|European Union directive|
|Title||Directive on markets in financial instruments|
|Made by||European Parliament and Council|
|Made under||Article 53(1) TFEU|
|Journal reference||L 173, 12 June 2014|
|Date made||15 May 2014|
|Came into force||30 April 2004|
|Implementation date||3 January 2018|
|Amends||Directive 2002/92/EC, Directive 2011/61/EU|
Directive 2014/65/EU is a legal act of the European Union. Together with Regulation (EU) No 600/2014 it provides a legal framework for securities markets, investment intermediaries and trading venues. The directive provides harmonised regulation for investment services of the member states of the European Economic Area - the EU member states plus Iceland, Norway, and Liechtenstein; the United Kingdom will continue to implement the directive during the transition period. Its main objectives are to increase competition and investor protection, and level the playing field for market participants in investment services. It repeals Directive 2004/39/EC.
Directive 2004/39/EC was a cornerstone of the European Commission's Financial Services Action Plan, whose measures changed how EU financial service markets operate. It is the most significant piece of legislation introduced in the Lamfalussy process designed to accelerate the adopting of legislation based on a four-level approach recommended by the Committee of Wise Men chaired by Baron Alexandre Lamfalussy. There are three other "Lamfalussy Directives": Directive 2003/71/EC, replaced with Regulation (EU) 2017/1129 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, the market abuse directive, and Directive 2004/109/EC on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market.
Directive 2004/39/EC retained the principles of the EU "passport" introduced by Directive 93/22/EEC but introduced the concept of "maximum harmonization", which places more emphasis on home state supervision. This is a change from the prior EU financial service legislation, which featured a "minimum harmonization and mutual recognition" concept. "Maximum harmonization" does not permit states to be "super equivalent" or to "gold-plate" EU requirements detrimental to a "level playing field". Another change was the abolition of the "concentration rule" in which member states could require investment firms to route client orders through regulated markets.
Directive 2004/39/EC, implemented through the standard co-decision procedure of the Council of the European Union and the European Parliament, set out a detailed framework for the legislation. Twenty articles of this directive specified technical implementation measures (Level 2). These measures were adopted by the European Commission based on technical advice from the Committee of European Securities Regulators and negotiations in the European Securities Committee, with oversight by the European Parliament. Implementation measures in the form of a Commission Directive and Commission Regulation were officially published on 2 September 2006.
After its initial implementation, Directive 2004/39/EC was intended to be reviewed. After extensive discussion and debate, in April 2014, the European Parliament approved both Directive 2014/65/EU, an updated version of Directive 2004/39/EC, and its accompanying Regulation (EU) No 600/2014. The directive and regulation include fewer exemptions and expand the scope of Directive 2004/39/EC to cover a larger group of companies and financial products. Both Directive 2014/65/EU and Regulation (EU) No 600/2014 have been effective from 3 January 2018.
Background and history
Directive 2004/39/EC was intended to replace Directive 93/22/EEC, which was adopted in 1993. The law creates a single market for investment services and activities, which improves the competitiveness in EU markets. While the original law did succeed in lowering prices and expanding choices for investors, weaknesses in ISD's structure became apparent during the financial crisis in 2008.
Directive 2004/39/EC was also intended to make changes to share trading, and it set guidelines for the use of related financial instruments. The law was introduced in order to reduce systemic risk and strengthen existing investor protections.
During the approval process for Directive 2004/39/EC, a proposal from the European Commission (EC) was read by the European Parliament (EP) in March 2004. In April 2006, the Commission published consultation responses it received in 2005. In June 2006, the Commission published a new draft. The EC and EP discussed any suggested amendments to approve Level One texts. A second reading of the legislature, by both EP and EC, followed.
Directive 2004/39/EC was introduced under the Lamfalussy procedure, which was designed to accelerate the adoption of legislation based on a four-level approach recommended by the Committee of Wise Men. The Committee was chaired by Baron Alexandre Lamfalussy. There are three other "Lamfalussy Directives": the Prospectus Directive, the Market Abuse Directive, and the Transparency Directive.
Directive 2004/39/EC, implemented through the standard co-decision procedure of the Council of the European Union and the European Parliament, sets out a detailed framework for the legislation. It also amends Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC and repeals Council Directive 93/22/EEC, Investment Services Directive (ISD) originally adopted in 1993.
Twenty articles of this directive specified technical implementation measures (Level 2). These measures were adopted by the European Commission, based on technical advice from the Committee of European Securities Regulators and negotiations in the European Securities Committee with oversight by the European Parliament. Implementation measures in the form of a Commission Directive and Commission Regulation were officially published on 2 September 2006.
To determine which firms are affected by Directive 2004/39/EC and which are not, the directive distinguishes between "investment services and activities" ("core" services) and "ancillary services" ("non-core" services). More detail on the services in each category can be found in Annex 1 Sections A and B of Directive 2004/39/EC.
If a firm performs investment services and activities, it is subject to Directive 2004/39/EC in respect both of these and also of ancillary services (and it can use the Directive 2004/39/EC passport to provide them to member states other than its home state). However, if a firm only performs ancillary services, it is not subject to Directive 2004/39/EC (but nor can it benefit from the Directive 2004/39/EC passport).
Directive 2004/39/EC covers almost all tradable financial products with the exception of certain foreign exchange trades. This includes commodity and other derivatives such as freight, climate and carbon derivatives, which were not covered by ISD.
That part of a firm's business that is not covered by the above is not subject to Directive 2004/39/EC.
Celent, a financial services consultancy, estimated in 2007 that under Directive 2004/39/EC, the three largest EU jurisdictions—France, (Germany), and the UK—would require publication of over 100 million additional trades annually, with spending increasing as well but at a slower rate, from €38 million yearly to close to €50 million.
- Authorisation, regulation and passporting
- Firms covered by Directive 2004/39/EC will be authorised and regulated in their "home state" (broadly, the country in which they have their registered office). Once a firm has been authorised, it will be able to use the Directive 2004/39/EC passport to provide services to customers in other EU member states. These services will be regulated by the member state in their "home state" (whereas currently under ISD, a service is regulated by the member state in which the service takes place).
- Client categorisation
- Directive 2004/39/EC requires firms to categorise clients as "eligible counterparties", professional clients or retail clients (these have increasing levels of protection). Clear procedures must be in place to categorise clients and assess their suitability for each type of investment product. That said, the appropriateness of any investment advice or suggested financial transaction must still be verified before being given.
- Client order handling
- Directive 2004/39/EC has requirements relating to the information that needs to be captured when accepting client orders, ensuring that a firm is acting in a client's best interests and as to how orders from different clients may be aggregated.
- Pre-trade transparency
- Directive 2004/39/EC requires that operators of continuous order-matching systems must make aggregated order information on "liquid shares" available at the five best price levels on the buy and sell side; for quote-driven markets, the best bids and offers of market makers must be made available. (Note consideration is being given to extending these requirements to other financial instruments. Under Article 65(1) of Directive 2004/39/EC, the European Commission is due to submit a report to the European Parliament and to the Council on extending pre- and post-trade transparency requirements to transactions in financial instruments other than shares by October 2007.)
- Post-trade transparency
- Directive 2004/39/EC requires firms to publish the price, volume and time of all trades in listed shares, even if executed outside of a regulated market, unless certain requirements are met to allow for deferred publication. (Note see comment above regarding extension of these requirements to other financial instruments).
- Inducements and investment research
- One of the most controversial aspects of Directive 2014/65/EU is that it severely restricts asset managers' ability to obtain investment research with client commissions.
- Best execution
- Directive 2014/65/EU requires that firms take all sufficient steps to obtain the best possible result in the execution of an order for a client. The best possible result is not limited to execution price but also includes cost, speed, likelihood of execution and likelihood of settlement and any other factors deemed relevant. Directive 2014/65/EU's "all sufficient steps" test sets a somewhat higher standard than the previous "all reasonable steps" standard in MiFID.
- Systematic Internaliser
- A Systematic Internaliser is a firm that executes orders from its clients against its own book or against orders from other clients. MiFID will treat Systematic Internalisers as mini-exchanges, hence, for example, they will be subject to pre-trade and post-trade transparency requirements (see above).
Although MiFID was intended to increase transparency for prices, the fragmentation of trading venues has had an unanticipated effect. Where once a financial institution was able to see information from just one or two exchanges, they now have the possibility (and in some cases the obligation) to collect information from a multitude of multilateral trading facilities, Systematic Internalisers and other exchanges from around the European Economic Area (EEA). This results in an additional amount of work to benefit from the transparency that MiFID has introduced.
The number of additional pricing sources introduced by MiFID means that financial institutions have had to seek additional data sources to ensure that they capture as many quotes/trades as possible. Numerous financial data vendors have worked with the MiFID Joint Working Group and Regulators to make sure that they are able to help financial institutions to deal with the fragmentation and benefit from the increased transparency, while helping them to fulfill their new reporting liabilities.
MiFID and its accompanying implementing directive were transposed in full and on time, with minor exceptions. The European Commission has published a transposition table linking to lists of national provisions which transpose directives.
The Financial Services Authority (FSA), now the Financial Conduct Authority (FCA), was the body responsible for regulation of the securities industry in the United Kingdom during the period of implementation. It incorporated MiFID into its Handbook of rules and guidance.
The French government has implemented MiFID by modifying the French Monetary and Financial Code, in particular by ordinance number 2007-544 of 12 April 2007, and the decrees 2007-901 and 2007-904 of 15 May 2007. The Autorité des Marchés Financiers (AMF) has also applied MiFID to its General Regulations (Règlement Général).
Directive 2014/65/EU / Regulation (EU) No 600/2014
In April 2010, CESR issued consultation papers on MiFID review. The consultation period was short and ended on 31 May 2010. There was one day of open hearings in Paris on 17 May 2010. Public responses to the consultations are now available although a number of institutions also submitted confidential responses.
On 8 December 2010, following a public hearing held in September 2010, the European Commission released a substantial public consultation relating to the review of MiFID (MiFID II), accompanied by a press release and frequently asked questions. The public consultation period was scheduled to close on 2 February 2011. On 26 May 2011, the Commission was reported to be working to present its proposals before the end of 2011.
On 20 October 2011, the European Commission adopted formal proposals for a "Directive on markets in financial instruments repealing Directive 2004/39/EC of the European Parliament and of the Council", and for a "Regulation on markets in financial instruments", which would also amend Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories.
In March 2012, MEP Markus Ferber suggested amendments to the European Commission's proposals, intended to strengthen restrictions on high-frequency trading and commodity price manipulation. The Association for Financial Markets in Europe (AFME)'s formal response to Ferber particularly cited concern with the requirement that all algorithms run continuously as this would preclude the use of broker algorithms to execute client orders. The creation of the Organized Trading Facility (OTF) rules have also caused concern because of their proposed ban on proprietary trading in broker crossing networks, which would prevent brokers from using their pools to unwind risk on behalf of a client or the bank itself.
Both Directive 2014/65/EU and Regulation (EU) No 600/2014 entered into force on 2 July 2014. Directive 2014/65/EU replaced Directive 2004/39/EC, which in turn replaced Directive 93/22/EEC. Directive 2014/65/EU is complemented by Regulation (EU) No. 600/2014 on markets in financial instruments The initial date for implementation by the Member States was 3 January 2017, however, in February 2016 the European Commission delayed this until 3 January 2018 to allow for the building of IT systems to enable enforcement of the new package. Some banks and institutions advocated for a further delay to the implementations of MiFID II, with smaller organisations not yet equipped for the additional demands. However, MiFID II came into force on the revised date of 3 January 2018.
Some analysts believe the impact of Directive 2014/65/EU will lead to global investment research expenditures falling by as much as $1.5bn annually when the rules come into force.
Within days of coming into effect, Intercontinental Exchange announced plans to transfer trading in 245 energy futures contracts from London to the US, putting transactions under the oversight of US, rather than European, regulators.
By 3 March 2021, the European Commission will need to present a report to the European Parliament and Council on the functioning of the directive. This will cover a broad range of issues, including the impact of requirements regarding algorithmic trading and the development in prices for pre and post trade transparency data. The European Securities and Markets Authority is to support the Commission with this exercise.
- Directive 2011/61/EU
- EU law
- European company law
- German company law
- Institutional investor
- Investment Company Act of 1940
- Reg NMS (similar United States legislation to MiFID)
- Request for quote
- Stock market equivalence
- UK company law
- Undertakings for Collective Investment in Transferable Securities Directives
- This option was not taken up by all EU states.
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