MiFID II delegated Regulations—market liquidity, trade transparency and product intervention

MiFID II delegated Regulations—market liquidity, trade transparency and product intervention

Financial Services analysis: Following the adoption of a number of delegated Acts containing implementing and regulatory technical standards, Simon Lovegrove, head of financial services knowledge global at Norton Rose Fulbright, examines the key provisions which will impact on the way UK financial institutions organise their business.

Background

While the revised Markets in Financial Instruments Directive 2014/65/EU (MiFID II) and the Markets in Financial Instruments Regulation (EU) 600/2014 (MiFIR) have been delayed by a year and won’t come into effect until 3 January 2018, the first half of 2016 has been a particularly busy period with the Commission adopting a number of delegated Acts that contain regulatory technical standards and implementing technical standards that add further detail to the framework Directive and Regulation. Indeed, many firms have found it difficult keeping pace with the volume of paper being published, so in June 2016 the European Securities and Markets Authority (ESMA) helpfully published a table setting out the status of each technical standard.

What does the Commission Delegated Regulation of 18 May 2016 cover?

On 18 May 2016, the Commission adopted a Delegated Regulation supplementing MiFIR with regard to definitions, transparency, portfolio compression and supervisory measures on product intervention and positions. An accompanying annex was also published.

What are the specifications in relation to the determination of liquid market for shares, depositary receipts, exchange traded funds and certificates together with general provisions on calculations necessary for the purposes of liquidity determination?

Chapter 1 of the Delegated Regulation of 18 May 2016 (arts 1–5) contains criteria in relation to the determination of a liquid market for shares, depositary receipts, exchange traded funds and certificates.

The criteria are based on specified amounts of free float, average daily number of transactions and average daily turnover, taking into account the specifics of each instrument. Importantly, each criterion has to be satisfied. For each instrument, guidance is given on how Member State competent authorities (NCAs) should make their calculations, and what to do where fewer than five instruments are considered to have liquid markets.

The Delegated Regulation also sets out (art 5) when NCAs of the most relevant market should assess liquidity and in summary these are:

  1. before the financial instrument is first traded on the trading venue
  2. between the end of the first four weeks of trading and the end of the first six weeks of trading of the financial instrument
  3. between the end of every calendar year and before 1 March of the following year for financial instruments traded on a trading venue before 1 December of the relevant calendar year, and
  4. immediately after the moment where, following a corporate action, any previous assessment has changed

It also covers the provision of information by trading venues (see also the annex) and the way in which relevant information must be used.

What are the specifications for the purposes of specifying the obligation of trading venues and systematic internalisers to provide market data on a reasonable commercial basis, which is part of the transparency framework under MiFIR?

Chapter 2 of the Delegated Regulation of 18 May 2016 (arts 6–11) contains specifications for the purposes of specifying the obligation of trading venues and systematic internalisers to provide market data on a reasonable commercial basis, which is part of the transparency framework under MiFIR.

These specifications concern the requirement that fees are set on the basis of cost and may include a reasonable margin, non-discriminatory provision of market data, the obligation to unbundle and disaggregate data and a transparency to the public obligation around the fees as well as cost accounting methodologies.

The Delegated Regulation of 25 April 2016 as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of the Directive contains similar provisions for reporting services providers to provide market data on a reasonable commercial basis (see above).

What are the criteria and factors to be taken into account by ESMA, EBA and national competent authorities when intending to use their product intervention powers?

‘The product intervention powers contained in this Delegated Regulation are a big milestone for consumer protection. European supervisory authorities will be equipped with a new and powerful toolkit allowing them to intervene in case financial instruments turn out to be harmful for investors or financial markets at large.’ (The European Parliament’s Rapporteur for MiFID II, Markus Ferber, MEP).

Chapter 5 of the Delegated Regulation of 18 May 2016 (arts 19–21) sets out the criteria and factors to be taken into account by ESMA, the EBA and NCAs when intending to use their product intervention powers. It is worth noting that the Delegated Regulation (recital 19) mentions that the need to assess all criteria and factors that could be present in a specific factual situation should not prevent NCAs, ESMA and the EBA from using a temporary intervention power when only one of the factors or criteria leads to such a concern or threat.

The long list of criteria includes:

  1. the complexity of the instrument or activity in relation to the relevant type of clients, and taking into account such matters as the underlying assets, costs of transparency, complexity of performance calculation, nature and scale of risks, whether the instrument or service is bundled with others and the complexity of its terms and conditions
  2. the potential for detrimental consequences, considering a list of factors such as the notional value of the investment, numbers of investors involved and the relative share of the product in their portfolios, probability, scale and nature of detriment and the anticipated duration of detrimental consequences, the volume of issue, intermediaries involved, the growth of the market or sales or the average amount each client invests
  3. the type of clients involved, including their categorisation, skills, financial situation, investment objectives and whether the target market has been properly identified or the product is being sold to investors outside it
  4. the degree of transparency and particular features of the instrument or service, including transparency of the underlying, hidden costs and charges and nature and transparency of description of risks, and
  5. the degree of innovation involved, relating to the structure and distribution model, innovation diffusion, innovation involving leverage, transparency of the underlying and past experience of the market with similar products or activities

Article 22 of the Delegated Regulation covers the position management powers of ESMA and sets out a list of the criteria and factors for determining the existence of a threat to the orderly functioning and integrity of financial markets. Such factors include the existence of serious financial, monetary or budgetary problems which could lead to the financial instability of a Member State or a financial institution deemed important to the global financial system.

 

Interviewed by Susan Ghaiwal.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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