New rules aim to give better protection to European investors

The European Parliament yesterday approved new rules on the trading of financial instruments that aim to curb speculative trading and offer better protection to investors.

The revised Markets in Financial Instruments Directive (MIFID) and its associated regulation was signed off by the European Parliament after more than three years of discussions, in a bid to better regulate capital markets in the wake of the financial crisis.

EU internal markets commissioner Michel Barnier said the new rules will establish a "safer, more transparent and more responsible financial system" and help restore investor confidence.

The new rules, which will affect the way stockbrokers, investment firms and other operators in the capital markets do business, are expected to come into force by the end of 2016, when national authorities will be obliged to have implemented the directive.

Among the main changes introduced in the regulation are new rules regarding the trading of commodities. The legislation imposes new limits on positions in commodity derivatives, in a bid to curb speculative activity in a range of commodities from energy to food.

The changes reflect fears that speculative commodity trading has affected the price of staple goods, particularly in the developing world.

MIFID II also introduces a new category of trading venue - called organised trading facilities (OTF) for non-equity instruments. It also aims to push the trading of standardised derivatives onto visible regulated venues such as a multilateral trading facility.

The need to ensure that derivative markets keep up with the rapidly evolving advances in high-frequency electronic trading is also a central aspect of the new package. It obliges all firms engaged in algorithmic trading activity to adhere to new regulatory and risk-control requirements.

Corporate governance
Similarly MIFID II also aims to step-up protection for investors, by introducing new regulations on corporate governance. Stricter compliance rules, as well as certain criteria for board directors, are included in the legislation.

It also permits regulatory authorities to ban the marketing and sale of certain financial products as a last resort.

Shane Kelleher, a partner in the Financial Regulation group at Dublin law firm William Fry, said MIFID II represents the biggest overhaul of the regulation of securities markets in Europe since the financial crisis.

“Fundamentally the rules are about providing stronger investor protection, by closing gaps and tightening up standards in the existing regulation.

'Magic wand'
"Regulators will have a lot more powers and will be provided with a lot more information, but it's important to keep in mind that it is not a magic wand to solve another crisis. It opens up the question of the responsibility that goes with that extra power."

Among the main changes contained in the new legislation, he says, are new rules regarding remuneration and providers’ responsibilities to clients.

“Effectively, it says, if you’re providing independent advice to clients, you can’t take fees from third parties. Similarly, you can’t have a remuneration policy that is in conflict with the duty to act in the best interest of the client. “

A further departure from the original MIFID directive, which dates back to 2007, is the move to allow companies that are not in the European Economic Area (EEA) to provide services to the EU under a ‘passport’ system, though companies offering products to retail investors will be required to have a physical presence in the country in which they are operating.