The European Commission’s Financial Services Action Plan (FSAP), introduced in 1999 and implemented in Lisbon in 2000, intended to radically reform the European securities markets between 1995 and 2005. The FSAP resulted in various directives and regulations in the field of securities law. The key objectives behind the FSAP are fourfold:
These above measures were considered necessary because the pace at which the liberalisation of the financial services market was proceeding was too slow and had to be accelerated. In 2005, at the end of the period covered by the FSAP, the European Commission presented its White Paper on Financial Services Policy (2005-2010), a follow-up to the FSAP.
In 2002, the Lamfalussy process was introduced to allow European financial services legislation to be adopted and applied at four levels. Level 1 consists of community directives and regulations based on framework principles, making them easier to agree. In addition, the nature and extent of the implementing measures to be decided at level 2 are agreed. Level 2 consists of the technical implementing measures adopted under power at level 1, whereby the Committee of European Securities Regulators (CESR) plays an important role. Level 3 measures have the objective of improving the common and uniform implementation and application of level 1 and 2 acts in the member states. Level 4 concerns enforcement, whereby the European Commission monitors the compliance of member states with EU legislation and may take legal action against member states if they are suspected of breaching Community law.
CESR is an independent advisory body that consists of the national securities regulators of the different member states. CESR can be mandated to give technical advice on the level 2 implementing measures. Under level 3, CESR is required to produce consistent guidelines, and common standards on matters not covered by EU legislation, to compare and review regulatory practices to ensure effective enforcement throughout the European Union and to conduct peer reviews of administrative regulation and regulatory practices in the member states to ensure consistent implementation and application.
As the Lamfalussy process develops, the role of CESR will become more important. One of CESR’s main objectives for the coming years is to plan how supervisory convergence can be achieved to enhance and reduce by mutual understanding the differences in supervisory practices. In addition, national regulators will have to cooperate more closely.
In this summary, we will discuss the current status of the Lamfalussy process whose ‘Lamfalussy’ directives – as of June 2006 – are namely the Prospectus Directive, the Transparency Directive and the Markets in Financial Instruments Directive (MiFID). We will now consider the changes made in the past year in relation to the above directives and the White Paper, and also discuss various problems that have arisen.
2. WHITE PAPER ON FINANCIAL SERVICES POLICY 2005-2010
On 5 December 2005, the European Commission presented its White Paper on the New Financial Services Policy for the next five years. Its’ new strategy focuses on ways to effectively deliver further benefits of financial integration to industry and consumers. The Commission points out that it is essential to build on the progress made under the FSAP. The White Paper sets out the Commission’s four main objectives as follows:
According to the White Paper, the Commission’s priorities are to further boost the efficiency of pan-European markets for long-term savings products, to finance the huge pensions deficit and to complete the internal retail market. A better functioning risk capital market is necessary to promote new and innovative firms and to increase economic growth.
The Commission will deploy open, transparent and evidence-based policymaking to draw up sound rules, which will add value to the EU’s financial services sector and benefit consumers. Open consultation and impact assessments will continue to play a central role and will be required before any legislation is deemed necessary. The Commission thinks it is important to strengthen the enforcement mechanisms. To reach this goal, intensive cooperation between the Commission and the member states is needed and gold-plating (adding national rules to the implementation of the European rules) must be avoided. The Commission will regularly update its online FSAP transposition matrix and the overall state of the transposition will be covered in the annual Progress Report on financial services. The transposition workshops with member states and European regulators will continue to provide a forum for establishing consensus on the implementation of European rules. The Commission thinks these practical processes will facilitate effective monitoring.
Ex-post evaluation of the FSAP and all new legislative measures is the Commission’s top priority for the next five years. By 2009, the Commission intends to have completed a full economic and legal assessment of all FSAP measures. In the Financial Integration Monitor (FIM) report, the Commission will monitor the overall state of financial integration every year, and will modify, amend and/or repeal any specific legal texts that are and have not been effective.
The Commission has tried to keep those rules adopted, pursuant to the FSAP as simple and as coherent as possible, however, there is still room for improvement. The national and community rules must function as a single coherent body of law. The Commission will carry out sectoral and cross-sectoral consistency checks to ensure coherence of terminology and effect. This work is envisaged to take several years and will start with the following practical steps:
The FIN-USE forum of financial services users is very important as it conveys the user perspective with respect to EU policy development. The Commission will ensure proportionate representation of users in all future advisory groups. The Commission has acknowledged the need for increased awareness and direct involvement of citizens in financial subjects and plans to hold a conference about consumer education on financial subjects in 2007. To increase awareness among consumers, the Commission intends regularly to publish a newsletter and to create a permanent group of consumer representatives from across Europe.
FIN-NET provides consumers and users with easy access to out-of-court legal procedures in cross-border cases. The Commission has initiated a review to make FIN-NET more efficient.
According to the White Paper, the Commission intends to support the evolution of a single market, inter alia by adapting the rules on VAT for financial services, in two ways namely: (i) by further developing the Lamfalussy process; and (ii) by reinforcing the exchange of information between national regulators.
The Commission has four ongoing projects: Retail Banking, Solvency II, Review Qualifying Shareholdings and Clearing and Settlement.
The main areas in which no new legislation is planned are: Rating Agencies; Financial Analysts; level 2 measures for the Takeover Bids Directive on requirements in the offer document; and capital requirements for regulated markets. The Commission thinks that the current regulatory requirements in these areas are sufficient.
The Commission has designated two subjects for future legislation: investment funds and potential retail financial services.
Increasingly, standards and best practices are being set and defined on a global level. In particular on namely accounting, auditing and capital requirements. In view of the EU’s size and harmonisation experience, it should, according to the White Paper, play a leading role in the development of these issues. The Commission intends to deepen the successful problem-solving dialogue between the EU and the US. The Commission also intends to build up a dialogue with other countries, for instance, Japan, China, Russia and India.
The Commission will publish a detailed Annual Report covering progress and developments in the areas outlined in the White Paper.
3. PROSPECTUS DIRECTIVE
The deadline for transposing the Prospectus Directive into the national laws of the different member states was 30 June 2005. The Prospectus Regulation came into effect on 1 July 2005. The passport system in this Directive and Prospectus Regulation (809/2004) requires the different competent authorities to work together. For this reason it is essential that regulators achieve convergence across the European Union in matters of day-to-day implementation.
The Prospectus Directive was discussed at length in the 2005 edition of Securities World and we will therefore not discuss it again as such. Instead, we will focus on (i) the advice given by CESR regarding historical financial information, (ii) CESR’s level 3 work, and (iii) various practical issues.
The Prospectus Regulation contains, inter alia, requirements with respect to how an issuer’s historical financial information should be presented in a prospectus. The main goal of including historical financial information in the prospectus is to enable investors to understand the issuer’s financial position. The historical financial information about the issuer should reflect the business as a whole throughout the period required by Regulation, including significant acquisitions or disposals. The financial disclosure requirements in the Prospectus Regulation, however, do not contemplate more complex financial history situations.
On 3 June 2005, the European Commission issued a mandate to CESR regarding a possible amendment to the requirements in the Prospectus Regulation concerning the treatment of historical financial information which must be included in a prospectus. The purpose was to achieve more detail in the level 2 implementing measures to handle treatment of issuers with a complex financial history, in a consistent manner across Europe. Market participants had already asked for clarification on this subject.
CESR proposed that a provision relating to issuers having a complex financial history be added to the Prospectus Regulation.
In accordance with the responses to the consultation on a possible amendment, CESR proposed that the amendment should not consist of a detailed set of requirements. This is because due to the specific characteristics of complex financial histories, they do not follow a standard pattern. Therefore, the regulatory approach should allow the competent authorities to maintain their flexibility when assessing these situations. CESR considered it more appropriate to give an illustrative list of the most commonly encountered cases of issuers with a complex financial history, such as:
CESR set out a few principles in which it recommends what competent authorities should take into account when deciding if an issuer with a complex financial history must provide any additional information in the prospectus. These principles are: economic reality (the additional information should reflect the economic substance of events and transactions and not merely their form); materiality (additional information about the significant business or subsidiaries should be required only if it is material in relation to the totality of the issuer’s business) and reasonableness (the additional information should not duplicate information already provided in the prospectus). According to CESR, these principles will provide guidance to issuers and ensure convergence in the different member states. On the other hand, these principles will also give the competent authorities flexibility when deciding whether additional information must be provided. We note that a different interpretation of these principles by the various competent authorities may lead to uncertainty for issuers with a ‘complex financial history’ as to what financial information to include in a prospectus. Clearance and certainty by the competent authority will need to be provided in an early stage of the process.
In cases where the issuer has changed its accounting reference date during the three-year period, CESR considers it necessary for the issuer to show its historical financial information over a period of at least 36 months.
The next step in this field for CESR will be to assess what level 3 work is needed in respect of the requirements relating to complex financial history. CESR thinks the principle-based approach might be best complemented by level 3 guidance from CESR. This guidance is more flexible than a legislative solution. CESR members will continue their current practice of sharing practical information after the Regulation is amended.
During the last four years, CESR advised the European Commission on implementing measures in relation to the Prospectus Directive and produced level 3 recommendations for the consistent application of it. It is presently continuing these efforts through the Prospectus Contact Group. This Group concentrates the efforts of competent authorities to ensure supervisory convergence in the application of the new legal framework. It focuses on simplifying the procedural aspects of the correct functioning of the European passport. The Prospectus Contact Group is also leading an effort to achieve common approaches on practical aspects and questions raised by market participants and regulators. CESR believes that in order to reach convergence in applying the legal framework, it is necessary to hold practical and operational meetings of prospectus contact experts. At these meetings, the experts can discuss specific implementation and application issues and, to the extent possible, agree on common solutions.
CESR has developed a common certificate of approval attesting that a prospectus has been drawn up in accordance with the Directive. It has also established a contact list of the person(s) responsible for notification with each competent authority.
It is now clear that member states have implemented certain provisions of the Prospectus Directive in different ways. An example is the ‘six-day rule’. Article 14(1) of the Directive prescribes that for an initial public offering of shares, an approved prospectus must be available for at least six working days before the end of the offer. The different member states took different approaches in implementing this rule. In some countries the requirement does not apply to offers for which a prospectus is only required because the securities are being admitted to trading on a regulated market. However, in other countries this requirement does apply in such cases.
It is not clear what kind of announcements fall within the scope of the Prospectus Directive. Article 2 of the Prospectus Regulation provides that announcements aiming to specifically promote the potential subscription or acquisition of securities are considered to be advertisements. They must therefore comply with the requirements of article 15 of the Directive. This has raised the question of whether an investment analyst’s research report published in the context of an offering must be characterised as an advertisement.
Article 16 of the Directive provides that investors who have agreed to purchase or subscribe for the securities before a supplementary prospectus is published have the right to withdraw from that agreement within a time limit not less than two working days after the publication of the supplement. There was a concern about how this provision would operate in the context of public takeovers involving an offer of securities as consideration to shareholders of the target company. In the same context, the withdrawal right does not apply if an ‘equivalent document’ is used instead of a prospectus, thus depriving the target company’s shareholders of this protection mechanism.
The Prospectus Directive makes a distinction between ‘equity securities’ and ‘non-equity securities’. However, there is still a group of securities whose classification is unclear, which may result in them being classified differently in the different member states. For example, partnership interests and hybrid instruments.
On 18 July 2006, CESR published its FAQs regarding Prospectuses: Common Positions Agreed on by CESR Members. This ‘Q&A’ publication is intended to provide market participants with (non-binding) responses in a quick and efficient manner. Some of the questions and answers will be dealt with below.
Article 5(4) of the Directive provides that the final terms of a base prospectus must be filed with the regulator of the issuer’s home country. CESR explains that, although filing of the final terms with the regulators of the host member states is not required, those regulators would nevertheless expect to receive such information. The same would apply to the filing of information concerning the total number of securities offered and the price thereof as part of a stand-alone prospectus, pursuant to article 8(1) of the Directive. In our view, the fact that host member states informally require this type of information is contrary to the system of the Directive.
According to the ‘Q&A’ publication, a host member state cannot require the issuer to publish a notice in the host jurisdiction in relation to a prospectus that has been passported into that jurisdiction.
According to the ‘Q&A’ publication, non-transferable options granted to employees pursuant to employee share schemes do not fall under the Directive. CESR points out that at the time of the conversion or exercise of these options, there is no public offer since it is just the exercise of a previous offer.
On 14 November 2006, CESR published a call for evidence on the functioning of the
Prospectus Directive. In particular in regard to the following:
• obstacles to passporting within the EEA in general;
4. TRANSPARENCY DIRECTIVE
On 15 December 2004, the proposal for Directive 2004/109/EC on the harmonisation of transparency requirements with regard to information about issuers whose securities are admitted to trading in a regulated market, the Transparency Directive, was adopted. This level 1 Directive establishes general principles relating to the harmonisation of transparency requirements. One of the main goals of this directive is to create and sustain investor confidence through ensuring the disclosure of accurate, comprehensive and timely information about security issuers.
In the context of the Transparency Directive, CESR received a mandate from the European Commission which stated as follows:
CESR’s final advice on possible implementing measures with respect to (i) the notification of major holdings of voting rights, (ii) the dissemination of regulated information, (iii) half-yearly financial reports, and (iv) the equivalence of transparency requirements for third country issuers was submitted on 30 June 2005.
According to CESR, the dissemination of regulated information is the process by which such information enters the public domain. For example, price-sensitive information, half-yearly financial reports, interim management statements and information about major shareholdings. CESR proposes a single set of minimum standards that issuers must meet when they disclose regulated information. These minimum standards include fast access to that information by investors, access on a non-discriminatory basis, effective dissemination throughout the European Union and the requirement that investors are not charged any specific fees by issuers for receiving information. Media that can be used to publish information include, press agencies, key national and European newspapers and special websites. Issuers should be free in their choice to disseminate the information themselves or to use a third party to do this.
The advice proposes specific implementing measures regarding half-yearly reporting, including rules for the minimum content of half-yearly financial statements. These rules are based on the principles of IAS 34 (Interim Financial Information). The advice also urges using the definition of ‘major related party transactions’ given in IAS 24 (Related Party Disclosure).
CESR proposes to test the equivalence of transparency requirements applicable to third country issuers by looking first at the key principles and objectives of the different disclosure requirements in the Directive, to then establish what a third country’s regulatory framework must include in order to meet the test of equivalence. It is essential that the requirements of the third country do not need to be identical. According to CESR, equivalence can be declared when general disclosure rules enable users to make an understandable and broadly equivalent assessment of the issuer’s position.
The Commission’s mandate on the storage and filing of regulated information contained three elements. Firstly, CESR had to advise on possible implementing measures on two issues relating to the architecture of the storage network: (a) the agreement on interconnectivity of the national Officially Appointed Mechanisms (OAMs); and (b) the cost and funding implications for the member states arising out of the creation of this network. The OAMs are the national storage systems. Secondly, CESR had to give technical advice on the role of the OAM for the central storage mechanism, on the role of the competent authority and the development of minimum quality standards for the OAMs. The final element of the mandate concerned an interim report on the cost of setting up and operating an OAM that meets the quality standards.
CESR published its final advice on 6 July 2006 which in particular covers the minimum quality standards for the national storage systems and how interconnectivity can be established among national storage systems. CESR states that the way in which information (such as price-sensitive information, regular financial reports, notifications for major holdings and prospectuses) is stored is crucial to the development of the European financial markets. The idea is that all regulated information on listed companies should be accessible by all investors through one or more officially appointed central databases in each member state. These databases can be linked, which means that the information is accessible to all EU investors, enabling them to better evaluate investment opportunities.
In its advice, CESR provides minimum standards for electronic filing with the OAM, such as access through the internet, and the requirement that OAMs be able to receive electronic filings. CESR also sets out the minimum quality standards of the IT systems’ security to be complied with by the OAM. The minimum quality standards relate to the integrity of stored regulated information, validation, availability of the stored information, acceptance of waivers and recovery and back-up systems. Furthermore, CESR’s advice also contains minimum quality standards on the information source. The OAM must have certainty that the information it receives is from an authentic source and it needs to ensure the integrity of the content of the regulated information.
The Transparency Directive was due to be implemented on 20 January 2007 by the member states in the European Economic Area (EEA). The United Kingdom and some other countries have met this deadline, but others have not resulting, possibly, in considerable difficulties for entities involved in cross-border activities. At the time of going to print the level 2 Implementing Directive had not yet been published, which adds further uncertainty to the market.
5. MIFID
The Markets in Financial Instruments Directive, or MiFID, (Directive 2004/39/EC) is the successor of the ISD, the Investment Services Directive, which was adopted in 1993. The ISD introduced the European passport for investment firms, which allowed these firms to offer their services in each of the countries of the European Union based upon a licence obtained in their home country. However, as a result of the fact that the ISD was implemented in different manners across the different member states of the EU, investment firms were and are still confronted with local differences when offering their services in the European Union. MiFID was introduced in order to produce an effective ‘single passport’ regime allowing investment firms and regulated markets to operate across Europe under a common set of rules which enhances the protection of European investors.
Member states are supposed to implement MiFID into their national legislation by 31 January 2007. Investment firms must comply with the implementing legislation from 1 November 2007. The purpose of this nine-month transitional period is to give firms sufficient time to prepare.
The MiFID has been developed in accordance with the Lamfalussy legislative process. This process was introduced in 2001 in order to accelerate the development of new European legislation in the field of financial services. According to the Lamfalussy process, the level 1 measures – MiFID – consist of a framework directive which sets forth the central principles for the new rules. These principles are worked out in more detail in the level 2 measures. With respect to the MiFID, the principles set forth in it are further elaborated upon in an Implementing Directive (Directive 2006/73/EC) and an Implementing Regulation (Regulation 1287/2006). These implementing measures add technical detail to the framework provided by MiFID.
Both the MiFID and the Implementation Directive will need to be implemented in the national laws of the EU member states. The Implementation Regulation will not need to be implemented – it is directly applicable in each EU member state.
MiFID widens the range of the investment services and activities in comparison to the ISD. Under MiFID, the provision of investment advice is no longer an ancillary service, but is upgraded to an investment service. In addition, operation of a Multilateral Trading Facility (MTF) is now also an investment service. A multilateral trading facility is a multilateral system operated by an investment firm or market operator which brings together multiple third-party buying and selling interest in financial instruments – in the system and in accordance with non-discretionary rules – in a way that results in a contract. The ISD did not yet contain any provision with respect to the operation of multilateral trading facilities. Consequently, firms providing investment advice and firms operating an MTF will need to be authorised as an investment firm and can rely on the European passport to provide these services in other EEA jurisdictions based on their home-state authorisation.
MiFID also widens the scope of the financial instruments in comparison to the ISD. Under MiFID, derivatives such as credit derivatives, most forms of commodity derivatives and other non-financial derivatives, such as weather and emissions derivatives, will become financial instruments. As a result, a firm which performs investment services or activities with respect to such derivatives will need to be authorised as an investment firm.
MiFID provides that when providing investment services and activities on a cross-border basis, only the home state rules shall apply. Contrary to the ISD, host states will not be allowed to impose additional rules on investment firms that provide cross-border services from their home state. This is different if an investment firm offers its services through a branch. If services are offered through a branch, the branch must comply with the requirements imposed by the host state for services provided by the branch within the host state’s territory.
MiFID, the Implementing Directive and the Implementing Regulation contain detailed prudential and conduct of business requirements for investment firms. Below we will discuss some of these requirements.
Organisational requirements
MiFID and the Implementing Directive set forth detailed organisation requirements. These include the requirement to establish adequate policies and procedures to ensure compliance of the firm with its obligations under MiFID, sound administrative and accounting procedures, internal control mechanisms and safeguard arrangements for information processing systems.
Outsourcing
MiFID requires investment firms, when outsourcing operational functions which are critical for the provision of continuous and satisfactory service to clients and the performance of investment activities on a continuous and satisfactory basis, to take reasonable steps to avoid undue additional operational risk. It also provides that outsourcing may not materially impair the quality of the internal controls and the ability of the supervisor to monitor compliance with all obligations.
Specific rules apply if an investment firm outsources the investment service of portfolio management provided to retail clients to a service provider located in a non-EEA country. First, the service provider must be authorised or registered in its home country to provide that service and it must be subject to prudential supervision. Secondly, there must be an appropriate cooperation agreement between the supervisor or the investment firm and the supervisor of the service provider.
Client classification
MiFID provides for a complex system of client classification. The regulatory obligations owed by an investment firm to its clients depend on their qualification. There are three categories of clients under MiFID:
Retail clients
A retail client is a client who is not a professional client.
Professional clients
Professional clients are, among others, entities which are authorised or regulated to operate in the financial markets, large undertakings, national and regional governments and certain other institutional investors.
Eligible counterparties
The category ‘eligible counterparties’ comprises, among others, investment firms, credit institutions, insurance companies, UCITS, pension funds and national governments. member states are allowed to expand the category of ‘eligible counterparties’ with certain entities.
The figure below (which has been based on a figure made by the European Commission) provides a schematic overview of the different categories.
Retail clients are afforded the highest level of regulatory protection. Professional clients are presumed to possess the experience, knowledge and expertise to make their own investment decisions and properly assess the risks that they incur. Therefore, certain regulatory obligations are disapplied or are applied in a less extensive manner. For instance, where an investment firm provides an investment service to a professional client, it is entitled to assume that the client has the necessary level of experience and knowledge.
A large number of conduct of business rules are disapplied when providing certain services to eligible counterparties. When executing orders on behalf of eligible counterparties, dealing on its own account with eligible counterparties and receiving and transmitting orders for eligible counterparties, the investment firm does not need to comply with, among others, the appropriateness test and the requirement to provide best execution.
Clients can move between the categories set out above to obtain more or less regulatory protection. Any retail client can request to be treated as a professional client. The investment firm may then agree to a lower level of protection. This is called ‘opting-up’. An investment firm may only agree to such request if it has a reasonable assurance that the client is capable of making his own investment decisions and understands the risks involved. In order to obtain reasonable assurance, the investment firm has to undertake an adequate assessment of the expertise, experience and knowledge of the client in the light of the nature of the transactions or services envisaged. Professional clients may also request less regulatory protection by requesting treatment as an eligible counterparty.
Clients may also request more regulatory protection. This is called ‘opting-down’. A professional client or an eligible counterparty may request treatment as a retail client. An eligible counterparty can also opt to be treated as a professional client.
Under MiFID, clients will be able to request more or less regulatory treatment either generally or in respect of a particular investment service or transaction, or type of transaction or product.
Know your customer
MiFID requires investment firms to assess whether the service or transaction they provide to a client is ‘suitable’ or ‘appropriate’. The suitability test must be applied when an investment firm provides investment advice or portfolio management. When providing such services, the investment firm has to obtain information regarding the client’s knowledge and experience in the investment field, his financial situation and his investment objectives in order to enable the firm to recommend to the client the investment services and financial instruments that are suitable for him.
If an investment firm provides other investment services in addition to investment advice or portfolio management, it must apply the suitability test. The investment firm must then ask the client to provide information regarding his knowledge and experience in the investment field relevant to the specific type or product or service offered in order to enable the firm to assess whether the investment services or product envisaged is appropriate for the client.
As set out above, the stringency of the suitability test and the appropriateness test depends on the type of client. The MiFID provides for a lighter regime for professional parties. For instance, an investment firm is entitled to assume that a professional client has the necessary level of experience and knowledge. The suitability test and the appriopriateness test do not apply when providing services to eligible counterparties.
The MiFID contains an exception for execution-only business. Investment firms which provide investment services that only consist of execution and/or the reception and transmission of client orders may provide those services without applying the suitability and the appropriateness test, provided that the following conditions are met:
Best execution
The MiFID provides that, when executing orders, an investment firm must take all reasonable steps to obtain the best possible result for its clients. A variety of factors has to be taken into account when determining the best possible result, such as the price, costs, speed, likelihood of execution and settlement, the size of the order and the nature of the order. When determining the relevant importance of these factors, the investment firm should take account of the classification of the client, the nature of the order and the type of, and venue of execution for, the relevant instrument being traded. Nevertheless, if there is a specific instruction from the client, the investment firm shall execute the order in accordance with that specific instruction.
Investment firms must establish effective arrangements for complying with the best execution obligation. This must include the implementation and periodic review of an order execution policy. Investment firms will be obligated to obtain the prior consent of their clients for their order execution policy. If the policy provides for the possibility that client orders may be executed outside a regulated market or an MTF, the investment firm shall be required to obtain the prior express consent of their clients before proceeding to execute their orders outside a regulated market or an MTF.
The best execution obligation differs depending on the client classification. For retail clients, the best possible result shall be determined in terms of the total consideration, which shall consist of the price of the financial instrument and the costs related to execution. As set out above, the best execution obligation does not apply when providing services to eligible counterparties.
Client order-handling rules
MiFID requires investment firms to implement procedures and arrangements which provide for the prompt, fair and expeditious execution of client orders and in the order that they are received by the firm.
Pre-trade transparency requirements
MiFID introduces the ‘systematic internaliser’. A systematic internaliser is an investment firm which, on an organised, frequent and systematic basis, deals on its own account by executing client orders outside a regulated market or an MTF. Systematic internalisers which deal in shares which are admitted to trading on a regulated market and for which there is a liquid market, are required to publish firm quotes. The pre-trade transparency requirements do not apply to systematic internalisers that only deal in sizes above standard market size.
Systematic internalisers shall execute the orders they receive from their retail clients at the quoted prices at the time of reception of the order. With respect to orders received from professional clients, they execute the orders at a better price in justified cases provided that the price falls within a public range close to market conditions and provided that the orders are of a size bigger than the size customarily undertaken by a retail investor.
MTFs and regulated markets are required to make public current bid and offer prices and the depth of trading interests at those prices for shares admitted to trading.
Post-trade transparency
MiFID requires investment firms which conclude transactions in shares admitted to trading on a regulated market or MTF outside a regulated market or MTF to make public the volume and price of those transactions and the time at which they were concluded. This information must be made public as close to real-time as possible, on a reasonable commercial basis, and in a manner which is easily accessible to other market participants. Similar requirements apply to investment firms and market operators operating an MTF and regulated markets.
Conflicts of interest
MiFID imposes detailed requirements with respect to conflicts of interest on investment firms. Investment firms must take all reasonable steps to identify conflict of interest. In addition, investment firms must maintain and operate effective organisation and administrative arrangements with a view to taking all reasonable steps designed to prevent conflicts of interest from adversely affecting the interests of its clients. When organisational or administrative arrangements made in an investment firm to manage conflicts of interest are not sufficient to ensure, with reasonable confidence, that risks of damage to client interests will be prevented, the investment firm must clearly disclose the general nature and/or sources of conflicts of interest to the client before undertaking business on its behalf.
The authors of this chapter would like to thank Rosanne van Bladeren for her useful basis for this chapter and for her hard work.
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