The state of play

As the Council of the European Union hands over to Ireland for the first trio of the 2013-2014 Presidency rotation (1st January 2013 – 30th June 2013), the outgoing Cyprus Presidency published a progress report on MiFID II / MiFIR on 13th December. This report outlines the current status of the compromise proposal negotiations, pointing out the main areas where Council agreement is yet to be reached. The areas of disagreement, the report says, may require further discussion at the political level. Once a qualified majority agreement is reached within the Council, expected Q1 2013, the trilogue process (European Commission proposed legislation vs. the European Parliament amendments and the Council amendments) can commence with the aim of agreeing the Level 1 final text of MiFID II / MiFIR.

A few stocking filler highlights below, and all the very best for the new year!

Organised Trading Facility (OTF)
The Presidency reports that delegations have been largely divided on OTF proposals. One side is in favour of the introduction of the OTF. The other side wants stricter OTF rules, or even the removal of this new trading venue category, to ensure that all organised trading can only take place on the existing types of execution venue, Regulated Markets (RMs) and Multilateral Trading Facilities (MTFs). The current Presidency is in favour of keeping the new OTF category but limiting it to non-equity instruments, and also allowing matched principal trading, which the Presidency does not consider proprietary. We can expect more debate on OTFs in 2013.

Transparency waivers
There are four types of pre-trade transparency waivers currently allowed for equity markets: the large in scale waiver; the reference price waiver; the negotiated price waiver; and the order management system waiver. The Commission, and several delegations, would like to maintain only one of these – the large in scale waiver. The Presidency has proposed keeping all four waivers, but narrowing down their scope.

Investor protection
Commissions paid by third parties (inducements) are viewed as a major source of conflicts of interest. The Presidency compromise text imposes stricter disclosure requirements on firms receiving inducements. A smaller group of Member States wants to introduce a general ban.

Derivatives and clearing
The Council continues to have difficulty reaching agreement on access to clearing. The EC proposals to remove barriers to non-discriminatory access to clearing facilities do not sit well with those who believe this will lead to fragmentation at the trading level and to a reduction in liquidity. Any proposals within MiFIR will need to be aligned with the provisions of EMIR which is more advanced having already had its technical standards adopted. Pushing ahead, ESMA has just published a consultation paper on guidelines for establishing consistent, efficient and effective assessments of interoperability arrangements. These guidelines focus on the risks that might arise from interoperability arrangements and outline the areas on which CCPs should focus, and which National Competent Authorities should verify, in order to mitigate those risks.

Third country regime
Several Member States have expressed serious concerns, and have strong reservations, regarding the Commission’s proposal introducing a third country regime for the provision of investment services in the EU. Many seem to be of the opinion that the introduction of a third country regime is unnecessary and disproportionate and would prefer to keep national rules. Based on these concerns, the Presidency has attempted to preserve the effect of the current regime, but has retained the requirement that a third country firm shall establish a branch in the Member State where it intends to provide investment services or perform investment activities to retail clients.

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