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About this book

This book provides a detailed analysis of the main innovations and impacts associated with the package of European legislation comprising MiFID II and MiFIR, which constitutes a pillar of the EU’s “single rulebook” for financial regulation. Adopting a research-oriented approach, the authors also consider the practical consequences of the new legislation, to provide a clear description of the new rules and the ways in which they address concerns raised by the financial crisis, as well as an appraisal of the theoretical implications from an EU-wide perspective. The book also presents a comparative analysis of how the package is being implemented within the larger countries of the Eurozone and the United Kingdom, and evaluates the likely consequences for banks’ business models. This research book is a valuable resource for graduate and master’s level students as well as professionals and practitioners interested in understanding the European financial law and, in particular, the dynamics of the investment industry.

Table of Contents

Frontmatter

Chapter 1. Introduction

Abstract
Almost every time a financial crisis occurs, we witness a profound revision of that-time legislation. Over the last years, a number of analysts and institutions have sought to explain the crisis, its origin, its development, and its consequences. They have highlighted several shortcomings: inter alia, various distortions of the regulatory framework have been considered as co-responsible for the problem. It happened after the depression ignited by the 1929 crash, as well as following the Latin American crises of late Seventies. Nowadays, in the aftermath of the Global Financial Crisis (GFC) peaked in 2008, that story is repeating one more time.
Mario Comana, Daniele Previtali, Luca Bellardini

Chapter 2. Why the Package? Financial Markets Before and After the Crisis

Abstract
The chapter provides an overview of the salient features of the Global Financial Crisis (GFC), which may be seen as a fundamental cut-off point in the legislation of markets, both in the USA and the European Union. The trouble interrupted a trend of apparent long-term growth, rapidly spreading negative spill-overs onto the so-called “real” economy. When the GFC broke out, new instruments and activities had arisen; new subjects had entered the investment industry; and regulators were desperately trying to keep on track with technology-driven financial innovation. Supervisors have powerfully intervened to halt the crisis: in particular, they have addressed some structural issues in finance (lack of transparency, insufficient protection afforded to investors, etc.). As a result, the business models of several intermediaries have been disrupted. The chapter discusses the main macro-financial characteristics of the years usually labelled as Great Moderation (GM): ‘easy credit’ practices, liquidity created by means of assets furtherly revealed to be illiquid, and a loose monetary policy fuelling the other two phenomena. Then, it analyses the propagation of the GFC, with a focus on credit institutions and the threats (e.g., shadow banking) that traditional players have been facing over recent years.
Mario Comana, Daniele Previtali, Luca Bellardini

Chapter 3. Relevant Changes from MiFID I

Abstract
The chapter highlights how MiFID II differs from MiFID I, with regard to trading venues, instruments and entities affected by the new legislation, as well as the changes to the supervisory architecture. This is done by describing the legislative path undertaken and explaining the three-pillar content addressed by the Package (product governance, product intervention, rules governing the interaction between intermediaries and clients). We investigate how said EU legislation deals with specific issues, highlighting which rules are applicable to certain recipients and which are not, with a view to the issues of practical enforcement. In particular, the latter is addressed by explaining the rationale of including certain rules into the Directive rather than the Regulation, or vice versa. Moreover, we focus on the provisions entailing a close cooperation between different supervisory authorities. Finally, we discuss corporate governance and risk management issues, as well as those dealing with investor protection and transparency toward clients, which are highly significant in order to ensure an efficient implementation of the principles inspiring the Package.
Mario Comana, Daniele Previtali, Luca Bellardini

Chapter 4. How Exchanges Work: Trading Venues, Algorithmic and High-Frequency Transactions

Abstract
The chapter investigates the functioning of exchanges. First, it discusses the features of different types of trading venues: for instance, the role of newly-introduced OTFs. Then, it debates the role of technology underlying transactions, which is increasingly shifting towards algorithmic (AT) and high-frequency (HFT) solutions, widely regarded by the EU legislator as a potential threat to systemic stability. To provide a deeper understanding of what an automated exchange means, the chapter briefly covers the divide between ‘electronic communication networks’ (ECNs) and ‘market makers’ in the US jurisdiction, which presents a concerning trade-off under multiple aspects (e.g., efficiency vs. transparency). In addition to merely economic aspects, the most salient regulatory tasks are also investigated: inter alia, the platforms being required to ‘self-assess’ themselves—and, specifically, their recourse to AT and HFT techniques—by means of a stress test, aimed at identifying and mitigating systemic threats. Finally, we devote some attention to the so-called ‘SME growth markets’, i.e. a type of MTF specifically designed to trade equities representing small and medium-sized enterprises, for the purpose of sustaining their development.
Mario Comana, Daniele Previtali, Luca Bellardini

Chapter 5. Market Infrastructure and Transparency Obligations

Abstract
The chapter discusses the wide and complex regulatory framework regarding pre- and post-trade transparency obligations, aimed at reducing information asymmetry and contributing to the overall ‘market infrastructure’. First, we provide an overview of the most salient provisions encompassed by the European Market Infrastructure Regulation (EMIR, No. 648/2012), as the latter—though focused on derivatives—constitutes the basis upon which the transparency framework has been drawn up in the Package. Then, we move onto the details of the discipline, which actually informs each section of both the Directive and the Regulation: inter alia, we present the different types of ‘data reporting service providers’ (DRSPs), which are intermediaries entitled to collect, store, and convey exchange-related information, ensuring their integrity and security. In particular, we devote a special attention to waivers and deferrals, which are critical in order to assess the likely impact of the new rules. Coming back to the content of EMIR, the chapter ends by directly facing the issue of derivatives trading, which is going to be increasingly disputed between trading venues and OTC markets, raising relevant transparency concerns.
Mario Comana, Daniele Previtali, Luca Bellardini

Chapter 6. Investor Protection

Abstract
The chapter analyses the major changes occurred in investor protection, which is one of the broader aims of the whole of MiFID legislation. In particular, we focus on two disruptive novelties: first, the so-called know your merchandise rule, entailing that investment firms identify a ‘target market of end clients’; second, the overarching principle that they must act ‘in the best interest of the client’, including so-called ‘tied agents’ when providing investment advice. The heavily-impacting rules on inducements—which independent advisors are almost completely banned from receiving—are also discussed. In addition to this, we review the criteria determining the categorisation of both products (complex vs. non-complex) and clients (retail, professional, eligible counterparties). Besides, we show the content and the purpose of the suitability and appropriateness tests, discussing which conditions allow not to administer the latter. Also, the strengthening of investor protection is read in the light of product governance and intervention, which are critical to prevent wrongly-designed investment decisions from backfiring.
Mario Comana, Daniele Previtali, Luca Bellardini

Chapter 7. Transposing the Package: A Cross-Country View

Abstract
The chapter compares the implementation of MiFID II, along with the enactment of MiFIR, across the largest EU economies (Germany, Spain, France, Italy) plus the United Kingdom, whose exit—almost surely effective on 29 March 2019—raises several concerns over the destiny of Europe’s financial hub, especially in terms of its accessibility for EU-based investment firms. Before discussing each country’s attitude toward implementing the Package, we draw up a short overview of its macroeconomic and financial fundamentals. We underline the connection between the different characteristics of financial markets in a given country, along with the response to the GFC, on the one hand, and the positions held in respect of Package-related issues, on the other. In fact, EU Member States have dealt with said legislation in a variety of manners: some have pursued a copy-out approach; some have hardened the discipline of certain issues, on the edge of gold-plating; some have tried to soften it by listening to many of the industry’s complaints. Although maximal harmonisation is still far away, we highlight similarities to be enhanced and differences to be possibly overcome for the purpose of levelling the playing field and bettering the Single Market for investment services.
Mario Comana, Daniele Previtali, Luca Bellardini

Chapter 8. Regulation Meets Business: The Effects on the Investment Industry

Abstract
The chapter discusses the expected impact of the Package on the financial industry. Also, this is done in a comparison to MiFID I. While the latter was widely welcomed as a modernizing novelty, nowadays both investors and the industry tend to worry about the ‘legislative flooding’ witnessed during the last decade, whose capacity to fulfil its goals deserves a thorough analysis. By looking at how product governance and intervention are going to be materially enforced, we debate some of the greatest concerns for the financial intermediaries affected by the Package: from the rise of additional compliance costs—mainly with regard to best execution and transparency requirements—to the consequences of wider disclosure to clients; from the change in distribution channels up to the duty of separating research-related revenues from different ones. In particular, we discuss these issues in connection with other seminal pieces of EU legislation in the fields of insurance and asset management, highlighting that several entities are likely to have their business model completely overhauled in the near future.
Mario Comana, Daniele Previtali, Luca Bellardini

Chapter 9. Conclusions

Abstract
In this book, we analysed the Package’s long journey, from its roots until the implementation in the leading EU economies. We stressed many times that the GFC paved the way to a new wave of regulation, including the revision of the MiFID I which, at the time of the outbreak of the crisis, had come into force less than one year before. Accordingly, we can come to our first conclusion, which is far more an open question: despite MiFID I being revised to take into account the issues brought by the GFC, might have the crisis been prevented, or the effect been smoother, had MiFID I come into force some time before? More reasonably, we can claim that the GFC can be interpreted as a really severe, but unfortunately realistic, stress test for the new-born MiFID I, very quickly become olden.
Mario Comana, Daniele Previtali, Luca Bellardini
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