The EU’s Review of the Markets in Financial Instruments directive (MiFID II/MiFIR) is a landmark reform that aims to make financial markets more efficient, stable and transparent. Technical standards are now being defined at Level 2 and Member States must implement the part of the package that is contained in the Directive (MiFID II), so that all rules can apply as of 2017. Our focus in MiFID II/MiFIR is on market structure reforms, over-the-counter derivatives trading, high frequency trading (HFT), commodity derivative speculation and investor protection.
The Level 1 text of MiFID II/MiFIR agreed in 2014 to introduce transparency requirements for a broad range of asset classes; the obligation to trade derivatives on-exchange; restrictions on algorithmic and high-frequency-trading and new tools to supervise and monitor trading in commodity derivatives. It also strengthens protection for retail investors through transparency on the use of commissions; conditions for the provision of independent investment advice; stricter organisational requirements for product design and distribution; product intervention powers; and the disclosure of costs and charges.
Two and half years after it was proposed in October 2011, the Level 1 text for MiFID II/MiFIR was finalised in Spring 2014 ahead of the elections, as work on the Level 2 implementation began.
The Level 2 work in 2015 involves supplementing the Directive and Regulation with a large number of “technical” measures. Many of these decisions seem technical, but they are very political, as the calibration of Level 2 measures determines the impact that the rules will have in practice.
Actions of Finance Watch
Finance Watch acknowledged the political agreement on the Level 1 text with a press release in January 2014 calling for strong Level 2 implementation. The team argued successfully against a late attempt to water down the position limits regime through linguistic changes in the recitals of the directive during technical negotiations in the weeks following the political agreement.
As work on Level 2 got underway, we published our responses to ESMA’s MiFID II/MiFIR Discussion Paper and Consultation Paper on 7 July 2014, the first of two days of public hearings held by ESMA in Paris. Finance Watch staff and some of its Members (BEUC, Oxfam International and SOMO) attended these hearings, providing much needed civil society representation among the 200 or so industry representatives at each hearing. This was important to show that civil society is now equipped to engaged in those technical discussions, and to make sure that the public interest provisions introduced in the law (Level 1) are effective when translated into technical rules (Level 2). The sessions we attended covered market issues (market structure and high-frequency trading), investor protection, and commodity derivatives (position limits).
On 23rd July 2014, Finance Watch and BEUC both issued press releases to support ESMA’s commitment on investor protection, commenting on the rules about fees and commissions paid to those giving investment advice.
During the autumn of 2014, we worked with the new team of MEPs responsible for the Level 2 scrutiny to make sure that our points were raised in internal meetings and discussions with the Commission and ESMA. We also started preparing our campaign in response to the draft Technical Standards as proposed by ESMA on 19 December 2014.
In February 2015, we issued a press release advocating for the European Commission to disregard the technical advice received from the European Securities and Markets Authority on the important consumer issue of how retail financial advisors and intermediaries are paid. On 2 March 2015, we published our Response to ESMA consultation on MiFID II/MiFIR Technical Standards, following our intervention at the public hearing on 19 February 2015. On 19 March 2015, we issued another press release saying that the EU’s new rules to curb excessive speculation in commodity derivatives – the subject of a large campaign by NGOs concerned about food speculation – may miss their target if a weak proposal for technical standards by the European Securities and Markets Association (ESMA) is implemented.
On 26 March 2015, Dennis Kelleher, President and CEO of Better Markets, and Benoît Lallemand, Head of Strategic Development for Finance Watch, issued a joint statement following the Securities and Exchange Commission (SEC) proposal to require high frequency traders (HFT) to register with a national securities association. We also published an infographic on high frequency trading.
Financial markets have evolved away from their primary role of helping to allocate resources. With MiFID Level 2, we focus our advocacy on commodity derivatives, high-frequency trading, and investor protection.
The popularity of commodity funds as an investment has led to speculators dominating commodity derivative markets that help to determine the price of food and other essential goods. We campaigned for the use of “position limits” to restrict the amount of speculation allowed and make food prices more secure, although they must be calibrated correctly and set at the right level to be effective.
The rise of high frequency trading techniques has opened the door to abusive trading strategies, in which some high frequency traders extract profits from ordinary (indirect) users of the market, such as people saving for their pension as well as from institutional investors. We support the introduction of tools for regulators to control this, such as a minimum tick-size which limits the smallest price movement for financial instruments. Here again, the actual calibration of the tick size is crucial.
In the area of investor protection, we feel that retail investors should be able to expect their financial advisors to have their best interests at heart when recommending investment products to buy, which means financial advisors should be paid in a way that does not incorporate potentially harmful biases. In the absence of a European ban on inducements, we insisted that clients should know that their financial advisor is being paid for selling specific products.
The economy and society at large benefit when financial markets allocate resources well and at a low cost. If market prices become unreliable, then financial resources may be allocated poorly and in some markets the supply of essential commodities used for food and energy production could be disrupted. Further, if the costs of financial intermediation are too high or if some types of trader are permitted to exploit others in the market, it is much harder for people to save for their future. Similarly, people’s long term financial security will suffer if retail investors are led towards unsuitable or overly expensive products as a result of sales-biased advice.
Finance Watch publications
- Infographic on high frequency trading
- Better Markets and Finance Watch Joint Statement on the SEC’s Proposal to Enhance Oversight of HFT Traders (press release, 26 March 2015)
- ESMA should revise its proposal on commodity derivatives (press release, 19 March 2015)
- Response to ESMA consultation on MiFID II/MiFIR Technical Standards (2 March 2015)
- Finance Watch calls on Commission to ignore industry-biased ESMA advice on inducements in MiFID II (press release, 6 February 2015)
- Finance Watch supports ESMA commitment to reduce conflicts of interest, increase choice for consumers seeking financial advice (press release, 23 July 2014)
- Response to the ESMA MiFID II/MiFIR Level 2 Consultation and Discussion Papers (7 July 2014)
- Understanding Finance #1: Splitting megabanks? (Pedagogical Unit, March 2014)
- Finance Watch welcomes MiFID II agreement, calls for strong Level 2 to realise the benefits (press release, 15 January 2014)
- Finance Watch’s assessment of German High-Frequency Trading Act (11 January 2013)
- “Investing, not betting” (Position paper on MiFID II, April 2012)
- Speech at the EC public hearing on the Call for Evidence – A review of the EU regulatory framework for financial services (17 May 2016)
MiFID II Key Issues
After debating more than 2000 amendments, Parliament approved an amended MiFID II text in October 2012. Negotiations in Council working groups continued into 2013, and final legislative agreement is expected towards the end of 2013, once the Parliament and Council agree on a common text.
Trialogues are taking place on a weekly basis until the end of 2013. For more information about the next meeting, please consult the “tubemap” on the main dossier page (Finance Watch members only, please log in to see this content).
The review of the Markets in Financial Instruments Directive (MiFID II) aims to make financial markets more efficient, stable and transparent. It is a landmark financial reform for the EU and covers market structure, over-the-counter derivatives trading, High Frequency Trading (HFT), commodity derivative speculation and investor protection, among other topics.
The European Commission published its in October 2011, seven years after the original MiFID was adopted in 2004. The liberalisation of Europe’s trading landscape that followed MiFID had several consequences, including:
- fragmentation of liquidity across an increasing number of venues
- development of dark pools and over-the-counter trading (reduced transparency due to to increased complexity)
- increased high-frequency trading
To create a better regulatory framework for these new developments as well as deadling with the consequences of the financial crisis, MiFID II aims to:
- move trading of “standardised” derivative contracts to regulated markets (exchanges and other trading platforms) and extend the “EMIR” requirements to centrally clear over-the-counter derivatives
- reduce the exemptions for pre-trade transparency which led to the popularity of “dark pools” (where prices and volumes are not made public prior to the trade),
- restrict high-frequency trading and excessive speculation on commodity derivatives (most importantly in agricultural products), and
- improve consumer protection for retail investors who buy financial products.