Results of the MiFID deal

High frequency trading

• Tick size regime: The smallest change by which a price of an investment product on a trading venue will be able to alter (tick) will be regulated. Smaller ticks increase the possibility for high frequency trading strategies to create revenues.
• Algorithms: Traders planning to use algorithmic trading on a trading venue will be obliged to have algorithms tested in the system of trading venues before they are applied for real trading (lesson from the knight capital case).
• Disclosure: Trades which were executed by algorithmic trading will have to be marked as such and be disclosed to the market participants.
• Fee structure: Trading venues will have to take the order to trade ratio into account in their fees. Traders placing a large number in orders just to cancel them within a short period and who therefore have a high order to trade ratio will have to pay higher fees in the future.

Consumer protection

• Independent advice: When investment advice is provided and the advisors claiming to provide independent advice they are not allowed to receive and retain any third party payments any longer.
• Disclosure of costs: Investors will receive at least annually information on the aggregated cost of their investment. Any detriment to the investment which is not caused by the underlying market risk will have to be disclosed as an aggregated amount.
• Target markets: When issuing or manufacturing financial products the issuer will have to define a target market for each product. Intermediaries are not allowed to actively market product outside this target market.
• Ban of dangerous products: ESMA and national supervisors will be able to ban certain products from selling when they are dangerous for consumers or the single market.
• Insurance: Concerning investment products in an insurance wrapper insurance intermediaries will have to act in the best interest of the consumers and they will have to obey the MiFID rules on fair and honest information.
• Third Country Regime: in the absence of a strong equivalence assessment regime, extra consumer protection is afforded by the right of a Member State to refuse marketing of services by an investment service provider, approved in another MS, to its own consumers (this contrasts with the case of sophisticated professional investors – here, approval in one MS automatically gives the right to provide services in another)

Position Limits

• Objectives: to ensure orderly pricing and settlement through preventing market distorting positions and prevent market abuse
• Who is subject? All end users of these derivatives. Both on- and off- trading venue trades are aggregated to arrive at the total position in each type of contract.
• Instrument Scope: all commodity derivatives that do not qualify as hedges for commercial activities (i.e. speculative positions), with the exception of those related to electricity and gas supply provided that they are exclusively physically settled, are traded in the new organised trading facilities (see below) and are held  up to maturity by end-users. Oil and coal related derivatives are included but benefit as a result of heavy lobbying, from a temporary exemption from EMIR CCP clearing and bilateral risk management provisions. This will be for 4 years, extendable by a further 3 maximum, if a review by the Commission deems it necessary.
• European Methodology and enforcement: ESMA sets the details of how to calculate the limit for each instrument type. National authorities apply the calculation in their jurisdiction. ESMA has power to enforce correct application. More specifically, the regime provides for little margin of manoeuvre for Member States as on top of the single methodology established by ESMA (which will clearly establish that positions are to be set for  all contracts irrespective of whether they are  cash or  for physical delivery) hold by any person (irrespective of whether the trade is done on a venue or OTC), for all maturities and with the explicit purpose of avoiding any type of market distortions which include excessive speculation), ESMA has also strong powers to:
  • a) monitor on a permanent basis the way competent authorities implement the positions limits set in accordance with the methodology established by ESMA
  • b) correct position established by National Competent authorities  of appropriate
  • c) settle disagreements by means of  binding mediation whenever there is a disagreement between National competent authorities on the position set by the competent authority of the venue where the largest volume takes place in relation to a commodity that is traded in significant volumes in more than one Member States
  • d) provide for specifications of what constitutes a ‘significant volume’ in draft RTS

• Authority: Aggregate positions are reported to ESMA who makes them public

Market Structure:

• New Organised Trading Facilities (OTFs): a new category of trading venue is created for non-equity products (bonds and derivatives), alongside the existing Regulated Markets and Multilateral Trading Facilities. These venues differ from the others in that the operator has discretion in matching buyers and sellers. Many multilateral trading arrangements that were previously unregulated, such as broker crossing networks, will now be obliged to register as OTFs and therefore be subject to the same regulatory requirements as existing MiFID venues. Furthermore, any OTC trading activity they used to perform would have to be moved to a separate entity as OTFs are not allowed to trade directly with clients (except, where explicitly authorised, highly illiquid bonds)

Transparency:

• Equities: in general, the pre-trade bid and offer prices and volumes for all transactions on MiFID trading venues must be immediately published; However, as in MiFID 1, there are four types of “waiver” which can be used to escape from this obligation. Furthermore, only one of them, the “reference price waiver’ is subject to a per-venue and Union wide limit of 4 and 8 percent of annually traded volumes respectively.

• Non-equities: the new framework extends the pre-trade transparency regime to bonds and derivatives for the first time, however, the limits mentioned above for equities are not applied and additional derogations are granted giving greater scope for so-called “dark-pools” of trading activity where prices and volumes are only disclosed after the deals are done

• Trading obligation: In line with G20 commitments, all derivatives that are required, under EMIR, to be cleared through a CCP will now also be subject to the obligation to trade them on a MiFID trading venue thus ensuring a strict limitation on bilateral (“over the counter”) trades that are not subject to transparency provisions.

The new rules will come into force in 2017.