The European
Securities and Markets Authority has fast tracked proposed regulations and
standards implementing a wide range of provisions under the recently enacted
MiFID II legislation, including on high frequency trading, derivatives and
investor protection. MiFID is a cornerstone of the regulation of financial
markets in the European Union This is the first step in the process of translating the
MiFID II requirements into practically applicable regulations to address the
effects of the financial crisis and to improve financial market transparency
and strengthen investor protection. The public comment period on the proposals
will end on August 1, 2014; and ESMA
expects to deliver advice to the European Commission sometime in December of 2014.
MiFID II introduced
changes that will have a large impact on the EU’s financial markets, including
transparency requirements for a broader range of asset classes; the obligation
to trade derivatives on-exchange; a requirement on high-frequency-trading, and
new regulatory tools for commodity derivatives. It will also strengthen
protection for retail investors through limits on the use of commissions;
conditions for the provision of independent investment advice; and the
disclosure of costs and charges.
ESMA proposed enhanced transparency and trading
obligations, including pre- and post-trade transparency for exchange-traded
funds and derivatives, as well as limitations on the trading of shares over-the-counter,
with new obligations to trade derivatives on trading venues;.
ESMA would also refine the definition of
high frequency trading and direct electronic access and specify the
requirements for operating in the market using algorithmic techniques. New
regulatory tools for commodity derivatives are also proposed,, including
position limits.
With regard to enhancing investor
protection, ESMA proposes new limitations on the receipt of commissions, as
well as rules distinguishing independent from non-independent advice. Product
governance is front and center, with proposed
requirements on the manufacture and distribution of financial products
including target market and risk identification. Improved information on costs and charges is
also mandated, with requirements to provide clients with details of all charges
related to their investment (relating to both the investment service and the
financial instrument provided) so that they can understand the overall cost and
its effect on their investment’s return.