Markets in Financial Instruments Directive II (MiFID II)

Overview

The EU's revised Markets in Financial Instruments Directive (MiFID) and Markets in Financial Instruments Regulation (together MiFID II) came into effect on 3 January 2018. MiFID II seeks to make financial markets in Europe more resilient, transparent and investor-friendly and is part of a number of measures enacted in response to the financial crisis. These include the European Markets Infrastructure Regulation (EMIR), which seeks to make the EU's OTC derivative market safer, and the Securities Transactions Regulation (SFTR) which seeks to regulate the EU's shadow-banking sector.

Background

In October 2011, the European Commission tabled proposals to revise the Markets in Financial Instruments Directive (MiFID II) with the aim of making financial markets more efficient, resilient and transparent, and to strengthen the protection of investors. On 14 January 2014, an agreement in principle was reached by the European Parliament and the Council on updated rules for MiFID II.

On 10 February 2016, the European Commission proposed a one year extension of the MiFID II implementation date from January 2017 to 3 January 2018. The twelve month delay was proposed due to the exceptional technical implementation challenges faced by regulators and market participants.

See the update on HSBC's position following the statement made by ESMA and the FCA on 20 December 2017.

What does MiFID II reform mean?

The MiFID II reform means that organised trading of financial instruments must shift to multilateral and regulated trading platforms or be subject to transparency requirements where traded over-the-counter (OTC). Strict transparency rules ensure that dark trading of shares and other equity instruments which undermine efficient and fair price formation is no longer allowed.

To whom does MiFID II apply?

MiFID II applies to MiFID firms, i.e. those Financial Services businesses undertaking MiFID Business anywhere in the European Economic Area ('the EEA'). It affects all participants in the EU's financial markets, whether they are based in the EU or elsewhere, including providers of asset management and custodial services.

MIFID II also applies to European providers of MiFID services in the European Economic Area (EEA)1, such as investment managers of pension funds, European firms which provide MiFID services and to a certain extent credit institutions. It has some application for UCITS management companies and AIFMs where they provide certain investment services. Additionally, European providers of MiFID services which have branches outside the EEA may be affected by MiFID as even if not established in the EEA, their interactions with EEA firms may mean they are indirectly impacted by MiFID II.

MiFID II also applies to all financial instruments and certain investor protection provisions now apply to structured deposits. A number of trading venue and trading-related requirements have been extended to include a wider range of equity and non-equity products.

1 This includes the 28 EU member states and, once incorporated into the EEA Agreement and transposed into national law, Iceland, Norway and Liechtenstein.

Foreign Exchange transactions and spot contracts under MiFID II

Foreign Exchange forwards are in scope for MiFID II.

However, there is an exemption for spot contracts and for Foreign Exchange transactions that are used in order to facilitate payment for identifiable goods, services or direct investment. You can read more about this exemption in an excerpt of the FCA consultation paper: ‘Markets in Financial Instruments Directive II Implementation – Consultation Paper III’.

Further information about MiFID II can be found on the FCA website

How does MiFID align with the MAD and MAR rules?

MiFID and MAD both look at the competitiveness, efficiency and integrity of EU financial markets. They need to be updated in tandem to ensure that they are fully coherent and support each other's objectives and principles. The political agreement reached on MAR is subject to agreement on MiFID II, because the new MiFID rules contain part of the regulatory framework on which MAR is based. Notably, it is hoped that the new MiFID will ensure that all types of organised trading are regulated. The MAR applies market abuse rules to all organised trading. Moreover, the pan-EU competition facilitated by MiFID has given rise to new challenges in terms of cross-border supervision. Harmonisation of the rules and competent authorities' powers is therefore a necessary step.

MiFID II in the UK following Brexit

The European Union (Withdrawal) Act 2018 (EUWA) creates a new body of UK law, known as retained EU law, based on the EU law that applied in the UK on 31 December 2020. That retained law may have been amended under EUWA powers to ensure that it operates appropriately after Brexit. These amendments are not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition to this situation. As a result and from January 2021, there will be an EU version of MiFID II and a UK version of MiFID II containing substantially the same rights and obligations.

Whilst the substance of MiFID II obligations are largely unchanged as a result of onshoring in the UK, a wide range of practical impacts on MiFID II provisions arise as a result of the UK’s exit from the EU.

A small number of indicative examples of the impact of Brexit on MiFID II implementation:

  • As a “third country” the UK will no longer be part of the MiFID “passport” regime. This means UK firms will lose their licence to provide services to EU clients, and EU firms’ licensing will no longer include the provision of services to UK clients. There may be impacts on firms’ ability to trade on certain trading venues. In some cases national regimes and exemptions may permit the provision of certain activities or services.
  • Firms in the UK and in the EU will need to consider how to satisfy obligations such as the share trading obligation or the derivatives trading obligation for in-scope financial instruments where trading venues have not been declared equivalent.
  • The duplication of pre- and post-trade transparency obligations and transaction reporting requirements means that reporting service providers have in many cases had to create duplicate reporting arrangements for UK and EU rules, and firms will need to point their reporting systems accordingly.

The many and varied issues arising in relation to MiFID II as a result of Brexit have been the subject of much discussion in the press, by regulators and by trade associations. HSBC Global Banking & Markets has been working to establish arrangements to ensure we continue to service our clients through Brexit and beyond. For specific questions about your relationship and transactions with HSBC please speak to your usual HSBC contact in the first instance.

 

Last updated: 21 December 2020