MiFID I (Markets in Financial Instruments Directive) provided the basis for the construction of a single capital market within the European Union. Enacted in 2004, it was intended to provide a common basis throughout the European Union regarding the rules on investor protection and financial market activity. But the legislator did not foresee what would happen after 2004, and so the need for a second MiFID legislation became pressing.
The reasons are manifold and can be summarised as follows:
- The urge to create a new EU supervisory scheme modified to reflect the creation of the “ESMA” (and supervisory infrastructure altogether);
- The need to promote more community integrations, with the creation of a unique code for the Member States and the convergence of supervisory authorities as well as implementing the Lisbon Treaty, with new procedures for the enactment of legislation;
- The possibility to anticipate future innovations in the technology driven markets and the impacts of technology in general, regulating the automated trading with specific algorithms, and in particular the high-frequency trading which culminated in the “Flash Crash” of May 6th, 2010 (the term “Flash Crash” refers to a sudden collapse of Dow Jones, the New York Stock Exchange, that took place between the 14:42 and the 15:07 local time. The index lost and then recovered 700 points).
The main issue
Among the reasons just stated lacks what perhaps has pushed for a more rapid revision of the legislative text: the economic crisis of 2008. The shortcomings of the original legislative text highlighted by the events following the 2008 crisis have forced the drafting of a new Community legislation which has taken the name of MiFID II and the drafting of a directly applicable regulation known as MiFIR.
Both are intended to fill the gaps in the previous legislative regime and to make the European capital market safer and more functional; with a direct benefit for the real economy, trying to empower traders operating in those markets in order to regain investor confidence. The implementation of MiFID II is long, laborious and very complex: suffice it to say that the transitional provisions state that the final factor to be implemented will not be integrated until July 3rd, 2020. The implementation was believed so complex that it was postponed for one year, from January 3rd, 2017 to January 3rd, 2018.
MiFID II Legislation
The text of MiFID II consists of seven titles divided for macro-topics, ranging from the scope up to the delegated and final provisions. Some of these are divided into Apparel, namely: title II has four heads, mainly concerning the conditions under which investment firms must comply within the course of their operations, while title VI is divided into three parts concerning the Division of powers between national and European authorities in surveillance.
Finally, in the annex to the legislative text, there are four annexes which collect some lists and specific descriptions of financial products, professional and non-professional figures and articles of previous legislation repealed. Like MiFID I, MiFID II is aimed at firms (like banks, investment companies, interdealer brokers, stockbrokers, etc.) which provide services to clients connected to financial instruments and the places where those devices are dealt with.
MiFID II will have around seven main areas of intervention, which are the following:
- Scope, extent of structured deposits, discipline the distribution of products of own issue;
- Market discipline, the definition of “conditions of admission to trading”, a new and wider definition of exchange markets organised, strengthening supervision on all exchange markets organised and a new and wider definition of automated trading (including high-frequency trading);
- Transparency, the extension of pre and post-trade transparency requirements, the use of persons authorised for publication of information, the timely publication of post-trade data, consolidating data of post-hand at European level, cost reductions post-trade data access for investors, the alignment of MiFID requirements and Market Abuse and financial instruments reporting requirements extension accepted on MTF and OTF;
- Investor protection, raising the level of information to be provided to customers, the revision of the law on “inducements”, and the introduction of independent financial advice;
- Derivative financial instruments, increased powers for supervisors to tighter control of positions in raw materials and derivatives trading and clearing requirement on certain categories of derivatives;
- Relations with third-party-countries, the introduction of a harmonised EU market access by persons established in third countries based on an assessment of equivalence of the latter by the European Commission;
- Product intervention; the possibility for the European Commission to ban specific investment activities, products or services that may generate systemic risk; and the introduction of additional powers for national supervisors
It is clear, therefore, that the requirements are onerous. This means that proper implementation will take time, professionalism, fairness and the presence of external figures to that of the intermediary. But the intention of the legislator is once again to regain consumer confidence and to regulate an industry that was not able to self-regulate.