MiFID II Review: EFAMA calls for changes to investor protection rules
22 May 2020 Brussels
Image: jakkapan/Shutterstock
The European Fund and Asset Management Association (EFAMA) has given its response to the European Commission’s consultations on the review of the the second Markets in Financial Instruments Directive (MiFID II)/MiFIR regulatory framework, where it has outlined its recommendations on investor protection and capital markets and infrastructure.
In its response, EFAMA reinforced its support for the MiFID II and MiFIR framework but called for targeted improvements for professional investors to increase market transparency.
As a priority, EFAMA proposed revisions to the Level 1 texts only with regards to the issues raised around ‘semi-professional’ investors and opt-outs for professional investors for certain requirements.
EFAMA indicated that these revisions can be made by way of a more flexible interpretation of the Level 1 framework via targeted amendments to the Implementing Directive and Regulations.
The association noted that this is as well as to ESMA’s guidelines and Q&As, which are currently seen as burdensome for the wider financial industry.
Creating thematic Q&A updates every year, with enough time for the industry to implement these changes, was, therefore, one of the strong suggestions from EFAMA.
Capital markets and infrastructures
Regarding its response to capital markets and infrastructures, the association stressed that MiFID II still fails to deliver a consolidated tape (CT) and the notion of “Reasonable Commercial Basis” in data cost has been largely overlooked.
The association calls on the commission to enforce the creation of a consolidated tape.
In the response from the World Federation of Exchanges, it was noted that a post-trade tape of record represents the only consolidated tape which has a clear use case and would be likely to be viable in terms of costs and benefits.
EFAMA also drew upon the Share Trading Obligation (STO) and the Derivatives Trading Obligations (DTO) and called for it to be completely removed.
“If not possible, at the very least the STO should be strictly imposed on EU securities and the DTO should be strictly relying on the application of the clearing obligation, as defined in EMIR Refit”, it outlined.
The association highlighted that it needs all sources of liquidity to deliver the best results to its clients. The Systematic Internalisers’ regime must be protected, EFAMA affirmed, to shield liquidity and financial market innovation.
Additionally, EFAMA cited that FX spot must remain excluded from the list of financial instruments. Any perceived regulatory gap should be assessed and managed through the Payment Service Directive or the Anti-Money Laundering Directive, the association stipulated.
Drawing upon the European Securities and Markets Authority’s point, EFAMA highlighted “the FX global code of conduct, developed by central banks and market participants from sixteen jurisdictions around the globe, has already achieved progress in promoting higher standards in the wholesale FX market”.
In comparison, the WFE also encouraged the European Commission to refrain from making changes to the regime for spot FX in the context of the ongoing implementation of the global code.
Investor protection
Elsewhere in its response to investor protection, EFAMA said that more flexibility should be provided to professional investors and eligible counterparties.
According to EFAMA, these types of investors should either be allowed to opt-out of many cost disclosure and investor protection requirements or should be out of scope, being allowed to opt-in.
Meanwhile, EFAMA said it does agree with the notion of 'semi-professional clients', but it does not believe that the creation of a new client category is the right way forward.
EFAMA suggested deleting the ‘10 percent depreciation alert’ as it encourages short-term behaviour, does not provide any added value for these types of clients and increases operational costs to comply with this requirement.
Regarding retail alternative investment funds, EFAMA said they should automatically be considered non-complex financial instruments that can be sold 'execution-only'.
In its response, the association also highlighted its disagreement with an outright ban on inducements. EFAMA explained this is because it would have substantial and far-reaching consequences in terms of overall access to investment advice for all European citizens.
According to EFAMA, where issuer-sponsored research is concerned, it should qualify as an acceptable minor non-monetary benefit, and therefore be kept out of the inducement regime.
Tanguy van de Werve, EFAMA’s director general, commented: "We reiterate our support for the overarching objectives of the MiFID II and MiFIR framework which, for the most part, is working as intended. We are calling for targeted improvements such as to provide more flexibility to professional investors, to increase market transparency by mandating the creation of a consolidated tape for all financial instruments and to address data quality and data cost issues through stricter enforcement of existing rules.”
To read the full response by EFAMA, click here.
The European Commission started its consultation to assess the overall functioning of the regime after two years of application of MiFID II/MiFIR.
The regulations require that the European Commission presents the parliament and council with a report on the operation of the new framework, together with a legislative proposal for reform, if deemed necessary.
This consultation looked to gather evidence from stakeholders, and more generally from EU citizens, on areas that would merit targeted adjustments as well as welcoming indications on how issues should be prioritised in a potential reform of the MiFID II/MiFIR rulebook.
In its response, EFAMA reinforced its support for the MiFID II and MiFIR framework but called for targeted improvements for professional investors to increase market transparency.
As a priority, EFAMA proposed revisions to the Level 1 texts only with regards to the issues raised around ‘semi-professional’ investors and opt-outs for professional investors for certain requirements.
EFAMA indicated that these revisions can be made by way of a more flexible interpretation of the Level 1 framework via targeted amendments to the Implementing Directive and Regulations.
The association noted that this is as well as to ESMA’s guidelines and Q&As, which are currently seen as burdensome for the wider financial industry.
Creating thematic Q&A updates every year, with enough time for the industry to implement these changes, was, therefore, one of the strong suggestions from EFAMA.
Capital markets and infrastructures
Regarding its response to capital markets and infrastructures, the association stressed that MiFID II still fails to deliver a consolidated tape (CT) and the notion of “Reasonable Commercial Basis” in data cost has been largely overlooked.
The association calls on the commission to enforce the creation of a consolidated tape.
In the response from the World Federation of Exchanges, it was noted that a post-trade tape of record represents the only consolidated tape which has a clear use case and would be likely to be viable in terms of costs and benefits.
EFAMA also drew upon the Share Trading Obligation (STO) and the Derivatives Trading Obligations (DTO) and called for it to be completely removed.
“If not possible, at the very least the STO should be strictly imposed on EU securities and the DTO should be strictly relying on the application of the clearing obligation, as defined in EMIR Refit”, it outlined.
The association highlighted that it needs all sources of liquidity to deliver the best results to its clients. The Systematic Internalisers’ regime must be protected, EFAMA affirmed, to shield liquidity and financial market innovation.
Additionally, EFAMA cited that FX spot must remain excluded from the list of financial instruments. Any perceived regulatory gap should be assessed and managed through the Payment Service Directive or the Anti-Money Laundering Directive, the association stipulated.
Drawing upon the European Securities and Markets Authority’s point, EFAMA highlighted “the FX global code of conduct, developed by central banks and market participants from sixteen jurisdictions around the globe, has already achieved progress in promoting higher standards in the wholesale FX market”.
In comparison, the WFE also encouraged the European Commission to refrain from making changes to the regime for spot FX in the context of the ongoing implementation of the global code.
Investor protection
Elsewhere in its response to investor protection, EFAMA said that more flexibility should be provided to professional investors and eligible counterparties.
According to EFAMA, these types of investors should either be allowed to opt-out of many cost disclosure and investor protection requirements or should be out of scope, being allowed to opt-in.
Meanwhile, EFAMA said it does agree with the notion of 'semi-professional clients', but it does not believe that the creation of a new client category is the right way forward.
EFAMA suggested deleting the ‘10 percent depreciation alert’ as it encourages short-term behaviour, does not provide any added value for these types of clients and increases operational costs to comply with this requirement.
Regarding retail alternative investment funds, EFAMA said they should automatically be considered non-complex financial instruments that can be sold 'execution-only'.
In its response, the association also highlighted its disagreement with an outright ban on inducements. EFAMA explained this is because it would have substantial and far-reaching consequences in terms of overall access to investment advice for all European citizens.
According to EFAMA, where issuer-sponsored research is concerned, it should qualify as an acceptable minor non-monetary benefit, and therefore be kept out of the inducement regime.
Tanguy van de Werve, EFAMA’s director general, commented: "We reiterate our support for the overarching objectives of the MiFID II and MiFIR framework which, for the most part, is working as intended. We are calling for targeted improvements such as to provide more flexibility to professional investors, to increase market transparency by mandating the creation of a consolidated tape for all financial instruments and to address data quality and data cost issues through stricter enforcement of existing rules.”
To read the full response by EFAMA, click here.
The European Commission started its consultation to assess the overall functioning of the regime after two years of application of MiFID II/MiFIR.
The regulations require that the European Commission presents the parliament and council with a report on the operation of the new framework, together with a legislative proposal for reform, if deemed necessary.
This consultation looked to gather evidence from stakeholders, and more generally from EU citizens, on areas that would merit targeted adjustments as well as welcoming indications on how issues should be prioritised in a potential reform of the MiFID II/MiFIR rulebook.
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