Markets In Financial Instruments Directive Research Articles

The paradoxical effects of market fragmentation on adverse selection risk and market efficiency

Unlike the US’s Regulation National Market System (RNMS), the EU’s Markets in Financial Instruments Directive (MiFID) does not impose a formal exchange trading linkage or guarantee a best execution price. This raises concerns about consolidated market quality in increasingly fragmented European markets. We investigate the impact of visible trading fragmentation on the quality of the London equity market and find a non-linear relationship between fragmentation and adverse selection risk. At moderate levels of fragmentation, order flow competition reduces adverse selection risk and enhances market efficiency by reducing arbitrage opportunities. Contrarily, high levels of fragmentation heighten adverse selection issues.

ICOs, Cryptoassets and MiFID II: Are Tokens Transferable Securities?

Following the recent popularity of Initial Coin Offerings (ICOs) as a form of obtaining funds in the financial market on the one hand and investment opportunity on the other, and related investor protection concerns, regulatory issues arise. The crucial question relates to the legal nature of tokens as units issued through an ICO under the EU capital markets regulatory regime. Especially, when certain categories of tokens, namely asset tokens, have similar characteristics as conventional securities. The present paper deals with the following research question: Shall such tokens be regarded as transferable securities within the meaning of the Markets in Financial Instruments Directive II, as well as implementing national legislations? Based on the analysis of the defining characteristics of transferable securities, the paper provides the positive answer. Indeed, the asset tokens should be regarded as transferable securities within the meaning of MiFID II and treated like that at the EU level, because they generally meet the defining characteristics of this category of financial instruments. Moreover, due to the autonomous interpretation of EU law concept of a transferable security, this conclusion applies to the specific national implementing legislation as well, irrespective whether the asset tokens are considered as securities or book-entry securities under the Member State’s general law.

High-Frequency Traders and Single-Dealer Platforms

High-frequency traders (HFTs) mainly operate on public exchanges where multiple third-party buying and selling interests interact with each other. Following recent European regulatory changes (the Markets in Financial Instruments Directive II), HFT single-dealer platforms have emerged on which HFTs conduct bilateral trading as dealers. We find that trading on HFT dealer platforms is detrimental to liquidity on public stock exchanges. HFTs manage inventory imbalances from their dealer operations by trading more aggressively, and reducing their liquidity supply on exchanges, which harms liquidity.

Market in Financial Instruments Directive (MiFID), stock price informativeness and liquidity

Abstract The paper examines the impact of MiFID on stock price informativeness and liquidity in 28 EU countries. We find that post-MiFID the stock prices reflect greater firm specific information and the market becomes more liquid. Consistent with the ‘Catch-up Hypothesis’ our evidence shows that the impact of MiFID in terms of price informativeness is greater for countries that have weaker quality of regulation. We find that regulation with enforcement improves market efficiency. Our results are robust with respect to the choice of price informativeness and liquidity proxies as well as the control sample.

Informational effects of MiFID: the case of equity analysts

ABSTRACTWe conduct an event study spanning the period from 2004 to 2013 to examine the information content of financial analysts’ stock recommendation revisions before and after implementation of the European Markets in Financial Instruments Directive in 2007 (MiFID). We find that, compared to the pre-MiFID period, stock recommendations issued by investment bank analysts are more informative in the post-MiFID period. Further, exploiting a difference in how MiFID addresses analyst-specific conflicts of interest, we show that MiFID has widened the gap in informational content between recommendations issued by investment bank analysts and those issued by independent brokerage firm analysts, with the former having significantly higher stock price impact than the latter. Overall, our findings suggest that investors perceive MiFID as effective in mitigating biases in investment bank analysts’ research and that investors are well aware of remaining adverse incentives facing independent analysts, and discount their recommendations accordingly.

Reducing Legal Uncertainty and Regulatory Arbitrage for Robo-Advice

Robo-advisers are online financial adviser services that use algorithms to create investment recommendations without human input. They deliver advice at low costs and they are growing in popularity. However, the nature of the interaction between client and machine raises many legal questions under the applicable EU regulation. This article argues that robo-advisers provide investment advice within the meaning of the Second Markets in Financial Instruments Directive (MiFiD2). They are subject to authorisation by the national regulator and ongoing conduct requirements. It might be tempting to introduce regulatory sandboxes to address the persisting legal uncertainties in practice, but such a regulatory change does not seem likely in the near future. Instead, regulatory arbitrage should be reduced by a uniform application of the MiFiD2 framework throughout the EU. Regulators and courts should also be aware that software replacing human advisers diverges from the basic idea of human interaction that forms the basis of contract law. Investment firms are able to use new technology in the services they provide. However, as this means introducing new risks for investors, the investment firm should be subject to a strict liability regime for failures of the respective technology (for example, the unavailability of the service).

Reducing Legal Uncertainty and Regulatory Arbitrage for Robo-Advice

Robo-advisers are online financial adviser services that use algorithms to create investment recommendations without human input. They deliver advice at low costs and they are growing in popularity. However, the nature of the interaction between client and machine raises many legal questions under the applicable EU regulation. This article argues that robo-advisers provide investment advice within the meaning of the Second Markets in Financial Instruments Directive (MiFiD2). They are subject to authorisation by the national regulator and ongoing conduct requirements. It might be tempting to introduce regulatory sandboxes to address the persisting legal uncertainties in practice, but such a regulatory change does not seem likely in the near future. Instead, regulatory arbitrage should be reduced by a uniform application of the MiFiD2 framework throughout the EU. Regulators and courts should also be aware that software replacing human advisers diverges from the basic idea of human interaction that forms the basis of contract law. Investment firms are able to use new technology in the services they provide. However, as this means introducing new risks for investors, the investment firm should be subject to a strict liability regime for failures of the respective technology (for example, the unavailability of the service).

Product Governance: Paternalism Outsourced to Financial Institutions?

High ranking in the top ten of challenges for the financial sector in 2018 was the entry into force of the second version of the Markets in Financial Instruments Directive (MiFID II). Among the most striking novelties in MiFID II are without doubt the product governance rules, which to this day cause a lot of interpretation and implementation difficulties. They introduce a kind of “know-your-customer” requirements at product level: both in the design and the distribution phase of a product, the target market for that product is to be identified. As a result product manufacturers and distributors need to properly understand all product features and assess for what type of clients those products could be suited. Those product governance rules should prevent that products are sold or recommended to investors for whom they are not intended and come on top of pre-existing measures, such as the suitability and appropriateness assessments. Although the aim of the product governance rules is commendable, the new regime is far from perfect. After briefly describing the MiFID II rules on product governance for product manufacturers and product distributors, this contribution discusses four major shortcomings: the limited personal scope of application of the regime and its inconsistency with the PRIIPs Regulation; the difficulties for product distributors in defining a target market for the mass of products manufactured by manufacturers not subject to MiFID; the compliance burden for distributors relating to the requirement to give feedback to manufacturers; and the problem of self-censorship by financial institutions. Each of these shortcomings result in reductions of the product offer for investors, without a correspondent increase in investor protection. The contribution offers concrete proposals for amendment of the PRIIPs Regulation and the ESMA Product Governance Guidelines to remedy those shortcomings. The contribution concludes that even though this may not have been the intent of the legislator, the effects of the MiFID II product governance regime represent nothing less than a paternalistic revolution. The author argues that, without losing the potential benefits of the product governance rules as a means of investor protection, the proposed amendments would result in an improved scope of the product governance rules, alleviate the compliance burden for distributors and allow the product governance rules to get rid of their paternalistic edge.

Standardisation put to the test: How reference data standards have evolved in an era of unprecedented regulatory and technological change

Reference data standards are the backbone to financial markets, providing a single source of truth for security and entity identification that is universally accessible whether market participants are working with equities, fixed income or derivatives. That reliability and consistency are constantly challenged by the forces of regulatory and technological change, which have pushed standards bodies and national numbering agencies around the world to continually innovate around existing standards and press forwards to develop new ones that meet the evolving needs of the marketplace. This paper chronicles the refinement of existing standards and the development of new standards over the last decade, spotlighting the evolution of the international securities identification number (ISIN) to identify derivatives in the post Markets in Financial Instruments Directive II (MiFID II) marketplace, the development of the legal entity identifier (LEI) in response to the failure of Lehman Brothers, the growing use of existing standards in the blockchain ecosystem and the ongoing development of a standardised approach to syndicated loan identification.

Regulated Markets. Trading Venues.

In publication 2020-21,01 we dealt mainly with regulated markets with a look at the historical evolution over the last 30 years of the legislative framework that involved services and organizations. The introduction of legislative provisions aimed at harmonizing the regulation of markets, venues for the negotiation of financial instruments, at European level takes place with Directive 93/22/EEC with which the European Commission issues the first complete definition of regulated markets; the same definition refers to the directive 79/297/CEE for the conditions of admission to the quotation and to the directive 83/349/CEE for the control, relative to the consolidated accounts. A previous and less complete definition is issued with the directive 89/592/CEE which concerns the protection of regulated markets at a community level. We have been interested in the evolution of the dynamics concerning the market abuses that in a first phase have concerned the Community legislation regarding the abuse of insider trading (privileged information), subsequently, 14 years later, extended common legislative provisions are introduced for the protection of the market in consideration of the same evolution, provisions that consider market abuse to include not only abuse of privileged information but also market manipulation. We carried out a study of the MiFID II directive (Market in Financial Instruments Directive), the 2014/65/EU directive and related updates with reference to the regulated markets which must be applied together with the MiFIR regulation (Markets in financial instruments regulation), the Regulation (EU) 600/2014, which is also the subject of our studies. We are interested in the requirements applicable to regulated markets, negotiation and transparency, the obligation to negotiate OTC derivatives subject to the clearing obligation established by the EMIR regulation and belonging to a category for which ESMA has declared the obligation to negotiation. Interesting observations regarding services were possible with this study: the similarity between the financial services required for payment transactions with electronic money, excluding the exceptions sanctioned by the PSD2 directive, with the services necessary for the operations of investment, considered the exceptions sanctioned by the MiFID II directive; for example for an IDP it is possible to have direct access to the trading venues (negotiation code) by possessing the infrastructure and connections that allows it to operate as a participant or member in application of Article 53 paragraph 3, alternatively can invest through an investment company (that provides an electronic direct access and that includes infrastructure and connections or sponsored access, without infrastructure and connections). We took a look at payment systems both with systemic relevance and without, with particular interest in payment and securities settlement systems regulated at EU level through directive 98/26/EC as amended by directive 2009/44/EC; we are interested in the financial guarantee contracts and therefore in the directive 2002/47/CE as well as the common provisions for the comparability and transfer of the payment account with particular attention to the provisions issued by the directive 2014/92/EU for access to the accounts of payment with basic characteristics that for Italy in implementation of the decree-law adopting the directive, number 37 of 15 March 2017, they have also been extended to the payment institution and electronic money as well as to credit institutions.

Regulating initial coin offerings and DAO tokens under the EU’s financial instruments framework

Much has been written already about virtual currencies primarily serving as means of payment, such as bitcoin. However, it is becoming clear that the success of such virtual currencies on the payments market is limited at best. More and more, they are being used as a means of investment, with investors speculating on their often dramatic value fluctuations. Moreover, a new class of virtual currencies has emerged that serves primarily or even only as a means of investment. These virtual currencies, generally issued through what is called an “Initial Coin Offering” or as part of a decentralized autonomous entity, may have to be regarded from the perspective of securities laws, rather than from the perspective of payments laws. This paper analyses a few of those investment virtual currencies and assesses them from the perspective of the EU’s Markets in Financial Instruments Directive.

Why MiFID & MiFID II Do (not) Matter to Private Law: Liability to Compensate for Investment Losses for Breach of Conduct of Business Rules

The role of enforcement by civil courts of the Markets in Financial Instruments Directive (MiFID) and MiFID II conduct of business in contributing to retail investor protection is often overlooked at the EU level. The EU legislator, primarily, focuses on the harmonization of public enforcement by supervisory authorities through administrative law means. However, it can be argued that the (relative) lack of attention for judicial enforcement through private law means does not do justice to this enforcement avenue. This article, therefore, explores the potential of judicial enforcement through holding investment firms liable to pay damages on the basis of national private law to contribute to retail investor protection. The aim of the article is to establish the extent to which retail investors can invoke the MiFID and MiFID II conduct of business rules and, thereby, benefit from these rules in claiming damages. The article will argue, in the first place, that MiFID and MiFID II leave intact the freedom of Member States and civil courts to shape the effect of a breach of the conduct of business rules contained therein on a firm’s private law liability to pay damages. However, that does not mean that the MiFID and MiFID II conduct of business rules are of no relevance to a firm’s liability on the basis of national private law. The article will show that the private law regimes of the Netherlands, England & Wales, and Germany contain distinct avenues of judicial enforcement of the MiFID and MiFID II conduct of business rules through private law liability, which can significantly contribute to retail investor protection.

Review of the EU prudential rules for investment firms: The practical implications for fund and asset management firms

In December 2017, the European Commission proposed a review of the prudential rules for investment firms, with the aim of introducing more proportionate, risk-sensitive rules and further distinction between those firms that need to continue to be within the scope of the Capital Requirement Directive/Capital Requirement Regulation (CRD/CRR) regime and those that merit a more specific, tailor-made regime. This paper presents an in-depth analysis of the changes that are introduced by the proposals, one which sheds some light on the practical implications they may have for fund and asset management firms. Under the new prudential regime, investment firms will fit into one of three categories, the first one containing those institutions that will continue to be regulated according to the CRD and CRR, and the second and third tier containing investment firms of differing size and complexity. Those in the second and third tier will be brought within the proposed new regime, namely the Investment Firm Directive (IRD) and the Investment Firm Regulation (IRR). The European Fund and Asset Management Association (EFAMA) believes a new regime with a simpler set of requirements for ratio of capital, liquidity and other indicators should be more tailored to different firms’ risk profile and business. In that way, the right balance can be achieved between protecting investors’ interests and the oversight function of national competent authorities and the capacity of investment firms to provide services to capital markets and customers. Although EFAMA welcomed the Commission’s proposal, the European association suggests further improvements that could help achieve this balance. Numerous sections of the proposal still mirror requirements intended for credit institutions, which should not be carried over into the new regime. The paper also touches on specific points for improvements from the perspectives of the limited MiFID (Markets in Financial Instruments Directive)-licensed asset management companies, including firm categorisation, the treatment of ‘limited authorisation firms’, group consolidation, ‘K-factor’ formula approach, liquidity requirements and remuneration rules, reporting and supervisory powers.

Modele doradztwa inwestycyjnego w dyrektywie MiFID II

The article discusses changes brought by Markets in Financial Instruments Directive II (MiFID II) in the area of investment advisory services. According to the new regulation, investment advice can be provided by an investment company on an independent and non-independent basis. The aim of the article is to point out the reasons behind the introduction of two models of investment advice, including discussing the conflicts of interest of an investment company and its client. In addition, two models of investment advice and the consequences of the new regulation will be presented.

The effectiveness of MiFID provisions for professional clients: a critical review

Purpose This paper aims to identify the duty of care that applies to ‘professionally classified clients’ based on the recently implemented Markets in Financial Instruments Directive II (MiFID II) as well as the previous Markets in Financial Instruments Directive I (MiFID I). The authors place critical notes on the effectiveness of some MiFID provisions. Design/methodology/approach The authors have reviewed the Delegated Acts of MiFID I and II, as well as Q&A’s of the European Regulator, ESMA and jurisprudence. The authors aim to add value by facilitating a discussion on the effectiveness of applicable MiFID provisions. Findings This review of the legal provisions provides researchers and practitioners in the investment sectors with a clear overview of the legal provisions detailing how these provisions should be met and how improvements to the provisions can be achieved. Practical implications This paper specifies what the provisions for professional classified clients are and facilitates a discussion on the effectiveness of these provisions. Originality/value Addressing the legal provisions which are applicable to ‘professional classified clients’ that derive from MiFID I and II and includes a critical analysis which offers an original perspective.

The underwriting and placement passport and Brexit

The importance of the UK and London as a financial centre and the cross-border nature of underwriting services and the lack of national regulation means Brexit will be a difficult challenge for regulators and market participants, both within Europe and other third-country financial centres. Investment services (6) and (7) in the Markets in Financial Instruments Directive (MIFID) are a creation of the European single market. Outside of the passported context, these combined services are regulated separately or within more broad definitions. As combined services, they are not regulated on a cross-border basis within Europe. This paper summarises the history of the European passport for underwriting and placing services, the challenges in how it is regulated on a cross-border basis and offers ideas on how they can be addressed.

Crypto-assets: Commodities under European financial markets law?

This paper sheds light on the legal nature of crypto- assets in capital markets law. There is currently no generally accepted legal definition of the terms ‘crypto–assets’ or ‘cryptocurrency’ aside from the term ‘virtual currency’ in the 5th Anti-Money Laundering Directive. While it is clear that cryptoassets performing payment functionalities are not considered legal tender in the sense of government sanctioned currencies, the question remains whether or not crypto-assets should be considered goods in the context of the European fundamental freedoms and/or commodities in the sense of European capital markets law. This classification, however, bears significant ramifications in various legal areas that are explored in this paper. It will be shown that crypto-assets are goods subject to the freedom of movement of goods guaranteed by articles 28 to 37 TFEU (Treaty on the Functioning of the European Union). On the other hand the authors propose that crypto-assets should not be considered to fall within the definition of commodities as used in capital markets law (eg, MIFID [Markets in Financial Instruments Directive] I and II, Benchmark-Regulation, etc) and are therefore not subject to the regulatory consequences of this qualification, such as potential regulation of market places as commodity exchanges or regulatory reporting obligations related to commodity derivatives.

A Bank’s Duty of Care: Perspectives from European and Comparative Law – Part I

In this article we place a bank’s duty of care in a European and comparative law perspective. We have chosen five topics which are hotly debated in theory and practice. The first topic is the scope and intensity of the essential duties which typically flow from a bank’s duty of care: duties to investigate, duties to disclose or warn, and – in exceptional cases – outright duties to refuse to render financial services or products. In some jurisdictions, financial disputes between investors and banks are not so much resolved by reference to a bank’s duty of care, but by reference to the traditional doctrine of error or mistake, and fraud. That is the second topic we discuss in this article. The third topic is the impact of the European Markets in Financial Instruments Directive (MiFID) on a banks’ duty of care. The fourth topic focuses on the role of the financial regulator in settling disputes between banks and clients. We conclude this article with the bigger picture and relevant reform perspectives

A Bank’s Duty of Care: Perspectives from European and Comparative Law – Part II

In this article we place a bank’s duty of care in a European and comparative law perspective. We have chosen five topics which are hotly debated in theory and practice. The first topic is the scope and intensity of the essential duties which typically flow from a bank’s duty of care: duties to investigate, duties to disclose or warn, and – in exceptional cases – outright duties to refuse to render financial services or products. In some jurisdictions, financial disputes between investors and banks are not so much resolved by reference to a bank’s duty of care, but by reference to the traditional doctrine of error or mistake, and fraud. That is the second topic we discuss in this article. The third topic is the impact of the European Markets in Financial Instruments Directive (MiFID) on a banks’ duty of care. The fourth topic focuses on the role of the financial regulator in settling disputes between banks and clients. We conclude this article with the bigger picture and relevant reform perspectives.

Índice de Calidad Financiera (ICF)

Una vez desencadenada la crisis económica que comenzó a mediados del año 2007, las autoridades financieras, así como los gobiernos de las principales economías del mundo desarrollado, comenzaron a enfatizar la importancia de anticipar y estimar los riesgos financieros sistémicos por sobre los riesgos de un determinado sector. Más allá de la solidez macroeconómica, los países estarán mejor preparados para convivir con la volatilidad potencial de las afluencias de capital si tienen mercados de renta variable de mayor calidad. Asimismo, la nueva directiva europea MIFID II (Markets in Financial Instruments Directive) que entrará en vigor a partir de enero de 2018, se inspira en las premisas de la seguridad, eficacia y transparencia del mercado hacia los inversores. El actual trabajo pretende desarrollar un indicador que refuerce y mida la calidad del mercado español, en particular el de renta variable, mediante el desarrollo de un nuevo indicador llamado ICF (Índice de Calidad Financiera) que muestra, de una manera objetiva, el grado de madurez y estabilidad del mercado.