened with regard to profile, role and responsibilities of both executive and non-executive directors and balance in the composition of management bodies. The rapporteur strengthens the rules for management bodies of trading venues and proposes that one person should not be able to hold more than one executive or two non-executive directorships at the same time, although the ability to combine executive and non-executive directorships within the same group was retained. There should also be effective systems in place to identify and manage conflicts of interest.

With SME growth markets, the Commission creates a new subcategory of markets which is usually operated as MTF. While supportive of the objective, the rapporteur is uncertain of the benefits in practice of labelling some markets as SME growth, and proposes that the concept should at least be based on the standard EU definition of SMEs.

According to the Commission, all trading venues on which commodity derivative contracts are traded should adopt position limits or alternative arrangements in order to ensure the proper functioning of the market and to provide standardised information. The rapporteur welcomes this approach in general as he supports the aim of banning excessive speculation on food prices. Nevertheless some adjustment and strengthening is needed. According to the rapporteur, the use of other controls on positions should be an addition, not an alternative, to the use of position limits. However, in setting such limits there should be a differentiation between positions related to commercial activity as regards to commodity and other positions. It should be up to ESMA to specify the limits on the number of contracts in draft regulatory standards further.

Regarding data consolidation, all firms would have to publish their trade reports through Approved Publication Arrangements (APA) to allow efficient comparison of prices and trades across all venues possible. The rapporteur supports the Commission proposals but points out that all information should be treated on a non-discriminatory basis.

The third country regime proposed by the Commission is based on an equivalence assessment of third country jurisdictions, so that third country firms in relation to which an equivalence decision has been adopted by the Commission would be able to request

The Commission proposals also contain wide-ranging powers for national authorities and ESMA. For example supervisory authorities would be able to intervene at any stage during the existence of a commodity derivative contract or to limit positions ex-ante and in a non-discriminatory way. Member States would be required to put in place at least a specified minimum level of administrative sanctions. The rapporteur strengthens these measures in order to ensure that market participants abide by the MiFID rules.

Finally, the rapporteur reduces the number of delegated and implementing acts, as he considers that the major political decisions have to be taken within the ordinary legislative procedure by Parliament and Council, and specifies the periods for ESMA to draft the requested regulatory standards.

Full draft report



© European Parliament


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