MiFID II and MiFIR review: agreement reached by Council

Gabriela Tsekova
Senior Manager, FS Regulations, PwC Switzerland

On 20 December 2022, the Council agreed on a mandate to start negotiations with the European Parliament regarding the review of the Markets in Financial Instruments Directive (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR). The negotiations are aimed at reaching a final agreement on the future legislation.

Main objectives of the MiFID II and MiFIR review

The review is focused on three main priorities:

improving the transparency and availability of market data;
improving the level playing field between execution venues;
ensuring EU market infrastructures remain competitive at international level.

Therefore, the review is an important step towards empowering smaller investors and making the market infrastructure more robust, while increasing market liquidity and making access to capital markets easier.

Main proposals

While the amendments to MiFID II are predominantly intended to ensure coherence in light of the amendments to MiFIR, the latter are quite significant and cover various areas. The key proposals are briefly summarised hereafter.

Consolidated tape provider (CTP)

The draft regulation foresees the establishment of a centralised database or “consolidated tape”, which will provide access to market data from trading venues, systematic internalisers and approved publication arrangements across the EU in a consolidated manner. Therefore, instead of relying on multiple CTPs, ESMA will run a selection procedure to appoint a CTP in each asset class (shares, bonds, ETFs and derivatives).

The CTPs shall provide close-to-real time data containing the consolidated tape of executed trades, together with the best bids and offers (BBO) available at the time of the particular trade and the European best bid and offer (EBBO) available at the time of the trade from the most competitive markets.

Ban on payment for forwarding client orders for execution (PFOF)

This was one of the most discussed amendments during the Council discussions. The draft of the MiFIR proposes that investment firms acting on behalf of the client shall not receive any fee, commission or non-monetary benefits from any third party for forwarding client orders to such third parties for execution. However, the regulation leaves a discretion to the Member States to only allow the PFOF in their territory.

Limitation on the dark trading

The draft regulation changes the double volume cap to a single volume cap, which will entirely rely on an EU-wide threshold set at 10%. The existing venue threshold will therefore be removed.

Amendments in the deferral regime

In order to increase the level of transparency, the draft regulation amends the deferral times for the size and liquidity profile of transactions in bonds, structured products, emission allowances and derivatives. Consequently, the size of the transaction and the liquidity of financial instruments are decisive for the deferrals.

The deferrals for bonds, structured products and emission allowances should not exceed four weeks. For OTC derivatives, the deferrals shall be calibrated on a more flexible basis. ESMA will calibrate the deferrals precisely based on market data.

Level 2 measures

The proposed regulation foresees various Level 2 measures. The table below is based on the Council’s draft regulation and provides an overview of the Level 2 mandates.

Article MiFIR proposal	Topic	Level 2 measure	Content	Timeline
Article 5	Volume cap	ESMA publication	ESMA shall publish the total volume of Union trading for each financial instrument in the previous 12 months, the percentage of trading in a financial instrument carried out across the Union under the waiver referred to in Article 4(1), point (a) and on each trading venue in the previous 12 months, as well as the methodology that is used to derive those percentages	ESMA shall publish this information within five working days of the end of March, June, September and December
Article 8a	Pre-trade transparency requirements in respect of derivatives	ESMA publication	ESMA shall publish a list of the OTC derivatives on which the transparency applies in accordance with this Article	Not specified
Article 9	Waivers for bonds, structured finance products, emission allowances and derivatives	ESMA RTS, followed by Commission Delegated Act	ESMA shall develop draft RTS to specify the following (the text indicates RTS should be submitted by 3 July 2015) (i) the parameters and methods for calculating the threshold of liquidity; (ii) the range of bid and offer prices and the depth of trading interests at the prices to be made public for each class of financial instrument concerned; (iii) the size of orders that are large in scale and the type and minimum size of orders held in an order management facility pending disclosure for which pre-trade disclosure may be waived, and (iv) the financial instruments or the classes of financial instruments for which there is not a liquid market where pre-trade disclosure may be waived	The text indicates that RTS should be submitted by 3 July 2015 – this will be clarified once the official Council’s GA has been available
Article 10	Post-trade transparency requirements for trading venues in respect of bonds, structured finance products, emission allowances and derivatives	ESMA opinion	ESMA shall issue an opinion to the competent authority as soon as practicable on whether it believes the suspension or the renewal of the temporary suspension is justified	Up to ESMA’s discretion
Article 11	Deferred publication for bonds, structured finance products or emission allowances	ESMA RTS, followed by Commission Delegated Act	ESMA shall develop draft RTS to specify the following in such a way as to enable the publication of information required under this Article: (i) the details of transactions that investment firms, market operators and investment firms operating a trading venue shall make available to the public for each class of financial instrument concerned; (ii) the time limit that would be deemed in compliance with the obligation to publish as close to real time as technically possible, including when trades are executed outside ordinary trading hours; (iii) what constitutes a transaction of a medium, large and very large size in a liquid and illiquid financial instrument; (iv) the price and volume deferrals applicable to each of the five categories, and (v) the criteria to be applied when determining the size or type of a transaction for which publication of details of several transactions	RTS need to be developed 9 months after publication in the Official Journal
Article 11a	Deferred publication for derivatives	ESMA RTS, followed by Commission Delegated Act	ESMA shall develop draft RTS to specify the following in such a way as to enable the publication of information required under this Article: (i) the details of transactions that investment firms, market operators and investment firms operating a trading venue shall make available to the public for each class of derivatives; (ii) the time limit that would be deemed in compliance with the obligation to publish as close to real time as possible, including when trades are executed outside ordinary trading hours; (iii) the conditions under which investment firms and market operators and investment firms operating a trading venue may provide for deferred publication of details of transactions for each class of derivatives, (iv) what constitutes a transaction of a medium, large and very large size in a liquid and illiquid derivatives, and (v) assigning the appropriate time deferral of price and volume for each of the categories of transactions For each category, ESMA shall recalibrate the applicable deferral duration on a regular basis with the aim of gradually decreasing them where appropriate based on quantitative and qualitative research to assess the impact of the decrease	RTS need to be developed 9 months after publication in the Official Journal
Article 13	Obligation to make pre-trade and post-trade data available on a reasonable commercial basis	ESMA RTS, followed by Commission Delegated Act	ESMA shall develop draft RTS to specify what constitutes a reasonable commercial basis, as well as the content, format and terminology of the reasonable commercial basis information that trading venues, APAs, CTPs and systematic internalisers have to make available to the public	RTS need to be developed 9 months after publication in the Official Journal
Article 21	Post-trade disclosure by investment firms in respect of bonds, structured finance products, emission allowances and derivatives	ESMA RTS, followed by Commission Delegated Act	ESMA shall develop draft regulatory technical standards in such a way as to enable the publication of information required under Article 64 of MiFID, specifying the following: (i) the identifiers for the different types of transactions published in accordance with this Article, distinguishing between those determined by factors linked primarily to the valuation of the financial instruments and those determined by other factors, (ii) the application of the obligation under paragraph 1 to transactions involving the use of those financial instruments for collateral, lending or other purposes where the exchange of financial instruments is determined by factors other than the current market valuation of the financial instrument	The text indicates RTS should be submitted by 3 July 2015 - this will be clarified once the official Council's GA will be made available
Article 21a	Designated publishing entity	ESMA publication	ESMA shall establish a list of all designated publishing entities, specifying the identity of the designated publishing entities, including the systematic internalisers, as well as the classes of financial instruments for which they are the designated publishing entities, and keep it updated on its website	Not specified
Article 22a	Provision of market data to the CTP	ESMA publication	ESMA shall publish and maintain the list of regulated markets and MTFs that meet the conditions set in the first subparagraph as well as those who decided to opt in to the CTP on its website, and update it annually or every time a new regulated market of MTF is licensed or decides to opt in.	Not specified
Article 22b	Market data quality	Commission expert group	The Commission shall set up an expert stakeholder group to provide advice on the quality and the substance of core market data, the common interpretation of core market data and the quality of the transmission protocol referred to in Article 22a(1). ESMA shall be a member of the expert stakeholder group. The expert stakeholder group shall provide advice on a yearly basis.	3 months after entry into force
		Commission Delegated Acts	The market data contributors need to provide data to the CTP in order to produce the core market data necessary for the CTP to be operational, including the substance and the format of the market data;	Not specified
		Commission Delegated Acts	Additional data fields that might be required to characterise the core market data referred to in Article 2(1)(36b) and the regulatory data referred to in Article 2(1)(36c).	Not specified
Article 22c	Synchronisation of business clocks	ESMA RTS, followed by Commission Delegated Act	ESMA shall, in accordance with international standards, develop draft RTS to specify the level of accuracy to which clocks are to be synchronised.	6 months after entry into force
Article 25	Obligation to maintain records	ESMA RTS, followed by Commission Delegated Act	ESMA shall develop draft regulatory technical standards to specify the details and formats of the relevant order data required to be maintained under paragraph 2 of this Article that is not referred to in Article 26	Not specified
Article 26	Obligation to report transactions	ESMA RTS, followed by Commission Delegated Act	New ESMA RTS to be developed on (i) the relevant categories of indices to be reported in accordance with paragraph 2; (ii) the conditions for linking specific transactions and the means of identifying aggregated orders resulting in the execution of a transaction, and (iii) the date by which transactions are to be reported	Not specified
Article 26	Obligation to report transactions	ESMA report	ESMA shall submit a report to the Commission assessing the feasibility of further integration in transaction reporting and the streamlining of data flows under Article 26 of this Regulation to: (a) reduce duplicative or inconsistent requirements for transaction data reporting, and in particular duplicative or inconsistent requirements laid down in this MiFIR, EMIR and Regulation on the transparency of securities financing transactions (b) improve data standardisation and efficient sharing and use of data reported within any Union reporting framework by any relevant competent authority, both Union and national	2 years after publication in the Official Journal
Article 27	Obligation to supply financial instrument reference data	ESMA RTS, followed by Commission Delegated Act	New standards to be developed by ESMA on the date by which reference data is to be reported	Not specified
Article 27da	Selection process for the authorisation of a single consolidated tape provider for each asset class	ESMA's procedure on CTP selection	ESMA to launch the selection procedure for the bonds CT by 9 months after entry into force ESMA to launch the selection procedure for the shares and ETFs CT by 6 months after the bonds CT selection procedure ESMA to launch the selection procedure for the Derivatives CT by 6 months after the shares and ETFs CT selection procedure
			ESMA shall adopt a fully-reasoned decision selecting the entities operating the consolidated tapes within 3 months of the initiation of the selection procedure
			In the event that no entity has been selected, ESMA shall organise a new selection procedure after 6 months from the end of the unsuccessful selection procedure.
Article 27h	Organisational requirements for consolidated tape providers	ESMA opinion	ESMA shall provide the Commission with a motivated opinion on the effectiveness and fairness of the level of participation of smaller trading venues	After 12 months of full operation of the CTP for shares
		Commission's Delegated Act	to revise the allocation key for the revenue redistribution, where appropriate. In the context of the allocation key revision, the position of the smaller trading venues compared to the situation before they became market data contributors shall not be deteriorated.	After 12 months of full operation of the CTP for shares
		ESMA RTS, followed by Commission Delegated Act	ESMA shall develop a draft RTS to specify the preferential weights assigned to the conditions justifying the preferential treatment referred to in paragraph 5 and the mechanism of calculating the revenue-sharing based on the weight system. For the purpose of determining the preferential weights, ESMA shall assess the characteristics of the trading venues, the data submitted and also the potential loss of revenue of smaller trading venues	9 months after entry into force
		ESMA RTS, followed by Commission Delegated Act	ESMA shall specify how the additional cost born by systematic internalisers accompanied with the provision of data through APA to CTP shall be determined.	9 months after entry into force
Article 27ha	Reporting obligations for consolidated tape providers	ESMA RTS, followed by Commission Delegated Act	ESMA shall develop a draft RTS to specify the content, timing, format and terminology of the reporting obligation	9 months after entry into force
Article 31	Post-trade risk reduction services and intragroup transactions	Commission's Delegated Act	The Commission shall adopt the following by means of Delegated Acts measures: (i) the elements of transactions concluded during the portfolio compensation in the scope of this Article; (ii) the post-trade risk reduction services in the scope of this Article, and (iii) elements of transactions to be recorded pursuant to paragraph 2.	Not specified
Article 32	Trading obligation procedure	ESMA decision	ESMA shall, on its own initiative and in accordance with the criteria set out in paragraph 2 and after conducting a public consultation, identify and notify to the Commission the classes of derivatives or individual derivative contracts that should be subject to the obligation to trade on the venues referred to in Article 28(1), but for which no CCP has yet received authorisation under Article 14 or 15 of EMIR or which is not traded on a trading venue referred to in Article 28(1) point (4)	ESMA's discretion
Article 32	Trading obligation procedure	ESMA's request to suspend the trading obligation	Where ESMA considers that the suspension of the clearing obligation as referred to in Article 6a of EMIR is a material change in the criteria for the trading obligation to take effect, as referred to in paragraph 5 of this Article, ESMA may request the Commission to suspend the trading obligation laid down in Article 28(1) and (2) of this Regulation for the same classes of OTC derivatives that are subject to the request to suspend the clearing obligation	ESMA's discretion
Article 32a	Stand-alone suspension of the trading obligation	Commission's implementing act	At the request of the competent authority of a Member State, the Commission may adopt an implementing act in accordance with the procedure referred to in Article 51 and, after having consulted ESMA, suspend the derivatives’ trading obligation with respect to the investment firms specified by the competent authority	NCA's and Commission's discretions
Article 34	Register of derivatives subject to the trading obligation	ESMA publication	ESMA shall publish and maintain on its website a register specifying, in an exhaustive and unequivocal manner, the derivatives that are subject to the obligation to trade on the venues referred to in Article 28(1), the venues where they are traded and the dates from which the obligation takes effect.’;	Not specified
Article 52	Report and Review	Commission's report	Three years after the first authorisation of a consolidated tape, after first having consulted ESMA the Commission shall submit a report to the European Parliament and to the Council on the following: (a) the asset classes covered by a consolidated tape; (b) the timeliness and delivery quality of market data consolidation; (c) the role of market data consolidation in reducing implementation shortfall; (d) the number of subscribers to consolidated market data per asset class; (e) the effect of market data consolidation on remedying information asymmetries between various capital market participants; (f) the appropriateness and functioning of the participation scheme for market data contributions; (g) the effects of the consolidated market data on investments in SMEs; (h) the possibility that the tape facilitates the identification of financial instruments which display features aligned with the EU GBS	Three years after the first authorisation of a consolidated tape

Expected timeline

Currently, it is expected that an agreement between the Council and the European Parliament on the final legislative text can be reached by the end of Q3 2023. The amended MiFIR II and MiFID might therefore be published in the Official Journal of the European Union in Q4 2023. Consequently, MiFIR might enter into force and may apply as of Q4 2023. On other hand, MiFID II will also enter into force twenty days after publication in the Official Journal, however, it will become applicable 18 months after this date.