European Commission legislative package from MiFID II/MiFIR review: What are the key points?

The European Commission has published legislative proposals to amend MiFID II  and MiFIR.

The detail of the changes proposed are summarised below, but the key takeaways from the proposals are:

• This is not really a “MiFID III”, as the changes proposed by the Commission are relatively modest and targeted. For example, there is no proposed change to the scope of “multilateral systems” (even though this was subject to the MiFID II review), and the only change has been to move the authorisation requirement from MiFID II to MiFIR.
• One of the most significant overhauls is the proposal for ESMA to appoint a single CTP in each asset class (with a suggestion that there may be separate CTPs for derivatives sub-asset classes), with relevant firms subject to a mandatory obligation to contribute data to each CTP.
• Refinements are being made to the scope of the STO and DTO. As expected, the STO is being limited to EEA ISINs, but with trading on third-country venues allowed where the trade is in the local currency. The DTO is proposed to be amended to de-scope small FCs (to align with EMIR Refit). Two powers to suspend the DTO are proposed – one to suspend the DTO where the clearing obligation has been temporarily suspended, and one to allow standalone suspension of the DTO with respect to specific investment firms. The latter suspension power could be used to address the problem of overlapping DTOs.
• Tweaks are being made to the transparency regime (e.g. changing the “double volume cap” to a “single volume cap”).
• The open access regime for ETDs is being deleted.
• An explicit ban on payment for order flow is being introduced into MiFIR.
• The exception from the MiFID II dealing on own account exemption for persons accessing a trading venue via DEA is removed. This carve-out of course received a lot of attention in the course of firms’ Brexit planning, given the potential licensing consequences for UK firms accessing European trading venues via DEA.
• The RTS 27 best execution reporting requirement is being deleted.

Background & Next Steps

The amendments to MiFIR and MiFID II are the output of the MiFID II review. Whilst the consultations on the review have been wide ranging, relatively limited changes are proposed to MiFIR and MiFID II. The Commission has focussed on three key priority areas:

1. Improving the transparency and availability of market data.
2. Improving the level playing field between execution venues.
3. Ensuring EU market infrastructures remain competitive internationally.

The Commission proposals will be subject to the ordinary legislative procedure, so the next step is for the European Parliament and the Council to negotiate a final legislative text on the basis of the proposals. The average length of the legislative procedure is around 18 months.

The proposals, once finalised, will also require additional delegated acts and technical standards covering the detail, for example on the content of standardised market data templates. It is worth noting that ESMA is already consulting on changes to certain RTS which may be impacted by the proposals, such as the current ESMA consultation on changes to RTS 27 and 28 which would be impacted by the proposal to remove RTS 27 best execution requirements, if and when implemented.

Amendments to MiFIR

The amendments to MiFIR are particularly focussed on reducing liquidity and trade execution risk, maintaining the balance between “lit” venues and other trading, removing open access requirements for exchange trade derivatives and refining the scope of the STO and DTO. 

One of the biggest changes is to the consolidated tape (“CT”) regime. The EU Commission notes that the current rules on the CT rely on private actors consolidating market data from various trading venues/APAs. It is also built on the assumption that there could be multiple competing CT providers (“CTPs”). However, no CTP has emerged under these rules for a variety of reasons (e.g. that there is no obligation for trading venues/APAs to provide the data to a CT, and poor data quality inhibits consolidation). The Commission proposes an overhaul to facilitate the emergence of one CTP for each asset class (with a suggestion that there may be separate CTPs for derivatives sub-asset classes).

The key changes proposed are:

• Overhauled CTP regime: Single CTP model and mandatory contribution
  • Instead of relying on multiple competing CTPs emerging, ESMA will run a selection procedure for the appointment of a CTP in each asset class (shares, ETFs, bonds and derivatives). This is intended to be a periodic competitive selection procedure where a single entity would be appointed to provide the consolidated tape in the specified asset class for a 5-year term. ESMA would start by running a selection procedure for the provision of post-trade transparency data in relation to shares. Further, the addition of best bids/offers and volumes to the CTP for shares would be subject to a report by ESMA and the EU Commission adopting a delegated act.
  • ESMA is required to consider a number of factors in selecting a CTP. Key ones include its organisational and governance structure, its technical ability, the level of fees it intends to charge, its resilience, and (in the case of the equities CTP) the revenue sharing scheme it intends to offer (see below).
  • Organisational and quality of services requirements will apply to all CTPs selected and appointed by ESMA, including requirements on:
    • the collection of consolidated core market data;
    • the collection of licensing fees from subscribers; and
    • establishing a revenue sharing scheme with regulated markets for market data concerning shares (with a particular focus on smaller regulated markets).
  • The Commission’s impact assessment indicates that the Commission envisages monthly “per user” subscription fees for professional users and no or nominal subscriptions fees for non-professionals. The impact assessment indicates anticipated annual revenues from equity and bond/derivatives CTPs and the amount of revenue that may be re-distributed to data contributors (estimated to be in the region of EUR100-150m per annum).
  • In addition, new quarterly public reporting obligations will apply to incumbent CTPs relating to service level requirements, e.g. on speed of delivery and operational resilience.
  • To support the CTPs and facilitate consolidation, there will be an obligation for trading venues, APAs and SIs not using an APA to contribute harmonised market data directly and exclusively to the entities appointed by ESMA as the CTP for each asset class. I.e. there will be mandatory contribution according to defined templates. An expert stakeholder group will be set up to provide advice on the quality and substance of market data, and the market data and transmission protocols. Requirements on business clock synchronisation will also be extended to SIs, APAs and CTPs. The enhanced data requirements/templates will require systems build at firms.
• Multilateral systems: Obligations moved into MiFIR
  • The obligation for all multilateral systems to operate as a regulated market or an MTF/OTF is moved into MiFIR. The Commission’s intention is to increase harmonization by making this obligation directly applicable across the EU.
• Equities transparency: Reference price waiver modified and the “double volume cap” becomes a “single volume cap”
  • The reference price waiver is modified to be limited to systems matching orders in sizes >2x SMS, with a consolidated tape provider becoming an eligible reference price source.
  • The double volume cap becomes a single volume cap, engaged when trading under the reference price waiver and the Art. 4(1)(b)(i) negotiated trade waiver exceeds 7% of trading in the EU (as opposed to a 4% trading venue-level cap, and an 8% EU-wide cap as currently).
• Non-equities transparency: SSTI waivers and deferrals deleted; post-trade deferral periods shortened and harmonised
  • The pre-trade SSTI waiver under Art. 9(1)(b), and the post-trade SSTI deferral under Art. 11(1)(c) are deleted.
  • Post-trade deferrals for non-equities would be simplified and harmonised. The proposals include shorter periods for post-trade deferral periods (up to the end of the trading day for price, and for up to two weeks with respect to volume), with ESMA tasked with developing RTS to determine whether deferrals should actually be as short as 15 minutes. Competent authorities will only retain discretion to permit extended deferrals for sovereign debt.
• Reasonable Commercial basis: further details to come from ESMA
  • ESMA will develop RTS to specify the content, format and terminology of the pre- and post-trade data that trading venues and SI are required to publish on a reasonable commercial basis. This seems to be intended to move the recent ESMA Guidelines on market data into legislation (but it remains to be seen whether there could be any changes in the process).
• Equity SI pre-trade transparency: Minimum quoting size of 2x SMS introduced, while mid-point matching permitted between 2xSMS and LIS
  • The transaction size threshold at which an equities SI is no longer required to publish quotes would be increased to 2x the SMS. A minimum quote size of 2x SMS is also proposed.
  • A prohibition is also introduced on matching orders at the mid-point between the current bid and offer prices in sizes below 2x SMS. However, Art. 17a (‘tick sizes’) is modified to say that matching orders at mid-point is permitted between 2x SMS and LIS, provided that tick sizes are complied with.
• EU STO scope: Restricted to EEA ISIN shares
  • Art. 23 MiFIR is amended to capture only shares with an EEA ISIN (ESMA shall publish a list of such shares), with an exception also introduced for trades in shares in EEA ISINs where traded on a third-country venue in the local currency.
  • The current carve-out for trades that are “non-systematic, ad-hoc, irregular and infrequent” has however been removed. This is a potentially significant change and how it interacts with previous ESMA statements regarding scope (e.g. on the availability of that exemption where no equivalence decision has been made) is not explicitly addressed, but the impact should be softened because of the new exemption for trading done in the local currency (presumably introduced to address the issues around EU STO compliance for dual-listed / traded shares).
• Transaction reporting and reference data: Technical changes made, but further commitment to examine harmonisation with EMIR and SFTR
  • Changes are made to give ESMA flexibility to define the date by which transactions must be reported, or reference data submitted, in Level 2 legislation as well as to take into account international developments and standards set at EU or global levels when developing relevant technical standards.
  • ESMA is also obliged to prepare a feasibility report on greater alignment with transaction reporting under EMIR and the SFTR.
• Derivatives trading obligation: Small FCs excluded, DTO suspensions where clearing obligation suspended and “ad hoc” suspensions for certain investment firms to mitigate effects of conflicting DTOs 
  • The scoping provisions of MiFIR are amended to exclude small FCs from being subject to Title V, therefore removing them from the scope of a DTO with a view to ensuring alignment with the scoping of the clearing obligation under EMIR Refit.
  • It is proposed that ESMA should be able to request the suspension of the DTO where it suspends the EMIR clearing obligation. The Commission would also have power to suspend the DTO “for certain investment firms” at the request of national competent authorities, with the recitals indicating this is intended to address the issue of overlapping DTOs.
• Open access requirements: ETDs removed
  • The requirement for CCPs to accept financial instruments that are traded on a trading venue for clearing on a non-discriminatory and transparent basis (Art. 35 MiFIR) and for trading venues to provide feeds to CCPs on a non-discriminatory and transparent basis no longer applies to ETDs.
• Ban on payment for order flow (“PFOF”)
  • A new Art. 39a proposes that investment firms acting on behalf of clients shall not receive any fee, commission or non-monetary benefits from any third party for forwarding client orders to such third parties for execution. This appears to be intended to stop, particularly, PFOF relating to orders from retail investors.

Amendments to MiFID II

Amendments to MiFID II are mainly intended to ensure coherence in light of the amendments to MiFIR. Hence, many of the changes are simply deletions or replacements of superfluous provisions. Outside of these the key proposed changes are:

• DEA Licensing Relaxed:
  • The licensing requirement for persons only dealing on own account on a trading venue via DEA is removed (on the basis that DEA providers will act as gatekeepers to ensure that DEA users have the necessary and appropriate systems and controls in place and orderly trading can be maintained).
• Data Standards Arrangements:
  • Member states must implement a requirement for trading venues to have arrangements in place to meet data quality standards now included in MiFIR.
• RTS 27 best execution reporting deleted:
  • The best execution reporting requirement in Art 27(3) MiFID II (RTS 27 reporting) is being deleted. Although the recitals indicate that these best execution reports will no longer be required because CTPs will (in future) provide sufficient post-trade information, the deletion of the RTS 27 reporting obligation is not drafted as being contingent on a CTP emerging for a particular asset class.
  • RTS 28 best execution reporting is not mentioned in the legislative proposal so looks to remain in place (with ESMA currently consulting on some changes to that RTS).

Links to relevant documents

The Commission legislative proposal to amend MiFIR, published on 25 November 2021, is here.

The Commission legislative proposal to amend MiFID II, published on 25 November 2021, is here.

The Commission has also published the following related documents:

• A factsheet on the consolidated tape proposals