Why the need for MIFIDII?
The existing regulatory landscape has been shaped by various overlapping pieces of legislation. Principle amongst these are Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR) and Markets in Financial Instruments Directive 2004/39/EC (MIFID I).
EMIR, with its overarching objective of reducing systemic risk, lay down mandatory central clearing and reporting requirements for certain classes of OTC derivative contracts (in EMIR’s parlance: subject to the clearing obligation) and established uniform requirements for the performance of activities of central counterparties and trade repositories. There is considerable overlap with EMIR’s clearing obligation and MIFIDII’s trading obligation which mandates obligatory trading on regulated venues for specified classes of derivative contracts.
MIFID I entered into force in 2007. The principle aspects it covered were: Business Conduct: (best execution, client categorisation, suitability, inducements, investment advice, commodity derivatives, reporting requirements, client order handling, marketing and transaction reporting). Organisation (licensing, cross-border passporting [a contentious issue in the post-brexit world], compliance arrangements, risk management, outsourcing, record-keeping, client assets and client money, conflicts of interest, systems and controls, auditors, controllers and governance) and Equity transparency (systemic internalisation, pre-trade transparency and post-trade transparency).
While it contributed to more competition and transparency, the unintended consequence was market fragmentation and an increase in market data costs for investment firms who had to source data from a plethora of lit and dark liquidity sources. The Chief Executive of BATS Chi-X Europe said, ‘[t]he biggest criticism of MIFID was the fragmentation it brought, but we never received the antidote – the consolidated tape.’ MIFIDII now provides this antidote. This near real-time consolidated tape of all trades executed across the EU will allow a one-stop snapshot of the bloc’s executions and liquidity a la US consolidated tape (called the Security Information Processor – SIP).
The consolidated tape alone will not prove to be a panacea, just as the SIP has failed to stem market abuse in the US, but that would be to pre-empt the discussion.
MIFID (I) needs to be recast in order to appropriately reflect developments in financial markets, address weaknesses and close loopholes that were exposed in the financial market crisis.
Since then we have had a financial crisis, and a proliferation of:
- novel complex derivative instruments,
- new investors,
- off-exchange private liquidity providers and dark pools leading to a fragmented market,
- high frequency trading firms.
The financial crisis and subsequent market developments made clear that the scope of the Directive was no longer appropriate and that investor protection had to be strengthened further. As mentioned, one of the unintended consequences of MiFID I was the explosion in OTC trading, off-exchange products and lightly or unregulated so-called ‘dark’ pools which threatened the integrity of the very market thereby increasing systemic risk. MIFIDII seeks to bring all OTC trading onto lit exchanges or organised venues ‘and that all such venues are appropriately regulated’.
So, on 15 May 2014 the European Parliament passed:
- Regulation No 600/2014 (MiFIR): ‘The legislation consists of two different legal instruments, a Directive and this Regulation…This Regulation should therefore be read together with the Directive.’ and
- Directive 2014/65 (MIFIDII).
This post is lifted from our best-selling book MiFID II: A Survival Guide
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 Mark Hemsley, chief executive of BATS Chi-X Europe speaking at the Trade Tech Liquidity conference in London on 29.11.2012
 (MIFIR, 2014) recital (4)
 (MIFIR, 2014) recital (6)