The MiFID II Framework

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.

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.

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.

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.

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.

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.