MiFIR II / MiFID III - A revamped regulatory era on EU markets in financial instruments…

MiFID framework reform is continuously evolving since 2007, introducing a significant number of notable developments – starting from Market in Financial Instruments Directive in 2004, moving to the Directive 2014/65/EU of 2018, with MiFID III being already on the horizon of the revamped regulatory era.

The rationale & key objectives of the revamping MiFIR/MiFID III

On 25 November 2021, the European Commission has published both the legislative proposals amending Regulation (EU) No 600/2014 on markets in financial instruments (“MiFIR”)[1], as well as amending Directive 2014/65/EU on markets in financial instruments (“MiFID II”)[2].

Both proposals aim to exert a higher degree of transparency and the availability of market data (including ending of RTS 27[3] reports), achieve a more uniform level-playing field between execution venues, establish and implement a new process relating to the selection of consolidated tape providers for EU trade data, update the EU share and derivative trading obligations, prohibit payments in relation to clients’ order flow towards execution venues, ensuring in such a way that EU markets in financial instruments infrastructure remains internationally competitive.

Quick Fixing at MiFID II in 2022, not sufficed though

Quick fixing on MiFID II took place during 2022, where the European legislator, in response to the COVID-19 pandemic and in order to alleviate the administrative burden on MiFID II firms, introduced and adopted the EU Directive 2021/338, via which introduced, amongst others, the following:

• changes in information and transparency related requirements were introduced (e.g. abolishment of the obligation to provide information to professional clients and eligible counterparties about costs and associated charges,
• periodic reporting requirements regarding the execution of client orders were postponed (RTS 27 reporting),
• criteria for ancillary investment activities were introduced, and
• electronic method of communication has become the default method for investment firms in communicating with their clients.

However, European legislators and market participants did not seek quick fixing rules as sufficient in revamping MiFID framework after 5 plus years of its implementation.

What is changing …

Some of the key propositions of the European legislators, are as follows:

• Design and implementation of a centralized database (consolidated tape), for both equity and equity-like financial instruments traded throughout the European Union across all trading venues, in an effort to improve overall price transparency across EU trading venues.
• Prohibition on payments on firms for forwarding client orders to third parties for execution.
• Abolishment of RTS27 periodic reporting for both trading venues and systematic internalisers.
• Changes in relation to systematic internalisers framework - systematic internalisers will be (i) required to publish firm quotes that are a minimum of twice the standard market size, (ii) prohibited from utilising payment order flow to retail clients as well as (iii) aligned with the reporting rules applicable to trading venues.
• Alignment of the trading obligation under MiFIR and clearing obligations under EMIR for derivative contracts.
• Introduction of new clock synchronisation rules for trading venues, systematic internalisers, as well as APA/ARM and CTP providers.
• ESMA would be required to propose amendments on transaction reporting and financial instrument reference data reporting system.
• Introduction of sanctions for infringements of certain MiFIR II provisions.

Overall, the upcoming MiFIR II / MiFID III legislative package could be seen as a complete overhaul of MiFID framework in the same way as was the case for MiFIR / MiFID II, since the upcoming changes are considered as notable and essential.

It is obvious that the MiFID framework will see additional revisions in future ...

Enforcement timeframe

Following the agreement on the proposed changes by the European legislators, MiFIR II/ MiFID III adoption by the European Parliament seems to take place towards the end of 2023 - Q1 2024. Once adopted, both the revised MiFIR II and MiFID III legislative documentation will be published in the Official Journal of the European Union.

Consequently, whilst MiFIR II would become applicable by its publication in the Official Journal, MiFID III would need to be transposed into national law by each Member State, which is expected to take place within 2025.

[1] https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021PC0727

[2] https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021PC0726

[3] https://eur-lex.europa.eu/legal-content/EN/TXT/uri=CELEX%3A32017R0575

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