MiFID II review in the context of the market impact of COVID-19

On 17th February 2020, the European Commission (EC) published a Consultation Paper on its review of the regulatory framework for investment firms and market operators under the Markets in Financial Instruments Directive (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR). The EC is required to undertake a post-implementation review of the MiFID II regime under Article 90 of MiFID II and Article 52 of MiFIR.

Subsequently, global markets have been dramatically impacted by the coronavirus COVID-19. In the UK, the Financial Conduct Authority (FCA) announced that it will be flexible in terms of firms’ ability to meet some MiFID II requirements including record keeping and pre and post-trade reporting obligations.

The outbreak comes as the Bank of England, the FCA, and the Prudential Regulation Authority (PRA) are consulting on a new and expanded operational risk and resilience rules and guidance. In December 2019, the FCA published Consultation Paper 19/32 on Building Operational Resilience: Impact Tolerances for Important Business Services. The compression of supply chains and the significant market impact of COVID-19 demonstrates a rationale for regulated firms to have in place robust resilience plans which are stress tested against extreme disruptions.

Meanwhile French, Italian Belgian and Spanish markets regulators have moved to expand short-selling bans on certain local stocks. Other regulatory tools – such as intraday circuit-breakers, longer periods of suspended trading in stocks and indices, the curtailment of algorithmic trading and market closures – have yet to be used in response to the COVID-19 pandemic.

The MiFID II Consultation

The EC Consultation’s main objective is to gather evidence from stakeholders and EU citizens on areas that would merit targeted adjustments. The EC says it would welcome indications on how issues should be prioritised in a potential reform of the MiFID II/MiFIR rulebook.

The consultation is broken down into three sections:

1. The first section aims to gather views from all stakeholders (including non-specialists) on the experience of two years of application of the financial instruments directive. Feedback will be gathered on whether a targeted review with an ambitious timeline would be appropriate to address the most urgent issues.
2. The second section focuses on various technical aspects of the current MiFID/MiFIR regime. It will allow the EC to assess the impact of possible changes to EU legislation on the basis of proposals already put forward from previous public consultations and studies. Included is a study on the effects of the unbundling regime on the availability and quality of research reports on SMEs, and a study on the digitalisation of the marketing and distance selling of retail financial services.
   
   Part one of Section 2 lists the following aspects as “priority areas for review”:
   • establishing EU consolidated tape (CT), reviewing why it has not emerged organically and proposals for its features and scope;
   • impact of share trading obligation (STO) and interaction with the CT;
   • systematic internalizers (SIs) generally and in relation to the STO and CT;
     protecting investors via access to simple and transparent products, the relevance and accessibility of adequate information, client profiling and classification.

Part two covers the following aspects that are designated as “non-priority for the review”:

• impact of the derivative trading obligation, the Double Volume Cap (DVC), and the open-access regime;
• applying the multilateral system and whether it is a “level playing field;
• proposals to address digitalisation and new technologies; and
• foreign exchange.

1. The final third section invites stakeholders to highlight any further regulatory aspects or identified issues not mentioned in the previous sections.

The EC notes that this consultation, and the European Securities and Market Authority (ESMA) consultation on certain aspects of MiFID II, are complementary and should not be considered mutually exclusive. Both the ESMA report and the findings from the EC Consultation will inform the EC’s review reports for the European Parliament and the Council of the EU, including legislative proposals where considered necessary.

The consultation period closes on 20 April 2020.

Given the ongoing dramatic impact of COVID-19 including on European markets, it remains to be seen whether the EC will extend the time for this consultation.