Ireland: An Introduction To MiFID II

The purpose of this briefing is to summarise some of the key changes that will be introduced by MiFID II, which is currently planned to be implemented across the EEA in 2014.

The Markets in Financial Instruments Directive ("MiFID") came into force on 1 November 2007 and was implemented in Ireland through the European Communities (Markets in Financial Instruments) Regulations 2007 (the "MiFID Regulations").

MiFID was subject to a mandatory post-implementation review and the EU Commission published a paper consulting on amendments to MiFID in December 2010. On 20 October 2011, following the consultation, the EU Commission published draft legislative proposals in the form of a draft Directive (the "Directive") and a draft Regulation (the "Regulation"), referred to together in this note as "MiFID II".

In very brief summary, MiFID II will introduce new post-financial crisis conduct of business requirements and will also seek to improve the transparency and regulation of the financial markets. It will lead to a more harmonised conduct of business and systems and controls framework for the investment services sector in Europe.

In a number of key areas the European Securities and Markets Authority ("ESMA") has been asked to prepare accompanying technical standards, which have not yet been published. Until these standards are available the full impact of MiFID II is difficult to assess.

Some of the key changes introduced by MiFID II are discussed in more detail below.

Key changes

Scope

MiFID II will be broader than MiFID in terms of the scope of firms covered. For example, a wider range of commodities firms will be covered than is the case at present and certain data providers will fall within the scope of regulation for the first time. In addition, a broader range of products will be covered, including structured deposits and emissions allowances.

Custody services (i.e. safekeeping and administration of financial instruments) will become a core investment service instead of an ancillary service, which will bring standalone custodians in Ireland within the scope of the MiFID Regulations instead of the Investment Intermediaries Act 1995 (the "IIA").

A new regulated category of trading venue called OTFs (organised trading facilities) will be introduced; this is broadly intended to capture broker crossing systems and inter dealer broker systems.

In a fundamental development, the EU Commission is proposing to permit third country firms (i.e. non-EEA firms) that wish to provide cross-border investment services across the EEA to do so on the basis of a "passport". Under the proposals, the passport will be exercised either:

1. by establishing an EEA branch (which will be mandatory if the intention is to deal with retail clients) and gaining authorisation for the branch; or
2. by becoming licensed by an EEA competent authority to provide services from outside the EEA on a cross-border basis (this is possible where the firm only intends to provide services to eligible counterparties).

In each case the non-EEA firm must pass an equivalency test to be devised by ESMA. It is not currently clear how the regime will apply to the provision of services to "professional clients", but this will no doubt be clarified. It is also envisaged that persons within the EEA will be able to receive services cross border from non-EEA firms that are not authorised in the EEA where the person in the EEA requests services from the non-EEA firm at their "own exclusive initiative", i.e. on an unsolicited basis. The proposed new regime for non-EEA firms will presumably lead to a re-write of the cross-border business "safe harbour" in Regulation 8 of the MiFID Regulations and the introduction of a formal "unsolicited business" exemption.

Conduct of business requirements

MiFID introduced a harmonised set of conduct of business rules for investment services across the EEA. MiFID II will introduce significant changes to some of these requirements, for example:

• Additional restrictions on the receipt of third-party payments (i.e. inducements) by portfolio managers and providers of independent advice;
• Additional requirements in relation to the provision of investment advice (e.g. requirements to notify whether the advice is "independent" and whether the firm will conduct an ongoing suitability assessment);
• Best execution requirements will be amended (e.g. firms will be required to disclose their top five execution venues for each class of financial instrument);
• Additional client asset requirements in respect of retail clients;
• Product intervention powers – national regulators, such as the Central Bank of Ireland, and ESMA will be permitted to ban or restrict products in certain circumstances. Position limits for products such as commodity derivatives will also be introduced.

Transparency and transaction reporting

New pre- and post-trade transparency requirements will be introduced, coupled with an extension of those requirements beyond equities to cover equity-like instruments, bonds, structured finance products, derivatives and emissions allowances. The requirements will also apply to a broader range of execution venues.

The transaction reporting regime will be extended to cover: (i) all financial instruments admitted on a regulated market, a MTF or an OTF; (ii) financial instruments whose value depends on the value of a financial instrument traded on a regulated market, a MTF or an OTF; and (iii) financial instruments which have or are likely to have an effect on a financial instrument admitted to trading or traded on an MTF or OTF.

Electronic and exchange trading

MiFID II will require firms engaged in algorithmic trading to comply with specific systems and control requirements designed to ensure that their trading systems are suitably resilient and include appropriate risk controls.

In accordance with the wishes of the G20, there will be a mandatory requirement for certain derivatives contracts (the exact scope is to be determined by ESMA) to be traded on a regulated market, a MTF or OTF.

Timetable

The implementation timeline is not entirely clear and the proposals must first pass to the European Parliament and to the Council for negotiation and adoption in due course. National implementation of the Directive will then have to follow (the Regulation will not have to be implemented at national level).

An estimated timetable is as follows:

Arthur Cox will provide regular updates as MiFID II progresses through the EU and domestic legislative processes, and as changes to the proposals inevitably arise.

In the meantime, please contact Robert Cain at Arthur Cox if you require advice on how MiFID II will impact your business in Ireland.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.