MiFID/R III is finally coming

European Commission proposes structural changes to enhance EU capital markets’ transparency and competitiveness

Context and objectives

On 25 November 2021, the European Commission published a long-awaited proposal amending Regulation (EU) No 600/2014 on markets in financial instruments (“MiFIR”), accompanied by a proposal to amend Directive 2014/65/EU on markets in financial instruments (“MiFID II”).

This initiative aims to empower investors, particularly smaller and retail ones, by enabling them to access the market data necessary to invest in shares or bonds more easily and by making EU market infrastructures more robust. This will also help increase market liquidity, which, in turn, will make it easier for companies to receive funding from capital markets. This is enshrined in the Capital Market Union’s (CMU) objectives of balancing bank- and market-based financing.

To meet its goal of fostering a true and efficient single market for trading, the European Commission has identified three priority areas tackled by these proposals:

• Improving the transparency and availability of market data;
• Improving the level-playing field between execution venues; and
• Ensuring EU market infrastructures can remain competitive at the international level.

While most of the legislative amendments concern MiFIR, the proposed MiFID II changes are of an incidental nature and introduced to ensure coherence. Therefore, the two proposals should be read in conjunction.

The key changes in the European Commission’s proposal

Emergence of an EU-wide consolidated tape

The cornerstone of the European Commission’s proposal to amend the MiFID/R framework is establishing and implementing a centralized database. This is meant to provide, for equity and equity-like financial instruments, a comprehensive view of market data—namely on the prices and volume of securities traded throughout the European Union across a multitude of trading venues (TVs). This centralized database, also referred to as the consolidated tape (CT), will aim to improve overall price transparency across TVs.

The adapted MiFID/R framework should ensure that any existing obstacles for establishing a CT are removed by:

• Requiring that all TVs and systematic internalizers (SIs) provide Consolidated Tape Provider (CTPs) with market data (the “provision rule”); and
  
  
• Enhancing data quality by harmonizing the data reports that TVs and SIs should submit to the CTP.

Only CTPs selected and authorized by ESMA will be able to collect harmonized market data under the mandatory contribution rule.

Share-trading obligation (STO)

Only shares with an EEA International Securities Identification Number (ISIN) are currently subject to the STO. ESMA introduced this distinction to provide clarity to market participants trading in shares.

ESMA’s current practice will now be incorporated into the MiFIR, while simultaneously removing the exemption for trades in shares that are non-systematic, ad-hoc, or irregular and infrequent.

Transaction reporting

Transaction reporting dates will be set in the RTS developed by ESMA.

For this purpose and to increase overall market reporting consistency, ESMA will take into account:

• The need for greater consistency in transaction reporting between Regulation (EU) 648/2012 (“EMIR”), Regulation (EU) 2015/2365 (“SFTR”) and the MiFIR; and
• International developments and reporting standards.

Ban on payments for forwarding client orders for execution

As it is incompatible with the best execution principle, the European Commission proposes to ban investment firms acting on behalf of clients from receiving any payment from a third party for forwarding client orders to such a third party for their execution.

Best execution reports

The European Commission proposes to permanently remove the requirement for TVs and SIs to publish periodic best execution reports. Currently, Directive 2021/338 ("MiFID Quick Fix") has suspended the reporting requirement for 2 years.

Non-equity transactions

The European Commission proposes to shorten and harmonize publication deferrals for non-equity post-trade reports to the public.

Provision of data on a reasonable commercial basis (RCB)

The MiFIR requires market operators and investment firms operating a TV to provide market data on an RCB, and to ensure non-discriminatory access to this information. ESMA has already issued Guidelines explaining how the RCB concept should be applied, and these Guidelines will now be converted into legal obligations.

Delayed data requirement

The requirement to deliver data for free after 15 minutes will be abandoned for CTPs to protect their potential business models.

Alignment of the trading and clearing obligations for derivatives

In light of the close interconnection between the clearing obligation under the EMIR and the derivatives trading obligation under the MiFIR, and to simplify the legal framework, the European Commission proposes to realign the derivatives trading obligation with the clearing obligation for derivatives.

Extended sanctioning regime

The European Commission proposes to amend the MiFID II to include sanctions for infringements of certain new provisions provided in the MiFIR.

Obligation for multilateral systems to operate with a TV license

Varying interpretations of the MiFID II licensing requirement have led to an uneven playing field between multilateral systems licensed as Regulated Market (RM), Multilateral Trading Facility (MTF) or Organised Trading Facility (OTF), and multilateral systems that are not licensed as such. Therefore, to ensure its uniform application, a licensing requirement for multilateral trading activity is now introduced directly in the MiFIR.

Increased SI obligations

SIs will no longer be free to decide the size of the equity instruments they quote, and should be required to publish firm quotes that are a minimum of twice the standard market size.

As for TVs, SIs will also no longer be allowed to match at midpoint below twice the standard market size.

Proposed amendments will also prohibit SIs from offering payment for (retail) order flow (PFOF).

Finally, SI trade reporting formats and reporting obligations are now aligned with those that apply to TVs.

Next steps

At this stage, these texts are drafts and will be discussed and negotiated in the European institutional process. While not yet final, they may be a good indicator of the future shape of the MIFID/R framework.

Finally, the proposal amending MiFID II seems to be of a more limited nature than the changes and potential reliefs that were anticipated. However, it is worth noting there may be future amendments via the EU retail financial service strategy, which is expected to be released in mid-2022.

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