The European Parliament has approved the Markets in
Financial Instruments Directive II (MiFID II) in plenary
The news will give relief to market participants who doubted
an agreement would be made before the European Parliamentary
elections in May.
"MiFID II is one of the most important pieces of the post
crisis regulatory reform puzzle, no one should underestimate
its importance," said Jonathan Herbst, head of financial
services regulation at Norton Rose Fulbright.
"Not only are there new markets requirements including those
relating to position limits, algorithmic trading and
transparency but there are also new conduct of business
requirements that add up to significant change for firms."
"MiFID II may prompt firms to consider their group structure
particularly in light of the changes to MiFID’s
existing exemptions and the new third country
There had been heated political negotiation between the
European Parliament and Council on issues such as the third
A counterparty will only be able to trade certain
derivatives on a non-EU platform if the third country has an
effective and equivalent regime for recognising EU trading
platforms. Non-EU companies providing financial services to
professional clients in the EU will need to register with ESMA
once considered to be equivalent for these purposes. The US is
likely to be one of the first on the list for an equivalence
"The tests around equivalence and reciprocity constitute an
explicit political dimension to the analysis," according to
Peter Snowdon, financial services partner at the firm.
Any non-EU company wanting to provide services to retail
clients in the EU will have to establish a branch and comply
with various MiFID II requirements. It is not clear that they
will benefit from a passport around Europe, according to Norton
While the US and EU hedging exemptions are broadly similar,
the US regime narrows the scope of bona fide hedging
transactions considerably while, under MiFID II, position
limits will not apply to certain hedging positions held by a
The legislation also includes changes to exemptions for
companies that trade commodity derivatives. Such firms may need
to be licensed in the future.
"Any commodity firm relying on MiFID’s
exemptions should revisit and update their analysis sooner
rather than later," said Herbst.
The definition of a commodity derivative will be widened to
capture physically settled contracts traded not only on a
regulated market or multilateral trading facility, but also on
a new organised trading facility. However there will be a
carve-out for physically settled gas and oil derivatives traded
on an organised trading facility as a result of lobbying.