In October 2011 (in the context of its ongoing review of the pan European framework for the provision of investment services and the operation of markets established by the MiFID, and in force since November 2007), the EU Commission published its long awaited formal MiFID2 legislative proposal.

MiFID2 consists of a “recast” Directive (commonly referred to as MiFID2) dealing primarily with authorisation, systems and conduct requirements in relation to investment business and a separate Regulation, known as the Markets in Financial Instruments Regulation (MiFIR) dealing with transparency, transaction reporting, clearing, and supervision of positions.

As a Directive, MiFID2 will need to be implemented into national law by EU Member States before it can take effect. As a Regulation, MiFIR will have direct effect without any need for local implementation. MiFID2 and MiFIR were finally published in the Official Journal on 12 June 2014 and entered into force on 02 July 2014. Whilst MiFID2 and MiFIR was originally set to apply 30 months after entry into force (03 January 2017) this has now been extended for a year until 03 January 2018.

MiFID2 and MiFIR make significant changes to the regulatory regime established by MiFID, in part as a result of the impact of the financial crisis. Other key catalysts for the proposed revisions include: (i) perceived inequalities in the markets, especially for end investors in financial products, (ii) technological developments, particularly around algorithmic trading and direct market access systems, (iii) perceived weaknesses in transparency in relation to investments other than shares, and (iv) a desire to increase investor protection.

The forthcoming amendments are designed, in particular, to:

  • increase transparency in the equity markets through changes to the regime for systematic internalisers, and the application of pre- and post-trade transparency requirements to “equity-like” instruments such as depositary receipts,
  • increase transparency in the non-equity markets through the application of pre- and post-trade transparency requirements to non-equity products including bonds, structured finance products, emissions trading allowances and certain derivatives,
  • introduce a new regulatory regime for so-called “organised trading facilities” (OTFs) covering such things as broker crossing systems,
  • extend transaction reporting requirements beyond financial instruments which are admitted to trading on a regulated market,
  • provide an increased regulatory focus on commodity derivative markets,
  • tighten the criteria for professional client or eligible counterparty status (resulting in more clients being categorised as retail clients),
  • change the criteria for determining whether a financial instrument is complex or non-complex (with a view to increasing the scope of products regarded as being complex), and
  • introduce increased investor protection measures in respect of retail clients and complex financial instruments, including product intervention rules similar to those of the UK Financial Conduct Authority (FCA).

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