The European Commission is using mandatory reviews of major pieces of capital markets legislation to move forward its Capital Market Union (CMU) action plan a year after it was launched. The MiFIR review proposals focus on improving market transparency and structure and will have the most impact on firms and venues engaged in the wholesale trading markets. A wider MiFID II review proposal is expected in 2022, and is likely to cover investor protection and corporate governance obligations.
The aim of the CMU is to strengthen and reduce fragmentation in the EU capital markets. The Commission's latest package of four legislative proposals aims to “improve the ability of companies to raise capital across the EU and ensure that Europeans get the best deals for their savings and investments” by:
- Amendments to MiFIR to stop “payment for order flows”, remove the main obstacles to the creation of a consolidated tape and increase market transparency, alongside simplifying some of the transparency obligations and levelling the playing-field between the different venues and methods of trade execution.
- Targeted revisions to AIFMD and the UCITS Directive to harmonise the regulatory framework for AIFs that issue loans to companies, ensure that fund managers which delegate their functions to non-EEA parties adhere to the same high standards applicable across the EU, and encourage the proper use of harmonised liquidity-management tools in open-ended funds. There are also changes to the data reporting requirements and rules for depositaries.
- Changes to the European Long-term Investment Fund (ELTIF) Regulation to make the funds more attractive for fund managers and investors.
- Establishing a European Single Access Point (ESAP) to provide a common source of public, free information about EU companies and investment products aiming to be phased in from 2024. This may be similar to the US SEC EDGAR database. It is also proposed to become a database for ESG data on companies and financial products.
For further detail on the AIFMD, UCITs and ETLIF proposals - see our latest article here.
Details on the MiFIR proposal
The Commission's aim with the MiFIR proposal is to “improve transparency and availability of market data, improve the level-playing field between execution venues and ensure that EU market infrastructures can remain competitive at international level.” Many of the proposals have been recommended in ESMA review reports over the last two years and generally aim to bring efficiencies and improvements to the existing regulation rather than wholesale change. The main proposals are:
- Various amendments to improve the conditions for consolidated tapes by mandating trading venues to contribute their data to a consolidated tape provider (CTP), harmonising data standards, requiring CTPs to share revenue with data contributors and introducing a selection procedure for the appointment of a CTP for each asset class (shares, ETFs, bonds and derivatives)
- Changing the double volume cap to a single volume cap which will rely only on an EU-wide threshold of 7% (the venue threshold will be removed)
- Increasing Systematic Internalisers' (SIs) transparency obligations, including aligning SI reporting formats and obligations with those applicable to exchanges, multi-lateral trading facilities (MTFs) and organised trading facilities (OTFs)
- Reducing the scope of non-equity trade reporting deferrals and harmonising the deferral regime, by instigating EU-wide, rather than national, thresholds
- Introducing the obligation that multilateral systems have to operate with a trading venue licence — to address the issue that software providers could be acting as trading venues
- Clarification that the share trading obligation (STO) applies only to shares with an EEA ISIN and establish an EU `official list' of shares subject to the STO
- Banning payment for order flow to try to improve best execution for investors
- Removing `open access obligation' for exchange-traded derivatives - already postponed several times
- Aligning the derivatives trading obligation (DTO) with the clearing obligation
A wider MiFID II review is expected in 2022, however the proposal includes related amendments to MiFID II to:
- Remove the licencing requirement for persons dealing on own account on a trading venue by means of direct electronic access (DEA), in line with ESMA recommendation on algorithmic trading
- Oblige investments firms, MTFs, OTFs and regulated markets to meet data standards enacted in the MiFIR proposals, to assist with consolidated tape
- Allow for sanctions for infringements of new provisions in MiFIR on data quality, mandatory data contributions and payment for order flow
Comparison with UK proposals
The UK Government launched its proposals to amend UK onshored MiFID II/MIFIR in July 2021. There is some consistency between the UK and EU proposals — alignment of the DTO with the clearing obligation and a focus on establishing a consolidated tape. But there is also divergence — the UK will completely revoke the double volume cap and the STO.
The EU and UK proposals will both require legislative changes and amendments to technical standards/the rule book. The Commission's proposals will now be debated and negotiated by the European Parliament and the Council. HM Treasury is likely to present the UK legislative changes in early 2022. ESMA and the FCA will issue further consultations on the technical standards/rule book changes over the next few months. The timing of all these changes is likely to be spread over the next year.
The differences in the proposals may further complicate the operating environment for firms. To plan effectively for the probable change needed to systems (and possibly business models), firms working in these jurisdictions should keep track of the developments and finalisation of the proposals.