The MiFIR Delegated Regulation

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By Emma Radmore

MiFID 2 Implementation Gathers Pace

Following on from previous articles on the “Level 2” legislation, which took the form of a Delegated Directive and a Delegated Regulation under the revised Markets in Financial Instruments Directive, on 18 May 2016, the Commission adopted what may be the final piece of Level 2 legislation—the Delegated Regulation under the Markets in Financial Instruments Regulation (MiFIR). It is based on 11 “empowerments” in MiFIR all of which are “shall” empowerments, and therefore oblige the Commission to act. The Delegated Regulation addresses, primarily, the rules on:

  •  determining liquidity for equity instruments for the purposes of pre- and post-trade transparency, including the relevant thresholds and periodicity of liquidity calculations;
  •  provision of market data on a reasonable commercial basis, which affects the obligation of trading venues and systematic internalisers to provide market data. The Regulation imposes the same criteria as the MiFID 2 Delegated Regulation set for approved publication arrangements and consolidated tape providers;
  •  publication, order execution and transparency obligations for systematic internalisers;
  •  derivatives, specifically on the elements of portfolio compression;
  •  supervisory measures on product intervention by the European Securities and Markets Authority (ESMA), European Banking Authority (EBA) and national authorities. The Regulation covers criteria and factors that must be taken into account when relevant authorities are considering using their product intervention powers; and
  •  the circumstances in which ESMA can use its position management powers.


Liquid Markets

The Regulation sets the criteria that, if an instrument meets them all, it will mean a market is liquid in respect of the following instruments that are traded daily:

  •  share;
  •  depositary receipt;
  •  exchange traded fund; and
  •  certificate.


The criteria are based on specified amounts of free float, average daily number of transactions and average daily turnover, taking into account the specifics of each instrument. For each instrument, the Regulation gives guidance on how authorities should make their calculations, and what to do where fewer than five instruments are considered to have liquid markets. It also sets out how the competent authority of the most relevant market should assess liquidity against the main criteria when instruments are first traded, between the end of the first four and first six weeks of trading, between the end of every calendar year and before 1 March of the following year for instruments traded in the previous year and immediately after a previous assessment changes because of a corporate action. It also covers the provision of information by trading venues (and further specifies this in an Annex to the Regulation), and the way in which relevant information must be used.

Data Provision on “Reasonable Commercial Basis”

The Regulation imposes conditions for market operators, investment firms operating a trading venue and systematic internalisers to provide information, with some exceptions for information they provide free. The conditions relate to cost of production (including a reasonable margin), provision of market data on a non-discriminatory basis, charging for use of market data, the obligation to make data available unbundled and to charge on the basis of disaggregation of data. The Regulation also imposes a transparency obligation, with specific data to be included in any disclosure. The Commission says the aim of the requirement is to allow a uniform application while taking into account difference business models and costs structures.

Data Publication Obligations for Systematic Internalisers

The Regulation specifies what is meant by the requirement for systematic internalisers to make public their quotes on a regular and continuous basis, and how they should make them easily accessible. It also covers, in relation to execution of orders by systematic internalisers, when exceptional circumstances exist that would make it contrary to prudent risk management to impose an obligation to provide firm quotes. The Regulation also covers when orders will be considered to considerably exceed the norm, and how to assess the size specific to the instrument.


Investment firms and market operators that provide portfolio compression must have an agreement with participants to it including relevant details, and must require each participant to specify their risk tolerance and provide them with a proposal, before initiating each compression process. This part also sets out what information firms and market operators should make available through an approved publication arrangement for each portfolio compression cycle.

Product Intervention

The Regulation sets out in detail the criteria that ESMA and EBA must take into account when considering whether to exercise relevant product intervention powers. The Regulation includes a long list of criteria, including:

  •  complexity of the instrument or activity in relation to the relevant type of clients, and taking into account such matters as the underlying assets, costs transparency, complexity of performance calculation, nature and scale of risks, whether the instrument or service is bundled with others and the complexity of its terms and conditions;
  •  the potential for detrimental consequences, considering a list of factors such as the notional value of the instrument, numbers of investors involved and the relative share of the product in their portfolios, probability, scale and nature of detriment and the anticipated duration of detrimental consequences, the volume of issue, intermediaries involved, the growth of the market or sales or the average amount each client invests;
  •  the type of clients involved, including their categorisation, skills, financial situation, investment objectives and whether the target market has been properly identified or the product is being sold to investors outside it;
  •  the degree of transparency and particular features of the instrument or service, including transparency of the underlying, hidden costs and charges and nature and transparency of description of risks;
  •  particular features of the instrument or activity, including any embedded leverage, considering leverage that is inherent in the project or due to financing, features of securities financing transactions or the fact the value of the underlying is no longer available or reliable;
  •  any expected disparity between expected return and risk of loss, including the structuring costs, disparity in relation to retained risk and the risk/return profile;
  •  ease and cost of sale or switching of the relevant instrument, taking into account factors such as the bid/offer spread, frequency of trading ability, secondary market size and liquidity, features of the trading system and any other barriers to exit;
  •  the pricing and associated costs of the instrument or activity, including considering hidden or secondary charges or charges that do not reflect the level of service provided;
  •  the degree of innovation involved, relating to the structure and distribution model, innovation diffusion, innovation involving leverage, transparency of the underlying and past experience of the market with similar products or activities;
  •  selling practices, including communication and distribution channels, information and marketing associated with the instrument, assumed investment purpose and whether the decision to buy depends on earlier purchases;
  •  the financial and business situation of the relevant issuer;
  •  the extent to which market participants can make an informed decision on investment on the basis of available information;
  •  whether the instrument or activity poses a high risk to the performance of transactions entered into by participants or investors in the relevant market;
  •  whether there is a risk of compromising the integrity of the price formation process in the relevant market;
  •  whether the instrument is susceptible to being used for the purposes of financial crime;
  •  whether there is a high risk to market operation;
  •  whether it could lead to a significant and artificial disparity between prices of derivatives and their underlying;
  •  whether there is a high risk of disruption to systemically important institutions;
  •  what is the relevance of the distribution of the instrument as a funding source for the issuer;
  •  whether the instrument or activity presents risks to payment, settlement or clearing systems; or
  •  whether it may threaten investors' confidence in the financial system.


For structured products, the criteria show slight amendments, reflecting the features of the product.

Position Management

Finally, the Regulation looks at the criteria and factors that will determine the existence of a threat to the orderly functioning and integrity of the financial markets, including existence of serious financial problems, a significant rating action, substantial selling pressures or volatility, disruptions to systems, significant and abrupt change in supply of a relevant commodity, significant positions being held by one, or several linked, persons and the inability of a trading venue to exercise its own position management powers because of a business continuity event.

What Next?

For some elements of MiFID 2, the EU-level requirements are now final. But for many more, we still await the final technical standards. The Commission has now started to adopt these, and these will be the focus of a separate article. Then, of course, national implementing measures. There is still some way to go, but firms should study these new Delegated Acts carefully and assess what changes the requirements may require them to make to their current policies and procedures.

Emma Radmore is a Managing Associate at Dentons UKMEA LLP, London. She is also a member of the World Securities Law Report Advisory Board. She may be contacted at

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