The European Securities and Markets Authority has translated the provisions of MiFID II/MiFIR into practical rules for regulators and practitioners to follow.

The European Securities and Markets Authority has translated the provisions of the Markets in Financial Instruments Directive and its accompanying regulation into practical rules for regulators and practitioners to follow. The aim is to make secondary markets fair, 'transparent' and safe for investors who are buying investment products.

ESMA's "implementing rules on both secondary markets and investor protection issues" have taken account of a flurry of correspondence from interested parties. Some 'advice' that ESMA has formulated is now on its way to the European Commission - the nearest thing that the European Union has to an executive branch - to use when it prepares some delegated legislation, while ESMA's 'technical standards' (draft rules) are open for a second round of consultation.

MiFID II is to include most financial instruments, trading venues and techniques. MiFID II and the accompanying regulation MiFIR will, according to their authors, introduce changes to the functioning of secondary markets, including transparency requirements for a broad range of asset classes; the obligation to trade derivatives on trading venues; requirements for algorithmic and high-frequency-trading and new supervisory tools for commodity derivatives.

ESMA’s main proposals in this round of rule-making are:
•    an increase in 'trade transparency' for non-equity instruments, in particular bonds, derivatives, structured finance products and emission allowances;
•    a trading obligation for shares and a double volume cap mechanism for shares and equity-like instruments - a major change to the EU's trading policy;
•    an obligation to trade derivatives 'on MiFID venues' (regulated markets, multilateral trading facilities or organised trading facilities) only, in line with the wishes of the 'Group of 20' (actually only 19) of the world's most industrialised nations, whose opinions are evidently worth more to the EU than those of the next 20;
•    newly introduced position limits and reporting requirements for commodity derivatives;
•    rules governing high-frequency trading, imposing a strict set of organisational requirements on investment firms and trading venues;
•    provisions regulating access to central counterparties, trading venues and benchmarks, designed to increase competition in the European Union; and
•    requirements for a consolidated tape of trading data, with rules for tape-providers, reporting,  publication and the sale of data.

MiFID II to improve investor protection

ESMA wants the European Commission to take steps to further the protection of investors from sharp practice. Its main proposals in this regard include:
•    more clarity about the circumstances in which portfolio managers can receive research from third parties;
•    more clarity about the circumstances under which 'inducements' meet the 'quality enhancement requirement' for the provision of advice;
•    requirements for investment firms that manufacture and/or distribute financial instruments and structured deposits to have product governance arrangements in place in order to assess the robustness of their manufacture and/or distribution;
•    requirements for firms to provide clients with the details of all costs and charges related to their investments, including cost aggregations, the timing of disclosure (ex-ante and ex-post); information to non-retail clients; the scope of firms subject to this obligation; information on the cumulative effect of costs on the return;
•    organisational requirements for firms that provide investment advice independently; and
•    specification of powers for ESMA and national regulators with regards to prohibiting or restricting the marketing and distribution of financial instruments.

MiFID II/MiFIR and their so-called implementing measures (defined by one Europhile website, eup-network.de, as "mandatory requirements in the form of regulations that come into force without further implementation into national laws") will start to apply on 3 January 2017.