Published: 2nd November 2012

Regulatory Roundup 36 contained an article on the publication by the EU Commission of a draft for a revised MiFID – a link to the draft can be found within that article. As was mentioned therein, the revised MiFID actually consists of a recast framework Directive and a new Markets in Financial Instruments Regulation.

Amendments to the draft were adopted by the European Parliament on 26 October (see link to ‘MiFID II Adopted Text’).

Shades of the RDR appeared in Article 24 with a ban on commission etc. where investment advice or discretionary portfolio management is given on an independent basis (the RDR commission ban does not distinguish between advice or independent advice and, of course, does not extend to discretionary portfolio management). However section 5 of Article 24 has been introduced which allows individual Member States to prohibit or further restrict the payment of commissions where advice is given, or discretionary portfolio management provided, without the ‘independent’ requirement. This addition should remove the possibility of the RDR being inconsistent with EU legislation. ‘Independent’ will require a firm to assess “a sufficiently large number of investment products…”, although reference should be made to Article 24(5a) for the full wordage.

This looks as if it will lead to a two-tier commission approach in the UK. An EU firm passporting into the UK on a branch basis under MiFID will be on a level footing with UK firms as it will be subject to COBS including the RDR commission ban. However an EU firm passporting into the UK on a cross-border basis i.e. not establishing a UK branch will not be subject to COBS and RDR requirement as it will be bound by its Home State rules.

Remuneration and incentives e.g. not tied to sales is covered and reference should be made to Regulatory Roundup 44 which contains an article on the ESMA consultation on ‘Guidelines on remuneration policies and practices (MiFID)’.

As we know from the first draft, algorithmic/high frequency trading (HFT) will be brought within the remit of MiFID and subject to organisational requirements. Amendments introduced include the need for regulated markets to be able to identify HFT to be able to slow down the flow of orders if system capacity is being reached and to impose higher fees on those operating a HFT strategy to reflect the additional burden on system capacity (and the same is required of those subsequently cancelling an order). Regulated markets will also need to ensure that all orders entered into the system are valid for a minimum of 500 milliseconds and cannot be cancelled or modified during that time (Article 51). Firms using HFT strategy will be required to store an audit trail of any quotation and trading activities and make it available on request (Article 17).

This is not the end of the story: the EU Parliament will now have to engage in three-way talks with EU Member States and the European Commission.

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