Legal Updates

On 28 March 2024, two legislative acts amending the EU’s MiFID framework entered into force, namely:

• Directive (EU) 2024/790 amending MiFID II[1] (the Amending Directive), available here; and

• Regulation (EU) 2024/791 amending the Markets in Financial Instruments Regulation[2] (MiFIR) (the Amending Regulation), available here.

Following a lengthy review process, a range of changes have been introduced with the objective of enhancing data transparency, removing obstacles to the emergence of consolidated tapes, optimising the trading obligations, and banning payment for order flow when acting for retail or opt-up professional clients.

In this update we summarise some of the key changes.

Consolidated tape

The “consolidated tape” is a continuous electronic live data stream, intended to provide a comprehensive view of the prices and volume of equity and equity-like financial instruments traded throughout the EU across trading venues.

MiFIR provided a legislative framework for the authorisation of consolidated tape providers (CTPs) which was designed to make data from trading venues and approved publication arrangements (APAs) available to the public in a consolidated manner using the same data tags and formats. To date, however, there have been no applications made for authorisation as a CTP.

As part of its “Capital Markets Union” legislative package, the European Commission proposed amendments to the MiFID framework designed to incentivise applications for CTP authorisation.

The Amending Regulation aims to remove obstacles that have prevented firms seeking authorisation as a CTP, including a lack of clarity as to how the CTP is to obtain data, obstacles to cost-efficient consolidation of data and the lack of a commercial incentive.

Under the revised regime, ESMA will arrange a competitive selection procedure to select a single CTP for each specified asset class for a period of five years. Trading venues and APA will be required to contribute market data to the relevant CTP as close to real time as technically possible. Data quality issues will be addressed by way of requirements for the quality and substance of the data which are to be set out in regulatory technical standards (RTS).

Pre- and post-trade transparency changes

The Amending Regulation makes significant changes to pre- and post-trade transparency obligations for equities, bonds and derivatives. These changes include the replacement of the double-volume cap mechanism (designed to limit the level of trading on dark pools to a certain percentage of total trading in an equity instrument) with an easier to enforce single volume cap of 7% in respect of trades executed under the reference price waiver.

Changes have also been made to the quotation obligations of Systemic Internalisers and to establish a new transparency regime for derivatives based on the characteristics of the derivatives in question rather than the concept of being “traded on a trading venue”.

The Trading Obligation clarified

MiFIR requires most trading in shares to take place on trading venues or Systematic Internalisers. The Amending Regulation seeks to provide clarity as to when the obligation applies by providing that the obligation applies to all shares with an EEA ISIN. In addition, there will no longer be an exemption from the trading obligation for trades that are non-systematic, ad-hoc, irregular and infrequent.

In relation to derivatives, the trading obligation has helpfully been aligned with the clearing obligation for derivatives under EMIR.

Ban on Payment for Order Flow

Payment for order flow is the practice whereby a firm receives a fee or commission from a third party for executing client orders on a particular venue or for forwarding client orders to a third party for execution on a particular venue. Viewed by regulators as being inconsistent with the obligation of best execution, the restriction of this practice proved to be particularly contentious given its long-standing establishment in several EU member states.

The Amending Regulation prohibits firms acting on behalf of retail clients or opt-up professional clients from receiving any fee, commission or non-monetary benefit from any third party for executing orders from those clients on a particular execution venue or for forwarding orders of those clients to any third party for their execution on a particular execution venue. Member states where the practice is established may exempt firms from the prohibition until 30 June 2026.

Next steps

Both the Amending Regulation and the Amending Directive entered into force on 28 March 2024. The Amending Regulation took effect immediately. However, Article 54(3) MiFIR (as amended) provides for the continued application of the Level 2 regulations that are currently in place until such time as those regulations are revised. ESMA will launch consultations on developing those revised Level 2 regulations. It is also worth noting the statements issued by ESMA and the European Commission in relation to the transition and the operative dates for the various changes which are available here and here.

Member States will have until 29 September 2025 to transpose the Amending Directive, which for the most part provides for consequential changes to ensure consistency with the changes to MiFIR.

Finally, the European Commission will assess, by 29 March 2025, the possibility of extending the transaction reporting requirements of Article 26 MiFIR to include AIFMs and UCITS Management Companies with MiFID “top-up” permissions.

If you have any queries about the information contained in this article, please contact the authors or your usual Dillon Eustace contact.

Footnotes:

[1] Markets in Financial Instruments Directive (2014/65/EU)

[2] Markets in Financial Instruments Regulation (EU) No. 600/2014