In a recent alert we examine changes to the investment services and activities, and financial instruments, within scope of regulation as a result of the revised Markets in Financial Instruments Directive (the ‘MiFID II Directive’) and the Markets in Financial Instruments Regulation, (together ‘MiFID II’), which will come into force on 3 January 2018 (the implementation date having been pushed back by one year).
MiFID II is designed to build upon the framework of MiFID I, addressing perceived gaps and dealing with market developments since MiFID I was penned over a decade ago. Our alert highlights that, although under MiFID II there are only a few headline changes to the activities and instruments within scope, and the lists of investment services and activities and financial instruments remain largely unchanged, there are plenty more nuanced changes that need to be considered.
One obvious change is the addition of the new investment activity, operation of an organised trading facility (‘OTF’). This is to reflect the fact that a new trading platform, the OTF, is being introduced, to sit alongside the other MiFID trading venues: regulated markets and multilateral trading venues. Further, the definition of ‘systematic internaliser’ (essentially, a bilateral trading venue) has been widened to include more objective criteria than under MiFID I.
Although at first glance other investment services and activities do not appear to have changed, upon closer inspection it becomes evident that the meaning of several activities has, in fact, been extended:
- A change in the Level 2 measures means that the MiFID investment advice activity will include recommendations given through a distribution channel, meaning that the provision of investment advice will constitute MiFID business in a much wider range of scenarios.
- A recital to the MiFID II Directive explains that issuers of financial instruments should be within scope of the activity ‘execution of orders on behalf of clients’ in relation to primary issues of their own financial instruments when distributing those instruments themselves, even when they do not provide any advice.
- The ‘dealing on own account’ activity will capture firms engaging in ‘matched principal’ or ‘back-to-back’ trading. Under MiFID II, firms doing this sort of trading will need to be authorised to perform both the activity of execution of orders on behalf of clients and the activity of dealing on own account.
In terms of changes to the financial instruments within scope, physically settled derivatives relating to emission allowances (rather than just cash settled) will be included, as will commodity derivatives that can be physically settled and that are traded on an OTF.
Although structured deposits are not financial instruments under MiFID II, certain provisions (relating to organisational requirements, conduct of business requirements and powers of competent authorities) will be extended to MiFID firms when selling, or advising clients in relation to, structured deposits.
The alert featured in this post is part of a series of MiFID II alerts produced by The Financial Regulation Team at King & Wood Mallesons.