The Eurozone is currently experiencing a crisis of potentially biblical proportions. The debt markets are proving themselves the masters of national destinies. Yet the European Commission appears to be continuing doggedly on with its regulatory plans for European financial markets having published, on 20 October 2011, its texts1 for the next revision of the Directive 2004/39/EC on markets in financial instruments (MiFID).
The original MiFID, consisting of a framework directive,2 an implementing directive3 and an implementing regulation4 came into force on 1 November 2007. Intended to create a regulatory regime that would level the playing field across Europe in the provision of investment services, its initial implementation cost was estimated to be in the region of £1 billion to the UK financial services industry.5
SUCCESS OF MIFID
In spite of the considerable cost, hindsight has allowed many industry players to judge the original MiFID package a success. For instance, HM Treasury has commented that “abolition of the concentration rule has allowed for alternatives to conventional stock exchanges to emerge, fostering greater competition among trading venues. This is generally recognised as having driven down trading charges and stimulated innovation.”6 Indeed, a report prepared for the City of London Corporation by London Economics has gone further claiming that, through the effects of reduced trading costs on the costs of capital, “MiFID can be said to have raised the long-run level of EU GDP (at constant prices) by about 0.7% to 0.8%.”7
While the current MiFID review was built into the original legislative plan, whether encouraged by the flush of success or inspired by the political imperative to be seen as doing something in the aftermath of the 2008 financial crisis, the Commission has taken full advantage of this opportunity to carry out a wide ranging assessment of many aspects of the EU securities industry. The result is a legislative proposal which, by the Commission’s own calculations, will cost the industry one-off implementation costs of between €512 and €732 million and ongoing costs of between €312 and €586 million.8 However, unlike 2006/7, the financial services industry is in no position to complain about increased regulatory costs.
FORMULATION OF NEW LEGISLATION
The new legislation takes the form of two documents: a draft directive (MiFID II), and a regulation (MiFIR).
As a matter of EU constitutional law, a directive requires implementing legislation in each Member State while a regulation does not. Consequently, the provisions of MiFIR may come into effect immediately on its being passed. Once a regulation is passed, it can be amended more quickly than a directive, in the Commission’s own words, enabling “the EU to meet internationally agreed deadlines for implementation and follow significant market developments.”9
Yet the division of labour between MiFID II and MiFIR is quite different from the way it was done last time.
Rather than dealing with detailed implementing measures, the regulation is being used, rather more controversially, to ensure that all derivatives are dealt in on an organised market, to ensure individual Member States cannot deviate from the rules on pre- and post-trade-transparency, to make it difficult for Member States to frustrate the proposed new rules on access to clearing and to introduce an EU-wide framework for access by non-EU firms based on an assessment of whether the regulatory regime to which such a firm is subject is “equivalent” to the EU system.
There can be little doubt that this choice of regulatory mechanism is a deliberate attempt to create and concentrate regulatory power in the hands of the Commission and the European Securities and Markets Authority (ESMA).
INCREASED POWERS FOR THE COMMISSION & ESMA
The draft provides the Commission with a wide range of delegated acts empowering it to make decisions without further reference to the European Parliament or the Council.10 As the majority of clearing in the EU, in both Euro and non-Euro trading, takes place in London, the UK is particularly concerned about the Commission’s self appointed to role to settle the conditions of access to clearing facilities. The Commission also will become the sole arbiter of “equivalence”; deciding whether the prudential frameworks of non-EU jurisdictions are sufficient to allow firms from those jurisdictions which are not established in the EU to provide services here. This effectively will neuter existing national arrangements.
ESMA is a further clear beneficiary of the arrangements. The draft regulation takes significant strides towards creating the feared common EU rulebook by requiring ESMA to produce a variety of implementing technical standards.11 It also gives ESMA the power to intervene in relation to specific products, activities or practices12and to facilitate and co-ordinate between national authorities on a number of issues.13 It further proposes that ESMA becomes the inquisitor and registrar of third country firms from “equivalent” jurisdictions wishing to deal directly with eligible counterparties.
Introducing these measures by way of a regulation, rather than a directive, also circumvents the issue of whether MiFID should be a maximum or a minimum harmonisation directive.
The measures contained in the draft Directive include the introduction of a new type of trading facility – an organised trading facility or OTF.14 While this idea is intended to catch over-the-counter (OTC) derivative trading, the definition is much wider creating a new catch all for any type of organised trading activity which is neither a regulated market nor a multilateral trading facility. There is clearly a danger of unintended consequences with such a move. It certainly extends the ambit of MiFID well beyond the original concept.
Other controversial areas are the attempt to regulate algorithmic trading – so called high frequency trading – and the introduction of common rules for the establishment of branches by non EU firms.
Again the increasing concentration of delegated power to the Commission and ESMA are obvious with the creation of standards and wide ranging reporting obligations.
THE WAY FORWARD
With the publication of MiFID II and MiFIR, the Commission’s responsibility is over for the time being. However the legislation could be about to enter its most turbulent phase. It will be considered on behalf of the Parliament by the Economic and Monetary Affairs (ECON) committee, whose rapporteur on MiFID is Markus Ferber. At the same time the Council of Ministers will also review the text. After both the Parliament and the Council have settled their own versions of each text a further process, known as “trialogue,” ensues during which the Commission, the Parliament and the Council attempt to reconcile their views on the proposals and settle a final text.
The lobbying campaign is far from over and the word on the street is that everything remains up for discussion. Much of the outcome is likely to depend on the Parliament’s view of the Commission’s and ESMA’s increased powers. To assist ECON in its review of the proposals, Markus Ferber has launched a consultation with responses due by 13 January 2012.15
Donald Stewart is a partner in the corporate department of Faegre & Benson LLP in London. Donald’s practice is focused mainly on corporate finance, takeovers, mergers and acquisitions, and UK publicly listed companies. Donald is a past chairman of the Quoted Companies Alliance, a UK non-for-profit organisation dedicated to promoting the cause of smaller quoted companies, is currently a member of the International Regulatory Strategy Group, an advisory body to the City of London Corporation and TheCityUK on the international regulatory regime, and is the UK’s representative on the legal committee of European Issuers, the pan European organisation promoting the common interests of listed companies in the EU. Telephone: +44 (0) 20 7450 4586; E-mail: email@example.com.
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