Published: 9th November 2011

The EU Commission has published the long-awaited draft for a revised MiFID (Markets in Financial Instruments Directive) – the current MiFID came into force 1 November 2007.

The revised MiFID actually consists of a recast framework Directive and a new Markets in Financial Instruments Regulation (MiFIR). In EU terms the former sets out goals and leaves it to Member States to ensure their laws are adapted accordingly whilst the latter is law as soon as passed and has binding legal force throughout every Member State.

Algorithmic/high frequency trading will not only be brought into MiFID but will also be subject to organisational requirements – and regulated markets will need to have effective systems and controls in place – to tackle the possibility of a disorderly market and annual submissions on trading strategies etc will need to be submitted to the regulator (see Articles 17 & 51 for further information on the revised MiFID).

The range of financial instruments will extend to include emission allowances (emission allowance derivatives are currently captured but not ‘spot’ transactions). Whilst not a financial instrument in itself, structured deposits will be brought within the scope of MiFID (Article 1(3)).

Firms currently subject to the recording obligations in COBS 11.8 (and we take the opportunity to issue a further reminder on the imminent loss of the mobile phone exemption – see e.g. Regulatory Roundup 29) may take pleasure in reading that the recording of telephone conversations will become obligatory across all Member States. However retention for a period of three years is proposed (COBS 11.8.10 requires ‘at least 6 months’) (Article 16).

Governance receives attention and in particular the need for all members of the management body to be able to commit sufficient time e.g. it is proposed that such a person will not be able to combine more than four non-executive directorships. Recital 38 tells us that gender balance is particularly important to ensure adequate representation of ‘demographical reality’.

Shades of the RDR appear in Article 24 in respect of a ban on commission (or fees or any other ‘monetary benefits’). However the ban will apply to advisers offering independent advice (the RDR makes no such distinction) and it will also extend to firms providing portfolio management. Most High Street advisers will be outside of MiFID anyway by virtue of the Article 3 exemption, but those already within MiFID, especially those not offering ‘independent advice’ (not really defined), will be in interesting times (although it is probable that the FSA will see Article 24 as a minimum requirement).

Those firms to which COBS 10 (Appropriateness) applies will find some changes including a differentiation between UCITS and ‘complex’ UCITS (Article 25).

The clarity within order execution policies(COBS 11.2) will need to be improved (Article 27) and firms will have to make public the top five execution venues, for each class of financial instrument, where they executed client orders.

Transaction reporting (MiFIR Article 23) will extend to include instruments traded on an MTF or an OTF (organised trading facility). The latter will be a new regulated trading venue to accompany the current regulated markets and MTFs. Article 20 sets out the specific requirements for OTFs.

There is no set time-line in place, and in any event the proposals have to go through the codecision process. The flow chart of the codecision process on the European Commission website (see link) would suggest that progress on MiFID II agreement will be a feature in the Regulatory Roundup this time next year.

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