This Wednesday, the European Commission will unveil its revisions to the Markets in Financial Instruments Directive. The updated legislation, known as MiFID II, is part of the European Union’s G-20 commitment to increase the transparency of and strengthen oversight for the financial system. It is seen as particularly important that MiFID II address regulatory differences between EU members, and set minimum penalties for non-compliant governments.
A draft document leaked late last week reveals that the revisions will impose new transparency and disclosure rules across all types of trading venues. “[The] financial crisis has exposed weaknesses in the regulation of instruments other than shares, traded mostly between professional investors,” the document explains. According to the Wall Street Journal, the transparency requirements to be instituted will be modeled on those currently in place at stock exchanges. The draft lacked specifics, but different financial instruments, from bonds to derivatives, will have reporting requirements tailored to their particular market niche.
The MiFID II draft also contains language allowing regulators to demand information from market participants. There are also position limits rules that will enable regulators to force a trader to reduce their derivatives position. The draft also mandates that commodity trading venues publish position breakdowns for various contracts on a weekly basis. However, end-users or those engaged in legitimate commercial or insurance activities will be exempted from many of these requirements.
Furthermore, as CFTC Law reported last week, MiFID II will make substantial changes to high-frequency trading (“HFT”) practices. Traders will now be required to run their algorithms continuously during trading hours. Currently, traders only run algorithms during specific market conditions. MiFID will also limit prop-trading for organized trading facilities (“OTFs”), and opens exchanges operating as vertical silos to greater competition.
Once proposed, the MiFID revisions must be approved by the European Parliament and member states.