MiFID II - important changes

MiFID II revises the rules and regulations for investment firms and trading platforms. Important changes in rules and regulations will occur with regard to, among others, the following topics:

  • organised trading facility (OTF)
  • direct electronic access
  • third-country policy for investment firms
  • algorithmic trading
  • commodity derivatives and position limits
  • product development and product intervention
  • licence obligations.

Organised trading facility (OTF)

MiFID II introduces an Organised Trading Facility (OTF) as a new trading facility. An OTF is a multilateral trading platform where only bonds, structured financial products, emission rights and derivatives may be traded. The order execution on an OTF takes place on a discretionary basis. This means that an OTF has the freedom to execute an order or not. This is different from a regulated market or a multilateral trading facility. On a regulated market or multilateral trading facility the point of departure is that the order must be executed.

Direct electronic access

The rules for direct electronic access to trading systems will be tightened under MiFID II. Direct electronic access means that a member, participant or client of a trading platform allows a legal entity or person to make use of its trading code. As a result, this order can be transmitted directly to a trading platform.

The investment firms that offer direct electronic access remain responsible for orders that are entered by their clients by making use of their systems and/or their trading codes. They must develop criteria regarding the appropriateness of the parties to whom direct access is being provided. The trading platforms are required to incorporate risk controls and threshold values for trading in relation to the direct access. Under MiFID II, traders who trade for their own account and who have direct electronic access to a trading platform are required to have a licence and to fulfil ongoing obligations.

Third-country policy for investment firms

The regulations for third countries have been revised with regard to a number of points. The third-country policy for investment firms can be divided into three categories under MiFID II.

1. Investment firms from third countries with equivalent supervision, with eligible counter parties or professional investors as clients

The European Commission (the Commission) can designate countries that are not Member States ("third countries") that carry out the supervision of investment firms in an equivalent and effective manner. Investment firms from these designated third countries may provide investment services or carry out investment activities in the Netherlands directly (thus without a branch office) without an AFM licence. In that case, these investment firms must satisfy three conditions:

1. they are registered in a register maintained by ESMA,
2. they only provide investment services to or carry out investment activities for eligible counter parties or professional investors, and
3. they inform their clients that they are not subject to European supervision.

These investment firms are thus not subject to supervision by the AFM, they are subject to the supervision of the designated third country where the investment firm has its registered office.

2. Investment firms from third countries without equivalent supervision (at present), with eligible counter parties or professional investors as clients

If the Commission has not (yet) designated a third country as a state that supervises investment firms in an equivalent and effective manner, Member States may determine themselves how they wish to deal with this. In the Netherlands these investment firms must have a licence. The same applies with regard to investment firms from third countries that are designated as equivalent, but for which this status has been revoked by the Commission.

This means that the exemption rules laid down in the Dutch Financial Supervision Act remain applicable for investment firms from Switzerland, Australia and the USA as long as these countries are not designated as equivalent by the Commission. Investment firms from other countries than Switzerland, Australia and the USA are now required to apply for a licence in the Netherlands and to open a branch office.

3. Investment firms from third countries with non-professional investors as clients

Investment firms with their registered offices in third countries that provide investment services to or carry out investment activities for non-professional investors in the Netherlands will be required to apply for a licence at the AFM and to open a branch office in the Netherlands.

Algorithmic trading

MiFID II requires investment firms and trading platforms to take measures to prevent algorithmic trading to lead to a disorderly market or market abuse. Trading platforms must ensure that their trading systems can handle the large order flows and market pressures. For instance, trading platforms must have circuit breakers to temporarily suspend or limit trading in the event of unexpected price fluctuations.

Commodity derivatives and position limits

After the introduction of MiFID II, commodity derivatives will also be regarded as financial instruments if these derivatives are traded on a trading platform and the commodities are not delivered physically.

ESMA is still developing criteria for this. A trading platform is a regulated market, Multi-Trading Facility (MTF) or Organised Trading Facility (OTF).

Market parties are required to report their positions in commodities derivatives. The AFM will be granted the authority to request information from everyone who has a position in commodity derivatives. The AFM can demand a party to reduce its position(s) in order to prevent speculation on the food derivatives market and the consequential negative effects on food prices. ESMA establishes the bandwidths within which the position limits are determined.

Product development and product intervention

One of MiFID II's main objectives is better protection of investors. This is why new requirements have been introduced for the product development of an investment firm. In this case, we make a distinction between two types of investment firms:

  • an investment firm that develops a financial instrument (the manufacturer)
  • an investment firm that buys the product from a third party and distributes the product (the distributor).

The manufacturer must have a clear target market and must indicate which demands the product aims to satisfy. The distributor must examine the characteristics of this target market and the existing objectives and demands. The distributor must do this when determining its range of product supply and when providing investment services. This requirement is a supplement to the already existing duty of care.

The AFM can suspend the marketing and selling of financial instruments and structured deposits under certain circumstances.

Licence obligation

New market parties that are subject to the licence obligation of MiFID II are among others traders who trade for their own account who were previously exempt, such as:

  • certain commodity traders
  • traders in emission rights
  • legal entities and persons with direct electronic access
  • legal entities and persons who trade as market makers on the derivatives market
  • members and participants of regulated markets
  • legal entities and persons who engage in high frequency algorithmic trading.

Parties who provide investment services in emission rights will also be required to have a licence as emission rights will be regarded as financial instruments. In addition, the MiFID II introduces a new platform the Organised Trading Facility (OTF), and alters the licence regime for investment firms from outside the EU who wish to engage in activities within the EU.

The parties that are obliged to have a licence under MiID II are prohibited to trade without such a licence from the date upon which MiFID II comes into force. Therefore, the AFM considers to review licence applications before the MiFID II comes into force. The AFM will inform market parties about this.

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