COMMISSION STAFF WORKING PAPER IMPACT ASSESSMENT
Date: 2011-10-20
Institutions: European Commission
Subjects: administrative check, consumer protection, credit institution, financial instrument, free competition, investment company, official market, provision of services, securities

EUROPEAN COMMISSION 

Brussels, 20.10.2011 
SEC(2011) 1226 final 

COMMISSION STAFF WORKING PAPER 

IMPACT ASSESSMENT  

Accompanying the document 

Proposal for a  

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL  

on Markets in financial instruments [Recast] 

and the  

Proposal for a  

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL  

on Markets in financial instruments 

{COM(2011) 656 final} 
{SEC(2011) 1227 final} 

EN 

   EN 

 
 
 
 
  
 
 
 
 
 
 
 
 
 
COMMISSION STAFF WORKING PAPER 

IMPACT ASSESSMENT  

Accompanying the document 

Proposal for a  

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

Markets in financial instruments [Recast] 

and the 

Proposal for a  

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

Markets in financial instruments 

1 

 
 
  
 
 
 
 
 
 
1. 

2. 

2.1. 

2.2. 

2.3. 

2.4. 

2.5. 

3. 

3.1. 

3.2. 

3.3. 

3.4. 

3.5. 

3.6. 

3.7. 

3.8. 

3.9. 

4. 

4.1. 

4.2. 

4.3. 

5. 

6. 

6.1. 

6.2. 

TABLE OF CONTENTS 

Introduction .................................................................................................................. 3 

Procedural issues and consultation of interested parties .............................................. 6 

Public consultation....................................................................................................... 7 

CESR (now ESMA) reports ......................................................................................... 7 

External studies ............................................................................................................ 7 

Steering Group ............................................................................................................. 7 

Impact Assessment Board ............................................................................................ 7 

Policy context, Problem Definition, Baseline scenario and Subsidiarit....................... 8 

Problem definition........................................................................................................ 8 

Problem 1: lack of level playing field between markets and market participants ..... 10 

Problem 2: Difficulties for SMEs to access financial markets .................................. 11 

Problem 3: Lack of sufficient transparency for market participants.......................... 12 

Problem 4: Lack of transparency for regulators and insufficient supervisory powers 
in key areas and inconsistent supervisory practice .................................................... 13 

Problem 5: Existence of areas in which investor protection has revealed deficiencies15 

Problem 6: Weaknesses in some areas of the organisation, processes, risk controls 
and assessment of some market participants.............................................................. 17 

How would the problem evolve without EU action? The base line scenario ............ 18 

Subsidiarity and proportionality................................................................................. 19 

Objectives................................................................................................................... 20 

General, specific and operational objectives.............................................................. 20 

Consistency of the objectives with other EU policies................................................ 22 

Consistency of the objectives with fundamental rights.............................................. 23 

Policy options............................................................................................................. 23 

Analysis of impacts and choice of preferred options and instruments....................... 32 

Regulate appropriately all market structures and trading practices taking into account 
the needs of smaller participants, especially SMEs ................................................... 33 

Regulate appropriately new trading technologies and address any related risks of 
disorderly trading ....................................................................................................... 37 

6.3. 

Increase trade transparency for market participants................................................... 39 

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6.4. 

6.5. 

6.6. 

6.7. 

6.8. 

6.9. 

7. 

7.1. 

7.2. 

7.3. 

7.4. 

7.5. 

7.6. 

7.7. 

8. 

8.1. 

8.2. 

9. 

9.1. 

9.2. 

9.3. 

9.4. 

9.5. 

10. 

11. 

Reinforce regulators' powers and consistency of supervisory practice at European 
and international levels .............................................................................................. 42 

Reinforce transparency towards regulators................................................................ 46 

Improve transparency and oversight of commodities markets .................................. 48 

Broaden the scope of regulation on products, services and providers under the 
directive when needed................................................................................................ 51 

Strengthen rules of business conduct for investment firms ....................................... 52 

Strengthen rules of organisational requirements for investment firms ...................... 56 

The preferred policy options and instrument ............................................................. 58 

The preferred policy options ...................................................................................... 58 

The choice of instruments to ensure an efficient revision of MiFID ......................... 58 

Impact on retail investors and SMEs ......................................................................... 61 

Impact on third countries/ impact on EU competitiveness ........................................ 61 

Social impact.............................................................................................................. 62 

Impact on fundamental rights..................................................................................... 63 

Environmental impact ................................................................................................ 63 

Estimate of impact in terms of compliance costs and administrative burden ............ 64 

Estimated overall compliance costs ........................................................................... 64 

Estimate of impact in terms of administrative burden ............................................... 64 

Estimate of impact in terms of indirect economic effect ........................................... 65 

Trading of clearing eligible and sufficiently liquid derivatives on organised trading 
platforms .................................................................................................................... 65 

Extension of the trade transparency regime for equities to shares traded only on 
MTFs or other organised trading facilities................................................................. 66 

Trade transparency in non-equity markets................................................................. 66 

Consolidation of post-trade data in the equities and non-equities markets................ 67 

Ban inducements in the case of investment advice provided on an independent basis 
and in the case of portfolio management ................................................................... 68 

Monitoring and evaluation ......................................................................................... 69 

ANNEXES: Table of contents ................................................................................... 71 

1. 

INTRODUCTION  

The  issuance  and  trading  of  financial  instruments  is  essential  to  ensure  the  availability  of 
capital in the economy and to ensure capital is efficiently allocated. Financial instruments are 

3 

 
 
  
 
used by economic agents such as companies to raise funds, e.g. for growth and innovation, or 
investors  to  invest  their  financial  surplus  and  seek  financial  returns.  They  are  also  used  by 
entities to manage risks. Together with the services provided e.g. by banks, payment-service 
providers and clearing and settlement infrastructures, the market in financial instruments is a 
backbone of a modern economy and essential to feed economic growth and innovation.  

Like any market, financial markets need rules to function. The EU rules governing the market 
in  financial  instruments  are  set  out  in  .  the  Markets  in  Financial  Instruments  Directive 
(MiFID. Applied since November 2007 (3,5 years), it is a core pillar of EU financial market 
integration. Adopted in accordance with the "Lamfalussy" process1, it consists of a framework 
Directive  (Directive  2004/39/EC)2,  an  Implementing  Directive  (Directive  2006/73/EC)3  and 
an Implementing Regulation (Regulation No 1287/2006)4. This impact assessment focuses on 
the revision of the framework Directive 2004/39/EC while outlining when needed the possible 
changes in the implementing legislation which would follow at a later stage. Separate impact 
assessments will be carried out for subsequent changes to implementing legislation. 

MiFID  establishes  a  regulatory  framework  for  the  provision  of  investment  services  in 
financial instruments (such as brokerage, advice, dealing, portfolio management, underwriting 
etc.)  by  banks  and  investment  firms  and  for  the  operation  of  regulated  markets  by  market 
operators.  It  also  establishes  the  powers  and  duties  of  national  competent  authorities  in 
relation to these activities. Due to the level of risks generated by financial activities, the rules 
governing the market in financial instruments need to be robust, targeted and proportionate. In 
appropriate cases, they need to be precautionary. After the 2008 financial crisis, the G20 has 
clearly  signalled  that  "less  is  more"  is  no  longer  a  valid  maxim  in  financial  regulation, 
whether in relation to lending to consumers, securitisation and repackaging of risks by banks, 
or oversight of professional investors and trading of financial instruments including complex 
instruments. In particular:  

- 
The financial crisis has woken the world to the issue of counterparty risk, notably with 
regards  to  over  the  counter  (OTC)  derivatives.  The  failure  of  a  counterparty  in  a  derivative 
transaction  not  only  leave  unhedged  the  counterparty  but  could  also  have  systemic 
consequences  for  the  whole  financial  system.  This  issue  is  being  addressed  in  EMIR  by 
introducing central counterparties to better manage this risk. 

The  crisis  also  demonstrated  that  financial  institutions  are  not  always  adequately 
- 
capitalised  to  be  able  to  face  adverse  circumstances.  The  Capital  Requirements  Directive 
seeks  to  legally  underpin  international  agreements  to  ensure  that  the  financial  system  as  a 
whole is better capitalised to face future risks.  

- 
There are also undesirable trading products or practices, which competent authorities 
have been unable to act against. This is partly due to insufficient transparency, and partly to a 
lack  of  legal  tools  to  fight  market  abuse.  The  issue  of  transparency  and  the  possibility  of 
product bans is taken up in MiFID. The legal framework will be strengthened in the review of 
the Market Abuse Directive. 

While  MiFID  has  sought  to  introduce  competition  between  trading  venues,  such 
- 
competition  has  been  limited  by  lack  of  competition  in  the  post  trading  infrastructure  field. 
Clearing  and  settlement  practices  can  limit  investors'  ability  to  choose  between  platforms. 
This  issue  will  be  addressed  in  MiFID,  EMIR  and  the  proposal  on  central  securities 
depositories. 

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The overarching objective of MiFID has been to further the integration, competitiveness, and 
efficiency of EU financial markets. MiFID is predicated on a series of key principles: cross-
border  competition  between  investment  firms  and  trading  venues  on  a  level-playing  field, 
market transparency, non-discriminatory and equal treatment of market participants, diligent 
corporate governance and avoidance of conflicts of interest by intermediaries, and suitable as 
well  as  effective  protection  of  investors.  In  concrete  terms,  it  abolished  the  possibility  for 
Member  States  to  require  all  trading  in  financial  instruments  to  take  place  on  specific 
exchanges  and  enabled  Europe-wide  competition  between  traditional  exchanges  and 
alternative venues. It also granted banks  and investment firms a strengthened  "passport" for 
providing investment services across the EU subject to compliance with both organisational 
and  reporting  requirements  as  well  as  comprehensive  rules  designed  to  ensure  investor 
protection. 

The  result  after  3.5  years  in  force  is  more  competition  between  venues  in  the  trading  of 
financial  instruments,  and  more  choice  for  investors  in  terms  of  service  providers  and 
available  financial  instruments,  progress  which  has  been  compounded  by  technological 
advances. Overall, transaction costs have decreased and integration has increased5. 

However, some problems have surfaced. First, the more competitive landscape has given rise 
to  new  challenges.  The  benefits  of  open  competition  in  trading  financial  instruments  and 
accessing new markets have thus far mostly flowed to intermediaries, institutional investors 
(such  as  funds)  and  nimble  traders  with  the  technology  necessary  to  exploit  differences 
between markets, not fully to the issuers and end retail investors.  The market fragmentation 
implied  by  competition  has  also  made  the  trading  environment  more  complex,  especially  in 
terms of collection of trade data. Second, regulation is always a few steps behind the market 
reality,  and  the  detailed  rules  upholding  the  core  precepts  above  need  to  be  periodically 
bolstered.  Market  and  technological  developments  have  outpaced  various  provisions  in 
MiFID. The common interest in a transparent level playing-field between trading venues and 
investment  firms  risks  being  undermined.  Third,  MiFID  suffers  from  the  misplaced 
assumption that professional investors know what is best for themselves and the market as a 
whole, so that there could be minimal oversight of complex wholesale markets. The financial 
crisis  has  exposed  weaknesses  in  the  regulation  of  instruments  other  than  shares,  traded 
mostly between professional investors. Eventually, rapid innovation and growing complexity 
in  financial  instruments  underline  the  importance  of  up-to-date,  high  levels  of  investor 
protection.  While  largely  vindicated  amid  the  experience  of  the  financial  crisis,  the 
comprehensive  rules  of  MiFID  nonetheless  exhibit  the  need  for  targeted  but  ambitious 
improvements. 

The  implementation  of  MiFID  coincides  with  the  onset  of  the  financial  crisis  and,  as  ever, 
rapid innovation in financial services. As a result, its effects are virtually impossible to assess 
in  isolation  from  the  latter.  For  example,  institutional  investors  increasingly  seek  to  escape 
pre-trade  transparency  and  hide  their  trading  intentions  from  the  public.  Is  this  due  to 
uncertainty  caused  by  the  crisis,  technical  solutions  presented  by  investment  firms  for 
managing  their  orders  in  private,  or  to  fragmentation  of  trading  between  venues  and  a 
reduction in trade size hastened by MiFID-induced competition? Or do the available waivers 
from  pre-trade  transparency  not  properly  address  the  splitting  of  large  trades  into  small 
orders? Or is it due to all of the above? Would liquidity and resilience in non-equity markets 
have been better or worse amid the crisis with more comprehensive transparency rules under 
MiFID? 

However  MiFID  underlying  principles  remain  valid.  Cross-border  pan-EU  competition  is 
more conducive to efficient allocation than national markets. A fragmentation of liquidity is 

5 

 
 
  
 
not anathema to fair and efficient price discovery provided all markets play by the same rules 
and  transparency  is  effective.  Different  investors  need  different  degrees  of  protection. 
Investors  should  be  able  to  be  served  by  trustworthy  market  participants  from  across  the 
Union.  Investment  firms  and  trading  venues  need  to  abide  by  strong  organisational  rules  in 
order to avoid market disorder or excessive volatility  in some asset-classes from undermining 
trust in all financial instruments – and in the ability of the economy to finance itself. 

The review of MiFID needs to consider this backdrop. Wholesale repairs like those to parts of 
the financial system linked more directly to the crisis, e.g. bank capital or resolution, are not 
required.  A  comprehensive  review  of  the  underlying  precepts  and  basic  building  blocks  of 
MiFID is neither necessary nor appropriate only some years after it entered into force. Since 
experience  amid  the  crisis  and  technological  developments  in  recent  years  have  neither 
entirely  vindicated  nor  invalidated  its  basic  precepts  or  provisions,  an  approach  targeted  at 
fixing visible flaws is proposed instead. Nonetheless this exercise will be broad in scope as it 
touches upon a diverse set of issues and will affect a broad range of stakeholders. 

It has been decided to address all these issues through one single legislative initiative for three 
main  reasons.  First,  MiFID  is  a  comprehensive  regulatory  framework  in  which  various 
provisions depend on one another. In tackling some of the challenges separately from others 
we could lose sight of the overall picture, and negatively affect the integrity and clarity of this 
regulatory  framework.  Second,  a  series  of  incremental  reviews  with  multiple,  overlapping 
procedures and objectives could put more strain on the resources of stakeholders and reduce 
their  chances  of  contributing  towards  a  balanced  outcome.  Finally,  in  view  of  rapid  and 
ongoing  technological  developments,  to  adopt  an approach  for  reviewing  the  functioning  of 
certain markets, such as for example those in equities, under a different lens compared with 
markets  in  other  instruments  would  not  be  efficient.  Phenomena  which  may  occur  in  one 
market today may emerge in others tomorrow, and our regulatory framework should be both 
comprehensive and flexible in this respect.  

In conclusion, the revision of MiFID is an integral part of the reforms aimed at establishing a 
safer,  sounder,  more  transparent  and  more  responsible  financial  system  working  for  the 
economy and society as a whole in the aftermath of the financial crisis.6 It is also an essential 
vehicle for delivering on the G207 commitment to tackle less regulated and more opaque parts 
of the financial system, and improve the organisation, transparency and oversight of various 
market  segments,  especially  in  those  instruments  traded  mostly  over  the  counter  (OTC)8, 
complementing the legislative proposal on OTC derivatives, central counterparties and trade 
repositories9. 

Last,  in  line  with  proposals  from  the  de  Larosière  group  and  ECOFIN,10  the  EU  has 
committed to minimise, where appropriate, discretions available to Member States across EU 
financial services directives. This is a common thread across all areas covered by the review 
of MiFID and will contribute to establishing a single rulebook for EU financial markets, help 
further  develop  a  level  playing  field  for  Member  States  and  market  participants,  improve 
supervision and enforcement, reduce costs for market participants, and improve conditions of 
access and enhance global competitiveness of the EU financial industry11. 

2. 

PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES 

The  proposal  for  a  revision  of  MiFID  and  its  impact  assessment  has  been  prepared  in 
accordance with the Commission's better regulation principles. They take into consideration 
the views expressed in a public consultation from 8 December 2010 to 2 February 2011. They 

6 

 
 
  
 
also  take  account  of  input  obtained  through  extensive  meetings  with  a  broad  range  of 
stakeholder  groups  since  December  2009.  Finally,  the  proposal  takes  into  consideration  the 
observations and analysis contained in the documents and technical advice published by the 
Committee  of  European  Securities  Regulators  (CESR),  now  the  European  Securities  and 
Markets Authority (ESMA). 

2.1. 

Public consultation  

Commission services have held several ad hoc and organised meetings with representatives of 
market  participants,  public  authorities,  and  other  stakeholders  on  issues  included  in  the 
revision  of  MiFID.  Six  targeted  roundtables  were  organised  between  December  2009  and 
January  201012.  A  large  and  well-attended  public  hearing  was  held over  two  days  on  20-21 
September  201013.  A  summary  of  this  hearing  can  be  found  in  Annex  12.  Between  8 
December 2010 and 2 February 2011 a public consultation was organised to which over 4200 
contributions  were  received.  The  non-confidential  contributions  can  be  consulted  on  the 
Commission's website14. The outcome of the consultation has been summarised in Annex 13. 

2.2.  CESR (now ESMA) reports 

CESR was granted an informal mandate on 2 March 2010. CESR published several reports on 
MiFID related issues during the course of 201015.  

2.3.  External studies  

Two studies16 have been commissioned from external consultants in order to prepare for the 
revision of the MiFID. The first one which was requested from PriceWaterhouseCoopers on 
10  February  2010  and  received  on  13  July  2010,  focused  on  data  gathering  on  market 
activities and other MiFID related issues. The second, from Europe Economics mandated on 
the 21 July 2010 after an open call for tender, received on 23 June focused on a cost benefit 
analysis  of  the  various  policy  options  to  be  considered  in  the  context  of  the  revision  of 
MiFID. 

2.4. 

Steering Group  

The Steering Group for this Impact Assessment was formed by representatives of a number of 
services of the European Commission, namely the Directorates General Internal Market and 
Services,  Competition,  Agriculture,  Climate,  Economic  and  Financial  Affairs,  Energy, 
Industry  and  Entrepreneurship,  Health  and  Consumers,  Justice,  Trade,  Taxation,  Digital 
Agenda,  Development,  the  Legal  Service  and  the  Secretariat  General.  This  Group  met  3 
times,  on  10  December  2010,  11  January  2011  and  14  February  2011.  The  contributions  of 
the members of the Steering Group have been taken into account in the content and shape of 
this impact assessment17.  

2.5. 

Impact Assessment Board  

DG  MARKT  services  met  the  Impact  Assessment  Board  on  18  May  2011.  The  Board 
analysed  this  Impact  Assessment  and  delivered  its  opinion  on  23  May[  2011.  During  this 
meeting the members of the Board provided DG MARKT services with comments to improve 
the content of the Impact Assessment that led to some modifications of this final draft. These 
are:  

–  improved  presentation  of  the  initiative's  overall  context,  as  well  as  the  different  set  of 
issues  adressed  in  this  initiative  by  clarifying  the  link  with  other  international  or  EU 

7 

 
 
  
 
initiative (including a more precsise assessment of the differences and similarities with the 
US) and prioritising the different issues; 

–  improved  analysis  of  the  problems  by  further  specifying  the  magnitude  of  the  problems 
and the underlying problem drivers while clarifying why EU action is needed, such as G-
20 commitments or precautionary concerns; 

–  improved  presentation  of  the  options  by  clarifying  the  content  of  some  of  the  options, 

focusing on the key issues and regrouping some of the options; 

–  strenghtening  our  analysis  of  the  options  by  better  identifying  the  nature  and  giving  an 
order of magnitude whenever possible of the benefits, by making sure that all options were 
assessed against a comprehensive baseline secnario, as well as by discussing more in detail 
the impact on Member States;  

–  better explaining why in some cases our preferred options might differ from stakeholders' 

views. 

3. 

POLICY CONTEXT, PROBLEM DEFINITION, BASELINE SCENARIO AND SUBSIDIARITY 

3.1. 

Background and context 

MiFID applies to markets in financial instruments18. The financial markets covered by MiFID 
as well as how these markets work is briefly described here. 

Actually, there are different financial instruments with different market features and different 
market  participants.  Financial  instruments  are  usually  split  into  three  large  categories, 
equities,  debt  instruments  and  derivatives.  These  instruments  can  be  traded  on  organised 
markets which is mostly the case for equities or over the counter (OTC) which is the case for 
most  of  the  debt  instruments  and  derivatives.  In  terms  of  respective  size,  total  turnover  on 
equities  markets  amounted  in  2010  in  Europe  to  nearly  €19.9  trillion19  .  International  and 
domestic debt securities markets in terms of outstanding issued debt amounted in March 2011 
and December 2010 to respectively $29 trillion and $67 trillion for all countries out of which 
the  Euro  area  countries  and  the  UK  accounted  for  $16  trillion  and  $15  trillion20  .  OTC 
derivatives markets in terms of notional amount outstanding amounted to $601 trillion as of 
end of December 2010 21. 

In addition to their respective size, the relevant financial markets are also different in terms of 
trading  features.  The  nature  of  the  instrument,  the  type  of  market  participants  and  the 
organisation  of  trading  vary  according  to  the  instrument.  Equity  and  bonds  are  fungible 
instruments while most of the derivatives are not. As such, the level of activity on secondary 
market tends to be higher. But the secondary market is actually only really active for shares. 
For  bonds,  the  combination  of  "buy  and  hold"  investors,  the  fact  that  the  instrument  has  a 
maturity date and the fact that there are multiple issues for each issuer largely contribute to 
very  low  activity  on  the  secondary  debt  market.  In  addition,  markets  also  differ  in  the  way 
trading is organised. For equities, the larger share of the transactions take place on organised 
venues with multiple buyers and sellers meet. The meeting of these parties are often organised 
through a central order book system. For debt instruments and derivatives, trading tend to be 
more bilateral and a request for quote system in which counterparty asks counterparty for a 
price on a specific instrument, prevails. The diversity in the nature of the instrument and in 
the way it is being negotiated need to be taken into consideration when looking at MiFID in 
its globality. 

8 

 
 
  
 
3.2. 

Problem definition 

The problems that the revision of MiFID is aiming to solve are multiple and can be grouped 
as follows: 

–   lack  of  a  level  playing  field  between  markets  and  market  participants  has  become 

exacerbated as new players and new trading techniques develop 

–  difficulties for SMEs to access financial markets 

–  lack of sufficient transparency of the financial markets for market participants 

–  the  lack  of  sufficient  information  and  powers  for  national  regulators  regarding  financial 

markets and intermediaries, and inconsistent supervisory practice 

–  existence of areas in which investor protection has revealed deficiencies 

–  weaknesses  in  some  areas  of  the  organisation,  processes,  risk  control  and  assessment  of 

some market participants. 

The problem tree included below provides an overview of the main drivers and consequences 
of these various problems. 

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Problems

Consequences

Difficulties for SME in accessing
capital markets

Uneven playing field between
market participants

Lack of sufficient transparency
for market participants

Insufficient information and powers for 
regulators and inconsistent supervisory
practice

Existence of areas in which investors
protection has revealed some
deficiencies

Insufficient organisation in the 
provision of services and incorrect 
assessment or control 

Risks on investor confidence,
markets order and integrity

Systemic risks

Sub efficient financial markets
and unecessary costs for 
market participants

Drivers

Evolution of market and 
trading structures 

Technological
developments

Fragmentation and short 
comings in transparency of 
equities market

Opacity of non equities
markets

Increased weight of financial
transactions in commodities
markets

Some products, services or 
services providers 
unsufficiently regulated

Weaknesses in business 
conduct and information 
requirement by investment
firms

Shortcomings in 
organisation of
investment firms

Insufficient coordination 
between national market
regulators in implementation
and supervision

The  following  sections  provide  a  summary  of  the  problems  highlighted  above;  for  a  more 
detailed explanation and background in relation to these problems please see Annex 2. 

3.3. 

Problem 1: Lack of level playing field between markets and market participants 

The  implementation  of  MiFID  combined  with  the  effect  of  technological  advances  has 
dramatically changed the structure of financial markets across Europe, notably in the equity 
space,  and  made  the  conduct  of  market  participants  evolve  to  reflect  these  developments. 
These  changes  have  undoubtedly  helped  stimulate  competition  between  trading  venues  but 
have also created some distortions of competition between market participants. There are five 
main reasons for this situation. 

There is concern that despite providing comparable services to regulated markets, Multilateral 
Trading  Facilities  (MTFs)  may  in  practice  be  subject  to  a  less  stringent  supervisory  regime 
while  at  the  same  time  key  concepts  such  as  admission  to  trading22do  not  apply  to  them. 
Further, the fragmentation of trading across different venues could result in misconduct being 
missed due to the lack of coordinated monitoring between them.  

New  trading  venues  and  market  structures,  such  as  broker  crossing  systems  and  derivative 
trading  platforms,  have  emerged  that  carry  out  similar  activities  to  MTFs  or  systematic 
internalisers23  without  being  subject  to  the  same  regulatory  requirements,  both  in  terms  of 
transparency  and  investor  protection24.  The  fact  finding  carried  out  by  CESR25  found  that 

10 

 
 
  
 
 
actual  trading  through  broker  crossing  systems  –  which  are  not  subject  to  any  pre-trade 
transparency requirements - increased from an average of 0.7% of total EEA trading in 2008 
to an average of 1.5% in the first quarter of 2010. This means that between 2008 and the 1st 
quarter  of  2010  this  %  has  tripled.  Pre-trade  transparency  is  key  for  the  price  formation 
process  and  dark  trading  (including  both  broker  crossing  networks  and  dark  pools  –  i.e. 
platforms operated by a RM or a MTF and benefiting from pre-trade transparency waivers) is 
expected to increase in the near future following a similar path as in the United States where 
dark trading made up 13.27% of consolidated US equities trading volume at the end of 201026 
and  is  expected  to  still  grow  further  with  estimates  by  the  end  of  2011  of  15%.  Regarding 
derivatives markets, the US authorities have created, for derivatives, the new concept of Swap 
Execution  Facilities  (SEFs)27  to  bring  such  trading  venues  or  structures  within  the  scope  of 
financial services regulation. 

Rapid  technological  changes,  and  in  particular  the  growth  of  automated  trading  and  high 
frequency  trading  (HFT)  that  represents  an  increasing  share  of  transactions,  especially  on 
equity  markets,  have  led  to  concerns  about  possible  new  risks  to  the  orderly  functioning  of 
markets, e.g. due to rogue algorithms or a sudden withdrawal of liquidity in adverse market 
conditions.  The  analysis  of  the  May  6,  2010  flash  crash28  performed  by  US  regulatory 
authorities has underlined the fact that even if HFT firms may not have been the cause of this 
crash, the way and the speed of their reaction has greatly amplified its effects. Further, not all 
HF traders are subject to authorisation and supervision under the MiFID as they can use an 
exemption set in the  framework  directive29. Even if the effect  of this type of trading on the 
markets is still being investigated and discussed, some arguing that it is beneficial in terms of 
liquidity and spreads while others considering that markets have become more shallow, it is 
obvious that this type of activity deserves to be properly regulated simply in light of the size 
that  it  represents  in  terms  of  trading  as  of  today,  and  the  potential  spill  over  effects  their 
misbehaviour might have on the whole financial markets. The scale of HFT in Europe already 
accounts for a significant portion of equity trading in the EU, and is expected to grow further. 
According to CESR30, HFT trading accounts from 13% to 40%  of total share trading in the 
EU.  As  a  comparison,  HFT  traders  account  for  as  much  as  70%  of  all  US  equity  trading 
volume31. 

The growth of over the counter (OTC) trading on  equities  has led to concerns among some 
national  supervisors  that  it  threatens  the  quality  of  price  formation  on  exchanges  and  its 
representative nature, as a substantial part of the transactions are not being taken into account. 
Further,  as  far  as  derivatives  are  concerned,  it  has  been  agreed  by  the  G20  to  ensure  that, 
where appropriate, trading in standardised OTC derivatives moves to exchanges or electronic 
trading platforms.32  

3.4. 

Problem 2: Difficulties for SMEs to access financial markets 

Small  and  medium-sized  enterprises  face  greater  difficulties  and  costs  to  raise  capital  from 
equity  markets  than  larger  issuers.  These  difficulties  are  related  to  the  lack  of  visibility  of 
SME  markets,  the  lack  of  market  liquidity  for  SME  shares  and  the  high  costs  of  an  initial 
public offering. Although some "SME markets", regulated as MTFs, have emerged at national 
level  to  try  to  address  these  difficulties  by  offering  a  tailored  regulatory  regime  to  SME 
issuers, different requirements apply and uncertainty in this regard may put off investors.The 
listing as well as the transparency requirements  might differ from one  SME platform to the 
other. Further, these SME markets are not interconnected as MiFID currently does not foresee 
that SME shares listed on one MTF can automatically be traded on another. Finally the costs 
of listing for an SME are disproportionate given the limited access to capital that it currently 
provides. 

11 

 
 
  
 
3.5. 

Problem 3: Lack of sufficient transparency for market participants  

The  key  rationale  for  transparency  is  to  provide  investors  with  access  to  information  about 
current  trading  opportunities,  to  facilitate  price  formation  and  assist  firms  to  provide  best 
execution  to  their  clients.  It  is  also  intended  to  address  the  potential  adverse  effect  of 
fragmentation  of  markets  and  liquidity  by  providing  information  that  enables  users  to 
compare  trading  opportunities  and  results  across  trading  venues.  Post  trade  transparency  is 
also used for portfolio valuation purposes. Transparency is crucial for market participants to 
be  able  to  identify  a  more  accurate  market  price  and  to  make  trading  decisions  about  when 
and  where  to  trade.  However  a  number  of  concerns  have  emerged  that  the  transparency 
regime set out in the MiFID is insufficient for market participants in both the equities and non 
equities markets. 

With respect to equity markets, the growth of electronic trading has facilitated the generation 
of dark liquidity and the use of dark orders33 which market participants rely upon to minimise 
market impact costs. However, an increased use of dark pools raises regulatory concerns as it 
may ultimately affect the quality of the price discovery mechanism on the "lit" markets34. In 
terms  of  overall  EEA  trading,  dark  pools  (i.e.  platforms  operated  by  a  RM  or  a  MTF  and 
benefiting  from  pre-trade  transparency  waivers)  and  broker  crossing  networks  account  for 
approximately 7%. If we add up the OTC trading share which usually estimated to be around 
38%3536,  45%  of  the  EEA  trading  is  "dark"  or  not  subject  to  pre-trade  transparency  (see 
Annex 2.3.1). The issue at stake is to balance the interest of the wider market with the interest 
of individual parties by allowing for waivers from transparency in specific circumstances37.  

Market  participants  require  information  about  trading  activity  that  is  reliable,  timely  and 
available  at  a  reasonable  cost.  They  have  expressed  concerns  about  time  delays  in  the 
publication38  of  trade  reports  in  the  equities  markets.  Many  supervisors  as  well  as  market 
participants  seem  to  agree  that  the  maximum  permitted  delays  for  publishing  trade  details 
should be reduced39. This would help to make post trade information available sooner to the 
market. 

The pre and post trade transparency requirements currently only apply to shares admitted to 
trading  on  a  regulated  market.  A  number  of  instruments  that  are  similar  to  shares40  are 
therefore outside the scope of MiFID transparency requirements. Since the requirements only 
apply to shares admitted to trading on a regulated market, there is also a potential difference 
in the level of transparency for shares that are only admitted to trading on a MTF or another 
organised trading facility.  

For  non-equity  markets,  transparency  requirements  are  not  covered  by  the  MiFID  and  are 
only regulated at national level; these are not always considered sufficient41. Efforts by trade 
associations of investment banks to make these markets transparent have not been successful. 
Especially during the financial crisis, market participants have faced difficulties in accessing 
price  information  and  valuing  their  positions  in  different  instruments,  especially  the  bonds 
markets. Access to information on these markets is uneven and often depends on the size and 
type of investors and market context. On the other hand, the issue is made more complex by 
the  fact  that  non  equity  markets  are  currently  mostly  dealers'  market  i.e.  markets  in  which 
market makers are playing a key role. In these markets, the level of activity on the secondary 
market is much lower than on equity markets. Transactions are very often done on a bilateral 
basis in which a counterparty asks a dealer for a price on a specific instrument. In quoting the 
price for the specific instrument, the dealer is taking a position and putting its own capital at 
risk. If there is too much trade transparency, the dealer may have to reveal its positions, which 
would  put  him  at  a  higher  risk  versus  other  market  participants  that  could  benefit  from  the 

12 

 
 
  
 
information they have on his position to gain a profit. This negative possible effect could be 
mitigated by proper calibration of a future transparency regime such as it is already the case 
for the equities markets where a balance has been struck between the wider market interests in 
terms of transparency and market efficiency by foreseeing pre-trade transparency waivers and 
deferred post-trade publication for large transactions.  

Besides  requiring  market  data  to  be  reliable,  timely  and  available  at  a  reasonable  cost, 
investors also require the information to be brought together in a way that allows comparison 
of prices across different venues. Experience since the implementation of MiFID shows that 
the reporting and publication of trade data in shares is not living up to this expectation.42 The 
main problems relate to the quality and format of the information, as well as the cost charged 
for the information and the difficulty in consolidating the information. If these issues are not 
fully  addressed,  they  could  undermine  the  overarching  objectives  of  MiFID  as  regards 
transparency,  competition  between  financial  services  providers,  trading  venues  and  investor 
protection. While a number of initiatives have been put in place to try to address these issues 
there are practical and commercial obstacles that appear to necessitate regulatory intervention 
to facilitate the consolidation and dissemination of post trade information.  

Similar  issues  are  likely  to  arise  for  non  equity  instruments  if  these  are  brought  within  the 
scope of a pre and post-trade transparency regime.  

3.6. 

Problem  4:  Lack  of  transparency  for  regulators  and  insufficient  supervisory 

powers in key areas and inconsistent supervisory practice 

In several areas, regulators are lacking the necessary information or powers to properly fulfil 
their role. 

Commodities markets 

Recent developments in commodity markets have highlighted a number of issues.  

The  G20  agreed  "to  improve  the  regulation,  functioning,  and  transparency  of  financial  and 
commodity markets to address excessive commodity price volatility." In its Communication 
of 2 June 2010 on "Regulating Financial Services For Sustainable Growth", the Commission 
announced  it  is  preparing  a  comprehensive,  balanced  and  ambitious  set  of  policy  initiatives 
which will touch upon commodity derivatives markets. More recently, the Communication of 
2 February 2011 on commodity markets and raw materials has called for further action 

Many  commentators43  have  raised  concerns  that  the  increased  presence  of  non-commercial 
investors,  especially  in  some  key  benchmark  commodity  derivative  markets  (e.g.  oil  and 
agricultural  markets)  have  led  to  excessive  price  increases  and  volatility.44  Physical 
commodity  and  commodity  derivatives  markets  are  increasingly  intertwined  and  influence 
each  other.  This  stronger  interaction  requires  reinforcing  the  cooperation  between  financial 
and physical regulators as well as between regulators at international level.  

The second group of issues lies in the lack of transparency faced by both market participants 
and  regulators  in  both  financial  and  physical  commodities  markets  as  well  as  the  lack  of 
intervention powers for regulators. There is no position reporting requirements for derivatives 
and  especially  commodities  derivatives  and  no  harmonised  and  effective  position 
management oversight powers to prevent disorderly markets and developments detrimental to 
commodity  derivatives  users.  This  lack  of  transparency  has  undermined  the  ability  of 
regulators  as  well  as  market  participants  to  understand  the  impact  of  the  increasing  flow  of 

13 

 
 
  
 
financial  investments  in  the  commodity  derivatives  markets.  In  addition  although  position 
reporting or oversight are recognised as effective tools to ensure fair and orderly trading and 
prevent market abuse especially in commodity derivatives markets as highlighted by existing 
practices  of  trading  venues,  the  powers  given  to  trading  venues  and/or  regulators  vary 
significantly between Member States.   

A  third  issue  relates  to  the  scope  of  the  exemption  from  MiFID  rules  for  commodity  firms 
trading  on  own  account  in  financial  instruments,  or  providing  investment  services  in 
commodity derivatives on an ancillary basis as part of their main business and when they are 
not subsidiaries of financial groups.45 These exemptions intend to cover commercial users and 
producers  of  commodities,  under  the  assumption  that  commercial  firms  and  specialist 
commodity firms do not pose systemic risks comparable to traditional financial institutions or 
interact with investors. The size and level of activity of the exempted commodity firms has 
developed  over  the  years  and  the  assumption  of  their  limited  effect  in  terms  of  market 
disorder or systemic risk may not be as valid as before. 

In  addition,  it  has  been  suggested  that  commercial  companies  benefiting  from  the  MiFID 
exemptions  active  in  the  oil  market  should  not  provide  investment  services  in  commodity 
derivatives even as an ancillary activity46. As these MiFID exempt firms are not subject to any 
MiFID  provisions  –  including  the  conduct  of  business  rules  –  some  national  regulators  and 
market  participants  have  argued  that  unsophisticated  clients  would  not  be  adequately 
protected.  On  the  other  hand,  this  notion  of  ancillary  activity  appears  to  be  an  essential 
provision  for  agricultural  cooperatives,  enabling  them  to  provide  hedging  tools  to  their 
farmers while remaining exempt from a regulatory regime ill-calibrated to the small risks they 
pose to the financial system.  

Fourth,  emission  allowances47  are  an  instrument  created  by  the  EU  Emissions  Trading 
Scheme Directive (the EU ETS Directive)48, in force since 2005. Emission allowances are a 
new type of legal instrument which could lend itself to be classified as a financial instrument 
or as a physical commodity. At present, not all segments of the European carbon market are 
consistently  covered  by  financial  markets  legislation  or  afforded  equivalent  regulatory  and 
supervisory  treatment  by  other  European  legislative  instruments.  Notably,  MiFID  does  not 
apply to the secondary trading of spot emission allowances. This stands in contrast with the 
situation in the allowances derivatives market and the regulatory arrangements for the future 
primary spot market (i.e. instead of free allocation, emission allowances will be auctioned to 
market participants) in those instruments: in those two market segments, to a greater or lesser 
extent the provisions of the MiFID would apply49. This perceived distortion has only partially 
been  covered  by  individual  initiatives  of  a  few  Member  States  to  bring  the  secondary  spot 
activity in the carbon market under the national regimes implementing the MiFID or Market 
Abuse  Directive50.  The  lack  of  consistency  in  the  regulatory  framework  may  eventually  be 
detrimental  to  the  spot  segment's  prospects.  This  makes  it  vulnerable  to  a  risk  of  market 
abuse,  for  example  through  potential  manipulation  of  spot  price  indices  against  which 
derivative positions are priced, as well as other forms of market misconducts, such as fraud 
due to insufficient checks on the integrity of market participants. 

Transaction reporting 

The  second  issue  for  regulators  is  the  access  to  information.  Transaction  reporting  under 
MiFID  enables  supervisors  to  monitor  the  activities  of  investment  firms,  the  functioning  of 
markets and ensure compliance with MiFID, and to monitor abuses under the Market Abuse 
Directive (MAD). Investment firms are required to report to competent authorities all trades 
in all financial instruments admitted to trading on a regulated market, regardless of whether 

14 

 
 
  
 
the trade takes place on that market or not51. Transaction reporting is also useful for general 
market monitoring, as it provides insight into how firms and markets behave. 

The existing reporting requirements fail to provide competent authorities with a full view of 
the market because their scope is too narrow (e.g. financial instruments only traded OTC are 
currently not reportable) and because they allow for too much divergence. First, since it has 
an  important  function  in  monitoring  the  functioning  of  the  market,  including  its  integrity  in 
the  perspective  of  MAD,  the  requirements  under the  two  directives  need  to  remain  aligned, 
taking  also  into  account  the  ongoing  review  of  the  MAD52.  Second,  reporting  requirements 
today diverge between Member States, which adds costs for firms and limits the use of trade 
reports  for  competent  authorities.  Third,  third  party  firms  that  investment  firms  can  use  to 
report  their  transactions  are  not  subject  to  on  going  monitoring  by  the  supervisor.  Last,  for 
cost  and  efficiency  purposes,  double  reporting  of  trades  under  MiFID  and  the  recently 
proposed reporting requirements to trade repositories should be avoided53 while at the same 
time,  non-investment  firms  who  may  have  direct  access  to  markets  do  not  need  to  report, 
which creates gaps between the trading activity actually done and the one reported.  

Powers of competent authorities 

Experience,  especially  during  the  financial  crisis  has  shown  that  the  powers  granted  to 
competent  authorities54  need  to  be  strengthened  in  key  areas,  including  in  terms  of 
investigatory powers55.  

There have recently been various calls to subject complex products such as certain types of 
structured  products,  to  stricter  regulatory  scrutiny  as  regards  the  provision  of  certain 
investment services and activities.56 The fact that national regulators do not have the power to 
ban  or  restrict  the  trading  or  distribution  of  a  product  or  service  in  case  of  adverse 
developments, has appeared as a major lacking point, similarly to the absence of provisions 
that would ensure cooperation with regard to general market oversight. On the other hand, the 
access  of  third  country  firms  to  EU  markets  is  not  harmonised  under  MiFID  and  this  gives 
rise  to  a  patchwork  of  national  third  country  regimes.  Consequently,  there  is  considerable 
divergence  as  to  how  third  country  regimes  are  applied  across  the  Union.  This  is  damaging 
the functioning of the single market as well as creating additional costs for these firms. 

On  sanctions,  MiFID  requires  Member  States  to  ensure  that  it  is  possible  to  impose 
administrative  measures  or  sanctions  that  are  effective, proportionate and  dissuasive.  In this 
context,  evidence  by  CESR57  shows  that  there  are  significant  differences  and  lack  of 
convergence  across  the  EU  in  terms  of  the  administrative  measures  available  for  MiFID 
infringements as well as the application of those sanctions.  

3.7. 

Problem  5:  Existence  of  areas  in  which  investor  protection  has  revealed 

deficiencies  

There  are  a  number  of  provisions  in  the  current  MiFID  which  result  in  investors  not 
benefiting  from  sufficient  or  appropriate  levels  of  protection.  The  consequences  are  that 
investors may be mis-sold financial products which are not appropriate for them, or may make 
investment choices which are sub-optimal. There are several drivers to these problems. 

Uneven coverage of service providers 

Member States may exempt from MiFID investment firms providing certain services only at 
national level, provided that they are subject to national rules58. This exemption means that an 

15 

 
 
  
 
investor buying a financial product from a MiFID exempt firm may be less protected than if 
he buys the same product from a MiFID regulated firm. Investors may not even be aware of 
the differences in the levels of protection.  

Second,  in  the  context  of  the  Communication  on  packaged  retail  investment  products 
(PRIPs)59,  the  Commission  has  underlined  the  importance  of  ensuring  a  more  consistent 
regulatory  approach  concerning  the  distribution  of  different  financial  products  to  retail 
investors,  which  however  satisfy  similar  investor  needs  and  raise  comparable  investor 
protection  challenges60.  Specifically,  the  sale  of  structured  deposits,  an  activity  almost 
exclusively carried out by credit institutions, is outside the scope of EU regulation 

Third,  national  regulators61  have  raised  concerns  with  respect  to  the  applicability  of  MiFID 
when investment firms or credit institutions issue and sell their own securities. As a primary 
market activity, issuance of financial instruments is not covered by MiFID 

Uncertainty around execution only services 

MiFID  allows  investment  firms  to  provide  investors  with  a  means  to  buy  and  sell  so-called 
non-complex  financial  instruments  in  the  market,  mostly  via  online  channels,  without 
undergoing  any  assessment  of  the  appropriateness  of  the  given  product  -  that  is,  the 
assessment against knowledge and experience of the investor.62 This possibility is offered for 
products  which  are  considered  as  non-complex  which  mostly  include  shares,  money  market 
instruments,  bonds  and  some  securitised  debt  and  UCITS  instruments.  Individual  investors 
greatly  value  the  possibility  to  buy  and  sell  (essentially)  shares  based  on  their  own 
assessments  and  understanding.63  Nonetheless,  there  are  three  potential  problems  with  the 
status  quo  which  should  be  addressed  on  precautionary  grounds.  First,  the  financial  crisis 
clearly underlines that access to more complex instruments needs to be strictly conditional on 
a proven understanding of the risks involved. Second, the ability of investors to borrow funds 
solely  for  investment  purposes  even  in  non-complex  instruments,  thereby  magnifying 
potential losses, needs to be tightly controlled. Third the classification of all UCITS as non-
complex  instruments  needs  to  be  reviewed  in  light  of  the  evolution  of  the  regulatory 
framework  for  UCITS,  notably  when  assets  they  can  invest  in  are  themselves  considered 
complex under MiFID, for instance derivatives. 

Quality of investment advice 

In the context of the financial crisis and recent debates on the quality of investment advice, 
including the debate on PRIPs, several possible areas for improvement have emerged. Under 
MiFID intermediaries providing investment advice are not expressly required to explain the 
basis on which they provide advice (e.g. the range of products they consider and assess) and 
more clarity is thus needed as to the kind of service provided by the intermediary. One study 
indicates that, at present, investment advice is unsuitable roughly half of the time64. 

Framework for inducements 

MiFID  regulated  for  the  first  time  the  payment  of various types of incentives to investment 
firms  which  can  influence  the  choice  and  the  promotion  of  products  when  firms  provide 
services  to  clients  (inducements).  The  MiFID  rules  for  incentives  from  third  parties  require 
inducements  to  be  disclosed  and  to be designed to enhance the quality of the service to the 
client65.  These  requirements  have  not  always  proven  to  be  very  clear  or  well  articulated  for 
investors66  and  their  application  has  created  some  practical  difficulties  and  some  concerns. 
Further,  the  treatment  of  inducements  with  respect  to  portfolio  management  and  investment 

16 

 
 
  
 
advice67 may require further tightening due to the characteristics of these services. Although 
the  firm  should  always  act  in  the  best  interests  of  the  client,  yet  the  possibility  to  accept 
inducements  when  providing  advice,  especially  on  an  independent  basis,  and  portfolio 
management  can  decisively  compromise  this  principle  and  lead  to  sub-optimal  choices  on 
behalf of the investor. 

Provision of services to non retail clients and classification of clients 

In  the  current  MiFID  framework,  clients  are  classified  in  three  categories:  retail  clients, 
professional  clients  and  eligible  counterparties68.  The  level  of  protection  and  the  level  of 
requirements  for  investment  firms  in  serving  these  clients  decreases  from  retail  clients  to 
professional  and  eligible  counterparties,  the  underlying  principle  being  that  larger  entities 
have  access  to  more  information,  benefit  from  higher  expertise  and  more  able  to  protect 
themselves.  

The  financial  crisis  showed  that  in  practice  a  number  of  non-retail  investors,  notably  local 
authorities,  municipalities  and  corporate  clients69,  suffered  losses  due  to  being  mis-sold 
complex  financial  instruments  the  risks  of  which  they  did  not  fully  understand.  Further,  the 
provision of services to certain investors (so called, eligible counterparties) is not subject to 
the general MiFID principles that these services should be fair and not misleading, whereas 
services to retail investors are.  

Execution quality and best execution 

Finally,  although  trading  venues  have  to  provide  post-trade  transparency  on  the  prices  of 
executed trades, they are not currently required to publish data on execution quality (such as 
the  speed  of  trade  execution  or  the  number  of  trades  cancelled  prior  to  execution)70.  Since 
both of these factors can affect the price at which shares are traded, the absence of published 
data on these aspects could impair the ability of investment firms to select the best possible 
venue for executing a trade for a client. 

3.8. 

Problem 6: Weaknesses in some areas of the organisation, processes, risk controls 

and assessment of some market participants  

The problem presents several dimensions. 

Insufficient  role  of  directors  and  insufficient  organizational  arrangements  for  the  launch  of 
new products, operations and services and weaknesses in internal control functions 

The MiFID defines a high-level framework for fit and proper requirements regarding persons 
who  direct  the  business  of  investment  firms  and  a  general  framework  for  organizational 
requirement71  and  the  establishment  and  the  operation  of  internal  control  functions 
(compliance function72, risk management function73, internal audit function74). Recent events 
during  the  financial  crisis  such  the  insufficient  assessment  and  control  of  risks  have  shown 
that  the  involvement  of  directors  and  the  role  of  internal  control  functions  are  not  always 
strong enough75. The issues generated during the recent financial crisis by some new products, 
such  as  complex  credit  related  structured  products  have  revealed  the  way  investment  firms 
design  and  launch  new  products  and  services76  can  be  improved.  The  role  and  the 
involvement of directors and the internal control functions in developing firms' policies needs 
to  be  better  defined  in  order  to  strengthen  investment  firms  and  avoid  detrimental  practices 
toward clients.  

17 

 
 
  
 
Lack  of  specific  organisational  requirements  for  portfolio  management,  underwriting  and 
placing of securities 

Regarding portfolio management, the actual management of these portfolios is not covered in 
MiFID  by  any  specific  provision  and  Member  States  have  recorded  numerous  complaints 
where  clients  have  challenged  the  way  in  which  their  portfolio  has  been  managed77.  For 
underwriting and placing,  despite the  fact that corporate business is covered under different 
investment  and  ancillary  services  in  MiFID,  some  specific  practices  contrary  to  firms 
obligations to take all reasonable steps to prevent conflict of interest such as underpricing or 
overmarketing of securities to be issued have recently been noted.  

Uneven regime for telephone and electronic recording  

MiFID  leaves  to  Member  States  the  possibility  to  require  firms  to  record  telephone  and 
electronic  communications  involving  client  orders.  Most  Member  States  have  used  this 
option.  However,  the  wide  discretion  introduced  by  MiFID  has  led  to  different  approaches 
being adopted by Member States, ranging from the lack of any obligations to the imposition 
of very detailed rules in this area78. There is therefore a lack of consistent framework across 
Europe on this question that creates differences in the supervisory tools available to regulators 
and disparities between firms providing the same services in different Member States. Indeed 
evidence  collected  through  telephone  and  electronic  recording  is  key  in  detecting  and 
investigating  cases  of  market  abuses  as  acknowledged  by  CESR79.  In  case  of  cross  market 
abuses it is also important that the level of information available to competent authorities is 
harmonised up to the most stringent level.  

3.9.  How would the problem evolve without EU action? The base line scenario  

If  no  action  is  taken  to  revise  the  MiFID,  it  is  very  likely  that  the  problems  that  have  been 
identified  will  persist  and  could  be  aggravated  by  future  market  developments  as  very  few 
countervailing forces are likely to exert themselves. 

The lack of clarity as to the rules applicable to different trading venues and investment firms 
in  the  execution  of  orders  would  continue,  and  the  share  of  OTC  trading  without  an 
appropriate regulatory framework and with no pre-trade transparency would continue to feed 
uncertainty.  There  would  be  no  upgrades  to  the  framework  of  safeguards  around  trading  in 
today's low latency, high-speed environment. If no action is taken, the regulatory framework  
governing  trading  venues  and  market  partcipants'  risk  management  tools  will  probably  fall 
even  further  behind  market  changes  as  trading  in  a  dark  environment  and  new  electronic 
means of trading seem likely to continue to grow. SME markets would remain an indistinct 
venue  with  a  different  level  of  transparency  towards  investors  between  the  different  junior 
markets,  hindering  the  cross-trading  of  SME  shares  and  the  build  up  of  a  pan-European 
network of SME markets. Deficiencies in equity market transparency and data consolidation 
would persist, as would the delicate but ultimately unsustainable transparency environment in 
non-equities.  Without  any  regulatory  action,  the  deficiencies  in  the  equities  markets  would 
likely  persist.  Opacity  in  the  non-equity  markets  would  also  likely  remain  the  general  rule. 
Uncertainty  would  also  continue  in  relation  to  the  effectiveness  of  regulation  applicable  to 
commodity derivative markets. The increasing flow of financial investments has changed the 
way these markets function. In the absence of any regulatory action, the lack of transparency 
and  regulatory  tools  would  undermine  regulators'  ability  to  properly  understand  these 
developments  and  ensure  the  integrity  and  proper  functioning  of  these  markets.  Failure  to 
address  the  deficiencies  in  transaction  reporting  and  access  to  telephone  and  electronic 
records  would  entail  that  the  tools  available  to  regulators  for  example  for  detecting  market 

18 

 
 
  
 
abuse or checking the compliance of firms with their obligations under MiFID would remain 
sub-optimal. As for investor protection, the lack of action at EU level will likely result in an 
increase in the number of cases of mis-selling of financial services products and cases where 
gaps  in  the  regulation,  absence  of  information,  or  internal  conflicts  of  interest  at  firms  lead 
investors to take undue risks. A rise in the number of such cases could have a serious impact 
on  investor  confidence  leading  to  strong  consumer  reactions  and  negative  socio-economic 
impacts which could create further market disorder and systemic risk. 

Other legislative proposals already, or shortly to be, adopted by the Commission complement 
the MiFID review in terms of increasing transparency towards regulators and market integrity.  
The  review  of  the  Market  Abuse  Directive  (MAD)80  will  ensure  all  trading  venues  and 
practices  are  appropriately  caught  under  the  market  abuse  prohibitions.  The  objective  is  to 
adapt  the  MAD  framework  to  market  and  technological  developments,  building  upon  the 
existing  and  future  MiFID  framework  relating  to  rules  for  trading  venues  and  market 
participants.  The  proposal  for  a  regulation  on  OTC  derivatives,  central  counterparties  and 
trade  repositories81  will  increase  transparency  of  significant  positions  in  OTC  derivatives 
which  will  assist  regulators  to  monitor  for  market  abuse  and  help  to  detect  any  build  up  of 
systemic  risks  through  the  use  of  derivatives.  There  are  currently  no  transaction  reporting 
obligations  for  OTC  derivatives  under  MiFID  which  is  the  main  instrument  available  to 
regulators  to  detect  market  abuse  cases.  The  existence  of  trade  repositories  might  facilitate 
such  reporting  under  certain  conditions.  The  proposal  for  a  Regulation  on  short  selling  and 
certain  aspects  of  Credit  Default  Swaps82  includes  a  short  selling  disclosure  regime  which 
would  make  it  easier  for  regulators  to  detect  possible  cases  of  market  manipulation.  The 
issues of transparency requirements and manipulative behaviours specific to physical energy 
markets,  as  well  as  transaction  reporting  to  ensure  the  integrity  of  energy  markets,  are  the 
subject  of  the  Commission  proposal  for  a  Regulation  on  energy  market  integrity  and 
transparency83. This initiative covering the udnerlying phyiscal markets will complement the 
MiFID and MAD frameworks governing trading in derivatives on energy products as physical 
and  financial  markets  are  interlinked  and  influence  each  other.  Overall  these  initiatives  will 
significantly improve the transparency towards and the tools available to regulators to fulfill 
their  supervisory  duties.  However  it  should  be  noted  that  these  initiatives  do  not  increase 
transparency of trading (pre-and post-trade transparency towards market participants (or only 
in a very limited way by the public disclosure of aggregated positions in OTC derivatives by 
trade repositories) 

3.10. 

 Subsidiarity and proportionality  

According  to  the  principle  of  subsidiarity  (Article  5.3  of  the  TFEU),  action  on  EU  level 
should  be  taken  only  when  the  aims  envisaged  cannot  be  achieved  sufficiently  by  Member 
States  alone  and  can  therefore,  by  reason  of  the  scale  or  effects  of  the  proposed  action,  be 
better achieved by the EU.  

Most  of  the  issues  covered  by  the  revision  are  already  covered  by  the  acquis  and  MiFID 
today. Further, financial markets are inherently cross-border in nature and are becoming more 
so.  International  markets  require  international  rules  to  the  furthest  extent  possible.  The 
conditions  according  to  which  firms  and  operators  can  compete  in  this  context,  whether  it 
concerns rules on pre and post-trade transparency, investor protection or the assessment and 
control of  risks  by  market participants need to be common  across borders and  are  all at the 
core of MiFID today. Action is now required at European level in order to update and modify 
the  regulatory  framework  laid  out  by  MiFID  in  order  to  take  into  account  developments  in 

19 

 
 
  
 
 
financial markets since  its  implementation. The improvements that the directive has already 
brought  to  the  integration  and  efficiency  of  financial  markets and  services  in  Europe  would 
thus be bolstered with appropriate adjustments to ensure the objectives of a robust regulatory 
framework  for  the  single  market  are  achieved.  Because  of  this  integration,  national 
intervention would be far less  efficient  and would lead to the fragmentation of the markets, 
resulting in regulatory arbitrage and distortion of competition. For instance, different levels of 
market  transparency  or  investor  protection  across  Member  States  would  fragment  markets, 
compromise liquidity and efficiency, and lead to harmful regulatory arbitrage.  

The  European  Securities  and  Markets  Authority  (ESMA)  should  also  play  a  key  role  in  the 
implementation of the new legal proposals. One of the aims of the creation of the European 
Authority is to enhance further the functioning of the single market for security markets; new 
rules at Union level are necessary to give all appropriate powers to ESMA.  

The  options  analysed  below  will  take  full  account  of  the  principle  of  proportionality,  being 
adequate to reach the objectives and not going beyond what is necessary in doing so. Given 
the need for implementing legislation, the proportionality of individual options cannot always 
be fully assessed at this stage. For instance, regarding the new transparency rules that could be 
applied  to  bonds  and  derivatives  markets,  the  revision  advocates  for  a  carefully  calibrated 
regime that will take into consideration the specificities of each asset class and possibly each 
type of instrument. Whenever possible we have ensured that the preferred policy options are 
compatible with the proportionality principle, taking into account the right balance of public 
interest  at  stake  and  the  cost-efficiency  of  the  measure.  The  requirements  imposed  on  the 
different  parties  have  been  carefully  calibrated.  In  particular,  the  need  to  balance  investor 
protection, efficiency of the markets and costs for the industry has been transversal in laying 
out these requirements.  

4. 

OBJECTIVES 

4.1. 

General, specific and operational objectives 

In light of the analysis of the risks and problems above, the general objectives of the revision 
of MiFID are to:  

(1) 

strengthen investor confidence,  

(2) 

reduce the risks of market disorder;  

(3) 

reduce systemic risks; and  

(4) 

increase  efficiency  of  financial  markets  and  reduce  unnecessary  costs  for 
participants 

Reaching  these  general  objectives  requires  the  realisation  of  the  following  more  specific 
policy objectives: 

(1)  Ensure a level playing field between market participants; 

(2) 

Increase market transparency for market participants; 

(3)  Reinforce  transparency  towards  and  powers  of  regulators  in  key  areas  and 

increase coordination at European level;  

20 

 
 
  
 
(4)  Raise investor protection 

(5)  Address organisational deficiencies and excessive risk taking or lack of control 

by investment firms and other market participants 

The  specific  objectives  listed  above  require  the  attainment  of  the  following  operational 
objectives: 

(1) 

Regulate  appropriately  all  market  and  trading  structures  taking  into  account 
the needs of smaller participants, especially SMEs 

(2)  Set up relevant framework around new trading practices 

(3) 

Improve trade transparency for market participants on equities and increase it 
for non equities market 

(4)  Reinforce transparency towards and powers of regulators 

(5) 

Improve  consistency  in  the  implementation  of  rules  and  coordination  in 
supervision by national regulators 

(6) 

Improve transparency and oversight of commodities derivatives markets 

(7)  Reinforce regulation on products, services and services providers when needed 

(8)  Strengthen the rules of business conducts of investment firms 

(9)  Make organizational requirements for investment firms more strict 

An  overview  of  the  various  objectives  and  their  interrelationships  is  depicted  in  the  figure 
below: 

21 

 
 
  
 
 
General 
objectives

Specific
objectives

Operational
objectives

Reinforce investors’
confidence

Reduce risks of market
disorder and market abuse

Reduce systemic risks

Increase efficiency of  financial
markets and reduce
unecessary costs for 
participants

Ensure a level playing field
between market participants

Increase transparency
for market participants

Reinforce transparency towars and 
powers of regulators and increase
coordination at European level

Raise investors protection

Address organisational deficiencies
and excessive risk taking by 
investment firms and market
operators

Regulate appropriately
all market structures and trading places 
taking into account the needs of smaller
participants

Establish relevant framework around
new trading practices

Increase trade transparency
for market participants on equities and 
establish it for non equities market

Reinforce transparency for 
regulators

Reinforce powers and consistency of 
supervisory practice

Improve transparency and oversight
of commodities markets

Reinforce regulation on products, services 
and services providers  when needed

Strenghten the conduct of business 
rules for investment firms

Make organisational requirements for 
investment firms more strict

4.2.  Consistency of the objectives with other EU policies 

The  identified  objectives  are  coherent  with  the  EU's  fundamental  goals  of  promoting  a 
harmonised  and  sustainable  development  of  economic  activities,  a  high  degree  of 
competitiveness,  and  a  high  level  of  consumer  protection,  which  includes  safety  and 
economic interests of citizens (Article 169 TFEU). 

These  objectives  are  also  consistent  with  the  reform  programme  proposed  by  the  European 
Commission  in  its  Communication  Driving  European  Recovery.84  More  recently  in  the 
Commission  Communication  of  2  June  2010  on  "Regulating  Financial  Services  for 
Sustainable Growth" the Commission indicated that it would propose appropriate revision of 
the MiFID85.  

In addition, other legislative proposals already or shortly to be, adopted by the Commission 
complement the revision of MiFID in terms of increasing market transparency and integrity as 
well  as  containing  market  disorder  and  reinforce  investor  protection  (for  further  details,  see 
Annex  19).  The  proposal  for  a  Regulation  on  short  selling  and  certain  aspects  of  Credit 
Default  Swaps86  includes  a  short  selling  disclosure  regime  which  would  make  it  easier  for 
regulators to detect possible cases of market manipulation. The proposal for a regulation on 
derivatives,  central  counterparties  and  trade  repositories87  will  also  increase  transparency  of 
significant positions in derivatives for regulators as well as reducing systemic risks for market 
participants. The revision of the MAD88 that should be presented together with the revision of 
MiFID  will  aim  at  enlarging  the  scope  and  increasing  the  efficiency  of  the  directive  and 
contribute  to  better  and  sounder  financial  markets.  The  issues  of  transparency  requirements 

22 

 
 
  
 
 
specific to physical energy markets, as well as transaction reporting to ensure the integrity of 
energy  markets,  are  the  subject  of  the  Commission  proposal  for  a  Regulation  on  energy 
market integrity and transparency89. 

4.3.  Consistency of the objectives with fundamental rights 

The  legislative  measures  setting  out  rules  for  the  provision  of  investment  services  and 
activities in financial instruments, including sanctions need to be in compliance with relevant 
fundamental  rights  embodied  in  the  EU  Charter  of  Fundamental  Rights  ("EU  CFR"),  and 
particular  attention  should  be  given  to  the  necessity  and  proportionality  of  the  legislative 
measures. 

The following fundamental rights of the EU Charter of Fundamental Rights are of particular 
relevance: 

•  Respect for private and family life (Art.7) 

•  Protection of personal data (Art.8) 

•  Freedom to conduct a business (Art. 16) 

•  Consumer protection (Art. 38) 

•  The fundamental rights provided for in Title VI Justice: right to an effective remedy and to 

a fair trial (Art. 47); presumption of innocence and right of defence (Art.48) 

Limitations  on  these  rights  and  freedoms  are  allowed  under  Article  52  of  the  Charter.  The 
objectives  as  defined  above  are  consistent  with  the  EU's  obligations  to  respect  fundamental 
rights. However, any limitation on the exercise of these rights and freedoms must be provided 
for by the law and respect the essence of these rights and freedoms. Subject to the principle of 
proportionality,  limitations  may  be  made  only  if  they  are  necessary  and  genuinely  meet  the 
objectives  of  general  interest  recognised  by  the  Union  or  the  need  to  protect  the  rights  and 
freedoms  of  others90.  In  the  case  of  MiFID,  the  general  interest  objective  which  justifies 
certain  limitations  of  fundamental  rights  is  the  objective  of  ensuring  market  integrity  and 
compliance with MiFID rules such as conduct of business rules. On the other hand the MiFID 
review  will  overall  reinforce  the  right  to  consumer  protection  (Art.  38)  and  the  freedom  to 
conduct business in line with the following specific objectives: to ensure a level playing field 
between market participants, to increase market transparency for market participants, and to 
enhance  investor  protection.  As  most  of  the  options  considered  as  part  of  this  impact 
assessment do not interfere in any way with any of the fundamental rights identified above or 
reinforce  the  right  to  consumer  protection  and/or  the  freedom  to  conduct  business,  we  have 
focused  our  assessment  on  the  options  which  might  limit  these  rights  and  freedoms.  A 
summary  of  the  impacts  of  the  relevant  policy  options  is  set  out  for  each  option  in  the 
summary tables in section 6, and the full assessment for these options can be found in Annex 
3.  

5. 

POLICY OPTIONS 

In order to meet the objectives set out in the previous section, the Commission services have 
analysed different policy options.  

23 

 
 
  
 
The  range  of  policy  initiatives  included  in  the  revision  of  MiFID  being  considerable,  the 
different policy options have only been considered for the initiatives which are most critical 
and likely to have significant impacts. 

A  summary  discussion  of  the  secondary  policy  options  can  be  found  in  Annex  9.  We  have 
chosen not to analyze these in the core of the text and limit our costs-benefits analysis in the 
annex to the preferred options envisaged (i.e. no alternative options considered). 

Policy options 

Summary of policy options 

1 Regulate appropriately all market structures and trading places taking into account the needs of smaller participants, especially 
SMEs 

1.1 No action 

Take no action at the EU level 

Trading platforms 

to  capture  current 

Introduce  a  new  category  of 
1.2 
Organised  Trading  Facilities 
(OTF), 
besides  Regulated  Markets  (RM)  and 
MTFs 
(including 
broker  crossing  systems  -  BCS)  as  well 
as  possible  new  trading  practices  while 
further 
the 
and 
align 
surveillance 
and 
organisational 
requirements  of  regulated  markets  and 
MTFs  

reinforce 

Under  this  option  a  new  category  called  organised  trading  facility  would  be  established 
capturing previously not regulated as a specific MiFID trading venue organised facilities such as 
broker  crossing  systems,  "swap  execution  facility"  type  platforms,  hybrid  electronic/voice 
broking  facilities  and  any  other  type  of  organised  execution  system  operated  by  a  firm  that 
brings together third party buying and selling interests. This new category would ensure that all 
organised trading is conducted on regulated venues that are transparent and subject to similar 
organisational requirements. The different types  of trading venues will be clearly  distinguished 
based  on  their  characteristics.  Regulated  markets  and  MTFs  are  characterised  by  non-
discretionary  execution  of  transactions  and  non-discriminatory  access  to  their  systems.  This 
means  that  a  transaction  will  be  executed  according  to  a  predetermined  set  of  rules.  It  also 
means that they offer access to everyone willing to trade on their systems when they meet an 
objective set of criteria. By contrast, the operator of an organised trading facility has discretion 
over how a transaction will be executed. He has a best execution obligation towards the clients 
trading  on  his  platform.  He  may  therefore  choose  to  route  a  transaction  to  another  firm  or 
platform for execution. An organised trading facility may also refuse access to clients he does 
not  want  to  trade  with.  An  important  constraint  on  OTFs  is  that  the  operator  may  not  trade 
against his own proprietary capital. This would mean that firms operating internal systems that 
try  to match client orders or  that enable clients to execute orders  with the  firm  will have to  be 
authorised  and  supervised  under  the  respective  provisions  of  a  MTF  or  OTF  or  Systematic 
Internaliser.  The  OTF  category  would  not  include  ad  hoc  OTC  transactions.  It  would  also  not 
include systems which do not match trading interests such as: systems or facilities used to route 
an order to an external trading venue, systems used to disseminate and/or advertise buying and 
selling trading interests, post-trade confirmation systems, etc.   

The  organisational  requirements  applying  to  regulated  markets  and  MTFs,  as  well  as  OTFs 
would be further aligned where businesses are of a similar nature especially those requirements 
concerning  conflicts  of  interest  and  risk  mitigation  systems.  Operators  of  the  various  trading 
venues  trading  identical  instruments  would  be  required  to  cooperate  and  inform  each  other  of 
suspicious trading activity and various other trading events. 

1.3  Expand  the  definition  of  MTF  so  it 
would  capture 
trading  on  all  broker 
crossing systems (BCS) 

This  option  would  expand  the  current  definition  of  MTF  so  that  all  broker  crossing  systems 
(BCS)  would  be  expressly  captured  and  organisational  and  transparency  requirements 
applicable to trading venues would apply.  

Trading of derivative instruments 

1.4  Mandate  trading  of  standardised 
OTC  derivatives (i.e.  all  clearing  eligible 
and  sufficiently  liquid  derivatives)  on 
RM, MTFs or OTFs  

This  option  picks  up  on  the  G20  commitment  to  move  trading  in  standardised  derivatives  to 
exchanges  or  electronic  trading  platforms  where  appropriate.  All  derivatives  which  are  eligible 
for clearing and are sufficiently liquid (the criterion of sufficient liquidity would be determined via 
implementing measures) would be required to be traded on regulated markets, MTFs or OTFs. 
These  venues  would  be  required  to  fulfil  specifically  designed  criteria  and  fulfil  similar 
transparency requirements towards the regulators and the public.  

targets 

1.5  Set 
in 
standardised  OTC  derivatives  to  move 
to organised venues 

trading 

for 

This  option  would  entail  setting  targets  in  the  Directive  for  industry  –  i.e.  suitably  high 
percentages  of  transactions  per  asset  class  –  for  moving  trading  in  standardised  OTC 
derivatives  onto  organised  venues  within  a  given  timeframe.  The  venues  selected  could  be 
regulated  markets,  MTFs  and  OTFs,  or  only  the  first  two.  The  Directive  would  provide  for  the 
setting of targets in the implementing legislation. 

SME markets 

24 

 
 
  
 
1.6  Introduce  a  tailored  regime  for  SME 
markets  under  the  existing  regulatory 
framework of MTF  

Under this option a special category of SME market would be established in MiFID, under the 
existing  regulatory  framework  MTF,  specifically  designed  to  meet  the  needs  of  SME  issuers. 
Such a regime would entail more calibrated elements in relation to the eligibility of SME issuers 
facilitating  access  of  SMEs  to  MTFs  while  still  creating  a  unified  European  quality  label  for 
SMEs providing for more visibility and therefore more liquidity in SME stocks. 

1.7  Promote  an  industry-led  initiative  to 
enhance the visibility of SMEs markets. 

In this option, instead of setting up an EU harmonized regulatory framework for SME markets, 
an  industry-led  initiative  could  be  promoted  developing  market  standards  leading  to  a 
harmonized appearance of SME markets and finally networks between SME markets across the 
EU.  The  industry  may,  according  to  SMEs'  and  investors'  demand  and  needs,  create  a  self-
regulated standard model taking into account existing market models and practises. This would 
entail  to  give  some  incentives  to  SME  markets  at  EU  level  (e.g.  communication,  financing)  to 
enhance their visibility and promote a European network of SME trading venues. 

Options 1.2 and 1.3 are mutually exclusive, as are options 1.4 and 1.5, as well as options 1.6 and 1.7. 

2 Regulate appropriately new trading technologies and address any related risks of disorderly trading 

2.1 No action 

Take no action at the EU level 

Organisational requirements 

2.2  Narrow  the  exemptions  granted  to 
dealers  on  own  account  to  ensure  that 
High  Frequency  Traders  (HFT)  that  are 
a direct member or direct participant of a 
RM or MTF are authorised  

Under this option, all entities that are a direct member or a direct participant of a RM or MTF, 
including  those  engaging  in  high-frequency  trading,  would  be  required  to  be  authorised  as  an 
investment firm under MiFID so that they would all be supervised by a competent authority and 
required  to  comply  with  systems,  risk  and  compliance  requirements  applicable  to  investment 
firms.  

2.3  Reinforce organisational 
requirements for firms involved in 
automated trading and/or high-frequency 
trading and firms providing sponsored or 
direct market access  

Under this option specific obligations would be imposed targeted specifically at algorithmic and 
HFT  trading  ensuring  that  firms  have  robust  risk  controls  in  place  to  prevent  potential  trading 
system  errors  or  rogue  algorithms.  Information  about  algorithms  would  also  be  required  to  be 
made  available  to  regulators  upon  request.  In  addition,  firms  granting  other  traders  direct  or 
sponsored access to their systems would need to have stringent risk controls in place as well as 
filters which can detect errors or attempts to misuse their facilities.  

2.4  Reinforce organisational 
requirements (e.g. circuit breakers, 
stress testing of their trading systems) 
for market operators  

2.5  Submit  HFT  to  requirements  to 
provide liquidity on an ongoing basis  

This  option  would  address  automated  trading  from  the  perspective  of  the  market  operators. 
Operators of organised trading venues would be obliged to put in place adequate risk controls to 
prevent  a  breakdown  of 
trading  systems  or  against  potentially  destabilising  market 
developments.  These  operators  would  be  required  to  stress  test  and  encode  so-called  circuit 
breakers into their systems which can stop trading in an instrument or the market as a whole in 
adverse  conditions  when  orderly  trading  is  in  danger  and  investors  need  to  be  protected. 
Operators  would  also  be  obliged  to  put  in  place  rules  clearly  defining  circumstances  in  which 
trades  can  be  broken  following  trading  errors  and  procedures  to  be  followed  if  trades  can  be 
broken. 

Activity of HFT 

While  the  previous  options  entailed  measures  regarding  the  organisational  aspects  of 
automated  and  high-frequency  trading  the  now  following  options  focus  on  the  way  high-
frequency traders conduct their business. Option 2.5 would primarily impose a requirement on 
market operators, however with a direct impact on how high-frequency traders operating on the 
respective platforms. Operators would need to ensure in their rules that high frequency traders 
executing  a  significant  volume  of  trades  in  an  instrument  would  be  obliged  to  continuously 
provide  liquidity  on  the  trading  venue  for  the  instrument  (in  a  similar  but  not  identical  way  to 
market  makers).  That  is  they  would  not  be  able  to  intermittently  withdraw  from  trading  in 
instruments.  

2.6  Impose  minimum  latency  period  of 
orders in the order book 

Under this option an obligation would be implemented according to which orders on electronic 
platforms would need to rest on an order book for a minimum period of time before they can be 
withdrawn. This would prevent the use of many algorithmic and high frequency trading systems 
that involve submitting and withdrawing large number of orders in very short periods (which is 
an essential element of many forms of automated trading).  

Impose  an  order 

to  executed 
2.7 
transaction 
imposing 
incremental  penalties  on  cancelled 
orders and setting up minimum tick size 

ratio 

by 

Under this option market operators would need to ensure that their market participants maintain 
an adequate order to transaction executed ratio. It would impose that market operators impose 
a  system  of  incremental  penalties  for  cancelled  orders.  This  would  limit  the  number  of  orders 
that can be placed and then cancelled by high frequency traders. This would reduce stress on 
trading  systems  as  it  would  prevent  excessively  large  numbers  of  orders  from  being  sent  and 
then  withdrawn  and  updated.  It  would  also  prevent  behaviour  where  participants  submit  a 
multitude  of  orders  withdrawing  them  almost  immediately  just  to  gauge  the  depth  of  the  order 
book. In addition, the obligation for market operators to set up minimum tick size (i.e. a tick size 
is the smallest increment (tick) by which the price of exchange-traded instrument can move) on 

25 

 
 
  
 
their trading venues would prevent excessive arbitrage by HFT as well as unsound competition 
between trading venues that could lead to disorderly trading. 

Policy options 2.2, 2.3 and 2.4 are not mutually exclusive and can complement each other. Options 2.5, 2.6 and 2.7 are also not mutually 
exclusive. 

3.1 No action 

Take no action at the EU level 

3 Increase trade transparency for market participants 

the  pre  and  post 

trade 
3.2  Adjust 
transparency  regime 
for  equities  by 
ensuring  consistent  application  and 
monitoring  of  the  utilisation  of  the  pre-
trade transparency waivers, by reducing 
delays  for  post  trade  publication  and  by 
extending 
regime 
applicable  to  shares  admitted  to  trading 
on  RMs  to  shares  only  traded  on  MTFs 
or  OTFs  

transparency 

the 

Trade transparency for equities markets 

This  option  would  focus  on  strengthening  a  number  of  features  of  the  existing  trade 
transparency  regime  for  equities.  The  current  waivers  from  pre-trade  transparency  obligations 
would  be  further  harmonised  as  to  their  application  and  their  monitoring  would  be  improved 
giving ESMA an enhanced role in the process. In the post-trade section the maximum deadline 
for real-time reporting  would be  reduced down  to one minute (from three) and the permissible 
delays for publishing large transactions would be significantly reduced. Furthermore, the scope 
of  the  transparency  regime  would  be  extended  to  instruments  only  traded  on  MTFs  and 
organised trading facilities.  

3.3  Abolish  pre 
trade  waivers  and 
deferred  post  trade  publication  regime 
for large transactions 

This  option  would  go  one  step  further  than  option  3.2  providing  for  total  transparency  in 
European equities trading. Each order regardless of its type or size would be required to be pre-
trade transparent. Every concluded transaction would be required to be published to the market 
immediately.  

3.4  Introduce  a  calibrated  pre  and  post 
trade  transparency  regime  for  certain 
types of bonds and derivatives  

Trade transparency for non-equities markets 

This option would entail extending the MiFID trade transparency rules (both pre- and post-trade) 
from equities to certain types of other financial instruments such as bonds, structured products 
and  derivatives  eligible  for  central  clearing  and  submitted  to  trade  repositories.  As  non-equity 
products  are  very  different  from  equity  products  and  very  different  one  from  another,  the 
detailed  transparency  provisions  would  need  to  be  defined  for  each  asset  class  and  in  some 
cases for each type of instrument within that asset class. This calibration will need to take into 
account  several  factors  including:  (i)  the  make-up  of  market  participants  in  different  asset 
classes,  (ii)  the  different  uses  investors  have  for  the  instruments,  and  (iii)  the  liquidity  and 
average  trade  sizes  in  different  instruments.  The  detailed  provisions  will  be  laid  down  in 
delegated acts.    

3.5  Introduce  a  calibrated  post  trade 
only  transparency  regime  for  certain 
types of bonds and derivatives 

This  option  would  take  a  similar  approach  to  the  previous  option  the  difference  being  that  the 
new transparency regime for non-equity asset classes would only cover post-trade information.  

3.6  Reduce  data  costs  notably  by 
requiring  unbundling  of  pre  and  post 
trade  data  and  providing  guidance  on 
reasonable  costs  of  data,  and  improve 
the  quality  of  and  consistency  of  post 
trade  data  by  the  set  up  of  a  system  of 
Approved  Publication  Arrangements 
(APAs)  

Costs and consolidation of trade data 

Under  this  option,  measures  would  be  implemented  reducing  the  costs  of  data  for  market 
participants: 
-  organised  trading  venues  would  be  required  to  unbundle  pre-  and  post-trade  data  so  that 
users would not be required to purchase a whole data package if they are only interested in, for 
example, post-trade data; 
-  Standards  by  ESMA  determining  criteria  for  calculating  what  constitutes  a  reasonable  cost 
charged for data would be envisaged; 
- Introduce further standards regarding the content and format of post trade data; 
- Investment firms would be required to publish  all post-trade transparency information via so-
called Approved Publication Arrangements (APAs). These APAs would need to adhere to strict 
quality standards to be approved ; and 
- Trade data would be required to be provided free of cost 15 minutes after the trade. 

3.7 Reduce data costs by establishing a 
system for regulating the prices of data 

This option would entail setting up maximum prices that can be charged for market data with a 
view to reduce the cost significantly 

26 

 
 
  
 
3.8  Improve  the  consolidation  of  post 
trade  data  for  the  equities  markets  by 
the set-up of a consolidated tape system 
operated  by  one  or  several  commercial 
providers. Introduce a consolidated tape 
for non-equities markets after a period of 
2  years  under  the  same  set-up  as  for 
equities markets 

This option would be complementary to option 3.6 as the data pre-managed by the APAs would 
then  be  submitted  to  dedicated  consolidators  (i.e.  one  or  several  commercial  providers)  that 
would  need  a  separate  approval.  The  function  of  these  consolidators  would  be  to  collect  all 
information  that  is  published  per  share  at  any  given  time  and  make  it  available  to  market 
participants  by  means  of  one  consolidated  data  stream  at  a  reasonable  cost.  The  set-up  of  a 
consolidated  tape  by  one  or  several  commercial  providers  would  be  required  for  non-equities 
markets after a transitional period of 2 years depending on the type of financial instrument. This 
differed application would ensure that the consolidation of trade data would take place after the 
implementation of the new trade transparency requirements for non-equities markets by market 
participants.  

3.9  Improve  the  consolidation  of  post 
trade  data  for  the  equities  markets  by 
the set-up of a consolidated tape system 
organised  as  a  public  utility  industry 
body.  Introduce  a  consolidated  tape  for 
non-equities  markets  after  a  period  of  2 
years  under  the  same  set-up  as  for 
equities markets 

This  option  would  also  be  complementary  to  option  3.6.  However,  instead  of  having  one  or 
several  commercial  providers  of  consolidation  a  single  public  entity  would  be  established  to 
operate the consolidated tape system on a not for profit basis. The set-up of a consolidated tape 
by a public utility body would be required for non-equities markets after a transitional period of 2 
years depending on the type of financial instrument. This differed application would ensure that 
the  consolidation  of  trade  data  would  take  place  after  the  implementation  of  the  new  trade 
transparency requirements for non-equities markets by market participants.  

Policy options 3.2 and 3.3 are mutually exclusive, as well as options 3.4 and 3.5. Options 3.6 and 3.7, as well as options 3.8 and 3.9 are 
mutually exclusive, but these two sets of options are complementary to each other. 

4 Reinforce regulators powers and consistency of supervisory practice at European and International level 

4.1 No action 

Take no action at the EU level 

Powers of regulators 

4.2  Introduce  the  possibility  for  national 
regulators to ban for an indefinite period 
specific  activities,  products  or  services 
under  the  coordination  of  ESMA.  Give 
the  possibility  to  ESMA  under  specific 
circumstances  to  introduce  a  temporary 
ban  in  accordance  with  Article  9(5)  of 
the ESMA regulation N°1095/201091 

This  option  would  consist  in  giving  national  regulators  the  power  to  ban  or  restrict  for  an 
indefinite period the trading or distribution of a product or the provision of a service in case of 
exceptional  adverse  developments  which  gives  to  significant  investor  protection  concerns  or 
poses  a  serious  threat  to  the  financial  stability  of  whole  or  part  of  the  financial  system  or  the 
orderly  functioning  and  integrity  of  financial  markets.  The  action  taken  by  any  Member  State 
should  be  proportionate  to  the  risks  involved  and  should  not  have  a  discriminatory  effect  on 
services or activities provided by  other Member Sates. ESMA  would perform a facilitation and 
coordination role in relation to any action taken  by Member States to ensure that any national 
action  is  justified  and  proportionate  and  where  appropriate  a  consistent  approach  is  taken. 
ESMA would have to adopt and publish an opinion on the proposed national ban or restriction. If 
the national Competent Authority disagrees with ESMA's opinion, it should make public why. In 
addition  to  the  powers  granted  to  national  competent  authorities  under  the  coordination  of 
ESMA, ESMA would have the power to temporarily ban products and services in line with the 
ESMA regulation. The ban could consist in a prohibition or restriction on the marketing or sale of 
financial instrument or on the persons engaged in the specific activity. The provisions would set 
specific  conditions  for  both  of  these  bans  on  their  activation,  which  can  notably  happen  when 
there are concerns on investor protection, threat to the orderly functioning of financial markets 
or  stability  of  the  financial  system.  Such  a  power  would  be  complementary  to  the  national 
powers  in  the  sense  that  a  ban  by  ESMA  could  only  be  triggered  in  the  absence  of  national 
measures or in case the national measures taken would be inappropriate to address the threats 
identified. 

4.3 Introduce an authorisation regime for 
new activities, products or services 

This option would consist in requiring that before being distributed all new products and services 
are to be properly authorised by a dedicated mechanism at EU level. 

4.4  Reinforce  the  oversight  of  positions 
in  derivatives  in  particular  commodity 
granting 
derivatives, 
regulators  the  power  coordinated  via 
ESMA to introduce positions limits  

including 

by 

This option has several layers. First trading venues on which commodity derivatives trade would 
be required to adopt appropriate arrangements to support liquidity, prevent market abuse, and 
ensure orderly pricing and settlement. Position limits are a possible measure to this effect, i.e. 
hard  position  limits  are  fixed  caps  on  the  size  of  individual  positions  that  apply  to  all  market 
participants  at  all  times.  Position  management  is  another,  i.e.  the  possibility  for  the  venue 
operator  to  intervene  ad  hoc  and  ask  a  participant  to  reduce  its  position.  Second,  national 
competent authorities would also be given broad powers to carry out position management with 
regard  to  market  participants'  positions  in  any  type  of  derivatives  and  require  a  position  to  be 
reduced.  They  would  also  be  given  explicit  powers  to  impose  both  temporary  (i.e.  position 
management  approach)  and  permanent  limits  (i.e.  position  limits)  on  the  ability  of  persons  to 
enter  into  positions  in  relation  to  commodity  derivatives.  The  limits  should  be  transparent  and 
non-discriminatory.  ESMA  would  perform  a  facilitation  and  coordination  role  in  relation  to  any 
measure taken by national competent authorities. Finally, ESMA would have temporary powers 
to intervene in positions and to limit them in a temporary fashion consistent with the emergency 
powers granted in the ESMA regulation. In other words, ESMA would be equipped with position 
management powers in case a national competent authority fails to intervene or does so to an 
insufficient degree, but no position limit powers.  

27 

 
 
  
 
 
4.5  Reinforce  the  oversight  of  financial 
markets which are increasingly global by 
strengthening  the  cooperation  between 
securities 
EU 
and 
reinforce 
regulators. 
monitoring 
of 
commodity  derivatives  markets  by 
cooperation 
international 
promoting 
among 
financial  and 
physical markets 

third 
In 
and 

country 
addition 

regulators  of 

investigation 

 4.6 Harmonise conditions for the access 
to  the  EU  of  third  country  investment 
firms,  by  introducing  a  third  country 
regime  (based  on  a  common  set  of 
of 
criteria 
understanding 
the 
Member  States  regulators  and  the  third 
country 
the 
regulators 
coordination of ESMA) 

(MoU)  between 

memoranda 

under 

and 

This  option  would  consist  in  strengthening  cooperation  between  competent  authorities  with 
other  market  supervisors  around  the  world,  possibly  through  ESMA.  In  the  specific  case  of 
commodity derivatives markets this option would in addition reinforce the cooperation between 
financial  and  physical  regulators  both  within  the  EU  and  at  international  level.  This  entails 
establishing new memoranda of understanding and cooperation agreements. In addition, there 
will also be ongoing information sharing, assistance in information requests, and cooperation in 
cross-border  investigations.  This  option  is  complementary  to  a  similar  option  proposed  in  the 
review of the Market Abuse Directive. While MAD is limited to market abuse, this option seeks 
to promote cooperation in supervising fair and orderly working of markets.  

Conditions of access of third country firms 

This option would create a harmonised framework for granting access to EU markets for firms 
based  in  third  countries.  The  provision  of  services  to  retail  clients  would  always  require  the 
establishment of a branch in the EU territory; the provision of services without a branch would 
be  limited  to  non-retail  clients.  The  national  competent  authority  would  have  to  register  (and 
thus  grant  access  to  the  EU  internal  market)  and  supervise  third  country  investment  firms 
intending  to  establish  a  branch  in  its  territory.  Based  on  a  decision  of  the  national  competent 
authority  that  the  third  country  firm  is  subject  to  and  complies  with  legal  requirements  in  a 
number  of  relevant  areas  (authorisation,  criteria  for  appointment  of  managers,  capital, 
organisational  requirements),  access  to  the  EU  could  be  granted  subject  to  appropriate 
cooperation  agreements  between  the  relevant  third  country  authority  and  the  EU  competent 
authority  (i.e.  Memoranda  of  understanding  would  have  to  be  established  between  the  third 
country  authorities  and  the  Member  States  regulators  under  the  coordination  of  ESMA)  and 
compliance by the firm with key MiFID operating and investor protection conditions. To ensure 
consistency  of  approach  across  the  EU,  ESMA  would  be  able  to  resolve  any  disputes  arising 
between Member State authorities regarding the authorisations. 

Introduce  an  equivalence  and 
4.7 
reciprocity 
regime  by  which  after 
assessment  by  the  Commission  of  the 
third  country  regulatory  and  supervisory 
framework  access  to  the  EU  would  be 
granted to investment firms based in that 
third country. 

This  option  would  entail  the  assessment  of  equivalence  and  reciprocal  access  of  the  third 
country  regulatory  and  supervisory  regime  in  relation  to  the  EU  regime  and  to  EU-based 
operators. This assessment would be formalised by a decision of the Commission. Memoranda 
of understanding (MoU) between the Member States regulators and the third-country regulators 
should  be  concluded  based  on  a  standard  MoU  that  could  be  drafted  by  ESMA.  Investment 
firms established in third countries for which equivalence has been granted would have access 
to  the  EU  market,  with  the  provision  of  services  to  retail  clients  would  always  requiring  the 
establishment  of  a  branch  in  the  EU  territory  and  compliance  by  the  firm  with  key  MiFID 
operating and investor protection conditions. 

4.8  Ensure  effective  and  deterrent 
common 
sanctions  by 
administrative 
minimum 
measures and sanctions  

introducing 

rules 

for 

Sanctions 

This option would require Member States to provide for administrative sanctions and measures 
which are effective, proportionate and dissuasive byintroducing minimum rules on type and level 
of  administrative  measures  and  administrative  sanctions.  Administrative  sanctions  and 
measures  set  out  by  Member  States  would  have  to  satisfy  certain  essential  requirements  in 
relation to addressees, criteria to be taken into account when applying a sanction or measure, 
publication of sanctions or measures, key sanctioning powers and minimum levels of fines. This 
option would also entail establishing whistleblowing mechanisms.  

4.9  Ensure  effective  and  deterrent 
sanctions  by  harmonising  administrative 
measures and sanctions  

This  option  would  introduce  uniform  types  and  level  of  administrative  measures  and 
administrative  sanctions  across 
the  EU.  This  option  would  also  entail  establishing 
whistleblowing mechanisms. 

Policy options 4.2, 4.3, 4.4 and 4.5 can complement each other. Policy options 4.6 and 4.7 are mutually exclusive as well as options 4.8 and 
4.9. 

5 Reinforce transparency to regulators 

5.1 No action 

Take no action at the EU level 

Scope of transaction reporting 

5.2  Extend  the  scope  of  transaction 
reporting  to  regulators  to  all  financial 
instruments (i.e. all financial instruments 
admitted  to  trading  and  all  financial 
instruments  only  traded  OTC).  Exempt 
those only traded OTC which are neither 
dependent  on  nor  may  influence  the 
value  of  a  financial  instrument  admitted 
to  trading.  This  will  result  in  a  full 
alignment  with  the  scope  of  the  revised 

This  option  entails  that  investment  firms  report  the  details  of  transactions  in  all  instruments 
which are traded in an organised way, either on a RM, a MTF or an organised trading facility to 
regulators. Notably the extension to OTFs would bring a whole set of derivatives products into 
scope (e.g. part  of equity  derivatives, credit derivatives, currency  derivatives, and interest rate 
swaps).  All  transactions  in  OTC  instruments  which  are  not  themselves  traded  in  an  organised 
way    will  also  have  to  be  reported,  except  when  the  value  of  those  does  not  depend  to  some 
extent on or may not influence that of instruments which are admitted to trading. Extending the 
scope  of  transaction  reporting  to  such  instruments  will  bring  the  reporting  requirements  in  line 
with the existing provisions of MAD, as well as with those of the revised MAD, and corresponds 
to existing practice in some Member States (e.g. UK, Ireland, Austria, and Spain). Commodity 

28 

 
 
  
 
Market Abuse Directive. Lastly regarding 
derivatives,  harmonise  the  transaction 
reporting requirements with the reporting 
requirements under EMIR 

derivatives  may  be  used  for  market  abuse  purposes,  notably  to  distort  the  underlying  market. 
Commodity derivatives will  need to be brought into scope separately. This extension overlaps 
considerably with the scope of reporting requirements to trade repositories under EMIR. 

5.3  Extend  the  scope  of  transaction 
reporting to all financial instruments that 
are  admitted  to  trading  and  all  OTC 
financial  instruments.  Extend  reporting 
obligations also to orders 

This option entails that trading in all financial instruments will need to be reported, regardless of 
whether  an  instrument  is  admitted  to  trading  or  not,  and  whether  its  value  depends  to  some 
extent  on  or  may  influence  that  of  instruments  which  are  admitted  to  trading.  In  addition, 
reporting parties will have to transmit to their competent authorities not only the transactions that 
they have done but also the orders that they have received or initiated 

5.4  Require  market  operators  to  store 
order data in an harmonised way  

This  option  entails  that  all  market  operators  keep  records  of  all  orders  submitted  to  their 
platforms,  regardless  of  whether  these  orders  are  executed  or  not.  Such  records  need  to  be 
comparable across platforms, notably with regard to the time at which they were submitted. The 
information  stored  should  include  a  unique  identification  of  the  trader  or  algorithm  that  has 
initiated the order. ESMA will set the appropriate standards. 

Reporting channels 

5.5  Increase  the  efficiency  of  reporting 
channels  by  the  set  up  of  Approved 
Reporting  Mechanisms  ("ARMs")  and 
allow  for  trade  repositories  under  EMIR 
to be approved as an ARM under MiFID  

This  option  entails  that  all  entities  involved  in  reporting  transactions  on  behalf  of  investment 
firms  are  adequately  supervised.  Under  this  option,  competent  authorities'  powers  to  monitor 
ARM's functioning on an ongoing basis will be clarified. Also, the standards that ARM's need to 
comply with will be harmonised. 

Require 

5.6 
repositories 
authorised  under  EMIR  to  be  approved 
as an ARM under MiFID 

trade 

This  option  entails  that  financial  firms  would  be  required  to  use  trade  repositories  to  report 
derivatives transactions on their behalf, and that all trade repositories are required to report the 
transactions  they  receive  under  EMIR  on  behalf  of  market  participants  under  MiFID.  If  data 
requirements are not the same under MiFID and EMIR, firms would have to send additional data 
fields to enable trade repositories to report on their behalf 

Policy options 5.2 and 5.3 are mutually exclusive, while option 5.4 is complementary. Policy options 5.5 and 5.6 are mutually exclusive. 

6.1 No action 

Take no action at the EU level 

6 Improve transparency and oversight of commodities markets 

6.2 Set up a system of position reporting 
by  categories  of  traders  for  organised 
trading  venues 
trading  commodities 
derivatives contracts  

Evolution of commodity derivatives markets  

Under this option organised trading venues which admit commodity derivatives to trading would 
have  to  make  available  to  regulators  (in  detail)  and  the  public  (in  aggregate)  harmonised 
position information by type of regulated entity. A trader's position is the open interest (the total 
of all futures and option contracts) that he holds. The trader would have to report to the trading 
venue  whether  he  trades  on  own  account  or  on  whose  behalf  he  is  trading  including  the 
regulatory  classification  of  their  end-customers  in  EU  financial  markets  legislation  (e.g. 
investment  firms,  credit  institutions,  alternative  investment  fund  managers,  UCITS,  pension 
funds, insurance companies). If the end beneficiary of the position is not a financial entity, this 
position  would  by  deduction  be  classified  as  non-financial.  The  focus  of  this  obligation  will  be 
commodity derivatives contracts traded on organised trading venues (contracts traded either on 
regulated markets, MTFs or organised trading facilities) which serve a benchmark price setting 
function.  The  objective  of  this  position  reporting  would  be  to  improve  the  transparency  of  the 
price  formation  mechanism  and  improve  understanding  by  regulators  of  the  role  played  by 
financial firms in these markets.  

6.3  Control  excessive  volatility  by 
banning  non  hedging  transactions  in 
commodity derivatives markets 

Under  this  option,  any  entity  willing  to  take  positions  in  the  commodity  derivatives  markets  for 
other purposes than hedging an underlying physical commercial risk would be banned to do so. 
As a result this would prohibit financial entities to invest in these markets and offer investment 
products like commodity exchange traded funds to their clients 

Exemptions for commodity firms  

6.4  Review  exemptions  for  commodity 
firms to exclude dealing on own a/c with 
clients  and  delete  the  exemption  for 
specialist commodity derivatives  

Specialist  commodity  firms  whose  main  business  is  to  trade  on  own  account  in  commodities 
and/or commodity derivatives would not be exempt any more. Commercial entities would not be 
allowed any more to trade on own account with clients and the possibility to provide investment 
services  to  the  clients  of  their  main  business  on  an  ancillary  basis  would  be  applied  in  a  very 
precise and narrow way. This option would not by itself affect capital requirements imposed on 
firms. 

6.5 Delete all exemptions for commodity  The current exemptions for commodity firms would be deleted. This would considerably reduce 

29 

 
 
  
 
firms 

the scope of the exemptions for these firms as they would only be able to rely on the general 
exemption for trading on own account. There would no longer be a separate exemption for 
specific instruments. 

6.6  Extend  the  application  of  MiFID  to 
secondary  spot 
trading  of  emission 
allowances 

6.7  Develop  a  tailor-made  regime  for 
trading  of  emission 
secondary  spot 
allowances 

Secondary spot trading of emission allowances  

This  option  would  involve  coverage  under  the  MiFID  of  emission  allowances  and  other 
compliance  units  under  the  EU  Emissions  Trading  Scheme.  As  a  result,  MiFID  requirements 
would apply to all trading venues and intermediaries operating in the secondary spot market for 
emission  allowances.  Venues  would  need  to  become  regulated  markets,  MTFs,  or  OTFs. 
Financial  market  rules  would  apply  to  both  spot  and  derivative  markets  for  emissions  trading, 
establishing a coherent regime with overarching rules. This would replace the need to devise a 
tailor made regime for secondary spot emission allowances markets.  

Under  this  option,  a  dedicated,  stand-alone  framework  would  be  developed  to  cater  for  the 
needs  of  the  secondary  spot  trading  in  emission  allowances.  Any  such  framework  would 
complement the  existing rules applicable to trading in derivatives on emission allowances and 
those  envisaged  for  the  auctioning  of  emission  allowances  in  the  ETS  third  trading  period 
starting  in  2013.  This  means  that  whatever  solution  would  emerge,  it  would  need  to  be 
consistent  with  the  regulatory  approach  of  the  MiFID  which  applies  directly  to  trading  in 
derivatives  on  emission  allowances  and  is  extended  to  the  activity  of  auction  platforms, 
investment  firms  and  credit  institutions  in  the  primary  (auction)  market  via  the  Auctioning 
Regulation92. 

Policy options 6.2 and 6.3 can complement each other, whereas options 6.4 and 6.5, as well as options 6.6 and 6.7 are mutually exclusive.  

7 Broaden the scope of regulation on products, services and service providers when needed 

7.1 No action 

Take no action at the EU level 

Optional exemptions for certain investment service providers  

7.2  Allow  Member  States  to  continue 
exempting  certain  investment  service 
introduce 
from  MiFID  but 
providers 
national 
tighten 
requirements 
requirements 
them 
(particularly  conduct  of  business  and 
conflict of interest rules) 

to 
applicable 

to 

This  option  leaves  Member  States  the  possibility  to  exempt  certain  entities  providing  advice 
from the Directive but requires that national legislation includes requirements similar to MiFID in 
a  number  of  areas  (notably  proper  authorization  process  including  fit  and  proper  criteria  and 
conduct of business rules). Member States would maintain discretion in adapting organizational 
requirements to the exempted entities based on national specificities 

7.3  Delete  the  possibility  for  Member 
States 
to  exempt  certain  service 
providers from MIFID (Article 3) 

This option is an extension of the previous one. By deleting the optional exemptions, all these 
firms, often small service providers or even individuals, would be subject to all MiFID obligations 
(including, for instance, organizational requirements).  

Conduct of business rules for unregulated investment products  

7.4  Extend  the  scope  of  MiFID  conduct 
of business and conflict of interest rules 
to structured deposits and deposit based 
products with similar economic effect 

This  option  would  aim  at  extending  MiFID  conflicts  of  interest  and  conduct  of  business  rules 
(particularly  information  to  and  from  clients,  assessment  of  suitability  and  appropriateness, 
inducements) to structured deposits, products which currently are not regulated at EU level 

7.5  Apply  MIFID  conduct  of  business 
rules  and  conflict  of  interest  rules  to 
insurance products 

This option would be to broaden the scope of MiFID in order to apply directly MiFID conduct of 
business and conflict of interest rules to investment products marketed by insurance companies 
(instead  of  modifying  the  sectoral  legislation,  the  Insurance  Mediation  Directive,  in  line  with 
MiFID principles) 

Policy options 7.2 and 7.3 are mutually exclusive, as well as options 7.4 and 7.5. 

8 Strengthen rules of business conduct for investment firms 

8.1 No action 

Take no action at the EU level 

Execution only services and Investment advice 

30 

 
 
  
 
 
investor  protection  by 
8.2  Reinforce 
list  of  non-complex 
the 
narrowing 
products 
for  which  execution  only 
services  are  possible  and  strengthening 
provisions on investment advice  

This  policy  option  combines  two  measures  which  will  have  complementary  effects.  The  first 
measure  consists  in  the  limitation  of  the  definition  of  non-complex  products  which  allows 
investment firms to provide execution only services i.e. without undergoing any assessment of 
the appropriateness of a given product. The second measure consists in reinforcing the conduct 
of  business  rules  for  investment firms  when  providing  investment advice,  mainly  by  specifying 
the conditions for the provision of independent advice (for instance, obligation to offer products 
from  a  broad  range  of  product  providers).  Further  requirements  concerning  the  provision  of 
investment  advice  (reporting  requirements  and  annual  assessment  of  recommendations 
provided)  would  be  mainly  introduced  via  implementing  measures  to  complement  these 
changes in the framework directive. 

8.3  Abolition  of 
regime 

the  execution  only 

This option consists in abolishing the execution only regime. As a consequence, except in the 
case of investment advice, investment firms would be always required to ask client information 
about  their  knowledge  and  experience  in  order  to  assess  the  appropriateness  of  any 
investment. Clients would retain the possibility to refuse to give information or to proceed with 
any transaction indicated as inappropriate by the firm. 

Customers' classification  

This options aims at reinforcing the MiFID regime for non-retail clients by narrowing the list of 
type  of  entities  that  are  de  facto  eligible  counterparties  or  professional  clients.  Further 
requirements would be modified in the implementing measures (deletion of the presumption that 
professional clients have the necessary level of experience and knowledge). 

fairly  and  professionally 

to  act 
8.4  Apply  general  principles 
honestly, 
to 
eligible  counterparties  resulting  in  their 
application  to  all  categories  of  clients 
and  exclude  municipalities  and  local 
public  authorities  from  list  of  eligible 
counterparties  and  professional  clients 
per se 

8.5 Reshape customers' classification by 
introducing new sub categories 

This  option  is  the  extension  of  the  previous  one.  It  would  consist  in  reviewing  the  overall 
customers' classification of MiFID by sub dividing them into more refined categories in order to 
match more closely the diversity of existing market participants. 

8.6  Reinforce 
information  obligations 
when  providing  investment  services  in 
strengthen 
complex  products  and 
for 
periodic 
different 
products, 
including  when  eligible  counterparties 
are involved 

reporting 
categories 

obligations 

of 

Complex products and inducements  

This  option  aims  at  increasing  the  information  and  reporting  requirements  to  clients  of 
investment  firms,  including  eligible  counterparties.  In  the  case  of  more  complex  products, 
investment  firms  should  provide  clients  with  a  risk/gain  and  valuation  profile  of  the  instrument 
prior  to  the  transaction,  quarterly  valuation  during  the  life  of  the  product  as  well  as  quarterly 
reporting  on  the  evolution  of  the  underlying  assets  during  the  lifetime  of  the  product.  Firms 
holding  client  financial  instruments  should  report  to  clients  about  material  modifications  in  the 
situation  of  financial  instruments  concerned.  Most  of  these  detailed  obligations  would  be 
introduced in implementing measures and should be calibrated according to the level of risk of 
the relevant product.  

8.7  Ban  inducements  in  the  case  of 
investment  advice  provided  on  an 
independent  basis  and  in  the  case  of 
portfolio management 

The  objective  of  this  option  is  to  strengthen  the  existing  MiFID  inducement  rules  by  banning 
third  party  inducements  in  case  of  portfolio  management  and  independent  advice.  These 
measures  that  would  affect  the  Level  1  Directive  would  be  complemented  by  changes  in  the 
Level  2  implementing  acts  where  inducements  are  currently  regulated;  this  will  include  the 
improvement of the quality of information given to clients about inducements. 

8.8  Ban  inducements  for  all  investment 
services  

This option  would take the previous option one  step further by introducing a formal ban on all 
inducements for investment firms when they provide any investment services. 

Best execution  

8.9  Require  trading  venues  to  publish 
information  on  execution  quality  and 
improve information provided by firms on 
best execution 

This option consists in improving the framework for best execution by inserting in the MiFID an 
obligation for trading venues to provide data on execution quality. Data would be used by firms 
when  selecting  venues  for  the  purpose  of  best  execution.  The  implementing  directive  would 
clarify technical details of data to be published and would reinforce the requirements relating to 
information  provided  by  investment  firms  on  execution  venues  selected  by  them  and  best 
execution. 

the  best  execution 
8.10  Review 
framework  by  considering  price  as  the 
only factor to comply with best execution 
obligations  

This option aims at narrowing the current factors to consider for the purpose of best execution. 
In  particular,  price  would  be  the  only  factor  to  assess  best  execution;  it  would  replace  the 
current multifactor approach (price and costs for retail clients; further factors such as speed and 
likelihood of execution for professional clients).  

Policy options 8.2 and 8.3, as well as 8.4 and 8.5 are mutually exclusive. Options 8.7 and 8.8 are mutually exclusive, with option 8.6 being 
complementary to either 8.7 or 8.8. Options 8.9 and 8.10 are also mutually exclusive. 

5.9 Strengthen organisational requirements for investment firms 

31 

 
 
  
 
9.1 No action 

Take no action at the EU level 

Corporate governance  

9.2  Reinforce  the  corporate  governance 
framework  by  strengthening  the  role  of 
directors  especially  in  the  functioning  of 
functions  and  when 
internal  control 
defining 
and 
launching  new  products  and  services. 
Require 
clear 
procedures to handle clients' complaints 
in 
the  compliance 
function. 

the  context  of 

to  establish 

strategies 

firms 

firms 

of 

This  option  strengthens  and  specifies  the  overall  framework  for  corporate  governance  in  the 
design of firms' policies, including the decision on products and services to be offered to clients 
(clear  involvement  of  executive  and  non-executive  directors),  in  the  framework  for  internal 
control functions (reinforced independence, further definition of role of the compliance function 
including  handling  with  clients'  complaints)  and  in  the  supervision  by  competent  authorities 
(involvement  in  the  assessment  of  the  adequacy  of  members  of  the  board  of  directors  at  any 
time and in the removal of persons responsible for internal control functions). In addition it will 
explicitly require  that within the compliance function clear procedures have been developed to 
deal with clients' complaints. 

9.3  Introducing  a  new  separate  internal 
function 
the  handling  of  clients' 
complaints 

for 

This option aims at creating a detailed framework, including a separate organisational function, 
for the handling  of complaints. The detailed framework could include specific procedures from 
the reception of complaints to the final answer provided to the client. 

Organisational requirements for portfolio management and underwriting  

9.4  Require  specific  organisational 
requirements  and  procedures  for  the 
provision  of  portfolio  management 
services and underwriting services 

This  option  introduces  a  more  detailed,  while  still  general  framework  for  the  provision  of  the 
services  of  portfolio  management  (formalization  of  investment  strategies  in  managing  clients' 
portfolios)  and  underwriting  (information  requirements  concerning  allotment  of  financial 
instruments, management of conflicts of interest situations). 

Telephone and electronic recording  

9.5  Introduce  a  fully  harmonised  regime 
for telephone and electronic recording of 
client orders 

This  option  implies  the  deletion  of  the  current  option  for  Member  States  to  introduce 
requirements  to  record  telephone  conversations  or  electronic  communications  involving  client 
orders and the introduction of a fully harmonized regime. 

9.6  Introduce  a  common  regime  for 
telephone  and  electronic  recording  but 
still  leave  a  margin  of  discretion  for 
Member  States  in  requiring  a  longer 
the  records  and 
retention  period  of 
to 
recording 
applying 
services not covered at EU level. 

obligations 

This  option  aims  at  introducing  a  common  regime  for  telephone  and  electronic  recording  in 
terms  of  services  covered  (for  instance,  execution  and  reception  and  transmission  of  orders, 
dealing  on  own  account)  and  retention  period  (three  years)  while  still  leaving  a  margin  of 
discretion  to  Member  States  in  applying  the  same  obligation  for  other  services  (for  instance 
portfolio  management)  and  in  requiring  a  longer  retention  period  (up  to  the  ordinary  5  years 
period required for other records). This common regime would focus on the services which are 
the  most  sensitive  from  a  supervisory  point  of  view  in  terms  of  market  abuse  or  investor 
protection  and  would  be  fully  complaint  in  terms  of  retention  period  with  the  Charter  of  EU 
Fundamental Rights. 

Policy options 9.2 and 9.3 can complement each other, while options 9.5 and 9.6 are mutually exclusive. 

6. 

ANALYSIS OF IMPACTS AND CHOICE OF PREFERRED OPTIONS AND INSTRUMENTS 

This section sets out in the form of summary tables the advantages and disadvantages of the 
different policy options, measured against the criteria of their effectiveness in achieving the 
related objectives (to be specified for each basket of options), and their efficiency in terms of 
achieving  these  options  for  a  given  level  of  resources  or  at  least  cost.  Impacts  on  relevant 
stakeholders are also considered. 

The  options  are  measured  against  the  above-mentioned  pre-defined  criteria  in  the  tables 
below.  Each  scenario  is  rated  between  "---"  (very  negative),  0  (neutral)  and  "+++"  (very 
positive). Unlike compliance costs, the benefits are nearly impossible to quantify in monetary 
terms. This is why we have assessed the options based on the respective ratio costs-benefits in 
relative terms. The assessment highlights the policy option which is best placed to reach the 
related objectives outlined in section 5 and therefore the preferred one. Should the preferred 
options significantly differ from those suggested by CESR (now ESMA), this will be clearly 
specified. Lastly whenever our policy options draws on the work carried out at the level of the 
International Organization of Securities Committee (IOSCO), we have clearly indicated it. 

32 

 
 
  
 
You will find in Annex 3 a table highlighting the key initiatives under this review with their 
respective level of priority, their link with international or other EU initiatives, the impact on 
the market structure and/ business models (i.e. level of transformational impact), the level of 
execution risks, and the level of costs. A more detailed analysis of the impacts follows in that 
same Annex 3.  

6.1. 

Regulate appropriately all market structures and trading practices taking into 
account the needs of smaller participants, especially SMEs 

Comparison of options (the preferred options are highlighted in bold and underlined in grey): 

Policy option 

Impact on stakeholders 

Effectiveness  

Efficiency 

1 Regulate appropriately all market structures and trading places taking into account the needs of smaller participants, 
especially SMEs 

1.1 No action 

0 

0 

0 

Trading platforms 

1.2 Further align and reinforce the 
organisational and surveillance 
requirements of regulated markets and 
MTFs and introduce a new category of 
Organised Trading Facilities (OTF) to 
capture current and possible new trading 
practices, including BCS 
OR  

(++) creation of a level 

(+++) increased 

(++)compliance costs 

playing field between market 

market transparency  

compensated by 

participants 

(++) strengthening 

sustainable benefits 

(++) improved prevention of 

market integrity 

through sounder and 

market abuse  

 (++) strong 

more transparent 

(-) implementation costs for 

convergence with the 

trading facilities 

operators of MTFs  

US regulation 

(--) compliance costs for 

operators of systems that will 

have to register as OTFs  

benefiting to all 

participants  

1.3 Expand the definition of MTF so it would 
capture trading on all broker crossing 
systems (BCNs) 

(+) improvement of the level 

(++) stricter 

(+) compliance costs  

playing field between market 

framework for BCS 

compensated by 

participants 

(-) inflexibility of the 

benefits 

1.4 Mandate trading of standardised OTC 
derivatives (i.e. all clearing eligible and 
sufficiently liquid derivatives) on RM, 
MTFs or OTFs  
OR 

(-) higher cost of execution 

framework that will 

of large orders for 

not be future proof  

institutional investors 

(--) compliance costs for 

existing operators of BCS  

Trading of derivative instruments 

(++) increased transparency 

(++) increased 

(++)compliance costs 

for end users of derivatives  

transparency on the 

largely compensated by 

(++) increased transparency 

derivatives market for 

benefits for market 

for market regulators  

(++) increased market 

both market 

participants, 

participants and 

regulators in terms of 

surveillance  

especially smaller 

more transparent and 

(--) change in the business 

ones and regulators  

efficient trading  

model of dealers with likely 

(+) increased 

substantial drop of 

competition between 

profitability of dealing 

trading venues that 

activities 

could improve quality 

(-) compliance costs for 

and reliability of prices  

investment firms 

(-) lack of 

customisation of 

derivatives traded 

electronically  

(--) potential drop in 

derivatives market 

liquidity as dealers 

shrink their activities, 

33 

 
 
  
 
 
1.5 Set targets for trading in standardised 
derivatives to move to organised venues 

if no proper calibration 

(+) increased transparency 

(+) increased 

(+) benefits  for market 

for end users of derivatives  

transparency on the 

participants  

(+) increased transparency 

derivatives market for 

compensating 

for market regulators  

both market 

compliance costs  

(+) increased market 

participants and 

surveillance  

regulators 

(-) compliancecosts for 

investment firms 

SME markets 

1.6 Introduce a tailored regime for SME 
markets under the existing regulatory 
framework of MTF 
OR  

(++) keeping the high level of 

(++) easier access to 

(+) limited complaince 

investor 

protection 

as 

financial markets for 

costs more than 

provided  for  in  the  regulated 

SMEs 

compensated by 

market 

(+) more consistent 

benefits for SME in 

(+) harmonized requirements 

and transparent 

terms of easier access 

will reduce issuer- 

framework for SME 

to financing sources 

administrative burden  

financing 

(+)  quality  label  will  attract 

(+) possibility to build 

more 

investments 

and 

up pan-European 

provide for more liquidity 

market networks 

(+) as the EU tailored regime 

giving access to a 

is  a  non-mandatory  one  full 

broader capital pool 

flexibility  is  left  to  market 

operators 

to  use  different 

market models 

1.7 Promote an industry-led initiative to 
enhance the visibility of SMEs markets. 

(+) enhanced source of 

(+) increased source 

(=) compliance costs in 

financing for SMEs  

of capital for SMEs  

line with limited 

(-) enlarged investment 

(-) success depends 

benefits for SMEs 

solutions for investors 

on the willingness of 

industry (market 

operators)  

The creation of OTF has three different objectives: 

•  The first one is to deal with the issue of the broker crossing systems present in the equities 
markets by setting up an appropriate framework for these activities. The OTF regime will 
bring increased transparency and control as well as limit the activities of these systems to 
the pure matching of orders. 

Regarding this first objective, the alternative option to deal with Broker Crossing Systems 
(BCS)  could  have  been  to  use  the  existing  MiFID  market  infrastructure  of  MTFs  and 
change their definition so they could encompass BCS. In order to do so, the MTFs regime 
would have required to be amended to allow for discretionary execution and discriminatory 
access which are the two key specificities of BCS compared to MTFs.  This would fail to 
recognise  the  functional  differences  between  a  broker  crossing  its  client  orders  (a 
traditional and legitimate activity carried on by brokers) and the operation of an exchange. 
Further it is doubtful that such an option would capture all existing trading models and any 
of  those  possibly  to  be  invented  in  the  future  which  would  undermine  our  objective  of 
having  an  all-encompassing  and  future  proof  regulatory  framework  in  order  to  ensure  a 
level  playing  field.  It  would  have  also  generated  large  transformation  costs  for  the 
operators of BCS. These transformations and risks appear disproportionate in regard to the 
size of the trading mode that it aims to address, only 1.5 % of total equity trading93 is on 
broker crossing systems. 

34 

 
 
  
 
•  The second objective of OTFs is to set up an appropriate framework for different types of 
trading systems besides BCS and  irrespective of  the  traded financial instruments.  Mostly 
used  in  the  trading  of  derivatives,  these  systems  are  currently  not  authorised  as  trading 
venues in MiFID but the firms operating them are authorised as an investment firm under 
MiFID  and  not  as  trading  venue.Under  the  OTF  category  very  different  set-ups  such  as 
multi  dealer  platforms  (when  they  are  not  registered  as  MTFs),  interdealer  broker 
platforms, and hybrid voice/electronic trading systems will be captured. The establishment 
of  this  framework  will  be  combined  with  the  obligation  to  trade  on  these  OTFs  all 
standardised  derivatives  which  are  not  traded  on  regulated  markets  or  MTFs.  This  will 
contribute to reduce the share of derivatives which are currently dealt OTC (89 %)94. 

For the second objective, the alternative solution could have been to use the MTF category 
but  the  MTF  regime  does  not  offer  enough  leeway  to  adapt  the  discretionary  nature  of 
execution  and  possibly  the  transparency  rules  to  the  specificities  of  derivatives  and 
especially their intrinsic lower liquidity. Contrary to equities which are actively traded on a 
secondary market, derivatives are very often not traded on a secondary market. A trade on 
a derivative is often a primary trade, meaning that a derivative contract is created for each 
new  trade.  This  is  why  most  derivative  markets  operate  under  a  request  for  quote  model 
rather  than  under  an  exchange  order  book  model.  The  consequence  is  that  the  trading  of 
derivatives is far less active than for equities and therefore the liquidity of these markets 
much lower. This liquidity is important as it conditions the ability of market participants, 
including  non  financial  parties,  to  hedge  their  risks.  This  liquidity  depends  on  market 
makers and broker dealers who are creating these derivatives and take capital risk to do so. 
The transparency and execution rules have to combine the needs to preserve liquidity and 
therefore  ability  for  dealers  to  perform  their  function  with  the  needs  for  the  derivative 
markets to trade in an orderly fashion with a sufficient level of transparency which avoid 
dealers  abusing  their  function.  While  allowing  appropriate  calibration  depending  on  the 
specificities  of  the  instrument  (see  6.3  trade  transparency  for  non-equities  markets),  the 
OTF regime should apply the same transparency regime as other trading venues, the only 
different feature of OTFs being the discriminatory access and the discretionary execution. 

•  The third objective of the OTF regime is to have a framework which is dynamic enough to 
accommodate  the  future  trading  systems  and  solutions  that  could  emerge  in  the  future. 
Financial  innovation  is  such  that  such  emergence  can  be  very  fast.  For  example,  while 
crossing  of  client  orders  is  a  traditional  broker  activity,  increased  automation  of  such 
activities was not foreseen when MiFID was adopted. 

transparency  and  core  organisational  rules.  Regarding 

Overall, the creation of the OTF category will ensure a level playing-field without imposing a 
one-size-fits-all regulation. The proposed approach is to allow for different business models 
but require all venues to play by the same rules. Hence all trading venues would be subject to 
the  same 
the 
requirements  would  be  calibrated  by  asset  class  and  if  necessary  by  type  of  financial 
instrument  within  that  asset  class  via  delegated  acts  (see  6.3  trade  transparency  for  non-
equities).  However  these  transparency  requirements  would  be  the  same  irrespective  of  the 
trading  venue.  Regarding  the  organisational  requirements,  existing  core  organisational  rules 
for  trading  venues  covered  by  MiFID  should  be  extended  to  all  types  of  trading  venues 
offering  competing  services,  including  OTFs.  Most  of  the  calibration  relating  to  these 
requirements  is  set  in  the  framework  directive  and  should  therefore  not  require  major 
additional fine-tuning in implementing acts. 

transparency, 

In  addition,  the  creation  of  OTF  and  the  obligation  to  trade  on  them  standardised  products 
should  substantially  decrease  the  weight  of  OTC  trading  in  both  equities  and  non-equities 

35 

 
 
  
 
markets. The risk of regulatory arbitrage between MTF and OTF should be low as on the one 
end,  MTFs are in most cases successful business models that their operators are unlikely to 
put into danger by switching to OTF, and on the other end, OTFs and MTFs will have very 
similar organisation and trading rules. Further exchanges or MTFs would be unlikely to wish 
to become OTFs as they would then become subject to onerous client facing obligations (that 
a traditional broker has).  

There are both overlaps and differences between our approach and CESR recommendations in 
that  field.  CESR  recommended  to  create  a  new  regulatory  regime  for  BCS  and  also 
acknowledged  that  the  set  up  of  a  new  category  of  organised  trading  venue  might  be 
necessary  to  enact  the  G20  commitment  of  trading  of  standardised  derivatives  on  organised 
trading  venues  when  appropriate.  We  have  built  further  upon  these  recommendations  by 
creating one additional category encompassing all types of unregulated trading venues. 

the  alignment  and  reinforcement  of 

Regarding 
the  organisational  and  surveillance 
requirements of regulated markets and MTFs, we estimate the one off aggregated costs to be 
between  €1  and  €10  million.  We  expect  the  compliance  with  the  requirements  of  the  new 
OTF definition would lead to one-off aggregate costs of €4.2–€11.3 million and ongoing costs 
of €0.6-€3.2 million for the nine crossing system networks currently operating in Europe and 
the estimated 10 to 12 electronic platforms that would have to register as an OTF.  

This option of mandating the trading of clearing eligible and sufficiently liquid instruments on 
OTFs  would  entail  incremental  costs  to  market  participants  and  give  rise  to  estimated 
aggregated  one-off  costs  of  €4.7  to  €9.3  million  and  ongoing  costs  €8.7  and  €17.3  million. 
Mandating  trading  on  transparent  platforms  should  increase  competition  between  dealers 
leading to reduced spreads. Spreads decrease represents a benefit to the market as a whole, but 
an opportunity cost to dealers. The revenue from OTC derivative trading for the largest global 
dealers  is  estimated  to  be  around  $55  billion,  of  which  $33  billion  are  within  the  EU. 
Depending on the proportion of OTC derivatives that would be suitable for on on-exchange 
trading, a reduction of a few percentages in the dealers margins could bring benefits for the 
entire  market  beyond  €100  million  (see  Annex  8.1).  It  should  be  noted  that  this  loss  of 
profitability for dealers could to a certain extent be compensated by increased trading volumes 
and operational efficiencies.  

There  is  broad  support  from  Member  States  (including  the  UK  to  a  certain  extent  which 
would be the most impacted Member State because of its leading position in OTC derivatives 
trading)  and  operators  of  exchanges  for  this  approach,  but  limited  support  from  market 
participants due to concerns over liquidity, possible costs, and the ability to continue trading 
customised contracts. 

It  should  be  noted  that  this  option  build  upon  the  CESR  advice  which  has  then  been 
superseded by IOSCO recommendations95 on how to enact the G20 commitment of moving 
trading  in  standardised  derivatives  onto  exchanges  and  electronic  trading  platforms  where 
appropriate.  

Regarding  the  important  issue  of  SME  markets,  rather  than  an  industry  led  initiative  that 
could  have  limited  impact  (option  1.7),  the  introduction  of  a  tailored  regime  (option  1.6) 
would enlarge the sources of financing for this type of companies with relatively limited set-
up  costs.  Apart  from  Members  States  (i.e.  Germany,  France,  and  the  UK  are  the  Member 
States  hosting  the  main  SME-focused  stock  exchanges)  who  are  broadly  supportive  of  this 
option,  most  other  categories  of  stakeholders  are  much  more  reserved  or  negative  about  it. 
They  have  concerns  about  the  efficiency  of  such  system  and  even  the  potential  detrimental 

36 

 
 
  
 
impact  it  could  have  on  the  existing  SME  markets.  However  the  negative  feedback  from 
stakeholders may be due to the fact that the consultation on that specific point may have been 
insufficiently  clear.  More  fundamentally,  this  tailor  made  regime  will  aim  at  creating  a 
specific  quality  label  for  SME  markets  which  will  be  optional.  The  objective  is  neither  to 
lower existing  transparency standards neither to  restrict  the  existing  range  of  SME  markets. 
Hence we believe this tailor made regime will yield real benefits for SMEs while at the same 
time be flexible enough to accommodate the existing SME markets. Finally, this policy option 
is  not  in  itself  a  panacea  and  is  part  of  several  complementary  initiatives  that  aims  at 
improving the business conditions of SMEs in Europe. 

In conclusion all the above preferred options would give rise to one-off aggregated costs of 
€10  to  €31  million  and  yearly  ongoing  costs  of  €9  to  €21  million.  These  costs  are 
proportionate  as  the  above  policy  options  would  bring  significant  benefits  in  terms  of 
increasing competition by helping create a level playing field and improved transparency for 
market participants, while not being disruptive of the existing business models and preserving 
the liquidity of the markets.   

6.2.  Regulate appropriately new trading technologies and address any related risks of 

disorderly trading 

Comparison of options (the preferred options are highlighted in bold and underlined in grey): 

2 Regulate appropriately new trading technologies and address any related 
risks of disorderly trading 

Policy option 

Impact on 
stakeholders 

Effectiveness  

Efficiency 

2.1 No action 

0 

0 

0 

Organisational requirements 

2.2 Narrow the exemptions 
granted to dealers on own 
account to ensure that all High 
Frequency Traders (HFT) that are 
direct member or a direct 
participant of a RM or MTF are 
authorised  

(++) better monitoring 
by supervisors of HFT 
activity  
(--) marginal 
compliance costs for 
HFT which are not yet 
authorised  

2.3 Reinforce organisational 
requirements for firms involved 
in automated trading and/or high-
frequency trading and firms 
providing sponsored or direct 
market access  

2.4 Reinforce organisational 
requirements (e.g. circuit 
breakers, stress testing of their 
trading systems) for market 
operators  

(++) better risk control 
at investment firm 
level  
(-) marginal 
compliance costs for 
investment firms 

(++) better risk control 
at market operator 
level  
(-) marginal 
compliance costs for 
market operators 

(+) improve the level 
playing field between 
non regulated and 
regulated entities 
 (++) improvement in 
the quality of 
supervision 
(++) application of 
relevant 
organisational 
requirements for an 
authorised firm 
(++) decrease in risks 
of market disorder 
and disruption 
(++) alignment with 
measures introduced 
in the US 

(++) marginal compliance costs for 
entities affected by the new 
authorisation regime compensated 
for by benefits for all market 
participants in terms of level playing 
field and increased oversight by 
regulators 

(++) marginal compliance costs for 
entities affected by the new 
requirements more than 
compensated by benefits for all 
market participants in terms of safer 
trading and operational environment 

(++) decrease in risks 
of market disorder 
and disruption  
(++) alignment with 
the measured being 
considered in the US 

(++) marginal costs for 
entitiesaffected by the new 
requirements more than 
compensated by benefits for all 
market participants in terms of safer 
trading and operational environment 

2.5 Submit HFT to requirements 
to provide liquidity on an 
ongoing basis  

Activity of HFT 

(+) benefits of more 
liquid and less 
disorderly markets to 
all investors 
(-) opportunity costs 
for HFT 

(+) increased level 
playing field  
(-) possible backlash 
effects of the 
measure if HFT 
withdraw from the 
market 

(+) indirect costs (lower market 
efficiency) lower than benefits 
(stability) 

37 

 
 
  
 
 
 
2.6 Impose minimum latency period 
of orders in the order book 

2.7 Impose an order to executed 
transaction ratio  

(+) decrease in the 
tension of IT systems 
of market operators  
(-) opportunity costs 
for HFT that will need 
to have their orders 
resting longer in the 
market 

(+) decrease in the 
tension of IT systems 
of market operators 
(-) opportunity costs 
for HFT that will need 
to have their orders 
resting longer in the 
market 

(+) reduced risks of 
disorderly markets  
(+) increased market 
integrity  
(-) difficulty in 
defining the relevant 
minimum period 
(--) damage to 
market efficiency and 
liquidity 
(+) decrease risks of 
disorderly markets  
(+) increased market 
integrity  
(-) damage to market 
efficiency and 
liquidity 

(-) indirect costs (lower market 
efficiency)higher than benefits 

(+) costs in terms of trading 
constraints more than compensated 
by benefits for all market participants 
in terms of fewer chances of crashes 
of trading systems. 

In order to regulate appropriately the new trading technologies and contain any system risks 
or risks of disorderly trading, it is first important to regulate all the parties involved in these 
activities i.e. high frequency traders (HFT) themselves, firms conducting automated trading, 
including  firms  providing  sponsored  or  direct  market  access,  as  well  as  market  operators 
themselves.  Options  2.2,  2.3  and  2.4  all  aim  at  providing  better  monitoring  and  better  risk 
control  of  these  activities.  The  overall  cost  impact  of  these  preferred  policy  options  will  be 
marginal  given  that  we  will  essentially  enshrine  existing  practice  into  legislation.  However 
codifying  existing  practice  is  key  to  ensure  a  level  playing  field  and  making  these  players 
accountable for the risks the technologies they use might pose to the financial markets. Most 
respondents to the consultation also broadly support these options.  

Regarding firms providing sponsored or direct market access, IOSCO has issued principles96 
to give guidance on the controls to put in place to frame these new practices. Our preferred 
policy option takes into account these recently developed principles, as well as CESR advice. 

The second group of options consider several ways to impact on the activity of HFT in itself 
(options  2.5  to  2.7).  These  options  have  several  drawbacks  from  damaging  liquidity,  being 
difficult  to  implement  or  easy  to  circumvent  and  potentially  distorting  the  market  or 
indiscriminately  affecting  other  forms  of  trading.  Liquidity  provision  obligations  would 
probably  help  prevent  market  stress  and  execution  at  extreme  prices  even  though  affected 
participants could be reluctant to buy under extreme stress circumstances and even prefer to 
be fined for non-compliance. A minimum latency period would be a new measure which has 
not  yet  been  tested  and  would  impede  market  participants  to  react  to  exogenous  events 
exposing them to additional risks and creating distortions with the ones not subject to these 
obligations.97 Another appropriate option would be to impose an order to executed transaction 
ratio (option 2.7) that would alleviate the stress on IT systems of market operators and would 
still  have  limited  impact  on  market  liquidity  and  efficiency.  Respondents'  views  are  mixed 
with many preferring to leave any such controls up to the venues themselves. Although there 
is a lack of clear evidence of the impact of this form of trading on the liquidity and efficiency 
of the markets, there is no doubt that the increased share of HFT has dramatically contributed 
to increase the number of orders entering trading systems putting heavy load on them, and has 
aggravated the threat on orderly trading. An order to transaction ratio is already in place on 
some trading venues (see Annex 5.2.4).  Lastly there is a need to harmonise these measures 
across  trading  venues  as  otherwise  there  would  be  a  significant  risk  of  regulatory  arbitrage 
among trading venues that could compete on the level of such a ratio in order to attract order 
flows from HFT traders.HFT trading is a key source of trading revenues for market operators 
(i.e.  HFT  traders  are  mainly  active  on  organised  trading  venues  offering  high  level  of 
liquidity), and they are unlikely to take any measure which might lead to a migration of their 
HFT clients to other platforms. 

38 

 
 
  
 
Regarding  the  organisational  requirements  for  players  involved  in  automated  trading  as  per 
above,  CESR/ESMA  recommendations  are  fully  in  line  with  our  proposals.  ESMA  is 
currently  working  on  future  potential  additional  measures  in  the  area  of  automated  trading 
(see their recently published consultation paper98). 

In  conclusion  the  preferred  options  highlighted  above  would  contribute  to  reduce  the  risks 
posed by these new technologies and more resilient financial markets at very marginal costs.  

6.3. 

Increase trade transparency for market participants 

Comparison of options (the preferred options are highlighted in bold and underlined in grey): 

3 Increase trade transparency for market participants 

Policy option 

Impact on 
stakeholders 

Effectiveness  

Efficiency 

3.1 No action 

0 

0 

0 

Trade transparency for equities markets 

3.2 Adjust the pre and post trade 
transparency regime for equities by 
ensuring consistent application and 
monitoring of the utilisation of the pre-
trade transparency waivers, by 
reducing delays for post trade 
publication and by extending the 
transparency regime applicable to 
shares admitted to trading on RMs to 
shares only traded on MTFs or OTFs  

3.3 Abolish pre trade waivers and deferred 
post trade publication regime for large 
transactions 

(++) improvement in 
price discovery and 
market efficiency  
(-) less commitment 
of capital by dealers 
but this should be 
limited if proper 
calibration  
(-) opportunity costs 
for dealers 

(--) strong negative 
impact for larger 
equity investors and 
dealers 

(++) improvement in 
transparency  
(+) reduction in scope 
for regulatory arbitrage  
(-) reduction in market 
liquidity if less capital 
committed by dealers 

(++)compliance costs and 
possible side effects in terms 
of additional costs for trading 
firms and lower liquidity 
largely compensated by 
benefits in terms of more 
transparent and harmonised 
trading regime in Europe 

(--) collective damage in 
excess of collective benefits 

(++) maximum 
transparency 
(+) large increase in 
level playing field  
(--) substantial 
damage to market 
liquidity as larger 
investors and market 
makers could become 
far less active 

Trade transparency for non-equities markets 

3.4 Introduce a calibrated pre and post 
trade transparency regime for certain 
types of bonds and derivatives  

3.5 Introduce a calibrated post trade only 
transparency regime for certain types of 
bonds and derivatives 

(++) compliance costs and 
possible indirect side effects 
on market liquidity more than 
compensated by benefits for 
all market participants in terms 
of increased transparency 

(+) costs slightly compensated 
by benefits 

(++) increased 
transparency for most 
investors especially 
smaller ones  
(--) negative impact 
on revenues of 
dealers which could 
decide to commit less 
capital to their market 
making activities 

(+) increased post-
trade transparency 
for most investors 
especially smaller 
ones  
(-) negative impact on 
revenues of dealers 
which could decide to 
commit less capital to 
their market making 
activities 

(++) increased 
transparency on 
derivatives and bonds 
markets  
 (-) potential negative 
impact on market 
participants if liquidity 
of the markets drop 
but should be 
contained by proper 
calibration 
(+) increased post-
trade transparency on 
derivatives and bonds 
markets  
(-) detrimental impact 
on market participants 
if liquidity of the 
markets drop but 
contained by proper 
calibration 

Costs and consolidation of trade data 

3.6 Reduce data costs notably by 
requiring unbundling of pre and post 
trade data and providing guidance on 
reasonable costs of data, and improve 
the quality of and consistency of post 

(++) lowering of data 
costs for investors  
(++) improvements of 
data quality through 
the APAs  

(++) better informed 
investors and issuers  
(++) more transparent 
markets 
(++) more efficient 

(++) costs of opportunity for 
regulated markets and 
compliance costs of the set up 
of APAs more than 
compensated by benefits for 

39 

 
 
  
 
 
 
trade data by the set up of a system of 
Approved Publication Arrangements 
(APAs) 

3.7 Reduce data costs by establishing a 
system for regulating the prices of data 

3.8 Improve the consolidation of post 
trade data for the equities markets by 
the set-up of a consolidated tape 
system operated by one or several 
commercial providers. Introduce a 
consolidated tape for non-equities 
markets after a period of 2 years under 
the same set-up as for equities 
markets. 

3.9 Improve the consolidation of post trade 
data for the equities markets by the set-up 
of a consolidated tape system organised a 
public utility industry body. Introduce a 
consolidated tape for non-equities markets 
after a period of 2 years under the same 
set-up as for equities markets. 

(-) opportunity cost for 
market operators who 
would generate less 
revenues from the 
sale of market data  
(-) opportunity costs 
for market data 
providers 
(++) lowering of data 
costs for investors  
(-) opportunity cost for 
market operators who 
would generate less 
revenues from the 
sale of market data  
(-) opportunity costs 
for market data 
providers 
(++) reduce 
information cost for 
market participants 
(++) better market 
transparency for 
participants  
(++) closer tracking of 
best execution by 
market participants 

(++) reduce 
information cost for 
market participants  
(++) better market 
transparency for 
participants  
(++) closer tracking of 
best execution by 
market participants 

markets 

all market participants in terms 
of higher quality and more 
affordable market data 

(+) collective damage 
exceeded by collective 
benefits 

(++) compliance costs more 
than compensated by benefits 
for all market participants in 
terms of increased 
transparency 

(-) collective costs not 
compensated by benefits 

(++) better informed 
investors and issuers  
(++) more transparent 
markets  
(++) more efficient 
markets  
(--) difficulty in setting 
price levels 
(-) interference with 
free competition  
(+) closer alignment 
with the US set up for 
equities markets 
(-) possible uneven 
market information 
because of 
competition between 
providers 
(-) possible conflict of 
interests if some APA 
are given preferential 
treatment 
(+) strong alignment 
with the US set up for 
equities markets 
(--) creation of a 
situation of monopoly  
(-) risks of less 
innovative service 

The  options  to  increase  trade  transparency  for  market  participants  can  be  grouped  in  three 
large categories.  

The  first  group  deals  with  equity  markets  (options  3.2  and  3.3).  Rather  than  deleting  the 
existing pre transparency waivers and the deferred post trade publication regime (option 3.3) 
which  would  have  substantial  negative  impact  on  the  liquidity  of  the  markets  and  put 
European  markets  at  a  competitive  disadvantage  to  venues  outside  the  EU,  the  preferred 
option  consists  of  adjusting  these  waivers  and  the  post-trade  deferral  regime  as  well  as 
extending  them  to  shares  only  traded  on  MTFs  or  OTFs.  This  would  increase  transparency 
while preserving liquidity. A large majority of respondents support the options for clarifying 
the regime of waivers, but views are more mixed on reducing available delays in post-trade 
reporting. 

Neither  the  uniform  application  of  the  waivers  nor  the  shortening  of  publication  delays  are 
expected  to  create  significant  incremental  costs.  The  costs  of  extending  the  equities-
transparency regime to shares traded only on MTFs or organised trading facilities would lead 
to an estimated one-off cost of around €2 million and about ongoing costs of €0.4 million for 
all the trading platforms concerned. An order of magnitude of the benefits could be derived 
from the experience of the SME market AIM, which is regulated as a MTF and has applied 
the  same  transparency  regime  as  its  parent  entity  –  the  London  Stock  Exchange  -  since  the 
introduction of MiFID. According to Europe Economics econometric model, spreads were on 
average 16% lower relative to the average bid-ask spread in the pre-MiFID period (See Annex 
8.2). 

40 

 
 
  
 
 
The  second  group  of  options  deals  with  markets  other  than  equity  markets  i.e.  bonds  and 
derivatives  markets  (options  3.4  and  3.5).  In  order  to  increase  the  transparency  on  these 
markets to market participants, the favourite option (option 3.5) is to conceive a tailor made 
regime of pre- and post-trade transparency obligations that will be calibrated to each type of 
financial instrument included. This regime is tailor made in the sense that this regime will not 
simply be a copy paste of the MiFID equity transparency regime, but a regime which will be 
devised taking into account the specificities of each asset class (i.e. characteristics, liquidity 
and  trading  mode  of  non  equities  markets  are  completely  different  from  equities  markets). 
Thanks  to  this  calibration,  it  will  preserve  the liquidity  of  these  markets  much  better,  while 
ensuring  a  higher  level  of  transparency  than  if  only  a  post  trade  transparency  regime  were 
implemented  (option  3.5).  While  many  respondents  broadly  agree  with  the  notion  of  a 
calibrated regime, many signal that poorly designed disclosure rules especially pre-trade will 
harm liquidity. Member Sates broadly agree with post-trade transparency requirements, while 
being much more cautious in terms of pre-trade transparency requirements.  

The advice from CESR in the field of transparency for non-equity markets is broadly in line 
with  our  preferred  policy  option.  It  recommended  to  develop  harmonised  tailor  made  post-
trade  transparency  requirements  for  non-equity  markets  across  the  board,  as  well  as 
harmonised tailor made pre-trade transparency requirements for non-equity instruments traded 
on organised trading platforms. However it has not at this stage proposed to cover the OTC 
space under these mandatory pre-trade transparency requirements, but has left this possibility 
to the discretion of Member States. Nonetheless we believe that harmonisation is key in that 
regard  as  financial  markets,  especially  derivatives  markets,  are  inherently  cross-border.  In 
addition  transparency  should  become  the  general  rule  and  any  exemption  to  it  should  be 
provided  for  when  justified  by  appropriate  calibration  and/or  in  the  form  of  pre-trade 
transparency waivers in the implementing legislation. 

Concerning  the  introduction  of  a  transparency  regime  for  non-equities,  the  overall  one-off 
costs would range from €5.5 million to €9.2 million with yearly ongoing cots of €8.8 million 
to  €12.7million.  These  costs  are  pure  compliance  costs  that  are  expected  to  be  incurred  by 
trading platforms and market participants active in these markets as they will have to upgrade 
their systems to receive and disseminate quotes and prices. It is not possible at this stage to 
assess the impact of such a regime on the liquidity of the markets as this will largely depend 
on the calibration of the transparency requirements in terms of delays and content by type of 
instrument to be developed in the implementing legislation. However we have tried to assess 
what the potential benefits of a post-trade transparency regime for bonds could be by looking 
at the US experiment of the Trade Reporting and Compliance Engine (TRACE) system (see 
Annex  8.3).  Overall,  a  narrowing  of  spreads,  more  reliable  pricing,  as  well  as  improved 
valuation  is  expected.  Indirect  costs  in  terms  of  market  depth  undermining  the  ability  of 
dealers  who  commit  capital  to  easily  unwind  large  trades  could  be  addressed  by  a  proper 
calibration of the disclosure regime for orders of large size.  

The last group of options (options 3.6 to 3.9) relate to market data in order to improve their 
quality and reduce their costs. Rather than establishing a system for regulating prices of data 
(option  3.7)  that  would  be  too  intrusive,  the  chosen  solution  is  to  combine  the  provision  of 
costs guidance with a system of APAs that would contribute to the quality and ease of access 
to the data while also requiring the unbundling of pre- and post-trade data and the obligation 
to  release  data  free  of  charge  once  15  minutes  have  expired  since  the  trade  was  executed. 
These  improvements  should  facilitate  the  emergence  of  a  consolidated  tape  as  data  quality 
issues, lack of data standardisation and consistency, and costs were the main impediments to 
the emergence of a consolidated tape. Besides these improvements, there is a need to ensure 
that market data can be brought together in a way that allows efficient comparison of prices 

41 

 
 
  
 
and trades across venues. Consolidation of data should meet high quality standards while at 
the  same  time  be  provided  at  a  reasonable  costs.  The  setting  up  of  a  consolidated  tape, 
preferably  through  a  system  of  one  or  several  commercial  providers  duly  approved  would 
meet  these  objectives  and  increase  the  access  to  market  data  information  for  market 
participants, in an optimised way in terms of cost and efficiency. In addition the commercial 
solution, as opposed to a regulated public monopoly solution, would be more innovative and 
prone to cater for clients needs. Respondents, including Member States, largely agree with the 
approach regarding APAs, unbundling, and free data publication after 15 minutes. Views are 
more mixed on the need for a consolidated tape, with most support for a commercially lead 
model operating in accordance with mandatory standards.  

The  one-off  compliance  costs  for  EU  authorised  firms  and  APAs  of  conforming  with  and 
providing a fully standardised reporting format and content for post-trade data are estimated at 
€30  million,  with  ongoing  costs  of  €3  million  to  €4.5  million.  Finally,  compliance  and 
operational  costs  for  a  commercial  consolidator  are  considered  to  be  entirely  manageable 
(they already provide similar solutions for equities markets). In order to have an order of the 
magnitude of the possible benefits, one could look at the huge discrepancy in costs for market 
participants to get access to a consolidated set of trade data (€500 in the EU versus $70 in the 
US per user and per month). Requiring venues and vendors to sell pre-and post-trade data in 
unbundled form, provided that the format and content of trade reports are fully standardised, 
may be expected to reduce the cost of a European consolidated post-trade data feed by 80%, 
i.e.  from  €500  to  €100  a  month  per  user.  Another  benefit  would  be  that  the  availability  of 
better quality and consolidated trade data should help investment firms to comply with their 
best execution obligations, which could for the equity markets only generate benefits of €12 
million  (see  par.  9.4).Taken  together,  these  preferred  options  would  give  rise  to  one-off 
aggregated costs of €38 to €41 million and yearly ongoing costs of €12 to €18 million. These 
options would significantly improve transparency towards markets participants, especially in 
the  case  of  non-equities  markets  where  there  were  no  uniform  trade  transparency 
requirements before. Increasing transparency in a properly calibrated way should contribute to 
a better price formation mechanism and improve liquidity. These options would complement 
the options under 6.1 as this transparency regime would apply to all types of trading venues 
further aligning the requirements they are subject to.   

6.4.  Reinforce  regulators'  powers  and  consistency  of  supervisory  practice  at 

European and international levels 

Comparison of options (the preferred options are highlighted in bold and underlined in grey): 

4 Reinforce regulators powers and consistency of supervisory practice at European and International level 

Policy option 

Impact on stakeholders 

Effectiveness  

Efficiency 

4.1 No action 

0 

0 

0 

4.2 Introduce the possibility for 
national regulators to ban for an 
indefinite period specific activities, 
products or services under the 
coordination of ESMA. Give the 
possibility to ESMA under specific 
circumstances to introduce a 
temporary ban in accordance with 
Article 9(5) of the ESMA regulation 
N°1095/2010 

Powers of regulators 

(++) safer environment 
for market participants 
and investors 
(-) opportunity costs for 
developers of product 
that are banned 
(-) opportunity costs for 
traders of and investors 
in banned products 

(++) no possibility for 
regulatory arbitrage 
(++) increased orderly 
markets  
(++) reduced systemic risks  
(-) reduction in investment or 
hedging opportunities 
(--) restriction to financial 
innovation 

(++) marginal costs in 
terms of opportunity 
costs for providers of 
banned products more 
than compensated by 
benefits for all 
investors in terms of 
safer environment 

42 

 
 
  
 
(-) costs not 
compensated by 
benefits  

(++) marginal costs for 
persons involved in 
very speculative 
activities more than 
compensated by 
benefits for all market 
participants in terms of 
increased market 
integrity and more 
orderly market 
(+) no additional 
obligations on market 
participants 
(-) supervisors will 
incur costs for 
transmitting and 
processing data 

(+) costs partially 
compensated by 
benefits for all market 
participants in terms of 
increased competition 
and product offering in 
a level playing field, 
and enhanced single 
market 

(++) costs and time 
involved more than 
compensated by 
benefits for all market 
participants 
(-) difficulties in 
negotiating such an 
equivalence regime 

(++) costs more than 
compensated by 
benefits for all market 
participants in terms of 
safer environment 
resulting from 
improved enforcement 

4.3 Introduce an authorisation regime for 
new activities, products or services 

4.4 Reinforce the oversight of 
positions in derivatives out of which 
commodity derivatives, including by 
granting powers to regulators and 
coordinating via ESMA to introduce 
positions limits 

(++) safer environment 
for market participants 
and investors 
 (--) opportunity costs for 
developer of the product 
to be banned  
(---) huge costs and 
burden put on competent 
authorities 

(-) opportunity costs for 
market participants 
(-) compliance costs for 
market participants 
 (+) better insight into 
market dynamics for 
regulators 

(++) increased orderly 
markets 
(++) reduced systemic risks 
 (--) alleviation of 
responsibility (moral hazard) 
for product developers  
(--) possible reduction in 
investment or hedging 
opportunities  
(--) restriction to financial 
innovation 
(++) improved understanding 
of the price formation 
process 
(+) greater market integrity 
 (+) greater market stability 

4.5 Reinforce the oversight of 
financial markets which are 
increasingly global by strengthening 
the cooperation between EU and third 
country securities regulators. In 
addition, reinforce monitoring and 
investigation of commodity 
derivatives markets by promoting 
international cooperation among 
regulators of financial and physical 
markets 

(+)  gives  supervisors  a 
consolidated  overview  of 
the market 

allows 

(+) 
supervisors 
to 
combine 
their  market 
experience 

(++) 
increases  market 
integrity  by  reducing  risk  of 
cross-market manipulation 
(+) promotes fair and orderly 
markets 

Conditions of access of third country firms 

 4.6 Harmonise conditions for the 
access to the EU of third country 
investment firms, by introducing a third 
country regime (a common set of criteria 
, registration at national level, 
memoranda of understanding (MoU) 
between the Member States regulators 
and the third country regulators under 
the coordination of ESMA) 

4.7 Introduce an equivalence and 
reciprocity regime by which after 
assessment by the Commission of 
the third country regulatory and 
supervisory framework access to the 
EU would be granted to investment 
firms based in that third country. 

4.8 Introduce effective and deterrent 
sanctions by introducing common 
minimum rules for administrative 
measures and sanctions  

(+) widening of choice of 
providers for investors  
(-) increased competition 
for investment firms with 
no reciprocal access  

(+) more harmonised and 
legally clear basis for 
granting third country 
investment firms pan-EU 
access to EU securities 
markets 
(-) different access 
mechanisms applicable to 
investors and dual 
application of rules 

(+) widening of choice of 
providers for investors  
(+) increased horizons for 
investment firms with 
reciprocal access  

(+++) minimum duplication 
of rules for firms 
(-) risk of non operative 
scheme if political reticence 

Sanctions 

(++) reinforced and 
harmonised powers for 
regulators  
(+) better protection for 
persons providing 
information on 
infringements 
(+) more information on 
infringements for 
regulators 

(++) sounder financial 
markets thanks to more 
efficient fight against 
unauthorised practices 
detrimental to investors  
(+) limit regulatory arbitrage 
(+) step towards further 
harmonisation of sanction 
across EU 

Impact on fundamental rights: 
Option interferes with Articles 7 and 8and potentially also 
with Articles 47 and 48 of the EU Charter.  

Option provides for limitation of these rights in law while 
respecting the essence of these rights. Limiting these 
rights is necessary to meet the general interest objective 
of ensuring compliance with MiFID rules to ensure fair 
and orderly trading and investor protection. . In order to 

43 

 
 
  
 
 
 
 
 
 
4.9 Introduce effective and deterrent 
sanctions by harmonising administrative 
measures and sanctions  

(+) costs compensated 
by benefits 
(-) distinct market 
situations and legal 
traditions 

be lawful the administrative measures and sanctions 
which are imposed must be proportionate to the breach 
of the offence, respect the right not to be tried or 
punished twice for the same offence,   the presumption of 
innocence, the right of defence, and the right to an 
effective remedy and fair trial in all circumstances. 

Whistle blowing schemes interferes with Art 8 of the EU 
Charter and Art. 16 of the Treaty on the Functioning of 
the EU and Art. 48 of the EU Charter. Therefore, any 
implementation of whistle blowing schemes should 
comply and integrate data protection principles and 
criteria indicated by EU data protection authorities and 
ensure safeguards in compliance with the Charter. 
(++) reinforced and 
(+) sounder financial 
harmonised powers for 
markets thanks to more 
regulators  
efficient fight against 
(+) better protection for 
unauthorised practices 
persons providing 
detrimental to investors  
information on 
(+) step towards further 
infringements 
harmonisation of sanction 
(+) more information on 
across EU 
infringements for 
regulators 

Impact on fundamental rights: 
Option interferes with Articles 7, and 8, and potentially 
also with Articles 47 and 48 of the EU Charter.  

Option provides for limitation of these rights in law while 
respecting the essence of these rights. Limiting these 
rights is necessary to meet the general interest objective 
of ensuring compliance with MiFID rules to ensure fair 
and orderly trading and investor protection. In order to be 
lawful the administrative measures and sanctions which 
are imposed must be proportionate to the breach of the 
offence, respect the presumption of innocence, the right 
of defence, and the right to an effective remedy and fair 
trial in all circumstances. 

Whistle blowing schemes interferes with Art 8 of the EU 
Charter and Art. 16 of the Treaty on the Functioning of 
the EU and Art. 48 of the EU Charter. Therefore, any 
implementation of whistle blowing schemes should 
comply and integrate data protection principles and 
criteria indicated by EU data protection authorities and 
ensure safeguards in compliance with the Charter. 

The  policy  options  selected  in  order  to  reinforce  the  regulators  powers  and  consistency  of 
supervisory practice at European and international levels can be divided into three categories. 

The first group (option 4.2 to 4.5) relates to the powers of regulators on products and services, 
or markets. In order to address situations of risks on investor  protection,  market  stability  or 
systemic risk, the first of the preferred options (option 4.2) is to introduce the possibility for 
regulators to ban activities, products or practices in specific circumstances.  

Currently  most  national  regulators  do  not  have  any  explicit  power,  stemming  from  EU  or 
national  legislation,  to  ban  for  an  indefinite  period  of  time  financial  products  or  activities. 
Where such powers are foreseen at national level, there is no coordination mechanism at EU 
level which could significantly undermine the single market should one of the Member State 
decide unilaterally to introduce such a ban (e.g. such an example has already been seen with 
the  German  unilateral  ban  on  short  selling). Option  4.2  reinforces  both  national  and  ESMA 
powers  and  ensure  a  more  streamlined  regulatory  procedure  by  specifying  the  conditions 
under which a ban could be activated.  

It should be borne in mind that the power of banning products or activities should be seen as a 
last  resort  measure  which  would  be  needed  in  the  unlikely  although  plausible  event  that 
prevention measures such as reinforced organisational requirements and conduct of business 

44 

 
 
  
 
 
 
 
 
rules  for  investment  firms  have  failed.  Bearing  in  mind  the  last  resort  character  of  such  a 
measure  the  costs  of  a  full  ex  ante  authorisation  regime  compared  to  the  benefits  would  be 
disproportionate. In addition should an authorisation regime be introduced the scope and pace 
of  financial  innovation  might  be  significantly  hindered  due  to  a  lengthy  and  costly 
authorisation  process  that  would  put  an  extraordinary  strain  of  resources  of  competent 
authorities.  This  could  lead  to  "a  reduction  in  investment  opportunities".  Such  negative 
impacts  would  be  rather  limited  under  the  product  ban  option  as  only  toxic  products  or 
activities  would  a  posteriori  be  prohibited.  Lastly  the  banning  option  is  more  efficient  and 
fosters greater responsibility among investment service providers than an authorisation regime 
for new products and services. If there was an authorisation process for each financial product 
this  could  be  taken  as  a  seal  of  approval  by  the  investing  public  as  to  the  quality  of  such 
product. However, the future development of a product and in particular whether it is going to 
create losses for the investor is impossible to predict. Should the investor occur losses there is 
the very real and significant concern that he is going to turn to the competent authorities for 
damages thus alleviating the responsibility of the product developer. 

In addition, the reinforcement of oversight of positions (including position limits) (option 4.4) 
and  the  strengthening  of  the  cooperation  between  regulators  of  physical  and  financial 
commodities markets (option 4.5) would contribute to more orderly and stable markets. While 
Member State authorities broadly support such new powers (i.e. main commodity derivatives 
markets are located in France, Germany, and the UK), few market participants are in favour. 
They  say  they  could  give  rise  to  legal  uncertainties,  and  argue  that  limits  on  positions  are 
arbitrary and misguided. Regarding product bans, the financial crisis has clearly demonstrated 
the needs to give more powers to regulators to avoid both toxic financial instruments, such as 
CDOs  square  that  can  put  investors  at  risk,  or  practices  such  as  cornering  commodities 
markets,  that  threaten  market  stability.  The  views  on  these  measures  are  very  divided 
according the nature of stakeholders with strong support from national regulators and NGOs 
and,  as  one  would  expect,  opposition  from  investments  banks.  Despite  strong  support  from 
key  stakeholders,  the  preferred  options  still  insert  the  new  regulatory  powers  into  precise 
frameworks  to  avoid  abuse  or  unintended  side  effects.  For  instance,  the  powers  to  ban 
products or services will only be possible in case of serious threat to the orderly functioning 
and integrity of financial markets or significant and sustained investor protection concerns.  

The  costs  of  stronger  oversight  of  positions,  including  the  setting  up  of  position  limits,  for 
both trading platforms and market participants are estimated to be between €8.2 million and 
€12.9  million  for  one-off  costs,  and  on-going  costs  to  be  between  €9.5  million  to  €20.2 
million a year. 

The  second  group  of  options  deals  with  the  harmonisation  of  conditions  of  access  of  third 
country  investment  firms  (options  4.6  and  4.7).  The  preferred  route  is  to  establish  a  third 
country  regime  based  on  an  equivalence  and  reciprocity  approach  (option  4.7)  that  would 
replace  the  current  patchwork  of  national  third  party  regimes  more  efficiently  albeit  less 
quickly than a regime based on common criteria (option 4.6). Respondents' views are divided 
with  many  broadly  in  favour  but  cautioning  against  either  overly  strict  equivalence 
requirements or granting access to third country operators with no reciprocity. Our preferred 
option  takes  due  account  of  these  concerns  as  the  idea  is  to  assess  the  equivalence  of  the 
regulatory regime based on clear criteria and insisting on effective reciprocal access.   

The  last  group  of  options  refers  to  administrative  measures  and  sanctions.  A  maximum 
harmonisation  of  administrative  measures  (option  4.9)  while  being  highly  effective  as 
measures  and  sanctions  for  similar  offences  across  the  EU  would  be  more  comparable  and 
stricter,  which  should  reduce  the  scope  for  regulatory  arbitrage.  However  such  an  option 

45 

 
 
  
 
would not be efficient as market situations, legal systems and traditions differ across Europe. 
Therefore, to have exactly the same types and levels of sanctions might not be reasonable and 
proportionate  to  ensure  deterrent  sanctions  across  Europe.  As  a  result  the  preferred  policy 
option is to insert common minimum rules for administrative measures and sanctions at EU 
level,  accompanied  by  necessary  principles  and  safeguards  to  ensure  the  respect  of 
fundamental rights. Respondents are largely in favour of this approach.  

6.5.  Reinforce transparency towards regulators 

Comparison of options (the preferred options are highlighted in bold and underlined in grey): 

5 Reinforce transparency to regulators 

Policy option 

Impact on 
stakeholders 

Effectiveness  

Efficiency 

5.1 No action 

0 

0 

0 

Scope of transaction reporting 

all 

(i.e. 

5.2  Extend  the  scope  of  transaction 
reporting  to  regulators  to  all  financial 
financial 
instruments 
instruments  admitted  to  trading  and  all 
financial  instruments  only  traded  OTC). 
Exempt  those  only  traded  OTC  which 
are  neither  dependent  on  nor  may 
influence 
financial 
the  value  of  a 
instrument admitted to trading. This will 
result in a full alignment with the scope 
of  the  revised  Market  Abuse  Directive. 
Lastly  regarding  derivatives,  harmonise 
the  transaction  reporting  requirements 
with  the  reporting  requirements  under 
EMIR. 

5.3  Extend 
transaction 
the  scope  of 
reporting  to  all  financial  instruments  that 
trading  and  all  OTC 
are  admitted 
financial 
reporting 
obligations also to orders 

instruments.  Extend 

to 

5.4  Require  market  operators  to  store 
order data in an harmonised way 

brings 

all 
abusive 

(++) 
potentially 
trading in scope 
(+)  level  playing  field 
for 
and 
commodity 
other derivatives 
(-)  non-financial 
trading is not covered 

firm 

(++) higher compliance 
costs for firms but limited 
increase thanks to the 
harmonisation between 
EMIR and MiFID 

(+) offers a complete 
picture of firms' trading 
and other investment 
services and activities  
(+) robust to trading 
innovation  
 (-) not all OTC 
instruments are 
sufficiently 
standardised  
(--) covers much 
trading which is not 
potentially abusive  
(-) non-financial firm 
trading is not covered 
(+) better monitoring for 
market abuse and 
market manipulation by 
competent authorities 

 (-) higher compliance 
costs for firms due to too 
large scope of products 
covered while no marginal 
increase of market 
integrity   

(=) compliance costs 
compensated by medium 
term gains in terms of 
improved market integrity 
and more orderly trading 

(++) competent 
authorities see trading 
in all products 
susceptible to be used 
for abusive purposes 
(-) additional reporting 
cost for firms 
(-) additional market 
participants will need to 
start reporting 

(++)competent 
authorities see trading 
in all products  
(--) additional reporting 
cost for firms  
(--) additional market 
participants will need to 
start reporting 

(+) more efficient 
monitoring by 
competent authorities 
especially in a highly 
automated 
environment  
(--) additional costs 
imposed on market 
operators 

Reporting channels 

5.5  Increase  the  efficiency  of  reporting 
channels  by  the  set  up  of  Approved 
Reporting  Mechanisms  ("ARMs")  and 
allow  for  trade  repositories  under  EMIR 
to be approved as an ARM under MiFID  

(++) Better data quality 
reported 
(-) cost of registration 
may increase the cost 
of reporting for firms 
using ARMs 

 (+) Trade repositories 
are likely to be able to 
report significant parts 
of the derivatives 
markets 

(+) additional costs for 
reporting firms more than 
compensated by better 
information for regulators 

46 

 
 
  
 
 
 
5.6  Require  trade  repositories  authorised 
under  EMIR  to  be  approved  as  an  ARM 
under MiFID 

 (+) no double 
reporting 
(--) additional costs for 
trade repositories 

to 

(+)  easier  access 
consolidated 
information 
regulators 
(-)  restricts  reporting's 
firm  choice  of  reporting 
mechanism 

for 

(+) additional costs for 
reporting firms more than 
compensated by better 
information for regulators 

The  reinforcement  of  transparency  towards  regulators  includes  two  groups  of  options.  The 
first  set  of  policy  options  (options  5.  2  to  5.4)  look  at  extending  the  scope  of  transactions 
reporting while the second group aim (options 5.6 and 5.7) at improving the organisation of 
the reporting. 

Regarding  the  extension  of  the  scope  of  transaction  reporting,  the  preferred  and  principal 
option  is  to  extend  the  scope  to  all  financial  instruments  not  admitted  to  trading  but  whose 
value depends on a financial instrument that is admitted to trading and financial instruments 
that  can  have  an  effect  on  a  financial  instrument  admitted  to  trading  (option  5.2).  This  will 
notably bring into scope all derivatives that could be used for manipulative purposes, and as 
result will allow a much better and extensive monitoring of markets by regulators. Aligning 
the  transaction  reporting  requirements  under  MiFID  with  those  under  EMIR  allows  for  the 
majority  of  the  associated  costs  of  this  extension  to  be  avoided,  and  for  the  additional 
reporting costs and additional number of reporting firms to be reduced. The other extension 
that  is  favoured  because  of  better  cost/benefits  outcome  is  the  requirements  for  market 
operators to store data in a harmonised way (option 5.4). As part of the information stored, the 
unique identification of the trader or algorithm that has initiated the order will facilitate and 
improve market surveillance in a highly automated environment. Respondents largely support 
these  proposals,  but  many  signal  that  position  reporting  in  lieu  of  transaction  reporting  for 
commodity  derivatives  is  more  appropriate.  Reporting  on  transactions  and  reporting  on 
positions have different goals and are not mutually exclusive. Reporting on transactions allow 
regulators to monitor for market abuse while reporting on position also allows for monitoring 
on  market  abuse  as  well  detection  of  systemic  risks  by  monitoring  the  building  up  of 
excessive positions in regards to the financial capacity of the person taking them. We believe 
there  is  a  need  to  be  as  comprehensive  as  possible  in  terms  of  information  provided  to 
regulators. In parallel we acknowledge there is a need to streamline reporting requirements in 
order  to  avoid  double  reporting  and  undue  costs  on  market  participants.  This  is  why  we 
propose  to  leverage  the  existence  of  trade  repositories  for  derivatives  to  the  extent  possible 
(see option 5.5 below).   

The extension in scope of transaction reporting is estimated to generate incremental one off 
costs ranging from €65.4 to €84.1million and yearly ongoing costs from €1.6 to €3.0 million. 
The  bulk  of  these  costs  relates  to  the  extension  to  OTC  instruments  and  commodity 
derivatives.  Member  States  that  already  collect  OTC  derivatives  transactional  data  (UK, 
Ireland, Austria and Spain) would be of course less impacted. Anyway these costs would not 
materialise if reporting requirements under MiFID and EMIR are harmonised. As storage of 
orders is already standard practice to a certain extent, the incremental costs are not significant. 
One  of  the  main  benefits  of  the  extension  of  the  transaction  reporting  regime  would  be  to 
enable regulators to effectively detect market abuse cases. But just as it is difficult to give a 
precise estimate of the size of the problem of market abuse, it is hard to quantify the benefits 
of more effectively tackling this problem. 

Concerning  reporting  channels,  option  5.5  aims  at  increasing  the  efficiency  of  reporting 
channels  by  the  set  up  of  approved  reporting  mechanisms  (ARMs).  It  should  be  noted  that 
transaction  reporting  is  already  being  conducted  through  ARMs  in  the  UK.  In  addition  this 
option envisages the possibility (option 5.5) but not the obligation (option 5.6) which would 

47 

 
 
  
 
lead  to  too  much  data  for  regulators,  for  trade  repositories  under  EMIR  to  be  approved  as 
ARM. Respondents generally support streamlining reporting channels in this way, with many 
commenting on the importance of synergising data flows under MiFID and EMIR.  

Taken together, these preferred options would give rise to one-off aggregated costs of €65 to 
€84 million and yearly ongoing costs of €3 to €5 million. These incremental costs would be 
more  than  compensated  by  the  benefits  in  terms  of  market  integrity  (i.e.  regulators  would 
have all the necessary information to detect abusive practices across all types of instruments) 

6.6. 

Improve transparency and oversight of commodities markets  

Comparison of options (the preferred options are highlighted in bold and underlined in grey ): 

6 Improve transparency and oversight of commodities markets 

Policy option 

Impact on stakeholders 

Effectiveness  

Efficiency 

6.1 No action 

0 

0 

0 

Evolution of commodity derivatives markets 

6.2 Set up a system of 
position reporting by 
categories of traders for 
organised trading venues 
trading commodities 
derivatives contracts  

6.3 Control excessive volatility 
by banning non hedging 
transactions in commodity 
derivatives markets 

6.4 Review exemptions for 
commodity firms to exclude 
dealing on own account 
with clients and delete the 
exemption for specialist 
commodity derivatives  

(++) increased 
transparency for all market 
participants  
(++) better tracking by 
regulators of the interaction 
between physical and 
financial commodities 
markets 
(-) set up costs for trading 
venues 
 (-) would limit the 
possibility to hedge as it 
becomes more difficult to 
find a counterparty 

(++) increased 
transparency  
(++) improvement in price 
formation  
(+) alignment with the US 

(++) marginal additional 
compliance costs for organised 
venues more than 
compensated by improvement 
in terms of more transparency 
and orderly trading for all 
market participants 

(+) may decrease volatility  
(--) sharp drop in liquidity 
(---) position taking 
activities may move to 
physical markets 

(--) larger indirect  costs in 
terms of market efficiency than 
benefits for the whole 
community 

Exemptions for commodity firms 

(--)  additional compliance 
costs for previously 
exempted firms  

(++) increased level playing 
field  
(++) increased investors 
protection 

(++) costs more than 
compensated by benefits for all 
market participants in terms of 
level playing field and better 
oversight by regulators 

6.5 Delete all exemptions for 
commodity firms 

(---) additional compliance 
costs for previously 
exempted firms  

(-)Costs above benefitsfor the 
whole community 

(++) Increased level playing 
field  
(++) increased investors 
protection  
(-) disproportionate 
measure compared to the 
risk involved 

Secondary spot trading of emission allowances 

6.6 Extend the application 
of MiFID to secondary spot 
trading for emission 
allowances  

(--) additional costs for 
intermediaries and trading 
venues that would require 
a MiFID licence to conduct 
such operations 

(+) compliance costs more than 
compensated by benefits in 
terms of safer and sounder 
market environment for the 
carbon market 

(+) comprehensive 
regulatory framework for 
the carbon market 
(++) full consistency with 
financial markets rules 
(++) Increased level playing 
field  
(++) increased investors 
protection  
(-) potential issue for 
suitability and 
proportionality for some 
intermediaries 

48 

 
 
  
 
 
6.7 Develop a tailor-made 
regime for secondary spot 
trading of emission 
allowances 

(--) all  exchanges and 
intermediaries required to 
adapt to new 
organisational and 
operational  duties and 
obtain authorisation to 
operate 

(-) a specific framework and 
instrument to be developed 
giving rise to additional 
compliance costs 

(+) comprehensive 
regulatory framework for 
the carbon market 
(++) Increased level playing 
field  
(++) increased investors 
protection  
(+) more flexibility to adapt 
to the specificities of the 
carbon market 
(--) possible discrepancies 
with the financial markets 
rules governing the 
derivatives market or risk to 
develop a lighter regime 

The options to improve transparency and oversight of commodity derivatives markets can be 
grouped in three categories.  

The first group of options (options 6.2. and 6.3) aims at addressing the issue of the increasing 
inflow  of  financial  investments  in  these  markets.  Our  preferred  option  is  to  increase 
transparency  towards  both  regulators  and  the  public  by  introducing  a  position  reporting  by 
categories  of  traders.  This  should  enable  regulators  to  better  assess  the  impact  of  these 
financial  investments  on  the  price  formation  mechanism  and  the  related  price  volatility. 
Banning  non  hedging  transactions  would  imply  banning  financial  investments  which  could 
dry up liquidity and significantly undermine the ability of commercial users and producers of 
commodities  to  hedge  their  risks,  and  is  therefore  not  preferred.  Overall,  respondents  are 
broadly  in  favour  of  a  position  reporting  system  similar  to  the  one  in  the  US.  Many  note 
however that any classification  is  partly subjective  and  can  be  misleading.  However  market 
participants  have  increasingly  called  for  increased  transparency  which  has  led  to  market 
initiatives99  in  that  field  inspired  by  the  US  commitment  of  traders  report  distinguishing 
between open positions held by financial and non financial entities. Although this distinction 
is  not  watertight,  this  would  significantly  improve  the  situation  compared  to  the  status  quo, 
especially in an environment of high volatility of prices and the misunderstanding of the role 
played by speculation in these markets. 

The introduction of position reporting by categories of traders would entail costs for both the 
trading venues and the market participants which overall are estimated at between €0.8 and 
€1.0 million for one-off costs and between €3.3 and €3.8 million as yearly ongoing costs. 

The second group of options relate to the exemptions granted to commodities firms (options 
6.4 and 6.5). Narrowing these exemptions will ensure a level playing field between financial 
and non financial firms providing investment services in commodity derivatives. In addition 
we  want  to  enhance  investor  protection  by  ensuring  that  clients  of  these  commercial 
companies  are  benefiting  from  MiFID  conduct  of  business  rules  when  receiving  investment 
services. A complete deletion of these exemptions would be disproportionate compared to the 
risks  posed  by  these  commodity  firms  to  the  financial  system  as  a  whole  and  would 
undermine their ability to trade on own account for hedging purposes. It should be noted that 
the  capital  requirements  these  firms  should  be  subject  to  will  be  dealt  with  as  part  of  the 
forthcoming  review  of  the  existing  exemptions  for  commodity  firms  under  the  Capital 
Requirements  Directive  (CRD).100  Broadly,  most  respondents  agree  with  the  proposal  to 
reduce  the  scope  of  the  exemptions.  However,  significant  opposition  is  noted  among  the 
corporate end-users, most notably energy companies, who are wary of the cost of setting up 
their  operations  to  comply  with  MiFID  and,  more  critically,  possible  capital  requirements 
incumbent  upon  MiFID  firms,  and  clearing  requirements  emanating  from  the  Commission 
proposal  on  mandatory  central  clearing  for  financial  firms  –  also  originating  in  G20 
agreements.  However,  the  application  of  capital  requirements  does  not  automatically  follow 

49 

 
 
  
 
from being caught by MiFID – there is an exemption in the Capital Requirements Directive 
due to be reviewed before end-2014. Our consultation paper was not sufficiently clear in that 
regard,  namely  that  the  debate  about  the  MiFID  exemptions  (i.e.  application  of  MiFID 
organizational  requirement  and  conduct  of  business  rules)  should  be  clearly  distinguished 
from the debate around the CRD ones (i.e. level of capital requirements needed). The current 
work under MiFID does not prejudge about the outcome of the CRD exemptions for which all 
options  will  be  analysed  in  due  course.  Second,  central  clearing  is  already  widespread  in 
energy markets and leads to cost-benefits in terms of netting and lower counterparty risk. 

Our  preferred  option  in  that  field  goes  one  step  further  than  CESR's  earlier  advice  on 
commodities  business  dated  October  2008101  by  proposing  to  delete  the  exemption  for 
commodity  specialist  firms.  The  case  for  this  exemption  is  no  longer  valid  in  light  of  the 
lessons learned from the financial crisis and the G20 clear commitment to ensure appropriate 
regulatory coverage of all main participants in financial markets and commodity derivatives 
markets in particular.102 

Regarding the review of the exemptions, the number of firms that could be impacted and the 
related costs is very difficult to assess as these firms are not known to regulators because they 
are  usually  not  required  to  be  authorised.  However  as  a  rule  of  thumb  the  number  of  firms 
being  impacted  should  be  limited  as  most  of  the  commercial  companies  (e.g.  big  energy 
companies)  having  significant  trading  activities  have  already  set  up  a  MiFID  authorised 
subsidiary.  In  addition  most  of  the  MiFID  exempt  firms  active  in  the  energy  markets  and 
located  in  the  UK  –  which  is  together  with  France  hosting  the  main  European  commodity 
derivatives exchanges – have to be authorised and are already subject to a national regulatory 
regime.  

The  third  group  of  options  looks  at  how  best  to  improve  the  oversight  and  integrity  of  the 
secondary spot carbon market (options 6.6 and 6.7).  Developing a tailor-made regime would 
probably  offer  more  flexibility  to  adapt  to  the  specificities  of  the  spot  carbon  trade.  At  the 
same time, that flexibility would be limited by the need to conform to the overall approach to 
market  regulation  set  out  in  the  MiFID  and  applicable  to  the  other  segments  of  the  carbon 
market. Hence our preferred option is to extend the application of MiFID to secondary spot 
trading  of  emission  allowances.  Such  an  extension  would  ensure  appropriate  regulation  and 
oversight of the spot market, while allowing compliance buyers to trade on own account and 
hedge  their  risks  by  using  the  existing  MiFID  exemptions.  In  addition,  it  would  ensure 
consistency  in  the  regulatory  framework  between  the  physical  markets  and  the  derivatives 
markets,  as  the  latter  are  already  covered  by  the  MiFID.  It  would  also  ensure  consistency 
between the primary market and the secondary market, as the Auctioning regulation adopted 
by the Commission in July 2010 provides an extension of the relevant provisions of MiFID 
and MAD in the national legislation of Member States hosting an auction platform. Overall, 
there  was  limited  support  at  this  stage  for  extending  the  scope  of  MiFID  to  emission 
allowances  among  respondents.  While  many  noted  that  some  of  the  problems  witnessed  in 
emission allowances markets could thus be overcome, most urged further study in view of the 
possible implications for smaller firms. First, it is worth to recall that derivatives on emission 
allowances  are  already  covered  under  MiFID  and  emission  allowances  per  se  may  trade 
similarly to financial instruments. Second, the rather negative feedback from stakeholders on 
the proposed extension of MiFID is probably due to the lack of knowledge by most users of 
these  allowances  (i.e.  compliance  buyers),  of  the  MiFID  provisions  and  the  other  financial 
markets  legislation  that  cross  reference  to  MiFID.  We  acknowledge  that  our  consultation 
paper  might  have  provided  more  insight  in  that  respect.  Compliance  buyers  and  sellers 
dealing on own account in emission allowances will be exempt from MiFID if this activity is 
ancillary  to  their  main  business  and  they  are  not  part  of  a  financial  group.  As  mentioned 

50 

 
 
  
 
above,  the  status  of  the  CRD  exemptions  will  be  part  of  a  separate  review.  The  spill  over 
effects  of  an  extension  of  MiFID  to  the  carbon  market  in  terms  of  other  financial  markets 
legislation  (e.g.  Prospectus  Directive  (2003/71/EC),  Listings  Directive  (2001/34/EC), 
Transparency Directive (2004/109/EC), etc.) should be rather limited as these legislations will 
in most cases not apply or an exemption will be provided if needed. 

The extension of MiFID to the secondary spot trading of emission allowances would give rise 
to  aggregated  one-off  costs  of  €  1.5-€1.8  million,  with  yearly  ongoing  costs  of  €390,000-
€480,000 for smaller regional carbon exchanges (i.e. the major carbon exchanges are already 
authorised  as  regulated  markets).  The  costs  impact  on  compliance  buyers  and  non-financial 
market intermediaries (i.e. non-MiFID firms) is difficult to assess at this stage as the number 
of entities that would be impacted is not known. 

Together,  this  package  of  options  would  improve  the  functioning  of  commodity  derivatives 
markets by reinforcing transparency and applying similar rules to financial and non financial 
entities  carrying  out  similar  activities.  However  the  costs  triggered  by  these  options  are 
marginal  (i.e.  one-off  aggregated  costs  of  €2  to  €3  million  and  yearly  ongoing  costs  of  €4 
million)  

6.7.  Broaden  the  scope  of  regulation  on  products,  services  and  providers  under  the 

directive when needed 

Comparison of options (the preferred options are highlighted in bold and underlined in grey ): 

7 Broaden the scope of regulation on products, services and service providers when needed 

Policy option 

Impact on 
stakeholders 

Effectiveness  

Efficiency 

7.1 No action 

0 

0 

0 

Optional exemption for certain investment service providers 

7.2 Allow Member States to 
continue exempting certain 
investment service providers 
from MiFID but introduce 
requirements to tighten 
national requirements 
applicable to them (particularly 
conduct of business and 
conflict of interest rules) 

7.3 Delete the possibility for 
Member States to exempt certain 
service providers from MiFID 
(article 3) 

(++) increased level 
playing field between 
service providers  
(++) better 
understanding of 
applicable rules from 
investors because of 
their uniformity  
(-) compliance costs for 
entities concerned 

(+++) full level playing 
field between service 
providers  
(--) compliance costs 
for entities concerned  
(++) better 
understanding of rules 
from investors because 
of their uniformity 

(++) increased investor 
protection  
(-) persisting areas of 
discretion for each 
Member States that 
could maintain a level of 
inconsistency at 
European level 

(++) increased investor 
protection 

(++) compliance costs for entities 
concerned compensated by 
increased protection of investors 

(--) compliance costs for firms not 
sufficiently compensated by 
benefits; organizational 
requirements included in MiFID 
would be disproportionate in view 
of the average size of the 
exempted providers and could 
force several commercial 
companies out of business 

Conduct of business rules for unregulated investment products 

7.4 Extend the scope of MiFID 
conduct of business and 
conflict of interest rules to 
structured deposits and other 
deposit based products with 
similar economic effect 

(++) level playing field 
between products  
(++) better 
understanding of rules 
from investors  
(-)compliance costs for 
banks which could pass 
some of them on to 
their clients 

(++) increased investor 
protection 

(++) compliance costs partially 
compensated by benefits for firms 
(most entities selling different 
categories of investments will apply 
the same rules irrespective of 
products they sell) and clients 

51 

 
 
  
 
 
 
7.5 Apply MIFID conduct of 
business rules and conflict of 
interest rules to insurance 
products  

(+) level playing field 
between products but 
possible need to adapt 
certain requirements to 
specificities 
(+) better 
understanding of rules 
from investors (though 
different rules would 
continue applying to 
insurance products 
which are not Prips)  
(--) compliance costs 
(especially for entities 
currently not covered 
under MiFID) 

(++) increased investor 
protection  
(-) possible more 
fragmented regulatory 
framework for the 
insurance industry as 
MiFID rules unlikely to 
apply to non investment 
insurance products 

(+) compliance costs for entities not 
covered under MiFID (e.g. 
insurance companies) but which 
should be compensated by 
increased and more consistent 
investors protection 

The  first  preferred  option  (7.2)  consists  in  introducing  principles  for  national  regimes  that 
regulates  in  certain  countries  certain  investment  advisors  under  the  exemptions  granted  by 
article 3 of MiFID. Most of  the 16 Member States that make use of this exemption  already 
have  in  place  to  a  certain  degree  a  national  regime  very  similar  to  the  MiFID  provisions. 
Germany  is  the  Member  State  with  the  highest  number  of  exempt  service  providers.  The 
requirement for these national regimes to have analogous conflicts of interest and conduct of 
business  rules  (suitability,  information  and  reporting  requirements)  as  the  ones  for  MiFID 
authorised  entities  would  ensure  a  comparable  protection  of  clients  receiving  investment 
advice irrespective of the entities providing it. This would increase investor protection without 
imposing  undue  costs  on  the  beneficiaries  of  these  exemptions  as  a  deletion  of  the  optional 
exemptions would do (option 7.3). The other favourite option is to extend some of the MiFID 
rules to structured deposits (option 7.4) but not to insurance products (option 7.5) in order to 
provide  to  the  investors  a  more  consistent  and  protective  legal  framework.  Member  States 
with the highest investments in retail structured products are Italy, Germany, Spain, Belgium, 
and  France.  There  is  very  significant  support  among  respondents  for  both  of  the  preferred 
options. 

We expect the introduction of principles for the national regimes applying to firms operating 
under  the  Article  3  exemption  to  imply  a  one-off  cost  across  all  of  the  affected  service 
providers of €15–30 million. An extension of MiFID rules to the sale of such deposits would 
imply an estimated one-off impact of €31-€44m with ongoing costs of €9-€15m on a yearly 
basis. Taken together the preferred options would give rise to one-off aggregated costs of €46 
to €74 million and yearly ongoing costs of €9 to €15 million.  

6.8. 

Strengthen rules of business conduct for investment firms 

Comparison of options (the preferred options are highlighted in bold and underlined in grey): 

8 Strengthen rules of business conduct for investment firms 

Policy option 

Impact on stakeholders 

Effectiveness  

Efficiency 

8.1 No action 

0 

0 

0 

Execution only services and Investment advice 

52 

 
 
  
 
 
8.2 Reinforce investor protection 
by narrowing the list of non-
complex products for which 
execution only services are 
possible and strengthening 
provisions on investment advice  

8.3 Abolition of the execution only 
regime 

8.4 Apply general principles to 
act honestly, fairly and 
professionally to eligible 
counterparties resulting in their 
application to all categories of 
clients and exclude 
municipalities and local public 
authorities from list of eligible 
counterparties and professional 
clients per se 

8.5 Reshape customers 
classification by introducing new 
sub categories 

(-) possible difficulties in 
introducing distinction 
complex/non complex for 
certain categories of 
products (for instance 
UCITS) 
(++) better knowledge of 
clients and products by 
firms and better 
assessment of clients' 
profiles 
(--) compliance costs for 
investment firms 
(+) simplification of 
framework by eliminating 
distinction complex/non-
complex instruments 
(+) improved treatment 
for clients with low level 
of knowledge and 
experience 
(--) opportunity costs for 
investment firms 
(especially those only 
providing execution only 
services) 
(-) possible additional 
costs for clients with 
good knowledge and 
experience 

(+) increased clarity in 
classification of non-complex 
instruments 
(+) increased clarity of 
conditions for provision of 
advice  
(++) increased investor 
protection 

(++) compliance costs for 
firms compensated by 
improvement of quality 
service provided to 
clients at global level 

(++) increased investor 
protection 

(--) compliance and 
opportunity costs for 
investment firms not 
compensated by benefits 
(especially those only 
providing execution only 
services) 
(-) possible additional 
opportunity costs for 
clients not compensated 
by benefit in the case of 
clients with good 
knowledge and 
experience 

Customers' classification 

(++) increased protection 
for public entities 
receiving investment 
services 
(+) clear provision of 
general principles in the 
provision of services to 
eligible counterparties 
(-) marginal additional 
compliance costs for 
investment firms 
(especially those 
providing services mainly 
to professional clients 
and eligible 
counterparties) 
(--)compliance costs for 
investment firms to 
reshape the internal 
systems for client 
classification and to re-
classify their existing 
clients 
(+) possible benefits for 
certain clients 
(-) additional costs for 
clients 

(+) safer access to 
investment services for 
municipalities and local public 
entities (while leaving 
possibility to ask classification 
as professional client on 
request) 
(+) increased professionalism 
and correctness in provision 
of services among eligible 
counterparties  
(-) only partial improvement 
as the diversity of eligible 
counterparties will remain 

(+) possible additional 
costs for certain 
municipalities receiving 
investment services 
largely compensated by 
safer services provided to 
the entire category  
(+) compliance cost for 
firms compensated by 
benefits for client 
because of increased 
attention to the quality of 
services provided to them 

(+) increased protection for 
limited categories of clients 
(-) difficulty in implementing 
sub division in each 
categories 

(--) compliance costs for 
investment firms to 
reshape the internal 
systems for client 
classification and to re-
classify their existing 
clients not compensated 
by benefits for all clients 
(-) additional costs for 
clients with little benefits 
as they are already able 
to ask for a different 
classification under the 
current regime 

Complex products and inducements 

53 

 
 
  
 
 
 
8.6 Reinforce information 
obligations when providing 
investment services in complex 
products and strengthen periodic 
reporting obligations for different 
categories of products, including 
when eligible counterparties are 
involved 

(--)compliance costs for 
investment firms 
(++) benefits for clients 
receiving more precise 
and timely information 
about products and to 
some extent to 
regulators 

8.7 Ban inducements in the case 
of investment advice provided on 
an independent basis and in the 
case of portfolio management 

8.8 Ban inducements for all 
investment services  

(--) compliance costs for 
investment firms 
(+) possibility for firms, in 
the case of advice, to 
diversify the service they 
offer to clients 
(++) increased quality of 
service and clarity to 
clients 

(---) compliance costs for 
investment firms 
(-) reduced choice and 
increased costs for 
clients  

(++) increased awareness of 
different categories of clients 
about the characteristics and 
the valuation of products 
traded with their investment 
firms 
(++) overall improvement in 
the quality of information on 
products  
(-) reduction in opportunities 
for investors if costs passed 
on to them 

(++) removal of certain 
situations of conflicts of 
interests for the most 
sensitive services 
(-) increased direct costs for 
investors that may have to 
pay (higher) fees for these 
services 
(+) increased investor 
protection 
(--) broad application of the 
ban without any distinction 
between services would be 
disproportionate and could 
greatly damage the business 
model of many investment 
firms 

8.9 Require trading venues to 
publish information on execution 
quality and improve information 
provided by firms on best 
execution 

8.10 Review the best execution 
framework by considering price as 
the only factor to comply with best 
execution obligations  

Best execution 

(-)compliance costs for 
trading venues 
(+) improved ability of 
firms to select trading 
venues 
(+) better execution (and 
better information) for 
clients  
(+) increased clarity for 
investors 
(-) uncertainties to 
market participants on 
the impact of factors 
other than price on best 
execution 
(--) compliance costs for 
firms 

(++) improvements in 
delivering best execution to 
different category of clients 
(+) improvement in the ability 
of supervisors to monitor 
firms' compliance with best 
execution  

(-) additional complexity if 
best execution is extended 
(--) focus on price would not 
systematically lead to better 
execution than the current 
system because of the 
importance of other factors 
(costs, market impact, 
likelihood) in the choice of 
execution venues.  

(++) compliance costs for 
investment firms 
compensated by better 
knowledge of products by 
firms and clients and 
improved relationship 
with clients 

(++) compliance costs for 
investment firms 
compensated by benefits 
for investors in terms of 
higher quality services 

(-) costs for firms and 
clients not adequately 
compensated by benefits  

(++) compliance costs for 
trading venues largely 
compensated by benefits 
for other stakeholders in 
terms of best execution 

(-) costs not 
compensated by clear 
and univocal benefits 

The strengthening of business conduct for investment firms is tackled from different angles. 
The first favourite option is to review the list of products for which execution only services 
are  possible  and  reinforce  conduct  of  business  rules  for  the  provision  of  investment  advice 
(option 8.2). This will reinforce the protection of investors while preserving their freedom to 
use execution only services which was not the case in option 8.3. The second favoured option 
is  to  improve  the  rules  of  engagement  for  eligible  counterparties  by  applying  general 
principles of acting honestly as well as adapting slightly (without reshaping them as suggested 
in option 8.5) the customers' classification set in MiFID (option 8.4). Overall, there is broad 
support for narrowing the list of non-complex instruments, but with many cautioning against 
any  negative  implications  for  the  UCITS  brand.  There  is  also  broad  support  for  option  8.4. 
Views  are  more  mixed  on  the  merits  of  strengthening  provisions  and  requirements  around 
investment advice.  

The  costs  resulting  from  a  reduction  of  the  scope  of  non-complex  products  that  can  be 
distributed  via  execution-only  services  should  be  marginal.  The  overall  compliance  costs 
resulting  from  a  strengthening  conduct  of  business  rules  for  the  provision  of  investment 
advice  for  investment  advisers  would  amount  to  an  estimated  one-off  cost  of  between  €5.6 

54 

 
 
  
 
 
 
million  and  €12.5  million,  and  ongoing  estimated  costs  of  between  €134  million  and  €279 
million. 

We  expected  ongoing  costs  of  €16  million  resulting  from  the  clarification  of  the  rules  of 
engagement  with  eligible  counterparties.  We  do  not  expect  significant  costs  from  excluding 
municipalities from being classified as eligible counterparties or professional clients per se as 
such  a  change  has  already  been  effected  –  at  least  to  an  extent  –  in  a  number  of  Member 
States.  

Two other favourite options look at reinforcing the protection of investors when dealing with 
complex  products  (option  8.6)  with  the  requirements  for  additional  information  or  when 
offered investment advice on an independent basis or portfolio management (option 8.7) with 
the  ban  of  inducements.  A  total  ban  of  all  inducements  has  nevertheless  been  disregarded 
because of its excessive costs and potential impact on investment firms. Stakeholder views are 
divided with some agreeing with the need for more timely and stringent reporting in relation 
to  complex  products,  while  others  consider  this  would  overload  clients  with  information. 
Views are also divided on restricting inducements as per above, with more support however in 
the case of portfolio management.  

The  proposal  to  clarify  the  concept  of  independent  advice  takes  into  account  evolutions  at 
national  level  (e.g.  United  Kingdom)  although  is  not  directly  dealt  with  in  CESR  advice. 
Netherlands  has  also  indicated  that  it  is  considering  a    prohibition  of  inducements  for 
investment  advice.  The  proposal  tightens  the  existing  rules  while  at  the  same  time  leaving 
freedom of choice for investment firms and clients as to the service they wish to provide or 
receive. 

Regarding the additional information proposed for clients in relation to complex products, we 
would expect the overall one-off costs to be between €83.2-145.9 million and yearly ongoing 
costs between €11.6-36.6 million. In the case of the banning of inducements when providing 
investment  advice  on  an  independent  basis,  we  estimate  the  costs  for  firms  as  being  about 
€41m one-off and being about €24-28m ongoing. With respect to a ban on inducements for 
portfolio managers we expect overall one-off cost implications of about €131 million, and on-
going  costs  of  €3.7m.  The  key  benefit  in  terms  of  investor  protection  would  be  that  the 
inherent conflicts of interests that exist today would be removed, with the consequence that 
portfolio  managers  and  independent  advisors  would  align  more  their  decisions  with  the 
interests of their clients. The structure of the market would move to a certain extent from a 
commission-based towards a fee-based model (i.e. it should be noted that in the case of non-
independent advice inducements would still be allowed).  

Another  favourite  option  consists  in  requiring  trading  venues  to  publish  information  about 
execution quality and investment firm to improve information on execution venues they use 
and best execution (option 8.9). This option will also lead to more precise execution policies 
to  be  disclosed  by  investment  firms  to  their  clients.  Many  stakeholders  say  that  sufficient 
information  already  exists  in this  respect,  but  broad  support  is  expressed  by  Member  States 
and buy-side firms.  

The requirement for trading venues to publish information about execution quality is expected 
to trigger one-off costs of €18m and on-going costs of €6m. This would reinforce the benefits 
in terms of best execution that are expected from the introduction of a consolidated tape (see 
par. 6.3. above).  

55 

 
 
  
 
Taken  together  these  preferred  options  will  strongly  enhance  investor  protection  mainly  by 
reinforcing information requirements, by better protecting less knowledgeable investors, and 
by  removing  inherent  conflict  of  interests  (i.e.  banning  of  inducements  for  independent 
investment  advice  and  portfolio  management).  Taken  together  the  preferred  options  would 
give  rise  to  one-off  aggregated  costs  of  €281  to  €351  million  and  yearly  ongoing  costs  of 
€196 to €369 million. Although we acknowledge these costs are significant we believe these 
options strike the right balance between costs and benefits as we have limited the information 
requirements and the prohibition of inducements to certain complex products and investment 
services.  The  need  to  reinforce  investor  protection,  by  among  other  removing  inherent 
conflicts of interests, is so urgent and evident that national initiatives have already been taken 
(e.g.  UK  retail  Distribution  review  which  foresees  to  ban  the  payment  of  third  party 
commissions  not  only  for  independent  advice  as  targeted  here,  but  also  for  all  types  of 
investment advice).     

6.9. 

Strengthen rules of organisational requirements for investment firms  

Comparison of options (the preferred options are highlighted in bold and underlined in grey): 

9 Strengthen organisational requirements for investment firms 

Policy option 

Impact on 
stakeholders 

Effectiveness  

Efficiency 

9.1 No action 

0 

0 

0 

Corporate governance 

9.2 Reinforce the corporate 
governance framework by 
strengthening the role of directors 
especially in the functioning of 
internal control functions and when 
defining strategies of firms and 
launching new products and 
services. Require firms to establish 
clear procedures to handle clients' 
complaints in the context of the 
compliance function. 

9.3 Introducing a new separate 
internal function for the handling of 
clients' complaints 

(-) compliance costs for 
investment firms 

(-)compliance costs for 
investment firms 
(-) multiplication of 
internal functions in 
investment firms 

(++) greater consistency in role 
of directors in shaping policies of 
firms and on internal control 
functions across EU 
(+) increased focus on directors' 
role and on their professionalism, 
also in the perspective of 
supervisors  
(+) improved handling of clients' 
complaints 
(-) increased level of rigidity in a 
currently flexible framework 
(+) more uniformity in dealing 
with clients' complaints 
(-) less flexibility to adapt the 
procedure for handling with 
clients' complaints to the 
situation of each firms (type of 
services and clients, structure of 
the firm) 

(++) compliance 
costs for investment 
firms largely 
compensated by 
benefits in terms of 
safer products for 
investors 

(-) compliance costs 
and negative 
aspects not 
compensated by 
benefits 

Organisational requirements for portfolio management and underwriting 

9.4 Require specific organisational 
requirements and procedures for 
the provision of portfolio 
management services and 
underwriting services 

(-) limited compliance 
costs for firms 
(+) increased protection 
for investors 
(+) increased protection 
for issuers 

(++) introduction of common 
principles across the EU for 
aspects of portfolio management 
and underwriting currently 
insufficiently regulated 
(++) possibility for supervisors to 
establish more uniform 
supervisory practices  
(-) additional rigidity  

(++) compliance 
costs for investment 
firms largely 
compensated by 
benefits for all 
investors and issuers 
in terms of better 
services 

Telephone and electronic recording 

56 

 
 
  
 
 
 
 
 
9.5 Introduce a fully harmonised 
regime for telephone and electronic 
recording of client orders 

9.6 Introduce a common regime for 
telephone and electronic recording 
but still leave a margin of discretion 
for Member States in requiring a 
longer retention period of the 
records and applying recording 
obligations to services not covered 
at EU level. 

(--) compliance costs 
and downsides not 
compensated by 
benefits  

(++) icompliance 
costs are 
compensated by 
benefits in terms of 
better protection of 
clients and improved 
market integrity 

(+) common regime across 
Europe  
(--) a fully harmonized model 
does not allow to take into 
account the technological 
evolution as well as specificities 
in the provision of services 

(---) compliance costs 
for investment firms 
(except for those 
already subject to the 
obligation). 
(+) increased tools for 
supervisors 
(++) better protection of 
clients and detection of 
abusive behaviours for 
market integrity 
Impact on fundamental rights: 
Option interferes with Articles 7 and 8 of CFR.  

Option provides for limitation of these rights in law while 
respecting the essence of these rights. Limiting these rights 
is necessary to meet the general interest objective of 
ensuring market integrity and compliance with conduct of 
business rules. In order to respect fundamental rights, this 
requirement must be proportionate to the objective pursued 
and must respect EU data protection rules taking into 
account a maximum retention period for data of 2 years and 
also laying down the conditions for processing recorded 
communications. Supervision of the lawfulness of the 
processing of recorded communication shall be subject to 
the independent oversight of Member States data protection 
authorities set up by Directive 95/46/EC.  

(++) leaving some flexibility to 
Member States allows to take 
into account technological 
evolution as well as specificities 
in the provision of services 
(+) common regime across 
Europe 

(--) compliance costs 
for investment firms 
(except for those 
already subject to the 
obligation). 
(+) increased tools for 
supervisors 
(++) better protection of 
clients and detection of 
abusive behaviours for 
market integrity 
Impact on fundamental rights: 
Option interferes with Articles 7 and 8 of CFR.  

Option provides for limitation of these rights in law while 
respecting the essence of these rights. Limiting these rights 
is necessary to meet the general interest objective of 
ensuring market integrity and compliance with conduct of 
business rules.  In order to respect fundamental rights, this 
requirement must be proportionate to the objective pursued 
and must respect EU data protection rules and also laying 
down the conditions for processing recorded 
communications. Supervision of the lawfulness of the 
processing of recorded communication shall be subject to 
the independent oversight of Member States data protection 
authorities set up by Directive 95/46/EC. 

In  order  to  reinforce  the  rules  over  organisational  requirements  for  investment  firms,  three 
policy options have been retained. 

The first one aims at strengthening corporate governance by increasing the role of directors in 
a number of processes, with an additional focus on the handling of clients' complaints (option 
9.2). The second one is to require specific organisational requirements and procedures for the 
provision of portfolio management services and underwriting services (option 9.4) while the 
third  one  is  to  set  up  a  common  regime  for  telephone  and  electronic  recording  while 
preserving a certain margin of discretion for Member States (option 9.6). About 15 Member 
States  have  already  a  recording  requirement  which  is  incorporated  in  national  legislation  or 
rules. The selected options should ensure an appropriate reinforcement of the organisation of 
investment firms in some key areas for investors protection and market integrity (options 9.2 
and  9.4)  while  contributing  to  a  more  coherent  framework  in  Europe  (option  9.6)  without 
excessive  costs  (option  9.3  which  considers  the  introduction  of  a  new  internal  function  for 

57 

 
 
  
 
 
 
 
 
handling  of  clients'  complaints)  or  rigidity  (option  9.5  for  a  fully  harmonised  regime  for 
telephone  and  electronic  recording).  Respondents  generally  support  provisions  on  stronger 
governance  and  internal  reporting  requirements,  but  are  more  reserved  on  specific 
requirements for portfolio management and underwriting services. There is broad support for 
a minimum taping regime involving telephone and electronic communications which must in 
any  case  respect  fundamental  rights,  particularly  the  rights  to  private  life  and  protection  of 
personal data. 

Strengthening the role of  the  directors in  the functioning of the internal control functions is 
likely  to  lead  overall  to  an  incremental  on-going  cost  for  firms  of  €24-36m  across  the  EU. 
Requiring  specific  organizational  requirements  would  lead  to  a  one-off  cost  of  €2.8-4.2 
million in the case of portfolio management, and to one-off costs of €11-€26 million as well 
as  ongoing  costs  of  about  €0.25  million  in  the  case  of  underwriting.  In  relation  to  the 
introduction  of  a  harmonised  requirement  for  recording  client  orders  we  have  estimated  the 
range of incremental aggregated one-off costs to be €41.7-99.2 million and ongoing costs to 
be €45.2-101.2 million for the whole of the EU. Taken together the preferred options would 
give rise to one-off aggregated costs of €61 to €134 million and yearly ongoing costs of €69 
to €133 million. 

7. 

THE PREFERRED POLICY OPTIONS AND INSTRUMENT 

7.1. 

The preferred policy options 

Based on the analysis of the impacts above, the preferred options to achieve the objectives set 
out  in  this  impact  assessment  have  been  identified  in  the  tables  above.  An  overview  is 
included in Annex 4. 

Overall, the preferred policy options will lead to considerable improvement in the confidence 
of  investors  and  derivative  markets  users,  large  reduction  in  systemic  risks  and  substantial 
improvement in market efficiency. First, the improved transparency rules on equities and the 
new transparency rules on bonds and derivatives combined with the new reporting obligations 
and  systems  will  greatly  increase  the  level  of  transparency  of  financial  markets,  including 
commodities markets, towards regulators and market participants. Coupled with new powers 
for regulators, this should result in more orderly functioning of financial markets across the 
board.  Second,  the  new  obligations  imposed  on  investment  firms  in  terms  of  organisation, 
process  and  risk  controls  will  strongly  reinforce  investor  protection  and  therefore  raise 
investor  confidence.  Third,  the  new  trading  framework  and  obligations  imposed  on  some 
market  participants  will  at  the  same  time  decrease  systemic  risk  and  lead  to  more  efficient 
markets. 

7.2.  The choice of instruments to ensure an efficient revision of MiFID 

7.2.1.  Non-legislative cooperation between Member States with guidelines by ESMA 

A  potential  option  to  achieve  the  objectives  set  out  in  this  report  could  be  to  extensively 
utilise  cooperation  between  national  regulators  through  ESMA.  Under  the  current  MiFID 
framework national regulators are already required to cooperate, for example in respect of the 
supervision of branches of investment firms where supervisory competences are split between 
the  home-  and  the  host-Member  State  regulator,  and  to  exchange  information.  Such 
cooperation could be further intensified and facilitated by guidelines commissioned by ESMA 
in  order  to  achieve  a  greater  degree  of  supervisory  convergence  when  applying  rules  in 

58 

 
 
  
 
practice. A case in point could be the regulatory response to the relatively new developments 
in automated and high-frequency trading where common guidelines in how to deal with that 
phenomenon in supervisory daily practice could be designed.  

However,  the  disadvantage  of  this  approach  is  that  it  would  be  based  on  cooperation  of 
regulators, devising guidelines that are non-binding to market participants within the limited 
room for manoeuvre the existing legal framework permits. Cooperation can only go so far as 
is allowed by the law and cannot be a substitute for specific, binding legal rules designed to 
address new developments in the markets which  the current legislation does not cover or to 
extend the existing framework to additional areas which are currently insufficiently regulated. 
Therefore,  legal  provisions  are  needed  to  accomplish  the  desired  improvements  in  market 
transparency,  market  structure  and  investor  protection.  This  instrument  does  not  represent  a 
viable solution for accomplishing the goals described in this impact assessment. 

7.2.2.  The right legal instrument to amend the MiFID 

Having rejected the option of proceeding by non-legislative cooperation, this leaves the option 
of trying to achieve the objectives described in this impact assessment by a legal instrument. 
This would ensure the implementation and application of targeted amendments, additions and 
extensions  envisaged  for  the  scope  of  MiFID  in  all  Member  States.  The  improvements  in 
relation to market transparency and structure and investor protection would be achieved in the 
entirety  of  the  European  markets,  potential  regulatory  arbitrage  could  be  minimised  and 
especially firms operating on a cross border basis could benefit from economies of scale being 
assured that the same legal framework is applied wherever they operate within the EU. The 
suitable legal instrument for attaining the goals described in this impact assessment would be 
a combination of a Directive and a Regulation. Choice between these is made on the basis of a 
case-specific analysis. 

inconsistent 

that  permits 

The high level group on Financial Supervision recommended that future legislation should be 
implementation  and  application  of  rules103.  This 
avoided 
recommendation does point to an increased use of regulations as a legal instrument where by 
design  there  can  be  no  inconsistencies  in  implementation  due  to  deviations  in  national 
transposition  processes  and  where  manifest  differences  in  application  can  be  kept  to  a 
minimum  by  devising  a  stringent  set  of  rules  directly  on  the  European  level.  In  addition,  a 
Regulation could avoid diverging  national  rules being created in the transposition processes 
and would ensure best a harmonised set of core rules applicable in the EU. Specifically for the 
subject matters covered by MiFID three areas can be distinguished where the choice of legal 
instrument can be assessed separately. 

A  Regulation  might  be  the  best  way  to  ensure  full  harmonisation  of  national  supervisory 
powers  and  to  further  enhance  these  powers.  In  addition  a  Regulation  is  necessary  to  grant 
specific  direct  competences  to  ESMA  in  the  areas  of  setting  position  limits  and  banning  of 
investment products, as well as in the area of coordination of national supervisory powers.   

Concerning  other  areas,  a  regulation  could  be  appropriate  for  the  subjects  of  trade-
transparency  and  transaction  reporting  where  the  application  of  the  rules  often  depends  on 
numeric thresholds (eg for determining when a deferred publication of a trade large in scale is 
permitted) and specific identification codes (populating the automated and machine-readable 
transaction reports supervisors need to investigate potential cases of market abuse). Here any 
deviation  on  the  national  level  would  inevitably  lead  to  market  distortions  and  regulatory 
arbitrage, preventing the development of a level playing field. The current MiFID framework 
has  already  acknowledged  these  considerations  and  dealt  with  them  adequately.  While  the 

59 

 
 
  
 
framework  directive  does  entail  the  general  rules,  a  Level  2  regulation104  conclusively 
regulates  the  technical  details  on  trade-transparency  and  transaction  reporting.  Practical 
shortcomings  of  this  regulatory  structure  have  not  been  encountered  yet,  but  in  the  spirit  to 
use  as  much  as  possible  a  Regulation  as  the  legal  instrument  to  take  advantage  of  all  the 
benefits  it  could  bring,  it  might  be  appropriate  to  introduce  these  requirements  in  a 
Regulation.  This  may  require  the  change  of  the  legal  basis.  The  same  approach  could  be 
utilised when extending the rules in these areas, for example, to non-equity products.  

Concerning investor protection guaranteeing a level-playing field by using a Regulation as the 
legal instrument might appear to be an attractive option. 

Especially  for  retail  investors  across  the  EU  a  uniform  set  of  rules  may  promote  the  use  of 
cross-border  providers  or  the  investment  in  financial  products  from  other  Member  States. 
However one has to bear in mind that national retail markets for financial instruments across 
the EU still differ with certain instruments and services being more popular in some Member 
States than others. Therefore, in the specific case of MiFID, flexibility for Member States to 
add  specific  rules  tailored  for  their  markets  adds  to  a  high  standard  of  protection  for  retail 
investors. A directive is the right legal instrument for granting such flexibility. A one size fits 
all  approach  would  not  be  suitable  to  adequately  reflect  the  diversity  of  European  markets. 
This would increase compliance costs for investment firms while not bringing any benefit in 
terms of investor protection. 

Another  case  in  point  is  the  proposal  to  exclude  municipalities  and  local  public  authorities 
from  the  list  of  eligible  counterparties  to  better  protect  them  as  investors.  The  terms 
municipalities and local public authorities are deliberately broadly framed as the structures of 
local governments are very different in the Member States. Therefore, it appears valid to leave 
it  to  Member  States  to  determine  which  institutions  on  the  local  level  should  precisely  be 
captured  by  the  terms  municipalities  and  local  public  authorities.  The  directive  again  does 
seem  to  be  the  more  suitable  instrument  to  ensure  that  the  ensuing  provisions  are 
appropriately designed to fit in with the national structures and to work seamlessly in practice.  

Shortcomings  of  MiFID  cannot  be  linked  to  the  current  legal  structure  and  a  lack  of  direct 
applicability of the rules, but rather to technical developments, gaps and limitations in scope 
that need to be addressed.  

The current MiFID set-up (framework directive and two implementing measures, one of them 
being a regulation for technical aspects) has worked reasonably well in supervisory practice 
and  should  even  improve  due  to  stronger  ESMA  coordination.  A  restructuring  of  this 
framework by devising regulations on all levels would trigger substantial adaptation costs for 
public authorities and market participants alike only three and a half years after transposition 
(November 2007) of the original MiFID. 

While  financial  markets  are  increasingly  international  in  design  and  outlook  national 
specificities remain, e.g. in relation to market models used or, in particular, in the ways retail 
investors access the financial markets (for example, instruments preferred by retail investors 
differ between Member States as well using independent advisers or high-street banks as the 
prime  gateway  to  invest).  For  regulators  to  be  able  to  appropriately  take  into  account  such 
national  specificities  it  is  still  a  valid  point  within  the  wide-ranging  MiFID  field  to  grant 
Member States a certain degree of flexibility for which the directive is the more suitable tool.  

In conclusion, the Commission services consider that a Regulation should be devised dealing 
with  competences  of  ESMA,  as  well  as  in  the  area  of  coordination  of  national  supervisory 

60 

 
 
  
 
powers  and  possibly  further  enhancement  of  national  powers.  A  regulation  might  also  be 
appropriate for the subjects of trade transparency and transaction reporting. It should be noted 
that a different legal basis (Article 114 TFEU) than the existing one (Article 53 TFEU) should 
be used as the latter only allows for the issue of directives. A directive rather than a regulation 
is  deemed  to  be  the  most  appropriate  instrument  for  establishing  the  amended  framework 
dealing  with  the  substantive  matters  of  markets  in  financial  instruments.  This  outcome  is 
consistent  with  the  choices  made  for  other  European  legal  instruments  in  the  field  of 
regulating financial markets and services. 

7.3. 

Impact on retail investors and SMEs 

In  this  regard,  the  strengthening  of  the  provisions  on  conduct  of  business  rules  (i.e.  on 
inducements, on complex and non-complex products, on information to be provided to clients 
and  the  best  execution  rules,  linked  also  to  the  enhancement  of  the  quality  of  data),  the 
modification  of  some  organisational  requirements  and  the  strengthening  of  supervisory 
powers will be measures with a direct impact on the better protection of retail investors and 
thus will improve and enlarge the access of these investors to financial markets. In addition, 
the  revision  of  MiFID  will  also  have  an  impact  in  the  protection  of  professional  investors, 
which  will  have  additional  safeguards  concerning  the  way  investment  firms  deal  with  their 
investments (e.g. more transparency, stricter organisational rules, new clients classification). 

With regard to SMEs, their protection will be enhanced when acting as investors. In addition, 
through the revision of MiFID, by introducing an EU label for SME markets, their access to 
capitals markets will be facilitated. By giving more visibility to SME markets and thus more 
liquidity  to  their  assets,  more  investors  will  be  attracted  to  these  markets.  The  fact  that  the 
regime  proposed  will  facilitate  a  network  of  SMEs  markets  within  the  EU  gives  even  more 
possibilities  for  SMEs  to  obtain  financing  via  capital  markets,  as  their  assets  will  have  the 
possibility to be traded in all the markets belonging to the network. 

7.4. 

Impact on third countries/ impact on EU competitiveness 

Financial  markets,  including  commodity  derivatives  markets,  are  global  markets;  therefore 
any modification in the EU legislation will have an impact on third countries.  

However,  it  is  important  to  signal  that  several  of  the  modifications  proposed  to  the  current 
legal framework are steps taken in order to put into effect G20 commitments. In September 
2009,  the  G20105  committed  to  tackle  less  regulated  and  more  opaque  parts  of  the  financial 
system, and improve the organisation, transparency and oversight of various market segments, 
especially in those instruments traded mostly over the counter. In particular they agreed that 
all  standardised  over-the  counter  ('OTC')  derivatives  should  be  traded  on  exchanges  or 
electronic  trading  platforms  where  appropriate.  During  its  Pittsburgh  summit,  the  G20  also 
agreed "to improve the regulation, functioning, and transparency of financial and commodity 
markets  to  address  excessive  commodity  price  volatility."106  The  G20  commitment  was 
reinforced  in  November  2010  by  the  summit  statement  in  Seoul,  which  pledges  to  address 
food  market  volatility  and  excessive  fossil  fuel  price  volatility.107  Therefore,  the  legal 
framework  of  other  important  jurisdictions  (i.e.  USA,  Japan)  will  also  be  modified  in  the 
same sense.  

A comparison of the US regulatory reforms with the MiFID review is included in Annex 14. 
Overall  the  US  is  making  similar  choices,  albeit  to  suit  its  own  market  structure  and 
framework  of  laws  and  oversight.  Competition  between  trading  venues  is  welcomed.  In 
Dodd-Frank,  information  duties  between  firms  and  clients  are  being  tweaked  and 

61 

 
 
  
 
transparency  rules  are  being  extended  to  new  instruments.  High  frequency  trading  and  dark 
pools are both under study. At this stage, neither will be radically restricted but some possible 
safeguards  are  being  discussed.  As  a  result,  the  EU  and  US  are  poised  to  make  regulatory 
adjustments to deal with common issues, although differences in approaches may be justified 
according to the structure and needs of each respective market. By way of exception, EU-US 
measures in relation to OTC derivatives need to go beyond broad parallelism and be nearly 
identical.  Unlike  other  instruments  more  closely  tied  to  local  issuers,  investors,  laws,  and 
infrastructures,  trading  in  OTC  derivatives  can  be  uprooted  more  easily  to  another 
jurisdiction.  As  a  result,  the  EU  and  US  need  to  adopt  highly  similar,  viable  and  ambitious 
regulatory frameworks for migrating trading in derivatives increasingly from OTC markets to 
transparent,  multilateral  organised  trading  venues  in  line  with  the  G20  commitment.  Close 
alignment  is  also  required  as  regards  regulatory  improvements  to  commodity  derivatives, 
although the solutions cannot ignore differences in the structure and make-up of underlying 
local markets.  

However, the possibility of regulatory arbitrage exists with countries that are not part of the 
G20 and therefore not bound by the commitments taken at that level. A close monitoring of 
the evolution of the regulation in these countries will therefore be needed in order to ensure 
that the EU competitiveness is not harmed.  

Third  countries  will  be  positively  impacted  as  the  revision  of  MiFID  will  introduce  a  third 
country regime to frame the access of third country firms to the EU markets. Nowadays their 
access  is  fragmented,  as  each  Member  State  decides  whether  to  establish  a  third  country 
regime and how to do it. This third country regime will have a positive impact in the current 
trend of the industry to create mergers at international level, as it has recently been announced 
by  important  stock  exchanges  (see  Annex  2.4.3),  as  the  third  country  regime  will  require 
establishing comprehensive memoranda of understanding between the EU regulators and third 
country regulators to deal with the regulatory aspects in order to have the necessary tools to 
better  supervise  third  country  firms/market  operators.  Full  account  should  be  taken  of  the 
EU's international commitments, both in the WTO and in bilateral Agreements 

7.5. 

Social impact 

Some  of  the  proposals  suggested  will  increase  investor  protection,  reinforce  the  means  of 
regulators  for  controlling  financial  markets  and  financial  operators,  and  make  financial 
markets more transparent and more secure. Therefore, there will be a direct benefit to all types 
of  market  participants:  investors,  retail  or  institutional,  as  well  as  issuers.  In  particular,  the 
reclassification of some professional investors, such as municipalities and charities, as retail 
investors  will  avoid  that  those  investors  accede  the  markets  without  the  necessary  level  of 
protection, as it has been evidenced during the financial crisis, where some of these actors had 
invested in assets that were not at all suitable for them. 

The  proposals  taken  should  lead  to  higher  investor  confidence  and  possibly  greater 
participation  in  financial  markets.  In  addition,  by  contributing  to  reducing  markets'  disorder 
and  systemic  risks,  these  options  should  improve  the  stability  and  reliability  of  financial 
markets thereby making it easier for enterprises to raise capital to grow and create more jobs.  

In addition, by requiring investment firms to disclose further information to investors and to 
learn  more  about  their  investment  criteria,  the  revision  of  MiFID  might  encourage 
investments in specific types of business, such as social, environmental, ethical, etc. 

62 

 
 
  
 
7.6. 

Impact on fundamental rights 

An  assessment  was  made  of  the  policy  options  to  ensure  compliance  with  fundamental 
rights108. As most of the options considered as part of this impact assessment do not interfere 
in any way with any of the fundamental rights or reinforce the right to consumer protection 
and/or the freedom to conduct business, we have focused our assessment on the options which 
might  limit  these  rights  and  freedoms.  A  detailed  analysis  for  these  relevant  policy  options 
can  be  found  in  Annex  3.  The  proposal  is  in  compliance  with  the  charter  as  it  will  lead  to 
more effective and harmonised regimes for provision of investment services and activities in 
financial instruments improving market integrity and compliance with MiFID rules. However 
any limitation on the exercise of these rights and freedoms will be provided for by the law and 
respect  the  essence  of  these  rights  and  freedoms.  To  this  end  the  policy  options  relating  to 
whistleblowing  (as  part  of  the  option  on  administrative  sanctions)  and  telephone  and 
electronic  recording  ensure  that  access  to  telephone  and  data  records,  access  to  private 
premises, data on whistle blowing are subject to appropriate safeguards. These policy options 
will contribute to market integrity by facilitating the detection of market abuse within the EU 
as  well  as  facilitating  the  monitoring  of  compliance  with  MiFID  conduct  of  business  rules. 
The proposed sanctioning  regime will ensure that similar breaches are sanctioned in similar 
ways  throughout  the  EU,  unless  differences  can  be  objectively  justified.  This  Impact 
Assessment  addresses  problems  relating  to  divergences  and  weaknesses  of  administrative 
sanctions. It is without prejudice to the situation concerning criminal sanctions regimes in the 
field of MiFID, which deserves further analysis. Following such analysis the Commission will 
decide on policy actions to be taken in this regard, based on a full assessment of the relevant 
impacts. 

7.7.  Environmental impact 

It does not appear that the preferred options identified will have any direct or indirect impacts 
on environmental issues. 

However, there are some positive indirect environmental issues, as thanks to a better oversight 
of commodities markets, the current functioning of commodities markets could be improved, 
which could contribute to a more stable environment for producers of physical commodities 
which  could  improve  overall  allocation  of  resources  and  possibly  better  take  into 
consideration environmental constraints. Lastly, improving transparency and oversight of the 
emission  allowances  market  would  contribute  to  a  better  functioning  of  the  EU  Emissions 
Trading Scheme (ETS) which is a cornerstone of the EU's policy to combat climate change. 
The  EU  ETS  is  a  cap  and  trade  system  aimed  at  cost  effective  and  economically  efficient 
reductions  of  greenhouse  gas  emissions  by  creating  a  market  in  emission  allowances  and  a 
price signal that reflects the abatement costs, as well as the scarcity, of allowances and guides 
decisions on abatement measures. An efficient allocation implies that emission allowances go 
to those participants that have a marginal cost of reducing emissions above the market price. 
Participants with lower marginal cost would choose instead to abate their emissions, e.g. by 
production  optimisation  or  investment  in  low  carbon  technology.  The  most  important  place 
for price discovery is the secondary market, where trading takes place between many parties 
throughout the day. Liquidity of the secondary market is crucial for the reliability of the price 
signal.  In  this  context,  higher  standards  of  integrity  and  transparency  applicable  to  the  spot 
carbon  markets  will  enhance  investor  confidence  and  contribute  to  securing  sufficient 
liquidity in that market.  

63 

 
 
  
 
8. 

ESTIMATE  OF  IMPACT  IN  TERMS  OF  COMPLIANCE  COSTS  AND  ADMINISTRATIVE 

BURDEN 

8.1. 

Estimated overall compliance costs 

The  estimates  of  compliance  costs  provided  below  are  based  on  the  study  carried  out  by 
Europe Economics. A more detailed breakdown of consolidated costs can be found in Annex 
5. Further detailed analysis is also provided in this annex, including a detailed explanation of 
all the underlying assumptions. 

The  MIFID  review  is  estimated  to  impose  one-off  compliance  costs  of  between  €512  and 
€732 millions and ongoing costs of between €312 and €586 million. This represents one-off 
and  ongoing  costs  impact  of  respectively  0.10%  to  0.15%  and  0.06%  to  0.12%  of  total 
operating spending of the EU banking sector109. This is only a fraction of the costs imposed at 
the time of the introduction of MiFID. The one-off cost impacts of the introduction of MiFID 
were  estimated  as  0.56  per  cent  (retail  and  savings  banks)  and  0.68  per  cent  (investment 
banks)  of  total  operating  spending.  Recurring  compliance  costs  were  estimated  at  0.11  per 
cent  (retail  and  savings  banks)  to  0.17  per  cent  (investment  banks)  of  total  operating 
expenditure.110 

Consolidated overview of compliance costs (€ millions)

Market structures
New trading technologies ("automate trading")
Pre and post-trade transparency and data consolidation
Reinforce regulatory powers
Transparency to regulators
Commodity derivatives markets
Broaden the scope of regulation
Strengthening of conduct of business rules
Organizational requirements for investment firms
TOTAL MiFID REVIEW COSTS
Total operating costs of investment firms
Total MiFID review costs as a % of total operating costs

TOTAL INCREMENTAL COSTS
one-off

on-going

low

10
1
38
8
65
2
46
281
61
512
500.000
0,10%

high

31
1
41
13
84
3
74
351
134
732
500.000
0,15%

low

9
1
12
10
3
4
9
196
69
312
500.000
0,06%

high

21
1
18
20
5
4
15
369
133
586
500.000
0,12%

We  have  been  cautious  in  assessing  these  costs  taking  conservative  assumptions.  For 
example, the incremental one-off costs imposed upon investments firms relating to transaction 
reporting  of  OTC  derivatives  (including  commodity  derivatives)  would  virtually  disappear 
when  reporting  requirements  under  MiFID  and  EMIR  are  fully  harmonised,  so  that  trade 
repositories can be allowed to be approved as Approved Reporting Mechanism. This would 
mean that the any additional costs due to MiFID in that regard would be eliminated, reducing 
the total estimated compliance costs by €64 to 82 million. 

8.2.  Estimate of impact in terms of administrative burden 

The administrative burden costs are part of the compliance costs presented above. We have 
identified the compliance costs above which meet the definition of administrative burden and 
for these compliance costs which are at the same time administrative costs have constructed 
the Standard Costs Model ("SCM") estimates. The preferred options generating administrative 
burden (i.e. the measuresgiving rise to information obligations) are as follows: 

•  Pre-and post-trade transparency (both equity and non-equity). 

64 

 
 
  
 
 
 
 
•  Reporting channels and Data consolidation 

•  Commodity derivatives — position reporting 

•  Transparency to regulators: transaction reporting, storage of orders and direct reporting to 

ESMA 

•  Investor  protection  —  the  information  obligations  when  offering  investment  services  in 
complex  products  and  the  enhanced  information  to  be  published  by  trading  venues  on 
execution quality and the information given to clients by firms on best execution 

•  Further convergence of the regulatory framework — telephone and electronic recording of 

client orders 

•  Supervisory powers — position oversight. 

€  millions

Pre- and post-trade transparency
Reporting channels and Data consolidation
Reinforce regulatory powers: Position oversight & limits
Transparency to regulators
Commodity derivatives: Position reporting by categories of traders
Information on complex products
Trading venues - Execution quality
Harmonisation of the telephone and electronic recording regime
Total administrative burden

TOTAL ADMINISTRATIVE BURDEN COSTS

one-off

on-going

low

high

low

high

7,5
30,0
8,2
65,4
0,8
83,2
18,0
41,7
254,8

11,2
30,0
12,9
84,1
1,0
145,9
18,0
99,2
402,3

9,3
3,0
9,5
2,6
3,3
11,6
6,0
45,2
90,5

13,1
4,5
20,3
4,9
3,8
36,6
6,0
101,2
190,4

9. 

ESTIMATE OF IMPACT IN TERMS OF INDIRECT ECONOMIC EFFECT 

We  try  to  assess  in  this  section  the  impact  in  terms  of  indirect  economic  effects  of  our 
preferred options. We focus on the areas for which some information is available. 

9.1. 

Trading  of  clearing  eligible  and  sufficiently  liquid  derivatives  on  organised 
trading platforms 

Trading derivatives on exchanges, MTFs or electronic platforms should result in operational 
efficiencies  for  traders  (both  buy-  and  sell-side),  reduce  the  occurrence  of  front  and  back 
office errors and provide a clear and easily accessed audit trail. The increased transparency on 
such platforms, as well increased competition between dealers, is also likely to reduce the bid-
ask  spreads  in  the  relevant  markets  provided  that  liquidity  is  not  reduced.  This reduction in 
spreads  which  will  represent  an  opportunity  cost  to  dealers  of  trading  on  a  platform  rather 
than purely over the counter, can be considered as a positive effect for the wider market. In 
addition,  even  for  dealers,  the  opportunity  costs  could  be  largely  offset  by  the  significant 
increase  in  volume  (i.e.  when  a  product  is  traded  on  a  platform  the  level  of  standardisation 
increases, trading volumes increase, trading costs decrease and liquidity increases) as well as 
increasing ease of trades.111 Please refer to Annex 8 for more detailed analysis. 

65 

 
 
  
 
 
 
9.2.  Extension of the trade transparency regime for equities to shares traded only on 

MTFs or other organised trading facilities 

The experience of the UK Alternative Investment Market (AIM), a junior market regulated as 
a  MTF  and  part  of  the  London  Stock  Exchange Group  (LSE), indicates  a 16%  reduction in 
spreads with the advent of MiFID transparency regime for shares. AIM was indeed one of the 
primary MTFs, such as First North, which complied with the MiFID transparency regime in 
the  same  way  as  the  main  market  they  belong  to.  Hence  the  impact  of  MiFID  on  the  AIM 
should be similar to the impact that would be observed in other primary market MTFs if the 
more detailed transparency regime for shares admitted to trading on a regulated market were 
to be applied.  

9.3.  Trade transparency in non-equity markets 

Concerning wholly new pre- and post-trade transparency requirements for non-equities, it is 
not  possible  to  make  a  complete  assessment  of  the  possible  economic  impact  -  notably  in 
terms of liquidity in these markets - at this stage, as these will largely depend on the detailed 
requirements in terms of delays and content by type of instrument and venue to be developed 
in implementing legislation. However, some presumptive assessments can be made.  

Overall, the indirect benefits of improving pre-trade data flows in non-equity markets in terms 
of more efficient price formation, increased competition among dealers and greater certainty 
for investors in contrast to the present context of available data across non-equity products is 
difficult to judge. 

Increased post-trade transparency may have benefits of reducing transaction costs (in the form 
of bid/offer spreads), as informational advantages of large market makers would be reduced 
and investors would be able to negotiate better trading terms.  

We have tried to assess what the potential benefits of post-trade transparency could be by first 
looking  at  the  US  experiment  (the  Trade  Reporting  and  Compliance  Engine  (TRACE) 
system) and second by analysing available data of exchange traded and OTC bonds. 

Regarding the US experiment, TRACE was fully phased in by January 2006, and offers real-
time, public dissemination of transaction and price data for all publicly traded corporate bond. 
Please  refer  to  Annex  18  for  a  detailed  analysis  of  the  TRACE  initiative.  Unfortunately 
mapping the impacts of TRACE on the US market to the EU market is not something that can 
be  done  easily,  if  at  all.  There  are  important  differences  between  the  two  markets,  such  as 
greater competition between dealers and historically tighter bid-ask spreads in the EU market. 
Trading  activity  is  more  highly  concentrated  in  US  markets,  with  a  handful  of  banks  or 
dealers  controlling  the  majority  of  the  trading  and  syndication.  Nonetheless  a  number  of 
interesting lessons could be drawn: 

•  The main three studies112 examining the impacts of TRACE find that TRACE significantly 
reduced transaction costs (spreads). As customers originally (in the opaque market) had to 
pay  a  search  cost  to  find  out  quote  prices  from  different  dealers,  increasing  transparency 
had increased their ability to accurately evaluate the costs they pay and as a result reduced 
transactions costs and improved liquidity. The impact on the liquidity in its broader sense 
such as market  depth, trade volume,  and the ease  of transacting is less clear cut and still 
open to debate.  

66 

 
 
  
 
•  Evidence  from  TRACE  has  shown  that  TRACE  has  directly  benefitted  investors  and 
traders  by  increasing  the  precision  of  corporate  bond  valuation  and  consequently 
decreasing the bond price dispersion. Research indicated that at the individual bond level, 
regardless of rating or issue size, valuation of bonds positions across a fund became much 
tighter  once  TRACE  was  implemented.  As  a  result,  another  potential  indirect  benefit  of 
post-trade transparency is higher quality and reliable information for valuation purposes. 

Second Europe Economics carried out analysis of available bond data. It is important to bear 
in mind that the vast majority of corporate and government bonds are traded over the counter 
(estimated at 89 per cent of all trades)113. 

The first set of data relates to corporate bonds traded on exchanges. The analysis of these data 
suggests that increasing post-trade transparency for bonds traded on exchanges and regulated 
markets  will  have  a  positive  impact  in  terms  of  reducing  bid/offer  spreads.  Comparisons 
between countries that currently have post-trade transparency on exchanges (such as Italy and 
Denmark) with those that don’t shows the spreads in the former group decreased on average 
by eight basis points after the introduction of post-trade transparency. The potential benefit of 
extending  transparency  to  other  Member  States  that  do  not  currently  have  post-trade 
transparency  for  bonds  is  estimated  to  be  approximately  €8  million  a  year  based  on  trading 
volumes taking place on exchanges.  

The  second  set  of  data  relates  to  a  subset  of  OTC  corporate  and  government  bonds  traded 
OTC.  Analysis  of  data  from  bonds  traded  over  the  counter  reveals  less  scope  for  benefits 
arising from post-trade transparency. This is likely to be due to lower levels of liquidity than 
on-exchange bonds. However, an interesting result emerged in that average spreads for OTC 
traded bonds are lower in countries that have post-trade transparency for on-exchange bonds. 
Given  that  our  OTC  and  exchange-traded  bond  samples  consisted  of  almost  all  the  same 
bonds,  it  is  likely  that  price  formation  and  transparency  of  bonds  traded  on  exchanges 
influences the transparency of the same bonds traded OTC.  

As  a  conclusion,  both  in  the  case  of  on  exchange  traded  and  OTC  bonds,  a  narrowing  of 
spreads,  more  reliable  pricing,  as  well  as  improved  valuation  is  expected.  In  addition 
increased  transparency  should  deliver  improved  best  execution  of  clients'  transactions.  But 
indirect costs in terms of less immediacy and market depth can arise if the ability of dealers to 
provide liquidity is impaired. This risk is likely to be far lower for government bonds than for 
corporate bonds as the former are in general more liquid. This potential downside effect could 
be addressed by a proper calibration of the disclosure regime for orders of large size (e.g. by 
calibrating the type and the timing of information to be published). 

9.4.  Consolidation of post-trade data in the equities and non-equities markets 

As for a mandatory consolidated tape in the equities markets, it is expected that this should 
bolster  competition  between  trading  venues,  leading  to  a  further  reduction  in  direct  fees 
associated with trading. There should also be an improvement in market depth and liquidity, 
as the consolidated tape should overcome some effects of fragmentation in European markets. 
Moreover, it should deliver best execution benefits to investors. Based on a study of a sample 
of Europe’s most liquid stocks in January 2010, it has been estimated that this would amount 
to savings of €12.38 million in terms of transaction costs.114 

With respect to non-equities markets, the set-up of a consolidated tape is expected to deliver 
similar benefits. 

67 

 
 
  
 
9.5.  Ban  inducements  in  the  case  of  investment  advice  provided  on  an  independent 

basis and in the case of portfolio management 

Independent advice 

The following possible effects of this measure could take place: 

•  There is a risk that a number of small providers may exit the market as a result of the ban 
of  inducements115  (notably  those  for  which  commissions  is  an  important  source  of 
revenues and that will not be willing or able to change their business model).   

•  There  is  a  significant  possibility  that  many  investment  advisers  working  with  a 
remuneration structure geared towards third-party commissions would simply cease to self-
describe  as  being  independent  and  switch  their  business  to  the  provision  of  non-
independent advice (in that making the nature of their business more transparent to clients).  

•  There  may  be  a  switching  effect  away  (by  clients)  from  advisers  that  switch  from  a 
commission-basis to a fee-basis. The scale of this switch will be critically dependent upon 
the  extent  to  which  consumers  value  (and  are  therefore  willing  to  pay)  “independent 
investment  advice”  against  “investment  advice”.  If  this  is  the  case,  any  secular  trend 
towards independent advice (in the sense of not being restricted in market choice and also 
having  a  remuneration  structure  geared  towards  downstream  remuneration)  would  be 
considerably strengthened. This would benefit consumer choice and the quality of service 
received.  

Portfolio management 

Whereas  in  investment  advice  provided  on  packaged  products  downstream  charging  is 
typically  not  standard  practice,  fees  are  usually  charged  to  final  investors  in  the  case  of 
discretionary portfolio management.  

The  reception  of  commissions  by  portfolio  managers  from  product  providers  has  attracted 
attention  by  regulators,  due  to  the  discretionary  nature  of  this  service.  In  2007  and  2011 
CESR indicated the difficulty  for portfolio managers  receiving  inducements to  comply with 
their duty to act in the best interest of the clients1 and the opportunity to consider a possible 
ban  of  inducements2.  In  the  UK  common  market  practice  excludes  the  reception  of 
inducements  in  the  context  of  portfolio  management.  In  Italy  inducements  are  strongly 
discouraged in this case. Unfortunately no data are available to assess the scale of the changes 
driven by such a measure in Italy. An Italian trade association described this as having had the 
following impact on the business models of banks: 

•  the reduction in the use of inducements has resulted in an increase in the charges levied on 
investors  (to  compensate  the  portfolio  managers  for  the  revenues  lost  —  however, 
previously the customer would have borne these charges implicitly as the product provider 
would have charge higher fees in order to enable him to pay commissions to the portfolio 
manager and these fees would have been deducted from the investment returns achieved)  

1 Inducements under MiFID – CESR 07/228b. 
2 CESR Technical Advice to the European Commission in the context of the MiFID review and Responses to the 

European Commission request for additional information – 29 July 2010. 

68 

 
 
  
 
                                                 
•  A switch away from packaged products (where there had been inducements) towards direct 

investments by portfolio managers.  

However,  we  note  that  private  banking  and  discretionary  portfolio  management  (combined) 
have  been  recently  estimated  to  account  for  about  6  per  cent  of  mutual  fund  distribution  in 
Italy.116 This was 7 per cent in 2007 (FERI Fund Market Information). Whilst we recognise 
that market changes flowing from the regulatory change in Italy may not be fully reflected in 
the  current  estimate  (and  there  could  also  be  other  drivers  of  the  change)  and  that  the  split 
between  private  banking  and  discretionary  portfolio  management  activities  might  have 
changed this scale of change does not appear likely to be having significant impacts upon the 
asset management sector.  

Whether  the  same  impacts  would  occur  if  this  model  were  applied  elsewhere  in  Europe  is 
unclear.  However  one  could  argue  that  the  prohibition  of  inducements  would  result  in 
increased charges to the clients of the portfolio managers so that the net impact for the latter is 
neutral.  In  this  case,  the  inducements  on  packaged  products  could  be  passed  on  to  the  end 
clients who would (in theory) be exactly compensated for the increased charges made by the 
portfolio  managers.  This  would  also  mean  that  the  clients  were  put  into  an  equivalent 
position, as we have described above: i.e. that the increase in annual service charge from the 
portfolio manager would be matched by the reduction in fees levied by the product provider 
and deducted from investment returns.  

10.  MONITORING AND EVALUATION 

The Commission is the guardian of the Treaty and therefore will monitor how Member States 
are  applying  the  changes  proposed  in  the  legislative  initiative  on  markets  in  financial 
instruments.  When  necessary,  the  Commission  will  pursue  the  procedure  set  out  in  Article 
226  of  the  Treaty  in  case  any  Member  State  fails  to  respect  its  duties  concerning  the 
implementation and application of Community Law.  

The  evaluation  of  the  consequences  of  the  application  of  the  legislative  measure  could  take 
place  three  years  after  the  transposition  date  for  the  legislative  measure,  in  the  context  of 
reports to the Council and the Parliament. The reports shall be produced by the Commission 
following  consultation  of  the  European  Securities  and  Markets  Authority  (ESMA).  Key 
elements of such reports would assess in how far market structures have changed in the EU 
following the implementation of the MiFID Review; how the level of transparency in trading 
in  various  financial  instruments  has  developed;  and  how  the  cost  of  trading  for  market 
participants has changed due to the measures implemented. 

The  main  indicators  and  sources  of  information  that  could  be  used  in  the  evaluation  are  as 
follows:  

•  A report assessing the impact on the market of the new Organised Trading Facilities and 
the  supervisory  experiences  acquired  by  regulators;  impact  indicators  should  be  the 
number of Organised Trading Facilities licensed in the EU; the trading volume generated 
by them per financial instrument as opposed to other venues and particular over the counter 
trading; 

•  a  report  on  the  progress  made  in  moving  trading  in  standardised  OTC  derivatives  to 
exchanges  or  electronic  trading  platforms;  impact  indicators  should  be  the  number  of 

69 

 
 
  
 
facilities  engaging  in  OTC  derivatives  trading;  and  the  trading  volume  of  exchanges  and 
platforms in OTC derivatives as opposed to volume remaining over the counter; 

•  a report on the functioning in practice of the tailor-made regime for SME markets; impact 
indicators should be the number of MTFs which have registered as SME growth market, 
the  number  of  issuers  choosing  to  have  their  financial  instruments  traded  on  the  new 
designated  SME  growth  market;  and  the  change  in  trading  volume  in  SME  issuers 
following implementation of the MiFID Review; 

•  a  report  on  the  impact  in  practice  of  the  newly  introduced  requirements  regarding 
automated  and  high-frequency  trading;  impact  indicators  should  be  the  number  of  high-
frequency firms newly authorised; and the number of cases of disorderly trading (if any) 
perceived to be related to high-frequency trading; 

•  a  report  on  the  impact  in  practice  of  the  newly  designed  transparency  rules  in  equities 
trading;  impact  indicators  should  be  the  percentage  of  trading  volume  being  executed 
following  pre-trade  transparent  rules  as  opposed  to  dark  orders;  and  the  development  in 
trading volume and transparency levels in equity like instruments other than shares; 

•  a  report  on  the  impact  in  practice  of  the  newly  designed  transparency  rules  in  bonds, 
structured products and derivatives trading; impact indicators for these two reports should 
be  the  size  of  spreads  designated  market-makers  offer  following  implementation  of  the 
new  transparency  rules;  and  associated  with  that  the  development  in  costs  of  trading  for 
instruments of various liquidity levels across the different asset classes; 

•  a report on the functioning of the consolidated tape in practice; impact indicators should be 
the number of providers offering the service of a consolidated tape; and the percentage of 
trading volume they cover and the reasonableness of the prices they charge; 

•  a report on the experience with the mechanism for banning certain products or practices; 
impact  indicators  should  be  the  number  of  times  the  banning  mechanisms  have  been 
utilised; and the effectiveness of such bans in practice; 

•  a  report  on  the  impact  of  the  proposed  measures  in  the  commodity  derivatives  markets; 
impact indicator should be the change in price volatility on commodity derivatives markets 
following implementation of the MiFID Review; 

•  a report on the experience with the third country regime and a stock-taking of number and 
type of third country participants granted access; impact indicators should be the uptake of 
third  country  firms  of  the  new  regime;  and  the  supervisory  experiences  in  practice  with 
such firms; and 

•  a report on experiences regarding the measures designed to strengthen investor protection; 
impact indicators should be the development of retail participation in trading of financial 
instruments following implementation of the MiFID Review; and the number and severity 
of cases where investors, in general, and retail investor, in particular, have suffered losses.  

70 

 
 
  
 
11. 

ANNEXES: TABLE OF CONTENTS 

1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

9. 

Annex 1: Operational glossary of main terms employed in the document………...  72 

Annex 2: Problem definition – background and technical detail………………….  88 

Annex 3: Analysis of impacts and choice of preferred options and instruments…  120 

Annex 4: Overview of the preferred options…………………………………….  152 

Annex 5: Overview of compliance costs…………………………………………  158 

Annex 6: Overview of administrative burden……………………………………  205 

Annex 7: Detailed underlying costs assumptions………………………………. 

233 

Annex 8: Estimate of impact in terms of indirect economic effect………………  235 

Annex 9: Summary of secondary policy options considered…………………… 

261 

10. 

Annex  10:  Bibliography  including  list  of  reports  published  by  CESR  on  MiFID  

related issues……………………………………………………………………..  270 

11. 

Annex  11:  Dates  and  list  of  participants  to  meetings  organised  by  DG 

Internal Market about MiFID related issues………………………………... 

279 

12. 

Annex 12: Summary of public hearing……………………………………………. 281 

13. 

Annex 13: Summary of the replies to the public consultation…………………….. 295 

14. 

Annex 14: Comparison of MiFID review with related US new regulation……….. 329 

15. 

Annex 15: Comparison MiFID review and key IOSCO principles……………….  340 

16. 

Annex 16: Number of investment firms and credit institutions in the EU………..  344 

17. 

Annex 17: Literature review of market impact of HFT and automated trading…… 346 

18. 

Annex 18: Summary of TRACE initiative and its analysis……………………….  349 

19. 

Annex 19: Overview of main legislative initiatives in the field of securities markets 

  ……………………………………………………………….…………………  352 

71 

 
 
  
 
11. 

ANNEX  1:  OPERATIONAL  GLOSSARY  OF  MAIN  TERMS  EMPLOYED  IN  THE 
DOCUMENT 

Admission to trading 

Algorithm 

Algorithmic trading 

The decision for a financial instrument to be traded 
in  an  organised  way,  notably  on  the  systems  of  a 
trading venue. 

An  algorithm  is  a  set  of  defined  instructions  for 
making a calculation. They can be used to automate 
decision  making,  for  instance  with  regards  to 
trading in financial instruments. 

Algorithmic trading is trading done using computer 
programmes applying algorithms, which determine 
various  aspects  including  price  and  quantity  of 
orders,  and  most  of  the  time  placing  them  without 
human intervention. 

Approved Publication Arrangement (APA)  An Approved Publication Arrangement is a system 
that requires firms executing transactions to publish 
trade reports through a body that ensures timely and 
secure  consolidation  and  publication  of  such  data. 
See section 4 (on data consolidation) of the Review 
of the Markets in Financial Instruments Directive. 

Approved Reporting Mechanism (ARM) 

Arbitrage strategy 

Asset Backed Security (ABS) 

An  approved  reporting  mechanism  is  a  platform 
that  reports  transactions  on  behalf  of  firms.  This 
can  also  be  done  via  the  multi-lateral  trading 
facility  or 
the 
transaction was performed. 

regulated  market  on  which 

is  one 

An  arbitrage  strategy 
that  exploits 
differences  in  price  that  exist  due  to  market 
inefficiencies,  for  example,  buying  an  instrument 
on one market and simultaneously selling a similar 
instrument on another market. 

An Asset Backed Security is a security whose value 
and 
income  payments  are  derived  from  and 
collateralized  (or  "backed")  by  a  specified  pool  of 
instance 
underlying  assets  which  can  be  for 
mortgage or credit cards credits. 

72 

 
 
  
 
Automated trading 

Best execution 

Bid-ask spread 

Bilateral order 

Broker Crossing System (BCS) 

and 

The  use  of  computer  programmes  to  enter  trading 
orders  where  the  computer  algorithm  decides  on 
aspects of execution of the order such as the timing, 
order.
quantity 
A specific type of automated or algorithmic trading 
is known as high frequency trading (HFT). HFT is 
typically not a strategy in itself but the use of very 
sophisticated  technology  to  implement  traditional 
trading strategies. 

price 

the 

of 

MiFID  (article  21)  requires  that  firms  take  all 
reasonable  steps  to  obtain  the  best  possible  result 
for  their  clients  when  executing  orders.  The  best 
possible result should be determined with regard to 
the following execution factors: price, costs, speed, 
likelihood of execution and settlement, size, nature 
or any other consideration relevant to the execution 
of an order. 

The  bid-ask  spread  is  the  difference  between  the 
price a market maker is willing to buy an asset and 
the price it is willing to sell at. 

An  order  which  is  only  discussed  and  disclosed  to 
the counterparties to the trade. 

A  number  of  investment  firms  in  the  EU  operate 
systems  that  match  client  order  flow  internally. 
Generally, these firms receive orders electronically, 
utilise  algorithms  to  determine  how  they  should 
best  be  executed  (given  a  client's  objectives)  and 
then  pass  the  business  through  an  internal  system 
that  will  attempt  to  find  matches.  Normally, 
algorithms  slice  larger  'parent'  orders  into  smaller 
'child'  orders  before  they  are  sent  for  matching. 
Some  systems  match  only  client  orders,  while 
others 
client 
instructions/permissions)  also  provide  matching 
between  client  orders  and  house  orders.  Broker 
crossing systems do not show an order book, and as 
noted  above,  simply  aim  to  match  orders;  due  to 
this  nature  they  are  sometimes  compared  to  Dark 
Pools, which have similar characteristics. 

(depending 

on 

Central Counterparty (CCP) 

A  Central  Counterparty  is  an  entity that  acts  as  an 
intermediary  between  trading  counterparties  and 
absorbs some of the settlement risk. In practice, the 

73 

 
 
  
 
Circuit breaker 

Classification of clients 

Clearing eligible 

Client assets 

Committee of European Securities 
Regulators (CESR) 

Commodities Futures and Trading 
Commission (CFTC) 

Commodity derivative 

Competent authority 

the  central 
the  security 
seller  will  sell 
counterparty, which will simultaneously sell it on to 
the  buyer  (and  vice  versa).  If  one  of  the  trading 
parties  defaults,  the  central  counterparty  absorbs 
the loss. 

to 

A  circuit  breaker  is  a  mechanism  employed  by  a 
market  in  order  to  temporarily  suspend  trading  in 
certain  conditions,  including  sudden,  deep  price 
falls.  One  aim  of  the  use  of  circuit  breakers  is  to 
prevent  mass  panic  selling  and 
to  prevent 
associated herd behaviours. 

Protection requirements are calibrated in MiFID to 
three different categories of clients, notably clients, 
counterparties.
professionals, 
The  high  level  principle  to  act  honestly,  fairly  and 
professionally  and  the  obligation  to  be  fair,  clear 
and  not  misleading  apply  irrespective  of  client 
categorization. 

eligible 

and 

A  financial  instrument  which  is  deemed  to  be 
sufficiently standardised in order to be cleared by a 
central counterparty. 

Client  assets  are  assets  (cash,  equities,  bonds,  etc) 
which  belong  to  the  client,  but  which  are  held  by 
investment firms for investment purposes. 

The  Committee  of  European  Securities  Regulators 
was  one  of  advisory  committees,  composed  by 
advising 
national 
the 
regulators 
Commission  and  coordinating 
the  work  of 
securities  regulators,  and  has  now  been  succeeded 
by the ESMA (cf below).  

security 

The CFTC is a regulatory body responsible for the 
regulation  of  the  commodity  futures  and  option 
markets in the United States. 

A financial instrument the value of which depends 
on  that  of  a  commodity,  such  as  grains,  energy  or 
metals. 

legally  delegated  or 

A competent authority is any organization that has 
invested  authority, 
the 
capacity,  or  power 
to  perform  a  designated 
function.  In  the  context  of  MiFID,  it  refers  to  the 

74 

 
 
  
 
Complex product 

Conflicts of interest 

Consolidated tape 

Credit Default Swap (CDS) 

body  which  is  in  charge  of  supervising  securities 
markets. . 

A financial product the structure of which includes 
different  components,  often  made  of  derivatives 
and  the  valuation  of  which  will  evolve  in  a  non 
linear  fashion..  These  notably  include  tailor-made 
products  such  as  structured  products,  asset  backed 
securities, and non-standard OTC derivatives. 

The  term  conflict  of  interest  is  widely  used  to 
identify  behaviour  or  circumstances  where  a  party 
involved in many interests finds that two or more of 
these  interests  conflict.  Conflicts  of  interest  are 
normally attributed to imperfections in the financial 
markets  and  asymmetric  information.  Due  to  the 
diverse  nature  of  financial  markets,  there  is  no 
general definition of a conflict of interest; however 
they  are 
into  Firm/Client, 
Client/Client  and  Intra  Group  Conflicts.  MiFID 
contains  provisions  for  areas  where  conflicts  of 
interest  commonly  arise  and  how  they  should  be 
dealt with. 

typically  grouped 

A  consolidated  tape  is  an  electronic  system  which 
combines  sales  volume  and  price  data  from 
different  exchanges  and  certain  broker-dealers.  It 
consolidates  these  into  a  continuous  live  feed, 
providing  summarised  data  by  security  across  all 
markets. 
In  the  US,  all  registered  exchanges  and  market 
centres  that  trade  listed  securities  send  their  trades 
and  quotes  to  a  central  consolidator.  This  system 
provides real-time trade and quote information. 

A credit default swap is a contract between a buyer 
and a seller of protection to pay out in the case that 
another  party  (not  involved  in  the  swap),  defaults 
on  its  obligations.  CDS  can  be  described  as  a  sort 
of insurance where the purchaser of the CDS owns 
the debt that the instrument protects; however, it is 
the 
not  necessary  for 
underlying debt that is insured. 

the  purchaser 

to  own 

Cross-market behaviour 

Trading  strategies  which  involve  placing  orders  or 
executing trades in several markets. 

75 

 
 
  
 
Dark pool 

de Larosière group 

Dealer 

Derivative 

Direct Market Access (DMA) 

Directive 

Dark  pools  are  trading  systems  where  there  is  no 
pre trade  transparency  of orders in  the system (i.e. 
there is no display of prices or volumes of orders in 
the system). Dark pools can be split into two types: 
systems such as crossing networks that cross orders 
and  are  not  subject  to  pre-trade  transparency 
requirements, and trading venues such as regulated 
markets and MTFs that use waivers from pre-trade 
transparency not to display orders. 

The  de  Larosière  group  is  a  group  chaired  by 
former  head  of  the  Banque  de  France,  Jacques  de 
Larosière,  mandated  by  EC  President  José  Manuel 
Barroso  to  advice  on  reforms  to  financial  services 
regulation  and  supervision.  The  group  published  a 
report 
the 
establishment  of 
three  new  supervisory 
authorities including ESMA. 

in  February  2009,  which 
the 

led 

to 

A dealer is an entity that will buy and sell securities 
on  their  own  account,  acting  as  principal  to 
transactions. 

A derivative is a type of financial instrument whose 
value  is  based  on  the  change  in  value  of  an 
underlying asset. 

Participants  require  access  to  a  market  in  order  to 
trade  on  it.  Direct  market  access  is  a  form  of 
sponsored  access  and  refers  to  the  practice  of  a 
firm, who has access to the market as a Member, to 
allow another 3rd party firm to use its own systems 
to access to the market It is different from the direct 
sponsored  access  in  which  the  orders  of  the  3rd 
party  are  sent  directly  to  the  market  through  a 
dedicated  system  providing  by  the  sponsoring 
Member  

A  directive  is  a  legislative  act  of  the  European 
Union, which requires Member States to achieve a 
particular  result  without  dictating  the  means  of 
achieving that result. A Directive therefore needs to 
be 
to 
regulation that have direct applicability. 

into  national 

law  contrary 

transposed 

Dodd Frank Act 

The  Dodd–Frank  Wall  Street  Reform  and 
Consumer Protection Act became law in the United 

76 

 
 
  
 
ECOFIN 

Electronic order book trading 

States  in  2010,  introducing  reforms  to  financial 
regulation. 

The Economic and Financial Affairs Council of the 
European Union. 

A  system  of  transacting  in  financial  instruments 
based  on  publicly  available  prices  and  sizes  at 
which  investors  are  willing  to  transact.  It  is 
distinguished from request for quote trading, where 
investors  contact  each  other  bilaterally  in  order  to 
establish the prices which they can trade on. 

EMIR 

European Market Infrastructure Regulation. 

EU Emission Allowance (EUA) 

ESMA 

ETS 

An  allowance to emit one tonne of  carbon dioxide 
equivalent  during  a  specified  period,  as  more 
specifically  defined  in  Article  3(a)  of  Directive 
2003/87/EC. 

The  European  Securities  and  Markets  Authority  is 
the  successor  body  to  CESR,  continuing  work  in 
the  securities  and  markets  area  as  an  independent 
agency  and  also  with  the  other  two  former  level 
three committees. 

in 

the  system 

European  Union  Emission  Trading  Scheme  a  'cap 
and  trade'  system:  it  caps  the  overall  level  of 
emissions  allowed  but,  within  that  limit,  allows 
participants 
to  buy  and  sell 
allowances  as  they  require.  These  allowances  are 
the  common  trading  'currency'  at  the  heart  of  the 
system. One allowance gives the holder the right to 
emit one tonne of CO2 or the equivalent amount of 
another  greenhouse  gas.  The  cap  on  the  total 
number  of  allowances  creates  scarcity  in  the 
market.. 

European Systemic Risk Board (ESRB) 

Execution-only service 

The  European  Systemic  Risk  Board  was  set  up  in 
response  to  the  de  Larosière  group's  proposals,  in 
the  wake  of  the  financial  crisis.  This  independent 
body  has  responsibility  for  the  macro-prudential 
oversight of the EU.  

Investment  firms  may  provide  investors  with  a 
means to buy and sell certain financial instruments 
in  the  market  without  undergoing  any  assessment 
of the appropriateness of the given product - that is, 

77 

 
 
  
 
Fair and orderly markets 

Financial instrument 

Fit and proper 

Fundamental data 

Hard position limit 

Hedging 

High frequency trading 

Inducement 

the  assessment  against  knowledge  and  experience 
of  the  investor.  These  execution-only  services  are 
only available when certain conditions are fulfilled, 
including 
involvement  of  so-called  non-
complex  financial  instruments  (defined  by  article 
19 paragraph 6 of MiFID). 

the 

Markets  in  financial  instruments  where  prices  are 
the  result  of  an  equilibrium  between  supply  and 
demand,  so 
is 
reflected  in  the  price,  unhindered  by  market 
deficiencies or disruptive behaviour. 

that  all  available 

information 

A financial instrument is an asset or evidence of the 
ownership  of  an  asset,  or  a  contractual  agreement 
between  two  parties  to  receive  or  deliver  another 
financial  instrument.  Instruments  considered  as 
financial are listed in MiFID (Annex I) 

Persons  who  effectively  direct  the  business  of  an 
investment  firm  need  to  be  of  sufficiently  good 
repute and sufficiently experienced as to ensure the 
sound  and  prudent  management  of  the  investment 
firm. This is the so called fit and proper test. 

Information  on  the  supply  and  demand  of  goods 
and services in the real economy. 

A hard position limit is a strict pre-defined limit on 
the amount of a given instrument that an entity can 
hold. 

Hedging  is  the  practice  of  offsetting  an  entity's 
exposure by taking out another opposite position, in 
order  to  minimise  an  unwanted  risk.  This  can  also 
be  done  by  offsetting  positions 
in  different 
instruments and markets. 

High  frequency  trading  is  a  type  of  electronic 
trading  that  is  often  characterised  by  holding 
positions  very  briefly  in  order  to  profit  from  short 
term  opportunities.  High  frequency  traders  use 
algorithmic trading to conduct their business. 

Inducements is a general name referring to varying 
types  of  incentives  paid  to  financial  intermediaries 
in exchange for the promotion of specific products 

78 

 
 
  
 
Information asymmetry 

Insurance Mediation Directive 

Interest rate swap 

Intermediary 

Investment services 

Indication of interest (IOI) 

Junior market 

or flows of business. 

An information asymmetry occurs where one party 
to  a  trade  or  transaction  has  more  or  better 
information  than  another  party  to  that  trade  or 
transaction,  giving  it  an  advantage  in  that  trade  or 
transaction. 

EU  Insurance  Mediation  Directive  (2002/92/EC), 
introducing  requirements  for  insurance  companies 
such  as  registration  with  a  competent  authority, 
systems  and  controls  standards,  regulation  of 
handling of complaints, cancellation of products. 

An interest rate swap is a financial product through 
which two parties exchange flows; for instance, one 
party  pays  a  fixed  interest  rate  on  a  notional 
amount,  while  receiving  an  interest  rate  that 
fluctuates  with  an  underlying  benchmark  from  the 
other  party.  These  swaps  can  be  structured  in 
various  different  ways  negotiated  by 
the 
counterparties involved. 

A person or firm who acts to bring together supply 
and demand from two other firms or persons. In the 
context  of  MiFID,  intermediary  are  investment 
firms. 

Investment  services  are  legally  defined  MiFID 
(article  4  and  Annex  I),  and  covers  various 
activities  from  reception  of  orders,  portfolio 
management , underwriting or operation of MTFs. 

An indication of interest is where a buyer discloses 
that  he  wishes  to  purchase  an  instrument,  often 
made before an initial public offering. This can also 
be called an expression of interest. An IOI does not 
force the party expressing an interest to act on it i.e. 
to trade on it. 

Junior  markets  are 
those  on  which  smaller 
companies  with  shorter  track  records  are  often 
listed,  as  opposed  to  the  established  markets  on 
which  the  larger,  older  companies  are  traded. 
Conditions for listing  on these  markets are usually 
less  stringent  and  they  are  often  seen  as  a  starting 
point before eventually moving to a senior market. 

79 

 
 
  
 
Junior trading venue 

See junior market. 

Latency period 

Liquidity 

Lit market 

Lit order, dark order 

Market Abuse Directive (MAD) 

Market abuse 

Market disorder 

Market efficiency 

The  time  an  order  entered  into  a  trading  system 
stays in it before being executed or withdrawn. 

Liquidity  is  a  complex  concept  that  is  used  to 
qualify  market  and  instruments  traded  on  these 
markets. It aims at reflecting how easy or difficult it 
is to buy or sell an asset, usually without affecting 
the  price  significantly.  Liquidity  is  a  function  of 
both  volume  and  volatility.  Liquidity  is  positively 
correlated  to  volume  and  negatively  correlated  to 
volatility. A stock is said to be liquid if an investor 
can  move  a  high  volume  in  or  out  of  the  market 
without materially moving the price of that stock. If 
the stock price moves in response to investment or 
disinvestments, the stock becomes more volatile. 

A  lit  market  is  one  where  orders  are  displayed  on 
order books and therefore pre trade transparent. On 
the contrary, orders in dark pools or dark orders are 
not pre trade transparent. This is the case for orders 
in broker crossing networks. 

A lit order is one the details of  which  can  be seen 
by  other  market  counterparts.  A  dark  order  is  one 
which cannot be seen by other market counterparts. 

Directive  2003/6/EC  of  the  European  Parliament 
and  of  the  Council  of  28  January  2003  on  insider 
dealing and market manipulation (market abuse). 

Market  abuse  consists  of  market  manipulation  and 
insider dealing, which could arise from distributing 
false information, or distorting prices and improper 
use of insider information. 

General  trading  phenomenon  which  results  in  the 
market  prices  moving  away  from  those  that  would 
result from supply and demand. 

Market  efficiency  refers  to  the  extent  to  which 
prices  in  a  market  fully  reflect  all  the  information 
available to investors. If a market is very efficient, 
then  no  investors  should  have  more  information 
than any other investor, and they should not be able 
to predict the price better than another investor. 

80 

 
 
  
 
Market fragmentation 

Market integrity 

Market maker 

Market operator 

Markets in Financial Instruments Directive 
(MiFID) 

Multilateral Trading Facility 

Negative externalities 

Opaque market 

Order matching 

Market  fragmentation  refers  to  the  dispersion  of 
business  across  different  trading  venues,  where  in 
the  past  there  was  only  one  venue.  It  requires 
traders to look for liquidity across different places. 

Market  integrity  is  the  fair  and  safe  operation  of 
markets,  without  misleading  information  or  inside 
trades, so that investors can have confidence and be 
sufficiently protected. 

A  market  maker  is  a  firm  that  will  buy  and  sell  a 
particular  security  on  a  regular  and  continuous 
basis  by  posting  or  executing  orders  at  a  publicly 
quoted  price.  They  ensure  that  an  investor  can 
always trade the particular security and in doing so 
enhance liquidity in that security. 

A firm responsible for setting up and maintaining a 
trading  venue  such  a  regulated  market  or  a  multi 
lateral trading facility. 

Directive  2004/39/EC  that  lays  down  rules  for  the 
authorisation and organisation of investment firms, 
the structure of markets and trading venues, and the 
investor protection regarding financial securities. 

An MTF is a system, or "venue", defined by MiFID 
(article  4)  which  brings  together  multiple  third-
party  buying  and  selling  interests  in  financial 
instruments  in  a  way  that  results  in  a  contract. 
MTFs  can  be  operated  by  investment  firms  or 
market  operators  and  are  subject  to  broadly  the 
same  overarching 
requirements  as 
regulatory 
regulated markets (e.g. fair and orderly trading) and 
the  same  detailed  transparency  requirements  as 
regulated markets. 

A  negative  externality  in  finance  is  usually  a  cost 
incurred  by  a  party  because  of  another  party's 
decision.  It  means  that  not  all  information  is 
reflected in the price that a party is required to pay. 

See dark pool. 

Order matching is the process by which buying and 
selling  interests  of  the  same  security  at  the  same 
price  and  size  are  brought  together,  which  takes 

81 

 
 
  
 
Order resting period 

Over the Counter (OTC) 

Organised trading facility (OTF) 

Placing 

Position limit 

Position management 

Post-trade transparency 

place  in  venues  such  as  broker  crossing  networks, 
where  the  orders  of  one  party  are  matched  to  the 
bids  of  another,  allowing 
to  conclude 
transactions  at  mid  point,  therefore  saving  on  the 
bid offer spread. 

them 

The time an order waits on a trading system before 
it is executed. Similar to latency period. 

Over  the  counter,  or  OTC,  trading  is  a  method  of 
trading  that  does  not  take  place  on  an  organised 
venue such as a regulated market or an MTF. It can 
take various shapes from bilateral trading to trading 
done  via  more  organised  arrangements  (such  as 
systematic internalisers and broker networks). 

Any  facility  or  system  operated  by  an  investment 
firm or a market operator that on an organised basis 
brings  together  multiple  third  party  buying  and 
selling  interests  or  orders  relating  to  financial 
instruments. 
It  excludes  facilities  or  systems  that  are  already 
regulated  as  a  regulated  market,  MTF  or  a 
systematic  internaliser.  Examples  of  organised 
trading  facilities  would  include  broker  crossing 
systems  and  inter-dealer  broker  systems  bringing 
together  third-party  interests  and  orders  by  way  of 
voice and/or hybrid voice/electronic execution. 

Placing  refers  to  the  process  of  underwriting  and 
selling an offer of shares. 

A  position  limit  is  a  pre-defined  limit  on  the 
amount  of  a  given  instrument  that  an  entity  can 
hold. 

Position  management  refers  to  monitoring  the 
positions held by different entities and ensuring the 
position limits are adhered to. 

Post  trade  transparency  refers  to  the  obligation  to 
publish a trade report every time a transaction in a 
share  has  been 
concluded.  This  provides 
information  that  enables  users  to  compare  trading 
results  across  trading  venues  and  check  for  best 
execution. 

82 

 
 
  
 
Pre-trade transparency 

Pre-trade transparency waiver 

Price discovery 

Primary Market Operation 

Principle of proportionality 

Pre-trade  transparency  refers  to  the  obligation  to 
publish (in real-time) current orders and quotes (i.e. 
prices and amounts for selling and buying interest) 
to  shares.  This  provides  users  with 
relating 
information  about  current  trading  opportunities.  It 
thereby facilitates price formation and assists firms 
to provide best execution to their clients. It is also 
intended  to  address  the  potential  adverse  effect  of 
fragmentation of markets and liquidity. 

A  pre-trade  transparency  waiver  is  specified  in 
MiFID  (article  29)  as  a  way  for  the  competent 
authorities to waive the  obligation for  operators of 
Regulated  Markets  and  Multilateral  Trading 
Facilities  (MTFs)  regarding  pre-trade  transparency 
requirements for shares in respect of certain market 
models, types of orders and sizes of orders. 

to 

the  mechanism  of 
Price  discovery  refers 
formation of the price of an asset in a market, based 
on  the  activity  of  buyers  and  sellers  actually 
agreeing prices for transactions, and this is affected 
by  such  factors  as  supply  and  demand,  liquidity, 
information availability and so on. 

Primary Market Operations are transactions related 
to the issuance of new securities. They differ from 
secondary  market  operations  which  deal  with  the 
trading of securities already issued and admitted to 
trading. 

Similarly  to  the  principle  of  subsidiarity,  the 
principle of proportionality regulates the exercise of 
powers  by  the  European  Union.  It  seeks  to  set 
actions taken by the institutions of the Union within 
specified  bounds.  Under  this  rule,  the  involvement 
of  the  institutions  must  be  limited  to  what  is 
necessary to achieve the objectives of the Treaties. 
In  other  words,  the  content  and  form  of  the  action 
must be in keeping with the aim pursued. 
The  principle  of  proportionality  is  laid  down  in 
Article  5  of  the  Treaty  on  European  Union.  The 
criteria for applying it is set out in the Protocol (No 
2)  on 
the  principles  of 
subsidiarity  and  proportionality  annexed  to  the 
Treaties. 

the  application  of 

83 

 
 
  
 
 
Packaged retail investment products 
(PRIPS) 

Prospectus Directive 

Regulated Market 

Regulation 

Regulator /Supervisor 

Regulatory arbitrage 

REMIT 

Repository (Trade) 

Retail investor/client 

Packaged retail investment products are investment 
products  marketed  directly  to  retail  customers  and 
typically  offer  the  potential  to  participate  in  the 
return  and  risk  generated  by  an  underlying 
instrument  or  index.  They  are  therefore  made  of 
several components out of which an option is very 
often  present.  This 
they  are  called 
"packaged".. 

is  why 

Directive  2003/71/EC  of  the  European  parliament 
and  of  the  Council,  which  lays  down  rules  for 
information  to  be  made  publicly  available  when 
offering financial instruments to the public. 

A regulated market is a multilateral system, defined 
by  MiFID  (article  4),  which  brings  together  or 
facilitates  the  bringing  together  of  multiple  third-
party  buying  and  selling  interests  in  financial 
instruments  in  a  way  that  results  in  a  contract. 
Examples  are  traditional  stock  exchanges  such  as 
the Frankfurt and London Stock Exchanges. 

A regulation is a form of legislation that has direct 
legal effect on being passed in the Union. 

A  regulator/supervisor  is  a  competent  authority 
designated  by  a  government  to  supervise  that 
country's financial markets. 

Regulatory arbitrage is exploiting differences in the 
regulatory  situation  in  different  jurisdictions  or 
markets in order to make a profit. 

The  proposed  Regulation  on  Energy  Market 
Integrity  and  Transparency,  laying  down  rules  on 
the  trading  in  wholesale  energy  products  and 
information that needs to be disclosed that pertains 
to those products. 

A  mechanism  that  gathers  together  information  on 
essential 
financial 
future 
characteristics  of 
reference. 

storing 
those  contracts 

contracts, 

the 

for 

A  person  investing  his  own  money  on  a  non-
professional  basis.  Retail  client  is  defined  by 
MiFID as a non professional client and is one of the 

84 

 
 
  
 
three  categories  of  investors  set  by  this  Directive 
besides 
eligible 
counterparties. 

professional 

clients 

and 

Risk premium 

Sanction 

The  risk  premium  is  the  smallest  return  that 
investors  would  accept  above  the  amount  that  a 
'risk-free'  asset  would  return.  A  risk-free  asset  is  a 
theoretical  asset  that  would  never  default.  So  the 
risk  premium  is  the  amount  that  an  investor  wants 
to be paid for taking risk. 

A  penalty,  either  administrative  or  criminal, 
imposed as punishment. 

Securities and Exchange Commission (SEC) The  US  regulatory  body  responsible  for 

the 
regulation of securities and protection of investors. 

Secondary listing 

Single rulebook 

Small cap 

A  secondary  listing  is  the  listing  of  an  issuer's 
shares  on  an  exchange  other  than  its  primary 
exchange.  

The single rulebook is the concept of a single set of 
rules  for  all  Member  States  of  the  union  so  that 
there  is  no  possibility  of  regulatory  arbitrage 
between the different markets. 

Small  cap  is  short  for  small  capitalisation,  and 
refers to the value of the shares in issue, i.e. share 
price  multiplied  by  the  number  of  shares  in  issue. 
Small cap usually refers to listed SMEs. 

Small and medium sized enterprises (SMEs)  On  6  May  2003 

the  Commission  adopted 
Recommendation 2003/361/EC regarding the Small 
and  medium  sized  enterprise  definition.  While 
than  10 
'micro'  sized  enterprises  have  fewer 
employees,  small  have  less  than  50,  and  medium 
have  less  than  250.  There  are  also  other  criteria 
relating  to  turnover  or  balance  sheet  total  that  can 
be applied more flexibly. 

Spread 

Standardised derivative 

Structured bond 

This can refer to the bid offer spread (see separate 
entry).  

A  standardised  derivative  is  one  with  regular 
features based on a standard contract. 

A structured bond's value is linked to an underlying 
index  or  instrument,  so  that  the  bond  would  pay  a 

85 

 
 
  
 
Structured deposit 

coupon  in  the  same  way  as  an  ordinary  bond,  but 
the  actual  value  of  the  bond  to  be  repaid  would 
depend  on  the  underlying  performance  that  it  is 
linked to. 

A structured deposit's return may be linked to some 
index or underlying instrument, so that the amount 
repaid 
underlying 
performance.  

dependent 

this 

on 

is 

Supervisor 

See regulator. 

Swap Execution Facility (SEF) 

Syndication 

Systematic Internaliser 

Systemic failure 

Tied agent 

Trading venue 

Transaction reporting 

A  swap  execution  facility  is  a  US  trading  venue 
similar  but  not  identical  to  an  exchange,  whereby 
many  different  buyers  and  sellers  can  make  bids 
and offers on swaps, and the SEF must also publish 
relevant data.  

Syndication  is a process through  which  a group of 
banks are providing a loan to a debtor, usually with 
the  division  of  risk  and  financing  across  the 
different  banks  which  are  part  of  the  process 
(syndicate). 

Systematic  Internalisers  (SIs)  are  investment  firms 
which,  on  an  organised,  frequent  and  systematic 
basis,  deal  on  own  account  by  executing  client 
orders outside a regulated market or an MTF.  

A  systemic  failure  refers  either  to  the  failure  of  a 
whole market or market segment, or the failure of a 
significant entity that could cause a large number of 
failures as a result. 

A company or sales person who  can only  promote 
the  service  of  one  particular  provider  (generally 
their direct employer). 

A  trading  venue  is  an  official  venue  where 
securities  are  exchanged.  In  MiFID,  it  consists  of 
MTFs and regulated markets. 

to 

report 

required 

firms  are 

Investment 
to 
competent  authorities  all  trades  in  all  financial 
instruments  admitted  to  trading  on  a  regulated 
market, regardless of whether the trade takes place 
on  that  market  or  not.  It  covers  all  transactions  on 
trades. 
these 

including  OTC 

instruments, 

86 

 
 
  
 
Transparency 

Transparency Directive 

Undertakings for Collective Investment in 
Transferable Securities Directives (UCITS) 

Underwriting 

Volatility 

Transaction  reporting  is  not  public,  and  contains 
more details about the transaction than pre and post 
trade transparency. 

The disclosure of information related to quote (pre 
trade  transparency)  or  transactions  (post  trade 
transparency)  relevant  to  market  participants  for 
identifying trading opportunities and checking best 
execution  and  to  regulators  for  monitoring  the 
behaviour of market participants. 

Directive 2004/109/EC of the European Parliament 
and  of  the  Council  which  lays  down  rules  for  the 
publication  of  financial  information  and  major 
holdings. 

for  Collective 

Undertakings 
in 
Transferable  Securities  Directives,  a  standardised 
and regulated type of asset pooling. 

Investment 

Underwriting can refer to the process of checks that 
a  lender  carries  out  before  granting  a  loan,  or 
issuing an insurance policy. It can also refer to the 
process  of  taking  responsibility  for  selling  an 
allotment of a public offering. 

Volatility  refers  to  the  change  in  value  of  an 
instrument  in  a  period  of  time.  This  includes  rises 
and  falls  in  value,  and  shows  how  far  away  from 
the  current  price  the  value  could  change,  usually 
expressed as a percentage. 

87 

 
 
  
 
12. 

ANNEX 2: PROBLEM DEFINITION – BACKGROUND AND TECHNICAL DETAIL 

12.1. 

Problem 1: lack of level playing field between markets and market participants 

The  implementation  of  MiFID  has  dramatically  changed  the  structure  of  financial 
markets  across  Europe,  notably  in  the  equity  space.  Technological  advances  have 
also had a significant impact on the development of equity markets. The conduct of 
market participants has evolved to reflect these developments. These changes have 
helped  stimulate  competition  but  have  also  led  to  the  application  of  different 
regulatory  regimes  to  similar  trading  activities,  which  can  distort  the  level  playing 
field between markets and market participants. 

There are five main reasons for this situation. 

12.1.1. 

The  uneven  operating  conditions  between  Regulated  Markets  and  Multilateral 
Trading Facilities (MTFs)117 

Through the removal of the concentration rule118, MiFID has facilitated competition 
between various trading venues, mainly regulated markets and MTFs. Technological 
innovations  have  allowed  market  participants  to  fully  exploit  this  new  competitive 
environment. 

Equities  have  been  the  asset  class  most clearly  impacted  by  the  implementation  of 
MiFID  as  the  majority  of  equity  trading  takes  place  on  exchanges  (total  trading  in 
EEA  shares  amounted  to  €18.7  trillion  in  2010  with  OTC  trading  accounting  for 
37%119) as opposed to non-equity instruments such as bonds and derivatives which 
predominantly take place OTC. There are currently 231 trading systems (139 MTFs, 
92 regulated markets and) and 12 systematic internalisers120 registered in the CESR 
MiFID  database.  Out  of  these  231  trading  systems,  45  Regulated  Markets  and  50 
MTFs  are  offering  trading  in  cash  equities.121  The  growth  of  the  market  share  of 
MTFs  in  equities  markets  has  greatly  accelerated  since  the  introduction  of  MiFID. 
Altogether, MTFs are now assessed to represent between 25 to 30% of the trading 
activity  on  the  main  listed  equities122  although  these  figures  differ  substantially 
across markets. CESR123 also explained in one of its reports that this trend is more 
pronounced for  UK shares,  Euronext  shares and  German shares,  and  less  so in the 
Italian  and  Nordic  markets  so  far.  The  differences  between  national  markets  are 
mainly explained by the relative liquidity of these markets. The MTFs that offer pan-
European  trading  (i.e.  the  shares  are  admitted  to  trading  on  their  primary  market, 
usually being the national stock exchange) tend to cover the most liquid shares (UK 
shares for instance) and get higher market share in the trading of these stocks.  

As per Thomson Reuters below the largest MTFs, being Chi-X, BATS Europe and 
Turquoise,  accounted  for  23%  of  the  on  exchange  equity  turnover  in  the  EU  as  of 
January 2011.  

88 

 
 
  
 
– 

TABLE  1:  Market  share  by  venue  –  all  European  equities  –  January 
2011 

Venue 
LSE Group 
Euronext 
CHI-X 
Deutsche Boerse 
Spanish Exchanges 
SIX Swiss 
Nasdaq OMX Nordic 
BATS Europe 
MICEX 
Turquoise 
Oslo 
All Other Venues (42)
Total on exchange equity turnover

Group Turnover (€m) 

228.765
147.315
144.044
116.431
98.774
62.385
57.658
57.224
52.463
30.891
18.367
5.335

%ge
22,44%
14,45%
14,13%
11,42%
9,69%
6,12%
5,65%
5,61%
5,15%
3,03%
1,80%
0,52%
1.019.652 100,00%  

Source: Thomson Reuters website124 

Under MiFID the two types of multilateral trading venues (i.e. regulated markets and 
MTFs)  are  subject  to  high  level  requirements  in  terms  of  organisational 
arrangements  and  market  surveillance125.  Two  main  concerns  have  been  expressed 
in  that  respect:      lacks  of  alignment  in  both  the  organisational  and  the  market 
surveillance  requirements  for  these  two  types  of  trading  venues  when  operating 
similar types of businesses.  

First, differences in the details of organisational requirements in MiFID that apply to 
MTFs  and  regulated  markets  may  lead,  in  practice,  to  the  application  of  a  less 
stringent  regime  for  the  former  in  situations  where  the  venues  are  providing 
comparable services126. Organizational requirements for investment firms operating 
MTFs  are  not  specific  to  this  activity  but  are  part  of  the  overall  organisational 
requirements for investment firms irrespective of the investment service or activity 
carried  out,  whereas  regulated  markets  are  subject  to  detailed  organizational 
requirements  specific  to  the  activity  of  operating  a  trading  venue.  In  addition 
investment  firms  operating  a  MTF  are  required  to  employ  appropriate  and 
proportionate resources and systems to ensure the provision of their services127. This 
concept  of  "proportionate  approach"  is  identified  by  CESR  as  the  key  source  of  a 
potential  unlevel  playing  field  between  RMs  and  MTFs128.  Further  the  concept  of 
admission to trading only applies to regulated markets in line with the current scope 
of the Market Abuse Directive ("MAD")129 which applies to instruments admitted to 
trading on a regulated market. But with the review of MAD and the extension of the 
market  abuse  prohibitions  to  financial  instruments  admitted  to  trading  on  other 
organised trading platform such as MTFs, the concept of admission to trading would 
need to be extended to organised trading platforms beyond regulated markets.  

Second, existing obligations on operators of regulated markets and MTFs to monitor 
trades  conducted  on  their  venues  in  order  to  identify  breaches  of  rules,  disorderly 
trading  and  market  abuse,  are  not  properly  coordinated,  given  that  a  financial 

89 

 
 
  
 
instrument can be traded on a number of different platforms (as per above trading in 
the most liquid shares is spread among several trading platforms).  

12.1.2.  The emergence of new trading venues and market structures that do not fall within 

the scope of the definition of either regulated markets or MTFs  

They  can  take  various  forms  and  operate  under  various  schemes,  especially  where 
the trading of derivatives products is concerned. 

Equities markets 

One  such  innovation  in  the  field  of  equities  markets  is  the  development  of  broker 
crossing  systems  (BCSs).  On  the  equity  markets,  matching  of  client  orders  is  an 
activity  traditionally  carried  on  by  investment  firms  acting  as  brokers.  While  such 
activities are still carried on manually by some investment firms acting as brokers, in 
the  last  few  years,  some  investment  firms  have  increasingly  developed  automated 
systems  (known  as  broker  crossing  systems)  to  help  internally  match  client  orders 
where possible. The execution of clients' orders is subject to client-oriented conduct 
of business rules130, but the activity of operating a system to match clients' orders is 
not  regulated  as  a  market  unless  it  meets  the  criteria  for  being  defined  as  a 
multilateral trading facility (MTFs).131 Such electronic systems can be viewed as a 
hybrid  between  a  facility  to  assist  execution  of  clients'  orders  and  a  multilateral 
system  that  brings  together  orders.  These  systems  are  perceived  as  carrying  out 
similar  activities  to  MTFs  or  systematic  internalisers  without  being  subject  to  the 
same  regulatory  requirements  both 
investor 
in 
protection132. Unlike MTFs these systems are not subject to pre-trade transparency 
rules133 but only to post-trade transparency requirements, and do not need to have 
monitoring  systems  in  place  in  order  to  identify  conduct  that  may  involve  market 
abuse134.  

transparency  and 

terms  of 

The  fact  finding  carried  out  by  CESR  found  that  actual  trading  through  these 
systems was "very low, ranging from an average of 0.7% [of total EEA trading] in 
2008  to  an  average  of  1.15%  in  2009  (increasing  to  1.5%  in  the  first  quarter  of 
2010)"135.  This  means  that  between  2008  and  the  1st  quarter  of  2010  this  %  has 
tripled to reach 1.5% of total EEA trading in shares, or between 4% and 5% of OTC 
equity transactions136. The following table shows the results of the CESR survey. 

– 

TABLE 2: Trading executed in brokers' crossing networks 

Value (in € billions) 
Crossing as a % of OTC trading 
Crossingas a % of total EEA trading 

2008 

Q1 
38 
1,5% 
0,6% 

Q2 
40 
1,2% 
0,6% 

Q3 
43 
2,0% 
n.a. 

Q4 
40 
3,0% 
0,7% 

Q1 
28 
2,4% 
0,9% 

2009 

Q2 
37 
2,1% 

Q3 
48 
4,4% 
0,9% 

Q4 
56 
4,0% 
1,4% 

2010 
Q1 
58,9 
4,4% 
1,5% 

In  the  same  report  CESR  acknowledged  the  concerns  expressed  by  some  market 
participants  and  regulators  about  the  speed  of  growth  of  BCSs  and  the  potential 
impact  of  this  dark  trading  (as  opposed  to  lit  trading  which  is  subject  to  pre-trade 
transparency) on price formation in the future. Pre-trade transparency is key for the 
price  formation  process  and  dark  trading  (including  both  broker  crossing  networks 

90 

 
 
  
 
 
 
 
and dark pools – i.e. platforms operated by a RM or a MTF and benefiting from pre-
trade  transparency  waivers)  is  expected  to  increase  in  the  near  future  following  a 
similar path to the United States where dark trading made up 13.27% of consolidated 
US equities trading volume at the end of 2010137 and is expected to still grow further 
with estimates by the end of 2011 of 15%.. 

Fixed income markets 

Unlike  equities,  corporate  and  financial  bonds  are  not  as  actively  traded  (fixed 
income  markets  seek  more  long  term  goals  and  instruments  are  generally  held  to 
maturity);  the  trading  landscape  is  therefore  dominated  by  government  bonds. 
Estimates  show  in  the  region  of  27%  of  daily  traded  debt  relates  to  non-government 
bonds compared to 73% for government bonds138. 

While  trading  in  bonds  is  dominated  by  government  debt,  this  is  primarily  traded 
OTC and is rarely listed on exchange. Rather, approximately 97% of EU bond listings 
relate  to  non-government  debt  (both  on  the  domestic  market  and  debt  issued  on  the 
international bond market)139.  

Although non-government debt may be listed, trading does not necessarily occur on 
exchanges; rather, estimates based on UK FSA transaction reporting data show that 
approximately 89% of non government debt trading occurs OTC140.  

FIGURE 1 

Derivatives markets 

On the derivatives markets, the OTC portion of the market is largely predominant. 
As of December 2009, approximately 89% of derivatives contracts were transacted 
over-the-counter  (OTC)141.  The  Bank  for  International  Settlements  (BIS)  has 
estimated  that  the  total  OTC  derivative  outstanding  as  of  June  2010  was  $583 
trillion. This represents a more than doubling in notional outstanding from five years 
earlier.142 

– 

FIGURE 2. 

91 

 
 
  
 
 
 
International derivatives markets $bn, notional amounts outstanding

MiFID Implementation -

n
b
$

800,000

700,000

600,000

500,000

400,000

300,000

200,000

100,000

0

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Year

Exchange Traded

OTC

Source: BIS Statistics on Exchange Traded Derivatives, and BIS Semi annual OTC 
Derivatives Statistics. 

The  EU  is  a  key  location  for  OTC  trading  with  the  UK,  France,  and  Germany 
accounting for almost half of the global daily turnover - a breakdown by country is 
shown below143. 

– 

TABLE  3:  Location  of  OTC  derivatives  turnover  by  average  daily 
turnover 

Location of OTC derivatives turnover by average daily turnover 

UK  

US 

France  

Japan  

Singapore  

Switzerland  

Germany  

Hong Kong SAR 

Australia 

Others 

2001 

% share 

33,7 

15,3 

5,7 

7,1 

3,9 

3,4 

8,5 

2,8 

2,7 

16,8 

2004 

% share 

38,0 

19,3 

2007 

% share 

40,9 

18,6 

6,6 

6,0 

3,2 

2,4 

4,1 

2,6 

2,7 

5,4 

4,4 

4,1 

4,0 

3,2 

3,1 

3,0 

15,0 

13,3 

But the OTC markets have seen an increasing take up of electronic trading, i.e. OTC 
trades  that  are  executed  on  an  electronic  platform,  next  to  the  traditional  voice 
brokering services.  

92 

 
 
  
 
 
 
 
– 

TABLE  4:  Estimated  monthly  turnover  by  method  of  execution  for  all 
venues  (bilateral  and  multilateral)  for  OTC  derivatives  product  classes 
as of June 2010144 

Voice Execution 

Electronic Execution 

Interest rate derivates  
Credit derivatives  
Equity derivatives  

87.7% 
83.3% 
85.7% 

12.3% 
16.7% 
14.3% 

OTC trades can be executed on bilateral or multilateral platforms.  

– 

TABLE  5:  Estimated  monthly  turnover  by  type  of  trading  platform  for 
OTC derivatives product classes as of June 2010145 
Bilateral Execution 
68.9% 
62.6%  
82.9%  

Multilateral platforms 
31.1%  
37.4%  
17.1%  

Interest rate derivatives 
Credit derivatives 
Equity derivatives 

Various  forms  of  organised  trading  platforms  have  been  developing.  These 
electronic  platforms  (e.g.  single  dealer  platform,  multi  dealer  platforms,  and  inter 
dealer  broker  platforms)  are  operated  by  investment  firms  not  regulated  as  trading 
venues,  and  hence  not  subject  to  the  market-oriented  rules  of  organised  trading 
venues such as pre-trade transparency and market surveillance duties. 

By location for the 2nd quarter of 2010, BIS found that 50.8% of the total turnover in 
organised platform traded derivatives took place on North American markets, 42.4% 
in Europe, 4.0% in the Asia-Pacific region, and 2.9% elsewhere.146 

Significant efforts are underway to improve the stability, transparency and oversight 
of  OTC  derivatives  markets.  As  part  of  this,  it  has  been  agreed  globally  to  ensure 
that, where appropriate, trading in standardised OTC derivatives moves to exchanges 
or electronic trading platforms.147 This is why there is a need to define what type of 
trading  platforms  would  be  eligible  for  trading  of  derivatives  and  to  what  types  of 
transparency  and  organizational  requirements  it  would  be  subject  to.  Faced  with  a 
similar  situation,  the  US  authorities,  through  the  recent  Dodd  Frank  Wall  Street 
Reform  and  Consumer  Protection  Act148  has  created,  for  derivatives,  the  new 
concept  of  Swap  Execution  Facilities  (SEFs)149  that  aims  at  bringing  such  trading 
venues or structures within the scope of financial services regulation. A SEF would 
be a form of organised trading facility, bringing together multiple participants. This 
platform would be subject to real time post-trade transparency with delays for large 
trades ("block trade exemptions"). The level of pre-trade transparency is still under 
discussion  and  will  depend  on  the  type  of  trading  model  the  SEF  definition  will 
encompass. 

93 

 
 
  
 
 
 
 
12.1.3.  The rapid technological changes that equity markets have been witnessing over the 

last few years 

Automated  trading  also  known  as  algorithmic  trading  can  be  defined  as  the  use  of 
computer programmes to enter trading orders where the computer algorithm decides 
on  aspects  of  execution  of  the  order  such  as  the  timing,  quantity  and  price  of  the 
order.  This  form  of  trading  is  used  by  an  increasingly  wide  range  of  market  users 
(including for example funds and brokers). A third of all EU and US stock trades in 
2006 were driven by automatic programs, or algorithms, according to Boston-based 
financial services industry research and consulting firm Aite Group 

A  specific  type  of  automated  or  algorithmic  trading  is  known  as  high  frequency 
trading  (HFT).  HFT  is  typically  not  a  strategy  in  itself  but  the  use  of  very 
sophisticated technology to implement traditional trading strategies.150 HFT traders 
execute trades in matters of milliseconds on electronic order books, and are getting 
in and out of positions during the day with little or no exposed position at the end of 
the  day.  The  scale  of  HFT  in  Europe  already  accounts  for  a  significant  portion  of 
equity  trading  in  the  EU,  and  is  expected  to  grow  further.  According  to  CESR151, 
HFT  trading  accounts  from  13%  to  40%  of  total  share  trading  in  the  EU.  As  a 
comparison,  HFT  traders  account  for  as  much  as  70%  of  all  US  equity  trading 
volume152. 

– 

TABLE 6. Share of HFT by trading venue (shares of order books)153 

Trading venue  

High-Frequency Trading a 

Chi-X  
London Stock Exchange 
BME  
NYSE Euronext  
Borsa Italiana  
Turquoise  
Nasdaq OMX  
a  % of total trading value. b % of total trading volumes 

40% 
32% 
25-30%b 
23% 
20% 
19%b 
13%b 

Existing evidence is inconclusive about the impact of automated trading and HFT on 
market  efficiency  and  liquidity  (see  Annex  17  for  a  literature  review  of  market 
impact of HFT and automated trading). Some studies suggest that HFT using market 
making  (i.e.  orders  sent  to  capture  the  spread  between  the  bid  and  ask  quote)  and 
arbitrage  strategies  (i.e.  capturing  price  differences  between  trading  platforms)  has 
added  liquidity  to  the  market,  reduced  spreads  and  helped  align  prices  across 
markets. However, there is evidence that the average transaction size has decreased 
and some participants question the value of the additional liquidity provided154. The 
average transaction size is lower for MTFs than for regulated markets which might 
be  partly  explained  by  the  greater  use  of  algorithmic  trading  by  the  MTF 
customers155. Some participants argue there may be improved liquidity for investors 
who trade retail-size orders but it is now more difficult for institutional investors to 

94 

 
 
  
 
 
execute large orders. Also, there are different views about whether HFT increases or 
reduces market volatility. Eventually, some argue there may be a link between HFT 
and the increased use of dark liquidity – i.e. any pool of liquidity which is not pre-
trade transparent such as broker crossing networks and dark pools - as opposed to lit 
markets.156 

Perhaps the most significant new risk arising from automated trading is the threat it 
can pose to the orderly functioning of markets in certain circumstances. Such threats 
can  arise  from  rogue  algorithms,  from  algorithms  overreacting  to  market  events  or 
from the increased pressure on trading venue systems to cope with the large numbers 
of orders generated by automated trading.157 For HFT there are concerns that not all 
high  frequency  traders  are  currently  required  to  be  authorised  under  MiFID  as  the 
exemption  in  Article  2.1(d)  of  the  framework  directive  for  persons  who  are  only 
dealing  on  their  own  account  can  be  used  by  such  traders.  Therefore  there  is  a 
concern that even if a HFT trader is involved in a significant amount of trading they 
may not necessarily be subject to MiFID requirements and therefore to supervision 
by a competent authority.  

While  HFT  represent  an  increased  and  substantial  share  of  the  transactions  on  the 
markets and the liquidity they provide to the market may replace the more traditional 
market making activities, high frequency traders have no incentive or obligation to 
continue to provide ongoing liquidity to the market unlike registered market makers. 
Therefore,  they  are  able  to  provide  or  withdraw  liquidity  at  any  time  which  may 
cause  market  disruptions  as  this  would  mean  a  sudden  increase  or  drop  in  the 
amount of transactions entered into for a particular instrument.  

Finally arrangements such as Direct Market Access (DMA) and Sponsored Access 
(SA) are offered by firms to automated and HFT traders to reduce their latency (i.e. 
time needed to have access to the order book of these electronic platforms) as speed 
is  crucial  for  these  players.  According  to  CESR158,  Sponsored  access  (SA)  is  an 
adaptation of the concept of direct market access (DMA). Under SA arrangements, 
clients  of  firms  that  are  members  of  an  organised  trading  platform  can  access  the 
trading  platform  directly  without  becoming  members  themselves.  Under  such 
arrangements, clients submit orders to the trading platform by routing them through 
the firm's internal system. DMA is similar, except clients send orders directly to the 
trading platform without passing through the firm's internal system. In the absence 
of proper controls these arrangements may present risks which have been identified 
by CESR as revolving around the risk of erroneous activity, the possible impact on 
the  integrity  and  orderly  functioning  of  markets,  and  the  risks  for  sponsoring 
firms159.  IOSCO  has  also  identified  similar  risks  in  its  report  on  "Principles  for 
Direct Electronic Access to Markets"160. 

12.1.4.  The growth of Over The Counter (OTC) trading. 

For equities, OTC trading is perceived by certain market participants to account for a 
much  higher  proportion  of  transactions  than  initially  considered.  In  2009,  OTC  is 
estimated to have represented 37.8 % of overall European turnover in shares161 . The 

95 

 
 
  
 
consequences  according  to  some  national  supervisors,  such  as  the  Autorité  des 
Marchés  Financiers  (AMF)162,  is  that  it  threatens  the  quality  of  price  formation  on 
exchanges  and  its  representative  nature  as a  substantial  part  of  the  transactions  are 
not being taken into account.  

As highlighted above under point 2, OTC trading is also an important feature for non 
equity  products  such  as  bonds  and  derivatives  for  which  it  is  the  main  mode  of 
trading. Significant efforts are underway to improve the stability, transparency and 
the 
oversight  of  OTC  derivatives  markets.  The 
Commission163 on financial market infrastructure aims at improving the functioning 
of derivatives markets by increasing the transparency of these markets for regulators 
and decreasing counterparty and operational risks while the proposed regulation on 
short selling164will bring more light on the use of certain derivatives such as Credit 
Default Swaps on sovereign debt.  

legislative  proposal  by 

In addition to these structural measures, it has been agreed globally to ensure that, 
where appropriate, trading in standardised OTC derivatives moves to exchanges or 
electronic trading platforms.165  

There  are  less  than  2,000  standardised  interest  rate  swaps  executed  globally  on  an 
average day. The most liquid swaps (10-year dollar interest rate swaps) trade about 
200 times per day, while most swaps trade less than 20 times per day. In the credit 
default swap (CDS) market, ISDA notes that the most liquid reference entities (all of 
which were sovereign entities) averaged 20 trades per day, while the average trade 
size is around US$5 million for single name CDS.166 

At a minimum this would imply that trading on exchanges and electronic platforms 
becomes  the  norm  when  the  market  in  a  given  derivative  is  sufficiently  well 
developed,  and  when  the  shift  to  such  platforms  furthers  the  G20  commitment.167 
Benefits of on exchange or electronic platform trading incremental to those brought 
about by greater standardisation, central clearing and reporting to trade repositories 
include  increased  transparency  for  example  of  price  formation,168  improved 
oversight and increased competition between financial services providers. Action to 
implement the G20 commitments will be discussed in the policy options. 

12.2. 

Problem 2: Difficulties for SMEs to access financial markets 

Small and medium enterprises (SMEs) receive a very modest part of total investment 
in equity capital markets. While they are the majority in terms of listed companies, 
they are a minority in terms of capitalisation and in particular on volumes of trading. 
Market liquidity is concentrated on large companies.  

Recently collected data by the Federation of European Stock Exchanges (FESE)169 
shows  the  relative  importance  of  listed  companies  in  the  EU  stock  exchanges  by 
market  capitalisation.  FESE  establishes  four  categories  of  companies  (see  figure 
below): micro caps (XS ≤ €50M)), small caps (S: between €50M and €150M), mid 
caps  (M:  between  €150M  and  €1b)  and  large  cap  (L:  ≥  €1b).  The  first  column 
presents the relative importance (%) by number of listed companies (equity issuers); 

96 

 
 
  
 
the  second  column  by  market  capitalisation;  the  third  column  shows  the  trades  in 
number, while the fourth column shows the turnover in volume. 

– 

FIGURE  3:  Share  of  Market  Cap,  Trades  and  Turnover  against 
numbers of SMEs in Markets 

0.0%
0.5%
1.0%

5.2%

0 .0%
2 .6%
2 .2%

9 .6%

0.0%
0.3%
0.4%

3.4%

9 3.3 %

85.7%

96 .0%

N/A
XS

S
M
L

0.8%

50.7%

15.9%

19.0%

13.6%

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Num ber

Market Cap

Trades

Turnover

Source: FESE. 

Although  FESE  did  not  utilize  the  SME  definition  used  in  EU  legislation170,  it  is 
evident from the data that SMEs being present in markets fail to attract investments 
or liquidity which is largely absorbed by large companies. 

In  addition,  the  shallow  liquidity  of  SMEs  tends  to  lead  to  more  volatility  and 
therefore again prevents further investors from investing.171 In addition, the related 
costs  for  going  and  being  public  such  as  for  example  cost  of  compliance  with 
regulatory 
intervention  of  other 
intermediaries as well as indirect costs are only marginally proportional to the size 
of the capital raised. As the amount of capital that SMEs can raise on the markets is 
limited, the related costs may appear too high and SMEs are increasingly reluctant to 
bear these costs.  

requirements,  costs  associated  with 

the 

Market  operators  try  to  tackle  this  issue  by  creating  trading  venues  specialized  on 
SMEs,  mostly  falling  under  the  MiFID  MTF  category  (also  known  as  exchange-
regulated, junior, growth or alternative markets). Regular information and disclosure 
requirements  for  shares  admitted  to  trading  on  MTFs  are  usually  lighter  than  on 
regulated markets as the disclosure and organisation requirements established in the 
EU rules do not apply. Instead such markets are subject to higher level transparency 

97 

 
 
  
 
 
 
requirements that apply to MTFs. Member  States and/or the exchanges themselves 
may extend the regulated market requirements to companies listed in those markets, 
but they rarely do so172.  

Currently  around  20  trading  venues  operate  across  the  EU  with  requirements  for 
listing  lighter  than  on  regulated  markets  (and  therefore  lower  costs)  in  order  to 
attract  smaller  companies.  In  addition  to  being  lighter,  the  listing  requirements 
which apply are also different between SME markets. For instance, some markets do 
not  ask  for  application  documents  or  even  a  prospectus.  Moreover,  requirements 
differ concerning a minimum standard for operating history and free floats, trading 
rules,  periodicity  of  financial  reporting,  need  for  external  audit  or  not,  and  use  of 
international (IFRS/IAS) or local accounting standards etc.  

98 

 
 
  
 
– 

TABLE 

7: 

Summary 

of 

Key 

Listing 

and  On-going  Requirements 

of 

SME  Markets 

99 

 
 
  
 
CEESEG Wiener Boerse Dritter Markt

Austria

Bulgaria Unofficial Market "A"

Cyprus Emerging Companies

Bulgaria

Cyprus

Amission process (application of 
Prospectus Directive; 
authorsiation of admission 
document)

Public offer with prospectus or 
placement with limited information 
(subject to acceptance by 
exchange)

Requirement for/ role of "key 
adviser"

Minimum standards (operating 
history, free float)

Trading rules

Mandatory "Capital Market Coach".  
Mix of duties - checks "basic 
fitness" of firms for Dritter Markt.  
Also acts as liquidity provider for 
auction trading.

One year history versus standard 
three years on the Official Market 
(and one year on the Second 
Regulated Market).  Main market 
requires free float of at least 10,000 
shares.

Continuous trading: with market 
makers
Single intra-day auction: mandatory
market maker or liquidity provider 

On-going financial reporting 
(annual, semi-annual or 
quarterly; audited or not)

Audited annual (within 5 months of 
year-end); unaudited semi-annual 
(within three months).  Time limits 
are four and two months 
respectively on Main Market, which 
also requires quarterly reporting.

Use of IFRS (IAS) or
accounting standard

National accounting s
IFRS (IFRS on Main M

na

na

na

Nominated adviser required (and 
changes in the nominated adviser 
are reportable).  Nominated adviser 
presents admission document to 
the CES.

Two year history (versus four on the 
Main Market in Cyprus).  No free 
float minimum (versus 25%, with at 
least 1000 investors on Main 
Market).  No minimum market 
capitalisation (versus €17 million on 
Main Market).

If the offering is public, greater than 
€2.5 million and is addressed to 
over 100 persons, a Prospectus and 
approval from the Securities and 
Exchange Commission will be 
required. Through private placement, 
if addressed only to institutional 
investors (strategic or other) or to 
fewer than 100 persons and less 
than €2.5 million will be raised, an 
Admission Document must be 
submitted to the CSE by Nominated 
Adviser, without a requirement for 
approval by the Securities and 
Exchange Commission.

na

na

na

Audited annual (four months); 
unaudited semi-annual report (two 
months).  Main Market requires 
quarterly reporting.

na

na

NYSE Euronext Alternext

France, Belgium, Netherlands

Public offer (prospectus approved by 
AMF) or private placement or direct 
listing.  Latter two responsibility of 
listing sponsor/issuer.

Listing Sponsor required. Performs 
due diligence on issuer before and 
helps with on-going compliance after 
admission.

Two year track record versus three 
year track record on NYSE 
Euronext.  No minimum free float if 
placement (or €2.5m if IPO), versus 
25% on NYSE Euronext.

Single daily call auction unless 
achieving at least 2500 annual 
trades achieved when option to 
switch to continuous trading system 
possible.  Trading can be on or off 
central order book (if on, aided by 
Liquidity Providers).  Of Alternext 
stocks 86 have designated Liquidity 
Providers.

Audited annual; unaudited semi-
annual.  Quarterly reporting required 
on NYSE Euronext.

IFRS (local GAAP for
companies not makin
would still require rec
table) versus IFRA or 
NYSE Euronext.

DB Entry Standard

Germany

For public offerings: the prospectus 
approved and notified by the national 
regulator; for private placements: 
memorandum, which is the sole 
responsibility of the company.  On 
General and Prime Standard a 
Prospectus is mandatory.

Listing Partner is mandatory in order 
to assist issuer in its compliance.

na

At least one set of audited accounts 
(versus three years on General or 
Prime Standard).  No minimum size 
requirement. At least 30 share-
holders (versus initial free-float of 
25% on General or Prime Standard).

IFRS or national GAA
for General or Prime S
segment.

Audited annual in 6 months; 
unaudited semi-annual in 3 months 
(no prescribed format to latter) 
versus time limits of four months 
and two months respectively on 
General Standard.  Quarterly 
reporting required on Prime 
Standard only.

Boerse Stuttgart bwmit

Germany

na

Listing Expert (Emissionsexpert) 
appointed by the Munich Stock 
Exchange assists with complaince 
at admission and beyond.

Minimum capitalisation €10m.  At 
least 5% free float.  Must be based 
in Baden-Wuerttemberg.

Order-driven supported by Liquidity 
Provider, EUWAX AG. 

na

na

Munich (Bavarian) SE m:access

Germany

MSE approval.

na

Minimum capital of €1m.

na

Audited annual versus Audited 

annual; semi-annual and quarterly 
reporting on Regular Market.

German accounting s
(versus IFRS on Regu

ATHEX EN.A

Greece

Prospectus or Information 
Memorandum versus Prospectus on 
Main List.

Nominated adviser mandatory pre-
admission and for at least two years 
thereafter.  Assesses 
appropriateness of listing and 
submits document to ATHEX's 
Evaluation Committee.

Irish Stock Exchange IEX (Enterprise Securities Marke Ireland

No pre-vetting of ESM admission 
documents by the ISE unless 
Prospectus required.

ESM adviser must be appointed to 
assess suitability and assist in the 
admission process.

Mostly comparable to main market.  
Specified that one hour of 
continuous trading within pre-set 
fluctuation limits (10 or 20%).

Audited annual; unaudited semi-
annual (time limits to report not 
stated).  Main List also requires 
quarterly reporting.

IFRS or equivalent if f
country. Same as Ma

Trading rules are same as for the 
official market.

Audited annual (within 6 months); 
unaudited semi-annual (within 3 
months).

IAS if EEA; non-EEA 
from limited choice.

Two years accounts (one year with 
ATHEX permission); two years tax 
audit versus three years for Main 
List (and minimum profit 
requirements).  Free float at 10% 
(provided at least 50 people) versus 
25% (2000 people) on Main List.  
Minimum capital of €1m.

No specific admission criteria other 
than the requirement for an 
applicant to have a minimum market 
capitalization of €5 million.  No 
trading record required (versus three 
years on the official list).   No 
minimum number of shares to be 
held in public hands (versus 
minimum 25% free float on the 
official list).

AIM Italia

Italy

100 

Admission document.  No vetting by 
Borsa or by CONSOB (unless 
public offer prospectus) versus mix 
of CONSOB and Borsa Italiana 
vetting on main market.

Msut have Nominated Adviser.  
Nomads are obliged to guarantee 
information transparency for 
investors, focus the firm’s attention 
on the rules that apply to it as a 
publicly quoted company – 
supporting company to ensure it

No minimum free float (versus 25% 
on main market). No minimum 
market capitalisation (versus €40m 
on main segment).  No minimum 
trading history (versus three years 
on the main segment).

Choice of continuous trading or 
volatility auction.

Audited annual; unaudited semi-
annual. Main market also requires 
quarterly reporting.

[IFRS on all.]

 
 
  
 
Borsa Italiana MAC

Alternative Companies List   

Warsaw NewConnect

Italy

Malta

Poland

Amission process (application of 
Prospectus Directive; 
authorsiation of admission 
document)

Requirement for/ role of "key 
adviser"

Minimum standards (operating 
history, free float)

Trading rules

On-going financial reporting 
(annual, semi-annual or 
quarterly; audited or not)

Use of IFRS (IAS) or local 
accounting standards

na

na

na

na

na

na

10-20% free float minimum on ACL. na

na

na

na

na

Authorised Adviser required pre-
admission and for at least one year 
thereafter.  Market Maker required 
for two years (may be same as 
Authorised Adviser).

na

Choice between continuous, price-
driven market or, if order-driven, can 
be in either in continuous trading 
system or single-auction system. 

Audited annual; non-audited semi-
annual reports including only 
selected information (versus on 
Main Market the semi-annual 
reports require an audit and 
quarterly reporting is obligatory).

Free choice of accounting standards 
(any internationally recognised 
standards or standards applicable at 
the company's base).  [IFRS 
required on Main Market.]

Private placements for up to 99 
institutional and individual investors. 
In this case, irrespective of the size 
of the issue, the admission to 
trading is based on a short and 
simple information document 
prepared and approved by an 
Authorised Advisor.  A public 
offering requires the issuer has to 
comply with the same admission 
procedure as that binding in the 
regulated market with the obligatory 
issue prospectus approved by the 
Financial Supervision Commission 
(KNF). In the case of offerings up to 
€2.5 million, the admission may be 
based on an information 
memorandum subject to KNF's 
scrutiny. 

Ljubliana Entry Market

Slovenia

na

na

Bolsa de Madrid, MAB

Spain

MAB approval.

Registered Advisor checks 
compliance with MAB rules at 
admission and on a continuing 
basis.  Liquidity Provider also 
required.

No operating history requirement 
(versus three on Prime or Standard 
Market).  Minimum free float of 25% 
on Standard (with 150 investors).

na

na

National accounting standards.

At least €2m free float.  

na

Audited annual (four months after 

IFRS.

NASDAQ OMX First North

Sweden, Denmark, Finland, Baltic 
States

Prospectus is needed only when 
securities are offered to the public 
(versus on the Main Market a 
prospectus must be prepared, 
published and approved by the 
relevant authorities prior to listing).

Firms must have a Certfied Adviser.  
The Certfied Adviser ensures that 
the company meets the admission 
requirements and the continuous 
obligations associated with having 
shares admitted to trading on First 
North. Furthermore, the Adviser 
constantly monitors the company’s 
compliance with the rules and 
immediately reports to the 
Exchange if there should be a 
breach of the rules.

No minimum operating history 
(versus three years on the Main 
Market).  Sufficient number of 
shareholders and at least 10% of 
shares in public hands, or an 
assigned Liquidity Provider (versus 
25% free float on Main Market).  No 
minimum market value €1m on Main 
Market). 

Order-driven through INET.  Liquidity 
Providers on some Helsinki and 
Stockholm stocks (according to the 
minimum requirements, the Liquidity 
Provider must quote prices 
corresponding to a defined minimum 
value, on both buy and sell sides so 
that the prices do not deviate more 
than 4% from each other. The prices 
must be quoted at least 85 per cent 
of the time during continuous 
trading).

Nordic Growth Market

Sweden, Norway

AktieTorget AB

LSE AIM

Investbx

PLUS-quoted

Sweden

UK

UK

UK

Prospectus (approved by Swedish 
FSA or NGM depenendent upon 
circumstances).

Not required.

Prospectus or Information 
Memorandum (latter approved by 
AktieTorget)

Not required.

At least 300 shareholders; at least 
10% of shares and 10% of votes in 
public hands.

na

At least 200 shareholders with at 
least 10% of shares in public hands.

Order-driven (INET).

na

na

na

na

Admission document or Prospectus 
dependent on form of the offer.

Firm seeking admission must 
appoint a Nominated Adviser 
(Nomad).  Nomads are responsible 
for advising companies on the 
interpretation of and compliance 
with the rules (both for admission 
and on on-going compliance) - acts 
as "primary regulator".  Firm must 
also retain broker (can also be 
Nomad).

No free float requirement (versus 
25% on Full List); No minimum 
trading requirement (versus three 
years on Full List).

Quote-driven market maker system, 
mostly using SEAQ (non electronic 
executable quotation trading 
platform) although some of more 
liquid (for AIM) stocks are traded on 
SETSqx (which is hybrid of order- 
and quote-driven).

Audited accounts (within 6 months 
of year-end versus four months on 
Full List); Half-yearly (three months 
versus two months on Full List); No 
Interim Management statement 
requirement.

FRS or US, Canadian, Japanese or 
Australian GAAP (versus IFRS or 
equivalent on Full List).

Investbx approval of admission 
document.

na

101 

na

On-line auction via Sharemark.  
Auctions are not daily.

na

na

Prospectus or Admission 
Document.

PLUS Corporate Adviser required to 
make application for admission.

No quantitative minimums set.

Quote-driven market maker system. Audited annual (within five months) 
and half-realy (within three months).

IFRS, UK or US GAAP (others only 
with PLUS approval).

year-end); unaudited semi-annual 
(same form as annual reports, three 
months after period-end).  On main 
market the half-year reports required 
within two months; also requires 
quarterly reporting.

Audited annual (to be within three 
months of relevant period end); non-
audited semi-annual reports (to be 
within two months); optional 
quarterly reports.  (On "Premier" 
need at least one report other than 
annual report to be prepared under 
IFRS).  Quartrly reporting required 
on Main Market.

Home GAAP (IFRS for "Premier" 
segment).  IFRS required on the 
Main Market.

 
 
  
 
 
As presented above, the current market structure of SME markets widely diverges in 
terms  of  applicable  rules.  This  variety  of  different  requirements  leads  to 
fragmentation and prevents market networks. SME markets often focus on regional 
or even local capital markets173 and are not interconnected with each other although 
stakeholders claim for a pan-European market as a prerequisite for more liquidity174. 
MiFID  allows  already  secondary  listings  in  regulated  markets  and  in  MTFs  for  a 
security that has already been admitted to trading on a regulated market175. However, 
this is not the case for secondary trading on another MTF as different standards may 
apply. As a consequence, today these types of networks between SME markets can 
develop  only  if  there  are  bilateral  private  agreements  between  the  MTF  market 
operators.  While  such  a  fragmentation  limits  investments  and  therefore  liquidity,  a 
harmonized  framework  may  enable  SMEs  and  investors  to  gain  access  to  an 
international capital pool.176 

– 

TABLE 8: Overview of SME-focused Markets in the EU 

Reference 
date

Total 
number of 
issuers

Of which 
foreign

New 
issuers in 
2009 (2010)

Delistings, 
2009 (2010)

Total MV, 
€m

Average 
MV, €m

Issuance 
in 2009 
(2010), €m

CEESEG Wiener Boerse Dritter Markt

Bulgaria Unofficial Market "A"

Cyprus Emerging Companies

Austria

Bulgaria

Cyprus

NYSE Euronext Alternext

France, Belgium, Netherlands

DB Entry Standard

Boerse Stuttgart bwmit

Munich (Bavarian) SE m:access

ATHEX EN.A

Germany

Germany

Germany

Greece

Irish Stock Exchange Enterprise Securities Market

Ireland

AIM Italia

Borsa Italiana MAC

Alternative Companies List   

Warsaw NewConnect

Ljubliana Entry Market

Bolsa de Madrid, MAB

Italy

Italy

Malta

Poland

Slovenia

Spain

31-Dec-10

31-Dec-10

31-Dec-10

31-Dec-09

31-Dec-09

31-Dec-10

31-Dec-10

31-Dec-10

31-Dec-09

31-Dec-10

31-Dec-10

31-Dec-10

31-Dec-10

31-Dec-09

31-Dec-10

NASDAQ OMX First North

Sweden, Denmark, Finland, Baltic States

31-Dec-09

Nordic Growth Market

AktieTorget AB

LSE AIM

Investbx

PLUS-quoted

Sweden, Norway

Sweden

UK

UK

UK

36

70

6

162

120

58

37

14

25

13

8

1

185

54

12

103

22

139

9

na

na

na

na

na

na

na

na

na

na

na

3

na

na

na

na

na

31-Dec-10

31-Dec-10

31-Dec-09

1,306

[204]

31-Dec-10

31-Dec-09

na

na

3

183

2,557

10

na

6

21*

14

na

8

1

2

6*

na

na

86

8

10

9*

na

na

30

na

na

1,101.6

30.6

7

na

-

na

na

na

na

-

4

na

na

na

8

na

na

na

5,199.0

9,016.5

na

na

187.0

1,613.0

na

na

4.8

1,297.0

1,007.8

-

189.7

[18]

2,410.2

na

na

na

na

na

na

na

73.0*

69.6

na

na

na

79.0

32.0*

na

na

38.0*

na

48.0*

22.0*

na

na

na

na

32.1

75.1

na

na

13.4

64.5

na

na

4.8

7.0

18.7

15.8

23.4

na

na

293

62,918.4

48.2

4,959.7

na

na

na

2,942.5

na

16.1

na

na

87,887.5

Source:  Websites  of  respective  exchanges,  PwC  IPO  Watch  Europe  Survey,  EE 
analysis. The asterix * indicates where the PwC IPO Watch Survey data (for 2010) 
have been utilised. 

The only successful SME market, in terms of number of companies listed is AIM177, 
and to a lesser extent and at a smaller scale PLUS-Quoted178, both in the UK. AIM 
has  indeed  been  very  successful  since  its  creation  in  1995  although  the  current 
number of listed companies has decreased in recent years. In recent times, few others 
such as the Entry Standard (Deutsche Börse) and the New Connect (Warsaw Stock 
Exchange) have been increasing their number of quoted companies. 

Last,  the  general  cost  of  going  public  (i.e.  being  admitted  to  trading)  and  staying 
listed are often seen as high and burdensome.  179 In relation to low performance in 

102 

 
 
  
 
             
              
             
              
     
          
             
              
              
            
           
     
          
           
             
     
          
          
             
             
              
             
              
            
        
          
             
              
              
     
          
          
             
              
              
            
            
           
              
             
              
     
            
             
              
     
          
             
             
            
        
          
           
     
          
             
           
        
             
           
    
          
     
              
           
     
          
        
    
 
capital markets, SMEs' costs of going public and staying listed are often considered 
to be too high. 

– 

TABLE 9: Comparison of Total Flotation Costs (expressed in €m and as 
a  percentage  of  the  proceeds)  between  Exchange-regulated  and 
Regulated Markets in Selected European States (IPOs, 2005–2008)  

€10m 

€25m 

€50m

€100m

€100m

Proceeds 

NYSE Euronext Alternext

as % of proceeds

DB Entry Standard

as % of proceeds

0.82

8.2%

0.89

8.9%

1.8

7.2%

1.96

7.8%

3.42

6.8%

3.72

7.4%

LSE AIM

1.33

3.07

5.96

as % of proceeds

13.3%

12.3%

11.9%

6.57

6.6%

7.18

7.2%

11.65

11.7%

NYSE Euronext Eurolist

DB General Standard

LSE Main Market

6.35

6.4%

7.64

7.6%

9.03

9.0%

As presented in the table above, capital costs need to be seen in relation to proceeds 
made:  the  quota  of  costs  decreases  the  more  capital  is  collected.  However,  if 
financial  markets  would  provide  for  SMEs'  sufficient  access  to  finance  including  a 
high level of visibility and liquidity, the cost ratio might be seen as proportionate. 

12.3. 

Problem 3: Lack of sufficient transparency for market participants 

The key rationale for transparency is to provide investors with access to information 
about  current  trading  opportunities,  to  facilitate  price  formation  and  assist  firms  to 
provide  best  execution  to  their  clients.  It  is  also  intended  to  address  the  potential 
adverse  effect  of  fragmentation  of  markets  and  liquidity  by  providing  information 
that enables users to compare trading opportunities and results across trading venues. 
Post trade transparency is also used for portfolio valuation purposes. Transparency is 
crucial for market participants to be able to identify a more accurate market price and 
to  make  trading  decisions  about  when  and  where  to  trade.  Pre-  and  post  trade 
transparency serves to address these issues. The transparency regime in MiFID only 
applies  to  shares  admitted  to  trading  on  regulated  markets  (including  when  those 
shares are traded on a MTF or over the counter).  

12.3.1.  Equity markets 

Pre-trade transparency refers to the obligation to publish (in real-time) current orders 
and  quotes  (i.e.  prices  and  amounts  for  selling  and  buying  interest)  relating  to 
shares.180  Pre-trade  transparency  obligations  apply  to  regulated  markets,  MTFs  and 
systematic internalisers. 

Individual  market  participants  would  sometimes  prefer  not  to  disclose  their  own 
trading interest, while having full access to the trading intentions of everybody else. 
In  that  context  the  growth  of  electronic  trading  has  facilitated  the  use  of  dark 
orders181  which  market  participants  apply  to  minimise  market  impact  costs.  An 
increased  use  of  dark  pools  -  trading  platforms  operated  by  regulated  markets  or 
MTFs  that  benefit  from  the  MiFID  waivers  from  pre-trade  transparency  -  does 

103 

 
 
  
 
 
however  raise  regulatory  and  economic  concerns  as  it  may  ultimately  affect  the 
quality of the price discovery mechanism on the "lit" markets. The issue at stake is to 
balance the interest of the wider market with the interest of individuals by allowing 
for waivers from transparency in specific circumstances.  

Pre-trade transparency waivers182 

Waivers for pre-trade transparency are provided for in MiFID in relation to regulated 
markets  and  MTFs.  The  exemptions  that  allow  regulated  markets  and  MTFs  to 
operate systems or handle orders or quotes without publishing pre-trade transparency 
data are as follows: 

-  "Large-in-scale  waiver"  refers  to  orders  that  are  large-in-scale  compared  with 
normal market size; 

- "Management facility waiver" refers to orders held in an order management facility, 
waiting to be disclosed to the market; 

-  "Reference  price  waiver"  refers  to  systems  where  the  price  is  determined  by  a 
reference price; 

-  "Negotiated  transaction  waiver"  refers  to  systems  that  formalise  negotiated 
transactions, i.e. the terms of the transactions are determined outside the system. In 
that case the transaction price is required to be within an appropriate price range, or 
the  transaction  is  subject  to  conditions  other  than  the  current  market  price  of  the 
share. 

Dark  pools  -  i.e.  trading  under  the  pre-trade  transparency  waivers  is  estimated  to 
account  for  8.5%  of  the  overall  trading  in  EEA  shares  taking  place  on  organised 
trading  venues  (i.e.  regulated  markets  or  MTFs).  If  we  add  the  broker  crossing 
network turnover to this figure, we end up with more than 10% of the on exchange or 
electronic platform trading which is dark or not pre-trade transparent.  

In terms of overall EEA trading, dark pools and broker crossing networks account for 
approximately 7%. This % is still expected to rise in line with the level in the US. 
According to the US SEC, the combine volume percentage of dark pools and broker-
dealer internalizers is 20%183.  

In terms of overall EEA trading including OTC, 55% of the trading activity is still 
"lit"  or  pre-trade  transparent  whereas  45%  is  "dark"  or  not  subject  to  pre-trade 
transparency. 

104 

 
 
  
 
– 

TABLE 10: Turnover in EEA shares 

Turnover in EEA shares (€ billions )
All trading in EEA shares on RMs and M
Trading on RMs and MTFs as a % of tot
OTC trading 
OTC trading as a % of total EEA trading
Total EEA trading

Turnover in EEA shares (€ billions)
Trading under pre-trade waivers
Dark pools as a % of EEA RMs and MT
Trading executed in broker crossing net
BCNs as a % of EEA RMs and MTFs tra
Total dark trading as a % of EEA RMs

Turnover in EEA shares (€ billions )
Trading under pre-trade waivers
Dark pools as a % of total EEA trading
Trading executed in broker crossing net
BCNs as a % of total EEA trading
Total dark trading as a % of total EEA
OTC trading as a % of total EEA trading
Total dark trading - including OTC - a

Q1
1.934
62,0%
1.185
38,0%
3.120

Q1
147
7,6%
28
1,4%
9,0%

Q1
147
4,7%
28
0,9%
5,6%
38,0%
43,6%

2009
Q2
2.228
62,0%
1.365
38,0%
3.593

2009

Q2
204
9,2%
37
1,7%
10,8%

2009
Q2
204
5,7%
37
1,0%
6,7%
38,0%
44,7%

Q3
2.290
62,0%
1.403
38,0%
3.693

Q3
207
9,0%
48
2,1%
11,1%

Q3
207
5,6%
48
1,3%
6,9%
38,0%
44,9%

Q4
2.443
62,0%
1.497
38,0%
3.940

Q4
241
9,9%
56
2,3%
12,1%

Q4
241
6,1%
56
1,4%
7,5%
38,0%
45,5%

2010
Q1
2624,8
62,0%
1.609
38,0%
4.234

2010
Q1
222,6
8,5%
58,9
2,2%
10,7%

2010
Q1
222,6
5,3%
58,9
1,4%
6,6%
38,0%
44,6%

Source:  European  Commission  services'  own  calculations  based  on  CESR/10-802 
and assuming a constant OTC market share of 38% 

Post trade transparency refers to the obligation to publish a trade report every time a 
transaction  in  a  share  has  been  concluded.184  This  obligation  applies  to  regulated 
markets, MTFs and investment firms and to trades whether executed on or outside a 
trading  venue.  This  information  differs  from  pre-trade  transparency  data  because  it 
gives  historical 
than 
information  on  trading  opportunities).  Post  trade  transparency  is  important  for 
efficient  price  formation  and  for  best  execution  to  show  which  venues  or  firms  are 
providing  the  best  prices.  It  is  also  useful  to  enable  clients  of  firms  to  monitor 
whether they are receiving best execution (i.e. whether the order has been executed at 
a  reasonable  price  and  on  an  appropriate  venue)  and  is  used  for  the  pricing  of 
portfolios.  

transactions  executed  (rather 

information  about  share 

Market participants require information about trading activity that is reliable, timely 
and  available  at  a  reasonable  cost.  Market  participants  have  expressed  concerns 
related to the timing of publication of trade reports. Publication of trade reports must 
generally  take  place  in  real-time,  and  in  any  case  within  3  minutes,  but  for  large 
transactions  delays  between  60  minutes  and  up  to  4  trading  days  are  allowed, 
depending on the liquidity of the share and the size of the transaction185. Publishing a 
large trade immediately could move the market against the person taking the position 
and make it more costly to execute large orders. Trades reported with a delay under 
this  deferred  publication  regime  represent  approximately  one-fifth  of  all  trades  on 
average186.  The  reasoning  for  allowing  exemptions  to  the  general  rule  of  full  and 
immediate transparency for large orders is similar to that of pre-trade transparency. 
Many supervisors seem to agree that the maximum permitted delays for publishing 

105 

 
 
  
 
 
trade details could be reduced in order to improve the timeliness of the information 
for  all  market  participants187.  This  would  help  to  make  post  trade  information 
available sooner to the market. 

The  pre  and  post  trade  transparency  requirements  currently  only  apply  to  shares 
admitted to trading on a regulated market. A number of instruments that are similar 
to  shares188  are  outside  the  scope  of  MiFID  transparency  requirements.  These 
instruments from an economic point of view are equivalent to shares and share many 
characteristics  with  the  equity  markets,  including  liquidity,  types  of  investors,  etc. 
Hence  most  market  participants  and  regulators  are  of  the  view  that  it  would  be 
beneficial to subject these markets to transparency requirements. 

The  MiFID  pre-  and  post-trade  transparency  regime  applies  to  shares  admitted  to 
trading on a regulated market. The regime covers trading of such shares whether it 
takes  place  on  a  regulated  market,  on  a  MTF  or  OTC.  The  regime  does  not  apply 
though if an instrument is only admitted  to trading on a MTF or another organised 
trading facility as outlined in Section 3.3 above. In the former case the higher level 
transparency  obligations  for  MTFs  in  the  Directive,  instead  of  the  more  detailed 
regime189,  apply  to  the  shares.  This  leaves  a  potential  difference  in  the  level  of 
transparency  for  shares  that  are  only  admitted  to  trading  on  a  MTF.  This  concerns 
essentially MTFs that operate SME markets (see the list of junior markets above).  

12.3.2.  Non equity markets 

Pre and post trade information perform similar functions for non equity markets than 
for  equity  markets.  But  the  transparency  requirements  for  these  markets  are  not 
covered  by  MiFID  and  are  only  regulated  at  national  level.  For  non-equities,  the 
existing  level  of  transparency  is  not  always  considered  sufficient190.  CESR  clearly 
expressed the view that current market-led initiatives by trade associations191 in the 
bonds,  structured  finance  product  and  credit  derivatives  markets  have  failed  to 
provide  a  sufficient  level  of  transparency  in  terms  of  scope,  content  and  timing192. 
Market  participants  have  encountered  significant  difficulties  in  accessing  price 
information  and  valuing  their  positions  in  the  bonds  markets  following  the  severe 
retreat of liquidity during the financial crisis. In addition some market participants, 
notably retail investors and small market participants have limited access to trading 
information  giving  rise  to  information  asymmetries.  Prices  in  several  non-equity 
OTC markets are a function of the willingness of investment firms acting as dealers 
to provide investors with quotes on request through electronic or manual (telephone) 
channels  and  enter  into  trades  with  them;  not  a  public  interaction  of  supply  and 
demand.  The  balance  between  transparency  and  liquidity  in  non-equities  (as  in 
equities)  is  hotly  debated193.  A  higher  degree  of  transparency  might  attract  new 
market  participants,  increase  liquidity  and  reduce  bid-ask  spreads.  However  the 
increased transparency could also act as a disincentive for dealers to commit capital 
and as a result have an overall negative impact on liquidity. 

12.3.3.  Data consolidation 

Besides  requiring  market  data  to  be  reliable,  timely  and  available  at  a  reasonable 
cost,  investors  also  require  the  information  to  be  brought  together  in  a  way  that 
allows  comparison  of  prices  across  different  venues.  Experience  since  the 
implementation  of  MiFID  shows  that  the  reporting  and  publication  of  trade  data  in 
shares is not living up to this expectation.194 The main problems relate to the variable 

106 

 
 
  
 
quality and differences in the format of the information, as well as the cost charged 
for the information and the difficulty in consolidating the information. If these issues 
are not fully addressed, they could undermine the overarching objectives of MiFID 
as  regards  transparency,  competition  between  financial  services  providers  and 
investor  protection.  While  a  number  of  initiatives  have  been  put  in  place  to  try  to 
address these issues there are practical and commercial obstacles that appear to make 
regulatory intervention necessary to facilitate the consolidation and dissemination of 
post trade information.  

Similar  issues  are  likely  to  arise  for  non  equity  instruments  if  these  are  brought 
within the scope of a pre and post-trade transparency regime.  

12.4. 

Problem  4:  Lack  of  transparency  for  regulators  and  insufficient  supervisory 
powers in key areas 

In  several  areas,  regulators  are  lacking  the  necessary  information  or  powers  to 
properly fulfil their role. 

12.4.1.  Commodities markets 

As a general background, MiFID applies to all types of commodity derivatives which 
meet the definition of a financial instrument irrespective of the underlying physical 
commodity,  be  it  agricultural  commodities,  energy,  or  emission  allowances.195 
Commodity  and  commodity  derivatives  markets  are  strongly  interlinked,  and 
problems in these markets typically extend to both. However, it is beyond the scope 
of this initiative to consider the regulation of non-financial markets. This is because 
each underlying commodity market has a different market structure and set of price 
drivers. Regarding transparency in the underlying physical markets, both in terms of 
trading  activity  and  fundamental  data,  further  work  will  be  initiated  outside  this 
initiative in the respective sectoral legislations as announced in the Communication 
on  commodity  markets  and  raw  materials.  The  Commission  has  already  adopted  a 
proposal on Energy Market Integrity and Transparency for EU wholesale electricity 
and gas markets (REMIT)196. 

The  Commission  here  seeks  to  address  the  issue  of  increasing  financialisation  of 
commodity  derivatives  markets.  This  means  that  a  growing  number  of  financial 
participants  use  these  markets  in  search  of  risk  management  tools  and  investment 
opportunities.  Commodity  derivatives  are  increasingly  seen  purely  as  financial 
investments  by  financial  institutions  as  part  of  their  risk  allocation  strategies. 
Financial  investment  flows  into  commodity  derivative  markets  have  grown 
significantly  in  recent  years.  Between  2000  and  2010,  for  example,  institutional 
investors increased their investments in these markets from less than €10 billion in 
2000 to more than € 300 billion in 2010197. Index funds have become key players in 
the  market,  holding  for  example  about  25-35  percent  of  all  agricultural  futures 
contracts198. The volume of financial transactions in the oil markets represent about 
thirty-five times the oil traded in the physical market199.  

Understanding  the  price  formation  process  in  these  markets  and  the  role  played  by 
the multiple factors influencing the commodity prices is a complex issue. Some have 
claimed  that  the  increased  presence  of  financial  investors  in  these  markets  have 
contributed to excessive price increases and volatility. Although closely studied, the 

107 

 
 
  
 
impact  of  this  increasing  financialisation  on  prices  of  the  underlying  physical 
commodities is not yet fully understood. 

Commodity  markets  have  displayed  unprecedented  movements  of  prices  in  recent 
years. Prices in all major commodity markets, including energy, metals and minerals, 
agriculture  and  food,  increased  sharply  in  2007  to  reach  a  peak  in  2008,  declined 
strongly  from  the  second  half  of  2008  and  have  been  on  an  increasing  trend  again 
since  the  summer  of  2009.  To  varying  degrees,  these  price  swings  have  been 
reflected in consumer prices, at times leading to social unrest and deprivation. 

– 

FIGURE 4: Brent price development in nominal USD, nominal EUR and 
real EUR (Jan 2007 = 100) 

IDX Brent USD
IDX Brent EUR
IDX Brent real EUR

210

190

170

150

130

110

90

70

50

01/04/06

01/07/06

01/10/06

01/01/07

01/04/07

01/07/07

01/10/07

01/01/08

01/04/08

01/07/08

01/10/08

01/01/09

01/04/09

01/07/09

01/10/09

01/01/10

01/04/10

01/07/10

01/10/10

01/01/11

Source: ICE (Brent), ESTAT (EU27 HCIP), Oanda (exchange rate). 

– 

FIGURE 5: Price developments of key foods (January 2008 = 100) 

Wheat 

Soybean Oil 

Sugar 

200

150

100

50

0

8
0
0
2
/
1
0
/
2

8
0
0
2
/
3
0
/
2

8
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/
5
0
/
2

8
0
0
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/
7
0
/
2

8
0
0
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/
9
0
/
2

8
0
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2
/
1
1
/
2

9
0
0
2
/
1
0
/
2

9
0
0
2
/
3
0
/
2

9
0
0
2
/
5
0
/
2

9
0
0
2
/
7
0
/
2

9
0
0
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/
9
0
/
2

9
0
0
2
/
1
1
/
2

0
1
0
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/
1
0
/
2

0
1
0
2
/
3
0
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2

0
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/
5
0
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2

0
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/
7
0
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2

0
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/
9
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0
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1
1
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2

1
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1
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2

1
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0
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/
3
0
/
2

200

150

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50

0

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1
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200

150

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0

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2

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2

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0

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/

2

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7
0

/

/

2

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2
9
0

/

/

2

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1
1

/

/

2

9
0
0
2
1
0

/

/

2

9
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0
2
3
0

/

/

2

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0
0
2
5
0

/

/

2

9
0
0
2
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0

/

/

2

9
0
0
2
9
0

/

/

2

9
0
0
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1
1

/

/

2

0
1
0
2
1
0

/

/

2

0
1
0
2
3
0

/

/

2

0
1
0
2
5
0

/

/

2

0
1
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2
7
0

/

/

2

0
1
0
2
9
0

/

/

2

0
1
0
2
1
1

/

/

2

1
1
0
2
1
0

/

/

2

1
1
0
2
3
0

/

/

2

8
0
0
2
/
3
0
/
2

8
0
0
2
/
5
0
/
2

8
0
0
2
/
7
0
/
2

8
0
0
2
/
9
0
/
2

8
0
0
2
/
1
1
/
2

9
0
0
2
/
1
0
/
2

9
0
0
2
/
3
0
/
2

9
0
0
2
/
5
0
/
2

9
0
0
2
/
7
0
/
2

9
0
0
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/
9
0
/
2

9
0
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2
/
1
1
/
2

0
1
0
2
/
1
0
/
2

0
1
0
2
/
3
0
/
2

0
1
0
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/
5
0
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2

0
1
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/
7
0
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2

0
1
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/
9
0
/
2

0
1
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/
1
1
/
2

1
1
0
2
/
1
0
/
2

1
1
0
2
/
3
0
/
2

Corn 

 Rice (Bangkok 5%) –  

FAO Food price index 

200

150

100

50

0

8
0
0
2
/
1
0
/
2

8
0
0
2
/
3
0
/
2

8
0
0
2
/
5
0
/
2

8
0
0
2
/
7
0
/
2

8
0
0
2
/
9
0
/
2

8
0
0
2
/
1
1
/
2

9
0
0
2
/
1
0
/
2

9
0
0
2
/
3
0
/
2

9
0
0
2
/
5
0
/
2

9
0
0
2
/
7
0
/
2

9
0
0
2
/
9
0
/
2

9
0
0
2
/
1
1
/
2

0
1
0
2
/
1
0
/
2

0
1
0
2
/
3
0
/
2

0
1
0
2
/
5
0
/
2

0
1
0
2
/
7
0
/
2

0
1
0
2
/
9
0
/
2

0
1
0
2
/
1
1
/
2

1
1
0
2
/
1
0
/
2

1
1
0
2
/
3
0
/
2

200

150

100

50

0

peaked at 279 in May 2008 

peaked at 279 end of May 2008

200

150

100

50

-

8
0
0
2

/

1
0
2

/

8
0
0
2

/

2
0
2

/

8
0
0
2

/

3
0
2

/

8
0
0
2

/

4
0
2

/

8
0
0
2

/

5
0
2

/

8
0
0
2

/

6
0
2

/

8
0
0
2

/

7
0
2

/

8
0
0
2

/

8
0
2

/

8
0
0
2

/

9
0
2

/

8
0
0
2

/

0
1
2

/

8
0
0
2

/

1
1
2

/

8
0
0
2

/

2
1
2

/

9
0
0
2

/

1
0
2

/

9
0
0
2

/

2
0
2

/

9
0
0
2

/

3
0
2

/

9
0
0
2

/

4
0
2

/

9
0
0
2

/

5
0
2

/

9
0
0
2

/

6
0
2

/

9
0
0
2

/

7
0
2

/

9
0
0
2

/

8
0
2

/

9
0
0
2

/

9
0
2

/

9
0
0
2

/

0
1
2

/

9
0
0
2

/

1
1
2

/

9
0
0
2

/

2
1
2

/

0
1
0
2

/

1
0
2

/

0
1
0
2

/

2
0
2

/

0
1
0
2

/

3
0
2

/

0
1
0
2

/

4
0
2

/

0
1
0
2

/

5
0
2

/

0
1
0
2

/

6
0
2

/

0
1
0
2

/

7
0
2

/

0
1
0
2

/

8
0
2

/

0
1
0
2

/

9
0
2

/

0
1
0
2

/

0
1
2

/

0
1
0
2

/

1
1
2

/

0
1
0
2

/

2
1
2

/

1
1
0
2

/

1
0
2

/

1
1
0
2

/

2
0
2

/

108 

1/2008

3/2008

5/2008

7/2008

9/2008

11/2008

1/2009

3/2009

5/2009

7/2009

9/2009

11/2009

1/2010

3/2010

5/2010

7/2010

9/2010

11/2010

1/2011

 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Source: future prices from Ecowin and FAO, own calculations. 

Against this backdrop, the G20 agreed "to improve the regulation, functioning, and 
transparency  of  financial  and  commodity  markets  to  address  excessive  commodity 
price  volatility."  In  its  Communication  of  2  June  2010  on  "Regulating  Financial 
Services For Sustainable Growth" 200, the Commission announced it is preparing a 
comprehensive,  balanced  and  ambitious  set  of  policy  initiatives  which  will  touch 
upon  commodity  derivatives  markets.  More  recently,  the  Communication  of  2 
February  2011  on  commodity  markets  and  raw  materials  has  called  for  further 
action201.  More  specifically  on  agricultural  commodity  derivatives  markets,  the 
Commission  in  the  2009  Communication  on  a  better  functioning  supply  chain202 
announced  measures  to  improve  oversight  and  the  overall  transparency  of  EU 
agricultural  commodity  derivatives,  both  on-exchange  and  over-the-counter.  The 
review of MiFID is an integral part of these efforts.  

The  problems  in  these  markets  spring  from  five  sources.  First,  commodity  and 
commodity derivatives markets are global and strongly interlinked. Second, there is 
concern  that  competent  authorities  cannot  adequately  assess  the  price  formation 
process  due  to  a  lack  of  transparency.  Third,  there  is  concern  that  national  and 
divergent means of controlling fair and orderly markets are insufficiently effective. 
Fourth,  that  not  all  important  market  participants  are  covered.  And  finally,  that 
certain contracts which resemble financial instruments are not covered. 

First the physical and derivatives markets are increasingly intertwined and influence 
each other. The very nature of a derivative contract is that its value depends on the 
value  of  the  underlying  market  to  which  it  refers.  In  addition,  derivative  trading 
supports price discovery, and thereby also influences commodity prices. In addition 
to  growing  interdependence  between  physical  and  financial  markets,  these  markets 
have  become  increasingly  global.  For  instance,  many  commodity  trading  firms  are 
based  in  Switzerland,  where  they  generate  one  third  of  world  trade  in  crude  oil.203 
The global nature of commodity markets can also be clearly seen by the volume of 
trading  in  agricultural  commodity  futures  on  the  Chicago  Mercantile  Exchange 
(CME), where average daily volumes in maize futures contracts exceed those in Paris 
(EuroNext) by a ratio of more than 100 to 1.204 

The interlinked and global nature of commodity and commodity derivatives markets 
requires  reinforcing  the  cooperation  between  financial  and  physical  regulators,  as 
well as between financial regulators at international level. Financial regulators have 
called for enhanced global cooperation.205 In particular, they have signalled the need 
to  take  a  greater  interest  in  the  physical  commodity  markets,  to  cooperate  more 
closely,  and  share  information  with  physical  regulators  and  other  relevant 
organisations.  This  cooperation  should  help  promote  a  better  understanding  of  the 
price  formation  process  in  the  derivatives  markets  and  the  interaction  between 
physical  and  financial  markets.  It  should  also  serve  to  improve  the  detection  of 
market abuses which occur across physical and financial markets, and which involve 
multiple markets in different jurisdictions. 

The  second  problem  faced  by  regulators  and  market  participants  is  the  lack  of 
transparency  both  in  the  financial  and  physical  markets.  As  a  result  financial 
regulators at the international level have called for increased transparency in both the 
financial  and  the  underlying  physical  markets  to  better  understand  the  price 

109 

 
 
  
 
formation  mechanism  of  commodity  derivatives  and  the  interaction  with  the 
underlying physical markets206.  

Under  MiFID,  there  is  no  position  reporting  requirement  for  derivatives,  including 
commodity  derivatives.  However,  most  of  the  commodity  derivatives  exchanges 
have  already  in  place  some  form  of  position  reporting  or  oversight  as  part  of  their 
organizational requirements to ensure fair and orderly trading on their markets (see 
Annex  5.2.8  Tables  29  &  30).  In  thhe  European  regulation  on  OTC  trading207  the 
Commission  will  improve  transparency  of  these  instruments  by  requiring  that 
information  on  OTC  derivative  contracts  be  reported  to  trade  repositories  and  be 
accessible  to  supervisory  authorities208.  However,  the  level  of  granularity  of  this 
information  will  not  allow  competent  authorities  to  differentiate  positions  taken  by 
commercial  and  non  commercial  entities  or  for  hedging  or  non  hedging  purposes, 
and will not allow them to assess the exact nature and extent of the links between the 
price  formation  process  on  commodity  markets  and  the  growing  importance  of 
derivatives markets.  

The  third  problem  faced  by  regulators  is  the  lack  of  harmonised  and  effective 
position  management  oversight  powers 
to  prevent  disorderly  markets  and 
developments  detrimental  to  investors.  This  includes  excessive  volatility  of 
derivatives  prices  and  the  related  commodity  prices  which  could  undermine  the 
proper  functioning  of  these  markets.  Holding  large  positions  in  commodity 
derivatives  markets  may  allow  individual  market  participants  to  influence  the  price 
of the derivative or the underlying in a way that is manipulative or interferes with the 
fair  and  orderly  working  of  the  market.  In  addition,  the  weight  of  individual  or 
aggregated positions may have an impact on fair and orderly markets. 

Derivative  markets  have  grown  significantly  in  recent  years.209  The  European 
Parliament has recently stated that regulators should have harmonised powers to set 
position limits to reduce systemic risk and combat disorderly trading, especially for 
certain categories of derivatives210 echoing various calls to introduce positions limits 
to  curb  "financial  speculation"  in  commodity  derivatives  markets.  As  highlighted 
above, the manner in which competent authorities monitor and supervise positions in 
commodity  derivatives  is  different  between  jurisdictions.  For  example  French, 
German,  and  Spanish  commodity  exchanges  have  firm  position  limits  in  place  for 
physically  settled  contracts  and/or  certain  types  of  commodity  derivatives,  whereas 
UK exchanges have a soft position management system in place whereby they have 
the authority to manage positions at any time throughout a contract’s life cycle. They 
can  instruct  a  member  to  close  or  reduce  a  position  with  the  exchange,  if  that  is 
necessary,  to  secure  fair  and  orderly  markets211.  This  could  give  rise  to  regulatory 
arbitrage  and/or  unlevel  playing  field  concerns,  especially  when  contracts  on  the 
same commodity are traded on multiple exchanges. Similar concerns could arise at 
the international level as the existing position limits regime in place in the US will be 
reinforced with the Dodd-Frank Act (see Annex 14 for a comparison between the US 
and the EU regime). 

Fourth, many important commodity trading firms are currently exempt from MiFID, 
even  though  their  activities  increasingly  resemble  those  of  investment  firms. 
Commercial companies active in the commodity derivatives markets may be exempt 
from  MiFID  when  they  deal  on  own  account  in  financial  instruments  or  provide 
investment  services  in  commodity  derivatives  on  an  ancillary  basis  as  part  of  their 
main  business  and  when  they  are  not  subsidiaries  of  financial  groups.  Specialist 

110 

 
 
  
 
commodity  firms  whose  main  business  is  to  trade  on  own  account  in  commodities 
and/or commodity may also be exempt when they are not part of a financial group212 
These  exemptions  were  intended  to  cover  commercial  users  and  producers  of 
commodities, under the assumption that commercial firms and specialist commodity 
firms do not pose systemic risks comparable to traditional financial institutions nor 
interact  with  investors.  The  size  and  level  of  activity  of  some  of  the  exempted 
commodity  firms  has  developed  over  the  years  and  the  assumption  of  their  limited 
effect in terms of market disorder or systemic risk may not be as valid as before. 

 Moreover the G20 has set the objective to improve derivative market transparency 
and oversight of all players that have a significant activity in trading of derivatives 
which  goes  beyond  their  own  hedging  needs,  including  commodity  derivatives 
players. They should be subject to the same regulation as financial players active in 
these markets. Finally, it has been suggested that commercial companies benefiting 
from the MiFID exemptions active in the oil market should not provide investment 
services  in  commodity  derivatives  even  as  an  ancillary  activity.213  As  these  MiFID 
exempt  firms  are  not  subject  to  any  MiFID  provisions  –  including  the  conduct  of 
business  rules  –  some  national  regulators  and  market  participants  have  argued  that 
unsophisticated  clients  would  not  be  adequately  protected.  On  the  other  hand,  this 
notion  of  ancillary  activity  appears  to  be  an  essential  provision  for  agricultural 
cooperatives,  enabling  them  to  provide  hedging  tools  to  their  farmers  while 
remaining exempt from a regulatory regime ill-calibrated to the small risks they pose 
to  the  financial  system.  The  same  may  be  true  for  some  energy  companies  who 
manage the energy portfolio of smaller, often affiliated utilities. Both securities and 
prudential regulators' point of view is that there is a case for providing a more narrow 
interpretation  of  allowed  exempt  activities  in  line  with  the  overall  purpose  of 
MiFID.214  

A  final  problem,  limited  to  the  carbon  market,  is  that  emission  allowances,  which 
share many elements in common with derivatives, are not in scope. In addition, there 
is no general regulatory framework that covers the carbon market. Serious concerns 
have  recently  been  expressed  over  the  functioning  of  the  carbon  market  that  was 
recently  created  by  the  EU  institutions.  Emission  allowances215  are  an  instrument 
created by the EU Emissions Trading Scheme Directive (the EU ETS Directive)216, 
in force since 2005. The ETS system is a cornerstone of the European Union's policy 
to combat climate change. However, periodic reports of fraudulent trading activity in 
the  physical  (non-financial)  emission  allowances  markets  have  significantly 
undermined the credibility of this market217.  

This  lack  of  a  general  regulatory  framework  entails  that  spot  trading  platforms  for 
emission allowances are not required to guarantee standards of soundness, efficiency 
and market access. Intermediaries operating in the spot secondary market do not need 
to comply with conduct of business requirements or organizational safeguards, such 
as capital requirements. Also, financial regulators currently lack a complete overview 
of trading activity encompassing both financial and spot markets. 

The nature and characteristics of the emission allowances (i.e. certificate giving the 
right to emit 1 metric tonne of CO2) could lend themselves to be classified either as a 
financial instrument or a physical commodity. As a result their legal classification is 
not  uniform  in  the  Member  States.218  This  divergence  has  triggered  some  negative 
knock-on effects with respect to:  

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–  the uneven application of VAT rules to trade in those allowances across the EU, 

which opened possibilities of VAT carousel fraud219  

–  the possibilities of circumvention of anti-money laundering safeguards which do 

not extend in full to the access to spot market in emission allowances.220 

At the moment no EU wide market rules apply to the secondary trading of emission 
allowances.  While  MiFID  covers  derivatives  on  emission  allowances,  it  does  not 
apply  to  trading  venues  or  investment  firms  which  trade  emission  allowances  for 
immediate (spot) delivery. MiFID also applies to some extent to the future primary 
market (auctions) in those instruments221. As a result, the fact that the secondary spot 
carbon  market  is  not  subject  to  any  EU  wide  comprehensive  regulatory  framework 
stands  in  contrast  with  the  situation  in  the  allowances  derivatives  market  and  the 
regulatory arrangements for the auctioning (primary market). This regulatory gap has 
led to national divergences as a few Member States have brought the secondary spot 
activity in the carbon market under the national regimes implementing the MiFID or 
Market Abuse Directive.222  

12.4.2.  Transaction reporting 

Regulators also lack necessary information due to divergent and limited transaction 
reporting  requirements.  Investment  firms  are  required  to  report  to  competent 
authorities  all  trades  in  all  financial  instruments  admitted  to  trading  on  a  regulated 
market, regardless of whether the trade takes place on that market or not.223  

Transaction reporting under MiFID enables supervisors to monitor for abuses under 
the Market Abuse Directive (MAD). Transaction reporting is also useful for general 
market  monitoring,  as  it  provides  insight  into  how  firms  and  markets  behave. 
Records  of  trading  activity  can  be  used  by  supervisors  for  various  purposes, 
including  monitoring  market  stability,  cases  of  short  selling,  and  analysing  market 
trends including speculation during times of uncertainty.  

The existing reporting requirements fail to provide competent authorities with a full 
view of the market because their scope is too narrow, and because they allow for too 
much divergence.  

First,  since  transaction  reporting  enables  monitoring  the  functioning  of  the  market, 
including  its  integrity  in  the  perspective  of  MAD,  the  requirements  under  the  two 
directives need to remain aligned, taking also into account the ongoing review of the 
MAD224. In addition, the alignment of these two should also take into consideration 
the  proposal  for  a  regulation  on  Energy  Market  Integrity  and  Transparency  for  EU 
wholesale electricity and gas markets (REMIT) with regards to energy transactions. 
For  example,  OTC  options  and  credit  default  swaps  do  not  need  to  be  reported, 
although they can be used to benefit from abusive strategies, and could also be used 
to  give  misleading  price  signals  225.  Also,  financial  regulators  at  the  international 
level  have  called  for  increased  transparency  in  commodity  derivatives  markets226. 
Under  the  current  market  abuse  rules,  the  prohibition  already  extends  to  orders  to 
trade. In addition, MAD is expected to be extended to prohibit also attempted market 
manipulation, which could also involve orders to trade. Some exchanges may already 
retain order data in their own systems for some time. However, there are no reporting 
or  data  retention  rules  for  orders  to  trade  at  European  level.  Orders  to  trade  are 
therefore not available in a common format and according to common standards. 

112 

 
 
  
 
Second, reporting requirements today diverge between Member States. Notably, the 
directive is insufficiently clear as to what constitutes a transaction, and allows for the 
reporting of additional fields at national level. This adds costs for firms and limits the 
use  of  trade  reports  for  competent  authorities  to  identify  market  abuse  cases.  In 
addition  the  diverging  reporting  requirements  give  rise  to  additional  complexity  to 
exchange  transaction  reports  between  national  regulators  when  the  same  listed 
instrument is traded in different jurisdictions227.  

Third, investment firms can use third party firms to report their transactions228. These 
entities  need  to  be  approved  by  the  competent  authority,  but  there  is  no  provision 
which ensures adequate ongoing monitoring by the supervisor to ensure these firms 
provide high quality and consistent transactional data.  

Fourth, market participants that are not investment firms do not need to report their 
transactions.  When  non-investment  firms  have  direct  access  to  organised  markets, 
this could create substantial gaps between trading activity on the venue and reports 
sent to the competent authorities. 

Last, for cost and efficiency purposes, double reporting of trades under MiFID and 
the  recently  proposed  reporting  requirements  to  trade  repositories  should  be 
avoided.229 

12.4.3.  Powers of competent authorities and cooperation at EU and international level 

Experience over the past years, and particularly during the financial crisis show that 
competent  authorities'  powers230  need  to  be  strengthened  in  key  areas.  Notably, 
cooperation with regards to general market oversight is insufficient, access to the EU 
market  by  firms  from  third  countries  is  insufficiently  harmonised,  and  the  level  of 
sanctions is insufficiently deterrent in a number of jurisdictions. 

Regulatory scrutiny of complex products such as certain types of structured products, 
and of the provision of certain investment services and activities diverges. Currently, 
national regulators do not have the power to temporarily ban or restrict the trading in 
or the distribution of a product by one or more investment firms or the provision of 
an  activity  where  there  are  exceptional  adverse  developments  which  constitute  a 
serious  threat  to  financial  stability  or  to  market  confidence  in  their  jurisdiction. 
Further, there is no mechanism at EU level to coordinate such a ban (if they were to 
be imposed) nor any explicit power granted to ESMA to ban a product at EU level in 
case  of  persistent  sustained  market  failure  at  EU  level.231  Temporary  bans  put  in 
place  during  the  financial  crisis,  such  as  those  on  short  selling  in  shares  and  in 
government bonds, demonstrate that taking such measures on a national level causes 
compliance  problems  for  firms  active  in  several  member  states  and  can  result  in 
needless market disruption. In addition, national bans are not necessarily effective, as 
they may not cover activities that take place in other member states. 

Competent  authorities  cooperate  in  detecting  and  sanctioning  market  abuse.  There 
are  also  provisions  that  require  them  to  cooperate  when  suspending  trading.232 
However,  there  are  no  provisions  that  ensure  cooperation  with  regards  to  general 
market  oversight  in  order  to  ensure  fair  and  orderly  markets.  For  instance,  the 
manner  in  which  competent  authorities  monitor  and  supervise  positions  in 
derivatives on trading venues and OTC varies between EU jurisdictions (see Annex 
5.2.6.  Table  25).  This  lack  of  coordination  may  mean  competent  authorities  do  not 

113 

 
 
  
 
have  a  full  view  of  the  market,  or  fail  to  take  into  account  developments  in  other 
markets  when  considering  taking  action.  In  addition,  as  mentioned  under  the 
commodity derivatives section, financial regulators might not have at the moment all 
the  necessary  information  relevant  to  monitor  price  formation,  nor  all  trading  data 
needed to monitor trading behaviour in commodity derivatives markets. Finally the 
exchange  of  information  between  competent  authorities  in  Europe  and  in  third 
countries is insufficient when supervising market participants and markets which are 
increasingly global. The recent wave of stock exchange mergers (e.g. the collapsed 
merger  between  the  London  Stock  Exchange  and  its  Canadian  peer  TMX,  merger 
between  Deutsche  Börse  and  NYSE  Euronext,  and  merger  between  the  4th  largest 
operator of US equity markets Bats Global and Europe's largest MTF Chi-X Europe 
Ltd.)  has  highlighted  the  need  for  greater  coordination  of  supervision  of  market 
operators expanding in global markets. 

Regarding  the  access  of  third  country  firms  to  EU  markets,  it  is  not  harmonised 
under the MiFID but is left to the discretion of Member States as to who may access 
their  markets233.  Member  States  may  however  only  authorise  firms  to  access  their 
own State and also must not treat third country firms more favourably than EU firms. 
But this gives rise to a patchwork of national third country regimes granting access 
by third country investment firms and market operators to their markets. 

On sanctions, not all competent authorities have a full set of powers at their disposal 
to  ensure  they  can  respond  to  all  situations  with  the  appropriate  sanction 
corresponding to the severity of the MiFID violation observed.234  

The maximum levels of administrative pecuniary sanctions provided for in national 
legislation varies widely among Member States235 and in some cases the maximum 
fine can be considered low and insufficiently dissuasive. For example, in the case of 
violations of the minimum conditions for authorisation of investment firms such as 
the  need  to  have  adequate  organisational  arrangements  to  prevent  conflicts  of 
interests  from  adversely  affecting  the  interests  of  its  clients  (Articles  9  to  14  of 
MiFID), 17 Member States provide for maximum fines of less than 1 million and in 
6  of  them  the  maximum  amount  is  100  000  Euros  or  less.  Violations  of  investor 
protection rules (Articles 16 to 24 of MiFID) and market transparency rules (Articles 
25 to 30 of MiFID) can be sanctioned with a maximum of less than 15 000 Euros in 
some  Member  States.  When  the  gains  of  a  violation  are  higher  than  the  expected 
sanctions, the deterrent effect of the sanctions is undermined. This is reinforced by 
the  fact  that  the  offender  might  consider  that  his  offence  could  remain  undetected. 
But these maximum fines can also be considered low and insufficiently dissuasive in 
view of the substantial amount of damage to investors that such violations can cause 
–  in  recent  cases  damages  caused  by  failure  to  ensure  the  suitability  of  investment 
products for certain customers were estimated at several millions of Euros. 

Moreover,  some  Member  States  do  not  have  at  their  disposal  important  types  of 
sanctioning  powers  for  certain  violations.  Five  Member  States  do  not  provide  for 
public  reprimands/warnings  and  seven  Member  States  do  not  provide  for  the 
publication  of  sanctions,  even  though  it  is  acknowledged  that  publication  of 
sanctions  has  a  deterrent  effect  and  is  of  high  importance  to  enhance  transparency 
and maintain confidence in financial markets.  

These  divergences  and  weaknesses  may  render  the  sanctions  for  breaches  of  EU 
and 
insufficiently 
financial 

effective,  proportionate 

legislation 

services 

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dissuasive.236  They  may  create  distortions  of  competition  in  the  Internal  Market, 
and  financial  institutions  with  cross-border  operations  could  seek  to  exploit  the 
differences between the legislation in force in different Member States., which may 
be  detrimental  to  the  protection  of  investors  and  consumers  of  financial  services 
products alike. They can also have a negative impact on the trust between national 
supervisors and hence on cross border financial supervision. 

12.5. 

Problem 5: Insufficient investor protection  

A  number  of  provisions  in  the  current  MiFID  result  in  investors  suffering  from 
insufficient  or  inappropriate  levels  of  protection.  Specific  exemptions  and  unclear 
demarcation lines between products or services subject to higher levels of protection 
can lead to investors being sold financial instruments which are not appropriate for 
them and to make investment choices which are sub-optimal. 

12.5.1.  Uneven coverage of service providers  

First,  Member  States  have  the  option  not  to  apply  MiFID  to  firms  or  persons 
providing reception and transmission of orders and/or investment advice in relation 
to  a  broad  range  of  financial  instruments  (See  Annex  5.2.9.  Table  32).  Member 
States may only apply this exemption when the activities of the persons are regulated 
at  national  level,  but  MiFID  does  not  specify  any  details  of  what  this  national 
regulation should consist of.  

In view of the complexity of financial markets and products, investors often depend 
to a large extent on suitable recommendations provided by professional advisers237. 
In  this  respect  they  cannot  be  expected  to  inquire  as  to  the  regulatory  status  of  the 
adviser but should enjoy the same level of protection irrespective of the nature of the 
service  providers.  There  are  currently  over  100  000  individuals  or  firms  (mostly  in 
Germany) covered by the exemption, compared with around 8000 authorised MiFID 
firms  or  credit  institutions  providing  the  same  services  (see  5.2.9).  Exempting  this 
number  of  service  providers  even  on  a  national  basis  without  setting  a  minimum 
regulatory framework for investor protection no longer seems appropriate.  

Second, in the context of the Communication on packaged retail investment products 
(PRIPs),238  the  Commission  has  underlined  the  importance  of  ensuring  a  more 
consistent  regulatory  approach  concerning  the  distribution  of  different  financial 
products  to  retail  investors,  which  however  satisfy  similar  investor  needs  and  raise 
comparable  investor  protection  challenges.239  Specifically,  the  sale  of  structured 
deposits,  an  activity  almost  exclusively  carried  out  by  credit  institutions,  is  outside 
the  scope  of  EU  regulation.  This  represents  12%  of  the  combined  EU  market  for 
PRIPs.240  The  gap  in  terms  of  investor  protection  and  regulatory  arbitrage  is 
important. Investors in this market with comparable aims to those investing in other 
PRIPs, i.e. with either underlying securities or insurance  are at a disadvantage, while 
firms can be tempted to avoid rules applicable to the sale of other PRIPs and inflate 
sales of deposit-based products.  

Third, national regulators241 have raised concerns with respect to the applicability of 
MiFID  when  investment  firms  or  credit  institutions  issue  and  sell  their  own 
securities.  As  a  primary  market  activity,  issuance  of  financial  instruments  is  not 
covered  by  MiFID.  However  equities  and  bonds  issued  by  these  firms  represent  a 
sizeable share of total EU issuance. Issuance by financial services firms (as a proxy 

115 

 
 
  
 
for  investment  firms  and  credit  institutions)  are  very  significant  in  the  context  of 
issuance in Europe as a whole. Indeed according to Europe Economics, in 2009 over 
40  per  cent  of  equity  secondary  offering issuance  within  the  EMEA  region  was  by 
financial  services  firms.  This  is  equivalent  to  issuance  €120  billion.  The  share  of 
financials in total bond issuance is less clear but is likely to be substantial (financials 
is  the  largest  segment  in  terms  of  outstanding  corporate  bonds).  However  the 
significance  of  direct,  non-advised  sales  to  retail  investors  within  this  total  is  not 
known. In this respect, CESR has urged clarifying the applicability of MiFID to the 
direct and non-advised sales of these securities lest investors are unprotected in cases 
where they would reasonably expect the firm to be acting on their behalf.242 

12.5.2.  Uncertainty around execution only services 

MiFID allows investment firms to provide investors with a means to buy and sell so-
called non-complex financial instruments in the market, mostly via online channels, 
without undergoing any assessment of the appropriateness of the given product - that 
is,  the  assessment  against  knowledge  and  experience  of  the  investor.243  Individual 
investors value the possibility to buy and sell (essentially) shares based on their own 
assessments  and  understanding.244  Nonetheless,  there  are  three  potential  problems 
with the status quo which should be addressed on precautionary grounds. First, the 
financial crisis clearly underlines that access to more complex instruments needs to 
be strictly conditional on a proven understanding of the risks involved. Second, the 
ability  of  investors  to  borrow  funds  solely  for  investment  purposes  even  in  non-
complex  instruments,  thereby  magnifying  potential  losses,  needs  to  be  tightly 
controlled. Third the classification of all UCITS as non-complex instruments needs 
to  be  reviewed  in  light  of  the  evolution  of  the  regulatory  framework  for  UCITS, 
notably  when  assets  they  can  invest  in  are  themselves  considered  complex  under 
MiFID, for instance derivatives. In all these respects, the exact range of instruments 
and services covered under the execution-only regime today is not sufficiently clear 
and could lead to – avoidable – problems for investors. 

12.5.3.  Quality of investment advice 

In the context of the financial crisis and recent debates on the quality of investment 
advice, including the debate on PRIPs, several possible areas for improvement have 
emerged. Under MiFID intermediaries providing investment advice are not expressly 
required to explain the basis on which they provide advice (e.g. the range of products 
they  consider  and  assess)  and  more  clarity  is  thus  needed  as  to  the  kind  of  service 
provided  by  the  intermediary  and  to  the  conditions  attached  to  the  provision  of 
advice  on  an  independent  basis.  One  study  indicates  that,  at  present,  investment 
advice is unsuitable roughly half of the time.245 Compounded by cases of mis-selling 
amid  the  financial  crisis,  the  number  of  complaints  regarding  the  quality  of 
investment  advice  has  also  been  increasing.  Europe  Economics  has  searched  the 
databases  and  annual  reports  of  financial  services-focused  ombudsman  in  selected 
countries  (including  Belgium,  Czech  Republic,  France,  Germany,  Greece,  Ireland, 
Luxembourg,  Spain  and  the  UK)  in  order  to  investigate  the  recent  prevalence  (or 
even specific cases) of mis-selling or bad advice provided to retail clients: 

–  The  UK’s  Financial  Ombudsman  Service  opened  22,278  new  cases  relating  to 
investments  and  pensions  in  2009/10.246  Of  these,  62  per  cent  related  to 
complaints about sales and advice.  

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–  Germany’s  Ombudsmann  der  Privaten  Banken  reviewed  1,325  complaints 
relating to the provision of investment advice and asset management in 2008.247 In 
the latter case, the number of complaints about advice had quadrupled over 2007, 
which was attributed to the impact of the financial crisis. The complaints related 
to inadequate explanation of the specific risks attached to a particular security or 
the pressure exerted to purchase overly risky assets.  

–  Similarly  in  Greece  of  the  complaints  received  regarding  investment  business  a 
common one was that the key information regarding a particular product was not 
adequate.248  

12.5.4.  The framework for inducements 

MiFID  regulated  for  the  first  time  the  payment  of  various  types  of  incentives  to 
investment firms which can influence the choice and the promotion of products when 
firms provide services to clients (inducements). The MiFID rules for incentives from 
third parties require inducements to be disclosed and to be designed to enhance the 
quality of the service to the client249. These requirements have not always proven to 
be very clear or well articulated for investors250. Further, their application has created 
some  practical  difficulties  and  some  concerns,  especially  with  respect  to  portfolio 
management  and  investment  advice251,  and  may  lead  to  sub-optimal  choices  on 
behalf  of  the  investor.  This  inherent  conflict  of  interest  is  potentially  widespread: 
over  half  of  all  EU  investment  firms  and  credit  institutions  are  licensed  for  the 
provision  of  portfolio  management  and/or  investment  advice.252  The  problem  is 
partially already recognised in the national law, supervisory or industry practices of 
some Member States (e.g. UK, Italy).253 

12.5.5.  The provision of services to non retail clients and classification of clients 

The  MiFID  classifies  clients  in  different  categories  and  calibrates  protections 
accordingly. Conduct of business obligations fully apply only to retail clients while 
they apply partially or do not apply to professional clients and eligible counterparties.  

The  current  crisis  and  alleged  mis-selling  practices  involving  certain  categories  of 
non  retail  clients,  notably  local  authorities  and  municipalities,  have  shown  that  the 
ability  of  some  non-retail  clients  to  understand  the  risk  they  are  exposed  to, 
especially in the case of very complex products, may be inadequately reflected in the 
MiFID.  The  current  framework  for  clients'  classification  and  the  calibration  of 
applicable protections does not reflect their needs accurately. 

12.5.6.  The execution quality and best execution 

MiFID requires investment firms to execute orders on terms most favourable for the 
client  (best  execution).  This  obligation254  hinges  on  the  availability  of  data  on  the 
quality  of  execution  at  different  trading  venues  as  well  as  accurate  and  timely  pre- 
and post-trade transparency data (addressed in section 3.4 above). This combination 
enables firms to select the trading venues where they execute orders and to comply 
with  best  execution  obligations  on  an  on-going  basis,  as  well  as  to  review  their 
execution  policies  as  markets  evolve.  However,  MiFID  currently  does  not  require 
venues  to  publish  harmonised  data  on  execution  quality.  Potentially  relevant 
information  for  best  execution  purposes255  is  thus  not  systematically  available  in  a 
readily  comparable  format  to  market  participants256.  As  a  result,  investors  are 

117 

 
 
  
 
excessively  dependent  on  the  assurances  of  the  investment  firms  they  use  that  best 
execution  has  been  delivered.  This  can  propagate  sub-optimal  outcomes, 
inefficiency, and opportunities foregone. 

12.6. 

Problem  6:  Weaknesses  in  some  areas  of  the  organisation,  processes  and  risk 
controls and assessment of market participants  

The problem presents several dimensions. 

12.6.1.  Insufficient role of directors, weaknesses in the organizational arrangements for the 

launch of new products, operations and services, and internal control functions 

MiFID  requires  persons  who  direct  the  business  to  be  fit  and  proper,  establishes  a 
general  framework  for  organizational  requirement  and  regulates  specific  internal 
control  functions  (compliance  function,  risk  management  function,  internal  audit 
function).257  Events  during  the  financial  crisis  illustrate  the  importance  for  firms  to 
have  in  place  robust  corporate  governance  arrangements,  including  appropriate 
chains  of  accountability  and  involvement  of  directors,  as  well  as  strong  internal 
control functions258. Likewise, organisational checks and safeguards around the way 
investment  firms  design  and  launch  new  products  and  services  should  be  robust259. 
On  the  ground,  Member  State  practice  may  vary,  but  specific  shortcomings  in  the 
general  framework  of  MiFID  have  been  exposed  in  this  respect.  Notably  these 
concern  the  degree  of  experience  and  engagement  of  all  board  members  (not  just 
executive directors) and of  their direct responsibility regarding the operation of the 
internal control functions. 

12.6.2.  Specific  organizational  requirements  for  portfolio  management,  underwriting  and 

placing of securities  

Portfolio  management  on  a  client-by-client  basis  requires  a  specific  authorization 
under MiFID and is subject to the general organizational requirements and conduct 
of  business  rules260  but  the  area  of  the  actual  management  of  portfolios  on  a 
discretionary  basis  by  firms,  however,  is  not  covered  by  any  specific  provision. 
Inherently, the discretion enjoyed by the portfolio manager can nonetheless give rise 
to disputes regarding unsuitable or poor investment choices. Indeed, Member States 
have recorded numerous complaints where clients have challenged the way in which 
their  portfolio  has  been  managed.  The  review  of  the  published  annual  reports  of 
financial  services  ombudsmen261  did  reveal  some  problems  arising  in  relation  to 
discretionary portfolio management services. In particular, these were highlighted by 
the  ombudsmen  in  Belgium,  the  Czech  Republic,  France,  Germany,  Ireland, 
Luxembourg,  Spain  and  the  UK.  In  the  2010  Annual  Report  published  by  the  UK 
Ombudsman,  it  noted  that  the  complaints  made  about  discretionary  portfolio 
management  services  typically  involved  the  following  issues:262  (i)  A  failing  of 
administration of their portfolio; (ii) The portfolio was not managed in a ways that 
was initially agreed; (iii) A failure by the manager to diversify the investments made 
in  the  portfolio;  (iv)  A  manager  that  made  too  many,  or  too  few,  changes  to  the 
portfolio over a certain period of time. Only a few of the ombudsmen identified the 
number  of  cases  relating  to  discretionary  management.  For  instance,  the  German 
private  banking  ombudsman  identifies  274  cases  relating  to  discretionary  portfolio 
management (9 per cent of the cases it handled in the securities area, 4 per cent of its 
total cases workload); in Luxembourg seven of the cases settled related to this area 
(being three per cent of the total).  

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including  services 

For underwriting and placing, corporate finance business is covered under different 
investment  and  ancillary  services  in  MiFID:  underwriting  and  placing,  advice  to 
undertakings, 
to 
related 
underwriting.263 Firms providing the investment service of underwriting and placing 
need  to  be  authorised  and  are  subject  to  MiFID  requirements.  Nevertheless,  some 
specific  practices264  contrary  to  firms'  obligations  to  take  all  reasonable  steps  to 
prevent conflicts of interest, such as underpricing or overmarketing of securities to be 
issued have recently been noted.  

to  mergers,  services 

related 

12.6.3.  Telephone and electronic recording  

MiFID  gives  Member  States  the  possibility  of  requiring  firms  to  record  telephone 
and  electronic  communications  involving  client  orders.  Most  Member  States  have 
used  this  option.  However,  the  wide  discretion  introduced  by  MiFID  has  led  to 
different approaches being adopted by Member States, ranging from the lack of any 
obligations  to  the  imposition  of  very  detailed  rules  in  this  area265  (see  also  Annex 
5.2.11 Table 35). There is therefore no consistent framework across Europe on this 
question  creating  differences  in  the  supervisory  tools  available  to  regulators  and 
disparities between firms providing the same services in different Member States 

119 

 
 
  
 
13. 

ANNEX 3: ANALYSIS OF IMPACTS AND CHOICE OF PREFERRED OPTIONS AND INSTRUMENTS 

This  table  highlights  the  key  initiatives  under  this  review  with  their  respective  level  of  priority,  their  link  with  international  or  other  EU 
initiatives, the impact on market structure and/or business models (i.e. level of transformational impact), the level of execution risks, and the 
level of costs. Key initiatives are highlighted in grey.  

Regulation of market 
structure taking into a/c 
needs ofSMEs 

Set up relevant 
framework around new 
trading practices 

Improve trade 
transparency on equities 
and non equities 

Reinforce powers of 
regulators and 
coordination in 
supervisory practice 
Improve transparency 
towards regulators (i.e. 
transaction reporting) 

Improve oversight of 
commodities markets 

– 

TABLE 11: Key initiatives 

Operational objectives

Level of priority 
(high/medium) 

International initiative or 
link with other EU 
initiative 

Yes (G20 trading of 
derivatives; SME 
financing) 

Yes (IOSCO direct 
market access) 

High 

Medium 

High 

Level of 
transformational 
impact (high/medium/ 
low) 
Medium to high 
(creation of OTFs)

Level of       
execution risk 
(high/medium/ low)

Level of costs 
(high/medium/ low)

Low to medium 

Medium 

Medium 

Medium 

Low 

Yes (G20 
transparency of 
derivatives) 

Low (for equities) 
to high (non 
equities) 

Low to high 

Medium 

Medium 

Yes (Larosière 
Group; sanctions) 

Medium 

Low 

Low 

Medium 

Yes (MAD review) 

Low 

Low 

High 

Yes (G20) 

Medium 

Medium 

Low (costs 
incurred under 
EMIR) to high 
Low 

120 

 
 
  
 
Reinforce regulation on 
products and services 

Medium 

Yes (PRIPS 
structured deposits) 

Low 

Low 

Medium 

Strengthen conduct of 
business rules for IF 
Stricter organisational 
requirement for IF 

High 

No 

Low to medium 

Medium 

High 

Medium 

Yes (Corporate 
governance EU work 
stream) 

Low 

Low 

Medium 

121 

 
 
  
 
 
13.1.  Regulate appropriately all market structures and trading practices taking into 

account the needs of smaller participants 

Option 1 – take no action at EU level. 

As explained in the problem definition, there are shortcomings in the current design 
of  MiFID  with  respect  to  providing  a  level-playing  field  for  the  different  types  of 
trading  venues  existing  in  the  market  and  regulating  them  appropriately.  These 
shortcomings  would  remain  if  no  action  at  EU  level  was  taken.  In  addition,  SME 
financing via securities markets would remain at its current level.  

Trading platforms 

Option 2 - Introduce a new category of Organised Trading Facilities (OTF) besides RMs and 
MTFs  to  capture  current  (including    broker  crossing  systems  -  BCS)  as  well  as 
possible  new  trading  practices  while  and  further  align  and  reinforce  the 
organisational and market surveillance requirements of regulated markets and MTFs 

Establishing a new category of organised trading facilities would have the advantage 
of  applying  appropriate  trading  venue  specific  obligations  to  a  variety  of  different 
types of systems that involve the bringing together of multilateral or bilateral orders, 
for  example  crossing  systems,  "swap  execution  facility"-type  platforms,  hybrid 
voice/electronic broking systems and any other type of organised execution systems 
that are used by firms. An appropriate new regulatory category would be created that 
is  flexible  enough  to  meet  the  differing  nature  of  these  systems.  It  would  also  be 
future-proof  as  the  category  would  be  widely  defined  to  capture  new  systems  that 
may  develop  in  the  future.  It  would  also  result  in  the  application  of  pre-trade 
transparency requirements and therefore reduce the number of orders that are dark. 
This  could  benefit  best  execution  and  price  formation.  This  option  will  also  enable 
full  convergence  with  the  US  regulation  currently  being  discussed  regarding 
derivatives  trading  (the  Swap  Execution  Facilities  –  SEFs  under  the  Dodd  Frank 
Act).  

Further  aligning  the  detailed  rules  applying  to  regulated  markets  and  MTFs  would 
have  the  advantage  of  ensuring  that  similar  rules  apply  where  entities  essentially 
conduct the same type of business. Especially in equities trading there is an intense 
competition between Regulated Markets and MTFs and would therefore help create a 
level playing field. 

Requiring  co-operation  and  an  exchange  of  information  between  trading  venues 
would  also  appropriately  reflect  the  emergence  of  certain  MTFs  which  nowadays 
have  a  sizable  market  share  in  particular  in  the  trading  of  European  blue  chips.  In 
practice  this  means  that  equities  are  traded  intensively  on  a  significant  number  of 
trading venues so that a higher degree of co-operation between those trading venues 
can help reducing the probability of cross venue market abuse strategies. Intensified 
cooperation  and  information  exchange  would therefore  improve  market  integrity  in 
those cases where trading of financial instruments is spread over a number of venues.  

A disadvantage of streamlining the rules for regulated markets and MTFs could be 
that the compliance costs for some MTFs would increase. These costs may be passed 

122 

 
 
  
 
 
on to users so that this measure may cut into some of the reductions in trading costs 
stakeholders have experienced following the implementation of MiFID.  

There  are  no  obvious  disadvantages  to  requiring  an  enhanced  co-operation  and 
information exchange between different trading venues trading identical instruments. 
Establishing the initial routines for co-operating and exchanging information will be 
associated with some costs. However, the organisations affected run highly efficient 
state  of  the  art  IT  systems  so  that  liaising  with  other  venues  should  not  be  overly 
burdensome  and  any  costs  incurred  should  be  more  than  mitigated  by  the  positive 
impact achieved on market integrity. 

Disadvantages  in  relation  to  establishing  the  new  category  of  OTF  would  also  be 
associated with costs. For firms operating the various types of systems that may be 
an OTF there will be initial costs in determining whether the system constitutes an 
OTF  and  how  the  rules  apply  to  the  system.  There  will  then  be  ongoing  costs  of 
complying with the new organisational and transparency requirements.  

Option 3 – Expand the definition of MTF so that it would capture trading on broker crossing 

systems (BCSs) (Alternative to option 2) 

This option would have the advantage of applying trading venue specific rules to a 
specific  type  of  system  previously  only  regulated  as  an  investment  firm  thus 
improving market transparency, creating a level playing field among trading venues 
and promoting legal certainty. 

However,  a  disadvantage  could  be  that  indiscriminately  applying  the  MTF  rules  to 
BCS may be too inflexible and entirely change their business model. This would fail 
to recognise the functional differences between a broker crossing its client orders (a 
traditional  and  legitimate  activity  carried  on  by  brokers)  and  the  operation  of  an 
exchange. Finally, this approach may not be future proof as if new types of systems 
emerge in the future that are not broker crossing systems they would not be captured. 

Trading of derivative instruments 

Option  4  –  Mandate  trading  of  standardised  OTC  derivatives  (i.e.  all  clearing  eligible  and 
sufficiently liquid derivatives) on regulated markets, Multilateral Trading Facilities 
(MTFs) or organised trading facilities (OTFs) (Additional to options 2 3) 

One  advantage  of  implementing  this  option  would  be  that  a  previously  opaque 
market which entails systemic risk would be moved to more transparent and strictly 
supervised  platforms.  In  addition,  this  option  would  enhance  competition  between 
trading venues and improve the quality and reliability of prices quoted for derivatives 
which  are  currently  traded  OTC.  Investors  looking  e.g.  for  an  OTC  derivative  for 
hedging purposes of the market may find it difficult to make an informed judgement 
about  the  price  they  are  quoted  because  of  the  current  opacity  of  the  market.  By 
implementing  this  option  reference  prices  created  through  trading  on  electronic 
platforms  would  be  available  improving  the  bargaining  position  of  investors, 
especially  the  smaller  institutional  ones.  This  option  would  also  be  consistent  with 
the  new  US  rules  that  allows  trading  of  cleared  OTC  derivatives  to  take  place  on 
swap execution facilities, while establishing a framework of trading venues suitable 
for EU markets and respecting the EU treaty and case law as regards the delegation 
of powers to agencies such as ESMA. Exemptions would be provided for corporate 

123 

 
 
  
 
end-users,  in  order  to  avoid  imposing  central  clearing  and  circumventing  the 
the  Commission  proposal  on  OTC  derivatives,  central 
exemptions  under 
counterparties and trade repositories.266 

A disadvantage could be that derivatives traded on electronic platforms may not be 
sufficiently  customised  to  fulfil  the  particular  needs  of  certain  investors  trying  to 
hedge  their  positions.  However,  bespoke  derivatives  would  still  exist  as  only  those 
derivatives are moved to platforms where such a move is appropriate, i.e. if there is a 
high degree of standardisation and also liquidity. The second disadvantage is that this 
shift  of  trading  on  organised  venues  from  previously  OTC  traded  products  could 
dramatically  change  the  business  model  of  the  main  dealers  and  possibly  lead  to  a 
substantial  drop  in  their  ability  to  provide  liquidity.  This  could  have  a  significant 
detrimental impact for investors and users of these instruments.  

Option 5 – Set targets in legislation for trading in standardised OTC (i.e. all clearing eligible 
and  sufficiently  liquid  derivatives)  derivatives  to  move  to  organised  venues 
(Alternative to option 4) 

The advantages of this option would be that it goes with the trend of market practice 
(with  derivatives  increasingly  being  traded  on  automated  trading  facilities)  and 
avoiding  the  need  for  protracted  negotiations  on,  first,  the  range  of  instruments  to 
which  mandates  should  apply,  and  second,  the  range  and  exact  characteristics  of 
venues that could qualify under the G20 characterisation of exchanges and electronic 
trading platforms.  

The  disadvantages  would  be  the  need  to  establish  suitably  ambitious  yet  attainable 
target levels per asset class, the need for rigorous monitoring of the targets, as well as 
a back-up enforcement procedure in case they are not met. Further, the G20 text on 
trading of derivatives should be read together with the agreement on clearing. That 
is, where a mandatory approach is chosen on the latter, it is arguably incoherent to be 
significantly less firm on the approach to trading, i.e. to extend the notion of "where 
appropriate" beyond the scope of applicable venues and instruments to the choice of 
regulatory means. 

SME markets 

Option  6  –  Introduce  a  tailored  regime  for  SME  markets  under  the  existing  regulatory 

framework of MTFs (Additional)  

The introduction of a tailored regime for SME markets under the existing regulatory 
framework  of  MTFs  would  mean  to  set  up  a  harmonized  standard  which  market 
operators may apply when creating a SME segment. However, the EU SME regime 
would not be a mandatory one, so market operators may decide not to create such a 
segment. 

If  market  operators  decide  to  make  use  of  the  EU  regime  for  SME  markets,  they 
would  need  to  comply  with  organisational  and  system  requirements  to  be  further 
defined and specified in delegated acts. To build market confidence the SME regime 
will ensure the high level of investor protection as provided for in regulated markets 
in  order  to  gain  a  quality  label.  For  example,  market  abuse  legislation  should  be 
applied. This regime will lead to more visibility of SMEs and therefore will attract 

124 

 
 
  
 
more  investments.  Finally,  more  investments  will  provide  for  more  liquidity  and 
make applicable costs proportionate. 

Implementing this option would have the advantage of a quality segment providing 
for more visibility and therefore more liquidity while at the same time reducing the 
costs  of  administrative  burdens  for  issuers,  such  as  for  instance  a  proportionate 
disclosure regime according to the amended Prospectus Directive. In particular, SME 
markets  under  such  a  tailored  regime  will  gain  a  positive  perception  due  to  high 
regulatory  standards  notably  of  investor  protection.  Based  on  this  a  quality  label 
could  emerge.  This  will  lead  to  more  visibility  of  the  SMEs  listed  and,  in 
consequence,  will  attract  more  investments.  More  investments  will  broaden  the 
capital  pool  available  and  therefore  reduce  volatility  while  increasing  liquidity  in 
markets. This will make it more attractive for SMEs to seek an admission to trading 
on  a  MTF  thus  making  it  easier  for  them  to  access  the  capital  markets  to  raise 
finance.  Furthermore,  harmonized  standards  will  allow  a  network  among  SME 
markets  to  broaden  the  capital  pool  accessible  for  SMEs.  Therefore,  it  will  bring 
more  issuers  and  above  all  investors  to  these  markets,  which  should  facilitate  their 
growth and thus the financing of SMEs expansion. The setting up of a harmonised 
regulatory framework will not be sufficient to guarantee the emergence of a network 
of markets as national traditions in terms of family ownership or financing mode of 
SMEs may persist. Therefore, flanking measures such as setting up specific financing 
schemes at European level for SMEs may be needed to strengthen the establishment 
of a real network of SMEs markets. Once such connection is achieved, it will allow 
SMEs  to  access  to  a  broader  capital  pool  and  raise  larger  amounts  of  funds  which 
will decrease the relative cost of capital versus bank financing. 

A  disadvantage  could  be  that  market  operators  do  not  employ  the  framework 
provided.  Nevertheless,  as  the  use  of  the  EU  tailored  framework  is  not  mandatory, 
flexibility is left to market operators to use a different model. Then no quality label 
of  the  new  regime  may  emerge.  Furthermore,  lacking  a  common  basis,  markets 
would not be able to establish networks among themselves. Finally, the situation for 
SMEs seeking finance on capital market would stay as difficult as today. 

Option  7  –  Promote  an  industry-led  initiative  to  enhance  the  visibility  of  SMEs  markets. 

(Alternative to option 6) 

Instead of setting up an EU harmonized regulatory framework for SME markets an 
industry-led  initiative  could  be  promoted  developing  market  standards  leading  to  a 
harmonized appearance of SME markets and finally networks between SME markets 
across  the  EU.  The  industry  may,  according  to  SMEs'  and  investors'  demand  and 
needs,  create  a  self-regulated  standard  model  taking  into  account  existing  market 
models and practises. This option could imply the use of some financing tools (e.g. 
introduction  of  this  type  of  financing  in  the  Competitiveness  and  Innovation 
Framework Programme267) helping to develop further this type of industry initiative.  

The  main  advantage  of  this  option  would  be  that  it  should  help  SME  markets  to 
develop further their networks by agreeing on common exchange-regulated standards 
and practises. This option provides flexibility for market operators whether and what 
rules to apply. A framework agreed by everyone has the advantage that it will gain 
more acceptances by market operators. 

125 

 
 
  
 
However,  the  downside  is  that  an  SME  market  segment  agreed  among  market 
operators  may  not  attract  the  same  interest  at  investor-side.  Industry  negotiations 
may lead to a weak framework providing for insufficient provision for instance with 
regard  to  investor  protection.  However,  a  poor  perception  will  not  only  expel 
investors  but,  in  consequence,  also  may  have  negative  spill  over  effects  on  the 
issuers'  reputation.268  The  past  experience  (in  the  1990s)  with  second-tier  markets 
based  on  industry  developed  standards  is  not  positive:  all  of  them  disappeared,  but 
AIM269.  

– 

TABLE.12: Rise and Fall of the European New Markets 

Source: Mendoza270 

Furthermore, as market operators are competitors, they may look for their individual 
business advantage271 and may avoid entering into networks with other operators and 
allowing them access to their market segment. Market operators already today rarely 
use  the  possibility  to  set  harmonized  industry  standards  across  Europe  to  create 
networks  enhancing  SME  markets'  visibility  and  liquidity.  Thus  an  industry-led 
initiative might need a regulatory framework proposed under option 8 above. 

13.2.  Regulate appropriately new trading technologies and address any related risks 

of disorderly trading 

Option 1 – take no action at EU level. 

As  explained  in  the  problem  definition,  rapid  technological  advances  in  the  recent 
past  have  transformed  trading  practices  in  the  markets  due  to  the  increased  use  of 
algorithmic  trading  with  high  frequency  trading  representing  one  specific  type  of 
automated  trading.  Currently  the  MiFID  framework  lacks  specific  measures  to 
address these and other similar future technological developments. If the regulatory 
framework is not adapted to address such new developments in the markets risks of 
market disorder and systemic failure are increased.  

Organizational requirements 

126 

 
 
  
 
 
Option 2 – Narrow the exemption granted to persons dealing on own account to ensure that  
high  frequency  traders  that  are  a  direct  member  or  direct  participant  of  a  RM  or 
MTF are authorised  

The effect of this change is that all entities engaging in high-frequency trading that 
are a direct member or direct participant of a RM or MTF would be required to be 
authorised as an investment firm under MiFID so that they would be supervised by a 
competent authority and would be required to comply with 

MiFID provides organisational requirements for firms (e.g. systems, compliance and 
risk management obligations). The application of MiFID requirements and oversight 
of  activities  by  financial  supervisors  would  decrease  the  risks  of  systemic  failures 
and/or disorderly trading potentially arising from these activities.  

A disadvantage of such a measure would be that these traders would incur costs for 
the  authorisation  process  and  ongoing  compliance  with  MiFID  requirements. 
However, these costs are also incurred by other participants in the financial markets, 
so  imposing  financial  supervision  on  these  players  who are  increasingly significant 
and active market participants seems appropriate.  

Option 3 – Reinforce organisational requirements for firms involved in algorithmic or HFT 
trading  and  for  firms  providing  sponsored  or  direct  market  access  facilities 
(additional to option 2) 

Implementing this option would have the advantage that it would place the onus on 
firms  involved  in  algorithmic  and  high  frequency  trading  to  have  in  place  specific 
measures to mitigate some of the main systems risks inherent in algorithmic and high 
frequency  trading.  Further,  for  firms  that  allow  their  systems  to  be  used  by  other 
traders  it  would  clearly  attribute  responsibility  for  any  misuse  of  the  access  to  the 
investment  firm  granting  access.  Having  proper  risk  controls  and  filters  in  place 
would help prevent disorderly trading emanating from entities acting on the markets 
via  such  access  arrangements.  The  obligation  to  disclose  details  of  algorithms  to 
regulators upon request would ensure more rigorous oversight.  

This option does not have any obvious disadvantages apart from a possible marginal 
increase in costs for the relevant firms.  

Option 4 – Reinforce organizational requirements (e.g. circuit breakers, stress testing of their 

trading systems) for market operators (additional to option 2 and 3) 

Implementing  the  option  would  help  mitigate  and  prevent  the  risk  of  potential 
disorderly  trading  associated  with  automated  trading  and  other  unforeseen  market 
developments.  An  additional  advantage  would  be  that  circuit  breakers  in  particular 
can protect investors against execution of their orders at a price level not representing 
the real value of an instrument but rather caused by high volatility due to disorderly 
trading conditions. This option is very much in line with the measures considered by 
the  US  authorities  further  to  the  flash  crash  of  6  May  2010.  Significant 
interconnection  between  markets  in  the  US  means  that  having  adequate  circuit 
breakers and stress testing was of greater importance to prevent widespread system 
risks. While market infrastructures are not interconnected in the same way in Europe 
as in the US, there is still significant potential for market disturbances if operators of 

127 

 
 
  
 
venues  do  not  have  in  place  clear  circuit  breakers  and  if  trading  systems  have  not 
been properly tested to prevent systems crashing 

Implementing  this  option  would  increase  compliance  costs  for  market  operators. 
However, as these costs would help prevent disorderly trading or system breakdowns 
which could have negative consequences for market users and the reputation of the 
market  operator,  they  appear  to  be  a  justified  and  essential  investment  in  the  best 
interests of markets. 

Activity of HFT 

Option 5 – Submit high frequency traders to requirements to provide liquidity on an ongoing 

basis (additional to 2, 3 and 4) 

The advantage of implementing this option would be to ensure that  high frequency 
traders  cannot  abruptly  enter  or  leave  the  market  for  an  instrument  resulting  in  a 
sudden increase or decline in liquidity for that financial instrument. For example if 
there  were  adverse  market  conditions  a  withdrawal  from  the  market  could  cause  a 
sudden drain in liquidity which could exacerbate price movements and volatility for 
an instrument.  

A disadvantage could be that high frequency traders may refrain from participating 
in  the  markets  as  they  would  not  want  to  take  on  liquidity  provision  obligations, 
especially in adverse market conditions.  

Option 6 – Impose minimum resting period for orders (alternative to 5) 

Implementing this option would stop high frequency traders and algorithmic traders 
from  testing  the  depth  of  order  books  by  submitting  and  cancelling  orders  in  very 
quick succession. This would put less stress on the IT systems of market operators 
reducing  the  risk  of  systemic  failures.  If  such  practices  constitute  market  abuse 
imposing  a  minimum  latency  period  could  stop  them  thus  preventing  disorderly 
trading and promoting market integrity.  

A disadvantage would be that a minimum latency period would limit market liquidity 
and  efficiency  and  price  discovery.  The  ability  to  constantly  update  orders  helps 
maintain a tight bid-ask spread. In so far as some automated trading practices can be 
abusive  this  is  an  issue  that  will  be  addressed  in  the  review  of  the  Market  Abuse 
Directive.  This  option  would  also  amount  to  a  prohibition  of  many  forms  of 
algorithmic and high frequency trading strategies that are considered to be beneficial 
to the market (e.g. market making and arbitrage strategies) where constantly updating 
orders is essential to enable the firm to provide the best prices and mitigate its risk. In 
addition, this measure could also indiscriminately affect other forms of trading where 
it is necessary to cancel or update orders. It therefore has the potential to distort the 
functioning  of  the  market  and  create  various  unintended  consequences.  Finally, 
defining the minimum period would be highly controversial and sophisticated market 
participants  may  find  innovative  ways  to  exploit  this  resting  period  to  their 
advantage. 

128 

 
 
  
 
Option 7 – Impose an order to executed transactions ratio by imposing incremental penalties 
on cancelled orders and setting up minimum tick size (alternative to 5 and 6) 

The advantages described in option 6 would also be attained by this approach, i.e. the 
stress on IT systems would be alleviated and high frequency and algorithmic traders 
would be limited in their attempts to test the depth of the order book. The minimum 
tick  size  would  also  limit  the  scope  of  arbitrage  for  HFT  and  would  also  avoid 
unsound competition between trading venues that may be tempted to lure liquidity by 
reducing tick size to ridiculous levels. 

The  disadvantages  however,  would  be  less  severe  than  described  under  option  6. 
This  measure  would  in  all  likelihood,  provided  that  the  ratio  is  suitably  calibrated, 
only affect the high frequency traders or algorithmic trading activity it is targeted at. 
Market  liquidity  and  efficiency  and  the  quality  of  price  discovery  should  not  be 
adversely affected. Assuming that the ratio and the system of penalties is effectively 
calibrated  then  risks  would  be  effectively  addressed  while  minimising  the  adverse 
effect  on  spreads.  Market  operators  would  be  best  placed  to  calibrate  the  optimal 
approach that fits for the particular market concerned.  

13.3. 

Increase trade transparency for market participants 

Option 1 – take no action at EU level. 

It  is  described  in  the  problem  definition  that  the  current  transparency  regime  for 
equities  has  exhibited  shortcomings  in  relation  to,  for  example,  the  calibration  of 
existing waivers, the timing of post-trade information and the quality in the reporting 
and publication of trade data. In addition, the MiFID regime currently does not cover 
non-equities at all where the existing data reporting tools available in the market are 
not considered sufficient. All of these shortcomings would remain if no action at EU 
level was taken.  

Trade transparency for equity markets 

Option  2  –  Adjust  the  pre-  and  post-trade  transparency  regime  for  equities  by  ensuring 
consistent  application  and  monitoring  of  the  utilisation  of  pre-trade  transparency 
waivers,  by  reducing  the  delays  for  post-trade  publication,  and  by  extending  the 
transparency  regime  applicable  to  equities  to  shares  traded  only  on  MTF  or 
organised trading facilities  

The  package  of  measures  enrolled  in  this  option  would  improve  the  transparency 
information  available  in  the  European  markets.  More  specifically,  clarifying  and 
streamlining  the  rules  on  pre-trade  transparency  waivers  would  ensure  that  the 
exemptions  to  pre-trade  transparency  are  kept  to  the  absolute  minimum  necessary 
and  divergences  in  application  between  Member  States  would  be  reduced 
contributing to a level-playing field. On the post-trade side, the envisaged measures 
would  promote  swifter  access  to  data  which  should  facilitate  the  consolidation  of 
data, make it more useful for market participants and overall improve the efficiency 
of the price discovery process. Finally, extending the transparency regime to shares 
only  traded  on  MTFs  or  organised  trading  facilities  would  have  the  advantage  of 
making  the  trading  in  those  instruments  visible  to  the  market  improving  overall 
transparency and also levelling the playing field.  

129 

 
 
  
 
There  are  no  obvious  disadvantages  to  streamlining  the  rules  for  the  pre-trade 
transparency  waivers.  For  post-trade  transparency  reducing  the  maximum  deadline 
for  real-time  reporting  may  require  a  certain  investment  by  investment  firms  in  IT 
systems.  However,  one  must  bear  in  mind  that  already  the  general  rule  is  that 
transactions  need  to  be  published  as  close  to  real  time  as  possible  with  publication 
after three minutes being the exception rather than the norm. Therefore firms should 
already  have  the  necessary  infrastructure  in  place  and  any  adjustments  due  to  this 
rule  change  should  be  of  a  minor  nature.  A  potential  disadvantage  of  reducing  the 
permissible delays for publishing large transactions could be that liquidity providers 
refrain from committing capital due to concerns that transactions would be disclosed 
to the market before they can unwind a large position. However, this concern can be 
addressed  by  an  appropriate  calibration  of  the  delays  that,  although  shorter  remain 
permissible.  Also  extending  the  scope  of  the  transparency  regime  to  shares  traded 
only on MTFs or organised trading facilities only could also be met by concerns that 
this may cause a further drop in liquidity for shares that may not be overly liquid to 
begin  with.  However  the  MiFID  equities  regime  does  entail  a  sufficient  degree  of 
detail to cater for illiquid shares by allowing pre-trade waiver and post-trade deferral 
options.  

Option  3  –  Abolish  the  pre-trade  transparency  waivers  and  the  deferred  post  trade 

publication regime for large transactions (Alternative to option 2) 

An advantage could be that all trading would be instantly transparent to the investing 
public  as  all  options  for  not  making  orders  transparent  or  executed  transactions 
immediately  transparent  would  be  repealed..  Also  such  a  measure  would  create  the 
ultimate  level-playing  field  as  there  could  be  no  differences  in  the  national 
implementation and application of waivers.  

However, total transparency does have its drawbacks as market participants will be 
reluctant to submit large orders to the markets if they are displayed instantaneously. 
Especially liquidity providers would refrain from committing capital out of fear that 
the market turns against them and they end up with significant losses because they 
could not manage the order properly or do not have time to unwind a position while 
the disclosure is being delayed on the post-trade side. Investors would be tempted to 
further  break  orders  into  smaller  sizes  but  this  could  multiply  execution  costs.  In 
addition, such a total transparency regime would reduce investor protection as useful 
order management facilities, such as stop orders (i.e. a stop order is an order to buy 
or sell a stock once the price of the stock reaches a specified price, known as the stop 
price), would not be available anymore. Also this regime would work against market 
efficiency as the instantaneous display of large orders can cause unexpected market 
swings and agitation which may lead to a dry up in liquidity and a widening of bid-
offer spreads thus reducing the quality of the price discovery process.  

Further  the  benefits  in  terms  of  transparency  are  likely  to  be  limited  as  a  recent 
CESR  has  shown  that  over  90%  of  trading  in  EEA  shares  on  organised  trading 
venues are currently pre-trade transparent. 

Finally,  this  option  would  put  EU  trading  venue  at  a  significant  commercial 
disadvantage to venues outside the EU where such waivers are a common and long 
established feature of markets (cf. Annex 14 describing the situation in the US).  

Trade transparency for non-equities markets 

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Option 4 – Introduce a calibrated pre and post trade transparency regime for certain types of 

bonds and derivatives (Additional to option 2 or 3) 

Implementing  this  option  would  deliver  advantages  for  transparency  information 
available  freely,  the  intensity  of  competition  and  potentially  market  efficiency. 
Investors  would  have  a  better  picture  of  the  options  available  to  them  due  to 
additional  price  information  available  to  everybody  rather  than  quality  information 
only being available to a selected few professional players who can then make use of 
their  informational  advantages.  Therefore  this  extended  access  to  transparency 
information  across  asset  classes  would  level  the  playing  field  between  investors, 
including  those  from  the  retail  side.  In  the  medium-term  it  may  lead  to  efficiency 
gains and an improved price discovery process as transparency and an enlarged view 
of  what  is  available  in  the  market  for  investors  may  enforce  competition.  As  an 
additional advantage, the tailor-made approach envisaged here per asset class and per 
instrument  would  ensure  that  the  transparency  provisions  tie  in  with  the  specific 
characteristics of the market in each particular asset class. This would help avoiding 
detrimental effects to liquidity and market diversity.  

A  disadvantage  of  this  option  could  be  that  too  much  transparency  may  have  a 
detrimental  effect  on  liquidity  as  market  participants  and  especially  market  makers 
may  be  reluctant  to  commit  capital  if  their  quotes  or  trades  are  displayed  in  public 
and the market may turn against them. However, this disadvantage can be overcome 
by  carefully  calibrating  the  transparency  rules  for  each  specific  instrument  in  each 
asset  class  so  that  an  appropriate  equilibrium  is  found  between  transparency  and 
liquidity.  This  calibration  would  be  especially  important  for  bonds  with  small 
outstanding such as the ones issued by smaller Member States. 

Option  5  –  Introduce  a  calibrated  post  trade  only  transparency  regime  for  certain  types  of 

bonds and derivatives (Alternative to option 4) 

The  objectives  attained  by  option  4,  i.e.  increasing  market  transparency  and 
improving  market  efficiency  would  also  be  achieved  by  this  option,  however  to  a 
lesser extent as only post-trade information would be covered while the information 
on  present,  real-time  trading  opportunities  on  the  pre-trade  side  would  still  not  be 
available to the public on a non-discriminatory basis. A potential advantage could be 
that  the  concerns  regarding  an  impact  on  market  liquidity  would  be  diminished. 
Investors may be less worried about information leakage and more willing to commit 
capital if their order information pre-trade would remain in the dark. 

On the downside, while post-trade information is important for the market the same 
goes for pre-trade information especially for investors looking to "hit" a quote in a 
particular  moment  and  in  order  to  remove  information  asymmetries.  Therefore, 
rather  than  leaving  pre-trade  transparency  entirely  outside  the  new  regulatory 
approach  designing  a  framework  where  pre-  and  post-trade  information  is  custom-
designed  for  each  instrument  including  waivers  and  delays  in  disclosure  where 
appropriate appears as the more intelligent, comprehensive and flexible approach to 
achieve the desired objectives.  

Cost and consolidation of trade data 

Option  6  –  Introduce  measures  to  reduce  the  costs  of  data  notably  by  requiring  the 
unbundling of pre and post trade data and provide guidance on reasonable costs of 

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data, and improve the quality and consistency of post-trade data by the set up of a 
system  of approved  publication arrangements (APAs) (Additional to options 2  or 3 
and 4 or 5)  

Preventing the sale of bundles of pre and post trade data unless the constituent parts 
of  the  bundle  are  also  made  available  separately  at  a  reasonable  price  would 
contribute to lower data costs for investors while also facilitating the establishment 
of a consolidated tape (see options 8 and 9) at an affordable cost. Developing ESMA 
standards on criteria for calculating what constitutes a reasonable cost for data should 
further contribute to decreasing the costs of obtaining market data for stakeholders. 
The  standards  would  introduce  a  level  of  transparency  to  costs  previously  not 
available. ESMA standards to further harmonise both the content and format of post 
trade  data  would  significantly  improve  the  ability  of  data  providers  to  consolidate 
post trade data. The establishment of APAs and the requirement for investment firms 
to  use  them  as  a  means  of  publication  would  improve  overall  data  quality  and 
accessibility. These advantages would be attained as the APAs would be subject to 
an authorisation and on-going supervision process needing to adhere to strict quality 
standards. As a consequence they would be obliged to publish market data in a way 
facilitating  the  overall  consolidation  of  European  market  data.    Finally,  prescribing 
the  release  of  data  free  of  charge  15  minutes  after  the  trade  would  improve  the 
overall accessibility of the dealings and movements on financial markets in particular 
for retail investors. 

The  primary  disadvantage  associated  with  this  group  of  measures  for  investment 
firms  could  be  the  increase  in  costs  by  having  to  employ  APAs.  However,  this 
disadvantage could be mitigated as APAs would presumably operate in a competitive 
environment so that they would offer their services at a reasonable cost. The use of 
uniform  reporting  requirements  resulting  from  the  establishment  of  APAs  would 
greatly benefit consumers of financial data products as they would no longer struggle 
to  cross  map  data  from  data  vendors,  making  it  easier  for  them  to  switch  between 
data  providers  and  giving  them  the  freedom  to  choose  the  individual  data  products 
that best suit their business needs. The other measures under this option do not entail 
any obvious disadvantages.  

Option  7  -  Reduce  data  costs  by  establishing  a  system  for  regulating  the  prices  of  data 

(Additional to option 6) 

An advantage of this option would be that costs for investors for getting hold of data 
could  be  controlled.  Entities  consolidating  data  and  investors  would  have  easier 
access to the data and it could be used more efficiently for best execution purposes 
and, possibly, more economically by the users of the data. 

However, such intervention into the operation of financial markets would be alien to 
the  financial  supervisory  system  which  sets  the  legal  framework  for  market 
participants  but  so  far  does  not  prescribe  prices  charged  by  participants  in  the 
financial markets. In practical terms while driving down the costs this measure may 
have  a  detrimental  effect  on  data  quality.  If  trading  venues  are  severely  limited  in 
their  ability  to  charge  for  making  data  available  they  may  put  fewer  resources  into 
that part of their business and the service they provide to the market may be lacking 
innovation and the use of state of the art technical equipment.  

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Option 8 – Improve the consolidation of post-trade data for the equities market by the set up 
of a consolidated tape system operated by one or several commercial entities for all 
types of financial instrument. Introduce a consolidated tape for non-equities markets 
after  a  period  of  2  years  under  the  same  set  up  as  for  the  equities  markets 
(Additional to option 6 or 7) 

This  option  would  be  complementary  to  Option  6  as  the  data  pre-managed  by  the 
APAs would then be submitted to dedicated consolidators that would need a separate 
approval. The function of the single or several consolidators would be to collect all 
information  that  is  published  per  share  at  any  given  time  and  make  it  available  to 
market participants by means of one consolidated data stream at a reasonable cost.  

An advantage of implementing this option would be that one or several consolidated 
sources of reliable and comprehensive post-trade information would be available to 
market participants helping them in achieving best execution for clients, improving 
market  transparency  on  a  non-discriminatory  basis  and  countering  the  effects  of 
market fragmentation. Thus it would be a step towards the single European market 
adopting  a  feature  of  the  integrated  US  equities  market.  Also  this  option  should 
significantly  reduce  costs  for  market  participants  when  trying  to  get  a  complete 
picture of the market.  

A  specific  advantage  of  having  several  providers  would  be  that  the  provision  of 
consolidation services would be open to competition so that the consolidators would 
need to offer reasonable, innovative and state of the art services at a reasonable price 
to  convince  the  investing  public  of  purchasing  the  consolidated  data  from  them. 
Further  competition  would  ensure  the  providers  are  responsive  to  the  needs  of 
different data users. In the event that several commercial entities are involved in the 
process, there is potential that competition on price between such providers may be 
detrimental  to  the  quality  of  the  data  provided.  Further,  the  absence  of  a  uniform 
proprietary system or data format could also lead to fragmentation of consolidation 
services,  and  thereby  increase  costs  for  users.  Also  there  could  be  an  issue  of 
independence  and  conflict  of  interest  if  certain  APAs  were  giving  preferential 
treatment  to  certain  consolidators  due  to  them  belonging  to  the  same  group  of 
entities. However, these disadvantages should be avoided by implementing rigorous 
quality  standards  and  standardised  reporting  formats  in  legislation  as  a  prerequisite 
for approval as a consolidator and by rigorously enforcing rules to be implemented 
demanding non-discriminatory access to data for consolidators at a reasonable price.  

The  one  commercial  entity  approach  would  have  the  advantage  of  establishing  a 
single point of reference for European trade transparency data very much on par with 
the US approach already in place for equities markets. This single point of reference 
could  strongly  convey  the  picture  of  an  integrated  European  market  to  the  market 
participants  in-  and  outside  the  EU  where  trading  may  be  fragmented  across  a 
significant number of trading venues but where the transparency data is consolidated 
in  one  place,  easily  accessible  to  every  investor.  A  potential  disadvantage  of  this 
approach could be that if a consolidated tape is to be operated by a single commercial 
entity,  this  would  constitute  a  single  point  of  failure  if,  for  example,  for  technical 
reasons the consolidated data would not be available at any point in time. In addition, 
this option could create a situation of monopoly for the single commercial provider 
that would have been selected so there is a lack of competition and also potentially 
innovation and sufficient incentive to cater to the needs of different data users. 

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Option 9 – Improve the consolidation of post-trade data for the equities markets by the set up 
of  a  consolidated  tape  system  organised  as a public utility  or  industry  body for  all 
types  of  financial  instruments.  Introduce  a  consolidated  tape  for  non-equities 
markets after a period of 2 years under the same set up as for the equities markets 
(Alternative to option 8) 

In addition to the advantages of consolidation already described under option 8 this 
approach specifically could have the added advantage of being run by a not for profit 
entity which would by design be impartial in the way it handles data from different 
venues  and  has  got  no  incentive  in  giving  preferential  treatment  to  any  particular 
player or in the market. 

However, there also appears to be a downside to running the consolidated tape as a 
not  for  profit  entity  because  it  may  prove  a  hindrance  to  providing  an  innovative 
service  tailored  to  the  needs  of  the  investing  public  and  to  operating  at  the  lowest 
cost possible. This may in turn prove an obstacle to offering competitive prices for 
the data as competition is indeed missing. Further, there would be considerable cost 
in setting up such a system as public entities will not already operate such systems 
and  will  need  to  acquire  the  necessary  systems  and  expertise.  In  addition,  the 
considerations under option 9 regarding the constitution of a single point of failure in 
the case of a single commercial provider also apply here. 

13.4.  Reinforce  regulators'  powers  and  consistency  of  supervisory  practice  at 

European and international levels 

Option 1 – Take no action at EU level 

This would perpetuate the current patchwork of the scope and nature of supervisory 
powers with regard to how products or practices involving financial instruments may 
be  restricted,  the  level  of  information  supervisors  can  access  when  they  oversee 
markets,  and  the  way  key  regulatory  and  supervisory  powers  are  exercised  across 
Europe.  While  cost-neutral  in  the  short-term,  this  would  hinder  progress  towards  a 
single market in financial services and towards even enforcement across the EU. In 
the  medium  to  long-term,  EU  supervisory  capacity  in  relation  to  disruptive  market 
activity or future crises would be impaired with consequences in terms of economic 
and social costs. 

Powers of regulators 

Option 2 – Introduce the possibility for national regulators to ban for an indefinite period of 
time  specific  activities,  products  or  practices.  Give  the  possibility  to  ESMA  under 
specific circumstances to introduce a temporary ban in accordance with Article 9(5) 
of the ESMA regulation N°1095/2010 

The creation of dedicated mechanisms at EU level for restricting specific activities or 
products  which  give  rise  to  significant  concerns  in  terms  of  investor  protection, 
market stability or systemic risk would allow for a streamlined and more transparent 
regulatory  procedure,  for  example  in  response  to  disorderly  market  conditions  or 
warnings  issued  by  the  European  Systemic  Risk  Board,  improve  legal  certainty, 
effectiveness, and ensure equal treatment of EU market participants and investors.  

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This  entails  little  immediate  costs  apart  from  opportunity  costs  for  the  users  of 
products  and  providers  of  services  that  would  be  banned  while  mitigating  possible 
negative cross-border externalities of disruptive practices in the future, and is fully in 
line with the design and logic of Europe's new supervisory architecture. If used in an 
overly  restrictive  manner,  the  exercise  of  this  power  could  restrict  financial 
innovation and prevent market participants from financial opportunities. 

Option 3 – Introduce an authorisation regime for new products and practices (Alternative to 

option 2) 

This would substantially reinforce investors' protection by making sure that all new 
products and services are properly scrutinised by regulators and the most damaging 
ones are rejected. 

This  would  reduce  the  chances  of  new  products  being  introduced  into  the  market, 
leading  to  opportunity  costs  for  the  developers  of  new  products.  It  would  also 
lengthen lead times for product development. However, it would restrict innovation 
and  the  scope  for  economic  gains  to  a  much  larger  extent  than  Option  2.  It  would 
also  go  against  encouraging  greater  responsibility  among  investment  services 
professionals,  as  well  as  the  approach  of  allowing  for  freedom  of  movement  for 
investment service providers provided that they perform detailed checks of products 
and services against their clients' risk profile and experience. An authorisation from 
the  national  authority  for  any  activities  covered  by  MiFID  would  still  be  needed. 
Last,  it  would  require  considerable  means  for  the  entity  in  charge  of  this 
authorisation as financial innovation yields many new types of products. 

Option  4  –  Reinforce  the  oversight  of  positions  in  derivatives,  including  commodity 
derivatives,  by  granting  regulators  the  power  to  introduce  positions  limits, 
coordinated via ESMA (Additional to option 2 or 3) 

Having the power to request information on individual positions will lead to a better 
dialogue  between  competent  authorities  and  the  market.  This  will  give  competent 
authorities a better understanding of what is happening in the market, and will make 
market  participants  more  critical  of  their  own  behaviour.  Venues  may  have  an 
incentive  not  to  impose  position  limits,  as  this  will  limit  liquidity.  Competent 
authorities can be expected to be more independent in exercising this power. Greater 
coordination at EU level of the exercise of oversight powers in relation to positions 
in  derivatives  would  ensure  a  level  playing  field  and  convergent  application  for 
market  participants.  It  would  also  increase  the  effectiveness  for  derivatives  on  the 
same underlying traded on different platforms. 

The  power  to  set  harmonised  hard  position  limits,  amendable  over  time,  across  the 
EU would allow for effective action when the scope for disruptive activity or threat 
to market integrity cannot be sufficiently addressed in an ad hoc fashion. 

There are initial and ongoing costs for supervisors in exercising greater scrutiny as 
well  as  for  market  participants  in  transmitting  positions  to  regulators.  In  addition, 
there  could  be  potential  opportunity  costs  for  market  participants  in  limiting  their 
positions. However, at the consolidated level, these are outdone by gains in greater 
market integrity.  

135 

 
 
  
 
Option  5  –  Reinforce  the  oversight  of  financial  markets  which  are  increasingly  global  by 
strengthening the cooperation between EU and third country securities regulators. In 
addition,  reinforce  monitoring  and  investigation  of  commodity  derivatives  markets 
by promoting international cooperation among regulators of financial and physical 
markets (Additional to option 2 or 3 and 4) 

This  option  would  consist  in  strengthening  cooperation  between  competent 
authorities  with  other  market  supervisors  around  the  world,  both  bilaterally  and 
through ESMA. It would require them to take market developments on other relevant 
markets, and the interests of investors in other Member States into account. This will 
give supervisors a consolidated overview of the market, and allows them to combine 
their  market  experience.  As  a  result,  market  integrity  and  fair  and  orderly  markets 
will be improved by reducing risk of cross-market manipulation. 

In  addition,  there  will  also  be  ongoing  information  sharing,  assistance  in  sending 
information  requests,  and  cooperation  in  cross-border  investigations.  This  option  is 
complementary  to  a  similar  option  proposed  in  the  review  of  the  Market  Abuse 
Directive.  While  MAD  is  limited  to  market  abuse,  this  option  seeks  to  promote 
cooperation in supervising fair and orderly working of markets. It will complement 
MAD by allowing the monitoring of position limits, and data sharing in order to be 
able to set appropriate position limits on financial markets. 

While bringing considerable benefits in terms of market oversight, this option does 
not impose any additional obligations on market participants. All costs involved are 
imposed  on  competent  authorities.  This  includes  costs  for  transmitting  and 
processing data, and for establishing new (multilateral) memoranda of understanding 
and cooperation agreements. 

Conditions of access to third country firms 

Option 6 – Harmonise conditions for the access to the EU of third country investment firms, 
by  introducing  a  third  country  regime  (a  common  set  of  criteria,  memoranda  of 
understanding  (MoU)  between  the  Member  States  regulators  and  the  third  country 
regulators under the coordination of ESMA) (Additional to option 2 or 3, and 4 and 
5) 

This option would allow the national competent authority to register (and thus grant 
access to the E.U. internal market) and supervise third country investment firms and 
market  operators  for  the  non-retail  markets  complying  with  legally  binding 
requirements to the EU securities legislation requirements in accordance with a set of 
criteria  to  be  further  developed  in  delegated  acts.  Memoranda  of  understanding 
would have to be established between the third country authorities and the Member 
States  regulators  under  the  coordination  of  ESMA).  This  would  entail  a  more 
harmonised  and  legally  clear  basis  for  granting  third  country  investment  firms  and 
market  operators  pan-EU  access  to  EU  securities  markets.  This  would  replace  the 
current  patchwork  of  national  third  country  regimes  granting  access  to  individual 
Member States. The costs are borne by public authorities, while the benefits would 
accrue to investors and other market participants, as they will have a wider choice of 
providers, thus enhancing the competitiveness of EU markets. Any harmonisation of 
access  conditions  would  have  to  be  compatible  with  the  EU's  international 
commitments, both in the WTO and in bilateral agreements. 

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Option 7 – Introduce an equivalence and reciprocity regime by which after assessment by the 
Commission of the third country regulatory and supervisory framework access to the 
EU would be granted to investment firms based in that third country(Alternative to 
option 6)  

This  option  would  entail  the  assessment  of  each  third  country  regulatory  and 
supervisory framework by the Commission to decide on the equivalence of the third 
country  framework  to  allow  for  automatic  access  to  the  investment  firms  based  in 
that country subject to reciprocal access for EU firms. The assessment of equivalence 
would  enable  third  country  firms  to  access  EU  markets  and  avoid  duplication  of 
rules, notably in the case of relationships between eligible counterparties. However, 
it  could  take  some  time  because  many  rules  apply  to  investment  firms  when 
providing  investment  services  and,  in  many  jurisdictions,  key  applicable  rules  are 
now  under  review  to  enhance  the  legal  framework  due  to  the  financial  crisis.  In 
addition,  this  option  could  entail  political  reticence  to  take  an  equivalence  decision 
on a given third country. Any limitation of access for third-country market operators 
would  have  to  be  compatible  with  the  EU's  international  commitments,  both  in  the 
WTO and in bilateral agreements. 

Sanctions 

Option 8 – Ensure effective and deterrent sanctions by introducing common minimum rules 
for administrative measures and sanctions at EU level (Additional to option 2 or 3, 
4, 5, 6 or 7) 

This  option  would  ensure  that  administrative  sanctions  applied  across  the  different 
Member  States  are  effective  to  end  any  breach  of  the  provisions  of  the  national 
measures  and  also  deter  future  breach  of  these  provisions.  It  would  also  limit  the 
possibility  of  cross-border  infringements  from  countries  with  lower  standards.  In 
addition, the setting of appropriate whistle blowing mechanisms would help protect 
persons providing information on infringements and incentivise involved persons to 
cooperate. There are limited drawbacks to this option. 

Assessment of fundamental rights 

For  this  policy  option  the  following  fundamental  rights  are  of  particular  relevance: 
freedom to conduct business (Article 7), protection of personal data (Article 8), Title 
VI  Justice,  particularly  the  right  to  an  effective  remedy  and  fair  trial  (Art.  47), 
presumption of innocence and right of defence (Art 48).  

Introducing common minimum rules for administrative measures and sanctions will 
improve the coherent application of sanctions within the EU which is necessary and 
proportionate  to  ensure  that  comparable  breaches  of  MiFID  are  sanctioned  with 
comparable  administrative  sanctions  and  measures.  These  rules  will  particularly 
ensure  that  the  administrative  measures  and  sanctions  which  are  imposed  are 
proportionate  to  the  breach  of  the  offence.  As  the  rules  under  this  option  will 
introduce  minimum  rules  for  administrative  measures  and  sanctions,  they  will 
contribute to the "right to an effective remedy and to a fair trial" (Article 47 of the 
charter  of  fundamental  rights).  In  addition,  the  principle  of  innocence  and  right  of 
defence  (Article  48)  will  be  preserved.  In  view  of  the  above,  this  policy  option  is 
considered in compliance with the charter of fundamental rights.  

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Regarding the introduction of "whistle blowing schemes", this raises issues regarding 
the protection of personal data (Art 8 of the EU Charter and Art. 16 of the TFEU) 
and the presumption of innocence and right of defence (Art. 48) of the EU Charter. 
Therefore,  any  implementation  of  whistle  blowing  schemes  should  comply  and 
integrate  data  protection  principles  and  criteria  indicated  by  EU  data  protection 
authorities272
  and  ensure  safeguards  in  compliance  with  the  Charter  of  fundamental 
rights. 

Option 9 – Ensure effective and deterrent sanctions by harmonising administrative measures 

and sanctions (Alternative to option 8) 

This  option  would  entail  harmonising,  across  Member  States,  the  range  of 
administrative  measures  and  amount  of  administrative  fines  that  could  be  imposed. 
The  advantage  would  be  a  significantly  harmonised  playing-field  in  EU  financial 
markets  in  terms  of  threat  of  sanctions.  While  this  option  is  highly  effective  in 
achieving the policy objectives of deterrence, it is not sure that this option is efficient 
as  market  situations,  legal  systems  and  traditions  differ  among  Member  States.  To 
have  exactly  the  same  types  and  levels  of  sanctions  might  not  be  reasonable  and 
proportionate to ensure deterrent sanctions. Therefore this option is considered less 
efficient then introducing minimum rules for administrative sanctions. 

 Assessment of fundamental rights 

For  this  policy  option  the  following  fundamental  rights  are  of  particular  relevance: 
freedom to conduct business (Article 7), protection of personal data (Article 8), Title 
VI  Justice,  particularly  the  right  to  an  effective  remedy  and  fair  trial  (Art.  47), 
presumption of innocence and right of defence (Art 48).  

This  option  would  ensure  that  the  same  offence  would  be subject  to  the  same  type 
and  level  of  administrative  sanction  across  the  EU.  This  option  will  contribute  to 
"right  to  an  effective  remedy  and  to  a  fair  trial"  (Article  47  of  the  charter  of 
fundamental  rights)  as  rules  will  be  uniform  across  all  Member  States  and  the 
principle of innocence and right of defence (Article 48) will be preserved. In light of 
the  above,  this  policy  option  is  considered  in  compliance  with  the  charter  of 
fundamental  rights.  However,  designing  uniform  administrative  measures  and 
sanctions against the breach of MiFID across all Member States with different sized 
markets is disproportionate. 

Regarding the introduction of "whistleblowing schemes", this raises issues regarding 
the protection of personal data (Art 8 of the EU Charter and Art. 16 of the TFEU) 
and the presumption of innocence and right of defence (Art. 48) of the EU Charter. 
Therefore,  any  implementation  of  whistle  blowing  schemes  should  comply  and 
integrate  data  protection  principles  and  criteria  indicated  by  EU  data  protection 
authorities273
  and  ensure  safeguards  in  compliance  with  the  Charter  of  fundamental 
rights. 

13.5.  Reinforce transparency towards regulators 

These options will be assessed primarily against their effectiveness in achieving the 
specific  objective  of  allowing  supervisors  to  monitor  compliance  with  MiFID  and 
MAD.  These  policy  options  will  also  be  assessed  for  their  efficiency  in  achieving 
these objectives for a given level of resources or at least cost while avoiding unduly 

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negative effects on market efficiency. However, options will also be assessed against 
other objectives where appropriate. 

Option 1 - take no action at EU level. 

Under this option, information  on  trading  that  does  not  occur  on  regulated  markets 
will continue to be available only in a fragmented way. This means that competent 
authorities do not have a complete picture of trading activity in the market, and that 
the available data are difficult to analyse. Also, certain forms of abusive trading, such 
as  manipulating  commodity  prices  through  the  use  of  derivatives,  manipulating  the 
price  of  a  financial  instrument  through  an  OTC  instrument,  and  benefiting  from 
inside  information  through  OTC  derivatives,  will  remain  largely  invisible.  The 
absence and accessibility of data together make it difficult to detect and investigate 
market  abuse.  Also,  the  differing  reporting  requirements  will  continue  to  lead  to 
needless compliance costs for firms. 

Nevertheless, the above consequences would not apply for wholesale electricity and 
gas markets since REMIT provides for an effective EU level reporting framework for 
all wholesale energy products (including derivatives) which are not reportable under 
the  current  reporting  provisions  of  MiFID  or  EMIR.  Such  data  would  be  instantly 
available  for  competent  financial  and  energy  regulators  alike  and  enable  them  a 
comprehensive view of all relevant physical and derivatives energy transactions. 

Scope of transaction reporting 

Option 2 - Extend the scope of transaction reporting to regulators to all financial instruments 
(i.e. all financial instruments admitted to trading and all financial instruments only 
traded  OTC).  Exempt  those  only  traded  OTC  which  are  neither  dependent  on  nor 
may influence the value of a financial instrument admitted to trading. This will result 
in  a  full  alignment  with  the  scope  of  the  revised  Market  Abuse  Directive.  Lastly 
regarding  derivatives,  harmonise  the  transaction  reporting  requirements  with  the 
reporting obligations under EMIR  

Extending  the  scope  of  transaction  reporting  to  such  instruments  will  bring  the 
reporting requirements in line with the existing provisions of MAD, as well as with 
those of the revised MAD. The extension will also be useful for systemic purposes, 
as it gives insight into trading patterns and resulting concentrations of risk. 

Even if many of these instruments, i.e. derivatives, will already need to be reported 
under EMIR, the equity instruments that are admitted on OTFs will not be covered 
by  this  regulation.  In  addition,  the  content  of  transactions  reported  to  trade 
repositories will not necessarily be the same than the one required under MiFID. This 
would  make  the  data  consolidation  of  these  reports  very  difficult.  Therefore,  the 
extension of MiFID is needed to make sure that all instruments are covered and that 
the reports sent to trade repositories meet MiFID requirements. 

Commodity derivatives may be used for market abuse purposes, notably to distort the 
underlying market. The value of commodity derivatives does not depend on that of a 
financial  instrument,  but  on  the  underlying  physical  commodity.  Commodity 
derivatives will therefore need to be brought into scope separately 

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The  disadvantage  of  this  option  is  that  it  leads  to  higher  compliance  costs  for 
financial  firms.  This  is  notably  due  to  the  inclusion  of  instruments  which  are 
admitted  to  trading  on  OTFs.  Also,  the  extension  overlaps  with  the  requirement  to 
send information about OTC derivatives trading to trade repositories under EMIR. 

Last, for cost and efficiency purposes, double reporting of trades under MiFID and 
the recently proposed reporting requirements to trade repositories, and under REMIT 
should  be  avoided.  This  entails  fully  harmonising  the  reporting  requirements  under 
MiFID, EMIR, and REMIT. Almost all of the additional compliance costs associated 
with introducing this option will be avoided if reporting under EMIR is fully aligned 
with the requirements under MiFID. 

Option  3  –  Extend  the  scope  of  transaction  reporting  to  all  financial  instruments  that  are 
admitted to trading and all OTC financial instruments. Extend reporting obligations 
also to orders (Alternative to option 2) 

This  option  entails  that  investment  firms  would  need  to  report  all  transactions  in 
financial  instruments  which  they  have  carried  out,  regardless  of  whether  an 
instrument  is  admitted  to  trading  or  not.  This  extension  would  ensure  that  the 
reporting  requirements  are  aligned  with  the  provision  of  investment  services  and 
activities  under  MiFID.  In  addition,  reporting  parties  will  have  to  transmit  to  their 
competent  authorities  not  only  the  transactions  that  they  have  done  but  also  the 
orders that they have received or initiated  

It would mean that all trading in derivatives would be reported. Also, all equity and 
bond market trading, including all OTC instruments, will be transparent to competent 
authorities. This will give them a full picture of the performance of MiFID activities 
on  a  daily  basis.  Overall  such  an  extension  would  give  a  complete  picture  of  all 
trading in financial instruments by financial firms. A broad approach would be robust 
to  financial  innovation  with  regards  to  trading  practices.  The  disadvantage  of  this 
approach is that it brings into scope instruments that are not susceptible to or used for 
market  abuse.  Also,  there  may  be  practical  problems  to  report  instruments  that  are 
only traded infrequently, and are thereby difficult to capture in standard formats. 

The  main  advantage  of  the  reporting  of  orders  is  that  it  will  allow  competent 
authorities to monitor order book activity. This is in line with the extended scope of 
the  Market  Abuse  Directive,  which  forbids  attempts  to  manipulate  the  market  and 
submitting  orders  that  would  give  distortive  price  signals  can  be  a  form  of  market 
abuse.  In  addition,  the  reporting  of  order  would  allow  the  establishment  of  a  full 
audit trail, from the moment where a client or trader decides to place an order until 
the  execution  of  the  order  and  transformation  into  a  trade.  On  the  downside,  this 
option will dramatically increase the volume of the reporting that market participants 
will have to do. It will also extend the obligation to firms not currently caught under 
the  transaction  reporting  regime.  This  will  require  them  to  make  extensive 
investment  to  cope  with  this  new  obligation.  The  cost  of  this  option  is  therefore 
likely to be very high. In addition, the reporting of orders will generate a lot of data 
that  competent  authorities  will  need  to  be  able  to  analyse  to  extract  meaningful 
information. 

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Option 4 – Require market operators to store order data in a harmonised way (Additional to 

option 2 or 3) 

Requiring  market  operators  to  keep  these  records  in  a  standardised  way  will  allow 
competent  authorities  to  conduct  automated  searches.  This  will  allow  them  to 
monitor  for  attempted  market  abuse,  as  well  as  for  order  book  manipulation.  Also, 
the market operators are well placed to maintain the volume of data involved. ESMA 
would set the appropriate standards. 

The  disadvantage  of  this  approach  is  that  it  will  impose  costs  on  market  operators. 
Also,  order  information  will  not  be  stored  in  the  same  database  as  transaction 
information, making it harder for competent authorities to get a complete picture of 
the market. 

Reporting channels 

Option 5 – Increase the efficiency of reporting channels (i.e. third parties reporting on behalf 
of  investment  firms)  by  the  set  up  of  a  system  of  Approved  Reporting  Mechanism 
(ARM), and allow for trade repositories authorised under EMIR to be approved as 
an ARM under MiFID (Additional to option 2 or 3, and 4) 

The  advantage  of  this  approach  is  that  it  ensures  consistency  of  data  reporting 
through requirements on the reporting firms. By allowing trade repositories to serve 
as ARM's, this option would also limit the risk of double reporting by firms. Trade 
repositories  are  likely  to  have  all  the  data  required  to  be  reported  under  MiFID.  If 
data  requirements  are  not  the  same  under  MiFID  and  EMIR,  firms  would  have  to 
send additional data fields to enable trade repositories to report on their behalf. 

ARMs  are  to  be  distinguished  from  APAs.  Third  party  transaction  reporting  is 
already being conducted through ARMs, notably in larger Member States (Germany 
or United Kingdom for instance). This option will seek to harmonise the framework 
under which they operate and ensure clear oversight.  

The  main  disadvantage  of  this  approach  is  that  it  will  impose  additional  costs  on 
reporting firms, as the ARM's may charge a fee for the transmission of data on their 
behalf,  notably  when  additional  systems  investments  are  necessary.  However,  this 
fee  may  be  lower  than  the  costs  incurred  by  the  firm  when  it  chooses  to  report  its 
transactions itself. As reporting via ARMs is not made mandatory, investment firms 
can still report directly leaving the issue relating to the consistency of reported trades 
unresolved.  However,  this  disadvantage  will  need  be  addressed  in  implementing 
measures by further harmonising the content of reporting. 

Option  6  –  Require  trade  repositories  authorised  under  EMIR  to  be  approved  as  an  ARM 

under MiFID (Alternative to option 5) 

The main advantage of this approach is that it will ensure all transaction data are sent 
to  competent  authorities,  so  that  they  will  not  need  to  access  multiple  databases  to 
analyse  transaction  data.  It  also  means  that,  although  there  will  legally  be  two 
separate reporting obligations on firms, in practice there will be no double reporting.  

The main disadvantage with this option is that, when trade repositories are not able to 
report  on  behalf  of  firms  in  a  cost  efficient  manner,  this  will  impose  higher  than 

141 

 
 
  
 
normal market costs on firms. Mandating the use of trade repositories might bearer 
higher risks and costs than simply allow their use as under option 4. 

13.6. 

Improve transparency and oversight of commodities markets  

Option 1 – Take no action at EU level. 

If  nothing  is  done  at  the  EU  level,  we  will  have  less  transparent  and  efficient 
commodity  derivatives  markets  and  leave  the  door  open  to  regulatory  arbitrage 
between  Member  states,  and  between  the  EU  and  other  third  country  jurisdictions 
like  the  US.  Competent  authorities  will  not  be  able  to  assess  the  linkages  between 
commodity and commodity derivatives markets, there will be no tools to ensure that 
increasing financialisation does not hurt the functioning of commodity markets, and 
certain derivative like instruments will remain outside the scope.  

Evolution of commodities markets 

Option  2  –  Set  up  a  system  of  position  reporting  by  categories  of  traders  for  organised 

trading venues trading commodity derivatives contracts 

This option would significantly increase the transparency of these markets by making 
available  to  the  regulators  (in  detail)  and  the  public  (in  aggregate)  meaningful 
information  on  the  activities  of  the  different  markets  participants.  This  increased 
transparency would improve the price formation mechanism and enable regulators as 
well  as  market  participants  to  better  assess  the  role  of  financial  speculation  and  its 
impact on the prices and volatility of the underlying physical markets. As the public 
information is at aggregate level, this will not impact individual companies' trading 
behaviour. Another advantage of this measure would be to align the EU regulatory 
framework with the US where a position reporting by categories of traders is already 
in place and covers all contracts listed on US commodity regulated exchanges.  

The disadvantage of this obligation is the cost for organised commodity derivatives 
trading venues. On the other hand some of these trading venues have already taken 
initiatives in this field274.  

Option  3  –  Control  excessive  volatility  by  banning  non  hedging  transactions  in  commodity 

derivatives markets (Additional to option 2) 

While  one  could  argue  that  it  would  decrease  volatility  and  price  spikes  in  these 
markets,  a  total  ban  would  most  probably  dry  up  liquidity  and  further  increase 
volatility,  as  well  as  be  difficult  to  administer.  It  would  thus  not  be  effective  to 
address  the  stated  goal.  There  is  some  evidence  that  commodity  markets  for  which 
there  is  no  liquid  derivatives  market  are  more,  or  no  less,  volatile  than  other 
commodity  markets.275  Another  main  key  risk  with  such  a  measure  would  be  to 
move  financial  speculation  from  the  derivatives  or  financial  markets  to  the 
underlying physical markets.  

Exemptions for commodities firms 

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Option 4 – Narrow exemptions for commodity firms to exclude dealing on own account with 
clients  of  the  main  business  and  delete  the  exemption  for  specialist  commodity 
derivatives trading houses (Additional to option 2 and 3) 

The main advantage of this option would be to limit the scope of the exemptions to 
the intended business of hedging physical and price risks by commercial companies. 
It would also ensure that companies whose main activity is trading on own account 
would be authorised and duly supervised as any other entity trading on own account 
in other financial instruments, and approximate the approach in the US regarding the 
regulation of major swap participants, only from a qualitative not quantitative angle. 
Finally  investor  protection  would  be  reinforced  as  the  possibility  to  provide 
investment  services  by  exempt  firms,  which  are  by  definition  not  subject  to  any 
MiFID provisions including conduct of business rules would be narrowed down.  

The  disadvantage  of  this  option  is  the  costs  for  companies  which  were  previously 
exempted  to  comply  with  the  MiFID  rules.  The  capital  requirements  these  firms 
would  be  subject  to  will  be  dealt  with  as  part  of  the  forthcoming  review  of  the 
existing  exemptions  for  commodity  firms  under 
the  Capital  requirements 
Directive276. This review will take place before the expiry of these exemptions end of 
2014. 

Option 5 – Delete all exemptions for commodity firms (Alternative to option 4) 

The  advantage  of  option  5  compared  to  option  1  would  be  to  capture  under  the 
MiFID  regulatory  regime  all  firms  active  in  trading  in  commodity  derivatives 
markets,  either  for  financial  investment  or  hedging  purposes,  including  market 
makers. 

The  main  shortcoming  of  this  option  would  be  to  potentially  capture  under  MiFID 
entities that widely use financial instruments and commodity derivatives for hedging 
the risks linked to their underlying physical commercial activity, as well as various 
non-investment  firm  entities  providing  investment  services  on  an  ancillary  basis  to 
the  clients  of  their  main  business,  and  subject  these  to  potentially  disproportionate 
obligations compared to the risks they pose to the financial system. This might as a 
result undermine the ability of these companies to properly hedge their commercial 
risks,  and  of  some  clients  in  obtaining  the  special  ancillary  services  performed  by 
specialist non-investment firm intermediaries.  

Secondary spot trading of emission allowances 

Option 6 – Extend application of the MiFID to secondary spot tradingof emission allowances 

(Additional to option 2, 3 and 4 or 5) 

This  option  would  bring  the  carbon  market  under  a  comprehensive  regulatory 
regime,  which  is  consistent  with  financial  markets  regulation.  This  would  enhance 
market  transparency  and  investor  protection,  establishing  a  level  playing  field  and 
uniform standards for the services of intermediaries active in the various parts of the 
carbon market (primary and secondary, spot and derivatives). 

With such extension of MiFID, entities providing such services would be required to 
hold  a  MiFID  licence  and  comply  with  all  MiFID  organisational  and  operational 
requirements in the course of that activity. Similarly, trading venues specialising in 

143 

 
 
  
 
spot trade in emission allowances and thus not currently subject to the MiFID, would 
be expected to obtain a MiFID authorisation (as a regulated market, an MTF, or an 
organised trading facility). 

Under this option, the issue of suitability and proportionality might potentially arise, 
especially  with  regard  to  those  intermediaries  that  so  far  limited  their  activity  to 
secondary spot trade and/or have a fairly restricted and specific pool of clients (e.g. 
industry  associations  providing  intermediation  services  for  their  members).  Where 
appropriate,  such  situations  could  be  mitigated  by  application  of  exemptions  or 
proportionality  clauses  envisaged  for  intermediaries  under  MiFID  or  by  taking  into 
account their specificities in the revision of implementing measures (Level 2) within 
the powers conferred upon the Commission. 

Option 7 – Develop a tailor made regime for secondary spot trading(Alternative to option 6) 

This  option  would  probably  offer  more  flexibility  in  terms  of  developing  a  regime 
suited to the specificities of the spot carbon trade. At the same time, that flexibility 
would be limited by the need to conform to the overall approach to market regulation 
set out in the MiFID and applicable to the other segments of the carbon market.  

Even if the overall consistency with the MiFID were secured, the introduction of a 
dedicated  framework  for  spot  trading  of  allowances  and  its  autonomous  evolution 
over  the  years  would  give  rise  to  the  risk  of  (excessive)  segmentation  in  how  the 
different parts of the carbon market are regulated, which would be an impediment to 
a  sound  development  of  that  market.  Finally,  a  replication  of  most  of  the  general 
principles of the MiFID in any new instrument for spot carbon market could also be 
inefficient. 

13.7.  Broaden the scope of regulation on products, services and providers under the 

directive when needed 

Option 1 - Take no action at EU level.  

If no action is taken at the EU level, it is very likely that all the issues that the policy 
options described below would persist and possibly get more serious. In some cases 
Member  States  would  react  at  national  level,  in  others  they  wouldn't.  The  result 
would be that, in the area of investments - where the EU framework is already quite 
broad and harmonised - a few products and entities could not be subject to any or to 
very different legislation. An unlevel playing field would continue both for investors 
receiving  similar  services  based  on  different  rules  in  different  jurisdictions  and  for 
certain products which would compete unevenly with other more regulated products 
(for  instance:  structured  deposits  versus  structured  bonds)  or  would  be  treated 
differently in different Member States. 

Optional exemptions for certain investment providers 

Option 2 - Allow Member States to continue exempting certain investment service providers 
from MiFID but introduce requirements to tighten national provisions applicable o 
them (particularly conduct of business and conflict of interest rules) 

This  option  is  a  middle  ground  option  between  deleting  the  optional  exemptions 
under Article 3 and leaving the situation as it is. As such, it presents the advantages 
of  setting  up  a  minimum  and  consistent  level  of  standards  for  the  providers  to  be 

144 

 
 
  
 
exempted  while  preserving  some  flexibility  at  national  levels  for  catering  for  the 
specificities  and  constraints  of  these  providers  for  which  a  full  implementation  of 
MiFID could be detrimental, mostly because of their small size. This option would 
allow to strengthen investor protection standards and to level them irrespective of the 
entities  providing  the  services  (whether  subject  to  MiFID  or  not).  This  would  also 
make the rules easier to understand by investors because their increased uniformity. 

The  downside  of  this  option  is  that  a  number  of  areas  (notably  organisational 
requirements)  will  remain  at  the  discretion  of  Member  States,  which  presents 
residual risks of deficiency and inconsistency at European level. 

Option 3 - Delete the optional exemptions under Article 3 and subject these investment firms 

to the full MiFID regulatory regime (Alternative to option 2) 

This option is an extension of the previous one. By deleting the optional exemptions, 
all  these  firms  will  be  subject  to  all  MiFID  obligations.  This  would  ensure  a 
consistent and high quality framework across Europe. This would also make the rules 
easier to understand by investors because their uniformity.  

Nevertheless, this line of action could also be considered disproportionate in the light 
of the purely national dimension of the business of these entities (which do not enjoy 
the possibility of providing services in other Member States) and their limited size277 
exposing them to additional implementation costs and possibly forcing some of them 
out of business. 

Conduct of business rules for unregulated investment products 

Option  4  -  Extend  the  scope  of  MiFID  conduct  of  business  and  conflict  of  interest  rules  to 
structured deposits and other similar deposit based products (Additional to option 2 
or 3) 

In line with Commission's approach on packaged retail investment products (PRIPs) 
which  identified  MiFID  as  clear  benchmark  for  selling  practices  involving  PRIPs, 
this  option  would  ensure  proper  and  homogeneous  selling  rules  for  these  products 
which  are  currently  unregulated  at  EU  level  but  which  have  very  similar 
characteristics  to  other  categories  of  investment  for  investors  and  are  actively 
marketed to them often by the same intermediaries providing investment services in 
other financial products. 

On the downside, this option could raise the cost of distribution of these products by 
banks  which  could  transfer  some  of  these  costs  to  investors  making  them  less 
appealing.  

Option  5  –  Apply  MiFID  conduct  of  business  and  conflict  of  interest  rules  to  insurance 

products (Additional to option 2 or 3, and 4) 

This  would  ensure  a  fully  consistent  regulatory  environment  for  all  similar 
investment  products  whatever  the  nature  of  the  distributor  is.  This  could  lead  to 
easier possibilities of choice and safer investment by investors, especially retail ones. 

Nevertheless, such a solution presents also drawbacks. The first one lies with the fact 
that the insurance industry presents specificities in the organisation of its distribution 
of  products  compared  to  banks  which  could  make  more  complex  the  automatic 

145 

 
 
  
 
extension of MiFID and would require technical adaptations. The second drawback 
is  that  the  insurance  distribution  is  already  covered  under  the  Insurance  Mediation 
Directive,  which  covers  aspects  and  products  other  than  PRIPs.  The  objective  to 
ensure  consistency  in  the  PRIPs  context  by  adopting  the  MiFID  standards  for 
insurance PRIPs will be achieved in the context of the Insurance Mediation Directive 
(IMD), the revision of which is due in 2011. ;   

13.8. 

Strengthen rules of business conduct for investment firms 

Option 1 - Take no action at EU level. 

The application of certain EU requirements for the provision of investment services 
exposed some shortcomings. If no action is taken at the EU level, it is very likely that 
all  the  issues  described  below  would  persist  and  possibly  get  more  serious.  In  a 
highly harmonised context as the one in MiFID, Member States would probably not 
react sufficiently at their level (or even could not because of constraints in adopting 
additional requirements). On the other hand, if they reacted, this would lead to new 
fragmentation,  to  different  treatment  of  the  same  service  providers  and  products  in 
different jurisdictions and, finally, to a scaling back of the results obtained so far in 
pursuing a single market for financial services. 

Execution only services and investment advice 

Option 2 – Reinforce investor protection by reviewing the list of products for which execution 
only services are possible and strengthening provisions on investment advice  

The  revision  of  the  definition  of  non  complex  products  will  allow  clarifying  the 
uncertainty  around  this  concept  and  better  defining  certain  categories  of  financial 
instruments,  especially  in  view  of  the  increasing  sophistication  of  investment 
products.  The  second  measure  will  substantially  reinforce  the  rules  surrounding 
advice, one of the key services offered by investment firms. 

A disadvantage of the first aspect of this option is that, in the context of ever growing 
financial  sophistication,  non  complex  products  will  remain  difficult  to  clearly 
identify.  A  drawback  of  the  second  proposal  is  that  entities  providing  investment 
advice  would  continue  to  be  able  to  offer  advice  based  on  a  more  limited  range  of 
financial instruments. On the other hand, the option would provide further clarity and 
better  choice  to  investors  and  would  preserve  the  current,  broad  definition  of 
investment  advice,  which  allows  providing  simpler  and  less  costly  forms  of  advice 
while imposing in any case high MiFID standards of conduct of business obligations 
(strong  suitability  test  and  rules  concerning  inducements  in  addition  to  the  further 
improvements to be introduced in implementing measures). 

Option 3 – Abolition of the execution only regime (Alternative to option 2) 

The main advantage of this solution is to provide clients with the protection of the 
"know-your-customer"  rule  for  any  transaction  (even  if  only  based  on  the  limited 
assessment of appropriateness).  

Nevertheless, on the downside, it could be detrimental to certain types of investors 
who are interested in receiving execution only services and are not willing to pay for 
additional services they do not need. This is the case for instance of customers who 

146 

 
 
  
 
have a sufficient knowledge of financial markets or are even highly sophisticated and 
are able to make their own investment choices. 

Customers' classification 

Option  4  –  Apply  general  principles  to  act  honestly,  fairly  and  professionally  to  eligible 
counterparties resulting in their application to all categories of clients and exclude 
municipalities and local public authorities from the list of eligible counterparties and 
professional clients per se (Additional to option 2 or 3) 

By clarifying the principles of this regime, limiting the availability of this regime in 
terms  of  products  and/or  institutions,  this  option  will  contribute  to  limit  the  risk  of 
mis-selling  and  excessive  risk  taking  by  institutions  that  has  appeared  during  the 
crisis. This option has to be read in conjunction with option 6, insofar as it refers to 
non-retail clients. 

The  drawback  of  this  option  is  that  it  may  make  it  more  rigid  the  provision  of 
services to certain clients and does not fully solve the issues of the diversity of the 
eligible counterparty category which encompasses a wide range of participants. 

Option 5 –Reshape customers' classification (Additional to option 2 or 3, and 4) 

This  option  is  the  extension  of  the  previous  one.  It  would  consist  in  reviewing  the 
overall  customers'  classification  of  MiFID  with  a  view  of  sub  dividing  them  into 
more  refined  categories  in  order  to  match  more  closely  the  diversity  of  existing 
market participants. 

There  are  certain  drawbacks  to  this  option.  First,  except  for  a  few  categories 
(notably, municipalities and local administrations) there are few clear-cut criteria to 
make distinctions in the context of certain categories of clients (for instance, between 
entities  authorised  as  credit  institutions  or  investment  firms).  Second  the  current 
regime  is  already  flexible,  in  that  it  does  not  foresee  the  category  of  eligible 
counterparties  for  certain  services  (e.g.  advice)  and  allows  entities  to  require  a 
different classification. Third, it would require changing a harmonized classification 
system introduced just in 2007/2008 and was costly to implement, without clear and 
univocal evidence of broad malfunctioning.  

Complex products and inducements 

Option 6 – Reinforce information obligations when providing investment services in complex 
products  and  strengthen  periodic  reporting  obligations  for  different  categories  of 
products, including when eligible counterparties are involved (Additional to option 2 
or 3,and 4 or 5)  

This  would  allow  investors  to  have  a  better  understanding  of  the  products  and  the 
risks  attached  to  them  prior  to  investing  in  them  and  to  have  better  monitoring  of 
their investment in these products over the whole tenor of the product. Some of these 
obligations should also benefit eligible counterparties. 

These  new  obligations  could  increase  the  costs  of  the  firms  when  trading  these 
products. They could pass these costs on to the investors or refrain from marketing 
such products which could take away some investment opportunities for investors. 

147 

 
 
  
 
Option  7  –  Ban  inducements  in  the  case  of  investment  advice  provided  on  an  independent 
basis and in the case of portfolio management (Additional to option 2 or 3,4 or 5 and 
6)   

This  would  avoid  the  risk  of  conflicts  of  interest  for  portfolio  managers  who  are 
allowed 
to  make  decision  without 
involvement  of  the  client  and  reinforce  the  objectivity  of  the  selection  of  products 
provided by investment firms in case of independent advice. 

in  discretionary  portfolio  management 

The  drawback  of  this  option  is  the  possible  cost  for  intermediaries,  at  least  at  the 
initial  stage,  to  change  the  structure  of  their  incomes  and  of  the  modalities  for  the 
provision  of  these  services.  This  could  lead  to  increased  costs  for  investors. 
Nevertheless,  these  costs  might  be  absorbed  in  the  longer  term  and  would  be 
balanced by a better quality of these two services for which the client may expect the 
highest degree of independence.  

Option 8 – Ban inducements for all investment services (Alternative to option 7)  

This  would  aim  at  ensuring  that  investment  firms  are  not  influenced  at  all  in  their 
product selection by the reward that they can extract on the side from these products. 
On  the  other  hand,  this  option  would  dramatically  impact  of  the  current  business 
model  of  investment  firms  and  could  actually  result  in  a  reduction  in  the  range  of 
services  and  products  offered  to  clients  and  significant  increase  of  costs  for  clients 
receiving any investment services. 

Best execution 

Option 9 – Require trading venues to publish information on execution quality and improve 
information provided by firms on best execution (Additional to option 2 or 3, 4 or 5, 
6, and 7 or 8) 

The positive effects of such change would be to allow firms to improve compliance 
with  best  execution  obligations  as  they  will  have  more  information  to  use  to  adapt 
their  execution  policy.  In  addition,  this  should  lead  to  additional  information 
provided by investment firms and to more precise and concrete execution policies to 
be disclosed by investment firms to their clients, including professional clients. 

Option 10 – Review the best execution framework by considering price as the only factor to 

comply with best execution obligations (Alternative to option 9) 

Such a move would allow a simplification of the criteria that could benefit investors 
which are especially sensitive to the criteria to be retained. On the negative side, the 
relative importance of the various criteria varies according to the type of clients and 
type of orders (for instance, speed of execution may be relevant for certain clients). It 
is  therefore  very  difficult  to  come  up  with  one  unique  criterion  that  would  fit  all 
types of investors and orders. Furthermore, in a fragmented environment such as the 
European one, the impact of costs could largely exceed any positive effect on price. 

148 

 
 
  
 
13.9. 

Strengthen rules of organisational requirements for investment firms  

Option 1 – Take no action at EU level 

The  crisis  has  shown  the  relevance  of  appropriate  corporate  governance  principles, 
including  the  responsibility  of  boards  and  role  of  internal  functions.  If  no  action  is 
taken  at  the  EU  level  to  improve  the  framework  for  organisational  requirements 
under MiFID, it is very likely that all the issues described below would persist and 
possibly  get  more  serious.  In  a  highly  harmonised  context  as  the  one  in  MiFID, 
Member States would probably not react sufficiently at their level (or even could not 
because  of  constraints  in  adopting  additional  requirements).  On  the  other  hand,  if 
they reacted, this would lead to new fragmentation, to different treatment of the same 
service  providers  in  different jurisdictions  and,  finally,  to  scaling  back  some  of  the 
results obtained so far in pursuing a single market for financial services. 

Corporate governance 

Option  2  –  Reinforce  the  corporate  governance  framework  by  strengthening  the  role  of 
directors  especially  in  the  functioning  of  internal  control  functions,  and  when 
defining  strategies  of  firms  and  launching  products  and  services.  Require  firms  to 
establish  clear  procedures  to  handle  clients'  complaints  in  the  context  of  the 
compliance function. 

This  option  emphasizes  the  relevance  of  choices  at  the  highest  level  of  the  firm  in 
shaping the overall compliance of the financial institution with requirements for the 
provision  of  investment  services  and  activities.  It  provides  internal  functions  with 
further authority and improves, inter alia, the treatment of complaints received from 
any type of clients. 

On the negative side, in certain cases this option may introduce a level of rigidity in 
areas currently covered by a flexible framework (for instance fit and proper criteria). 

Option 3 – Introduce a new separate internal function for the handling of clients' complaints. 

(Additional to option 2) 

While  this  option  would  further  stress  the  relevance  of  proper  treatment  of 
complaints, it may lead to unnecessary standardisation of complaints handling which 
does  not  recognize  the  possible  differences  in  terms  of  complexity  and  type  of 
problems  raised  in  concrete  cases.  The  establishment  of  a  separate  function  could 
lead  to  fragmentation  of  internal  functions  and  risks  of  inefficient  communications 
between parts of the firm dealing with controls on the proper provision of services by 
the firm and some possible additional costs. 

Organisational requirements for portfolio management and underwriting 

Option 4 – Require specific organisational requirements and procedures for the provision of 
portfolio management services and underwriting services (Additional to option 2 and 
3) 

This option aims at introducing a more detailed – while still general – framework for 
the provision of services (notably portfolio management and underwriting) which are 
already in the scope of the directive but are insufficiently regulated. In particular this 
option  will  require  firms  to  formalize  their  investment  strategies  when  managing 

149 

 
 
  
 
clients'  portfolios.  Relating  to  underwriting  services,  firms  would  be  required  to 
provide  information  concerning  the  allotment  of  financial  instruments,  and  to  have 
specific procedures for the management of conflicts of interest situations. 

On the negative side, in certain cases this option might introduce a level of rigidity in 
these  areas  (for  instance,  information  requirements  covering  the  allotment  of  the 
financial instruments in the process of underwriting). 

Telephone and electronic recording 

Option 5 – Introduce a completely harmonized regime for telephone and electronic recording 

of client orders (Additional to option 2, 3 and 4)  

This option implies the deletion of the current option for Member States to introduce 
requirements  to  record  telephone  conversations  or  electronic  communications 
involving client orders and the introduction of a fully harmonized regime. 

The  advantage  would  be  the  delivery  of  a  common  regime  across  the  EU.  Since 
telephone recording is first of all a tool for supervisors, the drawback is that Member 
States would not retain flexibility in modifying the scope of this obligation in terms 
of services covered, retention period and technical means to be recorded according to 
local market conditions.  

Option  6  –  Introduce  a  common  regime  for  telephone  and  electronic  recording  of  client 
orders but still leave a margin of discretion to Member States (Alternative to option 
5) 

This  option  aims  at  introducing  a  common  regime  for  telephone  recording  (for 
instance,  execution  and  reception  and  transmission  of  orders,  dealing  on  own 
account) while still leaving a margin of discretion to Member States in applying the 
same  obligation  for  services  not  covered  at  EU  level  (for  instance  portfolio 
management). The retention period at EU level could be set at 3 years, i.e. less than 
the  ordinary  5  years  period  required  for  other  records,  while  leaving  the  option  to 
Member States to apply the ordinary period also for these records. 

This option would address the drawbacks of the previous one. On the negative side, 
it would leave margins for some differentiations at national level, but this would be 
consistent with the diversity of supervisory methods and techniques that exist across 
the EU.  

Fundamental rights assessment of options 5 and 6 

This  requirement  entails  an  interference  with  the  fundamental  right  to  privacy  and 
the  protection  of  personal  data  (Articles  7  and  8  of  the  EU  Charter),  in  particular, 
with  regard  to  the  access  to  recorded  communications  by  third  parties,  namely 
supervisory authorities. However limiting this right is proportionate and necessary as 
competent  authorities  need  this  information in  order  to  ensure  market  integrity  and 
enforcement  of  compliance  with  business  of  conduct  rules.  However  any  measure 
should  respect  EU  data  protection  rules  laid  down  in  Directive  95/46/EC.  The 
retention period to be set should take account of existing EU legislation on retention 
of data generated or processed in connection with the provision of publicly available 
electronic communications for the purposes of fighting serious crime. The retention 
period has been set at a maximum of three years, as it has been found proportionate 

150 

 
 
  
 
and  necessary  to  meet  the  legitimate  objective  pursued.  Accordingly  the  proposed 
retention  period  is  no  longer  than  three  years  as  this  would  not  comply  with  the 
principles  of  necessity  and  proportionality  necessary  to  make  it  lawful  an 
interference with a fundamental right. 

151 

 
 
  
 
14. 

ANNEX 4: OVERVIEW OF THE PREFERRED OPTIONS 

Policy options 

Summary of policy options 

1 Regulate appropriately all market structures and trading places taking into account the needs of smaller participants, especially 
SMEs 

to  capture  current 

Introduce  a  new  category  of 
1.2 
Organised  Trading  Facilities 
(OTF), 
besides  Regulated  Markets  (RM)  and 
MTFs 
(including 
broker  crossing  systems  -  BCS)  as  well 
as  possible  new  trading  practices  while 
further 
the 
and 
align 
organisational 
surveillance 
and 
requirements  of  regulated  markets  and 
MTFs  

reinforce 

Under  this  option  a  new  category  called  organised  trading  facility  would  be  established 
capturing previously not regulated as a specific MiFID trading venue organised facilities such as 
broker  crossing  systems,  "swap  execution  facility"  type  platforms,  hybrid  electronic/voice 
broking  facilities  and  any  other  type  of  organised  execution  system  operated  by  a  firm  that 
brings together third party buying and selling interests. This new category would ensure that all 
organised trading is conducted on regulated venues that are transparent and subject to similar 
organisational requirements. The different types  of trading venues will be clearly  distinguished 
based  on  their  characteristics.  Regulated  markets  and  MTFs  are  characterised  by  non-
discretionary  execution  of  transactions  and  non-discriminatory  access  to  their  systems.  This 
means  that  a  transaction  will  be  executed  according  to  a  predetermined  set  of  rules.  It  also 
means that they offer access to everyone willing to trade on their systems when they meet an 
objective set of criteria. By contrast, the operator of an organised trading facility has discretion 
over how a transaction will be executed. He has a best execution obligation towards the clients 
trading  on  his  platform.  He  may  therefore  choose  to  route  a  transaction  to  another  firm  or 
platform for execution. An organised trading facility may also refuse access to clients he does 
not  want  to  trade  with.  An  important  constraint  on  OTFs  is  that  the  operator  may  not  trade 
against his own proprietary capital. This would mean that firms operating internal systems that 
try  to match client orders or  that enable clients to execute orders  with the  firm  will have to  be 
authorised  and  supervised  under  the  respective  provisions  of  a  MTF  or  OTF  or  Systematic 
Internaliser.  The  OTF  category  would  not  include  ad  hoc  OTC  transactions.  It  would  also  not 
include systems which do not match trading interests such as: systems or facilities used to route 
an order to an external trading venue, systems used to disseminate and/or advertise buying and 
selling trading interests, post-trade confirmation systems, etc.   

The  organisational  requirements  applying  to  regulated  markets  and  MTFs,  as  well  as  OTFs 
would be further aligned where businesses are of a similar nature especially those requirements 
concerning  conflicts  of  interest  and  risk  mitigation  systems.  Operators  of  the  various  trading 
venues  trading  identical  instruments  would  be  required  to  cooperate  and  inform  each  other  of 
suspicious trading activity and various other trading events. 

1.4  Mandate  trading  of  standardised 
OTC  derivatives (i.e.  all  clearing  eligible 
and  sufficiently  liquid  derivatives)  on 
RM, MTFs or OTFs  

This  option  picks  up  on  the  G20  commitment  to  move  trading  in  standardised  derivatives  to 
exchanges  or  electronic  trading  platforms  where  appropriate.  All  derivatives  which  are  eligible 
for clearing and are sufficiently liquid (the criterion of sufficient liquidity would be determined via 
implementing measures) would be required to be traded on regulated markets, MTFs or OTFs. 
These  venues  would  be  required  to  fulfil  specifically  designed  criteria  and  fulfil  similar 
transparency requirements towards the regulators and the public.  

1.6  Introduce  a  tailored  regime  for  SME 
markets  under  the  existing  regulatory 
framework of MTF  

Under this option a special category of SME market would be established in MiFID, under the 
existing  regulatory  framework  MTF,  specifically  designed  to  meet  the  needs  of  SME  issuers. 
Such a regime would entail more calibrated elements in relation to the eligibility of SME issuers 
facilitating  access  of  SMEs  to  MTFs  while  still  creating  a  unified  European  quality  label  for 
SMEs providing for more visibility and therefore more liquidity in SME stocks. 

2 Regulate appropriately new trading technologies and address any related risks of disorderly trading 

2.2  Narrow  the  exemptions  granted  to 
dealers  on  own  account  to  ensure  that 
High  Frequency  Traders  (HFT)  that  are 
a direct member or direct participant of a 
RM or MTF are authorised  

Under this option, all entities that are a direct member or a direct participant of a RM or MTF, 
including  those  engaging  in  high-frequency  trading,  would  be  required  to  be  authorised  as  an 
investment firm under MiFID so that they would all be supervised by a competent authority and 
required  to  comply  with  systems,  risk  and  compliance  requirements  applicable  to  investment 
firms.  

2.3  Reinforce organisational 
requirements for firms involved in 
automated trading and/or high-frequency 
trading and firms providing sponsored or 
direct market access  

Under this option specific obligations would be imposed targeted specifically at algorithmic and 
HFT  trading  ensuring  that  firms  have  robust  risk  controls  in  place  to  prevent  potential  trading 
system  errors  or  rogue  algorithms.  Information  about  algorithms  would  also  be  required  to  be 
made  available  to  regulators  upon  request.  In  addition,  firms  granting  other  traders  direct  or 
sponsored access to their systems would need to have stringent risk controls in place as well as 
filters which can detect errors or attempts to misuse their facilities.  

152 

 
 
  
 
2.4  Reinforce organisational 
requirements (e.g. circuit breakers, 
stress testing of their trading systems) 
for market operators  

Impose  an  order 

to  executed 
2.7 
transaction 
imposing 
incremental  penalties  on  cancelled 
orders and setting up minimum tick size 

ratio 

by 

Introduce 

for 
2.5 
automated traders to provide liquidity on 
an ongoing basis  

requirements 

This  option  would  address  automated  trading  from  the  perspective  of  the  market  operators. 
Operators of organised trading venues would be obliged to put in place adequate risk controls to 
prevent  a  breakdown  of 
trading  systems  or  against  potentially  destabilising  market 
developments.  These  operators  would  be  required  to  stress  test  and  encode  so-called  circuit 
breakers into their systems which can stop trading in an instrument or the market as a whole in 
adverse  conditions  when  orderly  trading  is  in  danger  and  investors  need  to  be  protected. 
Operators  would  also  be  obliged  to  put  in  place  rules  clearly  defining  circumstances  in  which 
trades  can  be  broken  following  trading  errors  and  procedures  to  be  followed  if  trades  can  be 
broken. 

Under this option market operators would need to ensure that their market participants maintain 
an adequate order to transaction executed ratio. It would impose that market operators impose 
a  system  of  incremental  penalties  for  cancelled  orders.  This  would  limit  the  number  of  orders 
that can be placed and then cancelled by high frequency traders. This would reduce stress on 
trading  systems  as  it  would  prevent  excessively  large  numbers  of  orders  from  being  sent  and 
then  withdrawn  and  updated.  It  would  also  prevent  behaviour  where  participants  submit  a 
multitude  of  orders  withdrawing  them  almost  immediately  just  to  gauge  the  depth  of  the  order 
book. In addition, the obligation for market operators to set up minimum tick size (i.e. a tick size 
is the smallest increment (tick) by which the price of exchange-traded instrument can move) on 
their trading venues would prevent excessive arbitrage by HFT as well as unsound competition 
between trading venues that could lead to disorderly trading. 

This option would require algorithmic traders to both trade on the venues they connect to on an 
ongoing basis and to provide meaningful liquidity at all times. Requiring this as an integral part 
of the trading strategy of an algorithm would contribute to more orderly and liquid markets and 
mitigate episodes of high uncertainty and volatility.   

3 Increase trade transparency for market participants 

the  pre  and  post 

trade 
3.2  Adjust 
transparency  regime 
for  equities  by 
ensuring  consistent  application  and 
monitoring  of  the  utilisation  of  the  pre-
trade transparency waivers, by reducing 
delays  for  post  trade  publication  and  by 
regime 
extending 
applicable  to  shares  admitted  to  trading 
on  RMs  to  shares  only  traded  on  MTFs 
or  OTFs  

transparency 

the 

This  option  would  focus  on  strengthening  a  number  of  features  of  the  existing  trade 
transparency  regime  for  equities.  The  current  waivers  from  pre-trade  transparency  obligations 
would  be  further  harmonised  as  to  their  application  and  their  monitoring  would  be  improved 
giving ESMA an enhanced role in the process. In the post-trade section the maximum deadline 
for real-time reporting  would be  reduced down  to one minute (from three) and the permissible 
delays for publishing large transactions would be significantly reduced. Furthermore, the scope 
of  the  transparency  regime  would  be  extended  to  instruments  only  traded  on  MTFs  and 
organised trading facilities.  

3.4  Introduce  a  calibrated  pre  and  post 
trade  transparency  regime  for  certain 
types of bonds and derivatives  

3.6  Reduce  data  costs  notably  by 
requiring  unbundling  of  pre  and  post 
trade  data  and  providing  guidance  on 
reasonable  costs  of  data,  and  improve 
the  quality  of  and  consistency  of  post 
trade  data  by  the  set  up  of  a  system  of 
Approved  Publication  Arrangements 
(APAs)  

This option would entail extending the MiFID trade transparency rules (both pre- and post-trade) 
from equities to certain types of other financial instruments such as bonds, structured products 
and  derivatives  eligible  for  central  clearing  and  submitted  to  trade  repositories.  As  non-equity 
products  are  very  different  from  equity  products  and  very  different  one  from  another,  the 
detailed  transparency  provisions  would  need  to  be  defined  for  each  asset  class  and  in  some 
cases for each type of instrument within that asset class. This calibration will need to take into 
account  several  factors  including:  (i)  the  make-up  of  market  participants  in  different  asset 
classes,  (ii)  the  different  uses  investors  have  for  the  instruments,  and  (iii)  the  liquidity  and 
average  trade  sizes  in  different  instruments.  The  detailed  provisions  will  be  laid  down  in 
delegated acts.    

Under  this  option,  measures  would  be  implemented  reducing  the  costs  of  data  for  market 
participants: 
-  organised  trading  venues  would  be  required  to  unbundle  pre-  and  post-trade  data  so  that 
users would not be required to purchase a whole data package if they are only interested in, for 
example, post-trade data; 
-  Standards  by  ESMA  determining  criteria  for  calculating  what  constitutes  a  reasonable  cost 
charged for data would be envisaged; 
- Introduce further standards regarding the content and format of post trade data; 
- Investment firms would be required to publish  all post-trade transparency information via so-
called Approved Publication Arrangements (APAs). These APAs would need to adhere to strict 
quality standards to be approved ; and 
- Trade data would be required to be provided free of cost 15 minutes after the trade. 

3.8  Improve  the  consolidation  of  post 
trade  data  for  the  equities  markets  by 
the set-up of a consolidated tape system 
operated  by  one  or  several  commercial 
providers. Introduce a consolidated tape 
for non-equities markets after a period of 
2  years  under  the  same  set-up  as  for 

This option would be complementary to option 3.6 as the data pre-managed by the APAs would 
then  be  submitted  to  dedicated  consolidators  (i.e.  one  or  several  commercial  providers)  that 
would  need  a  separate  approval.  The  function  of  these  consolidators  would  be  to  collect  all 
information  that  is  published  per  share  at  any  given  time  and  make  it  available  to  market 
participants  by  means  of  one  consolidated  data  stream  at  a  reasonable  cost.  The  set-up  of  a 
consolidated  tape  by  one  or  several  commercial  providers  would  be  required  for  non-equities 
markets after a transitional period of 2 years depending on the type of financial instrument. This 

153 

 
 
  
 
equities markets 

differed application would ensure that the consolidation of trade data would take place after the 
implementation of the new trade transparency requirements for non-equities markets by market 
participants.  

4 Reinforce regulators powers and consistency of supervisory practice at European and International level 

4.2  Introduce  the  possibility  for  national 
regulators to ban for an indefinite period 
specific  activities,  products  or  services 
under  the  coordination  of  ESMA.  Give 
the  possibility  to  ESMA  under  specific 
circumstances  to  introduce  a  temporary 
ban  in  accordance  with  Article  9(5)  of 
the ESMA regulation N°1095/2010278 

4.4  Reinforce  the  oversight  of  positions 
in  derivatives  in  particular  commodity 
granting 
derivatives, 
regulators  the  power  coordinated  via 
ESMA to introduce positions limits  

including 

by 

4.5  Reinforce  the  oversight  of  financial 
markets which are increasingly global by 
strengthening  the  cooperation  between 
securities 
EU 
and 
reinforce 
regulators. 
of 
monitoring 
commodity  derivatives  markets  by 
cooperation 
promoting 
international 
among 
financial  and 
physical markets 

third 
In 
and 

country 
addition 

regulators  of 

investigation 

This  option  would  consist  in  giving  national  regulators  the  power  to  ban  or  restrict  for  an 
indefinite period the trading or distribution of a product or the provision of a service in case of 
exceptional  adverse  developments  which  gives  to  significant  investor  protection  concerns  or 
poses  a  serious  threat  to  the  financial  stability  of  whole  or  part  of  the  financial  system  or  the 
orderly  functioning  and  integrity  of  financial  markets.  The  action  taken  by  any  Member  State 
should  be  proportionate  to  the  risks  involved  and  should  not  have  a  discriminatory  effect  on 
services or activities provided by  other Member Sates. ESMA  would perform a facilitation and 
coordination role in relation to any action taken  by Member States to ensure that any national 
action  is  justified  and  proportionate  and  where  appropriate  a  consistent  approach  is  taken. 
ESMA would have to adopt and publish an opinion on the proposed national ban or restriction. If 
the national Competent Authority disagrees with ESMA's opinion, it should make public why. In 
addition  to  the  powers  granted  to  national  competent  authorities  under  the  coordination  of 
ESMA, ESMA would have the power to temporarily ban products and services in line with the 
ESMA regulation. The ban could consist in a prohibition or restriction on the marketing or sale of 
financial instrument or on the persons engaged in the specific activity. The provisions would set 
specific  conditions  for  both  of  these  bans  on  their  activation,  which  can  notably  happen  when 
there are concerns on investor protection, threat to the orderly functioning of financial markets 
or  stability  of  the  financial  system.  Such  a  power  would  be  complementary  to  the  national 
powers  in  the  sense  that  a  ban  by  ESMA  could  only  be  triggered  in  the  absence  of  national 
measures or in case the national measures taken would be inappropriate to address the threats 
identified. 

This option has several layers. First trading venues on which commodity derivatives trade would 
be required to adopt appropriate arrangements to support liquidity, prevent market abuse, and 
ensure orderly pricing and settlement. Position limits are a possible measure to this effect, i.e. 
hard  position  limits  are  fixed  caps  on  the  size  of  individual  positions  that  apply  to  all  market 
participants  at  all  times.  Position  management  is  another,  i.e.  the  possibility  for  the  venue 
operator  to  intervene  ad  hoc  and  ask  a  participant  to  reduce  its  position.  Second,  national 
competent authorities would also be given broad powers to carry out position management with 
regard  to  market  participants'  positions  in  any  type  of  derivatives  and  require  a  position  to  be 
reduced.  They  would  also  be  given  explicit  powers  to  impose  both  temporary  (i.e.  position 
management  approach)  and  permanent  limits  (i.e.  position  limits)  on  the  ability  of  persons  to 
enter  into  positions  in  relation  to  commodity  derivatives.  The  limits  should  be  transparent  and 
non-discriminatory.  ESMA  would  perform  a  facilitation  and  coordination  role  in  relation  to  any 
measure taken by national competent authorities. Finally, ESMA would have temporary powers 
to intervene in positions and to limit them in a temporary fashion consistent with the emergency 
powers granted in the ESMA regulation. In other words, ESMA would be equipped with position 
management powers in case a national competent authority fails to intervene or does so to an 
insufficient degree, but no position limit powers.  

This  option  would  consist  in  strengthening  cooperation  between  competent  authorities  with 
other  market  supervisors  around  the  world,  possibly  through  ESMA.  In  the  specific  case  of 
commodity derivatives markets this option would in addition reinforce the cooperation between 
financial  and  physical  regulators  both  within  the  EU  and  at  international  level.  This  entails 
establishing new memoranda of understanding and cooperation agreements. In addition, there 
will also be ongoing information sharing, assistance in information requests, and cooperation in 
cross-border  investigations.  This  option  is  complementary  to  a  similar  option  proposed  in  the 
review of the Market Abuse Directive. While MAD is limited to market abuse, this option seeks 
to promote cooperation in supervising fair and orderly working of markets.  

 4.7 Harmonise conditions for the access 
to  the  EU  of  third  country  investment 
firms,  by  introducing  a  third  country 
(based  on  equivalence  and 
regime 
and  memoranda 
reciprocity 
of 
the 
(MoU)  between 
understanding 
Member  States  regulators  and  the  third 
country 
the 
regulators 
coordination of ESMA) 

under 

This option would create a harmonised framework for granting access to EU markets for firms 
based  in  third  countries.  The  provision  of  services  to  retail  clients  would  always  require  the 
establishment of a branch in the EU territory; the provision of services without a branch would 
be  limited  to  business  for  eligible  counterparties.  This  option  would  entail  the  assessment  of 
equivalence  and  reciprocal  access  of  the  third  country  regulatory  and  supervisory  regime  in 
relation to the EU regime and to EU-based operators. This assessment would be formalised by 
a decision of the Commission. Memoranda of understanding (MoU) between the Member States 
regulators and the third-country regulators should be concluded. Investment firms established in 
third  countries  for  which  equivalence  has  been  granted  would  have  access  to  the  EU  market, 
with  the  provision  of  services  to  retail  clients  would  always  requiring  the  establishment  of  a 
branch  in  the  EU  territory  and  compliance  by  the  firm  with  key  MiFID  operating  and  investor 
protection conditions. 

154 

 
 
  
 
 
4.8  Ensure  effective  and  deterrent 
common 
sanctions  by 
minimum 
administrative 
measures and sanctions  

introducing 

rules 

for 

5.2  Extend  the  scope  of  transaction 
reporting  to  regulators  to  all  financial 
instruments (i.e. all financial instruments 
admitted  to  trading  and  all  financial 
instruments  only  traded  OTC).  Exempt 
those only traded OTC which are neither 
dependent  on  nor  may  influence  the 
value  of  a  financial  instrument  admitted 
to  trading.  This  will  result  in  a  full 
alignment  with  the  scope  of  the  revised 
Market Abuse Directive. Lastly regarding 
derivatives,  harmonise  the  transaction 
reporting requirements with the reporting 
requirements under EMIR 

5.4  Require  market  operators  to  store 
order data in an harmonised way  

This option would require Member States to provide for administrative sanctions and measures 
which are effective, proportionate and dissuasive byintroducing minimum rules on type and level 
of  administrative  measures  and  administrative  sanctions.  Administrative  sanctions  and 
measures  set  out  by  Member  States  would  have  to  satisfy  certain  essential  requirements  in 
relation to addressees, criteria to be taken into account when applying a sanction or measure, 
publication of sanctions or measures, key sanctioning powers and minimum levels of fines. This 
option would also entail establishing whistleblowing mechanisms.  

5 Reinforce transparency to regulators 

This  option  entails  that  investment  firms  report  the  details  of  transactions  in  all  instruments 
which are traded in an organised way, either on a RM, a MTF or an organised trading facility to 
regulators. Notably the extension to OTFs would bring a whole set of derivatives products into 
scope (e.g. part  of equity  derivatives, credit derivatives, currency  derivatives, and interest rate 
swaps).  All  transactions  in  OTC  instruments  which  are  not  themselves  traded  in  an  organised 
way    will  also  have  to  be  reported,  except  when  the  value  of  those  does  not  depend  to  some 
extent on or may not influence that of instruments which are admitted to trading. Extending the 
scope  of  transaction  reporting  to  such  instruments  will  bring  the  reporting  requirements  in  line 
with the existing provisions of MAD, as well as with those of the revised MAD, and corresponds 
to existing practice in some Member States (e.g. UK, Ireland, Austria, and Spain). Commodity 
derivatives  may  be  used  for  market  abuse  purposes,  notably  to  distort  the  underlying  market. 
Commodity derivatives will  need to be brought into scope separately. This extension overlaps 
considerably with the scope of reporting requirements to trade repositories under EMIR. 

This  option  entails  that  all  market  operators  keep  records  of  all  orders  submitted  to  their 
platforms,  regardless  of  whether  these  orders  are  executed  or  not.  Such  records  need  to  be 
comparable across platforms, notably with regard to the time at which they were submitted. The 
information  stored  should  include  a  unique  identification  of  the  trader  or  algorithm  that  has 
initiated the order. ESMA will set the appropriate standards. 

5.5  Increase  the  efficiency  of  reporting 
channels  by  the  set  up  of  Approved 
Reporting  Mechanisms  ("ARMs")  and 
allow  for  trade  repositories  under  EMIR 
to be approved as an ARM under MiFID  

This  option  entails  that  all  entities  involved  in  reporting  transactions  on  behalf  of  investment 
firms  are  adequately  supervised.  Under  this  option,  competent  authorities'  powers  to  monitor 
ARM's functioning on an ongoing basis will be clarified. Also, the standards that ARM's need to 
comply with will be harmonised. 

6 Improve transparency and oversight of commodities markets 

6.2 Set up a system of position reporting 
by  categories  of  traders  for  organised 
trading  venues 
trading  commodities 
derivatives contracts  

Under this option organised trading venues which admit commodity derivatives to trading would 
have  to  make  available  to  regulators  (in  detail)  and  the  public  (in  aggregate)  harmonised 
position information by type of regulated entity. A trader's position is the open interest (the total 
of all futures and option contracts) that he holds. The trader would have to report to the trading 
venue  whether  he  trades  on  own  account  or  on  whose  behalf  he  is  trading  including  the 
regulatory  classification  of  their  end-customers  in  EU  financial  markets  legislation  (e.g. 
investment  firms,  credit  institutions,  alternative  investment  fund  managers,  UCITS,  pension 
funds, insurance companies). If the end beneficiary of the position is not a financial entity, this 
position  would  by  deduction  be  classified  as  non-financial.  The  focus  of  this  obligation  will  be 
commodity derivatives contracts traded on organised trading venues (contracts traded either on 
regulated markets, MTFs or organised trading facilities) which serve a benchmark price setting 
function.  The  objective  of  this  position  reporting  would  be  to  improve  the  transparency  of  the 
price  formation  mechanism  and  improve  understanding  by  regulators  of  the  role  played  by 
financial firms in these markets.  

6.4  Review  exemptions  for  commodity 
firms to exclude dealing on own a/c with 
clients  and  delete  the  exemption  for 
specialist commodity derivatives  

Specialist  commodity  firms  whose  main  business  is  to  trade  on  own  account  in  commodities 
and/or commodity derivatives would not be exempt any more. Commercial entities would not be 
allowed any more to trade on own account with clients and the possibility to provide investment 
services  to  the  clients  of  the  main  business  on  an  ancillary  basis  would  be  applied  in  a  very 
precise and narrow way. This option would not by itself affect capital requirements imposed on 
firms. 

6.6  Extend  the  application  of  MiFID  to 
secondary  spot 
trading  of  emission 
allowances 

This  option  would  involve  coverage  under  the  MiFID  of  emission  allowances  and  other 
compliance units under the EU Emissions Trading Scheme. As a result, all MiFID requirements 
would apply to all trading venues and intermediaries operating in the secondary spot market for 
emission  allowances.  Venues  would  need  to  become  regulated  markets,  MTFs,  or  OTFs. 
Financial  market  rules  would  apply  to  both  spot  and  derivative  markets  for  emissions  trading, 
establishing a coherent regime with overarching rules. This would replace the need to devise a 
tailor made regime for secondary spot emission allowances markets.  

7 Broaden the scope of regulation on products, services and service providers when needed 

7.2  Allow  Member  States  to  continue 
exempting  certain  investment  service 

This  option  leaves  Member  States  the  possibility  to  exempt  certain  entities  providing  advice 
from the Directive but requires that national legislation includes requirements similar to MiFID in 

155 

 
 
  
 
from  MiFID  but 
tighten 

providers 
introduce 
requirements 
national 
them 
requirements 
(particularly  conduct  of  business  and 
conflict of interest rules) 

to 
applicable 

to 

a  number  of  areas  (notably  proper  authorization  process  including  fit  and  proper  criteria  and 
conduct of business rules). Member States would maintain discretion in adapting organizational 
requirements to the exempted entities based on national specificities 

7.4  Extend  the  scope  of  MiFID  conduct 
of business and conflict of interest rules 
to structured deposits and deposit based 
products with similar economic effect 

This  option  would  aim  at  extending  MiFID  conflicts  of  interest  and  conduct  of  business  rules 
(particularly  information  to  and  from  clients,  assessment  of  suitability  and  appropriateness, 
inducements) to structured deposits, products which currently are not regulated at EU level 

8 Strengthen rules of business conduct for investment firms 

investor  protection  by 
8.2  Reinforce 
list  of  non-complex 
narrowing 
the 
products 
for  which  execution  only 
services  are  possible  and  strengthening 
provisions on investment advice  

fairly  and  professionally 

to  act 
8.4  Apply  general  principles 
honestly, 
to 
eligible  counterparties  resulting  in  their 
application  to  all  categories  of  clients 
and  exclude  municipalities  and  local 
public  authorities  from  list  of  eligible 
counterparties  and  professional  clients 
per se 

This  policy  option  combines  two  measures  which  will  have  complementary  effects.  The  first 
measure  consists  in  the  limitation  of  the  definition  of  non-complex  products  which  allows 
investment firms to provide execution only services i.e. without undergoing any assessment of 
the appropriateness of a given product. The second measure consists in reinforcing the conduct 
of  business  rules  for  investment firms  when  providing  investment advice,  mainly  by  specifying 
the conditions for the provision of independent advice (for instance, obligation to offer products 
from  a  broad  range  of  product  providers).  Further  requirements  concerning  the  provision  of 
investment  advice  (reporting  requirements  and  annual  assessment  of  recommendations 
provided)  would  be  mainly  introduced  via  implementing  measures  to  complement  these 
changes in the framework directive. 

This options aims at reinforcing the MiFID regime for non-retail clients by narrowing the list of 
type  of  entities  that  are  de  facto  eligible  counterparties  or  professional  clients.  Further 
requirements would be modified in the implementing measures (deletion of the presumption that 
professional clients have the necessary level of experience and knowledge). 

8.6  Reinforce 
information  obligations 
when  providing  investment  services  in 
strengthen 
complex  products  and 
periodic 
for 
different 
products, 
including  when  eligible  counterparties 
are involved 

reporting 
categories 

obligations 

of 

This  option  aims  at  increasing  the  information  and  reporting  requirements  to  clients  of 
investment  firms,  including  eligible  counterparties.  In  the  case  of  more  complex  products, 
investment  firms  should  provide  clients  with  a  risk/gain  and  valuation  profile  of  the  instrument 
prior  to  the  transaction,  quarterly  valuation  during  the  life  of  the  product  as  well  as  quarterly 
reporting  on  the  evolution  of  the  underlying  assets  during  the  lifetime  of  the  product.  Firms 
holding  client  financial  instruments  should  report  to  clients  about  material  modifications  in  the 
situation  of  financial  instruments  concerned.  Most  of  these  detailed  obligations  would  be 
introduced in implementing measures and should be calibrated according to the level of risk of 
the relevant product.  

8.7  Ban  inducements  in  the  case  of 
investment  advice  provided  on  an 
independent  basis  and  in  the  case  of 
portfolio management 

The  objective  of  this  option  is  to  strengthen  the  existing  MiFID  inducement  rules  by  banning 
third  party  inducements  in  case  of  portfolio  management  and  independent  advice.  These 
measures  that  would  affect  the  Level  1  Directive  would  be  complemented  by  changes  in  the 
Level  2  implementing  acts  where  inducements  are  currently  regulated;  this  will  include  the 
improvement of the quality of information given to clients about inducements. 

8.9  Require  trading  venues  to  publish 
information  on  execution  quality  and 
improve information provided by firms on 
best execution 

This option consists in improving the framework for best execution by inserting in the MiFID an 
obligation for trading venues to provide data on execution quality. Data would be used by firms 
when  selecting  venues  for  the  purpose  of  best  execution.  The  implementing  directive  would 
clarify technical details of data to be published and would reinforce the requirements relating to 
information  provided  by  investment  firms  on  execution  venues  selected  by  them  and  best 
execution. 

5.9 Strengthen organisational requirements for investment firms 

9.2  Reinforce  the  corporate  governance 
framework  by  strengthening  the  role  of 
directors  especially  in  the  functioning  of 
functions  and  when 
internal  control 
defining 
and 
launching  new  products  and  services. 
clear 
Require 
procedures to handle clients' complaints 
in 
the  compliance 
function. 

the  context  of 

to  establish 

strategies 

firms 

firms 

of 

This  option  strengthens  and  specifies  the  overall  framework  for  corporate  governance  in  the 
design of firms' policies, including the decision on products and services to be offered to clients 
(clear  involvement  of  executive  and  non-executive  directors),  in  the  framework  for  internal 
control functions (reinforced independence, further definition of role of the compliance function 
including  handling  with  clients'  complaints)  and  in  the  supervision  by  competent  authorities 
(involvement  in  the  assessment  of  the  adequacy  of  members  of  the  board  of  directors  at  any 
time and in the removal of persons responsible for internal control functions). In addition it will 
explicitly require  that within the compliance function clear procedures have been developed to 
deal with clients' complaints. 

9.4  Require  specific  organisational 
requirements  and  procedures  for  the 
provision  of  portfolio  management 
services and underwriting services 

This  option  introduces  a  more  detailed,  while  still  general  framework  for  the  provision  of  the 
services  of  portfolio  management  (formalization  of  investment  strategies  in  managing  clients' 
portfolios)  and  underwriting  (information  requirements  concerning  allotment  of  financial 
instruments, management of conflicts of interest situations). 

156 

 
 
  
 
9.6  Introduce  a  common  regime  for 
telephone  and  electronic  recording  but 
still  leave  a  margin  of  discretion  for 
Member  States  in  requiring  a  longer 
the  records  and 
retention  period  of 
applying 
to 
recording 
services not covered at EU level. 

obligations 

This  option  aims  at  introducing  a  common  regime  for  telephone  and  electronic  recording  in 
terms  of  services  covered  (for  instance,  execution  and  reception  and  transmission  of  orders, 
dealing  on  own  account)  and  retention  period  (two  years)  while  still  leaving  a  margin  of 
discretion  to  Member  States  in  applying  the  same  obligation  for  other  services  (for  instance 
portfolio  management)  and  in  requiring  a  longer  retention  period  (up  to  the  ordinary  5  years 
period required for other records). This common regime would focus on the services which are 
the  most  sensitive  from  a  supervisory  point  of  view  in  terms  of  market  abuse  or  investor 
protection  and  would  be  fully  complaint  in  terms  of  retention  period  with  the  Charter  of  EU 
Fundamental Rights. 

157 

 
 
  
 
 
15. 

ANNEX 5: OVERVIEW OF COMPLIANCE COSTS 

15.1.  Consolidated overview of compliance costs 

Detailed breakdown of compliance costs (€ millions) 

Market structures 
Alignment and reinforcement of MTF / RM organisational 
and market surveillance requirements 
Broker crossing networks & Organised Trading Facilities 
Information pack to be provided to the Competent 

Authority 

Monitoring of trading 

Trading of OTC derivatives on organised trading venues 
SME markets 
Total market structure costs 

New trading technologies ("automate trading") 
All HFT firms to be authorised 
Reinforce organisational requ. of firms involved in 
automated trading 
Requirement for sponsoring firms to have robust risk 
controls 
Reinforcement of organizational requirements for market 
operators 
Total automated trading costs 

Pre and post-trade transparency and data 
consolidation 
Equity markets 
Equity transparency regime for MTF/OTF 
Non equities markets 
Pre trade for MTFs/OTFs 
Pre trade for market participants OTC 
Post-trade for MTFs/OTFs 
Post-trade for market participants 
Total transparency 
APAs, single formats and consolidated tape 
Total reporting channels and data consolidation 
Total transparency 

Reinforce regulatory powers 
Position oversight 

Trading platforms 
Market participants 

Setting and monitoring position limits 

Trading platforms with existing market surveillance in 

place 

Trading platforms without existing market surveillance in 

place 
Total regulatory powers costs 

Transparency to regulators 
Total transaction reporting costs 

158 

TOTAL INCREMENTAL COSTS 
one-off 

on-going 

low 

high 

low 

high 

1,0

4,2
0,5

3,7
4,7
0,0
9,9

0,0
1,0

0,1

0,0

1,1

0,0
2,0
5,5
0,4
0,6
0,4
4,1
7,5
30,0
30,0
37,5

0,0

8,2
2,2

6,0

8,2

10,0 

11,3 
0,5 

10,8 
9,3 
0,0 
30,6 

0,0 
1,0 

0,1 

0,0 

1,1 

0,0 
2,0 
9,2 
0,8 
1,0 
0,8 
6,6 
11,2 
30,0 
30,0 
41,2 

0,0 

12,9 
2,9 

10,0 

12,9 

0,0

0,6
0,0

0,6
8,7
0,0
9,3

0,9
0,0

0,0

0,0

0,9

0,0
0,4
8,9
0,2
4,1
0,2
4,5
9,3
3,0
3,0
12,3

2,0
1,6
0,4
7,5
3,7

3,8

9,5

0,0

3,2
0,0

3,2
17,3
0,0
20,5

0,9
0,0

0,0

0,0

0,9

0,0
0,4
12,7
0,3
5,3
0,3
6,8
13,1
4,5
4,5
17,6

4,0
3,1
0,9
16,3
7,3

9,0

20,3

65,4

84,1 

1,6

3,0

 
 
  
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
Extension to MTFs 
Extension to OTC derivatives, excl. commodity 

derivatives 

Extension to commodity derivatives 
Extension to depositary receipts 

Storage of orders 
Total transparency to regulators costs 

Commodity derivatives markets 
Position reporting by categories of traders 
Publishing costs for regulated markets 
MTFs 
Traders 

Extension of MiFID to secondary spot trading in EUAs 

Platforms offering spot trading 
Compliance buyers 
Market intermediaries 

Total commodity derivatives costs 

Broaden the scope of regulation 
Harmonisation of Article 3 exemption - authorisation 
process 
Extension of MiFID to structured deposits 
Total 

Strengthening of conduct of business rules 
Reduction in the list of non complex products  
Strengthening conduct of business rules for investment 
advice 

Extended suitability report 
Training 
Reporting every 6 months 
Annual request to update client's information 
Advice in changed circumstances 

Adjustments to the eligible counterparty and professional 
client classification 
Information on complex products 

Risk-gain profiles 
Marketing materials 
Quarterly reporting 
Material change systems 
Material change review 

Banning of inducements in rel. to independent investment 
advice 
Banning of inducements in relation to portfolio management 
Trading venues - Execution quality 
Total COB rules costs 

Organizational requirements for investment firms 
Strengthening the role of the internal control functions  
Internal control functions - Reporting to the Board 
Launch of new products 

Organizational requ. - Portfolio management 
Organizational requ. - Underwriting 
Review of existing procedures 

159 

0,7
48,2 

16,0 
0,7

65,4

0,8
0,0
0,1
0,6
1,5
1,5

2,3

15

31
46

0,1
5,6

5,6

2,3

83,2
50,6 
25,0 

1,7
6,0
41

130,8
18,0
280,9

5,0

5,0
2,8
11,0
9,0

1,1 
62,0 

19,9 
1,1 

84,1 

1,0 
0,0 
0,2 
0,8 
1,8 
1,8 

0,1
0,6

0,4
0,5
1,0
2,6

3,3
0,3
1,8
1,1
0,4
0,4

0,1
0,9

0,7
1,3
1,9
4,9

3,8
0,3
2,4
1,1
0,5
0,5

2,8 

3,7

4,3

30 

44 
74 

0,2 
12,5 

12,5 

2,9 

145,9 
86,7 
45,0 

2,7 
11,6 
41 

130,8 
18,0 
351,2 

5,0 

5,0 
4,2 
26,0 
22,0 

9
9

15
15

0
1 
34,3
29,1 

40,0 
23,5 
41,7 
16,0

11,6
10,1 

0
279,0

59,0 

67,5 
52,5 
100,0 
16,0

36,6
28,9 

1,5

7,7

24

28

3,7
6,0
195,6

3,7
6,0
369,3

24,0
24,0 

32,0
32,0 

0,3

0,3

 
 
  
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
New system 
Ongoing compliance monitoring 

Harmonisation of the telephone and electronic recording 
regime 
Total organizational requ. costs 

2,0

41,7

60,5

4,0 

99,2 

0,3
45,2

0,3
101,2

134,4 

69,45

133,45

TOTAL MiFID REVIEW COSTS 
Total operating costs of investment firms 
Total MiFID review costs as a % of total operating costs 

511,8
500.000,0
0,10%

732,4 
500.000,0 
0,15% 

312,3

586,2
500.000,0 500.000,0
0,12%

0,06%

Costs of the introduction of MiFID as a % of total 
operating costs 

Administrative burden costs are highlighted in grey. 

15.2.  Detailed analysis of compliance costs 

0,56%

0,68% 

0,11%

0,17%

15.2.1.  Introduce a new category of Organised Trading Facilities (OTF), besides Regulated 
Markets  (RM)  and  MTFs  to  capture  current  (including  broker  crossing  systems  - 
BCS) as well as possible new trading practices while further align and reinforce the 
organisational and surveillance requirements of regulated markets and MTFs 

A number of MTFs consider that they are already complying with organisational requirements 
that  are  functionally  equivalent  (even  if  they  are  not  identical  per  se)  to  those  of  regulated 
markets, and regulated markets believe that regulations are similar. This view was not held by 
a regulated market in the UK taking the view that to be considered equivalent requirements 
should  be  the  same.  On  this  basis,  we  can  conclude  that  further  aligning  organisational 
requirements  between  MTFs  and  RMs  would  have  a  negligible  one-off  and  on-going  cost 
impact on MTFs. 

Greater  costs  would  be  incurred  in  complying  with  a  reinforcement  of  the  surveillance 
obligations. The onus were on trading venues to establish methods of communication between 
themselves, costs would be substantially greater. In such a scenario, trading venues may incur 
infrastructure  costs  as  well  as  on-going  costs  but  the  magnitude  of  such  costs  would  be 
heavily  dependent  on  any  amendments  that  would  need  to  be  made  to  data  storage/sharing 
technologies in light of the fact that trading venues may need to communicate sensitive data to 
each  other.  We  estimate  the  range  of  potential  incremental  costs  to  be  between  €1  and  €10 
millions.  

They  are  nine  crossing  networks  currently  operating  in  Europe  which  would  fall  under  the 
new definition of organised trading facility279. Three of them also operate a dark MTF. The 
full size of the other electronic trading platforms that are not MTFs and might fall under the 
scope of the OTF definition is not completely clear. However market participants interviewed 
by Europe Economics have identified 10–12 as a reasonable population estimate.  

We expect the compliance with the requirements of the OTF definition would lead to one-off 
aggregate  costs  of  €4.2–€11.3  million  for  the  nine  crossing  system  operators  and  the 
estimated  10  to  12  other  electronic  platforms,  with  ongoing  costs  of  €0.6-€3.2  million.  The 
main costs would arise from the development of tools to monitor trading considering the six 
crossing networks that do not have or are not yet seeking MTF status280. The remaining costs 
relate to the provision of required information to regulators. This is unlikely to exceed €0.5 
million across all affected entities as this information is usually already available for clients. 

160 

 
 
  
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
15.2.2.  Mandate  trading  of  some  OTC  derivatives  on  Regulated  Markets  (RM),  MTFs  or 

OTFs  

Before turning to cost estimates, we describe briefly here what might be required by marker 
participants to engage in electronic trading.  

Depending  on  the  platform  model,  it  could  be  relatively  straightforward  for  buy-side 
participants  to  connect  to  electronic  trading  platforms.  They  could  access  these  through  the 
internet or through trading screens provided by the platform, and be enabled with dealers of 
their  choice  (this  would  be  easier  if  the  buy-side  firm  already  has  a  relationship  with  the 
dealers). The firm would be able to see prices in real time through a request for quote system 
and would be able to trade easily. The costs of this access may be relatively significant, and 
could range from €50,000 to €100,000 for access per year, with a one-off cost of developing 
the links of between €4,000 and €9,000.  

Buy-side  firms  can  also  establish  more  detailed  links  with  the  electronic  platform  (for 
example  if  they  undertake  a  large  amount  of  trading).  Many  large  buy-side  firms  currently 
connect their internal order management and accounting systems to trading platforms as this 
increased  efficiency  and  can  lead  to  cost  savings  Trades  are  sent  from  the  firm’s  order 
management  system  to  the  platform,  where  they  are  executed  with  an  appropriate 
counterparty, and then passed on for confirmation by the counterparties. Setting up these links 
involves  substantial  infrastructural  requirements,  estimated  at  between  €1  million  and  €2 
million in one-off costs and approximately €100,000 in on-going costs. 

The  costs  for  dealers  could  be  significantly  more  involved,  as  they  would  have  to  connect 
their whole trading system (including pricing engines and risk systems) to the platform which 
involves  significant  IT  infrastructure  investment.  However,  we  assume  that  the  majority  of 
large and medium dealers are already connected to electronic trading platforms, and that these 
costs would only be incurred by smaller dealers not currently undertaking electronic trading. 
Costs  for  these  are  likely  to  be  smaller  than  for  large  firms,  as  are  estimated  at  between 
€100,000  and  €200,000  in  one-off  costs  per  firm,  and  between  €10,000  and  €20,000  in  on-
going costs. 

If  we  assume  that  the  majority  of  existing  electronic  platforms  will  be  able  to  adapt  to  the 
requirements of an organised trading facility, then it is unlikely that a significant number of 
market  participants  will  have  to  link  up  to  new  trading  platforms.  However,  as  many 
platforms offer trading in only limited range of derivatives, it may be the case that a market 
participant currently operating electronically in one market will be required, as a result of the 
policy, to link up to a new platform to trade a different type of product. We assume that the 
infrastructure  linking  dealers  to  new  platforms  will  be  similar  to  that  required  for  existing 
platforms (estimated at one third of the original cost), but that for the buy-side there will be 
less  interoperability  and  thus  costs  of  linking  to  new  platforms  will  be  three  quarters  of  the 
original cost.  

There will also be costs to market participants who currently do not engage in any electronic 
trading at all. For sell-side participants this is estimated to be a relatively small number (40 
smaller dealers across the EU), and for buy-side customers this is estimated at 150.  

– 

TABLE 13: Background assumptions for costs estimates of trading 
of OTC Derivatives 

161 

 
 
  
 
Background assumptions 
Number of buy-side firms not currently trading electronically
Number of large buy-side firms currently trading electronically
Number of smaller buy-side firms currently trading electronically
Number of large dealers
Number of medium dealers
Number of smaller dealers not currently trading electronically
IT costs (staff per year)
Number of weeks in year
Proportion of buy-side costs in linking to new platforms 
Proportion of sell-side of linking to new platforms

150
50
450
14
36
40
€ 100.000
46
0,75
0,3

One-off costs for large buy-side of linking whole trading systems to platform
Ongoing costs for large buy-side

One-off costs to smaller buy-side of internet/trading access -  establish data feed
Ongoing- yearly subscription or access
Ongoing maintenance

One-off costs to larger dealers of linking systems to platform
Ongoing costs for large dealers
One-off costs to smaller dealers of linking systems to platform 
Ongoing costs for smaller dealers

Low

€ 1.000.000
€ 100.000

High

€ 2.000.000
€ 200.000

€ 4.348
€ 50.000
€ 5.000

€ 300.000
€ 30.000
€ 100.000
€ 10.000

€ 8.696
€ 100.000
€ 10.000

€ 500.000
€ 50.000
€ 200.000
€ 20.000  

The  table  below  presents  our  cost  estimates  for  a  range  of  assumptions.  Buy-side  firms  not 
already  connected  to  electronic  platforms  are  assumed  to  be  smaller  firms  that  would  adopt 
the  model  of  accessing  electronic  platforms  remotely  (i.e.  through  trading  screens,  and  not 
linking up their whole systems). One-off costs to these firms would range from €0.6 million 
to €1.3 million. On-going costs are significantly higher due to annual costs of accessing the 
systems, and range from €8.2 million to €16.5 million. One-off costs for sell-side firms not 
currently  engaging  in  electronic  trading  range  from  €4  million  to  €8  million,  and  on-going 
costs  range  from  €400,000  to  €800,000.  One-off  costs  in  this  case  are  higher  due  to  more 
significant investment in infrastructure to link all systems to the platforms.  

If we assume that firms currently engaged in electronic trading and those new to this method 
would  be  required  to  link  to  more  than  one  trading  platform,  costs  would  increase 
significantly. Costs for new firms now include the cost of accessing two platforms, and costs 
to ‘old’ firms include the cost of accessing one additional platform. If this assumption is held 
the total one-off costs for all market participants range from €47.6 million to €94.9 million, 
and on-going range from €37.5 million to €74.9 million.  

These costs represent an upper-bound as they assume that all firms currently not engaging in 
electronic trading will be required to do so under the new policy. However, it may be the case 
that some firms currently trade derivatives that will remain purely OTC. 

– 

TABLE 14: Costs of electronic trading 

Costs 
to 
participants (€000s) 

different  market 

Buy-side firms not connected 

Only one platform 

Two platforms 

Low 

High 

Low 

High 

162 

 
 
  
 
 
 
 
  
One-off costs 

On-going costs 

€ 652 

€ 1,304 

€ 1,141 

€ 2,283 

€ 8,250 

€ 16,500 

€ 14,438 

€ 28,875 

Sell-side firms not connected 

One-off costs 

On-going costs 

€ 4,000 

€ 8,000 

€ 5,200 

€ 10,400 

€ 400 

€ 800 

€ 520 

€ 1,040 

Buy-side firms already connected 

One-off costs 

On-going costs 

Sell-side firms already connected 

One-off costs 

On-going costs 

€ 38,967 

€ 77,935 

€ 22,313 

€ 44,625 

€ 2,340 

€ 4,260 

€ 234 

€ 426 

Total one-off costs 

€ 4,652 

€ 9,304 

€ 47,649 

€ 94,877 

Total on-going costs 

€ 8,650 

€ 17,300 

€ 37,504 

€ 74,966 

In conclusion, we assume that the majority of existing electronic platforms trading derivatives 
do already meet or will be able to adapt to the requirements of an organised trading facility. 
But this option would entail incremental costs to both dealers (sell-side) and investment firms 
(buy-side)  who  currently  do  not  engage  in  any  electronic  trading  at  all,  or  who  have  to 
connect to more than one platform. Under the assumption that firms would have to connect 
only  to  one  platform,  this  would  give  aggregated  one-off  costs  of  €4.7  to  €9.3  million  and 
ongoing costs €8.7 and €17.3 million.  

15.2.3.  Introduce  a  tailored  regime  for  SME  markets  under  the  existing  regulatory 

framework of MTF 

Regarding  the  development  of  a  tailor  made  regime  for  SME  markets,  the  main  objective 
would  be  to  facilitate  the  access  of  SMEs  to  capital  markets  at  a  proportionate  cost  by 
improving visibility and therefore liquidity in SME stocks. However, to gain more visibility 
and increase liquidity would need a high level of investor protection avoiding – for instance – 
any  market  abuse  such  as  insider  dealing  and market  manipulation.  Therefore,  cost  burdens 
cannot simply be reduced but could feed into a SME market quality label. This should reduce 
the ratio of cost against the capital gained in financial markets. All in all the impact would be 
that seeking equity in capital markets should become more attractive. The broader economic 
impact would be increased access to capital for SMEs leading to a reduction of their cost for 
capital.  

15.2.4.  Regulate appropriately new trading technologies 

The overall costs impact of the above preferred policy options will be marginal given that we 
will essentially enshrine existing practice into legislation.  

163 

 
 
  
 
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
 
There are at present between 25 and 50 firms involved in HFT in Europe with approximately 
a 50/50 split between HFT undertaken by firms that are authorised and non-authorised under 
MiFID281.  A  far  greater  number  of  firms  are  involved  in  automated  trading  since  all  large 
bank  brokers  and  broker  dealers  have  algorithmic  trading  suites  which  are  widely  used  by 
their  customers.  This  implies  that  there  may  be  hundreds  of  firms  involved  in  automated 
trading. We have assumed that 250 firms are active automated traders.  

We  assumed  that  25  HFT  would  require  authorisation  (so  that  senior  management  were 
judged fit and proper and capital adequacy tests were passed). We estimate the on-going cost 
implication would be €0.9 million per annum in total.282 

Based on feedback from market participants, firms involve in automated trading already have 
in  place  robust  risk  management  controls  to  mitigate  potential  trading  errors.  The 
reinforcement  of  organisational  requirements  of  investment  firms  involved  in  automated 
trading would mainly be codifying existing practice and hence would have little cost impact. 
However  there  might  be  additional  documentation  costs,  notably  if  firms  are  required  to 
notify  their  competent  authority  of  the  computer  algorithm  they  employ,  including  an 
explanation of its design, purpose and functioning. These costs would be marginal and would 
amount to a total one-off cost of €1 million.283 

Firms  that  permit  sponsored  access  require  more  sophisticated  systems  of  filters  and  risk 
controls than do those that do not. Based on interviews carried out by Europe Economics with 
sponsoring  firms  with  robust  risk  controls  we  estimate  that  4–6  working  weeks  would  be 
required  in  order  to  develop  a  suitably  robust  and  sophisticated  system.  At  an  estimated 
annual cost of €100,000 per IT professional this works out at about €8,888–€13,333 per firm. 
An  on-going  cost  below  this  level,  at  1–2  working  weeks  per  firm  per  annum  equates  to 
€2,222–€4,444 per firm. If we assume that ten firms permit sponsored access, the aggregate 
cost implication of these proposals would be one-off costs of €88,888–€133,333 and on-going 
costs would be approximately €22,222–€44,444.  

Trading  venues  already  have  systems  of  risk  controls  in  place,  including  stress  testing  and 
circuit  breakers,  and  hence  the  impact  of  these  proposals  is  likely  to  be  limited.  The 
Federation of European Stock Exchanges (FESE) has conducted a survey of its members to 
gather  information  on  the  use  of  stress  testing  and  circuit  breakers.  A  total  of  20  FESE 
members responded to the survey, all of whom operate a regulated market and 11 of whom 
operate an MTF. One respondent was an Exchange located outside the European Union. The 
results of this survey were included in their answer to our public consultation and led FESE to 
state that "a large portion of existing RMs and MTFs already have such risk controls in place 
(such as circuit breakers and stress testing). You will find below the FESE table summarising 
the current risk controls in place in the trading venues having responded to its survey:  

– 

TABLE 15: Trading venues – Risk controls in place 

164 

 
 
  
 
Of those that responded to the survey, 16 (80 per cent) stated that circuit breakers are used on 
the  regulated  market  and  8  stated  that  circuit  breakers  are  used  on  its  MTF  (73  per  cent  of 
MTFs).  A  lower  proportion  of  respondents  stated  that  stress  testing  is  used  on  regulated 
markets  and/or  MTFs.  In  particular,  9  (45  per  cent)  stated  that  stress  testing  is  used  on 
regulated markets and 7 stated that it is used on MTFs (63 per cent of MTFs). 

Lastly  it  is  noteworthy  that  some  trading  venues  also  have  fee  structures  in  place  that 
discourage  market  participants  from  maintaining  very  high  order-to-execution  ratios.    The 
driving force behind these fee structures appears to be the additional bandwidth requirements 
that are associated with high levels of cancelled orders rather than specific concerns about the 
potential  adverse  impact  on  the  market  and  other  market  participants  of  high  order-to-
execution  ratios.  However,  to  the  extent  that  high  order  levels  could  create  infrastructure 
challenges to the market’s data handling capabilities such levies are a useful tool to ameliorate 
this form of systemic risk. 

In  the  following  paragraphs,  we  describe  arrangements  that  are  currently  in  place  at  the 
London Stock Exchange and Euronext LIFFE. 

London Stock Exchange    

The  current  London  Stock  Exchange  (LSE)  Trading  Services  Price  List  specifies  an  “order 
management surcharge” that applies in certain circumstances.284  The surcharge applies if the 
number  of  order  events  (defined  as  order  entry,  order  modification  and  order  deletion)  per 
executed trade exceeds specified limits.  The applicable limits depend on the index in which a 

165 

 
 
  
 
 
security  is  listed  and  a  different  limit  applies  for  Exchange  Traded  Funds  (ETFs)  and 
Exchange Traded Products (ETPs).  The following table shows the applicable limits. 

– 

TABLE 16:  Order events per trade limits at LSE 

Security 

Number  of  order  events  per  electronic  trade  permitted 
before order management surcharge payable 

FTSE  100  and  FTSE  250  Index 
securities 

Exchange  Traded  Funds  and 
Exchange Traded Products 

500 

200 

All other securities 

No order management surcharge 

Source:  LSE (2011), “Trading Services (On- Exchange and OTC) Price List with Effect From 1 April 2011”, Page 4 

The surcharge is 5p, except for qualifying order events in ETFs or ETPs which have a charge 
of  1.25p.    To  qualify  for  the  lower  surcharge  available  for  ETFs  and  ETPs,  “order  book 
trading  by  the  member  firm  must  exceed  £500  million  by  value  or  10  per  cent  of  the  order 
book value traded in the product group over the billing period”.285 

The surcharge is assessed separately for each member firm in each segment (i.e. each division 
of the market) on a daily basis, with the exception of ETFs and ETPs which are assessed daily 
for each member firm in each product group (i.e. ETFs or ETPs). 

NYSE LIFFE 

NYSE  LIFFE  applies  an  order-to-trade  ratio  based  bandwidth  usage  charge  in  relation  to 
Euribor, Short Sterling and Euroswiss Interest Rate Futures Contracts.  The charge applies to 
all Individual Trading Mnemonics (“ITMs”) with the exception of Designated Market Making 
ITMs. 

Charges do not apply to the first 5,000 order entries, modifications or deletions made by an 
ITM  in  each  of  the  contracts.    If  this  limit  is  exceeded  in  a  single  trading  day,  an  order-to-
trade ratio of 2:1 applies and any order events that exceed the 2:1 ratio are charged at 17.5p. 

For  all  other  products,  NYSE  LIFFE  allocates  bandwidth  limits  to  each  Member.    If  these 
daily individual limits are exceeded the per-message charges shown in Table  are applied. 

– 

TABLE 17:  NYSE LIFFE charges for exceeding bandwidth limits 

Up to message allocation 

Between  100%  and  up  to  110%  of  message 
allocation 

No charge 

£0.070 

Above  110%  and  up  to  120%  of  message 
allocation 

£0.140 

Above 120% of message allocation 

£0.175 

Source:  NYSE LIFFE “European Markets Subscriptions, fees and charges 2011”, Page 17 

15.2.5.  Increase trade transparency for market participants 

Concerning the costs and benefits associated with the preferred options in the area of equity 
pre-trade transparency, the proposals mainly clarify the status quo and seek to ensure uniform 
application of the waivers via a reinforced process involving ESMA. No incremental costs are 

166 

 
 
  
 
 
thus expected except for possible unquantifiable costs in terms of reduced information flows 
and a potential loss of liquidity from the obligation to make actionable indications of interest 
(IOIs) pre-trade transparent on a par with other orders, as market participants could choose to 
use IOIs with less information, so as to avoid their IOI being classed as actionable. Regarding 
post-trade  transparency,  system  costs  related  to  shorter  publication  delays  seem  to  be 
insignificant according to the majority of market participants. However, costs caused by firms 
having a shorter time to unwind a risky position might be substantial and would be passed on 
to clients. 

The  costs  of  extending  the  equities-transparency  regime  to  shares  traded  only  on  MTFs  or 
organised trading facilities is not expected to generate significant costs as MTFs are already 
expected to possess and disclose this information. In addition some of the primary MTFs (e.g. 
AIM and First North) already apply the equity transparency regime to their market. However 
we have taken a prudent approach and derived the possible cost impact from the overall one-
off implementation costs of the equity transparency regime when MiFID was first introduced. 
As per their past work on the FSAP Cost of Compliance study, Europe Economics estimated 
the one-off cost of the IT and systems necessary to support transparency requirements cost the 
financial services industry about €100 million in respect of equity trading under MiFID. The 
population  of  shares  traded  only  on  MTFs  is  dwarfed  by  the  trading  of  shares  on  regulated 
markets. Europe Economics estimates that the volume of trading of shares only admitted to 
trading on MTFs is substantially below one cent of the existing volume of equity traded286. As 
a result, we consider a further one-off cost of around €2 million to be a reasonable estimate 
(2% of the one-off costs of the introduction of the initial equity regime). The incremental on-
going cost is estimated at about €0.4 million (being 20 per cent of the one-off cost). 

*** 

Concerning wholly new pre- and post-trade transparency requirements for non-equities, it is 
not  possible  to  make  complete  cost-benefit  assessments  at  this  stage,  as  these  will  largely 
depend on the detailed requirements in terms of delays and content by type of instrument and 
venue to be developed in implementing legislation. However, some presumptive assessments 
can be made.  

The  introduction  of  a  transparency  regime  for  non-equities  is  expected  to  generate  overall 
one-off  costs  of  €5.5  million  to  €9.2  million  with  yearly  ongoing  cots  of  €8.8  million  to 
€12.7million.  

– 

TABLE  18:  Summary  of  estimated  compliance  costs  to  increase 
trade transparency for MTFs and market participants  

Costs (€000s) 

Pre-trade  

Post-trade 

Total 

MTFs 

One-off 

€400 - €800 

€400 - €800 

€800 - €1,600 

On-going 

€160 - €320 

€160 - €320 

€320 - €640 

Market participants 

One-off 

€597 - €1,029 

€4,124 - €6,574  €4,721 - €7,603 

167 

 
 
  
 
 
 
 
 
 
  
On-going 

Total 

One-off 

On-going 

€4,056 
€5,256 

- 

€4,518 - €6,838 

€8,574 
€12,094 

- 

€997 - €1,829 

€4,524 - €7,374  €5,521 - €9,203 

€4,216 
€5,576 

- 

€4,678 - €7,158 

€8,894 
€12,734 

- 

Overall, the indirect benefits of improving pre-trade data flows in non-equity markets in terms 
of more efficient price formation, increased competition among dealers and greater certainty 
for investors in contrast to the present context of available data across non-equity products is 
difficult  to  judge.  Concerning  the  requirement  to  publish  pre-trade  information  on  available 
and  actionable  trading  interest  in  a  continuous  manner,  significant  compliance  costs  are  not 
expected  for  venues  which  operate  order-driven  trading  systems  which  publish  or  at  least 
possess  the  data  in  the  required  sense  already.  Costs  for  venues  which  operate  request-for-
quote  or  similar  systems  are  estimated  at  between  €400,000  and  €800,000  in  terms  of  total 
one-off costs and on-going costs of between €160,000 and €320,000 per year for all of the 46 
MTFs active in non-equities today in terms of extending data publication systems to meet the 
more  stringent  requirements.  As  for  requirements  for  investment  firms  to  make  their  OTC 
quotes  public,  this  implies  market  participants  will  be  required  to  connect  to  a  platform 
through  which  such  prices  can  be  disseminated.  Hence  it  is  likely  that  the  main  costs  to 
market participants will be either in linking their automated pricing engines to the platform, or 
establishing  manual  feeds.  One-off  costs  would  range  from  €597,000  to  €1  million  and 
include the cost of developing feeds for dealers with automated pricing systems (estimated at 
between  one  and  two  weeks  IT  time  per  firm,  for  88  firms)287  and  setting  up  secure 
connections  for  smaller  firms  with  manual  pricing  (estimates  at  between  three  days  and  1 
week per firm, for 176 firms).288 It should be noted that these figures refer only to dealers in 
bond  and  derivative  markets  (as  they  are  the  ones  affected  by  pre-trade  transparency), 
ignoring  the  buy-side.  We  estimate  that  in  there  are  54  large  and  medium  dealers  in  bond 
markets and 34 in derivatives (giving 88), and 100 smaller dealers in bonds and 76 smaller 
dealers in derivatives markets (including commodities). On-going costs would range from €4 
million to €5.2 million and include maintenance and support of data feeds for large firms, and 
costs of manually entering pricing information for smaller firms (estimated at between 1 and 
1.5 hours a day per firm, across 176 firms). 

– 

TABLE  19:  Costs 
transparency 

to  MTFs  of 

increasing  pre-trade  price 

Costs to MTFs (€000s) 

Low 

High 

Building on RFQ regime 

One-off costs 

On-going costs 

€400 

€160 

€800 

€320 

– 

TABLE  20:  Costs  to  market  participants  trading  in  bonds  and 
derivatives OTC of a central RFQ pre-trade regime 

168 

 
 
  
 
 
 
 
  
  
 
Costs  of  RFQ  system  for  whole  OTC  market 
(€000s) 

Low 

Dealers with automated pricing systems 

One-off costs 

On-going 

Dealers with manual pricing 

One-off costs 

On-going 

Total one-off 

Total on-going 

€191 

€1,856 

€405.57 

€2,200 

€597 

€4,056 

High 

€383 

€1,951 

€647 

€3,305 

€1,029 

€5,256 

Increasing  post-trade  transparency  requirements  for  regulated  markets  is  unlikely  to  be 
significant in cost terms. Post-trade transparency requirements for MTFs would be somewhat 
different as these platforms in general do not currently disseminate post-trade information on 
a  multilateral  basis  (very  often  only  the  parties  to  the  trade  are  able  to  access  such 
information).  Costs  to  market  participants  vary  according  to  whether  they  would  be  large 
enough  to  link  their  trading  systems  directly  to  reporting  platforms,  of  if  they  will  have  to 
enter trade information manually. Whilst infrastructure needed for different products will be 
similar  (e.g.  bonds,  structured  finance  products  and  derivatives),  it  is  likely  that  separate 
systems will have to be developed for each. Furthermore, reporting of derivatives is likely to 
be more complex, leading to higher costs. The table below summarises the potential costs to 
both trading platforms and market participants in the three different product markets. 

In terms of compliance costs arising from post-trade transparency requirements, one-off costs 
across  all  46  MTFs289  offering  trading  in  non  equity  instruments  are  expected  to  range 
between  €400,000  and  €800,000  and  on-going  costs  of  IT  maintenance  to  range  between 
€160,000 and €320,000 per year.  

For market participants required to develop data feeds from their front office systems to data 
platforms,  one-off  cost  estimates  for  the  whole  industry  for  all  types  of  non-equity 
instruments  (bonds,  structured  products,  and  derivatives)  range  from  €4.1  million  to  €6.6 
million with on-going costs estimated at €4.5-6.8 million per year.  

• 

TABLE 21: Summary of estimated post-trade transparency compliance costs  

for MTFs and market participants  

Costs (€000s) 

Bonds  

Structures 
products 

Derivatives 

Total 

MTFs 

One-off 

€226 - €452 

€174 - €348 

€400 - €800 

On-going 

€90 - €181 

€70 - €139 

€160 - €320 

169 

 
 
  
 
  
  
  
 
 
 
 
 
 
Market participants 

One-off 

On-going 

€1,208 
€1,967 

€1,476 
€2,330 

- 

- 

€1,208 - €1,967  €1,708 
€2,640 

€1,476 - €2,330  €1,566 
€2,178 

- 

€4,124 - €6,574

- 

€4,518 - €6,838

One-off costs across MTFs offering trading in bonds (approximately 26) are expected to range 
between  €226,000  and  €452,000  and  on-going  costs  of  IT  maintenance  to  range  between 
€90,000  and  €181,000  per  year.  One-off  cost  estimates  for  MTFs  offering  trading  in 
derivatives (approximately 20) would range from between €174,000 and €348,000, with on-
going costs of between €70,000 and €139,000 per year.  

In the case of bonds, one-off cost estimates for market participants range from €1.2 million to 
€1.9 million290, with on-going costs ranging from €1.4 to €2.3 million per year.  

– 

TABLE 22: Costs to market participants of post-trade reporting  

Costs to market participants (€000s) 

Low 

Firms with automated reporting 

One-off costs 

On-going  

Firms with manual reporting 

One-off costs 

On-going291 

Total one-off 

Total on-going 

€975 

€226 

€233 

€1,250 

€1,208 

€1,476 

High 

€1,599 

€452 

€367 

€1,878 

€1,967 

€2,330 

We assume that similar additional one-off and ongoing costs to market participants would be 
required for structured finance products as for bonds.  

In the case of derivatives, we assume that the process for post-trade reporting will be similar 
as for other non-equity products (in terms of time required to develop data feeds or manually 
enter trades), but that the time required would be greater due to the additional complexity of 
derivative products. Estimates obtained from a post-data publishing service for equities entail 
between 1 and 1.5 years of project time across the major firms to develop the data feed, as 
well  as  costs  to  the  wider  industry  of  adapting  the  feed  protocols  to  their  own  systems 
(between  3  and  6  weeks  IT  time).  On-going  costs  include  IT  maintenance  and  the  costs  to 
smaller dealers of manually entering trade details (assumed at between 1.5 and 2 hours a day 
per firm).292 One-off costs range from €1.7 to €2.6 million, with on-going ranging from €1.5 
to €2.1 million per year.  

170 

 
 
  
 
 
 
  
  
  
  
  
– 

TABLE  23:  Costs  to  market  participants  trading  in  derivatives  of 
post-trade reporting 

Costs to market participants (€000s) 

Low 

High 

Firms with automated reporting systems 

One-off costs 

On-going 

Dealers with manual systems 

One-off costs 

On-going 

Total one-off 

Total on-going 

€1,530 

€139 

€177 

€1,427 

€1,708 

€1,566 

€2,361 

€278 

€279 

€1,900 

€2,640 

€2,178 

As mentioned above, the introduction of a transparency regime for non-equities is expected to 
generate overall one-off costs of €5.5 million to €9.2 million with yearly ongoing cots of €8.8 
million  to  €12.7million.  This  is  significantly  lower  than  the  overall  one-off  implementation 
costs  of  the  equity  transparency  regime  when  MiFID  was  first  introduced  (as  per  Europe 
Economics  past  work  on  the  FSAP  Cost  of  Compliance  study).  The  main  difference  is  the 
difference in the step change from existing practice implied. Request For Quote systems and 
the automated pricing systems to support RFQ are already in place (at least for larger dealers) 
making  incremental  costs  low.  If  continuous  pricing  was  being  adopted  in  pre-trade 
transparency  for  non-equities  then  this  would  imply  a  much  higher  estimate.  Another  main 
difference is the lower number of participants affected is the non-equities markets compared 
to equities markets.  

*** 

The  one-off  compliance  costs  for  EU  authorised  firms  and  APAs  of  conforming  with  and 
providing  a  fully  standardised  reporting  format  and  content  for  post-trade  data  should  note 
exceed  one  quarter  of  the  original  investment  in  transparency  systems  when  MiFID  was 
implemented and are estimated at €30 million. Maintenance may be €3–€4.5 million per year, 
or  10-15%  of  this.  Finally,  compliance  and  operational  costs  for  a  commercial  consolidator 
are  considered  to  be  entirely  manageable  (they  already  provide  similar  solutions  for  the 
equities markets). 

Requiring venues and vendors to sell pre-and post-trade data in unbundled form, provided that 
the format and content of trade reports are fully standardised, may be expected to reduce the 
cost of a European consolidated post-trade data feed by 80%, i.e. from €500 to €100 a month 
per user.  

Market data providers have estimated that a total fee for a full data set of pre- and post-trade 
data  of  all  EU  venues  would  cost  about  €500  per  user  per  month.  This  is  confirmed  by  the 
analysis  conducted  by  PricewaterhouseCoopers  of  the  current  cost  of  real  time  data  across 
Europe. The table below shows that the sum of monthly fees per user and per device in order 
to get a complete view of all European equity markets is €497 at present. In comparison, the 

171 

 
 
  
 
  
  
  
cost  of  consolidated  post-trade  data  in  the  US  is  US$  70  (around  €50)  per  user  per  month 
although  it  should  be  noted  that  there  are  significant  differences  between  the  European  and 
US market data regime (e.g. a competitive model in Europe compared to a monopoly in the 
US, a much higher number of trading venues and shares traded in Europe). 

–  TABLE 24: Cost of Real-time data per user per month 

Trading Venue 

Cost of Real-time L1  

BOAT 

LSE 
ENX Paris 
Xetra 
Chi-X 
Mercado 
Italy 
ENX Amsterdam 
Stockholm 
BATS 
Turquoise 
Stuttgart 
Helsinki 
Copenhagen 
ENX Brussels 
Nasdaq OMX Eur. 
Frankfurt 
Athens 
Warsaw 
Vienna 
ENX Lisbon 
Plus 
SIX Swiss 
Liquidnet 
TLX 
Irish 
Budapest 
Johannesburg 
Prague 
POSIT 
NYSE Arca 
Burgundy 
Duesseldorf 
Oslo 
Smartpool 
Nomura NX 
Munich 
Hamburg 
Xetra Intl Mkt 
Bucharest 
Cyprus 
Berlin 
Tallinn 
Equiduct 
Ljubjana 
Vilnius 
Hannover 
Nordic Growth 
Bulgaria 
Luxembourg 
BlockCross 
Riga 
Bratislava 
Total 

€ 40.00 

€ 30.00 
€ 66.00 
€ 56.00 
€ 0.00 
€ 13.00 
€ 12.00 
€ 0.00 
€ 22.00 
€ 0.00 
€ 0.00 
€ 0.00 
€ 0.00 
€ 0.00 
€ 0.00 
€ 0.00 
€ 0.00 
€ 7.00 
€ 30.00 
€ 33.00 
€ 0.00 
€ 17.00 
€ 10.00 
€ 0.00 
€ 4.00 
€ 12.00 
€ 10.00 
€ 16.00 
€ 10.00 
€ 0.00 
€ 0.00 
€ 0.00 
€ 0.00 
€ 42.00 
€ 0.00 
€ 0.00 
€ 0.00 
€ 0.00 
€ 0.00 
€ 10.00 
€ 0.00 
€ 0.00 
€ 19.00 
€ 0.00 
€ 0.00 
€ 0.00 
€ 0.00 
€ 0.00 
€ 0.00 
€ 30.00 
€ 0.00 
€ 0.00 
€ 8.00 
€ 497.00 

€ 40.00 (for Systematic Internalisers and Investments firms 
reporting to BOAT, see Question 1) 
£ 26.51 = € 29.50
€ 59.00  + € 7.00 for MiFID OTC = € 66.00
€ 56.00 for Xetra and all German Re gionals
€ 0.00
€ 13.51
€ 12.00
Covered by Euronext fee above
€ 22.00 for Nasda q OMX Nordic Data
€ 0.00
€ 0.00
Included in the package for Xetra and German Regionals data 
Included in the package for Nasdaq OMX Nordic data
Included in the package for Nasdaq OMX Nordic data
Covered by Euronext fee above
€ 0.00
Included in the package for Xetra and German Regionals data 
€ 7.00
€ 30.00
€ 33.00
Covered by Euronext fee above
£ 15.00 = € 16.68
CHF 15.00 = € 10.00
Included in BOAT data
€ 4.00
€ 12.00
€ 10.00
$ 22.25 = € 16.00
€ 10.00
Included in BOAT data
€ 0.00
€ 0.00
Included in the package for Xetra and German Regionals data 
NOK 342.00 = € 42.00
Included in Euronext OTC data
Included in BOAT data
Included in the package for Xetra and German Regionals data 
Included in the package for Xetra and German Regionals data 
Included in the package for Xetra and German Regionals data 
€ 10.00
€ 0.00
Included in the package for Xetra and German Regionals data 
Nasdaq OMX Baltic € 19.00
€ 0.00
€ 0.00
Already included in Nasdaq OMX Baltic
Included in the package for Xetra and German Regionals data 
€ 0.00
€ 0.00
€ 30.00
€ 0.00
€ 0.00
€ 8.00

Source: PwC (2010), based on Thomson Reuters data 

If consolidated trade data were unbundled, we would expect that the post-trade bundle would 
be  available  at  less  than  half  of  the  cost  of  the  full  consolidated  tape.  The  rationale  for  this 
view is a comment reported in the PwC report that from an exchange perspective “the value 
of  a  post-trade  piece  of  the  bundle  is  a  smaller  percentage  than  the  pre-trade”.  The  view  is 
further  supported  by  the  fact  that  NYSE  Euronext,  one  of  the  few  exchanges  to  offer 
unbundled  data,  charges  €90  per  month  for  its  full  order  book  bundled  data.293  If  this 

172 

 
 
  
 
 
  
 
difference  held  across  trading  venues,  consolidated  post-trade  data  would  be  available  at 
approximately 18 per cent of the cost of the full consolidated tape. This means that requiring 
venues  and  vendors  to  sell  pre-and  post-trade  data  in  unbundled  form,  provided  that  the 
format and content of trade reports are fully standardised, may be expected to reduce the cost 
of a European consolidated post-trade data feed by about 80%, i.e. from €500 to €100 a month 
per user. However, the number of users and the extent to which each is buying multiple data 
feeds are not known. An aggregated figure for this potential saving is not therefore calculable. 
However,  by  way  of  an  illustration  only,  if  each  firm  authorised  to  conduct  execution 
activities on average had one user buying all tapes (or enough users each buying one tape to 
achieve  the  same  effect)  this would  mean  5,700  buyers  of  the  consolidated  tape  now  —  on 
these heroic (but not wholly unreasonable) assumptions, the potential saving would be €27.9 
million per annum. 

15.2.6.  Reinforce  regulators'  powers  and  consistency  of  supervisory  practice  at  European 

and international levels 

The oversight of positions in derivative markets takes place in a number of jurisdictions both 
within and without the EU. Although position management is largely limited to commodity 
derivatives,  some  exchanges  dealing  with  other  derivatives  also  have  the  ability  to  set 
limits.294  Regulatory  oversight  of  positions  is  mandated  by  the  competent  authority  but 
usually carried out either wholly or partially by the exchanges or MTFs that offer derivative 
contracts. 

The  table  below  summarises  Europe  Economics  research  into  the  use  of  position  oversight 
among exchanges within and without the EU, indicating whether firm position limits or more 
flexible  management  is  used,  and  whether  the  main  rationale  behind  the  oversight  is  the 
orderly  functioning  of  the  market  (e.g.  preventing  settlement  squeeze  and  market  abuse)  or 
controlling excessive speculation. 

– 

TABLE  25:  Position  oversight 
Jurisdictions  

in  EU  and  Third  Country 

Country 

Main  exchange  and  derivative 
products 

Position oversight 

Rationale 

Belgium 

NYSE 
agriculture, ETF and stocks  

Euronext. 

Liffe: 

Firm  position 
flexible management. 

limits  and 

Market 
functioning 

France 

NYSE  Euronext.  Liffe:  stocks 
and stock indexes  

Firm  position 
flexible management. 

limits  and 

Market 
functioning 

Germany 

Eurex:  agriculture,  precious 
metals,  energy  and  financial 
products;  European  Energy 
Exchange:  natural  gas,  coal, 
power. 

limits  for 
Firm  position 
physically  settled  contracts. 
Position  management  for 
cash-settled. 

Market 
functioning 

Italy 

Borsa Italiana: stock and stock 
index futures and options 

No 
firm 
management. 

limits; 

flexible 

Market 
functioning 

173 

 
 
  
 
Spain 

UK 

Mercado  Español  de  Futuros 
government 
Financieros: 
bonds, 
stock 
and 
indexes  

stocks 

NYSE 
Liffe: 
Euronext. 
agricultural; LME: metals; ICE 
Futures:  mainly  energy;  EDX: 
receipt 
equity  and  deposit 
options  and  futures;  European 
Climate Exchange: CO2 

Firm position limits 

Market 
functioning 

firm 

limits; 

flexible 
No 
management.  EDX 
has 
provision  for  the  use  of 
limits  but  does  not  apply 
them. 

Market 
functioning 

Argentina 

ROFEX:  agriculture,  foreign 
exchange and interest rate  

Australia 

Securities 
Australian 
Exchange: equity, interest rate, 
energy and agriculture  

Brazil 

and 
Brazilian  Mercantile 
Futures 
Exchange: 
agricultural,  precious  metal 
and financial products 

Firm  position  limits  for  all 
(e.g. 
contract 
financial 
as 
agricultural derivatives) 

types 
as  well 

Market 
functioning 

Firm limits for options only 

Market 
functioning 

Firm limits  

None given 

Canada 

ICE 
agriculture 

Futures 

Canada: 

Firm 
limits.  Exemptions 
based of CFTC regulations. 

None given 

China 

Shanghai  Futures  Exchange: 
metals, rubber and oil  

Firm  limits  on  speculative 
positions 

and 

Market 
functioning 
excessive 
speculation 

Excessive 
speculation  

Tokyo  Commodity  Exchange: 
rubber, 
precious  metals, 
aluminium and oil. 

Firm limits 

Japan 

US 

ICE  US,  Chicago  Mercantile 
Exchange, 
Liffe, 
CBOT,  

NYSE 

Position  limits  imposed  by 
agriculture 
CFTC 
markets.  To  be  extended  to 
energy and metals  

in 

Market 
functioning 
excessive 
speculation 

and 

Source:  Desk-based  research  of  regulator  and  exchange  websites  and  interviews  with  EU 
exchanges 

The  use  of  market  surveillance  for  preventing  market  abuse  and  ensuring  orderly  markets 
among  other  trading  platforms  is  less  widespread.  Research  conducted  by  PwC  and  Europe 
Economics suggests that multilateral trading facilities (MTFs) are required to undertake some 
trade  monitoring  to  combat  market  abuse,  but  that  position  limits  are  not  used,  not  is  any 

174 

 
 
  
 
 
 
 
 
regular  position  reporting  on  the  part  of  traders  required.  Other  electronic  trading  platforms 
that are not authorised MTFs (and which represent OTC trades) do not appear to apply any 
market monitoring.  

The  table  below  presents  a  summary  of  the  main  MTFs  and  electronic  trading  platforms 
offering trading in derivatives. According to PwC research, there are 29 derivative MTFs (13 
offering trading in commodity derivatives and 16 in financial derivatives). The same research 
estimates approximately ten electronic platforms that are not regulated as MTFs (although this 
figure  could  be  larger  if  all  larger  banks’  electronic  trading  facilities  are  considered  as 
electronic platforms). 

– 

TABLE 26: Market surveillance by MTFs and electronic platforms  

MTF/Electronic 
platform 

Country 

Instruments 

Position 
reporting 

Trading 
oversight 

Euronext  Liffe 
Bclear Equities  

UK 

Euronext  Liffe 
Bclear 
Commodities 

UK 

ICE 
(MTF) 

Creditex 

UK 

Equity 
derivatives 

Commodity 
derivatives 

Yes  

Yes 

CDS 

None  

ICE Energy 

UK 

Energy 
derivatives  

Yes 

Same  as  Liffe 
exchange 

Same  as  Liffe 
exchange 

Monitoring 
unusual trades 

of 

Position 
oversight 
similar  to  ICE 
exchange 

Powernext 
(MTF) 

France 

Energy 
derivatives  

None apparent   None apparent  

Bluenext  OTC 
(MTF) 

France 

CO2 

None apparent   None apparent  

Tradeweb (MTF)  UK 

Bloomberg 
SwapTrader 

ICAP 
ETC/Brokertec 
platform (MTF) 

US 

UK 

Monitoring 
unusual trades 

of 

Equity, 
interest 
rate  and  credit 
derivatives 

Trade 
logs 
available  to  the 
FSA 
no 
but 
official 
reporting 
obligation. 

Interest 
derivatives 

rate 

None apparent  

CDS 

None apparent  

None apparent 

Source: PricewaterhouseCoopers (2010) and Europe Economics research 

175 

 
 
  
 
 
Given the current level of position oversight within the EU taking place through exchanges as 
per noted above, the additional impact of competent authorities being empowered to perform 
additional oversight is unlikely to be significant. All Member States that authorise the main 
derivative exchanges, both those offering contracts in commodity derivatives295 and financial 
derivatives296, mandate a degree of position oversight, either through setting and monitoring 
position limits, or operating more flexible position management that requires traders and end 
clients to provide continuous information about position levels.  

Stronger  position  oversight  by  competent  authorities  of  trading  undertaken  away  from 
regulated markets, such as on MTFs and over the counter, is likely to have a greater impact, 
as it appears that the reporting of information is not currently mandated through these trading 
venues or practices. For these MTF platforms that do not, we estimate on-going costs to be 
between €1.6 million and €3.1 million per year across the EU297.  

If  all  members  of  MTFs  and  electronic  platforms  are  required  to  submit  additional 
information  about  the  contracts  they  enter  into  then  the  on-going  costs  of  doing  so  could 
range between €444,000 and €889,000 per year.298 Note that we only consider traders in non-
commodity  derivative  markets,  as  those  in  commodity  markets  will  already  be  subject  to 
position reporting under the section relation to commodity derivatives markets.299 300. 

The costs of implementing a system of ex ante hard position limits will depend on the nature 
of what is currently undertaken by exchanges and other trading platforms. We assume that the 
incremental costs to exchanges of a requirement to set position limits will be negligible. This 
is  because  many  exchanges  already  apply  limits,  and  those  that  do  not  already  have 
sophisticated  position  management  systems  which  could  adapt  to  the  introduction  of  limits. 
However,  costs  for  other  trading  platforms,  such  as  MTFs  and  electronic  platforms,  will  be 
higher. The costs to trading platforms of setting and monitoring position limits would depend 
on  whether  existing  market  surveillance  systems  are  in  place.  We  know  that  MTFs  already 
undertake some monitoring of trades to combat market abuse. Additional costs of monitoring 
position limits would therefore include one-off costs of setting up automated warning systems 
to  monitor  and  warn  against  position  levels,  and  on-going  costs  of  IT  support  and  staff 
oversight.  In  the  case  of  MTFs  we  estimate  one-off  cost  to  range  from  €2  million  to  €3 
million, and on-going costs to be between €3.7 million to €7 million a year301. In the case of 
electronic  platforms  where  no  surveillance  systems  are  currently  in  place  costs  will  be 
significantly higher, with one-off costs ranging from €6 million to €10 million, and on-going 
costs from €3.8 million and €9 million a year across the EU.302 This gives us for both MTFs 
and other electronic platforms consolidated one-off costs ranging from €8.2 million to €12.9 
million, and on-going costs to be between €7.5 million to €16.3 million a year. 

The table below summarises the costs of stronger position oversight (including the setting of 
position limits) for trading platforms other than exchanges and market participants: 

– 

TABLE 27: Costs of stronger oversight of positions  

Costs to MTFs, EP*s and market participants (€000s) 

Low 

High 

Requesting information on positions  

On-going costs for platforms 

€1,560 

€3,120 

On-going costs for market participants (reporting traders only) €353 

€588 

176 

 
 
  
 
  
  
On-going costs for market participants 

€444 

€889 

Setting and monitoring positions limits (MTF) 

One-off costs 

On-going costs 

Setting and monitoring position limits (Eps) 

One-off costs 

On-going costs 

Total one-off costs 

Total on-going costs 

* Electronic platforms 

€2,175 

€2,900 

€3,698 

€7,250 

€6,000 

€10,000 

€3,800 

€9,000 

€8,175 

€12,900 

€9,502 

€20,259 

In conclusion, the costs of stronger oversight of positions, including the setting up of position 
limits,  for  both  trading  platforms  and  market  participants  are  estimated  to  be  between  €8.2 
million and €12.9 million for one-off costs, and on-going costs to be between €9.5 million to 
€20.2 million a year. 

15.2.7.  Reinforce transparency towards regulators 

The  scope  of  transaction  reporting  currently  varies  across  the  EU303.  Only  four  countries 
collect OTC derivatives data (UK304, Ireland, Austria and Spain)305. In terms of instruments 
traded  only  on  MTFs  various  Member  States  apply  transaction  reporting  already:  Belgium, 
Denmark, Germany, Greece, Finland, Ireland, Romania and the UK. 

Based upon the above, and combined with estimates of the number of transactions currently 
within  the  transaction  reporting  regime,  Europe  Economics  estimates  the  current  annual 
recurring  cost  to  firms  of  transaction  reporting  to  be  in  the  order  of  €55–€90  million.306 
Breaking  this  down,  they  estimate  that  about  20  per  cent  of  this  relates  to  on-going  IT 
expenditure and about 55 per cent being the labour input (put another way, they believe that 
about  300–390  FTEs  work  on  transaction  reporting  activity  across  the  EU  at  present).  The 
remaining costs relate to data cleaning, payments to ARMs and so on. Again, based on their 
past  work  on  the  FSAP  Cost  of  Compliance  study,  they  believe  that  the  cost  of  originally 
implementing  the  MiFID  transaction  reporting  regime  may  have  been  at  least  €100  million 
across the EU.  

The extension of transaction reporting to instruments only traded on an MTF or an organised 
trading  facility  would  not  significantly  increase  the  volumes  of  transactions  processed, 
because  the  population  of  instruments  traded  only  on  an  MTF  is  dwarfed  by  the  trading  of 
instruments traded on a regulated market anyway  and  in  some  Member  States,  in  particular 
the  UK,  have  already  mandated  that  instruments  only  traded  on  an  MTF  are  transaction 
reported.  On  this  basis,  Europe  Economics  estimates  the  incremental  change  in  volume  of 
transactions  to  be  less  than  0.2  per  cent  of  that  currently  processed307.  As  a  result  they 
calculate  that  the  incremental  recurring  costs  would  be  relatively  trivial,  perhaps  as  low  as 
€0.1 million across the EU. The one-off cost should be reasonably low assuming that firms 

177 

 
 
  
 
  
  
  
  
would be able to achieve the necessary implementation changes using internal IT department 
resources and would involve building upon existing systems rather than developing new ones. 
They expect that the one-off cost for set-up would be €0.7–1.1 million across the EU308 

The  costs  for  including  OTC  instruments  and  commodity  derivatives  would  be  more 
substantial.  Notwithstanding  that  these  are  captured  for  transaction  reporting  purposes  by 
some Member States already (notably the UK and Spain which are estimated to account for 
76%  of  OTC  trades  within  the  EU309).  This  change  could  give  rise  to  an  estimated  one-off 
cost  of  €43.8–€53.9  million,  based  on  total  number  of  derivatives  dealers  of  250  and  an 
investment of between €60,000 and €1.75 million depending on the size of the dealer.310After 
taking into account those transactions already reported, the volume change of transactions to 
be  processed  would  again  not  be  very  significant311.  However  but  we  understand  that  OTC 
derivatives  may  have  additional  complexities  and  (to  the  extent  that  transaction  reporting  is 
not  everywhere  yet)  may  have  higher  error  rates  (e.g.  due  to  the  front-office)  relative  to 
equities.  Hence  we  estimate  the  on-going  cost  to  be  €0.5–€0.7  million.  If  foreign  exchange 
derivatives and credit derivatives that are related to an index (rather than a single issuer) are 
also brought within the scope of transaction reporting, we estimate the incremental set-up cost 
of this to be 10–15 per cent of the one-off costs described above, i.e. €4.4–€8.1 million. This 
is a little below the proportion of trades of this type relative to those captured above — we 
assume  some  positive  learning  effect  from  the  implementation  of  single  issuer  credit 
derivatives. In this case, the on-going cost would increase by a further €0.1–€0.2 million per 
annum312. 

Turning  to  commodity  derivatives,  we  apply  comparable  assumptions  to  those  for  OTC 
derivatives. We estimate that there are about 3.1 million commodity derivative transactions in 
the EU per annum.313 This gives us on-going costs of €0.4–€0.7 million.314 We have assumed 
that  the  one-off  investment  required  would  be:  that  400  (this  is  higher  than  the  assumed 
participants  on  financial  derivatives  to  reflect  the  specialist  firms  active  in  only  some 
commodity markets) smaller market participants would invest €20–€25,000, 36 would invest 
€75,000-€100,000  and  the  largest  around  €0.4–€0.5  million.  The  product  of  these  would  be 
incremental one-off costs of €16.0–€19.9 million. This is about 40 per cent of the equivalent 
figure for other (non-commodity) derivatives. 

However, it should be borne in mind that these costs result from a straightforward extension 
of  existing  MiFID  provisions.  However,  these  costs  will  virtually  disappear  when  reporting 
requirements under EMIR meet the requirements of transaction reporting under MiFID. As a 
result, trade repositories can be approved as Approved Reporting Mechanism. In that case, the 
waiving of a MiFID reporting obligation where an OTC trade has already been reported to a 
trade repository would allow the saving of the majority of the costs that would be associated 
with a straightforward extension of the transaction reporting regime to OTC derivative trades 
described  above  (and  indeed  savings  related  to  OTC  derivative  reporting  that  is  already 
conducted in the UK and elsewhere). 

Data on the number of transactions in depositary receipts are not readily available. However, 
the number of depositary receipts traded (i.e. which is clearly a higher figure than the number 
of  transactions  in  depositary  receipts,  since  each  transaction  will  include  at  least  one 
depositary receipt) per annum in the EU and the value of that trading is better established,315 
being  about  1  to  1.5  per  cent  of  the  equivalent  figures  for  equity  trading.  With  this  as  our 
guide  we  estimate  the  recurring  cost  of  extending  the  regime  to  depositary  receipts  to  be 
€0.5—€1.3  million  (i.e.  about  1-1.5  per  cent  of  the  current  cost  of  transaction  reporting). 
Again, we assume that one-off cost for set-up would be relatively low, and we estimate the 
costs  as  being  equivalent  to  those  required  to  bring  MTF-only  financial  instruments  into 

178 

 
 
  
 
scope: we believe €0.7–€1.1 million across affected firms to be a realistic estimate (again, we 
assume  that  this  would  involve  building  on  existing  systems  rather  than  developing  new 
ones). 

Overall  the  extension  in  scope  of  transaction  reporting  is  estimated  to  generate  incremental 
one off costs ranging from €65.4 to €84.1million and yearly ongoing costs from €1.6 to €3.0 
million: 

– 

TABLE 28: Costs for extending the scope of transaction reporting 

Transaction reporting (€ millions)

Extension to MTFs
Extension to OTC derivatives, excl. commodity derivatives
Extension to commodity derivatives
Extension to depositary receipts
Total transaction reporting costs

TOTAL INCREMENTAL COSTS
one-off

on-going

low

high

low

high

0,7
48,2
16,0
0,7
65,4

1,1
62,0
19,9
1,1
84,1

0,1
0,6
0,4
0,5
1,6

0,1
0,9
0,7
1,3
3,0

The  bulk  of  these  costs  relates  to  the  extension  to  OTC  instruments  and  commodity 
derivatives. However these costs will virtually disappear when reporting requirements under 
MiFID  and  EMIR  are  harmonised  and  trade  repositories  will  be  approved  as  Approved 
Reporting Mechanism.  

The costs associated with introducing a transaction reporting obligation on regulated markets, 
MTFs  and  any  organised  trading  facilities  that  offer  access  to  firms  not  authorised  as 
investment  firms  or  credit  institutions  (see  Annex  9.4.(a))  have  been  subsumed  within  the 
above  figures.  We  do  not  have  data  on  the  sub-set  of  trades  that  this  group  of  firms  are 
responsible for. 

The  cost  of  a  requirement  to  store  order  data  for  five  years  cannot  be  easily  estimated. 
However, it appears to be standard practice for such data to be stored for some period. Indeed, 
interviews  carried  out  by  Europe  Economics  with  some  trading  platforms  indicate  that  they 
have already in place order data storage capability in place. However we cannot assume this is 
universal  practice  and  the  retention  period  might  differ  as  well.  Hence,  some  marginal  data 
storage cost could be implied. If we assume that a transaction has a storage size of 15–20kb 
(say  equal  to  a  small  Microsoft  excel  spreadsheet,  which  appears  a  conservative  estimate) 
then  the  cost  of  storing  for  five  years  all  the  transactions  (note:  transactions  are  used  as  a 
proxy for orders) that would be within the new scope of transaction reporting would be €1.2–
2.3  million  per  annum.316  However,  as  we  have  noted,  some  storage  is  standard  practice 
already so the incremental would be below this level. We adopt additional four years storage 
as a guiding assumption, giving €1–€1.9 million as the implied on-going incremental cost. 

Third  party  transaction  reporting  is  already  being  conducted  through  ARMs,  notably  in  one 
large  Member  State  i.e.  the  UK.  This  option  will  seek  to  harmonise  the  framework  under 
which they operate and ensure oversight. The costs are therefore likely to be limited. 

15.2.8.  Increase transparency and oversight of commodity derivatives markets 

Set  up  a  system  of  position  reporting  by  categories  of  traders  for  organised  trading  venues 
trading commodities derivatives contracts 

179 

 
 
  
 
 
 
The introduction of position reporting by categories of traders would entail costs for both the 
trading venues and the market participants which overall are estimated at between €0.8 and 
€1.0  million  for  one-off  costs  and  between  €3.3  and  €3.8  million  as  yearly  ongoing  costs. 
Europe  Economics  estimates  there  to  be  in  total  15  commodity  derivative  exchanges  in  the 
EU, with those not listed below being smaller exchanges in countries such as Romania, the 
Czech  Republic,  Hungary  and  Slovakia).317  The  main  commodity  derivatives  regulated 
markets in the EU have already some form of position reporting and/or oversight in place (see 
table 29). The degree of trading and position oversight, including position reporting, among 
MTFs (see table 30), is less clear. However, it is likely that the majority do undertake some 
level of general trading oversight to combat market abuse.  

– 

TABLE 29: 
reporting requirements 

Main commodity derivative exchanges and position 

Exchange 

Country   Position Monitoring 

Members 
regularly 
submit 
position 
reports 

Respond  to 
requests  for 
information, 
including 
positions 

Bluenext - CO2 

France 

Position management 

Not explicit  Yes 

- 

agriculture, 
Eurex 
precious  metals,  energy 
and financial products. 

Germany 

European 
Exchange 

Energy 

Germany 

ICE  Futures  Europe- 
energy, CO2* 

UK 

Firm  position  limits  for 
settled 
physically 
Position 
contracts. 
management 
for  cash-
settled. 

Firm  position  limits  for 
settled 
physically 
Position 
contracts. 
management 
for  cash-
settled. 

No firm limits except for 
contracts  linked  to  US; 
otherwise 
flexible 
management. 

Yes 

Yes 

Yes 

Yes 

Yes 

Yes 

LME - metals 

UK 

No  firm  limits;  flexible 
management. 

Yes 

Yes 

Mercado  Español  de 
Futuros  Financieros  - 
energy, 
government 
bonds,  stocks  and  stock 
indexes  

Spain 

Firm position limits 

Yes 

Not explicit 

NYSE  Euronext  Liffe 
London - agricultural 

UK 

No  firm  limits;  flexible 
management. 

Yes 

Yes 

180 

 
 
  
 
NYSE  Euronext  Liffe 
-  Agricultural; 
Paris 
stocks 
stock 
indexes 

and 

France 

Firm  position  limits  and 
flexible management. 

Yes 

Yes 

*  Note:  CO2  derivatives  formally  traded  through  the  European  Climate  Exchange,  now 
owned by ICE 

Source:  Research  into  websites  and  rulebooks  of  regulators  and  exchanges,  and  interviews 
with LME, ICE, Liffe and Eurex 

The  degree  of  trading  and  position  oversight,  including  position  reporting,  among  other 
trading  platforms  such  as  MTFs  is  far  less  clear.  Interviews  with  MTFs  and  research  into 
websites and rule books presents (conducted both by Europe Economics and PwC318) suggests 
that  these  trading  platforms  do  not  require  any  position  reporting  by  members  and  traders. 
However,  it  is  likely  that  the  majority  do  undertake  some  level  of  more  general  trading 
oversight to combat market abuse. PwC research presents a list of the 29 main MTFs trading 
derivatives in Europe. Of these, 25 are based in the UK where general monitoring of trades 
for market abuse is required.319 The table below presents a summary of the main derivative 
MTFs and electronic platforms and their level of position and trading oversight. Note that this 
table  includes  all  main  derivative  MTFs  and  electronic  platforms,  not  just  those  trading 
commodity  derivatives.  In  addition,  we  do  not  list  all  MTFs  trading  commodity  derivatives 
(only the main ones for which information about position reporting and market oversight is 
readily available). According to the PwC report there are a total of 13 MTFs offering trading 
in commodity derivatives.320 

– 

TABLE 30: Position oversight on MTFs and electronic platforms 

MTF/Electronic 
platform 

Country 

Instruments 

Position 
reporting 

Trading 
oversight 

Euronext  Liffe 
Bclear Equities  

UK 

Equity 
derivatives 

Yes  

Euronext  Liffe 
Bclear 
Commodities 

UK 

ICE 
(MTF) 

Creditex 

UK 

Commodity 
derivatives 

Yes  

CDS 

None  

ICE Energy 

UK 

Energy 
derivatives  

Yes 

Position 
oversight 
similar  to  main 
exchange  

Position 
oversight 
similar  to  main 
exchange 

Monitoring 
unusual trades 

of 

Position 
oversight 
similar  to  ICE 
exchange 

Powernext 
(MTF) 

France 

Energy 
derivatives  

None apparent   None apparent  

181 

 
 
  
 
Bluenext  OTC 
(MTF) 

France 

CO2 

None apparent   None apparent  

Tradeweb (MTF)  UK 

Bloomberg 
SwapTrader 

ICAP 
ETC/Brokertec 
platform (MTF) 

US 

UK 

Equity, 
interest 
rate  and  credit 
derivatives 

None 

Monitoring 
unusual trades 

of 

Interest 
derivatives 

rate 

None apparent  

CDS 

None apparent  

None apparent 

Source: PwC (2010) and Europe Economics research 

If  position  reporting  already  takes  place  (as  in  the  majority  of  commodity  derivatives 
exchanges) then the additional costs of including client categorisation will be negligible. The 
only cost that would be incurred would be on the part of the exchanges in compiling a COT 
report, estimated at about a quarter of a full-time equivalent employee per year. Applying this 
to the 15 commodity regulated markets across the EU321 gives an on-going cost of €340,000 
per  year322.  For  the  members  of  the  regulated  markets  (reporting  traders),  including  detail 
about the client categorisation in the existence of a position-reporting regime will be trivial, as 
this will only entail an extra field or two in the submission. 

For MTFs it is assumed that systems of position management or monitoring already exist, but 
that  position  reporting  is  not  included.  Additional  one-off  costs  of  setting  up  reporting 
mechanisms  for  MTFs  and  electronic  platforms  are  estimated  at  between  €130,000  and 
€195,000  across  the  EU323.  On-going  costs  will  be  greater,  given  the  staff  costs  required  to 
collate and analyse position information as well as on-going IT maintenance costs, estimated 
at between €1.8 million and €2.4 million per year across the EU324.  

Costs  to  market  participants  (such  as  the  reporting  traders)  will  include  the  time  taken  to 
prepare position reports, which will depend on how automated their systems are. We estimate 
that there are approximately 52 traders325 across the various commodity derivative MTFs in 
the EU who would be required to report positions on behalf on their clients. One-off costs for 
these traders are estimated at between €624,000 and €780,000, based on a cost of developing 
reporting feeds of between €12,000 and €15,000 per trader. On-going costs of IT maintenance 
and a small staff cost are estimated at approximately €1.1 million per year.326 

– 

TABLE 31: Costs of position reporting and client categorisation 

One-off and on-going costs (€'000) 

Low 

High 

MTF costs 

One-off costs  

On-going costs  

Traders  

€ 130 

€ 195 

€ 1,833 

€ 2,360 

182 

 
 
  
 
 
 
 
 
 
One-off costs 

On-going costs  

Publishing costs (exchanges that already require position reporting)

On-going costs  

Total one-off  

Total on-going  

€ 624 

€ 780 

€ 1,102 

€ 1,118 

€ 340 

€ 340 

€ 754 

€ 975 

€ 3,275 

€ 3,818 

Review  exemptions  for  commodity  firms  to  exclude  dealing  on  own  a/c  with  clients  of  the 
main business and delete the exemption for specialist commodity derivatives  

Regarding  the  review  of  the  exemptions,  the  number  of  firms  benefiting  from  the  MiFID 
exemptions under Articles 2(1)(i) and 2(1)(k) is usually not known to regulators because they 
are not usually required to be authorised.  

However,  in  the  UK  the  boundaries  of  regulation  are  wider  than  those  under  MiFID. 
Therefore  some  of  the  MiFID  exempt  firms  in  the  UK  -  essentially  trading  arms  of 
commercial  firms  who  are  acting  as  agent  for  the  group  -  are  authorised  by  the  FSA  and 
subject  to  a  national  regulatory  regime.  But  there  are  UK  firms  dealing  on  own  account  in 
commodity  derivatives  that  are  inside  the  MiFID  exemptions  and  exclusions  from  UK 
regulation and therefore not authorised by the FSA.  

According  to  the  UK  FSA,  the  number  of  authorised  firms  in  the  UK  which  undertake 
commodity  derivatives  business  is  about  90.  Out  of  these  90  entities  approximately  50  are 
regulated as financial firms as they undertake other investment services or are active in other 
financial  instruments  and  40  are  specialist  commodity  derivatives  firms,  i.e.  their  main 
activity  is  in  relation  to  commodity  derivatives.  The  40  specialist  commodity  derivatives 
firms  consist  of  20  MiFID  regulated  firms  and  20  MiFID  exempt  firms  subject  to  the  UK 
"super  equivalent"  regime.  The  MiFID  exempt  firms  are  entities  owned  by  oil  and  energy 
companies. In most cases they have authorisations covering investment advice, receiving and 
transmitting and execution of client orders. These services are provided to companies within 
their  group  who  are  hedging  their  underlying  commercial  risk.  The  companies  who  are 
hedging their risk do not have to be authorised in the UK for dealing on own account because 
their  trading  is  done  through  the  regulated  entity  in  the  group.  This  superequivalent  UK 
regime  for  MiFID  exempt  commodity  firms  consists  of  prudential  requirements  (although 
softer than the Capital Requirements Directive – some firms are only subject to a requirement 
to  hold  adequate  financial  resources),  similar  MiFID  organizational  requirements  and  light 
conduct of business rules (reflecting the fact that they do not deal with retail clients) .  

The  deletion  of  the  exemption  under  Article  2(1)(k)  for  trading  on  own  account  and  the 
narrowing  down  of  the  notion  of  trading  on  own  account  under  Article  2(1)(i)  should  not 
impact  most  of  the  MiFID  exempt  commodity  firms  the  FSA  regulates.  These  are  mainly 
exempt  by  virtue  of  Article  2(1)(b)  because  they  provide  services  within  their  group. 
Commercial firms dealing on own account through MiFID exempt firms authorised in the UK 
would need to rely on either the exemption under Article 2(1)(i) and/or Article 2(1)(d) if they 
were to remain exempt from MiFID. The same is true for the small number of cases where the 
currently MiFID exempt firm is part of a larger commercial entity rather than being a separate 

183 

 
 
  
 
 
 
entity within the group. The impact in practice would depend upon how narrow the exemption 
for dealing on own account as an ancillary activity in Article 2(1)(i) became.  

The number of commercial entities providing investments services to the clients of their main 
business on an ancillary activity is not know to the UK FSA as these MiFID exempt entities 
benefit from a domestic exemption as well and do not fall under the scope of the UK super 
equivalent regime. Hence the number of firms possibly impacted by a strict application of the 
notion of ancillary activity cannot be assessed. 

Discussions  with  industry  associations  led  by  Europe  Economics  were  inconclusive  in  this 
matter. Due to the uncertainties regarding the number of firms which might be affected, we 
have  only  estimated  the  costs  on  a  per  firm  basis.  Firms  benefitting  from  exemption  under 
Article  2(1)(k)  would  be  most  affected  by  the  proposals,  as  they  would  not  have  the 
possibility of reorganising to reduce or avoid the burden of authorisation under MiFID, such 
as  may  be  the  case  with  firms  benefitting  from  exemptions  under  Article  2(1)(i).  These 
commodity specialist firms would have to ensure they are authorised under MiFID and fulfil 
transaction  reporting,  record  keeping  and  best  execution  requirements.  Firms  which  also 
provide  ancillary  investment  services  would  also  have  to  comply  with  Conduct  of  Business 
rules.  Cost  estimates  for  firms  complying  with  MiFID  for  the  first  time  from  the  FSA 
(2006)327 reached median one-off costs of MiFID of around €12,000 for a small firm (defined 
as  having  up  to  100  employees);  around  €295,000  for  a  medium-sized  firm  (100-5,000 
employees);  and  just  over  €8  million  for  a  large  firm  (over  5,000  employees).  The  cost  to 
commodity  or  commodity  derivatives  trading  houses  will  be  lower  than  this  if  they  do  not 
provide any investment advice but will be a non-trivial nonetheless.  

Extend the application of MiFID to secondary spot trading of emission allowances 

Three  categories  of  market  players  might  be  impacted  by  this  measure:  trading  platforms 
offering  spot  trading  in  emission  allowances,  compliance  buyers  (i.e.  energy  and  industrial 
companies which have a regulatory obligation to surrender emission allowances per emitted 
CO2 ton) and market intermediaries offering intermediation services in emission allowances. 

The  first  category  impacted  would  be  trading  venues.  At  present,  three  major  carbon 
exchanges  offering  spot  trading  in  emission  allowances  have  a  status  of  a  regulated  market 
and conform to the corresponding requirements set out in the MiFID. A few other platforms 
are  also  making  preparations  to  apply  for  authorisation  as  a regulated  market  in  accordance 
with the MiFID – these efforts are made in the context of the Auctioning Regulation328 and 
the  conditions  for  eligibility  that  Regulation  establishes  for  candidate  exchanges  seeking 
appointment  as  an  auction  platform.  As  a  result,  in  the  next  few  years  most  leading  carbon 
exchanges active in the spot segment would anyhow take steps to become a regulated market 
–  irrespective  of  any  changes  foreseen  to  the  scope  of  MiFID.  Thus,  the  application  of  the 
MiFID  to  spot  trading  in  emission  allowances  would  predominantly  affect  smaller  trading 
venues  like  national  or  regional  energy  or  commodity  exchanges  which  consider  emissions 
trading  as  complementary  to  their  main  lines  of  business.  The  application  of  the  revised 
MiFID  in  their  case  would  mean  that  in  order  to  continue  spot  trading  activity  they  would 
need  to  make  necessary  adaptations  to  their  organisation  and  operations  in  order  to  be  in 
position  to  seek  a  MiFID  authorisation.  For  the  one-off  adaptation  costs  and  ongoing 
compliance costs to be proportionate to the scale of their activity in the carbon markets, the 
applicant  trading  venues  could  consider  between  different  types  of  MiFID  authorisation 
available: a regulated market (most comprehensive but involving substantial costs), an MTF 
and  an  organized  trading  facility  (most  basic  and  least  expensive).  At  present,  the  costs  of 
obtaining a MTF authorisation by a trading  venue are estimated at €300,000–€400,000 as a 

184 

 
 
  
 
one-off cost and €90–€100,000 on an on-going basis (including market surveillance costs)329. 
The costs of operating as an OTF for such entities are estimated at €200,000 one-off with €40-
60,000  for  on-going  compliance  per  year330.  It  is  worth  noting  that  a  number  of  venues  are 
part  of  wider  groups  and  should  be  able  to  leverage  experience  from  these.  Some  are  also 
already conducting market surveillance (one of the major cost drivers) and thus may be able 
to incur lower adaptation costs. If we assume that there would be six smaller trading venues 
that  would  have  to  get  a  MiFID  authorisation  (3  MTF  licences  and  3  OTF  licences),  this 
would give rise to aggregated one-off costs of € 1.5-€1.8 million (€900,000-€1.2 million for 
the  3  MTFs  and  €600,000  for  the  3  OTFs).  The  aggregate  ongoing  costs  would  amount  to 
€390,000-€480,000  (€270,000-€300,000  for  the  3  MTFs  and  €120,000-€180,000  for  the  3 
OTFs). 

The  second  group  impacted  would  be  compliance  buyers.  Should  trading  in  emission  be 
covered  by  MiFID,  ETS  compliance  buyers  participants  may  observe  an  increase  in  their 
transaction  costs  (including  any  post-trade  unit  costs).  Any  such  increase,  resulting  from 
adaptation and new compliance costs incurred by the trading platforms and – if applicable – 
intermediaries  would  be  passed  on  to  the  ultimate  buyers  and  sellers  in  the  spot  carbon 
market.  At  the  same  time,  competition  from carbon  exchanges  already  authorised  under  the 
MiFID and offering spot trading would exert downward pressure on any such fee increases. In 
addition, a limited number of ETS compliance buyers331 that currently have direct access to or 
membership  in  a  spot  carbon  exchange  may  need  to  consider  on  a  case  by  case  basis 
substantial and occasionally costly changes to their organisation and business model in order 
to continue with any such status following the authorisation of the exchange concerned under 
the MiFID. In some cases, such compliance buyers may no longer be eligible to benefit from 
membership or direct access to the exchange, as a result of revision of the rules on access and 
membership undertaken by that exchange to conform to the MiFID.  

The last category to be impacted would be market intermediaries. Only limited cost impacts 
for ETS market intermediaries which are financial market participants should be expected as a 
result of applying MiFID to spot trading in emission allowances. Such entities have typically 
been covered by MiFID compliance duties before and have already established arrangements 
and  processes  involving  markets  regulated  under  the  MiFID.  The  additional  costs  involved 
would be associated with increased direct access, membership and transaction fees charged by 
the carbon exchanges as a result of their adaptation and compliance expense triggered by the 
MiFID authorisation duty. On the other hand, full alignment of compliance duties across the 
different  carbon  market  segments  would  allow  financial  participants  to  keep  largely 
unchanged  own  compliance  costs  associated  with  their  activity  on  the  spot  carbon  market. 
Finally,  a  substantial  number  of  intermediaries  currently  not  holding  a  MiFID  authorisation 
for investment firms332 would be required to ensure compliance with applicable organizational 
and operational requirements of the MiFID and to obtain such authorisation in order to pursue 
activity in secondary spot market for emission allowances. The average costs of obtaining a 
MiFID authorisation by an investment firm are estimated at around €0.5 – 1.5m one-off cost 
and  €150,000  on-going  cost  per  year.333  For  smaller  firms  (revenue  lower  than  €3m)  those 
average costs are expected to be significantly lower at around €100,000 for one-off cost and 
€30,000 for on-going cost per year. 334  

15.2.9.  Broaden  the  scope  of  regulation  on  products,  services  and  service  providers  when 

needed 

Leave  the  optional  exemptions  regime  under  article  3  for  certain  investment  services 
providers  but  introduce  additional  principles  for  national  regimes  aimed  at  tightening  and 

185 

 
 
  
 
further levelling investor protection standards across jurisdictions irrespective of the entities 
providing the services.  

We set out below the available information on the number of type of firms to whom Member 
States have applied the Article 3 exemption.  

– 

TABLE 32: Summary of Application of Article 3(1) Exemption 

Member State

Scope (services)

Scope (instruments)

Austria

Belgium

Both

Transferable securities and UCITS

Transmission of orders only

Czech Republic

Both

Transferable securities and UCITS

France

Germany

Greece

Ireland

Italy

Lithuania

Netherlands

Poland

Portugal

Romania

Slovakia

Both

Both

Both

Both

na

UCITS only

Transferable securities and UCITS

Transferable securities and UCITS

Investment advice only

na

Both

Both

Both

Transferable securities and UCITS

UCITS only

UCITS only

Investment advice only

Investment advice only

Transferable securities and UCITS

na

Transmission of orders only

UCITS only

Sweden

Both

Transferable securities and UCITS

United Kingdom

Both

Transferable securities and UCITS

Exempt service 
provider numbers

101

6

9,059 investment 
agents (8,826 
individuals, 233 
companies)
3,316

80,000

116 (only 14 
providing investment 
advice)
1,386

na

3

7,250

66

7

26  (22 individuals 
and 4 companies)
2,032 (1913 
individuals, 110 
companies)
575 (only 456 active 
providing investment 
advice)
5,161

Source: National competent authorities and/or Governments, EE analysis. 

The financial information available on the size of these firms is limited. It is understood that 
the  majority  are  small  firms  or  even  individuals.  The  latest  available  data  indicates  that  in 
Austria,  the  average  annual  revenue  from  the  relevant  services  is  €105,000;  in  the  UK  the 
median  firm  generated  €175,000  (with  the  average  firm  having  revenue  of  €820,000  with 
some  firms  clearly  well  in  excess  of  that).  Furthermore,  in  a  number  of  cases  investment 
services represent a minority of income (so that, say, in Germany the majority of revenue is 
related to insurance and pension products) 

At table below we describe in summary form the current applicable national regimes in the 
relevant Member States.  

186 

 
 
  
 
 
–  TABLE 33 

Summary of Applicable National Regulatory Regimes 

Member State

Authorisation

Austria

Belgium

Czech Republic

France

Germany

Greece

Ireland

Italy

Lithuania

Netherlands

Similar to that 
applicable under 
MiFID

Similar to that 
applicable under 
MiFID

Similar to that 
applicable under 
MiFID

Similarities to that 
applicable under 
MiFID (fit and proper 
requirements)

Similar to MiFID, and 
proposed amendment 
to Trade Regulations 
Act will make more 
so

Information to 
Clients

Similar to that 
applicable under 
MiFID

Suitability

Inducements

Reporting to clients 

Similar to that 
applicable under 
MiFID

Similar to that 
applicable under 
MiFID

Similar to that 
applicable under 
MiFID

Acting in best 
interest of client

Similar to that 
applicable under 
MiFID

na

na

na

na

na

Similar to that 
applicable under 
MiFID

Similar to that 
applicable under 
MiFID, unless only 
providing IA 

Similar to that 
applicable under 
MiFID

Similar to that 
applicable under 
MiFID

Similar to that 
applicable under 
MiFID

Similar to that 
applicable under 
MiFID

Similar to that 
applicable under 
MiFID

Similar to that 
applicable under 
MiFID

Similar to that 
applicable under 
MiFID

Similar to that 
applicable under 
MiFID

German court 
decisions and banks 
for whom acting as 
agents may make 
similar to effect of 
MiFID but explicit 
regulation is lacking

German court 
decisions and banks 
for whom acting as 
agents may make 
similar to effect of 
MiFID but explicit 
regulation is lacking

German court 
decisions may make 
similar to effect of 
MiFID but explicit 
regulation is lacking

German court 
decisions and banks 
for whom acting as 
agents may make 
similar to effect of 
MiFID but explicit 
regulation is lacking

German court 
decisions and banks 
for whom acting as 
agents may make 
similar to effect of 
MiFID but explicit 
regulation is lacking

na

Similarities to that 
applicable under 
MiFID (fit and proper 
requirements)

na

na

na

na

Similar to that 
applicable under 
MiFID

Similar to MiFID 
except that all clients 
assumed retail

Similar to MiFID 
except that all clients 
assumed retail

Similar to MiFID 
except that all clients 
assumed retail

Similar to that 
applicable under 
MiFID

All clients assumed 
retail without 
categorisation but 
otherwise application 
is similar

Similar to that 
applicable under 
MiFID

Similar to that 
applicable under 
MiFID

Similar to that 
applicable under 
MiFID

na

na

na

na

na

Fully the same as 
MiFID

Fully the same as 
MiFID

Fully the same as 
MiFID

[Fully the same as 
MiFID]

[Fully the same as 
MiFID]

Similar to MiFID 
except that all clients 
assumed retail

Similar to MiFID 
except that all clients 
assumed retail

All clients assumed 
retail without 
categorisation

Similar to that 
applicable under 
MiFID

All clients assumed 
retail without 
categorisation but 
otherwise application 
is similar

Poland

Similar to MiFID 

Almost the same as 
MiFID

Almost the same as 
MiFID

Almost the same as 
MiFID

Almost the same as 
MiFID

[Almost the same as 
MiFID]

Portugal

Romania

Slovakia

Sweden

na

na

Similar to MiFID 

Similarities to that 
applicable under 
MiFID (fit and proper 
requirements)

na

na

na

na

na

na

na

na

Similar to that 
applicable under 
MiFID

Similar to that 
applicable under 
MiFID

Same as MiFID

Same as MiFID

Same as MiFID

Same as MiFID

Same as MiFID

Same as MiFID

Same as MiFID

Same as MiFID

Same as MiFID

Same as MiFID

United Kingdom

Same basic 
provisions apply, but 
may be as guidance 
rather than rules

Similar to MiFID 
except that all clients 
must be assumed 
retail

Same as MiFID, 
unless transmisison 
and receipt of orders 
only

Where investmnet 
advice is provided, 
will be aligned post-
RDR

[Same as MiFID]

[Same as MiFID]

Source:  National  competent  authorities  and/or  Governments,  FIDIN,  Bundesverband 
Deutscher Vermögenberater e.V, EE analysis. 

As  per  the  tables  above,  most  of  the  16  Member  States  that  make  use  of  the  exemption 
already apply an authorisation process that is to a certain degree similar to the MiFID process. 
We expect that tightening the rules for receiving an authorisation due to the additional time 
needed for completing the authorisation process would imply a one-off cost across all of the 
affected service providers in these countries of €15–30 million.335 

187 

 
 
  
 
 
As  can  be  seen  from  the  above,  where  information  is  available,  the  applicable  regulatory 
frameworks  are  relatively  closely  aligned  (or  even  explicitly  modelled)  upon  the  provisions 
within MiFID, at least as far as the organisational and conduct of business rules selected for 
the  minimum  level  of  EU  regulation  are  concerned.  The  most  notable  exception  to  this  is 
Germany where in some cases explicit regulation is lacking (as opposed to the de facto effect 
of decisions by the German court system). In addition by far the majority of exempt firms (ca 
80,000) are based in Germany so that we assume that 95 per cent of the costs resulting from a 
tightening  of  conduct  of  business  rules  would  occur  there.  We  assume  that  tightening  the 
conduct of business requirements applicable to those firms in national legislation could lead 
to one-off costs equal to 0.45- 0.9 per cent of annual revenues (i.e. estimated annual revenue 
of €3.2 billion). It has to be borne in mind though that work is currently ongoing in Germany 
on a new statute already imposing stricter conduct of business rules on those exempt firms.336 
Therefore, most of the adaptation costs may already be triggered by that new national statute. 

Extend  the  scope  of  MiFID  conduct  of  business  and  conflict  of  interest  rules  to  structured 
deposits and other similar deposit based products 

There  are  a  number  of  forms  that  structured  products  can  take  (these  forms  are  called 
wrappers) such as funds, notes, bonds, certificates and deposits. Whilst the focus here is on 
deposit-based structured products (as these currently do not fall within the scope of MiFID), 
much  of  the  market  information  relates  to  the  structured  retail  product  industry  as  a  whole. 
The  total  outstanding  amount  invested  across  the  EU  at  the  end  of  2008  was  €678  billion, 
with total sales for 2008 reaching €179 billion.337 In terms of outstanding amounts invested at 
the end of 2008 Italy has the lead (at €167.7 billion) followed by Germany, Spain, Belgium 
and  France.  Germany  is  the  largest  market  in  the  EU  in  terms  of  annual  sales  (at  €50.2 
billion),  followed  by  Italy,  Spain  and  France.338  Deposit-based  products  accounted  for 
approximately 12 per cent (€22 billion) of total sales of structured products in 2008 across the 
European countries covered in the market information. The penetration rate was higher than 
this  in  Ireland,  Poland,  Slovakia,  Spain  and  the  UK.  In  terms  of  distribution,  92  per  cent  is 
sold by credit institutions, i.e. €20.2 billion in 2008. Independent financial intermediaries play 
a notable role only in the UK and Ireland. 

The regulation of structured deposit-based products is relatively light. It has been found that 
seventeen  Member  States  which  do  not  apply  any  regulation  similar  to  the  MiFID  selling 
rules. On the other hand, Italy and Slovakia’s existing regimes are comparable to MiFID.339 
An extension of MiFID rules to the sale of such deposits would therefore trigger adaptation 
costs for the credit institutions involved in this business. Taking into consideration that some 
credit  institutions  already  apply  the  MiFID  conduct  of  business  rules  to  the  sale  of  these 
products on a voluntary basis we estimate a one-off impact of €31-€44m with ongoing costs 
of €9-€15m on a yearly basis.340 To put this into further context, the one-off costs would be 
equivalent  to  0.11–0.16  per  cent  of  the  estimated  2010  sales  of  these  products  by  credit 
institutions341. The recurring costs would be 0.03–0.05 per cent of 2010 sales.  

15.2.10. Strengthen rules of business conduct for investment firms 

Reinforce  investor  protection  by  narrowing  the  list  of  products  for  which  execution  only 
services  is  possible  and  strengthening  conduct  of  business  rules  for  the  provision  of 
investment  advice  by  further  detailing  information  requirements  and  requiring  the  annual 
assessment of the advice initially provided  

Execution only services are typically provided in two ways: first, from standalone brokers or 
credit  institutions  offering  execution  only  as  (typically)  a  standalone  online  service  and 

188 

 
 
  
 
second,  from  off-line  brokers.  Europe  Economics research  indicates  that  online  provision  is 
the dominant form342.  

Concrete  data  on  the  size  of  the  execution  only  market  across  Europe  (i.e.  in  terms  sales 
volume  and  sales  value)  are  not  available.  Interviews  Europe  Economics  have  had  with 
banking associations based in Germany, Italy and Luxembourg and two large universal banks 
based  in  Denmark  (as  well  as  desk-top  research  in  the  UK)  indicate  that  business  models 
governing the provision of execution only services appear to differ relatively markedly across 
providers  of  these  services  both  between  and  within  countries  in  the  Europe  Union.  The 
differences largely reside with the extent to which execution only services, i.e. dealing only in 
non-complex products and with no appropriate tests carried out, overlap with other forms of 
online brokerage and in terms of market penetration. In general, the prevalence of execution 
only services tends to be larger in Northern than in Southern European States. However, some 
specific  examples  of  differences  across  Germany,  Denmark,  Luxembourg  and  Italy  were 
highlighted: 

•  In  Germany,  an  “execution  only”  service  is  taken  as  a  broader  concept  than  set  out  in 
MiFID. In general, “execution only services” is used to describe both execution only trades 
in  non-complex  products  (i.e.  execution  only  in  the  strict  sense  where  no  tests  of 
appropriateness  are  carried  out)  as  well  as  online  brokerage  more  generally  in  either 
complex  or  non-complex  products  where  an  appropriateness  test  is  conducted.  In 
Germany, the standard market practice is to apply a test of appropriateness irrespective of 
whether the product is non-complex — so that the distinction between execution only and 
online brokerage more generally is far from sharp. Indeed, approximately 90-95 per cent of 
execution only services provided by banks, where the products involved are non-complex, 
will include the application of a test of appropriateness. Ensuring maximum product choice 
for  investors  appears  to  be  one  of  the  key  factors  underlying  this  general  preference  of 
German banks not to differentiate between complex and non-complex products. It follows 
that the impact of this policy option would be significantly restricted in Germany. 

•  In  Denmark,  all  execution  only  trading  occurs  through  online  platforms.  While  the  exact 
proportion of execution only within non-complex trades is not known, it was thought to be 
substantially above the 20 per cent mark (indeed, for UCITS it is estimated at about 35 per 
cent). The practices of execution only providers in Denmark are significantly less uniform 
compared  with  Germany.  Some  banks  will  carry  out  all  of  its  execution  only  services 
online  and,  like  Germany,  appropriateness  tests  are  applied  to  trades  involving  non-
complex  products.  However,  unlike  Germany,  this  is  not  standard  market  practice  in 
Denmark  and  other  providers  do  not  apply  an  appropriateness  test  within  the  context  of 
execution only.  

•  Execution  only  in  Italy  is  much  more  limited  in  scope  than  in  Denmark  or  Germany.  A 
majority  of  execution  only  services  in  Italy  also  tend  to  be  combined  with  a  test  of 
appropriateness.  However,  in  Italy,  this  practice  seems  to  have  been  driven  more  by  the 
regulatory requirements of the Italian banking/financial services supervisor. 

•  Banks  in  Luxembourg  apply  a  similar  approach  to  those  in  Denmark.  The  view  is  that 

many clients (who know what they want to do) do not want excessive warnings.  

•  In  a  recent  report  published  by  the  UK  FSA  it  was estimated  that  two  thirds  of  all  retail 
investment  product  sales  between  April  2008  and  March  2009  were  sold  on  an  advised 
basis.343  This  implies  that  up  to  a  third  of  all  retail  investment  products  sales  in  the  UK 

189 

 
 
  
 
were carried out on a non-advised basis (which includes execution only and direct offer) 
over this period.  

Neither  data  on  the  products  that  embed  a  derivative  are  available  (nor  is  the  share  of 
execution  only  business  within  them).  However,  the  retail  bank  operators  of  execution 
services  that  Europe  Economics  interviewed  spoke  of  UCITS  as  being  the  only  packaged 
product  being  sold  on  an  execution  only  basis  —  it  indicates  that  volumes  of  complex 
products being executed in this way are probably not significant. 

A reduction of the scope of non-complex products that can be distributed via execution-only 
services would inevitably increase the number of appropriateness tests that need to be carried 
out by investment firms for the products for which execution-only is not an option anymore. 
The costs for this should be marginal for those institutions already offering dual platforms for 
advised  execution  and  execution  only.  Providers  currently  offering  pure  execution-only 
services would need to invest into IT, training and developing and filling out questionnaires to 
conduct appropriateness tests. Alternatively, these firms could simply offer a slightly limited 
range of products in the future as the reduction in scope only seems to affect a small minority 
of  products  and  clients.  As  a  result,  we  do  not  consider  the  overall  costs  of  this  option  are 
likely to be very significant (because the universe of products and business practices affected 
do not appear to be significant). We estimate the overall one-off costs for this transition to be 
in the region of €0.1—€0.15 million.344 

The overall compliance costs resulting from a strengthening conduct of business rules for the 
provision  of  investment  advice  for  investment  advisers  would  amount  to  a  one-off  cost  of 
between  €5.6  million  and  €12.5  million,  and  ongoing  costs  of  between  €134.3  million  and 
€279.0 million. 

We  estimate  that  there  are  about  40–45  million  mass  affluent  or  high  net  worth  individuals 
within the EU345. We consider two primary forms of advice — provision that is independent 
of  the  product  providers  (such  as  that  provided  through  independent  financial  advisers)  and 
other  provision  (such  as,  often,  advice  provided  by  banks).  The  importance  of  such 
independent  advisers  is  highest  in  Ireland,  the  Netherlands  and  the  UK.  In  the  UK,  for 
example, about 55 per cent of UCITS sales are through independent advisers. The penetration 
in  France,  Italy  and  Spain  is  much  lower  (perhaps  five  per  cent).  In  Germany,  independent 
brokers have grown in importance but remain closer to the levels seen in the latter group.346 
We estimate that across the EU 7–7.5 million of the wealthy individuals are receiving advice 
on an independent basis (i.e. 16 and 18 per cent of the total). 

The obligation for investment firms providing advice on the basis of an independent and fair 
analysis  to  assess  the  suitability  of  a  sufficiently  large  number  of  financial  instruments 
available  on  the  market  would  lead  to  incremental  costs.  The  time  taken  to  develop  the 
suitability report is expected to increase by 3–5 minutes in order to tailor product choice to the 
investor’s  profile.347  Based  upon  interviews  with  bank-based  advisers,  Europe  Economics 
estimates  that  on  average  each  client  is  receiving  advice  on  one  occasion  per  annum.  This 
means  that  33–37.5  million  occasions348  on  which  a  suitability  report  is  currently  being 
provided.  Based  upon  Europe  Economics  research,  we  consider  the  position  in  the  UK  and 
Germany to be sufficiently close such that the time required for advice would not need to be 
extended in the way described above. This reduces the number of bank-advised clients to 21–
25 million. With an average adviser cost estimated at €50,000 per annum, this implies an on-
going cost impact of €29–€59 million.  

190 

 
 
  
 
 
In addition, we would anticipate additional training, again only for bank-based advisers. If we 
apply the “industry standard” of 150 clients per adviser and take the incremental training to be 
1-2  hours  per  adviser,  then  the  incremental  one-off  training  cost  would  be  €6–€12  million. 
This  is  applied  across  the  whole  population  including  UK  and  German  banks  as  some  re-
modelling of processes would be required across the board. 

Requiring  intermediaries  to  provide  bi-annual  updates  (as  a  minimum  frequency)  to  inform 
investors  on  the  fair  market  value  of  their  investments  and  on  whether  there  has  been  any 
material modifications would give rise to incremental costs. If we take the case of two reports 
per annum then the incremental cost of accessing and delivering the valuation information is 
likely  to  be  €1–€1.5  per  client.349  This  means  one  additional  statement  per  annum  over  and 
above the annual statement from product providers. If we take it that each of the 40-45 million 
wealthy individuals described above then this implies an on-going cost of €40–€67.5 million 
per annum.  

A requirement to annually request information updates from clients would have several costs 
associated with it: the initiation of contact as well as the updating of the investment adviser’s 
records. The costs of making such a request may be quite low. We assume that independent 
intermediaries  send  an  information  request  pack  (costing  €1–€2  per  client)  whereas  non-
independent  ones  (typically  banks)  send  a  more  generic  request  (e.g.  for  the  customer  to 
contact  the  local  branch)  at  a  lower  cost  of  €0.5–€1  per  client.  This  gives  a  cost  impact  of 
€23.5–€52.5 million since this would apply to all advised investors. However, in the event of 
a reply the investment adviser would potentially be required to re-work his or her estimates of 
suitability. We assume that only a relatively small proportion of clients — interviews carried 
out  by  Europe  Economics  with  bank-based  and  independent  advisers,  and  also  a  consumer 
representative  group  indicated  that  5–10  per  cent  would  be  a  reasonable  response  rate  to 
expect.  An  association  of  independent  advisers  indicated  that  the  necessary  review  of 
circumstances would take at least 90–120 minutes per client. However, in some proportion of 
cases  it  would  be  recommended  by  the  adviser  that  some  re-balancing  of  the  investments 
should  be  done.  Assuming  that  this  was  agreed  to  by  the  client  and  was  executed  by  the 
adviser then this would generate revenue for the adviser and would pay for the time spent in 
reviewing the on-going suitability of the investments. Taking into account these two factors, 
we believe that the proportion of total clients requesting a review (by identifying a change in 
circumstances) but not requiring a change in the investments made (i.e. the net effect of the 
changes was not significant) may be 2.5–4 per cent. The implied on-going cost would then be 
€42–€100 million. 

Apply  general  principles  to  act  honestly,  fairly  and  professionally to eligible counterparties 
and exclude municipalities and local public authorities from list of eligible counterparties and 
professional clients per se 

Based  upon  feedback  with  market  participants  acting  honestly,  fairly,  professionally,  being 
clear and not misleading is very much the standard practice of players in the industry whether 
the  client  are  retail,  professional  or  are  eligible  counterparties.  Notwithstanding  this,  we 
consider the following drivers of cost impact. First the level of monitoring by internal control 
functions  would  increase.  The  number  of  all  of  those  workers  within  credit  institutions  and 
investment  firms  dealing  with  eligible  counterparties  is  not  known  with  precision.  About 
200,000  people  work  in  (largely  wholesale)  financial  services  in  the  City  of  London  and 
Canary Wharf.350 On the other hand, not everyone in wholesale finance is client-facing. As a 
working  estimate  we  take  this  figure  of  200,000  (this  is  against  2.7  million  employees 
working  in  EU  credit  institutions).  In  the  past  Europe  Economics  has  found  that  a  ratio  of 
350–400 of workers to a compliance worker was relatively typical with lower ratios applied in 

191 

 
 
  
 
investment  banking  or  asset  management,  perhaps  100:1.  Taking  the  ratio  of  100:1,  this 
implies a total of 2000 compliance staff as of now. We assume that this change would result 
in the industry as a whole moving to a ratio of perhaps 90:1. This implies an on-going cost of 
about €16 million. 

Excluding  municipalities  from  being  classified  as  eligible  counterparties  or  professional 
clients would not involve any significant costs at all. Indeed, in some Member States — such 
as Germany — this re-classification of municipalities as retail clients has already been done. 
Equally, in the UK and (from more recently) Italy municipalities are restricted from trade in 
OTC derivatives. However the restriction in the choice of products that may be traded without 
the  application  of  a  suitability  or  appropriateness  test  may  increase  the  cost  of  transacting. 
However a municipality would be able to request treatment as a professional client subject to 
demonstrating experience and so on. 

Reinforce  information  obligations  when  providing  investment  services  in  complex  products 
and strengthen periodic reporting obligations for different categories of products, including 
when eligible counterparties are involved 

Structured  products  (in  the  sense  of  direct  participation  in  asset  backed  securities)  are 
typically  traded  by  banks  and  brokerage  houses,  insurers  and  hedge  funds.  There  is  very 
limited retail participation, although some presence in Italy and Spain is identified by IOSCO. 
The same can be said of OTC derivatives. However there is a broader category of structured 
products that are sold to retail investors. These include a mix of underlying assets: products 
linked  to  equities  are  the  dominant  form,  followed  by  products  linked  to  interest  rates, 
hybrids,  commodities  and  various  other  types.  The  value  of  these  products  was  about  €188 
billion  across  Europe351.  Arete  Consulting  identifies  335,000  individual  retail  structured 
products  alone  in  the  countries  that  it  surveys.  We  consider  a  reasonable  estimate  of  the 
population of products potentially affected to be 350–400,000. Again building upon Arete’s 
analysis  we  consider  that  the  population  of  unique  product  providers  is  likely  to  be  around 
250–300. 

We assume that the community of investor relevant to this policy option are largely “high net 
worth”  investors  as  well  as  those  investors  automatically  categorised  as  professional  under 
Annex  II  of  Directive  2004/39/EC.  The  retail  and  professional  clients  who  deal  in  OTC 
derivatives or asset-backed securities appear to be a relatively small community of investors. 
However robust data on the exact number are not forthcoming. We adopt a pan-EU figure of 
150-300,000 retail investors to assist us in our analysis, the wide range reflecting the degree 
of uncertainty. In terms of professional investors as automatically classified under Annex II of 
Directive 2004/39/EC, we adopt a figure of 15–20,000352. This gives 165–320,000 overall. 

The additional information to be provided to clients in relation in relation to complex products 
would include:  

•  A risk/gain profile of the instrument across different market conditions. 

•  Quarterly (independent) valuations.  

•  Quarterly reporting on structured finance products on the evolution of the underlying assets 

during the lifetime of the products. 

•  Timely  informing  of  a  material  change  modification  in  the  situation  of  the  financial 

instruments with an annual statement.  

192 

 
 
  
 
•  Information on social and ethical criteria adopted. 

We would expect the overall one-off costs to between €82.7-146.2 million and yearly ongoing 
costs between €11.5-36.7 million. A main source of cost would be the development of risk-
gain  profiles  and  the  related  marketing  materials  costs.  We  would  assume  that  the  time 
required for that would be less than a day per product for a compliance official resulting in 
aggregate costs of €50-87m353, with on-going costs assuming the same volume of business of 
€10-29m.  In  addition,  we  expect  the  production  and  printing  of  related  supporting 
documentation ("marketing materials") to result in a per provider cost of €100,000-150,000354 
which  amount  to  an  expected  one-off  impact  of  €25-45m.  With  respect  to  quarterly 
valuations, this information could easily be provided by the back office who usually compiles 
this  kind  of  information.  Whether  external  independent  valuation  (i.e.  provided  by  a  third 
party)  might  be  needed  is  difficult  to  assess  at  this  stage.  In  addition  market  participants 
interviewed have been unable to provide Europe Economics with costs estimates for external 
valuation. For a switch to quarterly reporting in the evolution of underlying assets we expect 
on-going  costs  of  €1.5-7.7m355.  The  requirement  to  notify  investors  of  material  changes  in 
circumstances  will  trigger  system  modifications  of  product  providers  which  we  expect  to 
cause  one-off  costs  of  €1.7-2.7m356.  Furthermore,  accessing  the  information  necessary  for 
determining the occurrence of such a material change would cause additional cost. Here we 
would  estimate  that  a  compliance  officer  would  need  an  hour  for  each  client  for  such 
determination  resulting  in  one-off  costs  of  €6-11.5m.  On-going  costs  would  inadvertently 
depend on the number of times such material changes occur but are likely to be relatively low, 
i.e. below €1m.  

Ban  inducements  in  the  case  of  investment  advice  provided  on  an  independent  basis  and  in 
the case of portfolio management 

Requiring  firms  that  claim  to  give  advice  on  an  independent  and  fair  basis  to  offer  a 
sufficiently  broad  universe  of  products  to  clients  and  to  prohibit  them  from  accepting  any 
inducements  would  lead  advisers  currently  operating  as  independent  to  recoup  inducements 
by charging fees upfront. In the UK where there is a substantial community of independent 
advisers  the  impact  would  be  a  one-off  cost  of  €41m  and  on-going  costs  of  €29.5-35.4m 
which  would  already  be  triggered  by  the  UK  Retail  Distribution  Review  (RDR)357.  This 
review  is  broader  in  scope  as  it  would  prohibit  third  party  commission  payments.  Our 
proposal targets independent advice only.  

If firms outside the UK are to transition to a fee-based structure we would expect the costs to 
be  material.  We  estimate  that  the  affected  community  of  independent  investment  advisers 
outside the UK is broadly comparable in scale (but slightly smaller) to that in the UK (this is 
due  to  the  importance  of  this  channel  in  the  UK).  As  mentioned  above  we  estimate  the 
number  of  “mass  affluent”  and  high  net  worth  clients  serviced  by  independent  advisers  as 
being  7–7.5  million.  Further  assuming  that  the  150  clients  per  adviser  (derived  from 
interviews with advisers) holds widely across the EU then we have a population estimate of 
50,000 independent advisers in total, with about 60 per cent of those in the UK. If we pro-rate 
the  costs  of  the  UK  RDR  based  on  a  conservative  ratio  of  80  per  cent,  this  gives  us  an 
estimate of the one-off costs of about €33 million and on-going costs of €24–€28 million. As 
this option targets only independent investment advice (i.e. this is less wide-ranging than the 
DR), there is the distinct possibility that many advisers working based on commissions now 
would  simply  cease  to  describe  themselves  as  independent  so  that  there  would  be  no 
immediate  transition  costs.  However,  they  would  need  to  demonstrate  to  clients  that  their 
service is nonetheless valuable investment advice. There may also be some product re-design 
costs that would be borne by the product providers. These are estimated by the UK FSA at 

193 

 
 
  
 
about  €12  million  for  MiFID-relevant  products  in  the  UK.  Applying  the  same  reasoning  as 
with the impacts on advisers, this implies an €8 million one-off impact. 

As  a  rule  of  thumb,  Europe  Economics  estimates  that  EU  portfolio  management  industry 
could have revenues of at least €25bn. This would equate to perhaps 17 million customers and 
an industry of over 150,000 people (including back office workers).358 Of the total assumed 
population of 150,000 affected employees, we assume that none of those in the UK or Italy 
are affected.359 That leaves 90,000 potentially affected employees (60,000 portfolio managers 
and 30,000 back office staff).360 Similarly, of the up to 17 million customers, proportionately 
up  to  10.2m  could  be  potentially  affected.  Due  to  a  ban  on  inducements  for  portfolio 
managers  we  expect  overall  one-off  cost  implications  of  about  €131  million.  Portfolio 
managers would require a half day's training to explain matters such as new business models 
in respect of revenue raising (€280 per manager, in total €16.8m). The next category of one-
off  costs  is  the  costs  to  draft  letters  to  clients  and  edit  contracts  (three  days  of  time  of  one 
back-office  employee,  total  €9m).  Thirdly,  given  that  the  nature  of  this  industry  is  that  of 
personal  management  of  wealth,  we  estimate  that  a  significant  proportion  of  clients  (one 
quarter)  would  seek  a  personal  explanation  (three  days  of  time  per  manager,  total  €105m). 
Finally,  we  would  estimate  additional  on-going  internal  monitoring  costs  to  amount  to 
€3.7m.361  

We break down one-off costs below. 

– 

TABLE  34:  One-off  costs  relating  to  banning  of  inducements  in 
relation to portfolio management 

Costs  per 
employee 
(€) 

Numbers 
of 
employees 
involved 

Total 
(€m) 

cost 

Nature 

Training 
office) 

costs 

(front-

0.5 days at €560362 per 
day 

280 

60,000 

16.8 

Contract 
costs (back-office) 

renegotiation 

1 day at €300 per day 

300 

30,000 

9.0 

Client  explanation  costs 
(portfolio managers) 

One  quarter  of  clients 
seek  explanation  or 
40 
renegotiation, 
minutes  per  client  = 
3.125 days 

1750 

60,000 

105.0 

Total 

130.8 

Require trading venues to publish information on execution quality and improve information 
provided by firms on best execution 

An  obligation  on  trading  venues  to  publish  data  regarding  execution  quality  would  require 
labour costs at the trading venue concerned which we estimate as amounting to €150,000 per 
venue  one-off  and  as  €50,000  per  venue  on  an  on-going  basis363.  Based  on  the  number  of 

194 

 
 
  
 
 
 
 
 
  
trading  venues  affected364,  the  one-off  costs  would  be  estimated  as  €18m  and  the  on-going 
costs as €6m. We do not envisage material changes to execution policies of firms. As these 
already do need to be reviewed on an annual basis we would not expect a cost impact at the 
level of the firm. 

15.2.11. Strengthen organisational requirements for investment firms 

Reinforce corporate governance framework by strengthening the role of directors especially 
in the functioning of internal control functions and when launching new products and services  

As can be seen from the above the compliance function typically has a direct reporting line to 
Board-level executives, either as a group or through reporting to a designated individual.  

– 

FIGURE 13: The Nature of Compliance Function Reporting Lines 

Source:  Data  gathered  by  Europe  Economics  in  the  development  of  its  2009  study  on  the 
“Cost  of  Compliance  with  Selected  FSAP  Measures”  for  DG  MARKT.  This  chart  is  based 
upon  analysis  of  responses  from  57  discrete  financial  services  firms  (credit  institutions  and 
asset management firms). 

If  we  take  as  our  guide  those  firms  that  do  not  currently  incorporate  direct  reporting  to  the 
Board  or  to  someone  at  Board  level  as  the  sub-set  that  would  be  affected,  then  this  implies 
that  (given  about  5,000  investment  firms  and  8,000  credit  institutions)  about  1600  firms 
would be making a change in formal reporting lines (i.e. 12.3 per cent from our sample). An 
enhanced  profile  for  the  compliance  department  is  likely  to  result  in  either  churn  in  the 
individuals responsible for it (with more senior managers coming in) or in an enhanced ability 
for the incumbents to demand higher remuneration then this may result in an increased cost 
burden.  Following  this  line  of  argument,  if  we  take  a  salary  uplift  of  €7,500–€10,000  per 
affected individual compliance head as an illustrative scale of the impact then the implied on-
going incremental cost impact would be €12–€16 million across the EU. A cost impact on the 
risk management function should be limited as this is already associated with a high profile. 

195 

 
 
  
 
 
However  we  could  assume  similar  incremental  costs  of  €12-€16  million  for  the  internal 
control function, giving an overall ongoing costs impact of €24-€36 million across the EU. 

Regarding additional organisational requirements for the launch of new products, operations 
and  services  there  is  evidence  that  compliance  functions  within  firms  are  already  actively 
involved in new product and service development: 

– 

FIGURE 14: Characterisation of the Involvement of the Compliance Function in the 

Development of New Products and Services 

Source:  Data  gathered  by  Europe  Economics  in  the  development  of  its  2008  study  on  the 
“Cost  of  Compliance  with  Selected  FSAP  Measures”  for  DG  MARKT.  This  chart  is  based 
upon  analysis  of  responses  from  38  discrete  financial  services  firms  (credit  institutions  and 
asset management firms). 

Therefore  we  would  not  expect  a  significant  cost  impact  by  implementing  these  measures. 
However  we  expect  all  firms  providing  investment  services  (about  9,500)  to  need  two  days 
for the re-assessment of protocols for the launch of new products resulting in an incremental 
one-off cost of €5m.  

Require  specific  organisational  requirements  and  procedures  for  the  provision  of  portfolio 
management services and underwriting services 

We do not expect a major cost impact by the measures envisaged in relation to the provision 
of the service of portfolio management. The message that we have from portfolio managers 
and  associations  representing  them  (or  at  their  parent  banks)  is  that  there  is  a  very  strong, 
documented audit trail in terms of investment strategy and portfolio selection. However firms 
providing these services (about 4,900365) would need to carry out a review of existing client 
handling protocols that would likely take two or three days translating into a one-off cost of 
€2.8-4.2m.  

For the measures envisaged regarding the provision of underwriting and placing services one 
cost driver would be the necessary review of existing procedures (the cost of such a review 

196 

 
 
  
 
 
has been estimated at €24,000 to €60,000 per firm366). More material costs would be incurred 
in those firms requiring actual adjustment to processes. Past work has indicated costs of €1.2–
€2.4 million per firm.367 From the interviews with investment banks that Europe Economics 
has conducted, we would not anticipate that these costs would be applicable within the firms 
operating internationally. Let us assume, however, that all firms not operating internationally 
do undertake such a review (i.e. 360 firms368). This implies one-off costs of €9–€22 million. 
Finally  some  (i.e.  not  all)  firms  in  Central  and  Eastern  Europe  focused  on  a  “cost-effective 
implementation  of  MiFID  rather  than  a  comprehensive  one”369  could  incur  additional  costs 
linked to system changes. The specific rules proposed might indeed force a switch from the 
former type of implementation to the latter implying system changes giving rise to a one-off 
cost  of  €2-4  million370.  In  terms  of  recurring  cost,  we  assume  an  additional  quarter  FTE 
compliance  officer  per  firm  to  monitor  on-going  activities.  This  would  imply  an  additional 
recurring cost of perhaps €0.25 million per annum. 

Introduce a common regime for telephone and electronic recording but still leave a margin of 
discretion  for  Member  States  in  requiring  a  longer  retention  period  of  the  records  and 
applying recording obligations to services not covered at EU level  

The  proposal  would  harmonise  the  telephone  and  electronic  record-keeping  requirements  in 
terms of media covered and stipulate a minimum retention period. To assess the incremental 
costs  impact  of  a  harmonised  recording  regime,  it  is  important  to  recognise  that  such 
recording already apply to a majority of Member States anyway. The following table outlines 
the current national recording requirements in place in different Member States: 

– 

TABLE  35:  National 
requirements in EU member states 

legislative  or  supervisory 

recording 

Legal 
supervisory 
recording 
requirement? 

/ 

Mobile 
phones 
included? 

of 
Duration 
retention 
of 
records (years) 

Country 

Austria 

Belgium 

Bulgaria 

Czech 
Republic 

No 

No 

No 

Yes 

Cyprus 

Yes 

Denmark 

No 

Estonia 

Partially 

France 

Finland 

Yes 

Yes 

Germany 

Partially 

No 

No 

No 

- 

- 

- 

Yes 

10 

Yes 

No 

Yes 

Yes 

Yes 

Yes 

5 

- 

5 

0.5 

2 

0.25 

197 

 
 
  
 
Greece 

Hungary 

Italy 

Ireland 

Latvia 

Lithuania 

Yes 

Yes 

Yes 

No 

Yes 

Yes 

Luxembourg  No 

Malta 

No 

Netherlands  No 

Poland 

Portugal 

Romania 

Yes 

Yes 

Yes 

Yes 

Yes 

Yes 

No 

Yes 

? 

No 

No 

No 

Yes 

Yes 

Yes 

1 

1 

5 

- 

10 

10 

- 

- 

- 

5 

5 

5 

Slovakia 

Unknown  

Unknown  Unknown 

Slovenia 

Unknown 

Unknown  Unknown 

Spain 

Sweden 

UK 

Yes 

Yes 

Yes 

Yes 

No 

No 

5 

5 

0.5 

Source: CESR Technical Advice to the European Commission in the Context of the MiFID 
Review – Investor Protection and Intermediaries 

Fifteen  of  the  EU  Member  States  that  responded  to  CESR’s  consultation  have  a  recording 
requirement  which  is  incorporated  in  national  legislation  or  rules,  whilst  10  do  not.371  The 
costs  for  those  Member  States  who  do  not  currently  have  any  recording  requirements  are 
likely to be significantly larger than those who already fulfil the expected measures by their 
current  practice.  In  the  absence  of  detailed  information  on  Slovakia  and  Slovenia,  we  have 
assumed that no recording requirement is currently in place. 

The  cost  of  this  option  would  be  the  incremental  cost  of  the  recording  and  storage.  The 
magnitude  of  this  cost  would  depend  on  a  number  of  factors  related  to  the  implementing 
details  of  the  obligation  in  this  field  such  as  the  types  of  media  covered  and  the  retention 
period. We have taken the assumption that all media (fixed telephone lines, mobile telephone 
voice  calls,  text  messages  (SMS)  from  mobile  phones,  multimedia  messages  (MMS)  from 
mobile  phones,  video  communications  using  mobile  phones,  pin  to  pin  messages  (used  in 
BlackBerry to BlackBerry communication), (secure) instant messaging services (IM), and e-
mail) would be covered and that the retention period would be 2 years.372 

198 

 
 
  
 
To obtain aggregate cost estimates for the EU, we make the following assumptions: 

(a) 

(b) 

(c) 

Member States with no current legislation for recording requirements will face full 
costs for all of their employees (i.e. we assume that there is no voluntary recording 
by firms).  

Those Member States with existing recording requirements will only face costs if the 
current required duration of the retention of records is less than two years (such as in 
France, Germany, Italy and  the UK) or if no provision is currently in place for the 
recording of some of the media (e.g. mobile phone conversations in Sweden). 

The percentage of total financial sector employees that would require recording is the 
same in the UK as the rest of the EU. The FSA estimated the number of individuals 
in  the  UK  requiring  fixed  line  recording  as  between  55,000  and  70,000373  –  so 
between 4.6 and 5.8 per cent of financial sector employees. We estimate that around 
30  per  cent  of  employees  with  recorded  fixed  lines  would  also  conduct  relevant 
communications  on  a  mobile  device  and  therefore  need  recording  of  mobile 
communication channels as well.374 We recognise that in the UK wholesale finance 
is a larger proportion of the total financial sector than the average for the EU and that 
a  large  part  of  those  needing  recording  may  well  be  situated  in  wholesale  finance. 
Therefore, the percentages of EU employees requiring recording as calculated from 
the UK proportions will provide an upper bound. 

(d) 

The split of small to large financial institutions is the same in the EU as in the UK. 
So the assumed distribution of phone lines that would be required to be taped across 
firm  categories  (by  firm  size)  is  as  follows:  Small:  9  per  cent,  Medium:  9  per  cent 
and Large: 82 per cent. (The cost data available has been organised by size of firm). 

– 

TABLE 36: 
State, 2008 

Affected  Financial  Sector  Employees  by  Member 

Country 

Number of 
employees 

Number 
of 
employees  requiring 
recording 

Low 
estimate 

High 
estimate 

Percentage 
still needing 
fixed 
line 
recording 

Percentage 
still 
needing 
mobile 
recording 

Austria 

136,100 

6,219 

7,915 

100% 

Belgium 

156,900 

7,169 

9,124 

100% 

Bulgaria 

54,900 

2,509 

3,193 

100% 

Cyprus 

18,500 

845 

1,076 

0% 

Czech 
Republic 

92,800 

4,240 

5,397 

0% 

Denmark 

87,400 

3,994 

5,083 

100% 

Estonia 

10,000 

457 

582 

50% 

30% 

30% 

30% 

0% 

0% 

30% 

15% 

199 

 
 
  
 
Finland 

49,300 

2,253 

2,867 

0% 

France 

806,700 

36,860 

46,913 

0% 

0% 

0% 

Germany 

1,179,900 

53,913 

68,616 

50% 

15% 

Greece 

106,500 

4,866 

6,193 

Hungary 

81,200 

3,710 

4,722 

Ireland 

89,500 

4,089 

5,205 

0% 

0% 

0% 

0% 

0% 

0% 

Italy 

544,200 

24,866 

31,647 

100% 

30% 

Latvia 

19,400 

Lithuania 

19,900 

Luxembourg  21,000 

Malta 

6,100 

886 

909 

960 

279 

1,128 

1,157 

0% 

0% 

1,221 

100% 

355 

100% 

Netherlands  242,700 

11,090 

14,114 

100% 

Poland 

299,800 

13,699 

17,435 

0% 

Portugal 

90,000 

4,112 

5,234 

Romania 

108300 

4,948 

6,298 

0% 

0% 

Slovenia 

23,400 

1,069 

1,361 

100% 

Slovakia 

44,200 

2,020 

2,570 

100% 

Spain 

454,500 

20,767 

26,431 

0% 

Sweden 

90,800 

4,149 

5,280 

0% 

UK 

1,203,700 

55,000 

70,000 

0% 

0% 

0% 

30% 

30% 

30% 

0% 

0% 

0% 

0% 

0% 

0% 

30% 

30% 

Source: Eurostat – Ifsa_eegen2 - Employees by sex, age groups and economic activity, NACE 
code F (Financial and insurance activities) Downloaded 19th November 2010. 

Based  on  the  estimated  number  of  employees  that  would  be  affected  per  Member  State,  as 
estimated above, we come to the following totals across the EU: 

– 

TABLE  37:  Estimated  Employees  affected  by  Different  Aspects  of 
Potential EU-wide Recording Regulation 

Number  still  needing 
fixed line recording 

Number  still  needing 
mobile recording 

Company size 

Low 

High 

Low 

High 

200 

 
 
  
 
 
Small 

8,000 

10,000 

4,000 

5,000 

Medium 

8,000 

10,000 

4,000 

5,000 

Large 

72,000 

91,000 

35,000 

45,000 

Total EU27 

87,000 

111,000 

43,000 

55,000 

Based on previous work undertaken by Europe Economics estimating the cost to authorised 
firms of implementing a recording requirement, the following estimated costs per user were 
obtained: 

– 

TABLE 38:  One-off Cost per User, €

Small company 

Medium company 

Large company 

Low cost 

High 
cost 

Low cost 

High 
cost 

Low cost 

High 
cost 

Fixed telephone 

93  

3,080 

236 

489 

189  

255

Voice 
mobile 

SMS 

MMS 

Video 

Pin to pin 

IM 

Email 

from 

112  

1,291 

100 

245 

201  

-  

77  

47 

77 

- 

71 

112  

112 

100 

77  

77  

77  

77 

77 

77 

71 

71 

71 

47 

 71 

100 

 71 

 71 

 71 

-  

59  

89  

59  

59  

59  

94 

47 

59 

89 

59 

71 

59 

Source: Consideration of a Mobile Phone Recording Requirement - Final Report by Europe 
Economics  to  the  Financial  Services  Authority  and  Consideration  of  a  Discretionary 
Recording Requirement - Report by Europe Economics. 

– 

TABLE 39: On-going Costs per User, Six Month Retention Period, € 

Small company 

Medium company 

Large company 

Low cost  High cost Low cost  High cost Low cost  High cost

Fixed telephone 

-  

760 

24 

Voice 
mobile 

SMS 

from 

189  

985 

177 

71  

581 

71 

171 

334 

277 

19  

98  

71  

87 

452 

215 

201 

 
 
  
 
  
  
  
MMS 

Video 

Pin to pin 

IM 

Email 

118  

354  

59  

59  

94  

118 

354 

59 

59

94 

106 

307 

53 

53 

89 

106 

307 

53 

53 

89 

94  

283  

53  

53  

89  

94 

283 

53 

53 

89 

Source: Consideration of a Mobile Phone Recording Requirement - Final Report by Europe 
Economics  to  the  Financial  Services  Authority  and  Consideration  of  a  Discretionary 
Recording Requirement - Report by Europe Economics. 

These  costs  relate  to  a  retention  period  of  six  months  for  voice  from  mobile,  SMS,  MMS, 
video pin to pin, instant messaging and e-mail recording, and a retention period of any length 
for  fixed  telephone  recording  (as  storage  and  retrieval  are  included  in  the  package  for  new 
solutions). 

Regarding fixed telephone recording, we can make some estimate of the additional cost that 
would  be  incurred  if  the  required  retention  period  for  recordings  were  increased.  Evidence 
shows  that  the  price  of  the  retention  of  records  is  typically  included  within  the  cost  of 
installing a fixed line recording system for the first time. Therefore, for those Member States 
which currently have no requirement in place for recording fixed line telephone conversations 
the  incremental  on-going  cost  is  only  negligibly  influenced  by  the  length  of  the  retention 
periods.  However,  for  those  companies  with  recording  systems  already  in  place  for  fixed 
lines,  our  past  work  indicates  that  some  incremental  on-going  costs  will  be  required  to 
increase the retention period above the level currently sustained.  

This is an important distinction — on-going costs are a function of the length of the retention 
period only where the requirement for a recording system is already in place. The following 
data give costs for changing the retention period when companies already have a system of 
recording in place. 

– 

TABLE  40:  Additional  On-going  Costs  per  User  with  a  Retention 
Period of Six months Increasing to One or Three Years, € 

Additional on-going costs per user currently recorded 

Small company  Medium company Large company 

year 

retention 

One 
period 

Three  years 
period 

retention 

6.5 

17.7 

6.5 

17.7 

41.3 

122.7 

Source:  Own  figures  as  used  in  Consideration  of  a  Discretionary  Recording  Requirement  - 
Report by Europe Economics. 

Based on the assumption that the costs of holding records for an additional year are linear, we 
estimate that increasing the retention period would cost €5.60 per user in an SME and €40.70 
per user in a large firm. 

202 

 
 
  
 
  
 
Again,  no  additional  costs  (one-off  or  on-going)  were  found  for  voice  from  mobile  in 
increasing the retention period of recordings when this system was implemented from scratch. 
We assume the magnitude of cost for storage and retrieval comparable to that for fixed line 
calls  would  be  experienced  in  increasing  the  retention  period  for  those  already  with  mobile 
recording systems in place. 

The following incremental on-going costs can be estimated for different choices of retention 
duration: 

– 

TABLE  41:  Incremental  on-going  costs  for  EU27  of  Implementing 
Different  Retention  Periods  for  Telephone  Recordings  of  longer 
than Six Months, € millions   

Retention period 

One year 

Three years  Five years 

Low High Low  High Low  High 

Fixed 
telephones 

line 

Mobile 
telephones 

2.3 

2.6 

11.1 

13.9  20.0  25.2 

0.4 

0.5 

1.9 

2.4 

3.5 

4.4 

Due to the small size of the files for SMS (maximum sizes of around 0.1kB) compared to the 
size of a voice conversation (a 2 minute conversation would require approximately 140kB to 
store, i.e. over a thousand times more than an SMS) we do not make any changes to the on-
going  costs  of  recording  SMS  for  a  longer  retention  period.  The  other  media  (“pin  to  pin” 
recording, MMS, Instant Messaging, e-mail and video) are not currently commonly in place 
in  the  EU.  Therefore  we  have  assumed  that  in  effect  all  would  be  in  the  “from  scratch” 
category of building a recording requirement.  

For fixed line recordings, currently Finland, France, Germany, Greece, Hungary and the UK 
already have recording requirements but with retention period requirements of less than two 
years, so will still be impacted if a retention period of two years is legislated at EU level. All 
other  Member  States  with  existing  recording  requirements  for  fixed  line  telephone  calls 
require retention for at least five years. The picture for mobile phone recording is similar, as 
the UK is the only country with a current recording requirement of less than five years where 
the legislation does not include mobile phone calls. So UK employees are removed from the 
numbers. 

The  following  table  gives  the  number  of  employees  that  will  be  affected  as  the  retention 
period required is lengthened: 

– 

TABLE 42 
Number  of  Employees  in  the  EU  with  Additional  On-
going  Costs  with  the  Retention  Period  of  Fixed  Line  Recordings 
Increased 

Length of retention period 

1 year 

2 year 

3-5 year 

6-10 year 

11+ year 

Low  High  Low  High  Low  High  Low  High  Low  High 

Number 
of 
employees 
affected 
(000’s) 

203 

 
 
  
 
Fixed  line 
telephones 

Mobile 
telephones 

112 

143 

127 

162 

130 

165 

182 

232 

189 

240 

34 

43 

38 

49 

39 

50 

39 

50 

39 

50 

– 

TABLE 43 
Recording Requirements with a Retention Duration of Two Years 

Estimated  Total  EU  costs  of  Introducing  Harmonised 

Fixed telephone
Voice from mobile
SMS
MMS
Video
Pin to pin
IM
Email

Europe Economics costings

One-off

Low
€m

16.1
5.6
1.4
1.9
2.8
1.9
1.6
10.4

41.7

High
€m

58.9
7.3
1.6
2.1
3.1
2.1
2.5
21.6

99.2

Ongoing

Low

€m

High

€m

8.2
5.5
2.2
3.0
8.9
1.6
0.9
15.0

45.2

25.5
19.1
8.6
3.3
9.8
1.8
1.9
31.3

101.2

Note: The low total cost estimates are calculated using the lower population estimate and the 
lower  per  unit  estimates.  The  high  total  cost  estimates  are  calculated  using  the  higher 
population estimate as well as the higher per unit estimates. 

In conclusion, based on the assumption that all media (fixed telephone lines, mobile telephone 
voice  calls,  text  messages  (SMS)  from  mobile  phones,  multimedia  messages  (MMS)  from 
mobile  phones,  video  communications  using  mobile  phones,  pin  to  pin  messages  (used  in 
BlackBerry to BlackBerry communication), (secure) instant messaging services (IM), and e-
mail)  would  be  covered  and  a  retention  period  of  2  years,  we  have  estimated  the  range  of 
incremental aggregated one-off costs to be €41.7-99.2 million and ongoing costs to be €45.2-
101.2 million for the whole of the EU. 

204 

 
 
  
 
 
      
        
      
        
        
      
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
      
      
      
      
      
      
     
 
16. 

ANNEX 6: OVERVIEW OF ADMINISTRATIVE BURDEN 

16.1.  Description of the Model 

The EU Standard Cost Model (SCM) is a model presented in the Annex 10 to the EU Impact 
Assessment  Guidelines375  as  the  preferred  method  of  assessing  the  net  costs  of  information 
obligations or administrative costs imposed by EU legislation. Administrative cost is defined 
as: 

“the  costs  incurred  by  enterprises,  the  voluntary  sector,  public  authorities  and  citizens  in 
meeting legal obligations to provide information on their action or production, either to public 
authorities or to private parties.” 

On  the  basis  of  this  definition  of  administrative  costs  only  the  compliance  cost  aspects  of 
certain  of  the  preferred  options  described  in  this  IA  are  relevant  in  constructing  the  SCM 
estimate. The measures classified as giving rise to information obligations are as follows: 

•  Pre-and post-trade transparency (both equity and non-equity). 

•  Data consolidation 

•  Commodity derivatives — position reporting 

•  Transaction reporting 

•  Investor  protection  —  the  information  obligations  when  offering  investment  services  in 
complex  products  and  the  enhanced  information  to  be  published  by  trading  venues  on 
execution quality and the information given to clients by firms on best execution 

•  Further convergence of the regulatory framework — telephone and electronic recording of 

client orders 

•  Supervisory powers — position oversight. 

There are two important distinctions to be made in considering costs: 

(a) 

(b) 

Recurring/on-going  versus  one-off  —  one-off  costs  are  costs  incurred  only  once, 
while on-going costs reflect the recurring costs associated with running the business. 

Business-as-usual costs versus administrative burdens — this distinguishes between 
costs that result from collecting and processing information that would be incurred in 
the  absence  of  the  legislation  and  the  administrative  burdens  associated  with  the 
additional costs that result from processes undertaken solely due to the legislation. In 
each case costs can be divided into one-off and on-going costs. 

In terms of estimating the SCM both the one-off costs and on-going costs must be considered, 
but only in so far as they are incremental to business-as-usual costs. It is therefore clear that 
the  SCM  can  draw  directly  upon  the  results  of  the  cost-benefit  analysis  that  we  have 
conducted. We have only considered the incremental cost impacts in our work and we have 
also identified where these are one-off in nature or else recurring impacts.  

205 

 
 
  
 
The  core  concept  of  the  SCM  is  that  costs  should  be  calculated  as  the  average  cost  of  the 
administrative  activity  (price)  times  the  total  number  of  activities  performed  per  year 
(quantity). The price is calculated by multiplying the time required for performing that action 
with the average tariff rate for workers that perform that action, and the quantity is calculated 
by multiplying the number of actions required by their frequency. 

16.2.  Estimating the SCM 

The standard step by step procedure set out in the guidance is described in brief below: 

•  Step 1 — identify the information obligations and classify them according to a typology376 

published in Annex 10.  

•  Step 2 — for each type of information required, identify the type of action required based 

on the typology377 published in Annex 10. 

•  Step 3 — obtain a picture of the target groups, which may be classified by size, type and 

location. 

•  Step 4 — identify of the frequency of the required actions, i.e. on average the number of 

times per year an action is required to be taken.  

•  Step  5  —  identify  the  relevant  cost  parameters,  i.e.  the  time  spent  performing  the  action 
and  the  hourly  pay  of  those  performing  the  action.  In  addition,  there  could  be  costs  of 
equipment  and  supplies  where  the  parameters  would  be  (i)  acquisition  cost  and  (ii) 
depreciation period. Lastly, there could be outsourcing costs, where the parameter is what 
the service provider charges on average per information obligation per entity per year. 

•  Step 6 — estimate the average time spent on a task and the average hourly wage of those 

performing the task, based on information for all entities after removing any outliers.  

•  Step 7 — estimate of the number of entities in each target group. 

•  Step 8 — extrapolate data to EU level. 

The results of this exercise are presented in the standard summary format.378 

16.3.  Assumptions Made to Reflect Nature of the Policy Options 

In  constructing  out  estimate  we  have  made  a  number  of  assumptions.  These  are  described 
below. 

Step one 

We categorise the information obligations as set out below.  

Policy  option  giving 
information obligation 

rise 

to 

an 

Type of obligation 

Pre-and  post-trade  transparency  (both 
equity and non-equity). 

Non-labelling 
parties 

information 

for 

third 

206 

 
 
  
 
Data consolidation 

Commodity  derivatives  —  position 
reporting 

Transaction reporting 

Non-labelling 
parties 

information 

for 

third 

Cooperation with audit and inspection by 
public authorities, including maintenance 
of appropriate records 

Cooperation with audit and inspection by 
public authorities, including maintenance 
of appropriate records 

Investor 
services in complex products  

protection  — 

investment 

Non-labelling 
parties  

information 

for 

third 

Investor 
enhanced 
protection  — 
information  to  be  published  by  trading 
venues  on  execution  quality  and  the 
information  given  to  clients  by  firms  on 
best execution 

Non-labelling 
parties  

information 

for 

third 

Further  convergence  of  the  regulatory 
framework  —  telephone  and  electronic 
recording of client orders 

Cooperation with audit and inspection by 
public authorities, including maintenance 
of appropriate records 

powers  — 

position 

Inspection on behalf of public authorities 

Supervisory 
oversight. 

Step two  

In  terms  of  the  administrative  actions  required  to  fulfil  the  information  obligations  set  out 
above  the  most  relevant  for  both  one-off  costs  and  on-going  costs  are  as  follows:  Training 
members  and  employees  about  the  information  obligations;  Buying  (IT)  equipment  & 
supplies;  Designing  information  material  (leaflet  conception  etc);  and  Inspecting  and 
checking  (including  assistance  to  inspection  by  public  authorities).  These  are  more  fully 
detailed in the attached completed templates. 

Step three 

We have discretely identified the target groups (investment firms; investment advisers; MTFs, 
etc) within the compliance costs chapter and do not repeat that analysis here. 

Steps four to six 

For one-off costs we have assumed that the actions would only have to be undertaken once 
(i.e.  once  per  year  and  for  one  year  only).  For  on-going  costs  we  have  used  the  same 
assumptions in terms of the frequency of the actions per year as identified in the compliance 
costs analysis. For example, in terms of transaction reporting we have used the total number 
of transactions underlying the number.  

For  wages  (or  “tariff  per  hour”  as  set  out  in  the  template),  we  have  used  the  hourly  labour 
costs derived from the annual all-in annual cost estimates identified in Appendix 11 detailing 
our underlying main costs assumptions. 

207 

 
 
  
 
Since  the  only  asset  acquisition  identified  for  the  purposes  of  our  estimates  relate  to  IT 
systems we have not included a depreciation period. We have assumed that the system would 
continue until the company updated their IT as a natural part of their future development (i.e. 
unrelated to the introduction of the proposed rules). The one-off cost of the initial acquisition 
has, therefore, not been adjusted for depreciation. 

Using  this  information  we  have  estimated  an  average  cost  per  type  of  company  for  each 
action. 

Step seven 

The  number  of  entities  in  the  EU  as  a  whole  for  each  of  the  target  groups  has,  in  the  main 
part, been estimated as part of our analysis specific to each policy option. Where this has not 
been  available  we  have  used  the  total  number  of  investment  firms  and  credit  institutions 
providing investment services identified in Appendix 16 as conducting a relevant investment 
service (or any investment service) as appropriate. 

Step eight 

As we have noted already, the SCM estimates have been derived from the cost estimates used 
in the analysis of compliance costs. . The report’s cost estimates are based upon a number of 
more or less detailed (typically “bottom-up”) assumptions which are detailed in the respective 
paragraphs  relating  to  compliance  costs.  These  cost  estimates  have  then  been  applied  to  a 
“whole of EU” population for the purposes of establishing the cost impact of specific policy 
options.  It  follows  that  further  extrapolation  for  the  purposes  of  the  SCM  would  be 
inappropriate.  

To note again, the administrative burden estimated equates to the administrative costs. This is 
because  the  cost  estimates  are  on  an  incremental  basis,  i.e.  excluding  any  costs  that  they 
would incur in the absence of the regulation. As such we did not need to include any estimate 
of the Business as Usual costs. 

16.4.  Results 

We present below the detailed tables. We provide low and high estimates for both on-going 
and one-off costs. 

208 

 
 
  
 
– 

TABLE 44: Administrative burden costs - One-off costs (low) 

Review of the Market in Financial Instruments Directive 

Tariff 
(euros 
per 
hour) 

TIme 
(hours) 

Price 
(per  
action) 

Freq  
(per  
year) 

Nbr  
of  
entities 

Total 
number of 
actions 

Equipment 
costs  
(per entity 
& per year) 

Outsourcing 
costs  
(per entity 
& per year) 

Total 
Administrative 
Costs 

Business  
As Usual  
Costs 
(% of 
AC) 

Total 
Administra
tive 
Burdens 
(AC - BAU)

No. 

Art. 

Orig. 
Art. 

Type of 
obligation 

Description of required 
action(s) 

Target 
group 

1 

2 

3 

4 

 5 

6 

7 

8 

Equity pre-
trade 
transparency 

Equity post-
trade 
transparency 

Transparency 
for shares 
traded only on 
MTFs / OTFs 

Non-equity 
pre-trade 
transparency 
for MTFs 

Non-equity 
pre-trade 
transparency 
for Market 
participants 
OTC 

Non-equity 
post-trade 
transparency - 
costs to MTFs 

Non-equity 
post-trade 
transparency - 
costs to 
market 
participants 

Data 
consolidation - 
APA 

Non 
labelling 
information 
for third 
parties  
Non 
labelling 
information 
for third 
parties  
Non 
labelling 
information 
for third 
parties  
Non 
labelling 
information 
for third 
parties  

Non 
labelling 
information 
for third 
parties  

Non 
labelling 
information 
for third 
parties  

Non 
labelling 
information 
for third 
parties  

Familiarising with the 
information obligation 

Familiarising with the 
information obligation 

Buying (IT) equipment 
& supplies  

Buying (IT) equipment 
& supplies  

Buying (IT) equipment 
& supplies  

Buying (IT) equipment 
& supplies  

Buying (IT) equipment 
& supplies  

Other 

Buying (IT) equipment 
& supplies  

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Execution 
venues 
(MTFs) 

Investment 
firms and 
credit 
institutions 

Execution 
venues 
(MTFs) 

Investment 
firms and 
credit 
institutions 

Investment 
firms, credit 
institutions 
and APAs 

0 

0 

0 

0 

0 

0 

0 

0 

209 

1 

1 

1 

1 

1 

1 

1 

1 

600 

600 

600 

600 

0 

0 

0% 

0% 

600 

600 

3.333  

1.999.800 

0% 

0

0

1.999.80
0

46 

46 

8.696 

400.016 

0% 

400.016

264 

264 

2.261 

596.869 

0% 

596.869

46 

46 

8.696 

400.000 

0% 

400.000

380 

380 

10.853 

4.123.999 

0% 

600 

600 

50.000 

30.000.000 

0% 

4.123.99
9

30.000.0
00

 
 
  
 
  
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
9 

Data 
consolidation - 
Consolidated 
tape 

Commodity 
derivatives 
markets - 
position 
reporting 
requirements 
for 
exchanges/M
TF not 
currently 
requiring 
position 
reporting 

Commodity 
derivatives 
markets - 
position 
reporting 
requirements 
for traders not 
currently 
engaged in 
position 
reporting 

Transaction 
Reporting - 
extension in 
scope to 
equities 
primarily 
issued on an 
MTF 

Transaction 
Reporting - 
extension in 
scope to 
depositary 
receipts 

10 

11 

12 

13 

Other 

Adjusting existing data 

Non 
labelling 
information 
for third 
parties  

Buying (IT) equipment 
& supplies  

Buying (IT) equipment 
& supplies  

Buying (IT) equipment 
& supplies  

Notification 
of (specific) 
activities or 
events  

Cooperatio
n with 
audits & 
inspection 
by public 
authorities, 
including 
maintenanc
e of 
appropriate 
records  
Cooperatio
n with 
audits & 
inspection 
by public 
authorities, 
including 
maintenanc
e of 
appropriate 
records  

0 

0 

1 

0 

0 

0% 

0

0 

0,00 

1 

13 

13 

10.000 

130.000 

0% 

130.000

0 

0,00 

1 

52 

52 

12.000 

624.000 

0% 

624.000

0 

0 

1 

600 

600 

1.092 

655.000 

0% 

655.000

MTFs and 
exchanges 

MTFs and 
exchanges 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Buying (IT) equipment 
& supplies  

0 

0 

1 

600 

600 

1.092 

655.000 

0% 

655.000

210 

 
 
  
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
14 

Transaction 
Reporting - 
extension in 
scope to OTC 
derivatives 

15 

16 

17 

18 

19 

Transaction 
Reporting - 
extension in 
scope to 
commodity 
derivatives 

Investor 
Protection: 
Informing on 
Complex 
Products - 
risk-gain 
profiles 

Investor 
Protection: 
Informing on 
Complex 
Products - 
risk-gain 
profiles 

Investor 
Protection: 
Informing on 
Complex 
Products - 
material 
change 

Investor 
Protection: 
Informing on 
Complex 
Products - 
material 
change 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Buying (IT) equipment 
& supplies  

Buying (IT) equipment 
& supplies  

Adjusting existing data 

Designing information 
material (leaflet 
conception…) 

Buying (IT) equipment 
& supplies  

Familiarising with 
the information 
obligation 

Investment 
firms and 
credit 
institutions 

Cooperatio
n with 
audits & 
inspection 
by public 
authorities, 
including 
maintenanc
e of 
appropriate 
records  
Cooperatio
n with 
audits & 
inspection 
by public 
authorities, 
including 
maintenanc
e of 
appropriate 
records  

Non 
labelling 
information 
for third 
parties  

Non 
labelling 
information 
for third 
parties  

Non 
labelling 
information 
for third 
parties  

Non 
labelling 
information 
for third 
parties  

0 

0 

1 

250 

250 

192.720 

48.180.000 

0% 

0 

0 

1 

450 

450 

35.444 

15.950.000 

0% 

36 

4 

144 

1.400 

250 

350.000 

50.555.556 

0% 

1 

250 

250 

100.000 

25.000.000 

0% 

1 

250 

250 

6.667 

1.666.667 

0% 

48.180.0
00

15.950.0
00

50.555.5
56

25.000.0
00

1.666.66
7

36 

1 

36 

17 

9.537 

165.000 

5.958.333 

0% 

5.958.33
3

211 

 
 
  
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
20 

21 

22 

23 

Investor 
Protection: 
Execution 
quality 
reporting 

Convergence 
of Supervisory 
Powers - 
Electronic 
recording 

Reinforcement 
of Supervisory 
Powers - 
Position 
oversight for 
MTFs with 
some existing 
oversight 

Reinforcement 
of Supervisory 
Powers - 
Position 
oversight for 
Eps with no 
existing 
oversight 

Non 
labelling 
information 
for third 
parties  
Cooperatio
n with 
audits & 
inspection 
by public 
authorities, 
including 
maintenanc
e of 
appropriate 
records  

Inspection 
on behalf of 
public 
authorities  

Buying (IT) equipment 
& supplies  

Buying (IT) equipment 
& supplies  

Buying (IT) equipment 
& supplies  

Inspection 
on behalf of 
public 
authorities  

Buying (IT) equipment 
& supplies  

Execution 
venues 
(MTFs) 

Investment 
firms and 
credit 
institutions 

Execution 
venues 
(MTFs) 

Execution 
venues 
(EPs) 

1 

120 

120 

150.000 

18.000.000 

0% 

1 

9.537 

9.537 

4.372 

41.700.000 

0% 

0 

0 

0 

1 

29 

29 

75.000 

2.175.000 

0% 

0 

0 

0 

1 

10 

10 

600.000 

6.000.000 

0% 

Total 
administrati
ve costs (€) 

254.770.240 

18.000.0
00

41.700.0
00

2.175.00
0

6.000.00
0

212 

 
 
  
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
– 

TABLE 45: One-off costs (high) 

Review of the Market in Financial Instruments Directive 

No. 

Art. 

Orig. 
Art. 

Type of 
obligation 

Description of required 
action(s) 

Target 
group 

1 

2 

3 

4 

 5 

6 

7 

8 

Equity pre-
trade 
transparency 

Equity post-
trade 
transparency 

Transparency 
for shares 
traded only on 
MTFs / OTFs 

Non-equity 
pre-trade 
transparency 
for MTFs 

Non-equity 
pre-trade 
transparency 
for Market 
participants 
OTC 

Non-equity 
post-trade 
transparency - 
costs to MTFs 

Non-equity 
post-trade 
transparency - 
costs to 
market 
participants 

Data 
consolidation - 
APA 

Non 
labelling 
informatio
n for third 
parties  
Non 
labelling 
informatio
n for third 
parties  
Non 
labelling 
informatio
n for third 
parties  
Non 
labelling 
informatio
n for third 
parties  

Non 
labelling 
informatio
n for third 
parties  

Non 
labelling 
informatio
n for third 
parties  

Non 
labelling 
informatio
n for third 
parties  

Familiarising with the 
information obligation 

Familiarising with the 
information obligation 

Buying (IT) equipment & 
supplies  

Buying (IT) equipment & 
supplies  

Buying (IT) equipment & 
supplies  

Buying (IT) equipment & 
supplies  

Buying (IT) equipment & 
supplies  

Other 

Buying (IT) equipment & 
supplies  

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Execution 
venues 
(MTFs  

Investment 
firms and 
credit 
institutions 

Investment 
firms, credit 
institutions 
and APAs 

Tariff 
(euros 
per hour) 

TIme  
(hours) 

Price 
(per  
action) 

Freq  
(per year) 

Nbr  
of  
entities 

Total 
number 
of 
actions 

Equipment 
costs  
(per entity 
& per year) 

Outsourci
ng  
costs  
(per entity 
& per year) 

Total 
Administrative 
Costs 

Business  
As Usual  
Costs 
(% of 
AC) 

Total 
Administra
tive 
Burdens 
(AC - BAU)

0 

0 

0 

0 

0 

0 

1 

600 

600 

1 

600 

600 

0 

0 

0% 

0% 

1 

600 

600 

3.333  

1.999.800 

0% 

0

0

1.999.80
0

1 

46 

46 

17.391 

799.986 

0% 

799.986

1 

264 

264 

3.899 

1.029.217 

0% 

1.029.21
7

1 

46 

46 

17.391 

800.000 

0% 

800.000

1 

380 

380 

17.300 

6.574.000 

0% 

0 

0 

1 

600 

600 

50.000 

30.000.000 

0% 

6.574.00
0

30.000.0
00

213 

 
 
  
 
  
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
9 

Data 
consolidation - 
Consolidated 
tape 

Commodity 
derivatives 
markets - 
position 
reporting 
requirements 
for 
exchanges/M
TF not 
currently 
requiring 
position 
reporting 

Commodity 
derivatives 
markets - 
position 
reporting 
requirements 
for traders not 
currently 
engaged in 
position 
reporting 

Transaction 
Reporting - 
extension in 
scope to 
equities 
primarily 
issued on an 
MTF 

10 

11 

12 

13 

Transaction 
Reporting - 
extension in 
scope to 
depositary 
receipts 

MTFs and 
exchanges 

Execution 
venues 
(MTFs) 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Other 

Adjusting existing data 

Non 
labelling 
informatio
n for third 
parties  

Buying (IT) equipment & 
supplies  

Buying (IT) equipment & 
supplies  

Buying (IT) equipment & 
supplies  

Non 
labelling 
informatio
n for third 
parties  

Cooperati
on with 
audits & 
inspectio
n by 
public 
authoritie
s, 
including 
maintena
nce of 
appropria
te records  
Cooperati
on with 
audits & 
inspectio
n by 
public 
authoritie
s, 
including 
maintena
nce of 
appropria
te records  

0 

0 

1 

0 

0 

0% 

0

0 

0,00 

1 

13 

13 

15.000 

195.000 

0% 

195.000

0 

0,00 

1 

104 

52 

15.000 

780.000 

0% 

780.000

0 

0 

1 

600 

600 

1.884 

1.130.556 

0% 

1.130.55
6

1.130.55
6

Buying (IT) equipment & 
supplies  

0 

0 

1 

600 

600 

1.884 

1.130.556 

0% 

214 

 
 
  
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
Cooperati
on with 
audits & 
inspectio
n by 
public 
authoritie
s, 
including 
maintena
nce of 
appropria
te records  
Cooperati
on with 
audits & 
inspectio
n by 
public 
authoritie
s, 
including 
maintena
nce of 
appropria
te records  

Non 
labelling 
informatio
n for third 
parties  

Non 
labelling 
informatio
n for third 
parties  

Non 
labelling 
informatio
n for third 
parties  

Non 
labelling 
informatio
n for third 
parties  

Buying (IT) equipment & 
supplies  

Buying (IT) equipment & 
supplies  

Adjusting existing data 

Designing information 
material (leaflet 
conception…) 

Buying (IT) equipment & 
supplies  

Familiarising with the 
information obligation 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

14 

Transaction 
Reporting - 
extension in 
scope to OTC 
derivatives 

15 

16 

17 

18 

21
9 

Transaction 
Reporting - 
extension in 
scope to 
commodity 
derivatives 

Investor 
Protection: 
Informing on 
Complex 
Products - 
risk-gain 
profiles 

Investor 
Protection: 
Informing on 
Complex 
Products - 
risk-gain 
profiles 

Investor 
Protection: 
Informing on 
Complex 
Products - 
material 
change 

Investor 
Protection: 
Informing on 
Complex 
Products - 
material 
change 

0 

0 

1 

250 

250 

247.940 

61.985.000 

0% 

0 

0 

1 

450 

450 

44.222 

19.900.000 

0% 

61.985.0
00

19.900.0
00

36 

6 

217 

1.333 

300 

400.00
0 

86.666.667 

0% 

86.666.6
67

1 

300 

300 

150.000 

45.000.000 

0% 

1 

300 

300 

8.889 

2.666.667 

0% 

45.000.0
00

2.666.66
7

36 

1 

36 

34 

9.537 

320.00
0 

11.555.556 

0% 

11.555.5
56

215 

 
 
  
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
20 

21 

22 

23 

Investor 
Protection: 
Execution 
quality 
reporting 

Convergence 
of Supervisory 
Powers - 
Electronic 
recording 

Reinforcement 
of Supervisory 
Powers - 
Position 
oversight for 
MTFs with 
some existing 
oversight 

Reinforcement 
of Supervisory 
Powers - 
Position 
oversight for 
Eps with no 
existing 
oversight 

Non 
labelling 
informatio
n for third 
parties  
Cooperati
on with 
audits & 
inspectio
n by 
public 
authoritie
s, 
including 
maintena
nce of 
appropria
te records  

Inspectio
n on 
behalf of 
public 
authoritie
s  

Inspectio
n on 
behalf of 
public 
authoritie
s  

Buying (IT) equipment & 
supplies  

Buying (IT) equipment & 
supplies  

Buying (IT) equipment & 
supplies  

Execution 
venues 
(MTFs) 

Investment 
firms and 
credit 
institutions 

Execution 
venues 
(MTFs) 

Execution 
venues 
(EPs) 

1 

120 

120 

150.000 

18.000.000 

0% 

1 

9.537 

9.537 

10.402 

99.200.000 

0% 

0 

0 

0 

1 

29 

29 

100.000 

2.900.000 

0% 

Buying (IT) equipment & 
supplies  

0 

0 

0 

1 

10 

10 

1.000.000 

10.000.000 

0% 

Total 
administra
tive costs 

(€) 

402.313.004 

18.000.0
00

99.200.0
00

2.900.00
0

10.000.0
00

216 

 
 
  
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
– 

TABLE 46 Ongoing costs (low) 

Review of the Market in Financial Instruments Directive 

No. 

Art. 

Orig. 
Art. 

Type of 
obligation 

1 

2 

3 

4 

5 

6 

7 

8 

Equity pre-trade 
transparency 

Equity post-
trade 
transparency 

Transparency 
for shares 
traded only on 
MTFs / OTFs 

Non-equity pre-
trade 
transparency 
for MTFs 

Non-equity pre-
trade 
transparency 
for Market 
participants 
OTC 

Non-equity 
post-trade 
transparency - 
costs to MTFs 

Non-equity 
post-trade 
transparency - 
costs to market 
participants 

Data 
consolidation - 
APA 

Non 
labelling 
information 
for third 
parties  
Non 
labelling 
information 
for third 
parties  
Non 
labelling 
information 
for third 
parties  
Non 
labelling 
information 
for third 
parties  

Non 
labelling 
information 
for third 
parties  

Non 
labelling 
information 
for third 
parties  

Non 
labelling 
information 
for third 
parties  

Non 
labelling 
information 
for third 
parties  

Description 
of required 
action(s) 

Familiarising 
with the 
information 
obligation 

Familiarising 
with the 
information 
obligation 

Buying (IT) 
equipment 
& supplies  

Buying (IT) 
equipment 
& supplies  

Buying (IT) 
equipment 
& supplies  

Buying (IT) 
equipment 
& supplies  

Buying (IT) 
equipment 
& supplies  

Buying (IT) 
equipment 
& supplies  

Target 
group 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Execution 
venues 
(MTFs) 

Investment 
firms and 
credit 
institutions 

Execution 
venues 
(MTFs) 

Investment 
firms and 
credit 
institutions 

Investment 
firms, 
credit 
institutions 
and APAs 

Tariff
(euros 
per 
hour) 

TIme  
(hours) 

Price 
(per 
action) 

Freq 
(per 
year) 

Nbr  
of  
entities 

Total 
number 
of actions 

Equipment 
costs  
(per entity 
& per 
year) 

Outsourcing  
costs  
(per entity  
& per year) 

Total 
Administrative 
Costs 

Business  
As Usual  
Costs 
(% of 
AC) 

Total 
Administrative 
Burdens 
(AC - BAU) 

1 

600 

600 

1 

600 

600 

0 

0 

0% 

0% 

0 

0 

1 

600 

600 

667  

400.200 

0% 

400.200 

45 

46 

2.070 

77 

159.990 

0% 

159.990 

45 

264 

11.880 

341 

4.055.654 

0% 

4.055.654 

1 

46 

46 

3.478 

160.000 

0% 

160.000 

1 

380 

380 

11.889 

4.517.999 

0% 

4.517.999 

1 

600 

600 

5.000 

3.000.000 

0% 

3.000.000 

217 

 
 
  
 
  
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
9 

Data 
consolidation - 
Consolidated 
tape 

Non 
labelling 
information 
for third 
parties  

Adjusting 
existing 
data 

10 

11 

12 

13 

Commodity 
derivatives 
markets - 
position 
reporting 
requirements 
for 
exchanges/MTF 
not currently 
requiring 
position 
reporting 

Commodity 
derivatives 
markets - 
position 
reporting 
requirements 
for 
exchanges/MTF 
not currently 
requiring 
position 
reporting 

Commodity 
derivatives 
markets - 
position 
reporting 
requirements 
for traders not 
currently 
engaged in 
position 
reporting 

Commodity 
derivatives 
markets - 
position 
reporting 
requirements 
for traders not 
currently 
engaged in 
position 
reporting 

Non 
labelling 
information 
for third 
parties  

Retrieving 
relevant 
information 
from 
existing 
data 

Non 
labelling 
information 
for third 
parties  

Buying (IT) 
equipment 
& supplies  

Notification 
of (specific) 
activities or 
events  

Retrieving 
relevant 
information 
from 
existing 
data 

Non 
labelling 
information 
for third 
parties  

Buying (IT) 
equipment 
& supplies  

MTFs and 
exchanges 

Execution 
venues 
(MTFs) 

Execution 
venues 
(MTFs) 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

0 

0 

44 

3.150,00 

###### 

1 

13 

13 

1.820.000 

0% 

1.820.000 

44 

22,50 

1.000 

1 

13 

13 

13.000 

0% 

13.000 

44 

450,00 

###### 

1 

52 

52 

1.040.000 

0% 

1.040.000 

44 

27,00 

1.200 

1 

52 

52 

62.400 

0% 

62.400 

218 

 
 
  
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
14 

15 

16 

17 

18 

19 

Commodity 
derivatives 
markets - 
publication of 
COT report 

Transaction 
Reporting - 
extension in 
scope to 
equities 
primarily issued 
on an MTF 

Transaction 
Reporting - 
extension in 
scope to 
equities 
primarily issued 
on an MTF 

Transaction 
Reporting - 
extension in 
scope to 
equities 
primarily issued 
on an MTF 

Transaction 
Reporting - 
extension in 
scope to 
depositary 
receipts 

Transaction 
Reporting - 
extension in 
scope to 
depositary 
receipts 

Execution 
venues 
(MTFs) 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Non 
labelling 
information 
for third 
parties  

Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  
Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  
Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  
Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  
Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 

Retrieving 
relevant 
information 
from 
existing 
data 

Buying (IT) 
equipment 
& supplies  

Inspecting 
and 
checking 
(including 
assistance 
to 
inspection 
by public 
authorities) 

Filing the 
information 

Buying (IT) 
equipment 
& supplies  

Inspecting 
and 
checking 
(including 
assistance 
to 
inspection 
by public 
authorities) 

44 

450,00 

###### 

1 

17 

17 

340.000 

0% 

340.000 

1 

600 

600 

29 

17.326 

0% 

17.326 

56 

0,00027 

0,015 

5.201 

600 

####### 

47.286 

0% 

47.286 

1 

600 

600 

31 

18.725 

0% 

18.725 

1 

600 

600 

186 

111.391 

0% 

111.391 

56 

0,00027 

###### 

33.442 

600 

####### 

304.015 

0% 

304.015 

219 

 
 
  
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
records  

Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  
Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  
Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  
Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Filing the 
information 

Buying (IT) 
equipment 
& supplies  

Inspecting 
and 
checking 
(including 
assistance 
to 
inspection 
by public 
authorities) 

Filing the 
information 

20 

21 

22 

23 

Transaction 
Reporting - 
extension in 
scope to 
depositary 
receipts 

Transaction 
Reporting - 
extension in 
scope to OTC 
derivatives 

Transaction 
Reporting - 
extension in 
scope to OTC 
derivatives 

Transaction 
Reporting - 
extension in 
scope to OTC 
derivatives 

1 

600 

600 

201 

120.390 

0% 

120.390 

1 

150 

150 

753 

112.995 

0% 

112.995 

56 

0,00055 

###### 

67.846 

150 

####### 

308.393 

0% 

308.393 

1 

150 

150 

271 

40.708 

0% 

40.708 

220 

 
 
  
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
24 

25 

26 

Transaction 
Reporting - 
extension in 
scope to OTC 
derivatives 
(credit index 
derivatives) 

Transaction 
Reporting - 
extension in 
scope to OTC 
derivatives 
(credit index 
derivatives) 

Transaction 
Reporting - 
extension in 
scope to OTC 
derivatives 
(credit index 
derivatives) 

27 

Transaction 
Reporting - data 
storage 

28 

Transaction 
Reporting - 
extension in 
scope to 
commodity 
derivatives 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

OTFs, 
MTFs and 
RMs 

Investment 
firms and 
credit 
institutions 

Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  
Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  
Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  
Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  
Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  

Buying (IT) 
equipment 
& supplies  

Inspecting 
and 
checking 
(including 
assistance 
to 
inspection 
by public 
authorities) 

Filing the 
information 

Buying (IT) 
equipment 
& supplies  

Buying (IT) 
equipment 
& supplies  

1 

150 

150 

244 

36.670 

0% 

36.670 

56 

0,00055 

###### 

22.018 

150 

####### 

100.082 

0% 

100.082 

1 

150 

150 

88 

13.211 

0% 

13.211 

1 

100 

100 

9.968 

996.809 

0% 

996.809 

1 

150 

150 

677 

101.496 

0% 

101.496 

221 

 
 
  
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
29 

30 

31 

32 

33 

34 

Transaction 
Reporting - 
extension in 
scope to 
commodity 
derivatives 

Transaction 
Reporting - 
extension in 
scope to 
commodity 
derivatives 

Investor 
Protection: 
Informing on 
Complex 
Products - risk-
gain profiles 

Investor 
Protection: 
Informing on 
Complex 
Products - 
quarterly 
reporting 

Investor 
Protection: 
Execution 
quality reporting 

Convergence of 
Supervisory 
Powers - 
Electronic 
recording 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Execution 
venues 
(MTFs) 

Investment 
firms and 
credit 
institutions 

Inspecting 
and 
checking 
(including 
assistance 
to 
inspection 
by public 
authorities) 

Filing the 
information 

Adjusting 
existing 
data 

Retrieving 
relevant 
information 
from 
existing 
data 

Buying (IT) 
equipment 
& supplies  

Buying (IT) 
equipment 
& supplies  

Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  
Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  

Non 
labelling 
information 
for third 
parties  

Non 
labelling 
information 
for third 
parties  

Non 
labelling 
information 
for third 
parties  
Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  

56 

0,00055 

###### 

60.942 

150 

####### 

277.008 

0% 

277.008 

1 

150 

150 

244 

36.565 

0% 

36.565 

36 

0,80 

29 

1.400 

250 

####### 

10.111.111 

0% 

10.111.111 

5.940 

250 

####### 

5.940 

1.485.000 

0% 

1.485.000 

1 

120 

120 

50.000 

6.000.000 

0% 

6.000.000 

1 

9.537 

9.537 

4.739 

45.200.000 

0% 

45.200.000 

222 

 
 
  
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
35 

36 

37 

38 

39 

Reinforcement 
of Supervisory 
Powers - 
Position 
oversight for 
MTFs with 
some existing 
oversight 

Reinforcement 
of Supervisory 
Powers - 
Position 
oversight for 
MTFs with 
some existing 
oversight 

Reinforcement 
of Supervisory 
Powers - 
Position 
oversight for 
Eps with no 
existing 
oversight 

Reinforcement 
of Supervisory 
Powers - 
Position 
oversight for 
Eps with no 
existing 
oversight 

Reinforcement 
of Supervisory 
Powers - 
Position 
oversight for all 
execution 
venues i.t.o 
requesting 
information 

Execution 
venues 
(MTFs) 

Execution 
venues 
(MTFs) 

Execution 
venues 
(EPs) 

Execution 
venues 
(EPs) 

Execution 
venues 
(Eps and 
MTFs) 

Inspection 
on behalf of 
public 
authorities  

Buying (IT) 
equipment 
& supplies  

Inspection 
on behalf of 
public 
authorities  

Inspecting 
and 
checking 
(including 
assistance 
to 
inspection 
by public 
authorities) 

Inspection 
on behalf of 
public 
authorities  

Buying (IT) 
equipment 
& supplies  

Inspection 
on behalf of 
public 
authorities  

Inspection 
on behalf of 
public 
authorities  

Inspecting 
and 
checking 
(including 
assistance 
to 
inspection 
by public 
authorities) 

Inspecting 
and 
checking 
(including 
assistance 
to 
inspection 
by public 
authorities) 

44 

6 

268 

28 

29 

812 

217.500 

0% 

217.500 

44 

96 

4.286 

28 

29 

812 

3.480.000 

0% 

3.480.000 

44 

48 

2.143 

28 

10 

280 

600.000 

0% 

600.000 

44 

257 

11.429 

28 

10 

280 

3.200.000 

0% 

3.200.000 

44 

32 

1.429 

28 

39 

1.092 

1.560.000 

0% 

1.560.000 

223 

 
 
  
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
40 

Reinforcement 
of Supervisory 
Powers - 
Position 
oversight for all 
market 
participants not 
currently 
monitored 

Investment 
firms and 
credit 
institutions 

Other 

Buying (IT) 
equipment 
& supplies  

44 

8 

356 

5 

250 

1.250 

444.444 

0% 

444.444 

Total administrative 

costs (€) 

90.510.368 

224 

 
 
  
 
  
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
– 

TABLE 47: Administrative burden costs - Ongoing costs (high) 

Review of the Market in Financial Instruments Directive 

Tariff
(euros 
per 
hour) 

TIme 
(hours) 

Price 
(per  
action) 

Freq 
(per 
year) 

Nbr  
of  
entities 

Total 
number  
of actions 

Equipment 
costs  
(per entity 
& per 
year) 

Outsourcing  
costs  
(per entity  
& per year) 

Total 
Administrative 
Costs 

Business  
As Usual  
Costs 
(% of 
AC) 

Total 

Administrat
Burdens
(AC - BAU

0 

0 

0 

0 

0 

0 

No. 

Art. 

Orig. 
Art. 

Type of 
obligation 

1 

2 

3 

4 

5 

6 

7 

8 

Equity pre-trade 
transparency 

Equity post-
trade 
transparency 

Transparency 
for shares 
traded only on 
MTFs / OTFs 

Non-equity pre-
trade 
transparency 
for MTFs 

Non-equity pre-
trade 
transparency 
for Market 
participants 
OTC 

Non-equity 
post-trade 
transparency - 
costs to MTFs 

Non-equity 
post-trade 
transparency - 
costs to market 
participants 

Data 
consolidation - 
APA 

Non 
labelling 
information 
for third 
parties  
Non 
labelling 
information 
for third 
parties  
Non 
labelling 
information 
for third 
parties  
Non 
labelling 
information 
for third 
parties  

Non 
labelling 
information 
for third 
parties  

Non 
labelling 
information 
for third 
parties  

Non 
labelling 
information 
for third 
parties  

Other 

Description 
of required 
action(s) 

Familiarising 
with the 
information 
obligation 

Familiarising 
with the 
information 
obligation 

Buying (IT) 
equipment 
& supplies  

Buying (IT) 
equipment 
& supplies  

Buying (IT) 
equipment 
& supplies  

Buying (IT) 
equipment 
& supplies  

Buying (IT) 
equipment 
& supplies  

Buying (IT) 
equipment 
& supplies  

Target 
group 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Execution 
venues 
(MTFs) 

Investment 
firms and 
credit 
institutions 

Execution 
venues 
(MTFs) 

Investment 
firms and 
credit 
institutions 

Investment 
firms, 
credit 
institutions 
and APAs 

225 

1 

600 

600 

1 

600 

600 

0 

0 

0% 

0% 

1 

600 

600 

667  

400.200 

0% 

400.2

45 

46 

2.070 

155 

320.001 

0% 

320.0

45 

264 

11.880 

442 

5.256.199 

0% 

5.256.

1 

46 

46 

6.957 

319.999 

0% 

319.9

1 

380 

380 

17.995 

6.838.001 

0% 

6.838.0

1 

600 

600 

7.500 

4.500.000 

0% 

4.500.0

 
 
  
 
  
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
9 

Data 
consolidation - 
Consolidated 
tape 

Other 

Adjusting 
existing 
data 

10 

11 

12 

13 

Commodity 
derivatives 
markets - 
position 
reporting 
requirements 
for 
exchanges/MTF 
not currently 
requiring 
position 
reporting 

Commodity 
derivatives 
markets - 
position 
reporting 
requirements 
for 
exchanges/MTF 
not currently 
requiring 
position 
reporting 

Commodity 
derivatives 
markets - 
position 
reporting 
requirements 
for traders not 
currently 
engaged in 
position 
reporting 

Commodity 
derivatives 
markets - 
position 
reporting 
requirements 
for traders not 
currently 
engaged in 
position 
reporting 

Non 
labelling 
information 
for third 
parties  

Retrieving 
relevant 
information 
from 
existing 
data 

Non 
labelling 
information 
for third 
parties  

Buying (IT) 
equipment 
& supplies  

Notification 
of (specific) 
activities or 
events  

Retrieving 
relevant 
information 
from 
existing 
data 

Non 
labelling 
information 
for third 
parties  

Buying (IT) 
equipment 
& supplies  

MTFs and 
exchanges 

Execution 
venues 
(MTFs) 

Execution 
venues 
(MTFs) 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

1 

0 

0% 

44 

4.050,00 

180.000 

1 

13 

13 

2.340.000 

0% 

2.340.0

44 

33,75 

1.500 

1 

13 

13 

19.500 

0% 

19.5

44 

450,00 

20.000 

1 

52 

52 

1.040.000 

0% 

1.040.0

44 

33,75 

1.500 

1 

52 

52 

78.000 

0% 

78.0

226 

 
 
  
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
14 

15 

16 

17 

18 

19 

Commodity 
derivatives 
markets - 
publication of 
COT report 

Transaction 
Reporting - 
extension in 
scope to 
equities 
primarily issued 
on an MTF 

Transaction 
Reporting - 
extension in 
scope to 
equities 
primarily issued 
on an MTF 

Transaction 
Reporting - 
extension in 
scope to 
equities 
primarily issued 
on an MTF 

Transaction 
Reporting - 
extension in 
scope to 
depositary 
receipts 

Transaction 
Reporting - 
extension in 
scope to 
depositary 
receipts 

Execution 
venues 
(MTFs) 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Non 
labelling 
information 
for third 
parties  

Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  
Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  
Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  
Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  
Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 

Retrieving 
relevant 
information 
from 
existing 
data 

Buying (IT) 
equipment 
& supplies  

Inspecting 
and 
checking 
(including 
assistance 
to 
inspection 
by public 
authorities) 

Filing the 
information 

Buying (IT) 
equipment 
& supplies  

Inspecting 
and 
checking 
(including 
assistance 
to 
inspection 
by public 
authorities) 

44 

450,00 

20.000 

1 

17 

17 

340.000 

0% 

340.0

1 

600 

600 

45 

27.071 

0% 

27.0

69 

0,00034 

0,024 

5.201 

600 

3.120.862 

73.884 

0% 

73.8

1 

600 

600 

62 

37.450 

0% 

37.4

1 

600 

600 

435 

260.724 

0% 

260.7

69 

0,00034 

0,024 

50.162 

600 

######### 

712.534 

0% 

712.5

227 

 
 
  
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
records  

Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  
Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  
Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  
Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Filing the 
information 

Buying (IT) 
equipment 
& supplies  

Inspecting 
and 
checking 
(including 
assistance 
to 
inspection 
by public 
authorities) 

Filing the 
information 

20 

21 

22 

23 

Transaction 
Reporting - 
extension in 
scope to 
depositary 
receipts 

Transaction 
Reporting - 
extension in 
scope to OTC 
derivatives 

Transaction 
Reporting - 
extension in 
scope to OTC 
derivatives 

Transaction 
Reporting - 
extension in 
scope to OTC 
derivatives 

1 

600 

600 

602 

361.169 

0% 

361.

1 

150 

150 

1.177 

176.555 

0% 

176.5

69 

0,00068 

0,047 

67.846 

150 

######### 

481.864 

0% 

481.8

1 

150 

150 

543 

81.416 

0% 

81.4

228 

 
 
  
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
24 

25 

26 

Transaction 
Reporting - 
extension in 
scope to OTC 
derivatives 
(credit index 
derivatives) 

Transaction 
Reporting - 
extension in 
scope to OTC 
derivatives 
(credit index 
derivatives) 

Transaction 
Reporting - 
extension in 
scope to OTC 
derivatives 
(credit index 
derivatives) 

27 

Transaction 
Reporting - data 
storage 

28 

Transaction 
Reporting - 
extension in 
scope to 
commodity 
derivatives 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

OTFs, 
MTFs and 
RMs 

Investment 
firms and 
credit 
institutions 

Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  
Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  
Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  
Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  
Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  

Buying (IT) 
equipment 
& supplies  

Inspecting 
and 
checking 
(including 
assistance 
to 
inspection 
by public 
authorities) 

Filing the 
information 

Buying (IT) 
equipment 
& supplies  

Buying (IT) 
equipment 
& supplies  

1 

150 

150 

382 

57.297 

0% 

57.2

69 

0,00068 

0,047 

22.018 

150 

3.302.720 

156.379 

0% 

156.3

1 

150 

150 

176 

26.422 

0% 

26.4

1 

100 

100 

18.772 

1.877.230 

0% 

1.877.2

1 

150 

150 

1.057 

158.587 

0% 

158.5

229 

 
 
  
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
29 

30 

31 

32 

33 

34 

Transaction 
Reporting - 
extension in 
scope to 
commodity 
derivatives 

Transaction 
Reporting - 
extension in 
scope to 
commodity 
derivatives 

Investor 
Protection: 
Informing on 
Complex 
Products - risk-
gain profiles 

Investor 
Protection: 
Informing on 
Complex 
Products - 
quarterly 
reporting 

Investor 
Protection: 
Execution 
quality reporting 

Convergence of 
Supervisory 
Powers - 
Electronic 
recording 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Investment 
firms and 
credit 
institutions 

Execution 
venues 
(MTFs) 

Investment 
firms and 
credit 
institutions 

Inspecting 
and 
checking 
(including 
assistance 
to 
inspection 
by public 
authorities) 

Filing the 
information 

Adjusting 
existing 
data 

Retrieving 
relevant 
information 
from 
existing 
data 

Buying (IT) 
equipment 
& supplies  

Buying (IT) 
equipment 
& supplies  

Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  
Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  

Non 
labelling 
information 
for third 
parties  

Non 
labelling 
information 
for third 
parties  

Non 
labelling 
information 
for third 
parties  
Cooperation 
with audits & 
inspection 
by public 
authorities, 
including 
maintenance 
of 
appropriate 
records  

69 

0,00068 

0,047 

60.952 

150 

9.142.756 

432.896 

0% 

432.8

1 

150 

150 

488 

73.130 

0% 

73.

36 

2,00 

72 

1.333 

300 

400.000 

28.888.889 

0% 

28.888.8

12.800 

300 

3.840.000 

25.600 

7.680.000 

0% 

7.680.0

1 

120 

120 

50.000 

6.000.000 

0% 

6.000.0

1 

9.537 

9.537 

10.611 

101.200.000 

0% 

101.200.0

230 

 
 
  
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
35 

36 

37 

38 

39 

Reinforcement 
of Supervisory 
Powers - 
Position 
oversight for 
MTFs with 
some existing 
oversight 

Reinforcement 
of Supervisory 
Powers - 
Position 
oversight for 
MTFs with 
some existing 
oversight 

Reinforcement 
of Supervisory 
Powers - 
Position 
oversight for 
Eps with no 
existing 
oversight 

Reinforcement 
of Supervisory 
Powers - 
Position 
oversight for 
Eps with no 
existing 
oversight 

Reinforcement 
of Supervisory 
Powers - 
Position 
oversight for all 
execution 
venues i.t.o 
requesting 
information 

Execution 
venues 
(MTFs) 

Execution 
venues 
(MTFs) 

Execution 
venues 
(EPs) 

Execution 
venues 
(EPs) 

Execution 
venues 
(Eps and 
MTFs) 

Inspection 
on behalf of 
public 
authorities  

Buying (IT) 
equipment 
& supplies  

Inspection 
on behalf of 
public 
authorities  

Inspecting 
and 
checking 
(including 
assistance 
to 
inspection 
by public 
authorities) 

Inspection 
on behalf of 
public 
authorities  

Buying (IT) 
equipment 
& supplies  

Inspection 
on behalf of 
public 
authorities  

Inspection 
on behalf of 
public 
authorities  

Inspecting 
and 
checking 
(including 
assistance 
to 
inspection 
by public 
authorities) 

Inspecting 
and 
checking 
(including 
assistance 
to 
inspection 
by public 
authorities) 

44 

8 

357 

28 

29 

812 

290.000 

0% 

290.0

44 

193 

8.571 

28 

29 

812 

6.960.000 

0% 

6.960.0

44 

80 

3.571 

28 

10 

280 

1.000.000 

0% 

1.000.0

44 

643 

28.571 

28 

10 

280 

8.000.000 

0% 

8.000.0

44 

64 

2.857 

28 

39 

1.092 

3.120.000 

0% 

3.120.0

231 

 
 
  
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
40 

Reinforcement 
of Supervisory 
Powers - 
Position 
oversight for all 
market 
participants not 
currently 
monitored 

Investment 
firms and 
credit 
institutions 

Other 

Buying (IT) 
equipment 
& supplies  

44 

8 

356 

10 

250 

2.500 

888.889 

0% 

888.8

Total administrative 

costs (€) 

190.474.286 

232 

 
 
  
 
  
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
17. 

ANNEX 7: DETAILED UNDERLYING COSTS ASSUMPTIONS 

MARKET PARTICIPANTS 

Assumptions 

Bonds/equities 

No. large players  

No. medium players  

No. small players 

25 

75 

500 

600 

Notes: 

Breakdown for non-equity 
transparency 

Derivatives (excl commodity 
derivatives) 

Notes 

Commodity derivatives 

Highest number of participants in any exchange is 325. 
If all participants unique (i.e. no overlap), FESE data imply 1551 participants 
600 seems reasonable middle-ground 

Large dealers (with automated 
pricing) 

Medium dealers (with automated pricing) 
Small dealers (with automated 
pricing) 

Large buy-side firms 

Others 

No. large players / associated cost 

No. medium players / associated cost  

No. small players / associated cost 

14  G14 Large dealers 

40  Based on information from electronic platforms about total number of dealers 

Based on information from electronic platforms about proportion of dealers that have manual pricing 
systems 

100 

50 

396 

600 

14 

36 

200 

250 

Highest number of participants in any exchange-based derivatives market is 83. 
If all participants unique (i.e. no overlap), FESE data imply 383 participants, but missing UK where most specialist firms are 
At least 67 participants OTC from ISDA survey 
250 looks reasonable middle-ground assumption 

No. large players / associated cost 

No. medium players / associated cost  

No. small players / associated cost 

14 

36 

400 

233 

 
 
  
 
  
  
  
 
  
  
  
  
  
 
  
 
  
  
 
  
  
 
  
  
  
  
 
 
  
  
  
  
  
 
  
  
  
  
 
  
  
 
  
 
  
  
 
  
  
  
 
  
  
  
 
  
  
  
  
 
  
  
  
  
 
  
  
 
  
  
 
  
  
 
  
  
  
  
 
 
  
  
  
  
  
 
  
  
  
  
 
  
  
 
  
  
 
  
  
 
Breakdown 

EMPLOYEE COSTS 
ASSUMPTIONS 

IT worker 

Number of large dealers 

Number of medium dealers 

Number of smaller dealers  

Compliance & back-office workers  Medium-level staff 

Senior staff 

Portfolio managers 

Transaction reporting 

Low estimate 

High estimate 

Total derivatives - but likely to be some 
overlap between commodity and other 
derivatives (esp large dealers), but not so 
much with smaller ones. So total of around 
600 market players 

450 

700 

Number of large buy-side firms 

50  Based on info from MTF about the total number of buy-side clients (500) and proportion likely to be large 

Number of smaller buy-side firms  

450  Based on info from MTF about the total number of buy-side clients (500) and proportion likely to be small 

14  G14 dealers 

20  Based on information from electronic platforms about total number of dealers 

76 

610 

Annual 

€ 100.000 

€ 60.000 

€ 80.000 

€ 125.000 

€ 100.000 

€ 125.000 

Based on information from electronic platforms about proportion of dealers that have manual pricing 
systems 

Per Day 

€ 444,44 

€ 266,67 

€ 355,56 

€ 555,56 

€ 444,44 

€ 555,56 

234 

 
 
  
 
  
  
  
  
 
  
  
  
  
  
 
  
  
 
  
  
  
  
  
 
  
  
  
  
 
  
 
  
 
  
 
  
 
  
 
  
  
  
  
 
  
  
  
  
  
 
  
  
 
  
  
  
  
  
 
  
  
 
  
  
  
  
  
 
  
 
  
  
 
  
  
  
  
  
 
  
  
 
  
  
  
  
  
 
 
 
  
 
 
18. 

ANNEX 8: ESTIMATE OF IMPACT IN TERMS OF INDIRECT ECONOMIC EFFECT 

18.1.  Trading  of  clearing  eligible  and  sufficiently  liquid  derivatives  on  organised 

trading platforms 

Trading derivatives on exchanges, MTFs or electronic platforms should result in operational 
efficiencies  for  traders  (both  buy-  and  sell-side),  reduce  the  occurrence  of  front  and  back 
office errors and provide a clear and easily accessed audit trail. The increased transparency on 
such platforms, as well increased competition between dealers, is also likely to reduce the bid-
ask spreads in the relevant markets provided that liquidity is not reduced. It is likely that part 
of this reduction would stem from reduced search costs — costs savings made by dealers in 
finding eligible counterparties for trades and unwinding such trades (assuming that liquidity 
on an organised platform would be greater and ease of doing business will increase), as well 
as  cost  savings  from  operational  efficiency;  and  part  should  also  come  from  downward 
pressure on prices from increased competition and transparency.  

Spreads  decrease  represents  a  benefit  to  the  market  as  a  whole,  but  an  opportunity  cost  to 
(particularly  sell-side)  dealers  of  operating  on  an  organised  trading  platform  rather  than 
bilaterally  over  the  counter.  In  order  to  better  understand  how  this  may  affect  dealers,  we 
describe here the trading ‘life cycle’ of a derivative product.379 

The  market  for  a  derivative  product  will  typically  start  out  very  small.  The  product  will  be 
traded only bilaterally (e.g. voice) OTC and will be relatively bespoke and non-standard. Over 
time,  as  more  market  participants  trade  in  the  product,  it  can  become  increasingly 
standardised  (or  ‘commoditised’),  with  common  features  emerging  (e.g.  popular  maturity 
rates  etc).  The  increasing  number  of  players  will  increase  competition  among  dealers.  Each 
trade will become less and less profitable for dealers, but this can often compensated for by 
the significant increase in volume, and well as increasing ease of trades. 

The role of an electronic platform or exchange lies somewhere along this path. Such platforms 
will not launch a product at the beginning of its life, and will instead wait until it has reached 
a certain level of standardisation and attracts a certain level of trading interest. The interest of 
at least four or five dealers (depending of the platform) will be required. If a product launch is 
successful,  then  more  dealers  join  as  a  result  of  customer  demand  (if  a  customer  is  trading 
with four out of their five dealers over a platform, it will be in the interest of the fifth dealer to 
join to maintain his share of business). When a product is traded on a platform the level of 
standardisation  increases,  trading  volumes  increase,  trading  costs  decrease  and  liquidity 
increases. Once on a platform the growth in the market for a product will generally increase 
more quickly than usual given these reinforcing factors.  

The diagram below provides a simple illustration of this life cycle.380 The variables on the y-
axis  are  various  factors  that  lead  to  the  trading  of  a  product  on  a  platform.  As  mentioned 
elsewhere all of these factors are important (e.g. a product needs to be standardised and have a 
sufficient  volume  and  trading  interest).  As  can  be  seen,  the  launch  of  the  product  on  a 
platform  would  only  occur  once  the  product  is  already  sufficiently  developed.  It  is  stressed 
that there is nothing automatic in the development of a product on this cycle — some products 
will simply not achieve the necessary critical mass to migrate to an electronic platform. 

235 

 
 
  
 
– 

FIGURE 15 Life Cycle of a Derivative  

Product standardisation; 
trading volume; liquidity 

Electronic 
platform launch 

Time

When a product is launched for trading on an electronic platform the willingness of dealers to 
move  to  the  platform  can  be  mixed.  From  an  interview  with  an  MTF,  it  is  typically  the 
smaller or newer dealers in the market who are the most interested, as this presents a means 
by  which  they  can  capture  market  share  and  exploit  trading  efficiencies.  In  addition,  the 
associated  reduction  in  spreads  would  not  pose  as  big  an  opportunity  cost  to  them.  Later 
adopters tend to be the large incumbent dealers who require relatively larger trading volumes 
and efficiencies to attract them to the platform.  

Despite  the  fact  that  spreads  are  tighter  for  products  traded  on  electronic  trading  venues,  it 
must be emphasised that this represents an existing trend in the life cycle of the product and 
that  according  to  the  description  of  product  life  cycle  in  time  a  decrease  in  spreads  would 
have occurred anyway (although possibly over a longer period of time). Therefore assessing 
the  opportunity  costs  to  dealers  of  mandating  a  move  towards  electronic  trading  is 
complicated  by  the  possibility  of  what  would  have  happened  anyway  (both  in  terms  of  the 
general life cycle of a product in the absence of an electronic platform, and in terms of dealers 
moving to an electronic platform without being mandated to do so). If the move is mandated 
before a natural point in the life cycle of the product, then it is likely that dealers will suffer an 
incremental decrease in profits from ‘prematurely’ reduced spreads.  

A report by Morgan Stanley and Oliver Wyman in the context of US OTC derivative reform 
indicates  that  they  expect  the  OTC  derivative  markets  to  be  significantly  reshaped  by  the 
reforms  (which  include  similar  central  clearing  requirements  to  the  EMIR  legislation  in 
addition to exchange trading of derivatives). In relation to spreads, they assume that “the sell-
side margin erosion will be largely offset by increased volumes, improved cost structure and 
balance sheet efficiency.” However, they do also emphasise that an unintended consequence 
of enforced exchange trading in terms of a severe loss in liquidity is a distinct possibility.381 

It  is  also  possible  that  mandating  a  move  of  derivative  trading  to  electronic  platforms  and 
exchanges  may  increase  competition  between  these  venues.  Although  the  scale  of  such  an 
impact — even its likelihood — is uncertain, one could anticipate downward pressure from 
this  on  exchange/platform  fees.  Should  this  be  the  case,  it  would  contribute  to  offsetting  a 
decline in dealers’ revenue from tighter margins.  

236 

 
 
  
 
  
According to our interviews, once a product is launched on a platform it can take a number of 
years  before  liquidity  has  built  up  sufficiently  to  observe  decreasing  spreads,  and  by  then 
comparison  with  the  pre-platform  spreads  is  clouded  by  changing  market  conditions  in  the 
intervening years. It follows that robust measurement of the possible decline in spreads is not 
possible as we have no indication of how spreads respond now, let alone in the more complex 
conditions that would apply in the context of a mandated switch.  

It could be that if a move is mandated then the uptake of the electronic trading will be more 
rapid than under normal circumstances. Dealers would suffer from reduced spreads but may 
be  compensated  by  rapidly  increasing  volumes  and  trading  efficiencies.  However,  it  is  not 
possible  to  know  what  the  balance  of  these  factors  would  be.  In  order  to  contextualise  the 
impacts of a shift to electronic trading on dealers’ profits, we have investigated the revenue 
from OTC derivative trading for the largest global dealers. In 2009 revenue from global OTC 
derivative trading across the nine largest derivative trading banks amounted to $55 billion (see 
figure  below).  The  proportion  of  total  revenues  is  represented  by  global  OTC  derivative 
trading.382 About 60 per cent of global OTC trading is within the EU, giving us $33 billion, or 
€27.7 billion.383 384 

– 

FIGURE 16 

Estimated revenues from OTC derivative trading 

Source: Citi Investment Research and Analysis (2010) 

237 

 
 
  
 
 
– 

FIGURE 17 

Share of OTC derivative trading in total bank revenue  

Source: Citi Investment Research and Analysis (2010) 

According to the Financial Times, Tabb Group estimates that in 2010 there was $40 billion in 
annual revenues in global OTC derivatives, excluding credit derivatives, in play for the top 20 
dealers.385 This figure is broadly in line with that of Citi Research given that credit derivatives 
make up approximately 18 per cent of all derivative revenues.  

To the extent that a mandated move to electronic trading reduces spreads, these revenues will 
fall. However, it must be kept in mind that increases in volumes and trading efficiencies may 
offset losses, as described above. It must also be noted that the scope of OTC derivatives that 
may be mandated to trade on electronic platforms will be less –– possibly significantly less –– 
than  the  total  universe  (as  only  those  that  are  clearing  eligible  and  considered  sufficiently 
liquid will be included), and therefore the full revenues depicted above will not be affected. 

In  2006  JPMorgan  estimated  that  FSA  proposals  for  a  benchmark  model  would  place 
significant  pressure  on  fixed  income  dealers’  margins  due  to  increased  market  transparency 
and potential price competition, and from enforcing best execution practices with respect to 
pricing  and  trading  cost.  Whilst  this  proposal  did  not  come  to  pass,  the  analysis  is  a 
reasonable  analogue  in  that  it  focuses  on  the  impact  on  margins  (spreads)  and  increases  in 
transparency  and  price  competition  should  also  occur  under  greater  electronic  platform 
trading of derivatives. 

JPMorgan’s analysis is based around interest rate derivatives, fixed income and money market 
business (‘vanilla trading revenues’) as it assumed that a benchmark model for more tailored 
products would not be realistic. Whilst we are not considering fixed income (bonds) here we 
could  assume  that  only  standardised  vanilla  interest  rate  and  money  market  products  would 
fall under the scope of mandated derivative trading. 

JPMorgan estimated that the impact on margins would equate to a three per cent decline in 
affected revenues. We stress that JP Morgan modelled what we consider an analogous change 
(rather  than  this  policy  option).  In  addition,  the  proportion  of  revenues  described  above 

238 

 
 
  
 
  
relating to applicable products remains an unknown; we also must take into account that of 
the  total  OTC  trading  referred  to  above,  some  of  it  will  already  be  taking  place  on  an 
electronic platform (here we assume that the definition of OTC includes everything that is off-
exchange). 

As  an  illustration,  information  received  from  an  electronic  trading  platform  indicates  that 
approximately 30 per cent of trades they process are conducted through a hybrid of voice and 
electronic  methods  (whilst  the  other  70  per  cent  are  either  already  fully  electronic,  or  fully 
voice).386 If we take this sample (30 per cent) as the most likely to be mandated to trade fully 
on  an  electronic  platform,  we  could  estimate  the  proportion  of  trading  revenues  affected  by 
the policy, and apply the reduction of three per cent to this. 

Taking  the  global  revenues  from  interest  rate  derivatives  ($11  billion  or  €7.9  billion)  and 
multiplying by 60 per cent to reach a figure for trades within Europe, and a further 30 per cent 
to  reflect  only  the  proportion  of  trading  that  would  move  onto  electronic  platforms,  a 
reduction in three per cent is approximately €43 million. Applying a similar methodology to 
foreign exchange derivatives results in a reduction in revenue of €85 million. Given the fact 
that a very large proportion of credit derivatives are already traded on electronic platforms, we 
apply  a  similar  methodology  to  the  credit  derivative  figure  but  use  a  figure  of  15  per  cent 
instead  of  30  per  cent  to  represent  the  possible  volume  that  would  migrate  to  electronic 
platforms. This results in a corresponding reduction in revenue of approximately €19 million. 
We stress again that these figures are highly indicative and will depend on the proportion of 
derivative  trading  that  is  mandated  to  move  to  electronic  platforms.  It  must  also  be  kept  in 
mind  that  it  is  likely  that  margins  on  derivatives  (and  thus  associated  revenues)  that  are 
considered  sufficiently  standardised  and  liquid  to  be  traded  on  a  platform  will  already  be 
relatively lower, and the incremental decline in revenues may be lower. 

18.2.  Extend  the  equities  transparency  regime  to  shares  traded  only  on  MTFs  or 

organised trading facilities 

The analysis of the impact on the liquidity (measured as the average bid-ask spread) of this 
proposal is based on the econometric model built up by Europe Economics. Their results are 
based on the experience of the UK Alternative Investment Market (AIM), which is regulated 
as a MTF and is part of the London Stock Exchange Group (LSE).  

Since the introduction of MiFID the AIM complies with the same transparency regime as the 
main LSE market. Hence the impact of MiFID on the AIM should be similar to the impact 
that  would  be  observed  in  other  primary  market  MTFs  if  the  more  detailed  transparency 
regime for shares admitted to trading on a regulated market were to be applied. It should be 
noted, however, that some other primary market MTFs, such as First North, already comply 
with  the  same  transparency  obligations  as  the  respective  main  market  and  hence  additional 
benefits of this regulation would apply only to a subset of primary market MTFs.  

The results presented by Europe Economics show that bid-ask spreads were approximately 1 
euro cent lower in the post-MiFID period for AIM stocks, a decrease of approximately 16 per 
cent  relative  to  the  average  bid-ask  spread  in  the  pre-MiFID  period.  This  is  a  significant 
impact  on  transaction  costs  and  hence  investors  may  benefit  from  the  application  of  the 
detailed trade transparency regime to primary market MTFs that do not already comply with 
such measures. 

239 

 
 
  
 
18.3. 

Post-trade transparency in non-equities 

There  are  a  number  of  potential  positive  impacts  of  increased  post-trade  transparency.  The 
impacts discussed here are theoretical, or drawn from the analysis of other markets. Much of 
the  evidence  supporting  post-trade  transparency  comes  from  analysis  of  the  post-trade 
reporting  system  in  the  U.S,  TRACE.  Please  see  Annex  18  for  a  summary  of  the  TRACE 
initiative  and  the  main  findings  of  the  three  seminal  studies  analysing  the  impacts  of  the 
initiative. 

18.3.1.  Reduce transactions costs (narrow spreads) 

Reduce market-maker rents. It is suggested that opaque markets tend to benefit relatively well 
informed  dealers  in  their  negotiations  with  customers.  Increased  transparency  may  improve 
customers’ ability to control and evaluate trade execution costs and protect themselves against 
unfair  pricing.387  Green  et  al.  (2004)  and  Harris  and  Piwowar  (2005)  examine  trade  in  US 
municipal  bonds,  and  both  find  that  small  trades  pay  much  larger  percentage  trading  costs 
than  large  trades.  Schultz  (2001)  finds  that  the  bid-ask  spreads  on  US  corporate  bonds  also 
decline  with  trade  size.388  Each  set  of  authors  conclude  that  this  may  occur  because  small 
investors cannot easily evaluate the trading costs they pay in the opaque market. 

Decrease  market-making  costs:  increased  transparency  in  a  dealer  market  may  improve 
inventory risk sharing, thus decreasing inventory carrying costs.389 In an opaque market, the 
lack  of  transparency  can  encourage  strategic  behaviour,  whereby  liquidity  suppliers  will 
slowly unwind a large trade with further step-by-step trades with different dealers at different 
points in time, seeking to minimise the price impact. This will reduce the overall risk sharing 
gains from trade in the market place and, in that sense, its liquidity. In a transparent market, 
on  the  other  hand,  such  strategic  behaviour  is  not  possible  (as  al  dealers  will  know  if  a 
supplier is trying to unwind a trade) and thus risk sharing can be greater. In reality, however, 
increased transparency appears to increase dealers’ risk as they find it much more difficult to 
unwind their trades when the market has the ability to move against them. 

All three studies390 examining the impacts of TRACE find that TRACE significantly reduced 
transaction costs (spreads). With the exception of a few trade size groups, the spreads of all 
bonds  whose  prices  become  transparent  under  TRACE  decline  by  more  than  those  of  the 
control  groups.  Goldstein  et  al.  find  that  this  effect  is  strongest  for  small  and  intermediate 
trade sizes (between 101 and 250 bonds). These results are consistent with investors’ ability 
to negotiate better terms of trade with dealers once they have access to broader bond-pricing 
data. These results suggest that public traders benefit significantly from price transparency. If 
transactions costs are a deterrent to retail interest, it can be expected that retail interest should 
increase with lower transaction costs associated with transparency. In addition, Bessembinder 
et al. find this effect evident even with large institutional trades. 

Increased  transparency  can  reduce  transactions  costs  and  improve  liquidity  if  customers 
originally  (in  the  opaque  market)  paid  a  search  cost  to  find  out  quote  prices  from  different 
dealers. Transparency in this case will reduce information asymmetries, increase competition 
between dealers, narrow spreads and increase the number of investors in the market. 

The view from market participants in mixed. Approximately 40 per cent of respondents (buy-
side,  sell-side  and  repo)  to  ICMA’s  survey  on  corporate  bond  markets  felt  that  bid-offer 
spreads would be positively impacted by higher transparency, but a greater majority felt that 
this would not be the case.391  

240 

 
 
  
 
18.3.2.  Increase liquidity 

Some  argue  that  increased  transparency  in  the  bond  market  will  facilitate  better  deterrence 
and detection of fraud and manipulation and will improve pricing efficiency and competition 
in bond markets, leading to lower transactions costs. 

Greater  transparency  may  reduce  adverse  selection  and  encourage  uninformed  investors  to 
enter the trading arena. This of course depends on the scale of retail investors in the market 
(and  likelihood  that  this  increases).  For  example,  in  the  US  municipal  bonds  are  more 
attractive  to  retail  investors  than  corporate  bonds  as  they  are  tax  free  and  offered  in  more 
numerous, smaller issues. EU corporate bond markets have relatively low retail participation, 
even with the existence of retail-focused initiatives. 

Just under 60 per cent of respondents to ICMA’s survey on transparency and liquidity in bond 
markets  felt  that  greater  post-trade  transparency  would  improve  liquidity  in  the  corporate 
bonds  market.  392  This  was  lower  than  the  proportion  in  favour  of  greater  pre-trade 
transparency. Other factors that were felt would contribute more to increased liquidity were 
greater volume transparency, larger issue size and grater electronic trading. It must be kept in 
mind,  however,  that  the  nature  and  structure  of  the  post-trade  transparency  regime  was  not 
specified in the survey, and there is significant concern about liquidity relating to relatively 
stringent post-trade transparency requirements. 

18.3.3.  Liquidity externality  

Transaction  reporting  for  some  bond  issues  may  also  improve  the  market  quality  for  other 
issues. Amihud et al. (1997) report that an improvement in the trading mechanism used for a 
subset  of  Tel  Aviv  Stock  Exchange  securities  led  to  an  enhanced  liquidity  not  only  for  the 
affected  stocks,  but  also  for  correlated  stocks  with  no  change  in  trading  mechanism. 
Bessembinder  et  al.  (2006)  suggest  that  a  liquidity  externality  is  particularly  plausible  for 
corporate bonds, since market practitioners often estimate the value of non-traded bonds on 
“matrix” pricing that incorporates bond characteristics and observed prices for bonds that do 
trade.393  

18.3.4.  Reduce information gathering 

An increase in transparency could reduce the benefits to market makers of collecting superior 
information,  which  could  adversely  affect  incentives  for  traders  to  incur  costs  in  order  to 
become  more  informed.  This  could  in  turn  affect  the  informational  efficiency  of  the  bond 
market. 

As reported in the CESR report (2009), a number of sell-side market participants are of the 
opinion  that  different  market  participants  has  access  to  different  types  of  price  information, 
and that the existence of such differences is not a market failure per se. Differences in trading 
information may effectively exist if participants who stand to benefit for the information feel 
they  are  benefitting  more  than  they  are  compensating  the  person  gathering  the  information. 
Mandatory  transparency,  without  appropriate  compensation,  may  remove  the  incentive  to 
generate information.  

18.3.5.  Valuation practices 

A report by the Institute of International Finance indicates that post-trade information about 
prices and volumes in the bonds market is critical to the reinforcement of valuation practices 
for credit instruments and as supplementary information on the scale of risk transfers. Post-

241 

 
 
  
 
trade transparency is key for the price discovery and valuation of specific structured products. 
In some cases, where the underlying assets are sufficiently liquid, the primary valuation often 
does  not  entail  the  use  of  a  valuation  model,  but  rather  rely  on  market  quotes  (both  at  the 
underlying asset and the structured products level).394. 

In  the  current  financial  situation,  it  is  held  by  some  that  the  Credit  Default  Swap  (CDS) 
market  is  no  longer  a  reliable  indicator  for  bond  price  valuation  ––  whilst  ordinarily  some 
market  participants  say  that  the  CDS  market  is  useful  as  a  means  to  obtain  some  price 
information,  in  the  current  financial  turmoil  the  link  between  prices  provided  by  CDS  and 
prices for cash bond have uncoupled so that the CDS market is no longer considered to be a 
reliable  indicator  for  bond  price  valuation.  In  light  of  this,  among  other  issues,  some 
respondents  to  CESR  maintained  that  additional  post-trade  transparency  in  the  bond  market 
could assist in valuing portfolios more accurately395. 

A large number of respondents to the CESR consultation agreed that a greater amount of post-
trade information would assist in properly valuing European corporate bonds. Regarding the 
role of post-trade transparency for valuation in distressed market conditions, most respondents 
considered  that  post-trade  transparency  might  be  helpful  for  valuation  purposes,  e.g.  in  a 
situation where there are more participants with more access to see the prices where bonds are 
trading, their confidence to trade and investor confidence will both improve.396 

Lack of transparency may contribute to market failure or reduce the efficiency of the market. 
For  example,  some  market  participants  may  have  limited  access  to  trading  information,  or 
find it prohibitively expensive to obtain, which may in turn affect their ability to determine a 
fair  price  at  which  to  trade.  In  the  case  of  investment  firms  acting  on  behalf  of  clients,  this 
may  reduce  their  ability  to  obtain  best  execution  for  their  clients.  Some  market  participants 
may be able to exploit these differences in access to information in a systematic way, earning 
rents at the expense of less informed participants.  

The CESR report suggests that even though market transparency is less essential for bonds as 
there is more information available to assess their intrinsic value, it could help to “correctly” 
price this kind of assets which could mean that portfolios are more accurately valued.  

Evidence from TRACE has shown that TRACE has directly benefitted investors and traders 
by increasing the precision of corporate bond valuation and consequently decreasing the bond 
price dispersion. Research indicated that at the individual bond level, regardless of rating or 
issue size, pricing marks across a fund became much tighter once TRACE was implemented.  

18.3.6.  Applying TRACE to EU markets 

Mapping the impacts of TRACE on the US market to the EU market is not something that can 
be  done  easily,  if  at  all.  There  are  important  differences  between  the  two  markets,  such  as 
greater competition between dealers and historically tighter bid-ask spreads in the EU market. 
Trading  activity  is  more  highly  concentrated  in  US  markets,  with  a  handful  of  banks  or 
dealers  controlling  the  majority  of  the  trading  and  syndication.  Client  intermediation, 
particularly in the less liquid segments of the market, appears to be performed increasingly on 
an agency basis in the US, without dealers committing their own capital.397 The added value 
of more transparency in the EU is therefore likely to be less than experienced in the USA. In 
addition, negative consequences to liquidity resulting from dealers who act as principals and 
commit  capital  being  less  able  to  easily  unwind  large  trades  in  the  face  of  increased 
transparency are likely to be more of an issue in EU markets.  

242 

 
 
  
 
Other  differences  between  the  two  markets  include  the  fact  that  EURO  denominated  bonds 
are  traded  more  frequently  than  US  bonds,  suggesting  that  the  former  was  relatively  more 
liquid  than  the  latter  before  the  financial  crisis.  However,  as  noted  by  CESR,  post  financial 
crisis the spread gap in the US market in comparison to the EU corporate bond markets is less 
obvious than before, especially for higher grade corporate bonds.  

18.3.6.1. Bond Data analysis 

Europe Economics undertook their own analysis of bond data to examine the potential impact 
of  increased  post-trade  transparency  on  trading  costs.  This  was  the  most  cited  benefit  of 
TRACE in the U.S. Given that the policy options refer to post-trade transparency for bonds 
trades both on exchanges and OTC, they have conducted two sets of analysis.  

18.3.6.2. Exchange-traded Bond Transparency  

It is widely accepted that RMs and MTFs generally apply transparency requirements to non-
equity products as they do to other products. However, the requirements for non-equities may 
be  less  rigorous,  and  currently  there  are  only  relatively  high  level  transparency  obligations 
with  respect  to  exchanges  listing  non-equity  products  as  part  of  their  organisational 
requirements.398 

Information  from  CESR’s  report  on  Options  and  Discretions399  describes  the  formal 
transparency  requirements  for  bond  markets  in  EU  Member  States.  A  number  of  Member 
States  have  exercised  the  Option  under  Recital  46  of  MiFID  to  extend  MiFID  transparency 
requirements  for  equities  traded  on  exchanges  and  MTFs  to  non-equities.  Other  Member 
States,  while  not  exercising  this  option,  have  nevertheless  introduced  some  form  of 
transparency.  

The  table  below  summarises  the  information  regarding  transparency  requirements  for  non-
equities traded on exchanges. 

In  order  to  collect  data  on  corporate  bonds  traded  on  these  exchanges  and  MTFs,  Europe 
Economics  researched  the  number  of  exchanges  and  MTFs  within  each  country.  There  are 
many  stock  exchanges  and  even  more  MTFs  within  Member  States.  Their  criteria  for 
including  exchanges  were  that  they  are  included  in  Bloomberg’s  database  and  list  a  large 
number  of  bonds  (for  example,  Bloomberg  includes  the  Stock  Exchange  of  Antwerp  where 
only one bond is listed). 

Their research also found that if MiFID transparency regime was extended under Recital 46 
then this includes regulated markets and MTFs.  

They created an indicative ‘transparency score’ based on the degree of formal transparency, 
with the following categories: 

–  1 = similar to equities traded on regulated markets;  

–  2 = no Recital 46 but other requirements;  

–  3 = no apparent transparency. 

– 

TABLE  48:  Transparency  requirements  in  bond  markets  in  EU 
Member States 

243 

 
 
  
 
Member state  Main 

exchanges400 

stock 

Transparency 
traded bonds401 

of 

exchange-

Austria 

Vienna 
Exchange 

Stock 

Belgium 

Euronext Brussels 

recital  46  of 
Option  under 
MiFID  has  not  been  exercised. 
Current transparency unknown 

exercised. 

Recital  46  of  MiFID  has  not 
been 
Regulated 
markets however include in their 
rule  books  some  level  of  post-
trade transparency requirements. 

Inde
x402 

MiFID  Level  2 
implementation
403 

3 

01/11/07 

2 

01/11/07 

Bulgaria 

Cyprus 

Czech 
Republic 

Denmark 

Bulgarian 
Exchange 

Cyprus 
Exchange 

Prague 
Exchange 

Stock 

Stock 

Stock 

NASDAQ  OMX 
Copenhagen 

Estonia 

Finland 

NASDAQ  OMX 
Tallinn 

NASDAQ  OMX 
Helsinki 

France 

Euronext Paris 

01/11/07 

1-2/11/07 

01/07/08  

1 

01/11/07 

19/11/07 

1-2 

01/11/07 

recital  46  of 
Option  under 
MiFID  has  been 
exercised 
inasmuch as there is a post-trade 
for 
transparency 
mortgage  bonds,  covered  bonds, 
corporate bonds and UCITS. 

requirement 

Option  under 
recital  46  of 
MiFID  is  partly  implemented. 
Pre-  and  post-trade  transparency 
requirements are applied to other 
instruments  than  shares.  Only 
operators  of  regulated  markets 
and  MTFs  are 
to 
disclose  appropriate  information 
a 
concluded  on 
of 
regulated market or an MTF.  

required 

trades 

2 

01/11/07 

The  General  Rulebook  of  the 
Autorité  des  Marches  Financiers 
provides  for  pre-  and  post-trade 
transparency 
for 
financial  instruments  other  than 
shares  admitted  to  trading  on  a 
regulated market or on an MTF. 

requirements 

244 

 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Germany 

Greece 

Berlin 
Exchange 

Stock 

Dusseldorf 
Exchange 

Stock 

Stuttgart 
Exchange 

Frankfurt 
Exchange 

Hamburg 
Exchange 

Munich 
Exchange 

Athens 
Exchange 

Stock 

Stock 

Stock 

Stock 

Stock 

1-2 

01/11/07 

the 

The  option  under  recital  46  of 
MiFID  has  been  exercised  by 
transparency 
extending 
requirements 
depository 
to 
receipts in respect of shares. The 
available  with 
information 
trading  of 
respect 
the 
to 
corporate  bonds 
the 
data  which  is  generally  required 
for  all 
instruments 
admitted  to  trading  on  regulated 
transparency 
markets.  These 
requirements for corporate bonds 
are  also  applicable  to  corporate 
bonds  traded  on  MTFs  operated 
by an RM. 

financial 

includes 

2 

01/11/07 

Option  under 
recital  46  of 
MiFID  has  not  been  exercised. 
national 
under 
However, 
secondary 
regulated 
law, 
markets  should  specify  in  their 
rulebook  the  pre-  and  post-trade 
transparency  information  to  be 
made  public  in  respect  of  all 
financial instruments admitted to 
trading in their systems. 

Hungary 

Budapest 
Exchange 

Stock 

Option  under 
MiFID has not been exercised.  

recital  46  of 

2 

01/12/07 

Information 
transactions 
on 
completed through the electronic 
trading  system  of  the  BSE  is 
available 
for  BSE 
on-line 
subscribers and with delay of 15 
minutes  free  of  charge  for  the 
public. 

Ireland 

Italy 

Latvia 

Irish 
Exchange 

Stock 

Option  under 
MiFID has not been exercised. 

recital  46  of 

Italian 
Exchange 

Stock 

Option  under 
recital  46  of 
MiFID  has  been  exercised.  See 
the section about Italy. 

NASDAQ  OMX 
Riga 

Option  under 
MiFID has not been exercised. 

recital  46  of 

3 

1 

01/11/07 
21/11/07 

and 

1-2/11/07 

3 

18/05/07 

08/11/07 

16/11/07 

245 

 
 
  
 
 
 
Lithuania 

NASDAQ  OMX 
Vilnius 

01/11/07 

Luxembourg  Luxembourg  Stock 

Exchange 

Option  under 
MiFID has not been exercised.  

recital  46  of 

2 

01/11/07 

Luxembourg 

Stock 
The 
Exchange 
disseminates 
information  (pre-  and  post-trade 
data) on all financial instruments 
admitted 
its 
regulated market or on its MTF. 

trading  on 

to 

Malta 

Malta 
Exchange 

Stock 

Netherlands  Amsterdam  Stock 

Exchange 

Poland 

Warsaw 
Exchange 

Stock 

Portugal 

Euronext Lisbon 

Romania 

Bucharest 
Exchange 

Stock 

Slovakia 

Slovenia 

Bratislava 
exchange 

Ljubljana 
Exchange 

Stock 

Stock 

1 

01/11/07 

1-2 

01/11/07 

1 

01/05/08 

3 

01/11/07 

1 

28/02/07 

Pre-  and  post-trade  transparency 
for  corporate  and  sovereign 
bonds  is  equivalent  to  that  for 
equities 
the  Regulated 
Market.404 

on 

recital  46  of 
Option  under 
MiFID  has  not  been  exercised. 
However,  there  is  a  real  time 
pre-  and  post-trade  transparency 
for on-exchange trading of listed 
bonds. 

post-trade 

recital  46  of 
Option  under 
MiFID  has  been  exercised. 
There  is  no  difference  in  pre- 
and 
transparency 
requirements  for  all  financial 
instruments  that  are  admitted  to 
trading  on  a  regulated  market 
and an MTF. 

Option  under 
recital  46  of 
MiFID  has  not  been  exercised 
regarding corporate bonds. 

Option  under 
recital  46  of 
MiFID  has  been  exercised.  The 
transparency  requirements  are 
identical  both  for  shares  and 
bonds 
traded  on  a  regulated 
market. 

01/11/07 

11/08/07 

22/11/07 

246 

 
 
  
 
 
 
 
 
 
 
Spain 

Barcelona 
Exchange 

Madrid 
Exchange 

Stock 

Stock 

Sweden 

NASDAQ  OMX 
Stockholm 

UK 

London 
Exchange 

Stock 

2 

17/02/08 

2-3 

01/11/07 

2 

01/11/07 

recital  46  of 
Option  under 
MiFID  has  not  been  exercised. 
The  Fixed  Income  Electronic 
Market  uses  the  same  electronic 
platform as the stock market and 
it provides pre-trade information 
on  best  bid  and  asks  prices  and 
volumes  in  real  time.  Circular 
3/1999  from  the  CNMV  states 
certain 
post-trade 
transparency. 

level 

of 

to 

the 

Option  under 
recital  46  of 
MiFID  has  been  exercised.  For 
other  financial  instruments  than 
requirements  are 
bonds, 
similar 
the  MiFID 
requirements for shares admitted 
to trading on a regulated market. 
Transparency  requirements  for 
government  bonds  are  less  strict 
is 
and 
a 
market 
with 
discussion 
participants  to  what  extent  the 
similar 
are 
applicable to corporate bonds. 

requirements 

currently 

there 

Option  under 
recital  46  of 
MiFID  has  not  been  exercised. 
Exchanges  do  provide  pre-  and 
post-trade  transparency  similar 
to  that  required  for  equities,  but 
this  does  not  apply  to  MTFS. 
Other  publicly  available  post-
trade  data 
the 
information  currently  captured 
by 
the  ICMA  self-regulatory 
initiative. 

limited 

to 

is 

Source: CESR (2009) “Transparency of corporate bond, structured finance product and credit 
derivatives markets” 

The tale below presents the Member States within each of their categories.  

–  TABLE 49: Transparency rating  

(1)  Option  under  Recital  46 
exercised 

(2)  Other 
requirements 

transparency 

(3) No apparent transparency 

247 

 
 
  
 
 
Denmark; Finland; Germany; 
Italy; 
Poland; 
Malta; 
Romania;  

Belgium;  France;  Greece; 
Netherlands;  Spain;  Sweden; 
UK 

Austria; 
Portugal;  

Ireland;  Latvia; 

Notes: Although the Option under Recital 46 has been exercised in Sweden, corporate bonds 
are currently subject to lighter transparency requirements and thus Sweden is classified as 2 
here. 

It  must  be  noted  that  in  Italy  transparency  requirements  did  exist  for  financial  instruments 
other  than  shares  traded  on  regulated  markets  before  the  introduction  of  MiFID.  These 
requirements  were  characterised  by  a  flexible  approach  which  did  not  prescribe  specific 
transparency requirements for trading venues in terms of timing and content of information to 
be made available to the public. Trading venues could design their transparency rules, taking 
into account the market microstructure, the nature of the financial instrument and the type of 
market  participants  involved.  Whilst  it  is  not  clear  how  the  transparency  requirements  have 
changed since the exercising of the option under Recital 46, we assume that the regime has 
become more formalised and that the level of transparency has increased. Furthermore, some 
platforms previously not included in transparency requirements have now been brought into 
the scope. 

They downloaded from Bloomberg daily information on corporate bonds listed on the main 
exchanges  within  each  country  (as  opposed  to  bonds  issued  in  particular  countries,  as  we 
assume that transparency requirements will matter more according to where a bond is traded 
than where it is issued). Information includes: 

(a) average daily bid price; 

(b) average daily ask price; 

(c) average daily mid price; 

They calculated the relative  spread  for  each  bond  at  each  day  as  (Aski,t −Bidi,t)/Midi,t  and 
then compared the evolution in the spreads for bonds in the ‘Intervention Group’ (those listed 
on  exchanges  with  MiFID-like  transparency  -  Category  1)  and  the  ‘Control  Group’  (those 
listed on exchanges with Recital 46 not exercised – Category 2 and 3).  

The statistical analysis presented below is based on daily observations from the fourth quarter 
of  2006  (pre-MiFID)  and  the  fourth  quarter  of  2009  (post-MiFID).  They  chose  these  date 
ranges  to  compare  the  change  in  spreads  before  and  after  the  adoption  of  MiFID  and  the 
increase  in  transparency.  They  have  not  included  2007  and  2008  to  avoid  the  effects  of  the 
volatility of the financial crisis, and also because the exercising of Recital 46 in the relevant 
countries may have occurred at some time after the introduction of MiFID.  

The figure below shows the evolution of relative bid-ask spreads in corporate bonds between 
the end of the last quarter of 2006 and the beginning of the last quarter of 2009. 

248 

 
 
  
 
– 

FIGURE 18 

0.40%

0.35%

0.30%

0.25%

0.20%

0.15%

0.10%

0.05%

0.00%

6
0
0
2
/
2
0
/
0
1

6
0
0
2
/
3
1
/
0
1

6
0
0
2
/
6
2
/
0
1

6
0
0
2
/
8
0
/
1
1

6
0
0
2
/
1
2
/
1
1

6
0
0
2
/
4
0
/
2
1

6
0
0
2
/
5
1
/
2
1

6
0
0
2
/
8
2
/
2
1

9
0
0
2
/
2
1
/
0
1

9
0
0
2
/
3
2
/
0
1

9
0
0
2
/
5
0
/
1
1

9
0
0
2
/
8
1
/
1
1

9
0
0
2
/
1
0
/
2
1

9
0
0
2
/
4
1
/
2
1

9
0
0
2
/
5
2
/
2
1

Control group

Intervention group

Source: Bloomberg and EE analysis  

As can be seen, relative spreads increased significantly between 2006 and 2009, although this 
is almost certainly a result of the financial crisis and not the introduction of MiFID. The main 
explanations for this include a withdrawal of liquidity provision by market makers and banks, 
overall  market  volatility  and  sharply  reduced  risk  appetite.  Other  likely  factors  were  the 
widespread  lack  of  confidence,  the  reduction  in  the  number  of  market  counterparties  and 
increased uncertainties regarding credit spreads  

Despite the widening of spreads in all markets, it is clear that bonds traded on exchanges with 
a higher degree of transparency did not increase as much as bonds traded on other exchanges. 
Using the student's t test and taking into account unequal sample sizes and unequal variances 
in  post  and  after  MiFID  periods,  they  could  conclude  that  the  increase  in  relative  bid-ask 
spread  is  significantly  lower  for  the  intervention  group  compared  with  the  control  group  on 
any sensible significance level. This suggests that applying MiFID transparency regulations to 
corporate bond markets helps to lower the relative bid-ask spread.405 

The gap in spreads between the intervention and control groups widened after MiFID by an 
average of 0.0809% across the period, which is equivalent to eight basis points. It is possible 
that  the  relative  reduction  in  spreads  in  the  intervention  group  was  not  all  due to  post-trade 
transparency. However, for simplicity’s sake if we assume that it was, then the effects of post-
trade  transparency  can  be  viewed  as  a  reduction  in  eight  basis  point  of  relative  bid-ask 
spreads. 

Data relating to the value bonds transactions conducted on EU exchanges406 enables them to 
estimate the value of this reduction in bid-ask spreads. Assuming that exchanges in countries 

249 

 
 
  
 
 
in  the  control  group  (i.e.  those  without  the  Option  under  Recital  46  exercised)  could 
experience  a  similar  reduction  in  relative  bid-ask  spreads  after  introducing  post-trade 
transparency,  then  this  could  amount  to  €8  million  euro  a  year.407  It  must  be  emphasised, 
however,  that  these  calculations  are  very  rough  estimates,  and  serve  only  to  indicate  the 
potential scale of trading cost reductions arising from post-trade transparency. 

Whilst this spread analysis relates only to corporate bonds, we could apply the same rationale 
to  government  bonds.  However,  government  bonds  markets  are  widely  held  to  be  far  more 
liquid  and  transparent  than  corporate  bond  markets,408  and  thus  the  impacts  of  additional 
transparency requirements are likely to be significantly lower. 

18.3.6.3. Bonds Traded OTC 

The vast majority of corporate and government bonds are traded over the counter (estimated 
at 89 per cent of all trades).409 Furthermore, in terms of post-trade transparency bonds traded 
OTC  are  likely  to  be  less  transparent  than  bonds  traded  on  regulated  markets  (even  though 
Recital  46  of  the  MiFID  options  and  discretions  has  only  been  applied  in  nine  countries) 
given high-level transparency requirements for the majority of regulated markets. 

In  order  to  assess  the  potential  impact  of  greater  post-trade  transparency  on  the  indirect 
transactions costs of bonds (e.g. bid-ask spreads), Europe Economics compared the spreads of 
OTC bonds from Member States for which a post-trade transparency regime already exists to 
some degree. 

In  most  cases  the  Recital  option  discussed  above  was  exercised  only  in  relation  to  non-
equities traded on exchanges and MTFs. However, in some countries post-trade transparency 
was also extended to OTC trades. Italy and, to a lesser extent, Denmark, are two such counties 
where post-trade transparency already exists in OTC markets. 

Italy 

Post-trade  transparency  in  OTC  corporate  bonds  has  existed  in  Italy  since  before  MiFID. 
According  to  CONSOB,  prior  to  MiFID  implementation  there  existed  obligations  for 
investment  firms  to  report  off-market  transactions  in  financial  instruments  (admitted  to 
trading on regulated markets) to regulated markets. This transparency regime is characterised 
by a flexible approach, and firms are able to benefit from work done already for transaction 
reporting purposes. 

Investment firms are obliged to make public the information concerning the date and time of 
the transaction, the details of the financial instrument involved, and the price and quantity of 
the  transaction.  The  obligations  apply  to  transactions  below  or  equal  EUR500,000.  For 
transactions exceeding this threshold, investment firms are allowed not to publish the quantity 
and  instead  provide  an  indication  that  the  transaction  exceeds  the  threshold.  In  terms  of 
timing, the information has to be published with reference to each transaction by the end of 
the  working  day  following  conclusion  of  the  transaction  (i.e.  the  following  day).410  411  The 
fact  that  the  information  is  reported  at  the  end  of  the  following  day  enables  the  firms  to 
overlap (to some extent) this trade reporting obligation with transaction reporting obligations, 
which are also done at the end of the day. 

These levels of transparency were formalised after MiFID through Level 3 guidance issued by 
CONSOB in relation to areas not covered by MiFID (such as OTC trading obligations), and 
the nature of the transparency did not change significantly.412 Even though Level 3 guidance 

250 

 
 
  
 
is not full law, CONSOB maintains that their recommendations have been met with support 
among market participants. The two main associations for banking and investment (ABI and 
Assosim)  have  issued  industry  guidance  (ratified  by  CONSOB)  that  closely  reflects 
CONSOB’s recommendations. 

Very  little  analysis  of  the  transparency  regime  has  been  undertaken  in  Italy.  According  to 
CONSOB,  based  on  the  information  available  to  them,  the  transparency  regime  is  working 
well,  without  any  negative  impacts  on  liquidity  and  investment  strategies.  Other  Italian 
commentators also agree that the regime is successful. However, given the important timing 
delay,  no  analysis  in  terms  of  liquidity  effects  has  been  possible.  Furthermore,  it  has  been 
highlighted  by  the  LSE  Group  (of  which  Borsa  Italiana  is  a  member),  that  the  Italian  bond 
market has different characteristics to the rest of Europe (in particular a larger retail investor 
base, which developed before any transparency was introduced) which suggests more inherent 
liquidity and transparency. In terms of the formalised transparency arrangements after MiFID 
under the Level 3 guidance, CESR is of the opinion that it is too early to accurately assess the 
impact  of  the  these  requirements  on  Italian  bond  markets.413  However,  given  that  little  has 
changed it is not likely that significant impacts will be seen. 

Denmark  

Post-trade  transparency  requirements  exist  in  the  OTC  bond  market  in  Denmark,  but  only 
apply  to  bonds  listed  on  the  NASDAQ  OMX  CPH  that  are  traded  OTC.  Trade  reporting  is 
done through the OTC Publication Service, and all users of the OTC Publication Service must 
have appropriate technical connections with NASDAQ OMX.414 

The  information  to  be  included  in  the  post-trade  reporting  of  OTC  trades  is  Order  book 
identification;  buyer/seller;  price;  volume;  counterparty;  trade  type;  and  time  of  trade 
(agreement). Trades that take place during opening hours must be reported/published no later 
than three minutes from the time of the agreement.415 

18.3.6.4. Data used 

The dataset analysed by Europe Economics consists of information regarding amount issued, 
bid  and  ask  spreads,  maturity,  credit  rating,  sector  and  country  for  914  corporate  and 
government bonds for the last day of April, July and September of 2010, provided by Markit 
from their Evaluated Bond data.416 Whilst it is not possible to state exactly how the coverage 
of  their  dataset  reflects  the  overall  corporate  and  government  bond  market  in  the  EU,  they 
consider it to be closely representative.  

A  significant  aspect  of  their  data  set,  however,  (this  is  also  the  case  with  data  sets  used  in 
other studies) is that it represents the more liquid and frequently traded bonds in the EU, as 
these  are  the  bonds  for  which  the  most  information  is  available.  In  addition,  because  they 
required  bonds  with  available  pricing  information  in  order  to  carry  out  our  bid/offer  spread 
analysis, the bonds included are by definition more liquid and frequently traded (so that this 
information  is  available  for  each  bond  on  a  continuous  basis).  The  greater  liquidity  of  their 
sample must be kept in mind when viewing our results. Increases in transparency could have a 
greater effect on less liquid bonds due to the lack of current information. On the other hand, 
negative effects on liquidity are likely to be greater for less liquid bonds. 

251 

 
 
  
 
18.3.6.5. Transparency analysis 

In  order  to  assess  the  potential  impact  of  post-trade  transparency  on  bid-ask  spreads  they 
adopted two methods. 

The first involves comparing average spreads per country in order to see if more transparent 
countries  (Italy  and  Denmark)  exhibit  lower  spreads.  The  impact  of  increased  post-trade 
transparency on corporate bonds did not appear to be strong. 

Their second method of examining the impact of increased transparency involves the use of 
their indicative transparency score used in the analysis of exchange-traded bonds above. Even 
though this transparency variable relates to exchange-traded bonds, they believe it can reflect 
an overall level of transparency for the same bonds traded OTC. Comparing the bonds in their 
OTC data set with data available on Bloomberg shows that nearly all the bonds within their 
OTC  sample  are  also  traded  on  exchanges.  It  must  be  kept  in  mind,  however,  that  trades 
conducted on exchanges are likely to be far smaller than trades conducted over the counter, 
and thus price information obtained from exchange trading may only have a limited effect on 
the spreads of bonds traded OTC. This data set includes both government bonds and corporate 
bonds within the same regime. 

The  figures  below  indicate  that  spreads  are  lower  for  OTC  corporate  and  government  bond 
trades  in  countries  with  higher  exchange-based  post-trade  transparency.  This  takes  into 
account  issue  size,  and  ensures  that  the  spread-reducing  effects  of  large  issue  size  do  not 
interfere with the effect of post-trade transparency. 

– 

FIGURE 19: Corporate bond Average Spreads by Issue Size and Transparency Score 

2.00%

1.80%

1.60%

1.40%

1.20%

1.00%

0.80%

0.60%

0.40%

0.20%

0.00%

< 500

501 - 1000

> 1001

High Medium Low

Source: Markit Evaluated Bonds data and EE analysis  

252 

 
 
  
 
 
The  figure  above  presents  a  very  interesting  result.  Transparency  of  exchange-traded  bonds 
(measured by our transparency score) appears to influence (or at least to be correlated with) 
the  trading  costs  of  bonds  traded  over  the  counter,  as  average  spreads  for  OTC  bonds  are 
lower,  particularly  for  smaller  issue  sizes,  in  Member  States  where  post-trade  transparency 
exists  for  regulated  markets.  This  result  is  far  stronger  than  our  analysis  of  spreads  in 
Members  States  that  have  transparency  particular  to  OTC  markets.  This  suggests  that 
improvements in exchange-based post-trade transparency could have a positive effect on the 
OTC  bond  market.  This  result  could  be  related  to  the  concepts  of  a  liquidity  externality, 
whereby  increased  transparency  in  one  segment  of  the  bonds  market  affects  the  spreads  of 
other, non-transparent bonds.  

– 

FIGURE  20:  Government  Bond  Average  Spreads  by 
Transparency Score 

Issue  Size  and 

1.20%

1.00%

0.80%

0.60%

0.40%

0.20%

0.00%

< 500

501 - 1000

> 1001

High Medium Low

Source: Markit Evaluated Bonds data and EE analysis  

The effects of exchange-based transparency for government bonds are much less convincing. 
They believe this is likely to be related to the fact that government bonds, particularly those 
traded  on  exchanges,  are  already  significantly  more  transparent  and  more  liquid  than 
corporate bonds, making the impact of formal transparency far less noticeable. 

18.3.6.6. Impacts on liquidity  

The possible negative impacts on liquidity resulting from increased post-trade transparency, 
in  particular  whether  it  is  to  be  in  real-time  or  at  end  of  day,  have  been  raised  as  a  very 
significant concern of market participants and industry associations. However, assessing the 
impact  of  increased  post-trade  transparency  on  the  liquidity  of  European  markets  is  made 
difficult given both the lack of information on trading volumes, trading activity and spreads, 

253 

 
 
  
 
 
and evidence of liquidity impacts from other transparency regimes such as TRACE or Italy’s 
bond  market.417  This  section  provides  an  analysis  of  the  possible  impacts  of  post-trade 
transparency, setting out possible ways in which liquidity could be affected and the potential 
universe of trades affected. 

Any  analysis  of  the  impacts  of  transparency  on  liquidity  rests  on  the  definition  of  liquidity. 
This  includes  a  number  of  components  such  as  market  depth  (i.e.  the  market's  ability  to 
sustain relatively large market orders without impacting the price), trade volume, resilience, 
trading  costs  as  well  as  the  ease  of  transacting.418  Europe  Economics  provides  us  with  an 
analysis of these factors separately. 

Trading costs 

Trading  costs  include  direct  costs  to  market  participants  of  trading  (e.g.  exchange  fees,  the 
costs of linking to electronic platforms, front and back office costs), indirect costs covering, 
for  example,  search  costs  (included  in  bid-ask  spreads)  and  market  impact  costs  (the 
opportunity cost resulting in movements in market price before a trade has been completed), 
which  can  also  be  reflected  in  the  bid-ask  spreads  as  dealers  seek  to  protect  themselves 
against  trading  at  an  informational  disadvantage.  In  terms  of  the  liquidity  debate,  indirect 
costs and market impact costs are the most relevant.  

Dealers  that  provide  liquidity  in  markets  and  act  as  principals  in  trades  (commit  their  own 
capital  when  enabling  a  trade  between  two  counterparties)  need  to  be  compensated  for  this 
service, not least due to the risk they face when taking the trade onto their own order books 
and  unwinding  it  at  a  later  stage.  This  risk  premium  forms  part  of  the  bid-ask  spread.  The 
authors  of  an  ECB  paper  on  the  impacts  of  transparency  on  liquidity  provide  a  simple 
analytical  framework  for  considering  liquidity.419  In  this  framework,  this  risk  premium 
consists mainly of credit and liquidity premia.420 The liquidity premium is the additional yield 
investors demand as compensation for the potential reduction in price they may have to accept 
if  they  need  to  sell  or  unwind  a  bond  immediately,  compared  with  the  price  they  would 
receive if they could afford to wait until a buyer willing to pay the ‘market price’ appears. The 
authors identify two main drivers of the liquidity premium: 

•  Search  liquidity,  which  represents  the  costs  in  terms  of  time,  information  asymmetries, 
capital, funding and research costs required for a trader to locate a willing buyer for a stock 
he  has  recently  purchased.  Search  liquidity  is  likely  to  be  the  main  driver  during  ‘quiet 
times’,  and  is  likely  to  be  improved  through  increased  trade  transparency.  If  traders  are 
aware  of  the  activities  and  availability  of  other  buyers  or  sellers  then  the  search  costs  of 
finding suitable counterparties should be reduced. 

•  Systemic liquidity is a more suitable concept in times of market stress when investor risk-
appetite has fallen and buyers are both less common and prices are lower. A trader buying 
stock (or providing liquidity to a trade) will therefore require a greater compensation for 
the risk that he will have to unwind the trade in the face of falling prices and fewer buyers. 
The driver of this liquidity is the behaviour of market participants, and is related to how 
homogenous  they  are  (for  example,  if  investors  are  homogenous  in  their  information, 
valuation and risk management they will all react in a similar way to signals thus causing a 
possible wide-spread reduction in liquidity). 

Systemic liquidity can be affected by increased transparency. After large trades in transparent 
markets, liquidity suppliers can be in a difficult bargaining position to unwind their inventory, 
as competitors will have observed the initial trade and will be aware of the former supplier’s 

254 

 
 
  
 
need to resell, and could ‘act together’ and offer lower prices. These movements in the market 
could increase the margin that liquidity suppliers will require from investors to offer liquidity 
initially. 

It  is  possible  to  see  a  tension  between  systemic  liquidity  and  search  liquidity,  whereby 
increased  transparency  undermines  the  role  of  market-makers  and  reduces  search  costs 
(increasing search liquidity) but at the same time exposes dealers to the behaviour of market 
participants  through  increasing  the  homogeneity  of  information, risking  for  them  a  move  in 
the  market  upon  acquisition  of  a  large  trade  which  will  have  to  be  unwound  (decreasing 
systemic  liquidity).  Therefore,  although  observed  decreases  in  transaction  costs  (bid-ask 
spreads)  may  indicate  an  increase  in  search  liquidity,  it  may  be  possible  that  a  reduction  in 
systemic liquidity is occurring alongside resulting in negative market impacts. 

For example, in some large transparent markets there is evidence of an increasing frequency 
of liquidity black holes (short term unavailability of liquidity), combined with declining bid-
ask spreads.421 

The  three  seminal  papers  on  the  impacts  of  TRACE  point  to  a  tightening  of  spreads  in  the 
corporate bonds market.422 This is discussed in more detail above in the section on benefits. 
Viewed  in  terms  of  our  liquidity  framework,  this  could  suggest  (among  other  things)  an 
increase  in  search  liquidity  whereby  traders’  uncertainty  about  finding  buyers  and  sellers  at 
any one time is reduced and the risk premium they demand for searching decreases. However, 
there could also be support for a reduction in systemic liquidity having an opposite effect on 
spreads.  Although  no  study  found  that  spreads  widened  for  large  trades,  all  found  that  the 
tightening  of  spreads  after  increased  transparency  was  lowest  for  large  trades  (and  at  times 
statistically insignificant), which could indicate a counteractive, but proportionately smaller, 
effect as a result of a decrease in systemic liquidity. 

It is argued that the three research papers that show TRACE has tightened bid-ask spreads and 
thus not damaged liquidity focus on a too narrow definition of liquidity, and that it is likely 
that  other  factors  such  as  market  depth,  trade  volume  and  the  ease  of  transacting  have  all 
declined post-TRACE.423 We now turn to these issues. 

Market depth 

The  market  impact  of  increased  transparency  discussed  above  can  have  further  negative 
implications for liquidity by reducing the willingness of dealers to commit capital. This could 
happen  alongside  a  widening  of  spreads  if  dealers  feel  that  negative  market  movements 
cannot be sufficiently compensated for by increases in bid-ask spreads. This in turn could lead 
to  a  further  reduction  in  liquidity.  The  withdrawal  of  liquidity  and  increased  difficulty  in 
finding suitable counterparties is viewed as a serious consequence by the industry. Increased 
market impacts may also lead to increased price volatility (if the price changes more often as 
a result of large trades) and affect price discovery. 

According  to  a  small  survey  of  high  yield  investors,424  referred  to  in  several  SIFMA 
presentations,  54  per  cent  of  them  believed  that  TRACE  had  negatively  affected  dealers’ 
willingness to commit capital or to provide liquidity.  

Trade volumes 

Evidence from the USA market points to a possible reduction in trade volumes after TRACE. 
Goldstein et al find that for one set of bonds examined there is a significant decline in average 

255 

 
 
  
 
daily  trading  volume  between  transparent  and  non-transparent  bonds  (although  this  result  is 
not significant for other sets of bonds, not for very large trades). Although Bessembinder and 
Maxwell  argue  that  average  daily  trading  volumes  of  corporate  debt  securities  increased 
rather than decreased from 2002 to 2007, the total amount of corporate debt outstanding also 
increased  over  this  period,  by  a  far  larger  proportion  (an  increase  of  42  per  cent  compared 
with  an  increase  in  trading  volumes  of  27  per  cent).425  This  indicates  that  trading  volumes 
failed to keep pace with the total amount of corporate debt outstanding. Whilst it must be kept 
in mind that this relatively slow increase in corporate bond trading may be due to the fact that 
in  recent  years  much  credit  trading  has  migrated  from  corporate  bonds  to  derivative 
instruments  such  as  credit  default  swaps  (and  that  this  migration  is  not  necessarily  due  to 
TRACE),  it  cannot  be  conclusively  argued  that  the  increase  in  bond  trading  since  TRACE 
shows that TRACE has not impaired liquidity in the corporate bond markets.426 

Furthermore, the TRACE studies do not take into account the development of alternative and 
parallel markets for acquiring and hedging credit risk, such as the CDS market, and their role 
in price discovery.427 Whilst we do not have direct evidence for this, it has been suggested to 
us  by  a  number  of  market  participants  that  the  price  discovery  and  liquidity  in  the  CDS 
market may have offset some of the negative effects on liquidity in the corporate bond market 
resulting from TRACE. 

Shift towards a broker market (ease of transacting)  

A bid-ask spread is a pre-trade, posted spread, indicating the combination of prices at which a 
dealer is willing to buy and sell a specified amount of securities. A bid-ask spread represents a 
dealer  mark-up,  i.e.  the  implicit  profit  the  dealer  makes  on  a  security  he  buys  from  one 
counterparty  and  sells  to  another,  relevant  when  dealers  act  as  principals  and  put  trading 
capital  at  risk.  When  dealers  act  as  agents,  i.e.  identifying  suitable  counterparties  to  a  trade 
without putting their own capital at risk, then they would earn a commission to compensate 
their  search  costs,  which  would  be  a  predetermined,  disclosed  amount  paid  by  the  buyer  or 
seller to the dealer.428 

The  reduction  in  mark-ups  after  TRACE  identified  by  the  three  studies  may  have  occurred 
because  fewer  trades  have  been  executed  on  a principal  (capital  risk)  basis  and  more  on  an 
agency (risk-free) basis, or that relatively fewer and smaller trades have been completed. Such 
a rise in the agency or brokerage role of dealers would not necessarily be in the interests of 
investors, as the immediacy of trades conducted on an agency basis is likely to be lower than 
those conducted on a principal basis. In models of agency/brokerage, the bids may remain the 
same as when the dealers commit capital (or indeed decrease as the mark-up has been reduced 
and instead a commission is paid) but the time to execute the trade may take much longer, as a 
suitable counterparty needs to be identified before the dealer will arrange the trade. 

Indeed,  Bessembinder  and  Maxwell  (2008)  found  that  market  participants  whom  they 
surveyed  (including  small,  medium  and  large  investment  firms  and  medium  and  large 
corporate  bond  dealers)  “were  nearly  unanimous  that  trading  is  more  difficult  after  the 
introduction of TRACE”.429 

This puts investors at risk as they are open to price movements between first putting an order 
with a dealer and having a suitable counterparty found. The risk in this case moves from the 
dealer to the investor (where previously the dealer would have bought all the bonds being sold 
by the investor, he now may buy fewer bonds and take the rest on order so that he does not 
have  to  bear  the  risk  of  the  market  moving  against  him  as  a  result  of  increased  post-trade 
transparency),  and  the  loss  to  the  investor  of  price  movements  could  be  far  higher  than  the 

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savings  in  mark-up  he  or  she  made.430  In  addition  to  losses  made  from  price  movements, 
opportunity costs of unexecuted trades resulting from a shortage of market makers should also 
be considered and could be significant. 

Feedback  from  interviews  with  industry  associations  representing  both  buy-  and  sell-side 
market  participants  highlights  this  possibility  of  an  increase  in  the  broker,  rather  than 
principal, role of dealers. 

Impact on end clients 

As mentioned previously, the significant risk to dealers posed by post-trade transparency may 
result in dealers widening bid-offer spreads in order to compensate for this additional risk, or 
employing  a  larger  brokerage  role  by  either  delaying  the  execution  of  a  contract  until  a 
suitable counterparty is found, or by breaking up a client’s position into smaller parts. Both 
these  actions  would  shift  cost  and  risk  onto  the  client,  increasing  the  need  for  client 
sophistication. 

Further analysis  

Measuring how the possible effects of transparency on liquidity described above could impact 
the EU bond and derivative markets is difficult given the lack of data and the absence of any 
existing analysis that explicitly measures these effects (the results of the TRACE studies do 
not adequately address these effects, and are also not applicable to the EU context given the 
significant differences between the EU and US markets). 

It must also be kept in mind that large trades occurring under the current system could still 
have  a  degree  of  market  impact,  particularly  where  products  are  infrequently  traded  and 
market depth is low: a buyer being contacted in these circumstances by a dealer wanting to 
unwind a very large trade will know that the dealer might not have many alternative options 
and may factor in this knowledge when quoting a price. 

The extent to which increased transparency will increase this market impact will depend to a 
large  extent  on  the  calibration  of  a  transparency  regime.  If  very  large  trades  are  allowed  to 
remain  opaque  to  a  substantial  degree  (e.g.  by  having  no  post-trade  volume  information 
published)  then  the  negative  impacts  on  liquidity  may  not  be  severe.  The  timing  of 
information disclosure is also an important factor. 

18.4.  Ban inducements in the case of investment advice provided on an independent 

baisis and in the case of protfolio management 

Inducements  are  typically  employed  for  packaged  investment  products,  such  as  UCITs  and 
other forms of PRIPs.   

18.4.1.  Independent advice 

Europe Economics estimates the population of independent financial advisors to 50,000, with 
about  60%  of  those  in  the  UK  (see  Annex  5.2.10).  Reliance  on  third  party  inducements  by 
investment  advisors  is  extremely  widespread431,  with  commission-based  models  being 
widespread. 

The following possible effects of this measure could take place: 

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•  There is a risk that a number of small providers may exit the market as a result of the ban 
of  inducements432  (notably  those  for  which  commissions  is  an  important  source  of 
revenues and that will not be willing or able to change their business model).  The impact 
of  the  UK  FSA’s  Retail  Distribution  Review  (RDR)  dealing  with  the  regulation  of 
inducements  when  advice  is  provided  could  be  used  a  reference  point.  It  should  be 
mentioned, however, that the RDR proposes more stringent restrictions on the treatment of 
inducements since it deals homogeneously with inducements provided for in any form of 
advice  (not  only  independent);  furthermore,  the  RDR  deals  with  products  and  entities 
which are not covered under MiFID (i.e. entities providing insurance products). In addition 
it  also  includes  measures  on  professional  standards  (i.e.  professional  qualifications  of 
advisors).  Lastly  it  should  be  taken  into  account  that  there  is  a  broader  population  of 
investment advisors in the UK, including a significant proportion of small advisors. Having 
said than, it is anticipated that, 23 per cent of UK advisory firms might exit the market as a 
result  of  the  RDR,  with  a  much  higher  ratio  amongst  the  smallest  advisers  (those  with 
annual incomes below €50,000). Overall, adviser numbers would fall by about 11 per cent. 
This  includes,  for  instance,  small  providers  which  are  close  to  retiring  and  will  not  find 
worthwhile to make investments to adapt to the new rules.433 If the overall fall in adviser 
numbers relating to the UK (i.e. about 11 per cent) is applied here then it implies that about 
2,000 advisers would leave the industry.   

•  There  is  a  significant  possibility  that  many  investment  advisers  working  with  a 
remuneration structure geared towards third-party commissions would simply cease to self-
describe  as  being  independent  and  switch  their  business  to  the  provision  of  non-
independent advice (in that making the nature of their business more transparent to clients).  

•  There  may  be  a  switching  effect  away  (by  clients)  from  advisers  that  switch  from  a 
commission-basis to a fee-basis. The scale of this switch will be critically dependent upon 
the  extent  to  which  consumers  value  (and  are  therefore  willing  to  pay)  “independent 
investment  advice”  against  “investment  advice”.  If  this  is  the  case,  any  secular  trend 
towards independent advice (in the sense of not being restricted in market choice and also 
having  a  remuneration  structure  geared  towards  downstream  remuneration)  would  be 
considerably strengthened. This would benefit consumer choice and the quality of service 
received.  

18.4.2.  Portfolio management 

Based  on  Europe  Economics  bulk  estimates,  the  EU  portfolio  management  industry  could 
have revenues of at least €25bn. This would equate to perhaps 17 million customers and an 
industry of over 150,000 people (see Annex 5.2.10). 

Whereas  in  investment  advice  provided  on  packaged  products  downstream  charging  is 
typically  not  standard  practice,  fees  are  usually  charged  to  final  investors  in  the  case  of 
discretionary portfolio management.  

The  only  European  country  where  inducements  are  strongly  discouraged  in  the  context  of 
portfolio management is Italy. Unfortunately no data are available to assess the scale of the 
changes  driven  by  such  a  measure  in  Italy.  An  Italian  trade  association  described  this  as 
having had the following impact on the business models of banks: 

•  the reduction in the use of inducements has resulted in an increase in the charges levied on 
investors  (to  compensate  the  portfolio  managers  for  the  revenues  lost  —  however, 
previously the customer would have borne these charges implicitly as the product provider 

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would have charge higher fees in order to enable him to pay commissions to the portfolio 
manager and these fees would have been deducted from the investment returns achieved)  

•  A switch away from packaged products (where there had been inducements) towards direct 

investments by portfolio managers.  

However,  we  note  that  private  banking  and  discretionary  portfolio  management  (combined) 
have  been  recently  estimated  to  account  for  about  6  per  cent  of  mutual  fund  distribution  in 
Italy.434 This was 7 per cent in 2007 (FERI Fund Market Information). Whilst we recognise 
that market changes flowing from the regulatory change in Italy may not be fully reflected in 
the  current  estimate  (and  there  could  also  be  other  drivers  of  the  change)  and  that  the  split 
between  private  banking  and  discretionary  portfolio  management  activities  might  have 
changed this scale of change does not appear likely to be having significant impacts upon the 
asset management sector.  

Another relevant example could be the UK which as part of its Retail Distribution Review is 
considering  eliminating  inducements  for  portfolio  management  when  they  provide  personal 
recommendation  to  clients.  Apparently  the  advent  of  the  new  charging  approach  (i.e.  fee-
based instead of commission-based) does not seem to be in itself a major concern for the UK 
industry.  Indeed,  26  per  cent  of  discretionary  portfolio  managers  anticipate  an  increase  in 
business (i.e. more customers) due to the increased transparency in charging and consequent 
increase in confidence.435 

Whether  the  same  impacts  would  occur  if  this  model  were  applied  elsewhere  in  Europe  is 
unclear. There are only limited data on the importance of discretionary portfolio management 
as  a  distribution  channel  for  these  packaged  products.  The  importance  of  portfolio 
management (together with private banking) in the distribution of these funds is estimated to 
range from 6 per cent (in Italy, Spain and the UK) up to 9.5 per cent in France and 10.7 per 
cent in Germany.436 It follows that there could be some impacts upon the asset management 
industry, particularly in markets (e.g. Luxembourg or Germany) where inducements remain a 
more important aspect of the business model than in the UK or where portfolio management 
represents  a  more  important  component  within  the  distribution  of  funds  (e.g.  France, 
Germany).  

If distribution through portfolio managers declines by 15 per cent (the decline implied by the 
initial  data  on  the  Italian  market,  and  if  that  is  wholly  attributed  to  the  impact  of  the 
inducements ban) — without any increase from other sources such as direct sales — and we 
further  assume  that  6-10  per  cent  of  packaged products  (which  have  a  total  volume  of  €7.1 
trillion)437 are distributed in this way, then this implies (remembering that Italy and the UK 
would already have affected an equivalent policy approach or market practice) that the policy 
option would lead to a further decline in assets under management of 0.5–0.9 per cent (about 
€36–€64 billion across the whole EU).  This could mean a reduction in revenues in this sector 
of €216 to €384 million if we assume that management fees represent about one per cent of 
assets  managed  and  if  we  also  exclude  Italy  and  the  UK.    This  would  be  about  0.8–1.5  per 
cent of the total annual revenue attributed to discretionary portfolio management above (1.3–
2.5 per cent of revenues outside of the UK and Italy). 

This  could  result  in  some  reduction  in  headcount  in  the  asset  management  sector,  if  firms 
were unable to achieve compensatory changes elsewhere.  We are not in a position to estimate 
the  scale  of  that  affect  but  we  do  not  anticipate  notable  structural  change  to  the  asset 
management  industry.    Further,  our  model  of  the  effects  here  is  that  the  assets  under 
management  would  “switch”  from  packaged  products  to  direct  investment  through  the 

259 

 
 
  
 
portfolio managers, i.e. there could be a compensating upward adjustment in the headcount at 
managers. 
portfolio 

260 

 
 
  
 
19. 

ANNEX 9: SUMMARY OF SECONDARY POLICY OPTIONS CONSIDERED 

19.1.  Under the operational objective "Regulate appropriately all market structures 
and trading place taking into account the needs of smaller participants" 

 (a) 

Systematic internalisers 

MiFID introduced specific provisions for systematic internalisation.438 The core requirement 
for systematic internalisers (SIs) is to publish firm quotes in shares admitted to trading on a 
regulated  market  that  are  classified  as  'liquid'  under  MiFID  when  dealing  in  sizes  up  to 
standard market size. 

To  date  only  10  investment  firms  have  been  registered  as  systematic  internalisers.  The  low 
number of SIs may be attributable to a number of possible factors such as lack of clarity in the 
definition of a systematic internalisers439 and the relative inflexibility of the quote publication 
regime.  

The policy option will be to 

–  Provide more objective criteria in the implementing regulation for determining when a firm 
is  a  SI,  in  particular,  by  replacing  the  material  commercial  relevance  test  with  clear 
quantitative  thresholds  and  clarify  the  application  in  substance  of  the  non-discretionary 
rules and procedures. 

–  Clarify that once the conditions are fulfilled, SI are obliged to register towards competent 

authorities.  

–  Require SI's to maintain quotes to both buy and sell.  

–  Require SIs to maintain a minimum quote size equivalent to 10% of the standard market 

size of any liquid share in which they are a SI. 

–  Require  SIs  who  make  use  of  the  exemption  from  identifying  themselves  in  post-trade 
reports  to  publish  trading  data  monthly  instead  of  quarterly  as  a  condition  of  using  this 
exemption.  

A further issue relevant to which activities fall within the systematic internaliser definition is 
how the execution of orders by the use of matched principal trades would be treated for the 
purposes of MiFID (see paragraph 5 (d) below). 

(b) 

Non-discriminatory clearing access for financial instruments 

In addition to requirements in Directive 2004/39/EC that prevent Member States from unduly 
restricting  access  to  post  trade  infrastructure  such  as  central  counterparty  and  settlement 
arrangements, legislation should remove various other commercial barriers that can be used to 
prevent competition in the clearing of financial instruments. Barriers may arise from central 
counterparties  not  providing  clearing  services  to  certain  trading  venues,  trading  venues  not 
providing data streams to potential new clearers or information about benchmarks or indices 
not being provided to clearers. Without access to the central counterparty, positions involving 
similar  financial  instruments  could  not  be  netted  down  by  participants.  This  would  prevent 
competition from new trading platforms as it would be economically unviable for participants 
to use them.  

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The policy option is to prohibit discriminatory practices and remove barriers that may prevent 
competition for the clearing of financial instruments. Central counterparties should accept to 
clear transactions executed in different trading venues, to the extent that those venues comply 
with  the  operational  and  technical  requirements  established  by  the  central  counterparty. 
Access should only be denied if certain access criteria specified in delegated acts are not met. 
This  will  increase  competition  for  clearing  of  financial  instruments  in  order  to  lower 
investment  and  borrowing  costs,  eliminate  inefficiencies  and  foster  innovation  in  European 
markets.  

The policy option will also require trading venues to provide access including data feeds on a 
transparent  and  non-discriminatory  basis  to  central  counterparties  that  wish  to  clear 
transactions executed on the trading venue. Licensing and access to information about indices 
and  other  benchmarks  that  are  used  to  determine  the  value  of  financial  instruments  should 
also  be  provided  to  central  counterparties  on  a  non-discriminatory  basis.  The  removal  of 
barriers  and  discriminatory  practices  is  intended  to  increase  competition  for  clearing  of 
financial  instruments  in  order  to  lower  investment  and  borrowing  costs,  eliminate 
inefficiencies and foster innovation in European markets.  

19.2.  Under  the  operational  objective  "Improve  trade  transparency  for  market 

participants for equities and increase it for non equities" 

(a) 

Include Equity like instruments 

The pre and post trade transparency requirements currently only apply to shares admitted to 
trading on a regulated market. A number of instruments that are similar to shares are outside 
the  scope  of  MiFID  transparency  requirements.  Given  the  similarity  of  the  instruments  to 
equities,  support  from  market  participants  and  supervisors  and  the  fact  that  some  Member 
States  already  apply  transparency  requirements  to  such  instruments,  the  policy  option  is  to 
amend the framework directive440 to extend the transparency regime to the following equity 
like financial instruments if admitted to trading on a regulated market: 

–  Depositary receipts; 

–  Exchange traded funds; and 

–  Certificates  issued  by  companies  (i.e.  securities  issued  by  a  company  that  rank  above 
ordinary  shareholders  but  below  unsecured  debt  holders  for  the  repayment  of  the 
investment). 

The  regime  would  in  principle  be  based  on  the  regime  that  applies  to  shares  but  with 
appropriate  differentiation  to  take  into  account  specific  differences  in  the  nature  of  the 
instruments concerned. For example, appropriate thresholds for applying the pre-trade large in 
scale  and  post  trade  deferred  publication  regimes  would  be  developed  for  each  type  of 
financial  instrument  in  the  implementing  measures.  It  would  provide  a  harmonious  and 
consistent  framework  for  products  which  are  very  similar  in  the  way  they  trade.  On  the 
negative  side,  this  new  transparency  regime  could  impact  the  liquidity  of  these  instruments 
but a proper calibration of the regime could prevent that. 

The  extension  of  the  transparency  regime  to  these  equity-like  instruments  is  expected  to 
generate one-off costs of €5 million and ongoing costs of €1 million. 

262 

 
 
  
 
 
(b) 

Flag OTC trades 

The Commission services consider that the MiFID could continue to be neutral as to where a 
trade is executed. Nonetheless, concerns have been raised by some market participants over 
the lack of granular information about the nature and extent of trading that is taking place in 
various instruments outside regulated markets, MTFs and systematic internalisers. Such OTC 
trading is currently subject to the full range of MiFID organisational (e.g. conflicts of interest) 
and  conduct  of  business  requirements  and  subject  to  post-trade  and  transaction  reporting 
requirements.  

Regulators from some Member States have suggested that there could be greater granularity 
of  information  about  such  trading.  The  policy  option  would  be  that  further  post  trade 
identification  of  trades  on  organised  trading  facilities  there  could  be  identification  and 
flagging of trades that are OTC in post trade transparency reports.441 This would ensure that 
there  is  much  more  granular  and  accurate  information  about  levels  of  OTC  trading.  The 
drawbacks of such solution would be some additional reporting costs for investment firms as 
well  as  some  possible  disincentivisation  of  using  OTC  mode  to  trade.  Nevertheless,  the 
additional costs should be limited and the restraint on the use of OTC is one of the objectives 
of the G20. 

19.3.  Under  the  operational  objective  "Reinforce  transparency  towards  and  powers 

for regulators" 

(a) 

Extend the scope of transaction reporting 

This option will require market operators of organised trading venues to report transactions on 
behalf of their members which are not MiFID firms. The advantage would be that regulators 
would receive reports on the transactions of non-regulated market participants in relation to 
instruments  covered  by  MAD.  These  reports  contain  additional  information  in  comparison 
with the data feeds from the platforms themselves. Competent authorities' capacity to detect 
and sanction abuses would thus be enhanced. The main disadvantage is in terms of reporting 
costs for the operators of organised venues, but this should be mitigated by the fact that they 
already possess most of the data. 

(b) 

Improve the content of transaction reporting 

Various  differences  in  national  implementation  and  interpretation  regarding  transaction 
reporting  have  led  to  diverging  reporting  requirements.  In  order  to  minimise  differing 
requirements, reduce costs and improve efficiency in the exchange of transaction information 
between regulators, specific changes are necessary. 

First,  Member  States  take  differing  views  on  which  legs  of  the  process  of  order  execution 
constitute executing a transaction. Some Member States consider that only the execution of a 
transaction on an organised venue or OTC is reportable, while others consider that changing 
the essential characteristics of an order also constitutes a reportable transaction. There is also 
disagreement as to whether the aggregation of orders is considered to be executing the order. 

Second, national schemes differ as regards collecting data that identifies the person who has 
made  the  underlying  investment  decision.  Some  Member  States  do  not  require  this 
information  at  all.  This  hampers  automated  detection  of  market  abuse,  and  complicates 
investigations  of  possible  market  abuse  as  such  information  first  needs  to  be  gathered  from 
investment  firms.  Member  States  that  collect  this  information  do  so  either  through  direct 

263 

 
 
  
 
reporting by the client-facing entity, or by passing on client information down the execution 
chain. As a result, the number of transaction legs that need to be reported, as well as the way 
the  client  and  counterparty  fields  are  populated  in  a  transaction  report  differs  across  the 
Member  States.  This  divergence  limits  the  use  of  transaction  reporting  for  purposes  of 
detecting and investigating possible cases of market abuse, because it hinders the exchange of 
information between supervisors. It also leads to diverging obligations on firms.  

Third,  the  Commission  services  are  also  considering  whether,  in  order  to  provide  further 
information to monitor for market abuse, transaction reports could identify the trader within a 
firm who executes the transaction. This field is a so-called "trader ID". When the investment 
decision is made by an automated system (i.e. when a computer algorithm has decided on the 
aspects  of  execution  of  the  order  such  as  timing,  quantity  and  price),  the  transaction  report 
should  identify  the  algorithm  as  having  made  the  investment  decision  (i.e.  flagging  of 
algorithm in the transaction reports) 

Further,  it  will  be  necessary  for  implementing  measures  to  fully  harmonise  the  content  of 
transaction reports as any differences between Member States not only create difficulties for 
firms but act as an obstacle to competent authorities being able to exchange and understand 
exchanged  information  on  transactions.  Therefore,  subsequent  clarifications  to  transaction 
reporting are needed in the implementing acts. 

In this context, the policy option would be to modify transaction reporting obligations could 
be modified as follows: 

–  Amend  the  implementing  regulation  to  specify  that,  for  transaction  reporting  purposes,  a 
transaction  refers  to  any  agreement  concluded  with  a  counterparty  to  buy  or  sell  one  or 
more financial instruments.442  

–  Amend  the  framework  directive  to  introduce  an  obligation  on  firms  that  receive  and 
transmit or otherwise handle orders but which are not executing transactions in the above 
sense to transmit the required details of such orders to the receiving investment firm443. 

–  Amend  the  framework  directive  to  require  transaction  reports  to  include  means  of 
identifying the person who has made the investment decision (the client identifier) 444 and 
the  trader  who  executes  the  transaction.  Transaction  reports  would  need  to  identify  the 
person who has made the investment decision through the chain of order transmission to 
the  final  execution  of  the  transaction.  This  would  require  that  all  entities  in  a  chain  of 
transactions  have  the  obligation  to  pass  on  all  the  details  of  the  trade  including  client 
identifiers as in b) above they are themselves not subject to transaction reporting. 

–  Amend  the  framework  directive  to  allow  for  the  adoption  of  implementing  acts  on  a 
common European transaction reporting format and content, including the reporting form, 
identification of the instrument traded, date and time, price against which the transaction 
took  place,  identification  of  the  reporting  parties,  identification  of  the  client,  trading 
capacity,  number  of 
transmission,  and  way  of 
transmission.445 

technical  format  of 

the  report, 

This  would  greatly  improve  the  quality  of  the  reporting,  especially  in  case  of  cross  border 
transactions  and  should  result  in  an  upgrade  of  the  supervision  performed  by  competent 
authorities.  The  changes  brought  to  the  reporting  format  could  create  one  off  costs  for  the 
reporting parties but they should be minimal and reporting parties could actually benefit from 
having similar reporting obligations all across Europe. 

264 

 
 
  
 
These  measures  are  expected  to  generate  one-off  implementation  costs  of  between  €20  and 
€33 million.  

19.4.  Under the operational objective "Reinforce regulation on products, services and 

providers under the directive when needed" 

(a) Classifying the ancillary service under annex I section B (1) of MiFID as and investment 
service. 

The  provision  of  ancillary  services  under  MiFID446  is  subject  to  supervision  when  they  are 
provided  by  intermediaries  authorised  to  provide  investment  services  and  activities.  A 
particularly  sensitive  ancillary  service  is  the  "safekeeping  and  administration  of  financial 
instruments  for  the  account  of  clients,  including  custodianship  and  related  services  such  as 
cash/collateral management".447 This service is very often provided by investment firms and 
credit institutions but it could be provided by different entities, regulated at national level or 
not. 

MiFID  already  addresses  important  aspects  of  safeguarding  client  assets  in  the  context  of 
organisational requirements for firms.448 The Commission services consider that this service 
should be classified as an investment service449; consequently, entities providing the service 
of safekeeping would need a MiFID authorisation (except in cases when an existing MiFID 
exemption applies) and they would be subject to the MiFID regulatory framework450 and to 
supervision by competent authorities. 

This option has already been assessed in the context of the Impact Assessment accompanying 
the Proposal for a Directive on legal certainty of securities holding and transactions451.  

19.5.  Under  the  operational  objective  "Strengthen  rules  of  business  conduct  for 

investment firms" 

(a) 

Reinforce the framework around selling by investment firms of their own securities 

Some  national  regulators  have  raised  concerns  with  respect  to  the  applicability  of  MiFID 
when  investment  firms  or  credit  institutions  issue  and  sell  their  own  securities.  While  the 
application of MiFID is clear when investment advice is provided as part of the sale, greater 
clarity is needed in the case of non-advised services, where the investment firm or bank could 
be considered not to be providing a MiFID service. 

Some  practical  issues  have  also  emerged  with  respect  to  investment  firms  and  credit 
institutions distributing products to investors on the basis of an agreement with the issuer in 
the provision of the services of placing and underwriting. In particular, it seems necessary to 
clarify in practice the situation of investment firms that can be acting on behalf of an issuer 
and, as part of the same transaction, on behalf of the investor as well.452 

On the first issue, the policy option would be to specify that MiFID also applies to investment 
firms  and  credit  institutions  selling  their  own  securities  when  not  providing  any  advice.  To 
this  end,  the  definition  of  the  service  of  execution  of  orders  on  behalf  of  clients  could  be 
modified  in  order  to  also  include  the  direct  sale  of  their  own  securities  by  banks  and 
investment firms.453  

Concerning  the  second  point,  the  Commission  Services  consider  that  MiFID  conduct  of 
business  rules  clearly  apply  to  the  provision  of  services  to  investors,  irrespective  of  the 
circumstance that a firm is acting, at the same time, on behalf of the issuer and of the investor. 

265 

 
 
  
 
However,  in  order  to  ensure  a  convergent  application  of  these  principles  in  concrete 
situations, the policy option would be to adopt measures such as guidelines and examples of 
practical application of the rules by ESMA. This would clarify any ambiguity that could have 
existed and reinforce the position of investors.  

The  costs  of  these  options  should  be  minimal  with  one-off  costs  in  the  range  of  €3  to  €4.5 
million.  

(b) 

Dealing on own account 

Dealing  on  own  account  by  investment  firms  is  listed  among  the  investment  services  and 
activities  requiring  authorisation.  The  MiFID  definition  of  dealing  on  own  account  is  very 
broad  since  it  includes  trading  against  proprietary  capital  resulting  in  the  conclusion  of 
transactions  in  financial  instruments.454  On  the  other  hand,  the  exemption  regime  in  MiFID 
narrows significantly the coverage of this activity by excluding persons who do not provide 
any investment service or activities other than dealing on own account, unless they are market 
makers  or  deal  on  own  account  outside  a  regulated  market  or  an  MTF  on  an  organised, 
frequent and systematic basis.455  

Experience  shows  that  practice  and  supervision  in  Member  States  differ  on  how  MiFID  is 
applied  to  specific  cases  of  firms  dealing  on  own  account  and  on  the  scope  of  this  activity. 
This  is  particularly  the  case  when  firms  execute  client  orders  (another  investment  service 
which requires authorisation) against their proprietary capital. The first option in this area is to 
modify  the  definition  of  dealing  on  own  account  and  the  corresponding  exemption  to  make 
clear  that  the  exemption  applies  to  persons  who  do  not  provide  any  investment  services  or 
activities  other  than  dealing  on  own  account  unless  they  are  market  makers  or  deal  on  own 
account by executing client orders. Firms dealing on own account by executing client orders 
would  continue  to  be  authorised  for  the  execution  of  orders  on  behalf  of  clients  and  to  be 
subject to the corresponding obligations towards clients (for instance best execution456).  

Another  issue  concerning  the  definition  of  dealing  on  own  account  concerns  the  treatment 
under MiFID of orders executed for clients using matched principal (also known as "back to 
back") trading. Provided the legs of the trades are precisely matched, this method of executing 
orders can either be considered only as the execution of client orders, or also as dealing on 
own account, based on the argument that the firm's proprietary capital may be put at risk if 
one of the matched trades fails.457 The classification of this part of executing client orders has 
potential implications, in terms of, for instance, the applicability of the systematic internaliser 
regime and the capital treatment under the Capital Adequacy Directive.458  

The second policy option in this area is to clarify that generally under MiFID, the execution of 
client orders on a matched principal basis should be treated as also involving the activity of 
dealing  on  own  account.459  But  this  should  not  affect  the  capital  requirements  under  the 
Capital Adequacy Directive.  

19.6.  Under  the  operational  objective  "Strengthen  the  rules  of  organisational 

requirements for investment firms" 

(a) 

Fit and proper criteria 

The framework directive requires persons who effectively direct the business of an investment 
firm to be of sufficiently good repute and sufficiently experienced as to ensure the sound and 
prudent management of the investment firm (so called "fit and proper test")460. This provision 

266 

 
 
  
 
is generic and has led to different application in Member States. The implementing directive 
regulates the responsibility of senior management in ensuring the compliance of investment 
firms with their obligations under the MiFID. 

Following the Commission services consultation on corporate governance issues461, the policy 
option is to clarify and strengthen with particular reference to the role of executive and non-
executive directors. As to fit and proper criteria, different roles could be mirrored in different 
professional skills (for instance, non-executive directors should have professional experience 
in  the  financial  field  to  enable  them  to  carry  out  their  role  and  should  fulfil  independence 
requirements in relation to the firm where they provide their activity). In addition, the role of 
supervisors could clearly include the initial and on-going assessment of fitness and propriety 
of directors.  

The  policy  options  will  include  the  following  modifications  in  the  framework  and  in  the 
implementing directives could be envisaged: 

–  fit and proper criteria would clearly apply to all members of the board of directors (both 
executive and non-executive directors) and not only to persons who effectively direct the 
business462.  To  this  end,  a  comprehensive  definition  of  management  body  could  be 
introduced. Fit and proper criteria could include the assessment of time commitment and 
assessment  of  independency,  especially  for  non-executive  members  of  the  board. 
Principles  aimed  at  promoting  diversity  in  the  composition  management  body  could  also 
be envisaged; 

–  competent authorities would be satisfied, at the moment of the authorisation and in the on-
going  monitoring  of  the  firms,  that  all  members  of  the  board  are  and  continue  to  be  of 
sufficiently  good  repute  and  sufficiently  experienced  to  ensure  the  sound  and  prudent 
management of the firm and compliance with the applicable rules;  

–  implementing  measures  could  clarify  the  details  of  these  requirements  in  order  to  adapt 

them to different roles and functions and ensure their uniform application463; 

–  the definition of senior management464 in the implementing directive would be modified to 

reflect changes in the framework directive.  

These options are expected to generate one-off costs of €3.4 - €4.7 million and ongoing costs 
of €13.6 - €31.4 million. 

(b) 

Conflict of interest and sales process 

Conflicts of interest requirements465 cover a broad range of situations that may occur in the 
provision of investment services and activities. This also includes the remuneration of sales 
forces and the structure of incentives for the distribution of financial products. 

The  Commission  services  consider  that  the  framework  for  addressing  conflicts  of  interest 
within  MiFID  is  still  appropriate  to  prevent  failures  in  the  sales  process  provided  that  it  is 
consistently  applied  across  Europe.  The  key  element  of  this  framework  is  the  management 
and  the  avoidance  of  conflicts  –  not  just  disclosure.  While  the  framework  also  addresses 
circumstances  in  which  the  disclosure  of  conflicts  of  interest  might  be  necessary,  this  is  a 
measure  of  last  resort  and  not  a  means  for  managing  conflicts  of  interest.  For  instance,  it 
would  be  very  difficult  for  a  firm  which  creates  strong  incentives  for  its  sales  staff  to  sell 
certain products, e.g. through internal bonus structures, to be able to manage the conflicts of 

267 

 
 
  
 
interest  thereby  created.  It  is  unlikely  that  such  a  firm  could,  in  this  situation,  demonstrate 
compliance with MiFID. 

The  Commission  services  consider  that  the  convergent  application  of  conflicts  of  interest 
provision  has  to  be  ensured  across  the  Union  in  order  to  grant  the  same  level  of  investor 
protection  in  different  jurisdictions  and  the  same  treatment  of  intermediaries  providing  the 
services.  To  this  end,  the  policy  option  is  to  add  implementing  measures  in  the  area  of 
conflicts  of  interest  which  would  be  useful  for  a  consistent  application  of  MiFID  principles 
(e.g. elaboration of guidance and concrete examples by ESMA in order to ensure consistent 
application of the rules in practical situations). 

(c) 

Segregation of client assets 

Recent  cases  where  ownership  of  assets  has  been  in  dispute466  as  a  result  of  poor  rules  or 
practices  underline  the  importance  to  have  strong  requirements  in  this  area.  Therefore,  the 
Commission  services  consider  appropriate  to  introduce  modifications  in  the  implementing 
directive467 in the following areas. 

–  A  recital468  currently  allows  the  exclusion  of  client  asset  protection  rules  when  full 
ownership of funds and financial instruments has been transferred to an investment firm to 
cover  any  client  obligations.  The  indiscriminate  application  of  such  a  possibility  would 
jeopardise  the  effectiveness  of  segregation  of  client  assets  requirements.  Under  the  new 
policy, these arrangements would not be allowed, at least when dealing with retail client 
assets.469 Member States would also be given the option to exclude title transfer collateral 
arrangements in the case of professional clients and eligible counterparties and to require 
that,  when  such  arrangements  are  allowed,  clients  receive  a  specific  warning  in  writing 
giving appropriate evidence of the risk of these arrangements.  

–  MiFID  allows  the  use  of  securities  financing  transactions  involving  client  financial 
instruments held by the investment firm, subject to clients' express consent.470 The policy 
option here is to consider that the implementing directive could require firms, at least for 
retail  client  assets,  to  adopt  specific  arrangements  to  ensure  that  the  borrower  of  client 
assets  (for  instance  in  the  case  of  stock  lending  activities)  provides  the  appropriate 
collateral and that the firm monitors the continued appropriateness of such collateral and 
takes the necessary steps to maintain the balance with the value of client assets.  

–  Firms are required to provide retail clients with clear, full and accurate information on the 
terms  of  the  use  of  the  financial  instruments  and  relevant  risk.471  Leveraging  on  the  fact 
that described information is a useful tool irrespective of the type of client, the option is to 
extend  it  to  all  categories  of  clients  in  order  to  increase  awareness  of  the  risk  of  such 
practices.  

–  Investment  firms  are  required  to  place  client  funds  into  accounts  opened  with  a  central 
bank or a credit institution or certain money market funds and, except for central banks, to 
exercise all due skill, care and diligence in the selection and review of the institutions they 
choose.472 As a result of the financial crisis, it has emerged that the concentration of client 
money  in  group  entities  may  face  the  risk  of  contagion  when  intra-group  insolvency 
occurs. The option is to consider that diversification in the placement of client funds could 
be one of the criteria of conducting the due diligence and that implementing acts could be 
proposed in this area. 

268 

 
 
  
 
The range of costs is expected to be between €1.4 -€1.6 million for one-off costs and €6.8 – 
€24.1 million for ongoing costs. 

(d) 

Tied agents 

Member  States  may  currently  allow473  investment  firms  to  use  tied  agents  as  a  means  of 
offering  their  services  and  soliciting  business474.  This  option  has  been  exercised  in  most 
Member States. Based on CESR assessment475, the rules governing tied agents have worked 
well  so  far.  Thus,  the  Commission  services  consider  that  only  a  few  adjustments  to  these 
provisions would be necessary.  

In particular: 

–  National discretion of allowing tied agents476 could be abolished and the possibility to use 

tied agents would be generalised in all Member States.  

–  The  possibility  for  Member  States  to  allow  tied  agents  to  handle  clients'  money  and/or 
financial instruments could be restricted.477 Although this possibility is subject to the tied 
agent remaining under the full and unconditional responsibility of the investment firm, it 
may  pose  undue  risks  especially  when  tied  agents  represent  investment  firms  which  are 
themselves  not  authorised  to  hold  client  money  and/or  financial  instruments.  Therefore, 
tied agents would not be allowed to hold client money or assets.  

–  Tied agents would be treated as a branch478 independently of whether the investment firm 
operates any other branches on the territory of the host Member State. This would ensure 
their appropriate and consistent supervision across the EU.  

–  Where an investment firm intends to use tied agents in providing services cross border, the 
current  MiFID  provisions  allow,  but  do  not  prescribe,  the  transmission  of  the  identity  of 
tied  agents  from  the  home  to  the  host  competent  authority.  The  host  supervisor  has  the 
option,  but  not  the  obligation,  of  publishing  this  information.479  For  investor  protection 
reasons, it is important to give investors the possibility to check the identity of a tied agent. 
Therefore, the policy option is to make both requirements mandatory. 

–  Finally, the passporting provisions only apply to investment firms which intend to use tied 
agents. The cross-border activities of credit institutions using tied agents are not regulated 
under  EU  legislation,  resulting  in  an  unlevel  playing  field  between  the  two  types  of 
institutions  providing  the  same  services.  In  order  to  ensure  sufficient  transparency  for 
investors and competent authorities, the provisions on tied agents under articles 31 and 32 
of Directive 2004/39/EC could also be applicable to credit institutions.480  

269 

 
 
  
 
20. 

ANNEX 10: BIBLIOGRAPHY  INCLUDING  LIST  OF  REPORTS  PUBLISHED  BY CESR  ON 
MIFID RELATED ISSUES 

MiFID Impact Assessment Bibliography 

Markets in Financial Instruments Directive (MiFID): 

Directive 2004/39/EC (MiFID Framework Directive) 

Directive 2006/73/EC (MiFID Implementing Directive) 

Regulation No 1287/2006 (MiFID Implementing Regulation) 

Other European legislation: 

Directive 2004/72/EC (Market Abuse Directive)  

Directive 2003/6/EC (Market Abuse Directive) 

Directive  2006/49/EC  on  the  capital  adequacy  of  investment  firms  and  credit  institutions 
(recast) 

Directive 2005/60/EC (Anti-Money Laundering Directive) 

Directive 2003/87/EC of the European Parliament and of the Council 

Directive 2003/71/EC (Prospectus Directive) 

Directive 1993/22/EEC (Directive on investment services in the securities field) 

Commission Regulation (EC) No 1287/2006 

Commission Regulation (EU) No 1031/2010 (Auctioning Regulation) 

Regulation (EU) No 1095/2010 of the European Parliament and of the Council, establishing a 
European Supervisory Authority (European Securities and Markets Authority) 

Charter of Fundamental Rights of the European Union (2000/C 364/01) 

The Treaty on the Functioning of the European Union C 115/47 

Non-European Legislation 

Dodd–Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111-203, H.R. 4173), 
21 July, 2010 

Implementing  Dodd-Frank  Wall  Street  Reform  and  Consumer  Protection  Act  — 
Accomplishments, see: http://www.sec.gov/spotlight/dodd-frank/accomplishments.shtml 

Commission, Council and European Parliament sources 

(COM (2011) 25 final) Tackling the challenges in commodity markets and on raw Materials, 
February 2011 

270 

 
 
  
 
(COM (2010) 726) Proposal for a Regulation of the European Parliament and of the Council 
on energy market integrity and transparency, December 2010 

(COM  (2010)  716)  Communication  from  the  EC  on  Reinforcing  sanctioning  regime  in  the 
financial services sector  

(COM (2010) 573), Strategy for the effective implementation of the Charter of Fundamental 
Rights by the European Union, October 2010 

(COM  (2010)  484)  Proposal  on  Regulation  on  OTC  derivatives,  central  counterparties  and 
trade repositories, September 2010  

(COM  (2010)  482)  Proposal  on  short  selling  and  certain  aspects  of  Credit  Default  Swaps, 
September 2010  

(COM  (2010)  301  final)  Communication  From  The  Commission  To  The  European 
Parliament, The Council, The European Economic And Social Committee And The European 
Central Bank: Regulating Financial Services For Sustainable Growth, June 2010 

(COM (2010) 284 Final) Green Paper on Corporate Governance in financial institutions and 
remuneration policies  

(COM (2009) 563 final) Communication by the Commission on ensuring efficient, safe and 
sound derivatives markets: future policy actions  

(COM  (2009)  591)  Communication  from  the  Commission  to  the  European  parliament,  the 
Council, the European Economic and Social Committee and the Committee of the Regions A 
better functioning food supply chain in Europe  

(COM  (2009)  204  final)  Communication  on  Packaged  Retail  Investment  Products,  April 
2009, Update on Commission work on Packaged Retail Investment Products, December 2009 

(COM  (2009)204)  Impact  Assessment  –  Staff  Working  Paper  Accompanying 
Communication from the Commission on Packaged Retail Investment Products, April 2009 

the 

(COM  (2009)114)  Communication  for  the  spring  European  Council,  Driving  European 
recovery, March 2009 

Commission  Staff  working  document  (SEC(2009)  1447)  Agricultural  commodity  derivative 
markets: the way ahead, 28 October 2009 

Commission Staff working paper, (SEC 2009) 905), 3 July 2009 

Consultation of Commission services on legislative steps for the Packaged Retail Investment 
Products initiative of 26 November 2010 

Public  Consultation  by  the  Directorate  General  for  Energy  on  measures  to  ensure 
transparency and integrity of wholesale markets in electricity and gas, 31 May 2010 

G2/PP  D(2009)  Legislation  on  legal  certainty  of  securities  holding  and  dispositions, 
Consultation  document  of  the  Services  of  the  Directorate-General  Internal  Market  and 
Services, 16 April 2004 

271 

 
 
  
 
DG  Markt  G2  MET/OT/acg  D(2010)  768690,  Legislation  on  legal  certainty  of  securities 
holding  and  dispositions,  Consultation  document  of  the  services  of  the  directorate-general 
internal market and services 

Report,  High-level  Group  on  Financial  Supervision  in  the  EU,  chaired  by  Jacques  de 
Larosière, February 2009 

Council conclusions on strengthening EU financial supervision, 10862/09, June 2009 

European Parliament resolution on derivatives markets: future policy actions (A7-0187/2010), 
15 June 2010 

Competitiveness and Innovation Framework Programme (CIP), see http://ec.europa.eu/cip/ 

Commission 
http://ec.europa.eu/governance/impact/commission_guidelines/commission_guidelines_en.ht
m 

Assessment 

Guidelines, 

Impact 

see 

MiFID 
play, 
http://ec.europa.eu/internal_market/securities/isd/mifid_implementation_en.htm 

Transposition 

state 

of 

see 

Sources issued by supranational bodies 

Triennial Central Bank Survey, Foreign Exchange and Derivatives Market Activity in 2010, 
Bank for International Settlements, September 2010 

BIS  Quarterly  Review,  September  2010  International  banking  and  financial  market 
developments, Bank for International Settlements 

Directorate  for  Financial  and  Enterprise  Affair,  OECD  Steering  Group  on  Corporate 
Governance,  Paper:  Corporate  Governance  and  the  Financial  Crisis:  Conclusions  and 
emerging good practices to enhance implementation of the Principles, February 2010 

OECD, Income statement and balance sheet, OECD Banking Statistics Database, 2010 

G-20  Leaders' 
http://www.pittsburghsummit.gov/mediacenter/129639.htm 

Pittsburgh 

statement 

Summit, 

of 

24-25 

September 

2009, 

Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in 2007, 
Bank for International Settlements 

BIS Statistics, Bank for International Settlements, see http://www.bis.org/statistics/ 

Occasional paper series no.50: Implications for liquidity from innovation and transparency in 
the European corporate bond market, European Central Bank (Laganá, Peřina, von Köppen-
Mertes and Persaud), August 2006 

Documents issued by national public authorities 

FSA  fines  Barclays  £7.7  million  for  investment  advice  failings  and  secures  as  much  as  £60 
million in redress for customers, FSA/PN/006/2011, UK FSA, 18 January 2011 

Rapport  d'étape:  Prévenir  et  gérer  l’instabilité  des  marchés  agricoles,  Jean-Pierre  Jouyet, 
Christian de Boissieu et Serge Guillon, 23 September 2010 

272 

 
 
  
 
Financial Services Authority Quarterly consultation (No 25), UK FSA, July 2010 

Rapport sur la révision de la Directive MiF, AMF, 11 June 2010 

Report  of  the  staffs  of  the  CFTC  and  SEC  to  the  joint  advisory  committee  on  emerging 
regulatory issues, Findings regarding the market events of May 6 2010 

La  régulation  des  marchés  du  CO2:  Rapport  de  la  mission  confiée  à  Michel  PRADA, 
Inspecteur général des Finances honoraire, April 2010 

FSA estimate of incremental compliance costs for Retail Distribution Review proposals, UK 
FSA, March 2010 

Rapport du groupe de travail sur la volatilité des prix du pétrole, sous la présidence de Jean 
Marie Chevalier, Ministère de l'économie et de l'emploi, February 2010 

Report  to  the  Minister  for  the  Economy,  Industry  and  Employment  on  the  Review  of  the 
Markets in Financial Instruments Directive (MiFID), Pierre Fleuriot, February 2010 

Reforming  OTC  Derivative  Markets  -  A  UK  perspective,  UK  FSA  and  HM  Treasury, 
December 2009 

Retail Investments Product Sales Data (PSD) Trend Report, UK FSA, August 2009 

Annual Review, financial year 2009 – 2010 of consumer complaints about insurance, credit, 
banking, savings and investments, UK Financial Ombudsman Service 

Ombudsmann der Privaten Banken, Tätigkeitsbericht 2009 

Hellenic Ombudsman for Banking-Investment Services, Annual Report 2009 

Consultation Paper 07/9: Conduct of Business regime: non-MiFID deferred matters (including 
proposals for Telephone Recording), UK FSA, May 2007 

MiFID Non-Equities Market Transparency, Presentation by Claudio Salini, Head of Markets 
Division, CONSOB at ICMA conference 15 May 2008 

The overall impact of MiFID, UK FSA, November 2006 

CESR publications 

Consultation  paper,  Guidelines  on  systems  and  controls  in  a  highly  automated  trading 
environment for trading platforms, investment firms and competent authorites, 20 July 2011, 
ESMA/2011/224 

Technical  Advice  to  the  European  Commission  in  the  context  of  the  MiFID  Review  and 
Responses  to  the  European  Commission  Request  for  Additional  Information,  (including 
CESR/10-1096, CESR/10-882, CESR/10-1040, CESR/10-1254), October 2010 

Technical  Advice  to  the  European  Commission  in  the  context  of  the  MiFID  review  – 
Transaction Reporting, CESR/10-796, 29 July 2010 

Technical Advice to the European Commission in the context of the MiFID Review – Equity 
Markets, CESR/10-802, 29 July 2010 

273 

 
 
  
 
Technical  Advice  to  the  European  Commission  in  the  Context  of  the  MiFID  Review:  Non-
equity Markets Transparency, CESR/10-799, 29 July 2010 

Technical  Advice  to  the  European  Commission  in  the  context  of  the  MiFID  Review  – 
Investor Protection and Intermediaries, CESR/10-859, 29 July 2010 

Responses to Questions 15-18 and 20-25 of the European Commission Request for Additional 
Information in Relation to the Review of MiFID, CESR/10-860, 29 July 2010 

Final  Advice  to  the  European  Commission  in  the  context  of  MiFID  Review  on  transaction 
reporting, CESR/10-808  

Consultation Paper: CESR Technical Advice to the European Commission in the Context of 
the MiFID Review - Equity Markets, CESR/10-394, April 2010 

Micro-structural issues of the European equity markets, CESR/10-142, April 2010 

Report on the mapping of discretions in MiFID, CESR/09-833, 2010 

Transparency  of  corporate  bond,  structured  finance  product  and  credit  derivatives  markets, 
CESR/09-348, July 2009 

Impact of MiFID on equity secondary markets functioning, CESR/09-355, June 2009 

Response  to  the  European  Commission's  call  for  evidence  on  the  review  of  Directive 
2003/6/EC (Market Abuse Directive), June 2009 

Report  on  the  mapping  of  supervisory  powers,  supervisory  practices,  administrative  and 
criminal  sanctioning  regimes  of  Member  States  in  relation  to  the  Markets  in  Financial 
Instruments Directive (MiFID), CESR/08-220, February 2009 

Consultation  Paper:  Transparency  of  corporate  bond,  structured  finance  product  and  credit 
derivatives markets, CESR/08-1014 

Overview  of  national  options  and  discretions  under  MiFID  Level  1  –  Dir.  n.2004/39/EC, 
CESR/07-703, October 2007 

Response  to  the  Commission's  request  for  initial  assistance  on  commodity  and  exotic 
derivatives and related business, CESR/07-673, October 2007 

CESR / CEBS Technical Advice to the European Commission on the review of commodities 
business, CESR/08-752 and CEBS 2008 152 rev, 15 October 2008 

CESR  /  CEBS  /  CEIOPS  Report  of  the  3L3  Task  Force  on  Packaged  Retail  Investment 
Products  (PRIPs),  CESR/10-1136  and  CEBS  2010  196  and  CEIOPS-3L3-54-10,  l6  October 
2010 

IOSCO publications 

Report on trading of OTC Derivatives, OICV-IOSCO, FR03/11, February 2011 

Guidelines  for  the  Regulation  of  Conflicts  of  Interest  Facing  Market  Intermediaries:  Final 
Report, IOSCO, FR12/10, November 2010 

274 

 
 
  
 
Issues raised by dark liquidity, Consultation Report, IOSCO, CR05/10, October 2010 

Principles for Direct Electronic Access, Final Report, IOSCO, FR08/10, August 2010 

Transparency of Structured Finance Products, Final Report, IOSCO July 2010 

Task Force on Commodity Futures Markets, Report to G-20 and Final Report, March 2009 

External studies requested by the Commission 

Consumer  Market  Study  on  Advice  within  the  Area  of  Retail  Investment  Services  –  Final 
Report,  Prepared  for:  European  Commission,  Directorate-General  Health  and  Consumer 
Protection, Synovate, 2011MiFID review, Data Gathering and Cost-Benefit Analysis, Europe 
Economics, February 2011 

Consumer  Decision-Making  in  Retail  Investment  Services:  A  Behavioural  Economics 
Perspective, Final Report, Decision Technology Ltd, N Chater, S Huck, R Inderst, November 
2010 

Data gathering and analysis in the context of the MiFID review, Final Report for Directorate 
General  Internal  Market  and  Services,  European  Commission,  PricewaterhouseCoopers,  13 
July 2010 

Reports by think tanks, consultancies, professional and industry bodies 

Monitoring Prices, Costs and Volumes of Trading and Post-trading Services, Oxera, 16 July 
2009–  

MiFID 2.0: Casting New Light on Europe's Capital markets, Report of the ECMI-CEPS Task 
Force on the MiFID Review, chaired by Pierre Francotte, Centre for European Policy Studies 
Brussels, February 2011 

The Structure, Regulation and Transparency of European Equity Markets under MiFID, CFA 
Institute, January 2011 

Derivatives 2010, International Financial Services London, December 2010 

Monthly Agricultural Update and data supplied by NYSE-Euronext, CME Group, December 
2010  

European  Fund  Industry  Breakfast  Briefing,  Thomson  Reuters  and  Lipper,  Ed  Moisson, 
December 2010 

Does bad liquidity drive out good liquidity?, Credit Agricole Chevreux, 24 November 2010  

Study  on  the  Costs  and  Benefits  of  Potential  Changes  to  Distribution  Rules  for  Insurance 
Investment  Products  and  other  Non-MIFID  Packaged  Retail  Investment  Products:  Final 
Report, Europe Economics, September 2010 

MiFID:  Spirit  and  Reality  of  a  European  Financial  Markets  Directive,  Celent  and  Goethe 
Universitat Frankfurt am Main, September 2010  

Food  and  Agriculture  Organization  of  the  United  Nations  (FAO),  Economic  and  Social 
Perspectives, Policy Brief 9, June 2010 

275 

 
 
  
 
Summary  of  Responses  to  the  ICMA  Survey  on  Corporate  Bond  Markets  –  Liquidity  and 
Transparency, ICMA, June 2010 

ISDA 2010 Operations Benchmarking Survey, April 2010 

An  EU-Listing  Small  Business  Act,  March  2010,  F  Demarigny,  MAZARS  Group,  March 
2010 

Nordic  Trading  Landscape  Evolution  –  Impact  of  MiFID  on  Retail  Flow  Providers,  Citadel 
Securities, February 2010 

Retail Distribution Review: The return of “The man from the Pru”?, Exaxe White Paper, Tom 
Murray, January 2010 

Retail  Distribution  Review  proposals:  Impact  on  market  structure  and  competition,  Oxera, 
2010 

Economic  contribution  of  UK  financial  services  2009,  International  Financial  Services 
London, December 2009 

Electronic Trading of Bonds in Europe: Weathering the Storm, Celent, October 2009 

Trading in the Dark in Europe: Choice and Complexity on the Cusp of Change, TABB Group, 
M Mizen, October 2009 

High Frequency Trading Technology, A TABB Anthology, TABB Group, August 2009 

Two years after MiFID: No turning back for the equities markets, Celent, June 2009 

The  European  Structured  Retail  Product  Market  2009  Review,  Arete  Consulting,  EUMR09, 
April 2009 

Study  on  the  Cost  of  Compliance  with  Selected  FSAP  Measures:  Final  Report,  Europe 
Economics, January 2009 

IASB Expert Advisory Panel: Measuring and disclosing the fair value of financial instruments 
in markets that are no longer active, International Accounting Standards Board, October 2008 

Final Report of the IIF Committee on Market Best Practices: Principles of Conduct and Best 
Practice  Recommendations  Financial  Services  Industry  Response  to  the  Market  Turmoil  of 
2007-2008, Institute of International Finance, July 2008 

European  corporate  bond  markets:  transparency,  liquidity,  efficiency,  Biais  et  al,  Centre  for 
Economic Policy Research, May 2006 

The Rise and Fall of the European New Markets: on the Short and Long-run Performance of 
High-tech  Initial  Public  Offerings,  European  Corporate  Governance  Institute,  Finance 
Working Paper N°27/2003, Goergen et al, September 2003. 

MiFID Implementation Cost Survey of the UK Investment Industry, LECG, October 2005 

Goethe Universität report on High Frequency Trading, Prof. Dr. Peter Gomber, March 2011 – 
Commissioned by Deitsche Börse Group 

276 

 
 
  
 
Journal articles and academic papers 

Does  Algorithmic  Trading  Improve  Liquidity?,  T  Hendershott,  C  Jones,  and  AJ  Menkveld, 
American Finance Association Journal of Finance, forthcoming 

High-Frequency Trading, Stock Volatility, and Price Discovery, F Zhang, December 2010 

High  Frequency  Trading  and  its  Impact  on  Market  Quality,  J  Brogaard,  5th  Annual 
Conference on Empirical Legal Studies Paper, 22 November, 2010 

The  City's  Role  in  Providing  for  the  Public  Equity  Financing  Needs  of  UK  SMEs,  G 
Openshaw, D Widger, Professor C Mason, L Jones, S Wells, City of London, March 2010 

Algorithmic Trading and Information, T Hendershott, and R Riordan, NET Institute Working 
Paper No. 09-08, September 2009  

Price  Transparency  in  the  U.S.  Corporate  Bond  Markets,  J  Tempelman,  The  Journal  of 
Portfolio Management, Vol. 35, Spring 2009  

Assessing the Impact of Algorithmic Trading on Markets: A Simulation Approach 

M Gsell, Centre for Financial Studies Working Paper No. 2008/49, June 2008 

Securities  Regulation  in  Low-Tier  Listing  Venues:  the  Rise  of  the  Alternative  Investment 
Market, JM Mendoza, Fordham Journal of Corporate and Financial Law, vol. XIII, 2008 

Technology  and  Liquidity  Provision:  The  Blurring  of  Traditional  Definitions,  J  Hasbrouck 
and G Saar, 30 December 2007 

Latent  Liquidity  and  Corporate  Bond  Yield  Spreads,  S  Mahanti  A  Nashikkary  M 
Subrahmanyamz, 8 August 2007 

Corporate  bond  market  transaction  costs  and  transparency,  A  Edwards,  L  Harris  and  M 
Piwowar, The Journal of Finance, Vol LXII (3), 2007 

Populists versus theorists: Futures markets and the volatility of prices, DS Jacks, Explorations 
in Economic History 44 (2007) 342–362, 2007 

Market transparency, liquidity externalities and institutional trading costs in corporate bonds, 
H Bessembinder, W Maxwell and K Venkataraman, Journal of Financial Economics Vol 82, 
2006 

Transparency  and  liquidity:  a  controlled  experiment  on  corporate  bonds’  M  Goldstein,  E 
Hotchkiss and E Sirri, The Review of Financial Studies Vol 20 (2), 2006 

Access  to  Stock  Markets  for  Small  and  Medium-Sized  Growth  Firms:  The  Temporary 
Success and Ultimate Failure of Germany's Neuer Markt, Burghof and Hunger, October 2003 

Expansion of TRACE in the U.S. fixed-income OTC market, NO Persson, Director, TRACE 
and Fixed Income Strategy, FINRA 

Newspaper articles and press releases 

Inflation protection is doubtful, Financial Times, 13 December 2010 

277 

 
 
  
 
Derivative uncertainty likely to hit banks’ revenues, Financial Times, 21 March 2010 

Carbon trading – an outbreak of fraud in the European emissions trading scheme has battered 
the credibility of the bloc's chief weapon in the fight against global warming, Financial Times, 
15 February 2011 

End in sight for European post-trade data impasse, The Trade News, 3 March 2010 

Press  Release:  Depositary  Receipts  Show  Resiliency  in  2009  on  Higher  Global  Trading 
Volume,  Program  Establishment,  Capital  Raisings  and  Price  Returns,  According  to  BNY 
Mellon Year-End Industry Report, BNY Mellon Depositary Receipts, 13 January 2010 

Interview with J.Hardt, L'Echo, 12 January 2010 

Other sources 

All  European  Equities  Market  Activity  by  Trade  Type  (January  2010  to  January  2011), 
Thomson Reuters, 2011  

Bourse de Luxembourg Fact Book 2010 

NASDAQ  OMX  Guidelines  for  Members’  On-Exchange  Trade  and  Members’  and  Non-
Members’ OTC Trade Reporting in Danish Fixed Income Instruments Version 1.1, September 
2008 

Thomson Reuters Europe Monthly Market Share Reports 

Geneva Trading and Shipping Association (GTSA) website  

Findings regarding the market events of May 6, 2010; Report of the Staffs of the CFTC and 
SEC to the Joint Advisory Committee on emerging regulatory issues; 30 September 2010 

278 

 
 
  
 
21. 

ANNEX  11:  DATES  AND  LIST  OF  PARTICIPANTS  TO  MEETINGS  ORGANISED  BY  DG 
INTERNAL MARKET ABOUT MIFID RELATED ISSUES 

List of workshops organised on MiFID related issues 

Organisation 

Name 

Organisation 

Name 

Transparency 9 December 2009 

Commodities markets 17 December 2009 

AFME 

EFAMA 

Bertrand Huet 

EFET 

Karl-Peter Horstmann 

Nick Robinson 

EuroPEX 

Paulo Sena Esteves 

Tradeweb 

Roger Barton 

LEBA 

Alexander McDonald 

Thomson Reuters 

Robin Poynder 

ICE Futures Europé 

Simon Martin 

AIMA 

CESR 

EFAMA 
Euroinvestors / FIN 
USE 

Markit 

ICMA 

CEA 

EBF 
London Stock 
Exchange 

AFME 

ICAP 

Aron Landy 

LIFFE (NYSE Euronext)  Gilles Clerc 

Alberto Garcia 

Bertrand de Guerny 

AAF 
The European Flour 
Millers 

Guillame Prasche 

CIAA 

Marcus Schueler 

IETA 

Richard Britton 

ECX 

Juliette Jacques 

Bernard Vallius 

Roxane Feller 

Marc Cornelius 

Patrick Birley 

John Hale 

CESR 

Diego Escanero 

Dominic Adler 

ERGEG 

Andrea Korr 

Fabrizio Plateroti 

Liam McCarthy 

Morgan Stanley 

Guy America 

Godfried De Vidts 

European Issuers 

Pierre Marshal 

Bloomberg 

Jason Connolly 

FESE 

Ludovic Aigrot 

High frequency trading 12 January 2010 

Waivers and dark pools 18 January 2010 

Getco 

Optiver 

IAT 

FESE 

BATS 

AFME 

EFAMA 

AIMA 

Jim Faraci 

CESR 

Edwin van der Kruk 

FESE 

Yorck Schumacher 

Miroslav Budimir 

LSE 

Paul O'Donnell 

Chi-X 

Andrew Morgan 

BATS 

Alberto Garcia  

Burcak Inel 

Miroslav Budmir 

Steven Travers 

Denzil Jenkins 

Mark Hemsley 

Bertrand du Guerny  AFME 

George Andreadis 

Brad Hunt 

John Serocold 

Rebecca Fuller 

Thomson Reuters 

Bill Fenick 

279 

 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EBF 

CESR 

AMAFI 

Stéphane Tyc 

EBF 

Alberto Garcia 
Emanuel De 
Fournoux 

ICAP 

Gorm Praefke 

Ross Barrett 

Pinar Emirdag 

Flowtraders 

Jan de Bolle 

Euroissuers 

Pierre Marshal 

Chi-X 

EACB 

Graham Dick 

TABB Group 

Miranda Mitzen 

Philippe Guillot 

CEPS 

Liquidnet 

EFSA 

EFAMA 

Diego Valiente 

Eva Heffernan 

Stephane Giordano 

Bernard Coupez 

Best execution and conduct of business 
rules 22 January 2010 

Data consolidation 28 January 2010 

EBF 

AFME 

EFAMA 

EFAMA 

EAPB  

EACB  

ESBG  

EFSA 

Georg Baur 

FESE 

Santiago Ximénes 

Tillie Rijk 

Graziella Marras 

LSE 

Graham Goodew 

BATS 

Hans Bretschneider  AFME 
Christoph 
Echternach 

Jonas Myrdal 

Burcak inel 

Steven Travers 

Paul O'Donnell 

John Serocold 

Stephen McGoldrick 

Andrew Bowley 

Stephanie Hubert 

EFAMA 

Bertrand du Guerny 

FIN USE 

Marcin Kawinski 

Euroshareholders 

Casten Heise 

EBF 

Guy Sears 

Kim Lilmose 

CESR 

Diego Escanero 

Euroinvestors/FIN USE 

Guillaume Prache 

CESR 

Alberto Garcia 

Thomson Reuters 

Andrew Allwright 

BOAT /Markit 

Sophia Kandylaki 

Chi-X 

DG COMP 

EFSA 

Denzil Jenkins 

Fabien Kaiser 
Emmanuel de 
Fournoux 

280 

 
 
  
 
 
  
 
  
 
  
 
 
 
 
 
  
 
  
 
  
 
  
 
  
 
  
  
22. 

ANNEX 12: SUMMARY OF PUBLIC HEARING 

Conference on the MiFID review and commodity and exotic derivatives 

20-21 September 2010 

Summary 

DAY 1  

Opening Speeches  

Jonathan Faull (Director General, DG Internal Market and Services, European Commission) 
welcomed all participants and attendees to the conference. He noted the backdrop of intense 
regulatory  reform  in  the  financial  sector  and  the  vital  role  MiFID  has  to  play  in  this.  In 
particular  Mr  Faull  saw  five  areas  where  targeted  modifications  were  needed:  increased 
organisation,  transparency  and  oversight  of  various  market  segments;  continued  progress 
towards a genuine single market for investment services; appropriate regulation to keep pace 
with increasing competition, fragmentation and speed; amendments to meet the new European 
supervisory  structure;  and  finally,  additional  transparency  and  oversight  measures  in  the 
commodity derivatives market. 

Michel Barnier (Commissioner, Internal Market and Services, European Commission) noted 
the importance of MiFID, and its success to date; however he also noted that since the original 
proposal  was  drafted,  the  financial  world  has  witnessed  deep  changes  which  justify  this 
review.  Commissioner  Barnier  stated  that  questions  raised  by  the  crisis  must  not  remain 
unanswered  and  that  he  sought  to  fulfil  four  key  objectives  –  increased  accountability  for 
financial  actors;  transparency  for  all;  continuation  of  fair  competition;  and  restoring 
confidence in the markets and financial intermediaries. He noted that these objectives apply 
comprehensively across the financial landscape and that no markets, activities or players will 
be  left  aside,  including  commodity  derivative  markets.  He  said  that  the  Commission  would 
adopt a proposal in spring 2011. 

Dacian Cioloş (Commissioner, Agriculture and Rural Development, European Commission) 
expressed  his  concern  about  the  impact  on  agriculture  of  excessive  speculation  on  financial 
markets. He noted that across Europe farmers, various food industry players and processors 
and  consumers  were  all  seeking  increased  market  transparency.  The  Commission  must  take 
measures  against  the  extreme  volatility  of  prices  of  agricultural  products.  Commissioner 
Cioloş cited the fluctuations in the milk market over the period 2007-2009 and underlined that 
speculation should not put in danger farms otherwise perfectly viable in normal times. Asking 
for  more  transparency  of  the  financial  markets  and  more  supervision  for  the  derivatives 
markets,  Commissioner  Cioloş  stated  that  the  future  reform  of  the  Common  Agriculture 
Policy will include more elements to fight the volatility of prices and the decrease in farmers' 
incomes. 

In  her  keynote  speech,  Sharon  Bowles  MEP  (Chair,Economic  and  Monetary  Affairs 
Committee, European Parliament) considered that although there are many recent events from 
which  lessons  can  be  learned,  the  ultimate  consideration  of  MiFID  should  be  the  needs  of 
users and investors – these being choice and protection. Mrs Bowles commented that there are 
times when the needs, interests and incentives of the individual and the whole are not always 
the  same,  and  that  this  presents  tough  political  decisions.  In  meeting  these  decisions  key 

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principles  must  be  considered  –  recognition  of  the  difference  between  wholesale  and  retail 
markets; non discriminatory choice and regulation that is appropriate to its level; recognising 
that  liquidity  and  transparency  can  sometimes  be  a  trade  off  and  that  different  asset  classes 
behave  differently;  and  that  markets  are  organic  and  can  not  be  forced.  In  particular,  she 
questioned  if  the  appropriate  balance  for  pre  trade  equity  transparency  had  been  struck,  in 
view of the growth of dark trading. She also noted the technical changes in the market (e.g. 
new  types  of  trading  and  increased  fragmentation),  the  strong  case  to  move  to  intra-day 
monitoring, if not the banning on some types of trading - such as flash orders, and the need to 
move towards a consolidated tape of trade data. 

In the final keynote speech, Carlos Tavares ( Chairman, CESR) highlighted the progress made 
so  far,  but  also  the  need  to  further  develop  MiFID.  He  queried  whether  fragmentation  had 
increased  liquidity  -  citing  that  mitigating  systems  (to  provide  consolidated  information  to 
investors and regulators) are still far from being complete, and summarised seven key points 
to  be  considered  in  the  review  –  enhanced  transaction  reporting;  urgently  implement  a 
consolidated  tape;  review  the  best  execution  concept;  reduce  opportunities  for  regulatory 
divergence;  strengthen  investor  protection;  increase  pre  and  post  trade  transparency;  and 
regulate  new  trading  modalities  e.g.  high  frequency/algorithmic  trading.  Mr  Tavares  also 
noted that the review should anticipate the newly created ESMA and leave room for this to 
implement principles via technical standards. Mr Tavares concluded that markets have proved 
to be dynamic and creative in building new solutions and so regulation must be flexible and 
agile. 

Panel I 

Derivatives – geared for a paradigm shift 

The moderator, Georges Ugeux (Galileo Global Advisors), opened the debate by recalling the 
context of the financial crisis, the US legislative reform and the recent Commission proposal 
on OTC derivatives. 

Brendan  Bradley  (Eurex)  underlined  that  trading  on  organised  venues  and  OTC  has  been 
largely complementary. One of the key differences between the two was the level of pre trade 
transparency which has not been fully addressed in recent consultation as the focus has been 
placed  on  post  trade  transparency  and  the  availability  of  CCP  services.  As  a  result  he 
suggested  that  the  standardisation  approach  and  the  possibility  for  organised  trading  should 
broadly follow the US regulatory approach and that European regulators should provide for a 
level  playing  field  between  regulated  markets  and  MTFs  given  the  similarities  that  exist  in 
their execution functions. 

Erik  Litvack  (Société  Générale)  came  back  to  the  statement  of  the  G20  in  Pittsburgh  on 
trading of all standardised derivatives on organised venues where appropriate. He underlines 
the  differences  and  complementarities  between  trading  on  regulated  markets  which  can 
maximise turnover and liquidity and fits benchmark products and trading OTC which offers 
maximum flexibility for users but less frequency of trading. Post trade transparency for OTC 
products  could  be  possible  only  if  counterparty  risk  is  excluded,  otherwise  it  will  create 
misleading price signals. He insisted on the need to define the reasons for more transparency 
and the fact that there will likely be a trade off between more transparency and the willingness 
of dealers to trade. 

Håkan Feuk (E.ON Energy Trading) underlined the fact that it was crucial to allow efficient 
hedging for corporates, especially in the energy markets. Pushing more trading onto regulated 
markets  could  achieve  increased  liquidity  but  sufficient  flexibility  should  be  kept  to  allow 
effective hedging. For firms which have small volumes to transact, OTC is more efficient and 

282 

 
 
  
 
non financial firms should be able to choose the most efficient venue. Current exemptions for 
commodity firms should remain. 

Rich  Silts  (CFTC),  speaking  in  a  personal  capacity,  confirmed  the  willingness  of  US 
regulators to achieve consistency on both sides of the Atlantic. He gave a summary of the US 
reform  and  subsequent  rules  which  are  being  drafted.  Among  other  reforms,  he  mentioned 
swap execution facilities (SEFs), the main features of which would be trade transparency and 
multiple participants on both supply and demand sides. 

Matt Woodhams (GFI) mentioned that electronic trading was more developed in Europe than 
in  the  US.  A  balance  should  be  found  between  transparency  and  liquidity.  Suitable  trading 
venues need to be created possibly by reproducing the SEF concept in MiFID. 

The rest of the discussion focused on the different recipients of trade transparency. There was 
a  rather  larger  consensus  for  a  complete  and  full  transparency  for  regulators  but  only  high 
level transparency for the public. 

Panel II 
instruments 

Transparency,  efficiency  and  soundness  in  the  trading  of  financial 

The  moderator,  Alexander  Justham  (UK  FSA),  recalled  the  objectives  behind  a  regulatory 
framework for transparency of trading, namely a balance between private and public interests 
in  support  of  fair,  robust  and  efficient  markets.  He  noted  that  fragmentation  of  trading  and 
data in the wake of MiFID, as well as rapid technological developments, underline the need 
for regulation of transparency to keep pace. 

Scott  Cowlling  (Blackrock)  said  a  review  of  MiFID  transparency  rules  should  seek  to 
enhance,  not  rewrite  the  status  quo.  Equity  market  transparency  was  largely  satisfactory, 
while  non-equity  transparency  should  be  pursued  in  the  same  vein,  with  instantaneous 
publication whenever participants were not on risk, and allowing for suitable delays in other 
cases in order to avoid impairing clients' and participants' interests and damaging liquidity. He 
questioned  whether  many  equity  trades  occurring  OTC  were  relevant  for  price  discovery 
purposes. 

Roland  Bellegarde  (NYSE  Euronext)  said  that  there  had  been  a  big  increase  in  opacity  and 
OTC trading in equities since MiFID. He said a large number of equity trades occurring OTC 
were  in  fact  of  a  small  size  and  thus  did  not  need  the  confidentiality  associated  with  OTC 
trading. The future ESMA should have the capability and agility to address loopholes in the 
framework  of  transparency  in  order  to  mitigate  private  interests  from  circumventing  and 
compromising commonly established rules. 

Roger  Barton  (Tradeweb)  said  that  trading  in  various  fixed  income  non-equity  markets  is 
often  characterised  by  relatively  fewer  numbers  of  trades,  but  in  large  sizes.  Matching  of 
clients'  interests  is  unlikely  and  thus  facilitated  by  dealers.  Traditional  means  of  executing 
trades  by  phone  are  increasingly  giving  way  to  electronic  platforms,  which  adjust  levels  of 
transparency provided according to the needs of market users.  

Massimo Mocio (Banca IMI) recalled that the Italian transparency regime was more extensive 
than  MiFID.  He  said  that  while  it  had  not  played  a  direct  role  in  supporting  Italian  banks 
during  the  crisis,  it  did  serve  to  remind  that  liquidity  and  dealers'  capital  commitment  in 
various  non-equity  markets  can  be  fragile.  Financial  institutions  should  help  regulators 

283 

 
 
  
 
formulate  ambitious  and  balanced  transparency  rules,  and  that  CESR's  recent  advice  to  the 
Commission was a good compromise. 

Stephen Luparello (FINRA) said that, in relation to equities, the US was mostly focused on 
improving pre-trade transparency and transparency towards regulators, due to the challenges 
posed  by  dark  pools  and  fragmentation  between  competing  venues.  As  for  non-equities,  he 
said  the  TRACE  model  provided  the  necessary  transparency  for  regulators,  while  achieving 
the right balance in transparency towards the market was always in flux. 

In the discussion that followed greater clarity was sought on the size and nature of the OTC 
market in equities, whether there was a future for the systematic internaliser regime, and how 
transparency  and  various  execution  arrangements  in  non-equities  would  look  like  in  the 
future. 

Panel III 
venues and market participants 

The changing face of trading – achieving a level-playing field for trading 

The moderator, Karel Lannoo (CEPS), observed that the questions analysed by the panel are 
similar to those in 2001 when MiFID was elaborated, namely the one of the balance between 
transparency  and  fragmentation,  though  the  context  has  changed  since.  He  also  pointed  out 
that  MiFID  has  achieved  its  primary  objectives  of  reducing  fees  and  spreads,  but  more 
attention  needs  to  be  given  to  conduct  of  business  rules  and  to  markets  other  than  equity 
markets. 

David Lester (LSE) emphasized the success of MiFID in abolishing monopolies of national 
exchanges, in creating possibilities for new trading venues to appear, in bringing more choice 
and in reducing trading fees and spreads through modern technology. MTFs continue to gain 
market  share.  Harmonised  data  standards  would  allow  effective  consolidation  of  post-trade 
data by the industry and would enhance the transparency of the European equity market. Dark 
pools are an important component of the choice available to market participants, but all dark 
trading  venues  should  be  able  to  execute  within  the  spread  to  deliver  price  improvement. 
Competition  in  trading  must  be  supported  by  an  efficient  and  cost  effective  post-trade 
environment.  Finally,  SME  access  to  capital  should  be  supported  to  help  drive  economic 
growth and job creation. In the UK, the AIM market has been a success. 

Kelly Riley (US SEC), speaking in a personal capacity, underlined that markets have changed 
with automation, but also with the increase in the number of market participants. Applicable 
SEC  regulation  is  similar  to  MiFID  but  has  several  differences  due  to  market  changes  as 
regards for example best execution, information requirements, as well as order matching and 
the  consolidation  of  quotations  to  determine  one  national  best  bid  and  offer.  The  order 
protection rule requires trading centres to direct the order to the venue offering the best price 
when  they  can't  offer  it  themselves.  Dealers  also  have  to  respect  this  rule  for  clients. 
Following  the  flash-crash,  the  SEC  issued  different  proposals  on  regulating  high-frequency 
trading, dark pools, flash orders and transparency in order to achieve investor protection and 
fair markets. 

According  to  Jonathan  Eardley  (QCA/European  Issuers)  listing  rules  under  MiFID  are  not 
prohibitive  for  large  firms  and  there  is  no  evidence  of  a  need  to  change  this  for  large  caps. 
However, for small illiquid caps, rules need to be proportionate. The role of the Commission 
and of national government is to foster competition. This does not necessarily need to be done 
through uniform markets. On the contrary, markets have to meet investors' expectations. 

284 

 
 
  
 
Eleanor Jenkins (Morgan Stanley) expressed the view that the key driver to the success of the 
markets  today  is  the  choice  of  execution  methods  for  different  orders.  These  execution 
methods  are  not  mutually  exclusive.  She  pointed  out  that  better  understanding  is  needed 
regarding  different  types  of  models  including  the  methods  and  organisation  of  crossing 
systems. The working group set up by CESR should improve the quality of post-trade data. 
Without  this,  a  consolidated  tape  would  make  little  sense.  She  expressed  the  wish  that 
regulation  be  evidence-based.  According  to  her,  there  was  no  significant  increase  in  OTC 
trading  after  MiFID,  but  the  methods  of  trading  have  changed.  With  regards  to  Broker 
Crossing  Systems,  this  activity  does  not  represent  a  material  proportion  of  pan-European 
trading and arguably has no effect on price formation. Moreover, the provision of capital for 
risk filling purposes, which by its nature has to remain OTC, has always been a core broker 
activity  and  provides  an  important  and  valued  service  to  institutional,  retail  and  corporate 
clients. Integral to this is the ability of a broker to delay the publication of large risk trades 
and it would be damaging to European liquidity, especially in illiquid securities if this ability 
were to be taken away. Finally, the systematic internaliser regime is not achieving its aim. It 
makes little sense to mandate pre-trade transparency when only the investment firms' clients 
can interact with the quotes generated creating unnecessary noise on the tape. 

John Woodman (Chi-X Europe) underlined that one person's level playing field is another's 
disadvantage, because investment objectives differ, for instance according to the time of the 
investment  and  the  type  of  investor.  Fostering  choice  of  venues  according  to  the 
characteristics  of  the  order  has  been  one  of  the  main  benefits  of  MiFID.  Lower  execution 
costs  are  important  for  efficiency,  but  the  question  is  if  new  trading  venues  piggy  back  on 
existing  exchanges,  including  taking  the  most  lucrative  part  of  the  activity  of  regulated 
markets. He believes this is not the case, because new venues have grown the total market. 
Moreover, price formation occurs in new venues also and is more than centralising orders in a 
book.  It  is  also  about  post-trade  information  from  all  venues.  Concerning  high  frequency 
trading, made possible by technological developments, he considers it helps provide liquidity 
to  markets  and  thereby  drive  execution  costs  down.  Provided  the  risks  of  market  abuse  are 
prevented  through  the  application  of  existing  rules,  high  frequency  business  should  not  be 
inhibited unless it proves abusive or harmful. In this context, short-selling is also a valuable 
service, a natural adaptation of the market. The focus now should be on encouraging cheaper 
post-trading systems and on providing more consistent post trade information. 

Judith  Hardt  (FESE)  said  that  regulated  markets  played  a  key  role  in  providing  liquidity 
during the crisis, which shows that the structure of the markets they operate (neutral, robust, 
open,  etc)  brings  real  benefits  to  the  whole  economy.  MiFID  has  had  a  positive  impact  on 
improving competition among regulated venues, enabling pan-European trading and reducing 
execution  costs.  However,  MiFID  has  not  increased  choice  for  all  and  has  not  increased 
competition between all market players. There is a big amount of trading on unlit venues. The 
part  of  unlit  trading  on  regulated  markets  and  MTFs  is  well  known,  but  the  trading  that 
happens  on  an  OTC  basis  remains  more  opaque.  However  the  best  available  public  sources 
indicate that this trading might be quite significant when compared with other venue types – 
and more significant that one would have expected after MiFID, which allowed OTC only as 
an  exception.  This  has  undermined  price  formation  as  well  as  fair  competition  and  proper 
supervision.  She  stressed  that  the  same  business  should  be  subject  to  the  same  rules.  FESE 
thinks the price discovery process should be improved through more rigorous pre- and post-
trading  transparency  for  all  venues  engaged  in  multilateral  trading  and  a  clear  definition  of 
OTC  to  ensure  that  only  truly  OTC  trades  remain  outside  the  trading  venue  rules.  She  also 
stressed  that  funding  for  mid-size  caps  and  SMEs  should  be  analysed  more  closely,  as  the 
pan-European  trading  in  blue  chips  encouraged  by  MiFID  has  had  the  undesirable  and 

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unintended effect of restricting the ability of regulated markets to provide access to SMEs. As 
SMEs are not able to change jurisdiction easily, they will always need access to local capital 
markets. The MiFID Review needs to take a close look at their needs.  

Replying to the question on the need to increase regulation of high frequency traders, Eleanor 
Jenkins warned against a regulation based on definitions as opposed to a regulation based on 
effects. Judith Hardt recalled that despite the advantage of high frequency trading in providing 
liquidity, there is a limit to speed. On the question of the need to maintain the MTF category, 
David  Lester  observed  that  the  market  needs  MTFs  because  they  innovate  and  they  often 
operate  on  a  pan-European  basis,  going  beyond  the  national  markets  that  regulated  markets 
were operating in before MiFID. Judith Hardt also observed that it is much more expensive to 
run a regulated market than a MTF, notably due to different levels of supervisory oversight. If 
this trend continues, listing fees may have to increase.  

Panel IV 

Investor protection after the crisis – repair or reform 

The  moderator,  Jean-Paul  Servais  (CBFA)  emphasised  the  great  importance  of  MiFID  as  a 
step  forward  for  investor  protection  across  Europe.  He  recalled  the  recent  contributions  of 
CESR  to  the  review  in  this  area:  advice  to  the  Commission,  a  letter  on  specific  additional 
areas, and a paper on client classification. He also mentioned some of the topics covered such 
as inducements, intermediaries' internal approval process for new services and products. the 
classification of UCITS as non-complex instruments, and the treatment of different categories 
of clients.  

Fabrice De Marigny (Mazars) noticed that MiFID sets a satisfactory regulatory framework for 
the distribution of investment products and that fine tuning may be appropriate in few areas 
such as some aspects of client categorization and information on risk of financial instruments, 
which should include worst case scenarios. He recalled the PRIPs workstream and welcomed 
MiFID being the benchmark for selling practices. He emphasised that investor protection is 
one  of  five  broad  policy  areas  covered  by  MiFID  (besides  fragmentation,  competition, 
liquidity  and  transparency).  The  five  areas  are  clearly  interconnected.  For  instance,  he 
mentioned best execution as a topic touching upon different areas and deserving attention. 

Alain  Pithon  (AFG)  said  that  portfolio  managers  are  classified  by  brokers  as  eligible 
counterparties and consequently do not enjoy best execution (while they have best execution 
obligations  towards  their  clients).  He  recommended  a  careful  assessment  of  any  perceived 
problems in dealing with the treatment of inducements in the case of portfolio management. 
He  expressed  disagreement  with  positions  emerged  in  CESR  as  to  the  classification  of 
UCITS.  He  said  that  UCITS  are  appreciated  by  retail  clients,  they  are  liquid  and  strictly 
regulated in terms of management and should remain all classified as non-complex financial 
instruments. 

Guillaume Prache (EuroInvestors) expressed a general pessimistic view since, in spite of the 
crisis,  he  sees  financial  operators  back  to  “business  as  usual”.  He  recalled  that  investor 
representation at the European financial policies level is an important area in the Commission 
communication on “Driving European recovery” that has not been followed through yet. He 
recalled  the  importance  of  real  -  independent  -  advice  and  the  negative  impact  of 
compensation mechanisms on the quality of advice and also said that inducements provisions 
are actually not enforced. He mentioned the importance of the correct and full implementation 
and application of the regulatory framework by supervisors. He asked not to delay the PRIPs 
work stream and emphasised that MiFID only covers a fraction of investment products sold to 
retail investors. 

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Bernhard Koch (Raiffeisen Zentralbank Osterreich AG) noted that MiFID was implemented 
in  Member  States  only  at  the  end  of  2007.  The  implementation  was  costly  and  it  would  be 
premature to conduct a wide review of the directive. He emphasised that, in assessing investor 
protection  measures,  the  overall  body  of  legislation  should  be  taken  into  account,  including 
consumer law and civil law. The overall picture seems satisfactory in terms of protection of 
investors. 

Maria  Velentza  (European  Commission)  clarified  that  the  PRIPs  work  stream  is  advancing. 
She mentioned that, for selling practices, it will be part of the MiFID review and, in the case 
of  insurance  products,  should  be  included  in  the  parallel  review  of  the  Insurance  Mediation 
Directive. 

In  the  subsequent  discussion  the  relevance  of  distinguishing  independent  advice  was 
mentioned.  It  was  also  noticed  that  there  is an  increasing  retailization  of  complex  products. 
Mr  Prache  recalled  the  importance  of  proper  financing  for  investors  associations  and 
mentioned  the  commitment  of  the  European  Commission  in  that  direction.  Mr  Pithon 
expressed the hope that US and EU authorities are equally committed to implement any new 
rules resulting from G20 agreements. Mr De Marigny underlined that the current flexibility of 
client  categorisation  rules  should  remain  untouched  (opt-in  and  opt-out  mechanisms).  He 
mentioned the impressive budget for investor protection issues in the US, but he also argued 
that competing US-style agencies do not seem necessary or desirable; rather a dedicated unit 
in ESMA would be useful. 

Panel V 

Data consolidation – fixing the failures and supporting best execution 

Maria Velentza (European Commission) opened the discussion by asking the panellists how 
they  understand  the  concept  of  a  consolidated  tape,  if  they  agree  with  the  idea  of  a 
consolidated tape in case of a positive response, if it should be run by a public utility or if they 
prefer a decentralised solution and if they have any concrete proposals as to how to improve 
the best execution rule in MiFID. 

The moderator, Rhodri Preece (CFA Institute), pointed out that Europe does have problems 
regarding the timeliness, quality and cost of data. In a survey, 68% of CFA Institute members 
considered  trade-reporting  as  problematic  with  64%  believing  that  the  cost  of  data  had 
increased post-MiFID. 45% of members think that best execution had become more difficult 
and 82% were in favour of a consolidated tape. 

Rudolf Siebel (BVI and EFAMA) considered improvements in data consolidation and quality 
as  one  of  the  main  issues  of  the  MiFID  Review.  He  regarded  the  introduction  of  Approved 
Publication  Arrangements  (APAs)  as  a  necessary  first  step  in  that  direction,  however,  he 
advised  to  be  careful  in  relation  to  the  creation  of  a  mandatory  consolidated  tape.  A 
framework should rather be developed in cooperation between CESR and the industry.  

Andrew  Allwright  (Thomson  Reuters)  blamed  problems  such  as  over-reporting,  erroneous 
reporting,  the  lack  of  flagging  of  relevant  trades  for  investors  and  the  high  costs  on 
insufficient  detail  in  MiFID  on  pre-  and  post-trade  transparency  rules  and  a  lack  of 
enforcement.  In  addition,  he  held  the  lack  of  clarity  regarding  best  execution  obligations 
responsible for investment firms not demanding a consolidated tape. He did not agree with the 
imposition  of  a  mandatory  consolidated  tape  as  users  wanted  customised  data  rather  than  a 
one size fits all approach, it would entail limitation on pricing, would be costly to run and to 
finance and it would pose significant technical challenges. A demand for a consolidated tape 

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in  his  view  could  only  be  created  if  investment  firms  were  judged  on  their  performance 
against the consolidated data. 

Charles-Albert  Lehalle  (Credit  Agricole)  questioned  the  possibility  of  a  traceability  of 
execution  as  the  landscape  of  liquidity  changes  every  two  milliseconds.  Hence,  in  his  view 
pre-trade information does not allow for a determined decision and market participants should 
rely more on post-trade information. As useful regulatory measures he considered a recording 
of orders for surveillance purposes. For the price formation process, a better quality of post-
trade  data  should  be  ensured.  His  conclusion  has  been  that  dark  pools are  not  that  different 
from lit pools with so blurred a picture pre trade. 

Holger  Wohlenberg  (Deutsche  Börse)  emphasised  that  MiFID  should  continue  without  a 
mandatory  consolidated  tape  as  market  structures  in  Europe  are  different  from  the  US.  He 
advised  on  harmonising  trade-reporting  in  the  EU,  the  introduction  of  standards  for  APAs 
modelled on those for Trade Data Monitors in the UK, application of sanctions by supervisors 
and a reduction of delays in reporting. If all that was implemented the industry could develop 
a solution at competitive prices compared to the US. 

In  the  following  discussion  Mr  Siebel  and  Mr  Allwright  considered  that  there  is  neither 
demand nor need for consolidated pre-trade data. Mr Wohlenberg was happy with the existing 
best execution criteria. Mr Allwright thought that more clarity on the price elements of best 
execution would be welcome. Dr Lehalle explained that he rejected a mandatory consolidated 
tape because without a trade through rule it would not have the same importance as in the US. 

Conclusions Day 1  

Maria  Velentza  (European  Commission)  concluded  the  first  day  with  the  following 
summation. 

Panel I: The EU proposals on OTC derivatives, central counterparties and trade repositories 
goes  a  long  way  towards  improving  the  regulation  of  derivatives  markets  but  the  MiFID 
review  has  still  a  big  role  to  play.  The  G20  commitments  must  be  honoured  and  trading 
should be migrated to organised venues as far as possible. In addition, new and harmonised 
powers for regulators appear to be necessary to introduce an appropriate oversight regime for 
the derivatives area. 

Panel II: Additional rules on transparency in equity and non-equity markets appear to be an 
essential part of the upcoming MiFID review. Doing nothing in this area cannot be an option 
after  the  financial  market  crisis.  However,  new  regulatory  requirements  must  be  carefully 
calibrated  in  order  not  to  damage  the  liquidity  of  markets.  Extensive  consultations  will  be 
carried out to achieve this goal and we as the Commission encourage all parts of the industry 
to  submit  their  views.  In  substance,  key  areas  for  review  seem  to  be  the  aligning  and 
clarifying of the pre-trade waivers regime for shares and defining suitable trade-transparency 
regimes for other asset classes. 

Panel III: Creating more efficient and dynamic markets through competition is one of the key 
elements of MiFID that must be maintained. Levelling the playing field among trading venues 
can contribute to that end and should be addressed in the MiFID review. Among the issues to 
be  discussed  in  the  review  will  certainly  be  the  establishment  of  appropriate  regulatory 
requirements  for  crossing  systems.  Also  the  impact  of  and  risks  associated  with  high-
frequency trading seem to call for a regulatory response. 

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Panel  IV:  The  protection  of  investors  –  retail  investors  in  particular  –  has  been  one  of  the 
main goals of MiFID. We are aware that the industry had to make significant efforts to adapt 
to  the  MiFID  requirements.  Nonetheless,  the  financial  market  crisis  has  demonstrated  that 
some additional adjustments need to be made. Hence, the review should aim to strengthen the 
investor protection rules as well as their enforcement. 

Panel  V:  Given  the  current  state  of  post-trade  transparency  data,  a  regulatory  intervention 
appears to be necessary. Standards in all likelihood need to be implemented to harmonise data 
outputs and facilitate consolidation. In addition, Ms Velentza saw merit in further exploring 
the options of mandating a consolidated tape. 

DAY 2 

Maria Velentza (European Commission) opened the day by recalling the G20 agreement "to 
improve the regulation, functioning, and transparency of financial and commodity markets to 
address  excessive  commodity  price  volatility".  Policy-makers  are  tasked  notably  with 
increasing  oversight  of  commodity  and  futures  markets,  as  well  as  related  OTC  markets,  in 
order to improve their functioning for price discovery and hedging purposes. She noted that 
there is significant discord around the impact of increased investment flows in commodities 
and commodity derivatives on prices, and encouraged stakeholders to contribute their views 
on the required policy actions. 

In  his  keynote  speech,  Michel  Prada  (Former  Chair,  AMF)  said  that  recent  developments 
demonstrate  that  the  proper  functioning  of  commodity  derivative  markets  was  at  risk.  As  a 
result,  public  authorities  and  financial  regulators  had  a  duty  to  improve  regulation  and 
intensify oversight. Increased investment flows, the presence of new market participants, an 
increasing  number  of  available  derivative  products,  and  the  growth  of  alternative  means  of 
trading  presented  challenges  for  the  existing  regulatory  framework  and  for  price  formation. 
He  emphasised  the  need  to  avoid  repeating  some  of  the  mistakes  of  the  past.  No  party, 
instrument, or venue should be overlooked. Transparency and better information flows were 
critical. The EU should consider a dedicated framework of regulation for commodity markets, 
with  comprehensive  but  proportionate  requirements  for  all  players,  instruments,  and  trading 
platforms  across  both  physical  and  financial  markets.  Supervision  of  day-to-day  market 
functioning would reside with financial regulators, with various commodity authorities tasked 
with overseeing market fundamentals and implementing sectoral policy. 

Panel I 

The outlook for global commodity markets 

The  moderator,  Philippe  Chalmin  (University  of  Paris  Dauphine),  started  the  debate  by 
presenting data showing that commodity markets are undergoing big changes with prices on 
average  three  times  higher  than  in  2000.  Commodity  prices  evolution  is  subject  to  the 
combined  effects  of  supply,  demand  and  speculation.  Compared  to  financial  products, 
commodities have a much longer cycle because of physical constraints on the production. 

Christof Rühl (BP) said that it was difficult to substantiate that volatility in oil prices is due to 
speculators. The increase in financial transactions on commodities started before the hike in 
prices. Long positions in derivatives are said not to have driven prices or inventories up. Oil 
prices  are  fundamentally  driven  by  supply  and  demand  and  there  is  a  5  to  6  months  gap 
between the decisions by producers (with OPEC playing a central role) to increase or decrease 
output and the actual effect on prices or inventories because of this new production. 

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Myriam Vander Stichele (SOMO) insisted on the fact that the interests of consumers needed 
to be taken into consideration in the new regulation. In addition, a precautionary principle and 
the specific nature of commodity markets in everyday well-being should also be integrated. 
The  new  regulation  needs  to  define  position  limits  and  the  type  of  intervention  allowed  as 
well as increasing the information available to the public and to regulators. 

Jorge  Montepeque  (Platts)  said  that  markets  are  reacting  to  fundamentals  and  fiscal  and 
monetary conditions and that they are efficient. He pointed out that the oil market is getting 
more global with new pipelines capacities being rolled out and increasingly influenced by the 
economic evolution of Asia and particularly China. 

Jonathan  Whitehead  (Barclays)  mentioned  that  the  fundamentals  in  the  evolution  of 
commodity prices lie with the physical markets. Speculation was said not to impact on prices. 
Mandatory  clearing  will  make  hedging  more  difficult  by  requiring  hedgers  to  hold  and 
manage  flows  of  cash.  Standardisation  has  its  limits  and  many  products  are  actually  not 
traded. Transaction reporting obligations and positions limits should be pursued with care to 
preserve confidentiality while allowing taking large positions for people who need them. 

The  subsequent  discussion  and  questions  from  the  audience  raised  various  points  from  the 
issue of the lack of a clear legal definition of emission allowances to further questions on the 
exact role of speculation on the commodity markets. Various audience members challenged 
the assumptions and analysis of those panellists who claimed that the impact of speculation on 
prices is limited.  

Panel II 

Global regulatory perspectives 

The  moderator,  Don  Casturo  (Goldman  Sachs),  introduced  the  debate  by  saying  that  rules 
should be harmonised across financial and physical markets. Efficient markets require greater 
transparency  to  regulators  whereas  the  adequate  level  of  transparency  towards  the  public 
should be properly analysed. 

Wayne Smith (French AMF) recalled that these markets are extremely diverse which create 
challenges. He made three main recommendations to improve the regulation and oversight of 
commodity  markets:  (1)  All  market  participants  should  be  comprehensively  regulated  and 
supervised.  This  implies  a  narrowing  of  the  MiFID  exemptions  for  specialist  commodity 
firms.  Naturally  regulators  should  acquire  the  necessary  expertise  to  carry  out  proper 
oversight of these participants. (2) The G20 roadmap for OTC derivatives should be applied 
swiftly  to  commodity  derivatives.  Promoting  trading  on  exchanges  will  bring  the  benefit  of 
increased  competition  and  fairer  prices.  (3)  The  transparency  of  the  underlying  physical 
market  should  be  improved.  In  parallel  the  cooperation  between  regulators  should  be 
reinforced. 

Alexander  Justham  (UK  FSA)  acknowledged  that  no  single  category  of  traders  could  be 
pointed  out  as  being  the  main  group  influencing  prices.  Against  that  backdrop  he  gave  the 
message that there are clear areas where regulation could be improved: (1) Transparency of 
trading  towards  regulators  should  be  improved  by  implementing  the  G20  roadmap  on  OTC 
derivatives. (2) Market participants should have some regulatory net although proportionate to 
the  risks  they  pose.  (3)  Position  reporting  should  be  introduced  as  it  is  key  information  for 
regulators  and  market  participants  alike  to  understand  the  dynamics  of  the  market.  (4) 
Regulators  need  a  broader  set  of  powers  than  narrowly  defined  position  limits  to  tackle 
excessive price volatility, including powers to address attempts at market manipulation. 

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Johannes  Kindler  (Bundesnetzagentur)  said  that  markets  need  to  be  better  protected  by:  (i) 
improving  transparency  of  the  trading  process,  (ii)  a  proper  regulatory  coverage  of  OTC 
derivatives, and (iii) enhancing the oversight of these markets. The regulatory regime should 
take into account the whole market, both financial and physical as these markets impact each 
other. He also drew the attention to the importance of fundamental data transparency. 

Sony Kapoor (Re-Define) stressed that commodity markets are fundamentally different from 
securities markets. Although these markets may not contribute to financial systemic risk, they 
contribute  to  food  and  basic  well-being  risk.  Markets  are  there  to  serve  genuine  end-users, 
while  intermediaries  should  remain  liquidity  providers.  Investor-interest  in  commodities  is 
misplaced.  Hence  he  called  for  the  EU  to  develop  a  different  regulatory  approach  for 
commodity  markets.  Transparency  is  paramount in  these  markets  as  is  the  idea  of  positions 
limits, but these are just the start.  

Rich  Shilts  (CFTC),  speaking  in  a  personal  capacity,  outlined  the  US  regulation  of 
commodity  derivative  markets  and  upcoming  changes.  The  CFTC's  market  surveillance 
program draws on multiple sources of information among which one of the key tools are the 
highly confidential data on the activity and positions of individual traders derived from their 
large trader report system. The Dodd-Frank Act aims to extend the existing CTFC's oversight 
of exchange traded derivatives to OTC commodity derivatives. It also provides for the setting 
of  position  limits  on  all  non-hedged  positions  for  future  contracts  in  physical  commodities, 
including  agricultural  products,  energy  and  metals  with  the  aims  of  combating  excessive 
speculation  and  manipulation,  ensuring  market  liquidity  and  protecting  the  markets'  price 
discovery function.  

Panel III 

Users and producers 

The  moderator,  Anthony  Belchambers  (FOA),  introduced  the  debate  by  underlying  that  the 
role  played  by  speculators  in  markets  has  both  pros  and  cons.  Pros  come  in  the  form  of 
additional  liquidity.  Cons  come  in  the  form  of  short  term  price  spikes  and  acceleration  of 
price trends. In light of this, any regulatory intervention will need to be carefully considered 
and evidence-based. In addition it should be properly tailored to meet the specificities of the 
commodity  markets.  A  one-size-fits-all  approach  with  rules  for  banks  spilling  over  to  non-
banks would be disproportionate. Finally enhancing risk management capabilities of market 
participants is as critical as building safer derivatives markets. 

Yves  Vercammen  (ENI)  said  that  the  trading  arm  of  ENI  uses  commodity  derivatives  to 
hedge their commercial and financial risks arising from their underlying physical activity. As 
a result their trading activity does not contribute to systemic risk. This is why he stressed the 
importance  of  taking  the  specificities  of  the  commodity  business  when  devising  any 
regulatory rules. He gave the example of the accounting standards (more specifically IAS 32 
& 39) as poor practice based on an assumption of "one size fits all". In terms of transparency 
any  additional  information  made  available  should  be  relevant  information  which  allows 
market participants to better understand the price formation process.  

Paul  Dawson  (RWE)  considered  the  main  challenge  to  be  transparency.  Regulators  do  not 
have  up  to  now  the  necessary  information  to  understand  what  is  happening  in  the  markets. 
The forthcoming EU energy transparency and market integrity regime will bring significant 
benefits. It will consist of three main legs: (i) transparency of fundamental data, (ii) reporting 
of trades irrespective of where it takes place, and (iii) alignment of the standards for conduct 
and integrity with the financial markets standards. He did not think action beyond this tailor-
made  regime  was  necessary  at  this  stage,  saying  that  neither  these  markets  nor  the  market 

291 

 
 
  
 
participants  pose  any  systemic  risk.  In  addition  there  is  no  interaction  with  retail  investors. 
Hence the case to extend financial regulation to power and gas trading has still to be made. 
Lastly  the  focus  should  be  instead  on  increasing  competition  in  the  physical  markets.  The 
current  triangle  of  regulation  the  energy  companies  are  subject  to,  i.e.  financial,  energy  and 
competition is in itself a challenge.  

Fausto  Filice  (Cargill)  expressed  the  view  that  the  system  that  exists  today  is  not  broken 
although it could be improved. The factors for efficient and well functioning futures markets 
are the following: (i) the size of the underlying cash market, (ii) the liquidity of the futures 
markets, and (iii) the convergence between the futures contracts and the underlying at the time 
of delivery. He added that convergence between futures and the underlying cash markets acts 
as a natural deterrent for long term speculators. With the reform of the Common Agricultural 
Policy, producers and consumers will have to adapt to the increased volatility in the physical 
markets. Efficient futures markets can help them to deal with this increased volatility. He was 
in  favour  of  a  certain  number  of  regulatory  measures  to  maintain  the  efficiency  of  the 
markets:  (i)  regulators  and  exchanges  should  fix  the  convergence  problem  by,  for  example, 
expanding  the  number  of  delivery  points,  (ii)  the  introduction  of  position  limits  for  certain 
categories  of  market  participants,  and  (iii)  increasing  transparency  by  the  introduction  for 
example of a US type of Commitment of Traders report. 

Pekka Pesonen (COPA COGECA) said the he current reality for farmers and cooperatives of 
the  physical  markets  has  to  be  taken  into  account.  Farmers  are  exposed  to  severe  price 
volatility.  Agricultural  markets  are  connected  to  world  markets  which  expose  farmers  to 
foreign exchange volatility. Instability in agricultural markets has repercussions on other EU 
stakeholders and industrial sectors. A key tool farmers have at their disposal to deal with this 
volatility and instability is the futures markets. However these markets should respond to the 
need  of  greater  transparency.  Comprehensive  transaction  reporting  should  be  introduced. 
Information  about  the  trading  activity  of  different  categories  of  traders  should  be  made 
available. Farmers should also get direct access to the markets. Transparency would also be 
greatly enhanced if the EU had its own tool to analyse world supply and demand, improving 
the consistency and availability of fundamental data about the underlying physical markets.  

In  the  ensuring  discussion  several  questions  were  raised  about  the  size  and  profitability  of 
trading activities of large corporate end-users. The panellists concerned said that this financial 
information  is  publicly  available  but  that  it  is  very  difficult  to  draw  the  boundary  between 
hedging and speculative activities. Some transactions may not qualify as hedging transactions 
under the international accounting standards but still be backed by underlying physical assets. 
European Flour Millers meanwhile advocated for an exemption in favour of end users from 
the obligation to report to trade repositories as these deals do not contribute to systemic risk. 
The  importance  for  the  Commission  to  consult  all interested  parties  as  part  of  its  work  was 
also recalled. 

Panel IV 

The road ahead for EU energy and emissions markets 

The  moderator,  Simone  Ruiz  (IETA),  opened  the  panel  by  mentioned  three  priorities  in 
ongoing EU energy and emissions work: (i) securing conditions for businesses to continue to 
manage their production and carbon-related risks; (ii) adapting new regulatory requirements 
to the circumstances of the different commodities; (iii) streamlining reporting requirements to 
regulators. 

Simon  Smith  (Shell)  considered  that  many  parts  of  the  G20  derivatives  roadmap  were 
unsuited  for  commodity  trading.  He  recalled  the  2008  advice  by  EU  securities  and  banking 

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regulators  that  commodity  firms  do  not  represent  a  source  of  systemic  risk.  He  said  that 
clearing  was  well-established  in  various  commodity  derivative  markets,  that  Basel  rules  on 
capital  were  not  adapted  to  the  industry,  and  that  position  limits  were  not  helpful.  He  did 
agree  however  that  the  various  transparency  developments,  for  example  trade  repositories, 
could  help  alleviate  concerns  over  excessive  speculation  and  that  better  data  flow  on 
fundamentals should be required in sectoral legislation. 

Alexandre  Marty  (EDF  Trading)  said  that  power  companies  occupy  a  central  role  in 
electricity,  gas,  coal  and  emissions  markets,  where  prices  are  closely  interlinked.  He 
underlined various specific features of emissions markets, for example their origin in political 
decisions, their dematerialised nature, and their high rate of central clearing. He said that more 
detailed  information  on  fundamentals  such  as  supply  and  demand  of  emission  allowances 
would  be  welcome,  and  argued  that  hasty  solutions  for  enhancing  oversight  and  market 
integrity should be avoided. He mentioned that financial regulators could well play a bigger 
role in micro-level supervision, with energy regulators monitoring market fundamentals. 

Fredrik  Voss  (Nasdaq  OMX)  commented  that  the  basic  principles  for  regulating  different 
commodity  derivatives  should  be  the  same,  with  sufficient  latitude  to  take  into  account 
notably  different  physical  delivery  mechanisms.  Liquidity  in  today's  EU  power  and  gas 
market was poor and more trading by new investors was to be welcomed in order to improve 
economic  efficiency  and  price  discovery.  A  major  challenge  today  was  improving 
competition  in  the  physical  market.  Levelling  the  playing  field  for  hedging  between 
exchange-based  and  OTC  instruments  was  welcome  although  he  was  sceptical  about 
mandatory clearing. 

Jeremy  Elliott  (ICAP)  said  that  competition  between  commodity  derivative  trading  venues 
was  helping  efficiency.  For  example  electronic  trading  and  central  clearing  were  well 
advanced  in  energy  and  emissions  markets,  compared  to  some  other  derivative  classes.  He 
stressed  that  the  focus  today  should  be  on  increasing  automation  and  further  developing 
clearing, as well as setting up efficient trade repositories.  

In the ensuing discussion, panellists were challenged on why the G20 roadmap on derivatives 
was  inappropriate  for  commodity  derivatives,  why  position  limits  shouldn't  also  apply,  and 
how  to  ensure  a  level-playing  field  between  different  participants  in  commodity  markets. 
They commented that position limits had not dampened volatility in the US, that a transparent 
subsidy constituted a better means of price control, and that all participants in commodity and 
commodity derivative market should be better identifiable in the future.  

Conclusions Day 2 

Maria Velentza (European Commission) concluded the final day of the review of MiFID and 
commodity  derivatives  by  reiterating  that  measures  designed  for  commodity  derivatives 
markets should and will be an integral part of the MiFID review. She noted the widespread 
agreement  regarding  the  increasing  "financialisation"  of  commodity  derivatives,  that  the 
implications of this beyond financial markets (e.g. global food markets) deserved study, and 
that  if  necessary,  a  preventive  policy  approach  may  be  required.  She  concluded  with  the 
following  summation.  Panel  I:  Commodity  and  commodity  derivative  markets  have 
experienced  developments  of  late  that  do  pose  regulatory  challenges.  The  regulators  and 
supervisors responsible for these markets need to strike the right balance when dealing with 
these  challenges  to  ensure  functioning  and  sound  markets.  An  enhanced  cooperation  of  the 
various regulators and supervisors involved seems to be key.  

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Panel II: The message from the G20 is certainly very clear that action must be taken to tackle 
the volatility we experienced in commodity markets. Of course, the Commission will respond 
to  this  message  swiftly  and  take  appropriate  regulatory  action.  We  have  a  number  of 
initiatives in the pipeline which will apply to commodity derivatives markets in particular. In 
the  field  of  DG  Markt  Ms  Velentza  noted  in  particular  the  EMIR  legislation,  the  PRIPS 
initiative and the reviews of MiFID and of the Market Abuse Directive.  

Panel III: The European Commission is aware that commodity derivatives markets function 
to some extent in a different fashion from equity markets, therefore, solutions must be found 
that  fit  the  characteristics  of  these  markets.  To  that  end  Ms  Velentza  found  the  ideas  and 
opinions expressed during the course of the day very helpful and said that the Commission is 
keen to continue the dialogue with all stakeholders also in the future.  

Panel  IV:  Energy  and  emissions  markets  are  also  very  specific  in  their  functioning  and  the 
development of "tailor-made" regulatory solutions for these markets should be explored. For 
example, the emissions markets have a significant number of SME participants who need to 
fulfil their obligations in respect of submitting CO2 allowances. Imposing a wide array of the 
financial markets regulation upon them does not appear to be proportionate. However, market 
integrity  needs  to  be  upheld  at  all  times.  In  so  far  as  necessary,  adequate  supervisory  tools 
should be developed to guarantee market conditions that benefit the European economy as a 
whole.  

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23. 

ANNEX 13: SUMMARY OF THE REPLIES TO THE PUBLIC CONSULTATION  

The  consultation  ran  from  8  December  2010  to  2  February  2011.  We  received  around  360 
replies from organisations and nearly 4000 replies from citizens, on two distinct issues.481  

Details by stakeholder group 

The summaries below cover the aggregate views of stakeholders across nine groups: (i) public 
authorities;  (ii)  banks,  brokers  and  their  trade  associations  (sell-side);  (iii)  asset  managers, 
funds and their trade associations (buy-side); (iv) market operators and exchanges; (v) retail 
investor  associations;  (vi)  non-financial  corporates;  (vii)  academics;  (viii)  service  providers; 
(ix) other (including issuers, NGOs, law firms etc.).  

Public authorities (approximately 29 replies) 

1. Align requirements for venues and introduce Organised Trading Facilities (OTFs) A 
small majority is in favour but respondents raise several concerns. Some have doubts about, at 
once, adding a new venue and minimising differences in requirements between them. Some of 
the latter did however consider increasing cooperation in market surveillance between venues 
to be desirable. One opposed it as impractical and another said this should be treated under 
MAD.  Two  respondents  suggested  subsuming  systematic  internalisers  into  the  new  OTF 
category.  One  opposed  a  general  OTF  category  as  well  as  clarifying  that  crossing  cannot 
overlap with systematic internalisation and MTF-type multi-party interaction. 

2. Mandatory trading of clearing eligible and sufficiently liquid derivatives on OTFs A 
small majority is in favour. One explicitly opposes mandates, and prefers targets. Another is 
against  requiring  eligible  OTFs  to  be  multilateral  in  character,  prefers  to  consider 
standardisation  instead  of  clearing-eligibility  as  a  better  basis,  and  suggests  non-financial 
users should be exempt from any requirement.  

3.  Introduction  of  tailored  regime  for  SME  markets  A  small  majority  is  against  the 
introduction of a new SME segment. Two say it should only be under the MTF-category, not 
the regulated market category. 

4.  Authorisation  of  and  increase  in  organisational  requirements  for  all  HFT  firms 
Respondents are mostly in favour. One says authorisation should hinge on whether the HFT 
firm is a direct member of a trading venue or a user of direct market access. Another says only 
direct members who are HFT firms should be authorised.  

5.  Additional  requirements  for  firms  providing  sponsored  or  direct  market  access  The 
majority  agree  with  the  proposals.  One  respondent  says  each  algorithm  should  be  uniquely 
identifiable to the regulator via a code.  

6.  Reinforcement  of  organisational  requirements  for  organised  venues  Respondents 
unanimously support the proposal. 

7. Introduction of order-to-execution ratio There is no clear support for the proposal. The 
few replies received are evenly divided.  

8.  Harmonised  application  of  pre-trade  transparency  waivers,  reduction  of  post-trade 
delays and extension of transparency to shares traded only on MTFs or OTFs (including 

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new  SME  markets)  A  large  majority  support  the  proposals.  Some  do  not  agree  with  the 
proposal  to  publish  remaining  stubs  of  unexecuted  large-in-scale  orders  or  to  consider 
actionable  indications  of  interest  as  orders.  One  respondent  prefers  to  abolish  the  reference 
price waiver. One respondent suggests further calibration of the transparency regime may be 
needed for SME markets.  

9.  Calibrated  pre-  and  post-trade  transparency  regime  for  bonds,  structured  finance 
products,  and  derivatives  The  majority  broadly  agree  on  the  post-trade  transparency 
proposals,  but  some  disagree  with  extending  the  requirements  beyond  clearing-eligible 
derivatives. Most disagree with devising pre-trade requirements for OTC non-equity markets. 
Two  respondents  propose  to  exclude  all  sovereign  securities  from  the  exercise,  and  another 
two  to  further  differentiate  between  currencies  within  asset-classes.  Some  propose  further 
liquidity measures such as frequency of trading, issuance size, and the number of participants 
as relevant triggers to include in any regime.  

10.  Unbundling  of  data,  ESMA  guidance  on  "reasonable  price",  introduction  of 
Approved  Publication  Arrangements  A  large  majority  agree.  One  respondent  signals 
support for applying similar provision to non-equities. 

11.  Consolidated  tape  by  approved  commercial  provider(s)  A  majority  agree.  Two 
respondents prefer a public body, while another prefers a commercial entity chosen by public 
tender. 

12.  Mechanism  for  banning  products,  services  or  activities  The  majority  support  the 
proposals. 

13.  Reinforcement  of  oversight  of  positions  in  derivatives,  including  possible  position 
limits The views are mixed with a small majority in favour. One reply doubts the ability of 
regulators  to  assume  these  tasks.  Another  urges  caution  before  proceeding  with  this 
significant policy reorientation. One reply urges keeping management of positions as close to 
the  relevant  markets  as  possible  to  ensure  flexibility,  with  limits  as  a  conceivable  option  in 
low-liquidity or immature markets. One respondent says that the possible objectives given for 
position  limits  are  all  dealt  with  under  other  legislation,  e.g.  on  market  abuse,  capital 
requirements,  etc,  and  that  any  scope  for  limits  should  thus  only  apply  in  the  case  of 
speculative trading by unregulated entities.  

14. Third country regime The majority is in favour of such a regime. One respondent signals 
the AIFM Directive as a model.  

15. Common minimum rules for administrative sanctions and requirement for criminal 
sanctions The majority support the proposals. Two respondents does not support an EU-level 
framework for determining what constitutes a criminal act. 

16.  Extension  of  transaction  reporting  to  all  instruments  admitted  to  trading  on 
organised venues and all OTC instruments the value of which correlates with these, as 
well  as  commodity  derivatives  Respondents  largely  agree.  Two  oppose  reporting  for  all 
OTC  commodity  derivatives,  and  one  prefers  to  replace  "correlates  with"  by  "is  dependent 
on". One respondent prefers to go further and require reporting of all financial instruments.  

17.  Require  reporting  through  Approved  Reporting  Mechanisms  (ARMs)  and  enable 
reporting  of  derivatives  through  trade  repositories  The  majority  agrees,  but  two 
respondents  signal  ARMs  can't  absolve  reporting  firms  of  their  responsibility.  Many  also 

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stress that data flows under EMIR and MiFID will have to be identical for the proposal to be 
acceptable. 

18.  Direct  reporting  to  ESMA  after  transition  A  small  majority  is  against  this  proposal. 
Many point to recently incurred costs setting up existing reporting systems and call for cost-
benefit data. Some signal reporting to home competent authorities only as an option.  

19. Market operators to store order data Respondents unanimously support the proposals. 

20.  Market  operators  to  report  on  behalf  of  their  non-MiFID  members  Respondents 
unanimously support the proposals 

21.  System  of  position  reporting  by  types  of  traders  on  commodity  derivative  markets 
The majority are in favour. One respondent specifically urges adopting the US categorisation, 
while another stresses the need for close alignment, possibly via IOSCO.  

22.  Narrow  scope  of  commodity  derivative  exemptions  With  one  exception,  respondents 
unanimously support the proposals. 

23.  Classify  emission  allowances  as  financial  instruments  There  is  no  support  for  the 
proposal. Most urge further study. 

24. Require the application of key MiFID principles for national Article 3 regimes With 
one exception, respondents unanimously agree. 

25.  Extend  MiFID  conduct  of  business  and  conflict  of  interest  rules  to  structured 
deposits With one exception, respondents unanimously agree. 

26. Narrow list of non-complex products, specify when investment advice is independent, 
and  require  annual  assessment  of  the  advice  provided  A  majority  agree.  Some  remark 
however  that  an  obligation  of  ongoing  advice  blurs  the  distinction  between  portfolio 
management and investment advice. Many say that it should remain an option. Some do not 
agree with the proposals for a differentiation of advice as either independent or not, while one 
respondent  prefers  a  clearer  differentiation.  One  reply  warns  against  harming  the  UCITS 
brand  with  any  distinction  of  complex/non-complex  UCITS,  while  another  prefers  to  delete 
the execution-only regime altogether.  

27.  Apply  general  conduct  of  business  principles  between  eligible  counterparties  and 
exclude  municipalities  from  the  list  of  professional  clients  A  substantial  majority  agree. 
One respondent prefers to leave the classification of municipalities to national discretion. 

28.  Reinforce  information  obligation  in  relation  to  complex  products  and  strengthen 
associated reporting requirements A small majority of respondents agree. Those in favour 
specify that they prefer it apply only to retail structures products (2 replies) and not to eligible 
counterparties  (2  replies).  One  reply  prefers  a  reporting  frequency  of  six  months.  Another 
stresses that a risk/gain profile and periodic valuations may be too static to genuinely benefit 
the investor. Those against refer to the administrative burden.  

29.  Ban  inducements  for  independent  investment  advice  and  portfolio  management  A 
substantial  majority  agree  in  the  case  of  portfolio  management.  Those  who  agree  with  the 
differential labelling of independent advice support the proposal in this case as well. 

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30.  Require  trading  venues  to  publish  data  on  execution  quality  and  improve 
information  to  clients  on  best  execution  A  majority  agree.  Those  who  don't,  say  existing 
providers of data analytics, combined with the obligations incumbent on investment firms, are 
sufficient. 

31.  Strengthen  role  of  directors  in  relation  to  internal  control  functions  and  when 
launching  new  products  and  services  A  substantial  majority  agree.  Those  who  don't, 
nonetheless generally support improving internal reporting and governance. Two respondents 
disagree with any new requirements for launching new products. Another does not consider 
that all board-members have to have sufficient experience in financial services. Finally, one 
reply suggests public officials should not be able to take up a board seat before one year after 
leaving office.  

32. Require specific arrangements for portfolio management and underwriting A small 
majority disagree. One reply doesn't wish to create legal uncertainty by singling out portfolio 
management in terms of organisational aspects, while another would prefer Level 3 guidance 
to any new requirements on underwriting. 

33.  Minimum  regime  for  telephone  and  electronic  recordings  With  two  exceptions, 
respondents unanimously agree. 

Banks, brokers and their trade associations (approximately 85 replies) 

1.  Align  requirements  for  venues  and  introduce  OTFs  A  small  majority  agree. 
Respondents  generally  ask  for  more  clarity  on  the  scope  of  an  OTF  and  suggest  various 
approaches  to  trim  it  down.  Many  underline  that  OTFs  should  only  encompass  trading 
systems and not systems that merely confirm trades post execution. Some propose that a more 
rigorous  application  of  existing  categories  is  more  appropriate.  Many  oppose  a  unique 
identifier  for  crossing  networks  and  disagree  that  execution  against  proprietary  orders  or 
third-party access should compel the application of MTF or SI requirements. Others however 
support this and say this would dismiss the need for an OTF category. Some even support a 
threshold upon which the OTF would convert to an MTF, at e.g. 3-4% of global turnover for 
specific  shares  within  a  certain  timeframe.  There  is  broad  support  for  introducing  more 
cooperation between venues, but only tentative agreement on the alignment of requirements 
of venues.  

2. Mandatory trading of clearing eligible and sufficiently liquid derivatives on organised 
venues A majority disagree. Many argue against all aspects of the proposals, and in favour of 
targets  set  by  authorities.  They  see  few  benefits,  and  only  drawbacks.  Some  support  the 
proposals, provided that voice execution remains an option within OTFs, notably as regards 
transparency  requirements.  Many  underline  that  there  are  differences  between  derivatives 
eligible  for  trading  and  standardised  derivatives.  They  stress  that  an  evolution  of  liquidity 
over the life of the instrument, suitable exemptions for block trades and certain participants 
(non-financials)  are  needed.  Many  comment  that  flexibility  in  the  choice  of  trading  venue 
should be driven by both the type of contract and the type of customer. 

3.  Introduction  of  tailored  regime  for  SME  markets  Views  are  divided.  One  respondent 
says an SME label cannot assure investors if disclosure standards and listing requirements are 
reduced. They say we should not compromise quality and standards associated with regulated 
markets and MTFs. They also comment that the proposal is very unclear. Various respondents 
remark that MiFID is not the right tool to alleviate administrative burden for SMEs. 

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4.  Authorisation  of  and  increase  in  organisational  requirements  for  all  HFT  firms  A 
majority  are  in  favour.  One  respondent  says  HFT  firms  should  be  defined  exclusive  of  the 
services provided by brokers. Another says HFT should be defined more specifically than as a 
subcategory of automated trading. Many disagree with requiring liquidity commitment akin to 
that  of  market  makers  and  minimum  duration  of  orders.  As  an  alternative,  some  however 
suggest gradual increases in costs for cancelling orders. 

5.  Additional  requirements  for  firms  providing  sponsored  or  direct  market  access 
Respondents largely agree. 

6.  Reinforcement  of  organisational  requirements  for  organised  venues  Respondents 
largely agree. Some signal that the requirements should not be overly prescriptive and venues 
should have flexibility in applying them. 

7.  Introduction  of  order-to-execution  ratio  Few  agree.  Many  say  more  study  would  be 
required  before  such  a  measure  is  imposed.  Difficulties  would  emerge  from  HFT  firms 
accessing markets via multiple brokers. Some suggest that venues should be left to determine 
the specifics of any ratios, or that they could gradually increase costs for cancelling orders in 
order to discourage abuse usage of systems. 

8.  Harmonised  application  of  pre-trade  transparency  waivers,  reduction  of  post-trade 
delays and extension of transparency to shares traded only on MTFs or OTFs (including 
new SME markets) A small majority agree. Many signal concerns with reducing post-trade 
delays and keeping current large-in-scale thresholds. Some oppose large-in-scale order stubs 
being  made  transparent  and  a  minimum  order  size  for  the  reference  price  waiver.  Some 
oppose extending transparency to MTF/OTF-only shares. 

9.  Calibrated  pre-  and  post-trade  transparency  regime  for  bonds,  structured  finance 
products, and derivatives  Respondents mostly disagree. There is widespread opposition to 
any  pre-trade  requirements  especially  for  securitised  products  and  derivatives  (different 
prices, terms and overall low levels of liquidity), except possibly for issues actively traded by 
retail investors. They refer to existing levels of pre trade data already available for vanilla and 
liquid products. Many consider that asset-specific post-trade calibration should take frequency 
of trading and issuance size into account, and apply to confirmed trades only. Others consider 
that the priority would be to allow for significant delays in the case of large trades, as well as 
avoid  disclosing  trade  sizes  above  certain  limits.  Others  prefer  aggregate  disclosure  only. 
Many  signal  difficulties  and  significant  work  in  devising  an  overarching  transparency 
requirement  for  non-equities  at  Level  1,  with  asset-specific,  highly  calibrated  regimes  in 
Level  2.  Many  urge  a  phased  approach.  Various  respondents  comment  that  imposed 
transparency is only needed when there is retail participation and others say that it would even 
hurt retail investors in markets where they are present.  

10.  Unbundling  of  data,  ESMA  guidance  on  "reasonable  price",  introduction  of 
Approved  Publication  Arrangements  Respondents  mostly  agree.  Some  however  doubt 
whether unbundling will reduce costs. Some support mandated publication by APAs in non-
equities  also.  Others  see  no  need  to  define  "reasonable"  further.  Some  urge  to  avoid  the 
creation  of  new  APAs  and  prefer  to  leverage  upon  existing  arrangements  (e.g.  regulated 
markets). Isolated replies support making raw data available for free, with only APAs able to 
charge reasonable fees for processing it. 

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11.  Consolidated  tape  by  approved  commercial  provider(s)  A  majority  agree.  Some 
however doubt whether the incentives are strong enough to sustain commercial model. Many 
comment  that  governance  and  avoidance  of  monopoly  power  are  more  important  than  the 
nature of the entity. There is thus some support for a public entity or a public tender procedure 
but most support a single commercial organisation. 

12.  Mechanism  for  banning  products,  services  or  activities  Respondents  very  largely 
disagree. They say the powers are not circumscribed clearly enough, and would give rise to 
legal uncertainty. Many remark that existing powers of regulators and ESMA suffice. Some 
insist that any ban be triggered only in the event of actual investor harm, and that in any case 
it  should  be  at  European  level.  Most  criticise  the  ambiguity  of  safeguarding  investor 
protection in this respect. All are against banning OTC derivatives eligible for clearing but not 
offered by a CCP. 

13.  Reinforcement  of  oversight  of  positions  in  derivatives,  including  possible  position 
limits Almost all respondents disagree. Many support the views of the UK Treasury and UK 
FSA in favour of a position management approach. They remark that limiting activity in one 
part of the market is artificial and leads to regulatory arbitrage. Many urge considering soft 
position  limits  (i.e.  information  thresholds)  instead,  and  comment  that  positions  should 
already be supervised under existing prudential rules 

14.  Third  country  regime  The  views  are  split  with  a  small  majority  against.  They  caution 
against a strict equivalence regime. Many also insist that great attention needs to be devoted 
to this issue because of possible increased competition with no reciprocity 

15. Common minimum rules for administrative sanctions and requirement for criminal 
sanctions Respondents mostly agree. 

16.  Extension  of  transaction  reporting  to  all  instruments  admitted  to  trading  on 
organised venues and all OTC instruments the value of which correlates with these, as 
well  as  commodity  derivatives  Respondents  largely  agree.  However  many  say  the 
requirements should be limited to instruments solely traded on MTFs/OTFs and exclude non-
securities derivatives and those with index underliers. Many comment that position reporting 
is far more useful for commodity derivatives and strongly oppose an extension of transaction 
reporting. Most respondents urge a central list of reportable instruments, clarity on technical 
requirements  such  as  instrument  and  venue  codes,  and  replacing  "correlate"  with  "derived 
from or dependent on".  

17.  Require  reporting  through  Approved  Reporting  Mechanisms  and  enable  reporting 
of  derivatives  through  trade  repositories  Respondents  largely  agree.  Many  support 
maximum synergies with trade repositories. Others oppose extending ARM regime to existing 
practices. 

18. Direct reporting to ESMA after transition Many theoretically agree, but doubt will be 
more  efficient  in  practice.  Possible  high  transitional  costs  and  a  deterioration  of  service  are 
noted. 

19. Market operators to store order data Respondents are slightly against. 

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20.  Market  operators  to  report  on  behalf  of  their  non-MiFID  members  Respondents 
mostly agree. Some express doubts about practical and cost implications.  

21. System of position reporting by types of traders on commodity derivative markets A 
majority agree. Some say that a classification by EU-regulatory category is not watertight and 
suggest the following instead: producers, consumers/transformers, dealers, liquidity providers. 
Some remark that not all affected venues will have the required position information today. 
Isolated  comments  are  very  critical  and  think  any  classification  will  result  in  poor 
generalisations  and  confusing  outcomes.  One  banking  association  suggested  that  ad  hoc 
directive  would  probably  be  the  best  way  to  address  problems  identified  in  the  commodity 
markets. 

22.  Narrow  scope  of  commodity  derivative  exemptions  A  majority  agree.  Some  however 
comment that there is a risk in driving smaller participants out of the market. Others point out 
that  it  could  force  some  exempt  entities  previously  eligible  for  ECP  treatment  into  the 
professional client regime, with implications for who will accept to trade with them.  

23.  Classify  emission  allowances  as  financial  instruments  Virtually  all  are  against.  Some 
refer to the conclusions of the Prada report in this respect. 

24.  Require  the  application  of  key  MiFID  principles  for  national  Article  3  regimes  A 
majority agree. Some signal the need for proper cost-benefit analysis. 

25.  Extend  MiFID  conduct  of  business  and  conflict  of  interest  rules  to  structured 
deposits A majority agree, but comment that this will entail some reorganisation within credit 
institutions.  

26. Narrow list of non-complex products, specify when investment advice is independent, 
and require annual assessment of the advice provided Views are split. Many raise strong 
concerns over blurring of distinct services of advice and portfolio management, and possible 
new  costs  for  clients  from  ongoing  suitability  services.  Some  remark  that  differentiation  of 
advice  should  only  be  in  relation  to  retail  clients.  Some  doubt  that  differentiation  can  be 
adequately defined (e.g. what is a sufficiently large number of instruments), will be accepted 
by clients, or would deliver benefits to investors. Many recommend to await IOSCO work on 
the topic, and to avoid defining a list of complex products in Level 1 (leaving it to ESMA to 
make  it  more  flexible).  Many  comment  that  risk  level  and  not  complexity  of  a  product  is  a 
more valid distinction. 

27.  Apply  general  conduct  of  business  principles  between  eligible  counterparties  and 
exclude municipalities from the list of professional clients The majority agree. However, 
some  urge  more  study  on  ensuring  municipalities  still  have  sufficient  access  to  financial 
markets  and  counterparties.  Many  resist  the  ideas  to  increase  protections  for  professional 
clients or eligible counterparties. One reply comments that in their experience municipalities 
have  never  requested  downgrading  to  retail,  only  sometimes  upgrading  to  eligible 
counterparty status. Many comment that what constitutes a municipality differs across the EU. 
One reply notes that a population and budget threshold (e.g. 25k/€40k) could qualify them as 
professional. 

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28.  Reinforce  information  obligation  in  relation  to  complex  products  and  strengthen 
associated reporting requirements Most respondents disagree. They say information should 
only be made available to clients, not provided. The right for investors to request information 
is  better  met  on  the  basis  of  demand  of  clients  to  firms  than  by  regulation.  Providing  more 
information would run the risk of overloading clients and encouraging short-term investment 
horizons. Some say that PRIPs work should take precedence over this.  

29.  Ban  inducements  for  independent  investment  advice  and  portfolio  management 
Views  are  split.  Many  say  that  more  clarity  on  what  types  of  payments  actually  induce  a 
conflicting situation should be prioritised. Many disagree with entirely prohibiting payments 
to advisors when these "facilitate" fee-based advice. Others are against any differentiation in 
advice and assuming that the best interests of clients cannot be reconciled with inducements. 
Some  comment  that  commission-based  advice  is  preferable  for  clients  compared  with  fee-
based advice as they only incur costs if they actually choose to invest. 

30.  Require  trading  venues  to  publish  data  on  execution  quality  and  improve 
information  to  clients  on  best  execution  Most  respondents  oppose.  They  say  it  is  not 
necessary and that sufficient information already exists. Any system should ensure that price 
is a prominent but not the only measure of execution quality. Some say that more information 
on execution policies should be upon request only, lest clients are overloaded.  

31.  Strengthen  role  of  directors  in  relation  to  internal  control  functions  and  when 
launching  new  products  and  services  Views  are  split.  Many  say  that  distinctions  between 
the  involvement  of  the  supervisory  and  the  management  board  should  be  clarified.  They 
underline the need to avoid duplication with other EU corporate governance principles. 

32.  Require  specific  arrangements  for  portfolio  management  and  underwriting 
Respondents  mostly  disagree.  They  urge  avoiding  any  legal  uncertainties  in  the  case  of 
portfolio management. Many say that satisfactory rules already exist for underwriting and that 
flexibility shouldn't be hindered. 

33.  Minimum  regime  for  telephone  and  electronic  recordings  Most  respondents  agree. 
However  many  prefer  a  retention  period  of  6  months.  Those  against  question  the  value  of 
recordings  for  detecting  abuses  and  refer  to  privacy  concerns  with  recording  personal 
information. 

Asset managers, funds and their trade associations (approximately 55 replies) 

1. Align requirements for venues and introduce OTFs Respondents broadly agree with the 
extension of the admission to trading concept but ask for clarification. In relation to OTFs the 
buy  side,  in  principle,  appreciates  the  rationale  of  introducing  a  future-proof  definition  into 
MiFID,  however  is  concerned  that  it  could  be  too  wide.  Greater  clarity  is  asked  for  also  in 
relation  to  BCNs  and  the  requirements  applicable  and  other  potential  sub-regimes  for  other 
classes  of  financial  instruments.  Reasons  that  investors  use  lit  and  non-displayed  venues 
(market impact suffered when trading on lit venues is considered as not acceptable) and the 
need for flexibility should be taken into account. There is general agreement that a separate 
OTF  investment  service  should  be  created  which  can  be  passported.  The  majority  of 
respondents rejects the idea of a threshold triggering a conversion into an MTF. Respondents 
widely  agree  with  an  alignment  of  regulatory  requirements  for  RMs  and  MTFs  and  with 
extended cooperation requirements for trading venues.  

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2. Mandatory trading of clearing eligible and sufficiently liquid derivatives on organised 
venues  Views  are  mixed  with  some  in  agreement  with  the  proposals  and  others  strongly 
opposed.  Respondents  vouch  for  continued  flexibility  in  the  use  of  derivatives  (ie  oppose 
mandatory  exclusive  trading  on  organised  venues),  favour  a  gradual  approach  and  are 
concerned about an increase in costs.  

3.  Introduction  of  tailored  regime  for  SME  markets  From  the  few  responses  received 
agreement to stimulating SME markets however little conviction that a specialised regime is 
needed or beneficial. Same standards of investor protection should apply as for other sectors.  

4.  Authorisation  of  and  increase  in  organisational  requirements  for  all  HFT  firms 
Overall support but firms urge to appropriately calibrate definition.  

5.  Additional  requirements  for  firms  providing  sponsored  or  direct  market  access  The 
majority of respondents support the proposals.  

6. Reinforcement of organisational requirements for organised venues Strong support for 
measures  suggested  in  respect  of  risk  controls,  particularly  circuit-breakers.  Also  non-
discriminatory access to co-location services is strongly supported while the views are mixed 
on minimum tick-sizes.  

7.  Introduction  of  order-to-execution  ratio,  [also  minimum  resting  period  and 
requirement  to  provide  liquidity]  Views  are  mixed  regarding  the  imposition  of  a 
requirement  to  provide  liquidity  for  HFTs.  Some  respondents  see  the  point  in  an  equal 
treatment  of  market  makers  and  HFTs  while  a  majority  rejects  such  a  requirement  as 
inappropriate.  A  large  majority  rejects  a  minimum  resting  period  for  orders  and  most  firms 
also are not convinced of an order-to-execution ratio citing concerns regarding a widening of 
quotes and a decrease in liquidity.  

8.  Harmonised  application  of  pre-trade  transparency  waivers,  reduction  of  post-trade 
delays and extension of transparency to shares traded only on MTFs or OTFs (including 
new  SME  markets)  Firms  by  and  large  support  the  approach  to  pre-trade  transparency  but 
emphasise  the  importance  of  being  able  to  execute  orders  in  dark  pools  to  manage  market 
impact  und  achieve  best  execution.  The  right  balance  between  transparency  and  protecting 
proprietary order information needs to be struck. A slight majority agrees with making IOIs 
actionable  while  a  majority  disagrees  with  disclosing  stubs.  Very  limited  feedback  on 
embedded  fees  and  minimum  order  size  for  waivers.  Strong  support  for  leaving  pre-trade 
threshold  untouched.  Split  views  on  reducing  post-trade  delays  with  some  firms  warning 
specifically that costs on reducing the delay from 3 to 1 minute outweigh the benefits. Of the 
limited  responses  received  firms  favour  extending  transparency  to  shares  traded  on  MTFs 
only.  

9.  Calibrated  pre-  and  post-trade  transparency  regime  for  bonds,  structured  finance 
products,  and  derivatives  Most  firms  are  concerned  about  the  impact  of  the  proposed 
measures on liquidity, price formation, costs and market efficiency and demand a calibrated 
and proportionate approach taking into account the specificities of all asset classes as well as 
factors like size and time of issue (eg for bonds). Firms disagree with a requirement to make 
all  quotes  public.  If  quotes  need  to  be  good  to  everybody  below  a  certain  size  they  fear 
detrimental effects on banks risks and liquidity.  

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10.  Unbundling  of  data,  ESMA  guidance  on  "reasonable  price",  introduction  of 
Approved Publication Arrangements The firms are very supportive of most of the intended 
measures  but  want  to  avoid  an  increase  of  costs  for  investors  due  to  charges  of  APAs.  For 
non-equities firms warn that collecting data will be much more difficult than for equities and 
ask the Commission to be careful regarding methods and costs.  

11.  Consolidated  tape  by  approved  commercial  provider(s)  Firms  almost  unanimously 
support the establishment of a consolidated tape while preferences regarding the type of tape 
are  almost  evenly  split  between  the  public  utility  model  (option  A)  and  the  commercial 
provider  solution  (option  C).  There  is  almost  no  appetite  for  a  pre-trade  tape  and  firms  are 
split regarding the usefulness of a tape for non-equities.  

12.  Mechanism  for  banning  products,  services  or  activities  Contributions  range  from 
expression of concern (or even opposition) to recommendation to establish proper and careful 
criteria  and  procedures  for  any  ban.  Generally  no  support  for  ban  of  OTC  derivatives  that 
should be cleared but are not. One respondent warns against regulators vetting products. 

13.  Reinforcement  of  oversight  of  positions  in  derivatives,  including  possible  position 
limits  Few  answers  mostly  disagreeing  with  the  introduction  of  any  hard  position  limits. 
Suggestion that position management or exposure management regime would be better. One 
respondent indicates any limits to be simple (one limit applicable to all), with few exemptions 
for  hedging  (but  avoiding  any  concentration  risk);  net  open  interest  would  be  appropriate. 
Another suggests spot month limits as tool to prevent market manipulation. Few respondents 
indicate contracts with narrow supply (eg platinum) or with delivery on the physical side, soft 
agricultural commodity and OTC derivatives as more prone to market manipulation. 

14.  Third  country  regime  Few  answers  mostly  supporting  the  current  system  and  not 
introducing  an  equivalence  regime.  If  introduced,  it  should  be  a  broad  substantive  and  not 
strict equivalence regime. 

15. Common minimum rules for administrative sanctions and requirement for criminal 
sanctions  Few  answers.  Support  to  consistent  sanctions  but  not  levelled  to  the  highest 
existing  level.  One  suggests  example  of  Australian  "enforceable  undertakings"  (settlements 
alternative  to  court  action).  Criminal  sanction  to  be  left  to  MS.  Limited  support  for 
whistleblowing; most require full consultation, calibration and application across all sectors. 
Support  for  publication  of  sanctions  but  with  possibility  for  supervisors  to  issue  private 
sanctions and to withdraw previous publications. 

16.  Extension  of  transaction  reporting  to  all  instruments  admitted  to  trading  on 
organised venues and all OTC instruments the value of which correlates with these, as 
well  as  commodity  derivatives  Support  for  broad  scope.  A  few  recommend  portfolio 
managers  to  be  excluded.  Others  request  list  of  instruments  covered  (in  line  with  article  11 
Implementing.Regulation). Alignment with MAD needed.  

17.  Require  reporting  through  Approved  Reporting  Mechanisms  and  enable  reporting 
of derivatives through trade repositories Few answers. Support to the proposals. 

18.  Direct  reporting  to  ESMA  after  transition  Few  answers.  Divided  views. 
Recommendation to avoid duplications. 

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19. Market operators to store order data Few answers. Support for the proposal. 

20.  Market  operators  to  report  on  behalf  of  their  non-MiFID  members  Few  answers. 
Support for the proposal. 

21.  System  of  position  reporting  by  types  of  traders  on  commodity  derivative  markets 
There  are  concerns  that  information  to  the  public  even  on  an  aggregate  basis  may  not 
guarantee  the  anonymity  of  big  players  in  the  market  and  there  may  be  adverse  effects  on 
liquidity  and  proprietary  strategies.  Concerns  are  also  voiced  regarding  categorisation  by 
regulated entity as some firms may fall into more than one category.  

22.  Narrow  scope  of  commodity  derivative  exemptions  The  few  respondents  for  these 
questions all favour a level-playing field for all market participants.  

23.  Classify  emission  allowances  as  financial  instruments  Basically  just  one  response 
received which was in favour.  

24. Require the application of key MiFID principles for national Article 3 regimes Broad 
support.  One  respondent  proposes  a  quantitative  threshold  for  exempted  entities;  another 
questions the application of best execution requirements.  

25.  Extend  MiFID  conduct  of  business  and  conflict  of  interest  rules  to  structured 
deposits  Broad  support.  Some  suggest  the  extension  of  MiFID  to  any  Packaged  Retail 
Investment Products (PRIPs) (few also mention personal pension products). 

26. Narrow list of non-complex products, specify when investment advice is independent, 
and require annual assessment of the advice provided  

No  support  for  abolition  of  execution-only  regime.  Broad  support  for  narrowing  and 
clarifying  list  of  non-complex  instruments  but  only  few  respondents  support  split  of 
complex/non-complex UCITS while most disagree (in the light of strong UCITS framework 
and also not to weaken the UCITS "brand" in third countries). Few respondents recommend 
any shares in (non UCITS) investment funds to be treated as non-complex, similarly to other 
shares. 

General support for measures aimed at strengthening advice and clarifying its basis. However, 
mixed  views  about  the  opportunity to  label  part  of  the  advice  as  "fair  and  independent"  (as 
opposed  to  "restricted"  or  "(multi-)tied")  and  about  the  ban  of  inducements  for  it  (also 
considering  clients'  unwillingness  to  pay  for  advice).  Prevailing  support  to  written 
specification  to  clients  about  underlying  reasons  for  the  advice  (to  be  adapted,  however,  to 
different  channels).  Mixed  views  on  on-going  advisory  services;  many  recommend  to  leave 
the choice to clients and to require intermediaries to specify whether they offer this service; 
others underline the cost of this option that could be remunerated via continued payment of 
retrocessions;  others  disagree  with  regular  reporting  to  clients  about  financial  instruments; 
others mention the blurring line between this and portfolio management or suggest to classify 
this as a new service. Some emphasize the need of harmonised approach within PRIPs; also 
the issue of standardisation of disclosures is mentioned.  

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27. Apply general conduct of business principles between eligible counterparties (ECPs) 
and exclude municipalities from the list of professional clients General acknowledgement 
that current system works. Prevailing support for exclusion of municipalities from ECPs and 
professional clients per se. Prevailing support on extension of high-level principles to ECPs. 
A  few  respondents  claim  the  right  for  portfolio  managers  to  require/obtain  (and  not  only 
request) classification as professional or retail clients (especially for best execution purposes).  

28.  Reinforce  information  obligation  in  relation  to  complex  products  and  strengthen 
associated  reporting  requirements  Mixed  views.  On  information  prior  to  the  transaction, 
many  request  coordination  with  PRIPs  to  make  sure  that  the  Key  Investor  Information 
Document  (KIID)  is  sufficient.  Others  mention  the  need  to  involve  product  providers  in 
complying  with  any  such  obligations  (one  respondent  mentions  that  issuers  should  provide 
certain  data  free  of  charge).  Clarifications  are  requested  about  technical  details  and  some 
express  concerns  about  risk  of  confusion  due  to  excessive  information.  One  respondent 
mentions the inability of some intermediaries, emerged from the crisis, to understand product 
they  sell  and  consequently  welcomes  an  obligation  to  provide  ongoing  reporting  (but  on  an 
annual  basis,  except  when  there  has  been  a  significant  change  in  the  structure  or  expected 
outcome  of  the  product).  Few  answers,  normally  negative,  to  the  extension  of  information 
requirements to ECPs. 

29.  Ban  inducements  for  independent  investment  advice  and  portfolio  management 
Disagreement,  with  some  exceptions,  with  proposals.  As  to  portfolio  management,  some 
mention, however, the possibility to require rebate to clients of inducements received (or to 
allow clients' consent to commissions paid to portfolio managers). Others request any ban not 
to  include  soft  commissions.  As  to  advice,  few  support  ban  for  any  advice,  not  only 
independent; others underline clients' unwillingness to pay fees and risk for small firms to exit 
the market. Some underline the need for horizontal approach across different products/sectors. 
Two respondents suggest the ban of (certain) inducements for all investment services. 

30.  Require  trading  venues  to  publish  data  on  execution  quality  and  improve 
information to clients on best execution Prevailing support concerning publication of data 
on  execution  quality  by  trading  venues  (some,  however,  mention  that  data  seem  already 
available  from  commercial  providers).  Prevailing  support  for  clearer,  more  informative  and 
more standardised execution policies; a few, however, underline that retail clients often would 
not be interested or not able to understand them. 

31.  Strengthen  role  of  directors  in  relation  to  internal  control  functions  and  when 
launching new products and services General support for the proposal to strengthen fit and 
proper  criteria  and  internal  functions  (some  suggest,  however,  that  flexibility  for  internal 
functions  should  be  ensured,  including  involvement  of  the  compliance  function  in  handling 
complaints). Mixed view on organisational requirements for launch of products and services. 

32.  Require  specific  arrangements  for  portfolio  management  and  underwriting 
Prevailing support for portfolio management. A few answers, with prevailing negative views, 
for underwriting. 

33.  Minimum  regime  for  telephone  and  electronic  recordings  Broad  support  (with  few 
exceptions). Some mention need to avoid duplications and that portfolio managers should not 
be included. Many believe 3-years retention period is too long. 

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Exchanges and market operators (approximately 30 replies) 

1.  Align  requirements  for  venues  and  introduce  OTFs    The  majority    reject  the  OTF 
concept and recommend sticking to the existing MiFID categories (concerns re level-playing 
field, more fragmentation, lowering of standards, unnecessary complexity, and possibility for 
regulatory  arbitrage).  Some  supported  the  new  category  but  thought  it  needed  to  be  more 
clearly  defined  and  sought  greater  clarity  about  what  brokerage  activity  the  new  category 
would apply to. A majority of respondents did not support thresholds for OTFs, saying instead 
that there should be a "functional approach" to classifying new venues.  

Alignment  of  requirements  for  MTFs  and  RMs  is  widely  supported  as  well  as  more 
cooperation between trading venues. A number of respondents pointed out that MTFs are not 
homogenous.  Four  broad  groups  were  identified.  It  is  the  ones  trading  blue  chips  where 
treatment needs most to be aligned. But for others it is not necessarily proportionate to simply 
align  all  requirements  with  RMs.  A  number  of  exchanges  expressed  concerns  about  free 
riding by other MTFs and argued that exchanges undertake a number of costly or low margin 
activities that are not undertaken by an MTF. Many exchanges also expressed concern about 
what they saw as a high level of OTC trading. In relation to cooperation some raised concerns 
that  this  should  not  create  practical  problems.  For  example,  trading  halts  should  not  be 
required to be notified across EU every time they occur. Confidential commercial information 
should not be required to be disclosed. 

2. Mandatory trading of clearing eligible and sufficiently liquid derivatives on organised 
venues Views are mixed with a majority of operators strongly in favour of mandating trading 
on organised venues mentioning the benefits of reducing systemic risk and breaking-up vested 
business  interests  of  parties  involved  for  trading  to  remain  OTC.  Other  operators  question 
whether  a  reduction  of  systemic  risk  will  be  achieved  and  whether  platforms  can  generate 
sufficient liquidity if platform trading does not reflect customer needs. A number of regulated 
markets argued that trading should only be on regulated markets or MTFs. They argued that 
venues  should  be  multilateral  in  nature.  Other  supported  a  more  flexible  approach. 
Suggestions  of  derivatives  suitable  for  trading  on  OTFs  included  credit  derivatives,  equity 
options  and  contracts,  fixed  income  options  and  futures,  interest  rate  and  foreign  exchange 
contracts  and  electricity  contracts,  all  plain  vanilla  contracts  and  look  alike  contracts  and 
CFDs. But many stated that products that are highly customised are not suitable for trading on 
an  organised  trading  venue.  One  venue  suggested  that  if  an  OTC  derivative  was  "clearing 
eligible" then that should be sufficient to require trading on an organised trading venue. It is 
not  necessary  to  apply  any  liquidity  test  as  by  definition  to  be  clearing  eligible  instrument 
must be relatively standardised and capable of being valued on a continuous basis.  

3.  Introduction  of  tailored  regime  for  SME  markets  Opinions  range  from  strong 
opposition (concern that quality label of RM deteriorates) to support for the idea. A majority 
was  not  convinced  about  the  benefits  for  smaller  issuers  of  a  new  regulatory  regime  for 
SMEs. They were concerned that a new regime risks damaging an already well functioning 
market structure. This is because the existing categories provide sufficient flexibility but any 
new  category  would  by  definition  be  more  restrictive  and  it  would  be  difficult  to  come  up 
with  one  set  of  criteria  that  would  not  damage  current  SME  markets.  Those  supporting  the 
Commission proposal in principle believe that in practice it will not be possible to come up 
with  uniform  criteria.  It  was  also  pointed  out  that  there  seems  to  be  little  demand  by  SME 
issuers for passporting. Operators think that to make any initiative work other factors need to 
be taken into consideration (tax incentives, willingness to provide liquidity by intermediaries). 

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They  ask  for  flexibility  to  remain  for  platforms  operating  under  national  standards  (use  of 
national  accounting  standards).  A  number  of  respondents  suggested  an  industry  working 
group  (consisting  of  exchanges,  investors,  issuers  and  advisers)  should  be  set  up  to  look  at 
way  forward  for  SMEs.  This  should  consider  how  to  widen  the  universe  of  investors  that 
support SMEs in order to drive liquidity, incentivise a wider set of analysts and intermediaries 
to focus on SMEs and ultimately reduce the cost of public equity capital for this set of issuers. 
There  were  very  divergent  ideas  about  how  an  SME  could  be  defined  with  various 
respondents suggesting that any attempt would be too restrictive. 

4. Authorisation of and increase in organisational requirements for all HFT firms 

5. Additional requirements for firms providing sponsored or direct market access  

6.  Reinforcement  of  organisational  requirements  for  organised  venues  Almost  all 
respondents  commented  that  HFT  has  had  positive  effect  on  markets  or  that  there  is  no 
evidence that HFT is causing detriment to the market. Views are mixed on the definitions on 
HFT and the authorisation requirement (a majority supports the latter) while operators widely 
support non-discriminatory co-location offerings and imposing specific risk controls on firms 
and platforms. They warn against being overly prescriptive and while many operators support 
the use of circuit-breakers some would prefer measures such as market-wide stock-by-stock 
price limit regimes or pre-trade risk limits. There were polarised views about whether circuit 
breakers should be harmonised or left to individual venues to determine. Regarding tick sizes 
most  operators  are  against  regulatory  measures  and  feel  this  should  be  left  to  competition 
while a minority would support developing a regime in cooperation with the industry.  

7.  Introduction  of  order-to-execution  ratio,  [also  minimum  resting  period  and 
requirement  to  provide  liquidity]  A  majority  of  operators  opposes  these  measures  citing 
concerns  about  liquidity,  appropriate  risk  management,  market  quality  and  a  possible 
penalising  of  less  liquid  stocks  (where  due  to  a  stock  being  thinly  traded  the  order-to-
execution ratio may be high). Requiring resting times in the order books was widely rejected 
as  it  was  stated  that  this  would  have  a  dramatically  negative  effect  on  price  formation.  It 
would lead to wider spreads to compensate increased risk and would lead to liquidity moving 
to  opaque  markets.  Some  responses  were  more  supportive  of  order  to  transaction  ratios. 
Although  a  majority  pointed  out  this  measure  was  impractical  as  it  would  be  difficult  to 
prescribe a ratio for all instruments. Some argued that limiting ratios of orders could also have 
some  unintended  negative  effects.  For  example,  it  may  encourage  participants  to  generate 
additional trades for the purpose of reducing the ratio. 

8.  Harmonised  application  of  pre-trade  transparency  waivers,  reduction  of  post-trade 
delays and extension of transparency to shares traded only on MTFs or OTFs (including 
new  SME  markets)  Where  views  are  split  in  this  area  it  is  pretty  much  between  the 
traditional exchanges on the one and the operators of alternative venues on the other hand. On 
the  pre-trade  waivers  the  former  support  more  consistency  while  the  latter  question  the 
necessity  to  do  anything  and  emphasise  the  importance  of  retaining  a  principles-based 
approach. Some exchanges favour displaying stubs while MTF operators and other exchanges 
are  concerned  about  an  increase  in  trading  costs.  Some  exchanges  favour  a  minimum  order 
size  for  the  reference  price  waiver  with  MTFs  in  opposition.  Exchanges  favour  keeping  the 
current  thresholds  for  the  LIS  pre-trade  waiver  while  MTFs  consider  the  threshold  as  being 
too  high.  Large  majorities  are  supporting  treating  IOIs  as  orders,  the  prohibition  for 
embedding  fees  and  also  reducing  post-trade  delays  with  some  being  concerned  about 

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reporting manual trades inside one minute. Almost all agree that transparency should apply to 
"equity  like"  instruments.  A  number  of  respondents  opposed  requirements  being  applied  to 
UCITS as these prices are negotiated on their daily NAV and not through supply and demand. 
A majority of respondents supports transparency for shares traded on MTFs only while there 
is little support for a specific SME regime.  

9.  Calibrated  pre-  and  post-trade  transparency  regime  for  bonds,  structured  finance 
products,  and  derivatives  Respondents  are  generally  in  favour  of  the  concept  with  some 
exchanges  being  concerned  that  limiting  transparency  requirements  to  bonds  with  a 
prospectus  or  admitted  to  trading  would  serve  as  a  disincentive  for  publishing  a  prospectus 
and  admitting  such  bonds.  Therefore  they  want  the  requirements  to  apply  to  OTC  bonds  as 
well.  Almost  all  stressed  that  requirements  must  be  individually  calibrated  to  different 
instruments.  Some  are  against  pre-trade  transparency  in  the  OTC  space  due  to  concerns 
regarding  front-running  and  generally  applying  something  meaningful.  For  pre-trade 
transparency  to  apply  to  these  products  for  some  business  models  quotes  may  need  to  be 
indicative  rather  than  firm.  A  number  of  venues  suggested  criteria  for  determining  whether 
pre-post trade transparency should apply.  

10.  Unbundling  of  data,  ESMA  guidance  on  "reasonable  price",  introduction  of 
Approved  Publication  Arrangements  Respondents  strongly  favour  the  introduction  of 
APAs and the proposed criteria for establishing them. The majority support further standards 
to address the quality, availability and consistency of data. Some respondents voice concerns 
regarding mandating formats by legislation. Almost all respondents agreed with proposals for 
unbundling  of  trade  data  and  making  data  free  after  15  minutes.  Views  are  mixed  on  an 
application of an APA regime to non-equities where some respondents suggest doing this at a 
later  stage.  The  proposals  on  reducing  the  cost  of  data  are  welcomed  but  are  considered 
insufficient  by  one  respondent.  On  disaggregation  of  data  views  are  mixed  with  some 
respondents  strongly  in  favour  with  others  concerned  about  additional  costs.  Strong  views 
were  expressed  regarding  the  reasonable  cost  of  data  with  some  respondents  vigorously 
demanding a definition and strict enforcement of reasonable costs with others strictly opposed 
demanding to leave the setting of costs to market forces.  

11. Consolidated tape by approved commercial provider(s) Views are split along the lines 
of exchanges opposed and MTF operators in favour of the introduction of a consolidated tape. 
Exchanges do not consider a tape as necessary, economically viable, an outdated concept and 
creating a single point of failure. There were also some concerns expressed that the proposal 
was  unclear  about  the  main  issue  which  is  who  would  bear  the  cost  of  a  consolidated  tape 
under options A and B. Option C was most supported as it allows competition and innovation. 
Little value was seen by the exchanges in a pre-trade consolidated tape as prices would not be 
actionable, so it will only create confusion and it would not be viable due to latency issues. 
Most thought that given the lack of conformity for non-equities transparency, they see even 
less feasibility of a consolidated tape in this area. The MTF operators consider a consolidated 
tape  as  necessary  and  by  majority  favour  Option  A  or  B.  MTF  operators  also  cautiously 
support a pre-trade tape for equities while there seems to be no appetite for a non-equity tape.  

12.  Mechanism  for  banning  products,  services  or  activities  Some  support  based  on  the 
provision  of  clear  criteria  and  proper  analysis  before  taking  a  decision  with  others  thinking 
that  banning  should  be  approached  with  great  caution.  Also  some  respondents  agreed  that 
CCPs  not  accepting  a  product  for  clearing  could  be  taken  as  an  indicator  although  such  a 
decision  may  not  always  be  due  to  excessive  risks  associated  with  the  product  as  other 

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considerations play a role as well. Others held the banning of uncleared OTC derivatives to be 
the wrong approach. Incentives should be used instead. 

Most  thought  that  banning  should  be  approached  with  great  caution.  It  should  only  be  in 
response to specific and demonstrated market failure. If banning is provided for it needs to be 
coordinated. One respondent referred to the FSA paper on product intervention sets out some 
useful criteria. Banning of uncleared OTC derivatives was argued by a number of respondents 
to be the wrong approach. Incentives should be used instead. 

13.  Reinforcement  of  oversight  of  positions  in  derivatives,  including  possible  position 
limits A number of responses express a preference either for position management or support 
leaving  the  setting  of  position  limits  to  exchanges.  Many  respondents  argued  that  breaking 
down  positions  by  type  of  entity  and  also  breaking  down  positions  between  hedging  and 
speculation  is  not  practicable  and  will  be  misleading.  It  is  also  very  difficult  in  practice  to 
adopt  a  common  client  identifier  system.  Several  made  the  point  that  position  reporting  is 
important but needs to cover OTC transactions.  

14.  Third  country  regime  There  were  limited  responses  on  this  issue  and  those  responses 
diverged.  Some  supported  development  of  a  third  country  regime.  Others  were  concerned 
about  a  "strict  equivalence"  test  for  third  country  firms  in  the  EU.  This  could  be  viewed  as 
protectionist  leading  to  retaliation  in  third  countries  threatening  access  of  EU  firms.  Some 
rejected an EU regime and Member States should rather maintain the ability to grant access to 
3rd countries.  

15. Common minimum rules for administrative sanctions and requirement for criminal 
sanctions There was some support for common rules in this area. 

16.  Extension  of  transaction  reporting  to  all  instruments  admitted  to  trading  on 
organised venues and all OTC instruments the value of which correlates with these, as 
well as commodity derivatives A number of respondents stressed that we need to be clearer 
about  the  purpose  of  transaction  reporting  before  extending  scope.  Transaction  reporting 
should only be of information that is necessary for regulators and can be analysed. There is a 
risk of flooding regulators with information that is not useful. Before extending the scope it 
must be considered whether there is a clear regulatory reason for seeking transaction reports 
for an instrument. For commodities derivatives, a majority of respondents expressed the view 
that  position  reporting  is  the  correct  tool  to  monitor  market  abuse  and  not  transaction 
reporting. Transaction reporting should only apply to products which need to be monitored on 
a  transaction  by  transaction  basis.  Therefore  it  is  a  mistake  to  require  transaction  reporting 
rather than position reporting for commodity derivatives. Others also expressed doubts about 
whether  a  harmonised  transaction  reporting  regime  for  commodity  derivatives  not  possible 
given  their  diversity.  One  respondent  specifically  criticised  an  extension  to  instruments  the 
value  of  which  correlates  with  admitted  instruments  as  disproportionate.  Most  respondents 
agree with proposal to extend transaction reporting to depositary receipts. 

17.  Require  reporting  through  Approved  Reporting  Mechanisms  and  enable  reporting 
of  derivatives  through  trade  repositories  Most  respondents  agreed  that  ARMs  have  the 
potential  to  enhance  the  quality  and  reliability  of  data.  Most  agreed  with  the  possibility  of 
reporting through trade repositories but had concerns about such reporting leading to double 

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reporting. Most agreed trade repositories should be approved as ARMs if they are performing 
that function. 

18. Direct reporting to ESMA after transition There were mixed views about proposal, a 
number of respondents thought it was desirable but some queried whether it was practicable 
and were concerned about costs. 

19.  Market  operators  to  store  order  data  Most  agreed  with  this  proposal  for  market 
operators to store order data for a specified period as it would be useful for regulators. There 
were  mixed  views  about  harmonisation  of  storage  requirements  with  some  respondents 
thinking this would be beneficial while others criticise that a one size fits all approach is not 
feasible and that costs would outweigh the benefits. 

20. Market operators to report on behalf of their non-MiFID members Many respondents 
opposed an obligation being placed on the trading venue arguing it should be placed on the 
entity  itself.  Further  there  were  concerns  that  having  obligations  performed  at  the  trading 
venue level could increase the risk of double reporting of transactions. 

21.  System  of  position  reporting  by  types  of  traders  on  commodity  derivative  markets 
Two  respondents  support  disclosing  harmonised  position  information  because  they  believe 
greater  transparency  is  desirable.  Both  ask  for  an  alignment  of  rules  with  the  US.  One 
respondent did not consider extending the disclosure of harmonised position information to all 
OTC  commodity  derivatives  as  feasible  while  another  one  thought  this  was  desirable  to 
provider for a level-playing field.  

22.  Narrow  scope  of  commodity  derivative  exemptions  Responses  on  this  issue  were 
limited and varied. There was some support for commission proposals to narrow exemptions 
but one respondent felt the exemptions should be preserved. 

23. Classify emission allowances as financial instruments Two respondents considered this 
classification  as  helpful  even  if  it  would  not  remove  all  imperfections.  Another  respondent 
strongly opposed such classification as it would exclude certain companies from the market 
and as it would make the mechanism more costly and complicated.  

24. Require the application of key MiFID principles for national Article 3 regimes One 
respondent suggested that it should be clarified that CDF providers are covered under MIFID. 

26. Narrow list of non-complex products, specify when investment advice is independent, 
and require annual assessment of the advice provided There was opposition to abolition of 
execution  only  regime  or  further  restriction  of  non-complex  products  while  the  latter  also 
received some support.  

28.  Reinforce  information  obligation  in  relation  to  complex  products  and  strengthen 
associated  reporting  requirements  Two  responses,  one  considering  the  provision  of 
additional data as virtually impossible with the other supporting daily reporting to the retail 
investor.  

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30.  Require  trading  venues  to  publish  data  on  execution  quality  and  improve 
information  to  clients  on  best  execution  There  was  some  support  for  publishing  data  on 
execution quality. But there was quite some agreement to the suggestion that the content of 
execution  policies  need  to  be  improved  as  they  are  often  not  sufficiently  informative  and 
difficult to read. One respondent advocated obliging firms to connect to venues offering better 
execution opportunities.  

31.  Strengthen  role  of  directors  in  relation  to  internal  control  functions  and  when 
launching new products and services Just one response agreeing with the suggestions.  

32.  Require  specific  arrangements  for  portfolio  management  and  underwriting 
Responses  on  this  issue  were  limited.  There  was  not  much  support  for  further  measures  on 
underwriting. It was pointed out that conflicts of interest provisions for firms already address 
the issues that can arise from underwriting.  

33.  Minimum  regime  for  telephone  and  electronic  recordings  Responses  on  this  issue 
were limited. Most supported harmonised requirements for telephone and electronic recording 
and for records to be kept for a minimum period. 

Retail investor associations (approximately 10 replies) 

1. Align requirements for venues and introduce OTFs Very few answers. No extension of 
"admission to trading" to new venues. No support for OTF (this would add complexity and 
confusion); rather, low thresholds to OTC trading should be introduced (globally and for each 
operator);  above  the  threshold,  operators  should  switch  to  RMs,  MTFs  or  SIs  (and  the 
category of SI is also questioned). Support for alignment RMs/MTFs. 

2. Mandatory trading of clearing eligible and sufficiently liquid derivatives on organised 
venues  Two  associations  support  mandatory  trading  on  RM  and  MTF  (no  OTF).  Role  for 
ESMA to detail criteria. Possible mandatory trading on RM/MTF to include Forex, CDS and 
IRS. Transparency does not hurt liquidity and the crisis concerned the most illiquid product 
being also most opaque.  

3.  Introduction  of  tailored  regime  for  SME  markets  Answer  from  two  associations. 
Support need to promote SME, but need to look for evidence on MiFID impact. 

4.  Authorisation  of  and  increase  in  organisational  requirements  for  all  HFT  firms 
Answer from two respondents. Support specific regime for HFT firms. Possibility to ban HFT 
disturbing markets and investors is mentioned. 

5.  Additional  requirements  for  firms  providing  sponsored  or  direct  market  access 
Agreement from two respondents. 

6. Reinforcement of organisational requirements for organised venues No answer. 

7. Introduction of order-to-execution ratio Support from two respondents to require orders 
to rest on the order book for a period of time. 

8.  Harmonised  application  of  pre-trade  transparency  waivers,  reduction  of  post-trade 
delays and extension of transparency to shares traded only on MTFs or OTFs (including 
new  SME  markets)  Answer  from  two  associations.  Reference  price  waiver  to  be  deleted. 

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Large  in  scale  waiver  to  be  left  untouched,  no  evidence  of  decrease  of  investors'  order  size 
(rather orders are sliced by intermediaries). Support extension of transparency to MTF.  

9.  Calibrated  pre-  and  post-trade  transparency  regime  for  bonds,  structured  finance 
products,  and  derivatives  Mixed  views  Some  respondents  oppose  pre  and  post  trade 
transparency  for  corporate  bonds,  citing  insufficient  liquidity  and  fragmented  issues.  Many 
respondents  note  that  pre  and  post  trade  transparency  are  currently  sufficient  for  energy 
derivatives.  Some  argue  that  the  introduction  of  trade  repositories  will  be  sufficient  to 
improve post trade transparency. Many argue that pre and post trade requirements should only 
apply  to  liquid  derivatives  and  not  to  bespoke  products,  as  their  characteristics  differ  and 
prices reflect other factors such as counterparty credit risk. Many note that post trade reports 
should be anonymous. Some note that OTC transactions are typically referenced to observable 
market prices. 

10.  Unbundling  of  data,  ESMA  guidance  on  "reasonable  price",  introduction  of 
Approved Publication Arrangements  

11.  Consolidated  tape  by  approved  commercial  provider(s)  Mixed  views.  Several 
respondents consider there is no need to introduce a consolidated tape. Some consider it might 
support development of certain markets, but stress the need to filter useful information. 

12.  Mechanism  for  banning  products,  services  or  activities  Mixed  views.  A  number  of 
respondents oppose banning of products, as they consider it limits their choice and note there 
is no systemic risk in most markets. Some urge cooperation with sectoral regulators in such 
instances. 

13.  Reinforcement  of  oversight  of  positions  in  derivatives,  including  possible  position 
limits No answer 

14. Third country regime No answer 

15. Common minimum rules for administrative sanctions and requirement for criminal 
sanctions  Two  answers.  Support  for  criminal  sanctions.  Administrative  fines  should  be 
effective  and  harmonised  across  EU.  Proceeds  to  be  partly  used  to  finance  investors' 
representatives. Sanctions to be publicly disclosed.  

16.  Extension  of  transaction  reporting  to  all  instruments  admitted  to  trading  on 
organised venues and all OTC instruments the value of which correlates with these, as 
well  as  commodity  derivatives  Two  answers.  Support  for  transaction  reporting  regime  for 
instruments admitted on RMs and MTFs and instruments the value of which correlates with 
those. Support for transaction reporting on commodity derivatives. 

17.  Require  reporting  through  Approved  Reporting  Mechanisms  and  enable  reporting 
of derivatives through trade repositories No answer 

18. Direct reporting to ESMA after transition Two answers: Yes 

19. Market operators to store order data Two answers: Yes 

20. Market operators to report on behalf of their non-MiFID members Two answers: Yes 

21.  System  of  position  reporting  by  types  of  traders  on  commodity  derivative  markets 
Two answers: Yes. 

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22. Narrow scope of commodity derivative exemptions No answer. 

23.  Classify  emission  allowances  as  financial  instruments  Two  answers:  option  to  be 
studied. 

24.  Require  the  application  of  key  MiFID  principles  for  national  Article  3  regimes 
Support for the proposal with one respondent preferring the deletion of Article 3. 

25.  Extend  MiFID  conduct  of  business  and  conflict  of  interest  rules  to  structured 
deposits  Support  for  the  proposal.  MiFID  investor  protection  rules  should  cover  all  PRIPs. 
Some  respondents  mention  the  area  of  'grey  market  investments'  ('Grauer  Kapitalmarkt'  in 
German),  investments  involving  financial  participation  in  different  assets  (for  instance,  art 
objects, real estate, containers, teak plantations) that should be brought under MiFID. 

26. Narrow list of non-complex products, specify when investment advice is independent, 
and require annual assessment of the advice provided Execution only – Mixed views, with 
three  associations  supporting  the  abolition  of  this  regime  (they  underline  the  merits  of 
profiling  the  clients  and  that  investors  would  be  allowed  not  to  provide  their  personal 
information and to proceed with any inappropriate transaction and they are concerned about 
banks  pushing  retail  investors  into  execution-only  despite  advising  them  in  order  to  escape 
further  obligation).  Support  for  narrowing  list  of  non-complex  products  except  from  one 
respondent. Support to split UCITS except from one respondent.  

Advice  -  Support  for  proposals  -  Some  suggest  restricting  definition  of  advice  to  exclude 
firms receiving commissions from product providers. Two respondents recommend that any 
reporting  on  underlying  reasons  for  advice  should  not  include  any  clause  to  reduce 
responsibility  of  advisers.  Another  association  disagrees  with  the  proposal  to  give  the 
underlying  reasons  for  advice  to  the  client  in  writing  due  to  adverse  national  experiences. 
Most  support  annual  monitoring  of  products  recommended  (especially  when  commissions 
from product providers are received by firms). Others are more prudent; they are concerned 
about costs or they would leave on-going advice to negotiations between advisors and clients 
or warn that review of clients' portfolios should not lead to unnecessary adaptations.  

27.  Apply  general  conduct  of  business  principles  between  eligible  counterparties  and 
exclude municipalities from the list of professional clients Two answers: Yes 

28.  Reinforce  information  obligation  in  relation  to  complex  products  and  strengthen 
associated  reporting  requirements  Support  for  the  proposal.  One  respondent  considers 
unrealistic  to  say  what  might  happen  to  complex  products  in  unpredictable  future;  clients 
purchasing risky products should be aware of danger of losses. One respondent advocates a 
prohibition to actively distribute structured bonds to retail clients.  

29.  Ban  inducements  for  independent  investment  advice  and  portfolio  management 
Suggestion for a large ban of inducements covering any advice. Two respondents underline 
non-compliance  of  firms  with  rules  and  lack  of  enforcement  (for  inducements  as  well  as  in 
other areas).  

30.  Require  trading  venues  to  publish  data  on  execution  quality  and  improve 
information to clients on best execution Complaint about best execution not being delivered 
to  investors  and  need  of  effective  supervision.  Need  to  improve  pre-  and  post-trade 
transparency,  to  ensure  best  price  for  client's  orders,  to  overcome  fragmentation,  to  ensure 

314 

 
 
  
 
proper  information  to  clients  about  best  execution.  Two  respondents  consider  that  data  on 
execution quality is not useful for retail investors. 

31.  Strengthen  role  of  directors  in  relation  to  internal  control  functions  and  when 
launching  new  products  and  services  Some  respondents  agree  with  strengthened  fit  and 
proper  criteria;  others  support  Commission's  proposals 
to  strengthen  organisational 
requirements and internal control functions. 

32.  Require  specific  arrangements  for  portfolio  management  and  underwriting  No 
answer. 

33.  Minimum  regime  for  telephone  and  electronic  recordings Some  respondents  suggest 
recording  of  any  contacts  leading  to  advice  in  order  to  solve  any  conflicts  between 
intermediaries and clients; it is also suggested a retention period of at least 5 years.  

Non-financial corporates (approximately 55 replies) 

1. Align requirements for venues and introduce OTFs Respondents generally oppose the 
introduction of OTF's as they consider it would increase costs, limit trading opportunities, and 
constrain their choice of instruments. There is concern that the definition of OTF will capture 
platforms  that  help  tailored  deals,  and  corporate  end  user  platforms.  Some  respondents 
welcome  increased  cooperation  between  platforms  for  market  surveillance  purposes.  Some 
welcome  OTF's  as  they  expect  them  to  bring  more  transparency,  but  are  divided  on  which 
MiFID rules should apply. 

2. Mandatory trading of clearing eligible and sufficiently liquid derivatives on organised 
venues Practically all respondents oppose mandatory organised trading, which they consider 
to be inconsistent with the exemptions proposed under EMIR. There is general concern that 
organised trading would imply central clearing, so that this obligation would impose central 
clearing on non-financial companies exempt under EMIR. Some respondents argue that these 
problems  especially  arise  when  physical  forwards  are  reclassified.  Physically  settled  futures 
should remain out of scope, as they are under Dodd-Frank. There is further concern among 
many  respondents  that  this  would  limit  the  range  of  non-standardised  OTC  instruments 
available.  It  would  also  limit  the  execution  choice  for  end  users.  Some  argue  that  it  would 
hinder  execution  of  transactions  in  the  desired  size.  Many  also  argue  that  it  would  increase 
costs due to margin calls. Some smaller companies may not be able to make the arrangements 
to trade through an exchange. It would be difficult for non-financials to hedge a combination 
of exchange traded contracts and continuous adjustments. 

3.  Introduction  of  tailored  regime  for  SME  markets  Some  respondents  welcome  the 
introduction  of  SME  markets,  but  do  note  concern  that  harmonisation  of  requirements  on 
these markets may not be appropriate. 

4.  Authorisation  of  and  increase  in  organisational  requirements  for  all  HFT  firms  A 
respondent  favours  increased  requirements  on  HFT  firms  as  HFT  may  distort  commodity 
derivatives markets. 

5. Additional requirements for firms providing sponsored or direct market access  

6. Reinforcement of organisational requirements for organised venues  

7. Introduction of order-to-execution ratio  

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8.  Harmonised  application  of  pre-trade  transparency  waivers,  reduction  of  post-trade 
delays and extension of transparency to shares traded only on MTFs or OTFs (including 
new  SME  markets)  Some  respondents  welcome  further  harmonisation,  but  see  no  need  to 
adjust current thresholds and delays. 

9.  Calibrated  pre-  and  post-trade  transparency  regime  for  bonds,  structured  finance 
products,  and  derivatives  Mixed  views  Some  respondents  oppose  pre  and  post  trade 
transparency  for  corporate  bonds,  citing  insufficient  liquidity  and  fragmented  issues.  Many 
respondents  note  that  pre  and  post  trade  transparency  are  currently  sufficient  for  energy 
derivatives.  Some  argue  that  the  introduction  of  trade  repositories  will  be  sufficient  to 
improve post trade transparency. Many argue that pre and post trade requirements should only 
apply  to  liquid  derivatives  and  not  to  bespoke  products,  as  their  characteristics  differ  and 
prices reflect other factors such as counterparty credit risk. Many note that post trade reports 
should be anonymous. Some note that OTC transactions are typically referenced to observable 
market prices. 

10.  Unbundling  of  data,  ESMA  guidance  on  "reasonable  price",  introduction  of 
Approved Publication Arrangements  

11.  Consolidated  tape  by  approved  commercial  provider(s)  Mixed  views.  Several 
respondents consider there is no need to introduce a consolidated tape. Some consider it might 
support development of certain markets, but stress the need to filter useful information. 

12.  Mechanism  for  banning  products,  services  or  activities  Mixed  views.  A  number  of 
respondents oppose banning of products, as they consider it limits their choice and note there 
is no systemic risk in most markets. Some urge cooperation with sectoral regulators in such 
instances. 

13.  Reinforcement  of  oversight  of  positions  in  derivatives,  including  possible  position 
limits Most respondents oppose position disclosure. They question the benefits, and there is 
general concern that it would hurt liquidity, and that individual open positions and business 
strategies may be inferred. Most respondents oppose position limits. Many favour a position 
management  approach,  welcoming  harmonisation  and  more  dialogue.  If  limits  were  to  be 
imposed,  there  should  be  a  hedge  exemption,  and  characteristics  of  products  and  markets, 
including  the  wider  EU  market,  need  to  be  taken  into  account.  A  number  of  respondents 
oppose using IAS 39. 

14.  Third  country  regime  Some  respondents  welcome  a  third  country  regime  on  an 
exemptive relief basis, but cite concern over access to third countries. 

15. Common minimum rules for administrative sanctions and requirement for criminal 
sanctions  

16.  Extension  of  transaction  reporting  to  all  instruments  admitted  to  trading  on 
organised venues and all OTC instruments the value of which correlates with these, as 
well  as  commodity  derivatives  Respondents  generally  do  not  oppose  the  extension  of  the 
scope  of  transaction  reporting,  but  stress  that  there  should  be  no  duplication  of  reporting 
under REMIT or EMIR. Some welcome aggregate rather than trade by trade reporting. 

17.  Require  reporting  through  Approved  Reporting  Mechanisms  and  enable  reporting 
of derivatives through trade repositories  

18. Direct reporting to ESMA after transition  

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19.  Market  operators  to  store  order  data  Some  respondents  welcome  this  extension  as  a 
sensible accompaniment to the extension of MAD to attempted market manipulation. 

20. Market operators to report on behalf of their non-MiFID members  

21.  System  of  position  reporting  by  types  of  traders  on  commodity  derivative  markets 
Most  respondents  question  the  need  for  position  reporting,  noting  that  market  operators  are 
better placed to oversee the markets. Position reporting would require costly changes to deal 
capture systems. Many respondents express concern that individual positions may be inferred, 
and  stress  that  there  should  be  no  duplication  of  regulation  or  reporting.  A  number  of 
respondents  welcome  disclosure  of  weekly  open  positions  as  in  the  US.  A  few  favour 
categorisation as commercial versus non-commercial, and others by commercial, banks, other 
financial,  other.  With  regards  to  contract  design,  some  note  there  should  be  no  mandatory 
physical settlement. 

22.  Narrow  scope  of  commodity  derivative  exemptions  Almost  all  respondents  oppose 
narrowing the scope of exemptions as energy companies are not systemically relevant and do 
not have clients in the MiFID sense. The main concern is that energy companies would need 
to  meet  capital  requirements  under  CRD.  Narrowing  the  scope  would  affect  energy 
companies'  business  models.  It  would  increase  entry  costs  and  hurt  competition.  Hedging 
should  be  exempt.  Dealing  on  own  account  to  help  customers  hedge  their  prices  should  be 
exempt,  and  they  should  be  able  to  offer  hedge  transactions  (brokerage)  to  clients.  Non-
financial users and those offering services on an ancillary basis should remain exempt. Some 
fear regulatory scrutiny of contracts. Some argue that energy companies are already covered 
by  other  legislation,  notably  EMIR.  Many  oppose  reclassifying  forwards  as  financial 
instruments. 

23.  Classify  emission  allowances  as  financial  instruments  Respondents  generally  oppose 
reclassifying  emission  allowances,  as  their  main  purpose  is  not  investment,  but  hedging. 
Many  note  it  would  raise  costs  for  compliance  buyers.  Some  favour  a  specific  regime,  e.g. 
through REMIT. There should be no regulatory overlap. 

24. Require the application of key MiFID principles for national Article 3 regimes  

25.  Extend  MiFID  conduct  of  business  and  conflict  of  interest  rules  to  structured 
deposits  

26. Narrow list of non-complex products, specify when investment advice is independent, 
and require annual assessment of the advice provided  

27.  Apply  general  conduct  of  business  principles  between  eligible  counterparties  and 
exclude municipalities from the list of professional clients Some welcome the application 
of general principles. 

28.  Reinforce  information  obligation  in  relation  to  complex  products  and  strengthen 
associated reporting requirements  

29. Ban inducements for independent investment advice and portfolio management  

30.  Require  trading  venues  to  publish  data  on  execution  quality  and  improve 
information to clients on best execution  

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31.  Strengthen  role  of  directors  in  relation  to  internal  control  functions  and  when 
launching new products and services 

32.  Require  specific  arrangements  for  portfolio  management  and  underwriting  Some 
welcome  specific  arrangements  as  there  may  be  conflicting  interests  between  issuer  and 
underwriter. 

33.  Minimum  regime  for  telephone  and  electronic  recordings  Some  welcome  such  a 
regime,  as  it  could  help  resolve  conflicts,  and  there  currently  is  divergence  under  different 
contracts. 

Academics (approximately 10 replies) 

1. Align requirements for venues and introduce OTFs Overall support Respondents in this 
category  felt  that  there  was  a  strong  need  to  introduce  a  level  playing  field.  They  felt  that 
there was a need to eliminate admission to trading loopholes whereby some instruments may 
be  traded  on  some  venues  without  being  admitted  to  trading,  and  not  on  others.  All  MiFID 
trading  venues  and  any  others  that  seem  relevant  should  be  included.  There  was  strong 
support for aligning requirements; broker crossing networks (BCNs) should be brought within 
scope  as  other  venues,  otherwise  they  are  operating  under  a  loophole.  They  should  have  to 
comply with the same regulatory requirements as other venues; they have a large market share 
and should be treated as important. Respondents were strongly against the threshold approach, 
for fear of arbitrage, market uncertainty, and difficulties in choosing the right threshold, given 
the wide variation of market sizes across Member States. There is also the question of what 
would happen if the volume of the venue fell. There was strong support for the principle that 
all  venues  performing  the  same  activities  should  be  treated  equally  –  so  BCNs  should  be 
treated accordingly since they are not innovative in terms of procedures, instead performing a 
mix  of  the  activities  of  MTF  dark  pool  and  SI  functionalities.  Respondents  felt  it  might  be 
possible to regulate BCN activities falling into either category separately, without creating a 
new  category,  but  that  BCNs  should  not  be  subject  to  less  regulation.  However,  genuine 
derivative price crossing mechanisms should not be affected. 

2. Mandatory trading of clearing eligible and sufficiently liquid derivatives on organised 
venues There was strong agreement for standardised OTC products to be traded in this way, 
to  help  eliminate  information  asymmetries  exploited  by  some  participants  and  increase 
efficiency.  The  degree  of  concentration  should  be  taken  into  account.  For  more  complex 
derivatives, it may not be realistic to trade them in this way. OTC trades are different to what 
MiFID envisages. Large orders should be protected against market impact; this need should 
be  cross-checked  with  the  reality  of  trading  opportunities  provided  in  public,  transparent 
markets.  Existing  derivatives  proposed  include  benchmark  index  credit  default  swaps,  some 
large single-name CDS issues, and sovereign CDS. 

3. Introduction of tailored regime for SME markets There was less support for this option, 
as it was felt that MTFs already catered towards an SME market, with generally less stringent 
requirements,  so  that  there  was  no  need  to  create  further  sub-categorisations  as  in  practice 
these exist. There was caution on the consequences of such a move. 

4. Authorisation of and increase in organisational requirements for all HFT firms Some 
support  for  this  approach,  provided  the  threshold  and  definition  for  automated  trading  are 
carefully defined. 

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5.  Additional  requirements  for  firms  providing  sponsored  or  direct  market  access 
Overall  support.  Some  respondents  noted  CESR  work  in  this  area  and  the  additional  risk 
posed by such arrangements. 

6.  Reinforcement  of  organisational  requirements  for  organised  venues  Overall  support. 
Circuit  breakers  were  seen  as  effective  and  co-location  a  normal  commercial  arrangement, 
provided that all can access if they wish to pay. Smaller tick sizes are viewed as a good thing 
as they reduce volatility, reduce inventory risk, but tick sizes should be similar on all venues. 

7. Introduction of order-to-execution ratio Not supported. 

8.  Harmonised  application  of  pre-trade  transparency  waivers,  reduction  of  post-trade 
delays and extension of transparency to shares traded only on MTFs or OTFs (including 
new  SME  markets)  Overall  support.  Respondents  said  that  suggested  changes  to  waivers 
look  reasonable,  but  that  large  orders  should  be  covered  by  pre-trade  transparency  waivers. 
Several  MTFs  already  are  SME  markets.  Transparency  should  always  be  similar  when  the 
same instruments are traded; transparency to be extended to MTFs. 

9.  Calibrated  pre-  and  post-trade  transparency  regime  for  bonds,  structured  finance 
products,  and  derivatives  For  equities,  transparency  is  roundly  supported.  For  other 
products, this would need to be tailored to the structure of these markets. 

10.  Unbundling  of  data,  ESMA  guidance  on  "reasonable  price",  introduction  of 
Approved Publication Arrangements Pre- and post-trade separation supported. This should 
also help pricing, but some suggest this is still a commercial arrangement that should not be 
regulated.  

11.  Consolidated  tape  by  approved  commercial  provider(s)  Opinion  was  divided  on 
whether or not a consolidated tape was necessary or useful, though a commercial solution was 
preferred. 

12.  Mechanism  for  banning  products,  services  or  activities  Mixed  views.  The  bans  (or 
possibility of them) could disrupt markets; others sought clarification. 

13.  Reinforcement  of  oversight  of  positions  in  derivatives,  including  possible  position 
limits Hard position limits were opposed, with a suggestion to focus more on exposure. 

14. Third country regime No comments. 

15. Common minimum rules for administrative sanctions and requirement for criminal 
sanctions Overall support. There should be standardised rules and standardised sanctions to 
ensure a level playing field. 

16.  Extension  of  transaction  reporting  to  all  instruments  admitted  to  trading  on 
organised venues and all OTC instruments the value of which correlates with these, as 
well  as  commodity  derivatives  Provided  that  the  definition  of  'financial  instrument'  was 
completely clear, respondents in this category were strongly in favour of these measures. 

17.  Require  reporting  through  Approved  Reporting  Mechanisms  and  enable  reporting 
of  derivatives  through  trade  repositories  There  was  general  support  for  removing 
transaction reporting loopholes. 

18. Direct reporting to ESMA after transition There was some support for this option. 

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19. Market operators to store order data There was support for this option, so long as the 
requirements were not overly burdensome. 

20. Market operators to report on behalf of their non-MiFID members The respondents 
supported this proposal. 

21.  System  of  position  reporting  by  types  of  traders  on  commodity  derivative  markets 
No comments. 

22. Narrow scope of commodity derivative exemptions No comments. 

23. Classify emission allowances as financial instruments No comments. 

24. Require the application of key MiFID principles for national Article 3 regimes There 
was support for strictly limiting the number of exemptions that could be applied. 

25.  Extend  MiFID  conduct  of  business  and  conflict  of  interest  rules  to  structured 
deposits There was support for this measure. 

26. Narrow list of non-complex products, specify when investment advice is independent, 
and  require  annual  assessment  of  the  advice  provided  There  was  one  suggestion  of 
forfeiting  the  complex  /  non-complex  distinction  in  favour  of  the  classification  of  financial 
products  being  discussed  in  relation  to  PRIPS  taking  into  account  level  of  risk  and  time 
horizon. Respondents felt that execution only services should be allowed where products for 
simple, low risk products and some felt that where the client was acting purely on their own 
initiative  they  should  be  allowed  to  undertake  these.  There  was  some  support  for  barring 
execution  only  services  where  credit  was  also  granted,  especially  as  highly  leveraged 
transactions may pose systemic risks, but others felt this should be regulated more from the 
point  of  view  of  supervisors  ensuring  clients  posted  enough  collateral  and  that  firms  have 
enough  capital.  There  was  more  support  for  tying  the  barring  of  execution  only  to  the 
definition of complex and non-complex. Respondents opposed the abolishment of execution 
only services. There was significant agreement that products were not sold on suitability, but 
simply on fees. Therefore, respondents generally supported disclosure of the basis on which 
advice  is  given.  Some  respondents  noted  the  advantages  of  requiring  qualifications  to  give 
advice. There was agreement for recording in writing the logic behind investment decisions. 

There was agreement that advice should be updated, but some felt that the situations where 
this was appropriate needed to be defined.  

27.  Apply  general  conduct  of  business  principles  between  eligible  counterparties  and 
exclude  municipalities  from  the  list  of  professional  clients  There  was  strong  support  for 
introducing  a  high-level  requirement  for  eligible  counterparties  to  act  honestly,  fairly  and 
professionally,  and  to  be  fair,  clear  and  not  misleading.  This  is  seen  as  fundamental  to  the 
financial markets. 

28.  Reinforce  information  obligation  in  relation  to  complex  products  and  strengthen 
associated  reporting  requirements  Respondents  felt  that  if  advice  is  provided,  then  there 
should be fuller obligations, but that if a portfolio was discretionary, there was less need for 
such obligations. 

29.  Ban  inducements  for  independent  investment  advice  and  portfolio  management 
General support. Inducements were not seen as acceptable. 

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30.  Require  trading  venues  to  publish  data  on  execution  quality  and  improve 
information to clients on best execution There was some support for these measures. 

31.  Strengthen  role  of  directors  in  relation  to  internal  control  functions  and  when 
launching  new  products  and  services  There  was  strong  support  for  all  these  measures,  as 
culture and the fit and proper test was seen as extremely important. 

32.  Require  specific  arrangements  for  portfolio  management  and  underwriting  There 
was limited support. 

33. Minimum regime for telephone and electronic recordings There was support for these 
measures  on  the  basis  that  it  is  already  common  in  several  MS  and  that  this  would  be 
beneficial to all the parties involved. 

Service Providers (approximately 22 replies) 

1.  Align  requirements  for  venues  and  introduce  OTFs  Concern  was  expressed  by  some 
respondents that a definition of admission to trading could lead to unintended or inadvertent 
consequences  unless  carefully  considered.  A  majority  of  respondents  agreed  with  the  new 
OTF category but raised concerns that: there is still a lack of clarity about the objective of the 
category being so broad; it needs further clarification/definition otherwise it will capture post 
trade  activities,  retail  service  providers,  receivers  and  transmitters  etc;  it  does  not  clearly 
distinguish for systems that are multilateral and non-discretionary when a system is an MTF 
and  when  it  is  an  OTF.  There  must  be  a  level  playing  field.  Some  commented  that  there  is 
limited  evidence  of  trading  shifting  outside  regulated  markets  and  MTFs  to  new  venues. 
Many  do  not  support  the  concept  of  using  thresholds  to  differentiate  between  regulatory 
categories. There was support for the idea of cooperation between trading venues regarding 
surveillance. 

2. Mandatory trading of clearing eligible and sufficiently liquid derivatives on organised 
venues There was limited support for this option. Opposition was based on the principle that 
it should be for investors to decide where and how they execute a trade. Also it was argued 
that  rather  than  using  prohibitions,  trading  on  organised  venues  should  be  incentivised.  It 
should be for venues and participants to determine when an instrument should be traded on a 
facility.  Some  suggested  that  such  a  requirement  should  apply  where  contracts  are  mature, 
liquid and standardised. But nascent markets should be able to operate unneeded regulatory 
burden. Others suggested if instrument can be cleared there should be a presumption it can be 
traded  on  an  OTV.  Some  responses  suggested  full  pre-trade  transparency  will  have  a  very 
negative effect on these OTC markets. 

3. Introduction of tailored regime for SME markets There were limited responses on this 
issue. One response suggested that such a category is unnecessary and instead it is necessary 
to promote investor interest in SMEs. 

4. Authorisation of and increase in organisational requirements for all HFT firms There 
was support for these proposals. One respondent suggested the automated trading definition 
may be too broad and needs to distinguish between algorithms that take control away from the 
participant and simpler forms where the participant retains control over the method, manner 
and timing of order entry and execution. Another suggested that it should be made clearer that 
automated trading is trading where a computer is helping to deliver best execution and/or risk 
management on criteria such as minimising market impact, completing block trades. HFT is a 

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specific  computer  trading  activity  that  focuses  on  high  throughput  and  low  latency.  The 
current definitions do not reflect this distinction. 

5. Additional requirements for firms providing sponsored or direct market access There 
was support for these requirements being imposed on such firms. 

6. Reinforcement of organisational requirements for organised venues There was support 
for requirements for more effective stress testing and circuit breakers. 

7.  Introduction  of  order-to-execution  ratio  There  was  little  support  for  minimum  resting 
periods, minimum tick sizes, order to transaction ratios or a requirement for HFT to provide 
ongoing  liquidity.  It  was  argued  that  resting  periods  for  orders  will  have  unintended 
consequences. A minimum tick size is not necessary and we can't prescribe a one size fits all 
approach.  One  respondent  argued  that  high  order  to  transaction  ratios  do  not  damage  but 
benefit the market. Therefore, resting times and order to transaction ratios are misguided and 
detrimental. One response pointed out that any requirement to provide liquidity cannot work 
if market is crashing. A firm would be out of business in hours if it had to provide competitive 
quotes in such situations. This proposal fails to understand the rationale for market making – 
to provide liquidity in normal conditions. 

8.  Harmonised  application  of  pre-trade  transparency  waivers,  reduction  of  post-trade 
delays and extension of transparency to shares traded only on MTFs or OTFs (including 
new SME markets) There was support for more uniform application of waivers. Also there 
was  support  for  actionable  indications  of  interest  being  covered  by  the  pre-trade  regime. 
There were mixed views about whether order stubs should benefit from a pre-trade waiver. 

9.  Calibrated  pre-  and  post-trade  transparency  regime  for  bonds,  structured  finance 
products,  and  derivatives  A  number  of  responses  commented  that  it  is  unclear  what  non-
equity  products  are  intended  to  be  covered  under  the  proposals.  Unlike  equities,  non-equity 
instruments potentially cover a wide universe of products. Apart from more definition of the 
scope  more  information  is  necessary  about  the  proposed  calibration.  One  response  agreed 
with extension of transparency to other instruments where there is transparency in other major 
markets  e.g.  certain  bonds  and  securitised  instruments.  Another  response  suggested  the 
proposed public quoting obligation goes far beyond the US and also the regime for equities in 
the  EU  and  will  dissuade  market  making.  So  it  is  not  useful.  Some  argued  that  significant 
costs  have  been  ignored  in  the  proposals.  Increased  transparency  in  dealer  markets  (as 
opposed to order driven markets) is likely to be counterproductive. Also, it is not helpful in 
markets  with  limited  numbers  of  buyers  and  sellers  (such  as  corporate  bond  markets  where 
investors  hold  their  bonds  until  maturity).  Pre-trade  transparency  requirements  need  to  take 
into  account  the  needs  of  buyers  and  sellers  and  the  effect  of  proposals  on  liquidity.  One 
response  opposed  further  transparency  especially  for  OTC  energy  markets  as  these  are  not 
retail markets and there is a lack of recognition of differences regarding participants. 

10.  Unbundling  of  data,  ESMA  guidance  on  "reasonable  price",  introduction  of 
Approved Publication Arrangements Most responses supported the proposed APA regime 
and the criteria for approval. There was some support for extending the APA regime to non-
equities.  There  was  wide  support  for  prescribed  standards  to  harmonise  the  quality,  content 
and format of post trade reports. Some suggested prescribing a consistent format is essential. 
One  suggested  ISO  20022  already  prescribes  standards  for  format  of  reports  that  could  be 
used. Another that there should be greater consistency in post trade data regarding the use of 
time  stamps.  There  was  some  support  for  prescribing  standards  to  harmonise  content  and 
format  also  for  non-equities.  A  number  of  responses  suggested  the  concept  of  "reasonable 

322 

 
 
  
 
cost" needs to be further defined under the Directive. There is a monopoly and so this is the 
only effective means of addressing the issue. A contrary view was suggested that the cost of 
data  should  be  left  to  competitive  forces.  A  number  of  responses  supported  the  idea  that 
making information available after 15 minutes will reduce costs. One response did not agree 
that  unbundling  of  data  will  help  reduce  costs.  There  was  some  support  for  extending 
standards and proposals to non-equity markets where there are many different sources of data. 

11.  Consolidated  tape  by  approved  commercial  provider(s)  Most  believe  the  case  for  a 
consolidated tape has not been made out. Most support was for option C on the basis that it 
will allow competition, innovation, responsiveness to client demands and will prevent risk of 
a single point of failure. There was some limited support for Option B. One made the point 
that the consolidated tape was proposed in the US in the 1970s but it seems unlikely if today's 
technology was available then that US would have adopted such an approach. Not possible or 
very difficult to have a consolidated tape for non-equities and need for it and evidence of a 
problem  does  not  exist.  For  non-equities  will  have  trade  repositories.  One  provider  argued 
that  the  consolidated  tape  should  include  pre-trade  information  but  most  argued  there  is  no 
clear case for a consolidated tape for pre-trade data and it is not feasible for latency issues. It 
was  also  argued  that  it  will  be  important  to  also  place  obligations  on  data  providers  to 
aggregate. 

12.  Mechanism  for  banning  products,  services  or  activities  Concerns  were  raised  about 
banning of products. 

13.  Reinforcement  of  oversight  of  positions  in  derivatives,  including  possible  position 
limits There was disagreement about limits as to how much prices can fluctuate. This would 
threaten an orderly process especially for energy derivative markets. There was opposition to 
imposition of position limits. 

14. Third country regime There was some opposition to such a regime on the basis that it 
fails to recognise that many EU firms need to use non EU firms to access non EU markets. 

15. Common minimum rules for administrative sanctions and requirement for criminal 
sanctions There was some support for more harmonisation of administrative sanctions. 

16.  Extension  of  transaction  reporting  to  all  instruments  admitted  to  trading  on 
organised venues and all OTC instruments the value of which correlates with these, as 
well  as  commodity  derivatives  There  was  support  for  further  clarification  of  what  is  a 
transaction.  Respondents  were  not  convinced  about  extending  requirements  on  transaction 
reporting.  Some  argued  it  is  mainly  relevant  to  equities  and  equity  related  instruments.  For 
example,  the  risk  of  market  abuse  relating  to  interest  rates  and  foreign  exchange  is  much 
lower.  For  other  asset  classes  different  tools  are  required.  There  was  support  for  the  use  of 
client  identifiers.  But  some  argued  that  passing through  of  client  identifiers  is  not  practical. 
One  suggested  increased  use  of  the  Business  Identifier  Code  (BIC)  (ISO  9362)  which  is 
already  the  basis  for  entity  identification  in  transaction  reports  under  MiFID.  There  were 
doubts that a trader identifier would work and there is no common identifier that can be used 
for all traders. There were doubts about whether reporting of orders will work as many orders 
are not submitted to or by investment firms. 

17.  Require  reporting  through  Approved  Reporting  Mechanisms  and  enable  reporting 
of derivatives through trade repositories There was support for the use of ARMs. 

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18.  Direct  reporting  to  ESMA  after  transition  A  number  of  respondents  did  not  support 
this proposal. 

20.  Market  operators  to  report  on  behalf  of  their  non-MiFID  members  The  practical 
issue was raised that the market operator will not have all of the necessary data to be able to 
make a transaction report under MiFID. 

22.  Narrow  scope  of  commodity  derivative  exemptions  There  was  some  opposition  to 
removing  the  specialist  commodity  exemptions  as  no  regulatory  failure  has  been  identified 
and there is no appropriate regulatory regime developed for commodity firms, especially no 
appropriate capital regime. 

23. Classify emission allowances as financial instruments There was some opposition with 
the argument being made that these are spot contracts. 

24.  Require  the  application  of  key  MiFID  principles  for  national  Article  3  regimes  A 
number  of  responses  disagreed  with  proposals  to  apply  MiFID  type  obligations  to  firms 
"receiving  and  transmitting  orders".  Some  firms  only  receive  instructions  from  clients  and 
pass  these  on  to  a  broker.  They  should  only  be  required  to  pass  a  fit  and  proper  test  for 
authorisation and be under a duty to act in the best interests of the client. 

25.  Extend  MiFID  conduct  of  business  and  conflict  of  interest  rules  to  structured 
deposits There was some support for this proposal. 

26. Narrow list of non-complex products, specify when investment advice is independent, 
and require annual assessment of the advice provided There was opposition to abolition of 
the  execution  only  regime.  This  was  on  the  basis  that  clients  should  have  the  choice  of 
receiving advice or not and deletion of the possibility for execution only would be detrimental 
to investors. A number of responses argued that all UCITS products should be non-complex. 
Also  that  further  clarity  is  required  about  instruments  currently  included  or  excluded  under 
article 19(6).  

27.  Apply  general  conduct  of  business  principles  between  eligible  counterparties  and 
exclude  municipalities  from  the  list  of  professional  clients  Some  responses  opposed 
applying  principles  to  ECP  clients  as  it  is  unnecessary  and  they  have  the  contracts  and 
resources to protect themselves. There was also opposition to further limiting the ECP regime 
according  to  products  or  other  criteria.  Some pointed  out  that  the  Commission  has  failed  to 
appreciate  that  many  new  and  OTC  markets  do  not  involve  retail  but  wholesale  clients. 
Therefore underlying assumptions for some proposals are not correct. There was support for 
classifying  local  authorities  as  professional  investors.  But  a  need  to  clearly  define  what  is 
meant by municipalities, as it can mean very diverse associations. 

28.  Reinforce  information  obligation  in  relation  to  complex  products  and  strengthen 
associated  reporting  requirements  There  was  some  support  for  strengthened  reporting 
requirements  but  only  where  the  adviser  and  customer  agree  to  it.  It  was  argued  it  is  not 
necessary for eligible counterparties. There was support for quarterly valuations of complex 
products. 

29.  Ban  inducements  for  independent  investment  advice  and  portfolio  management 
There was support for advisers being required to consider a sufficient range of products and 
for the rationale for advice being set out in writing. But review of investments should not be 

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automatic but a matter for agreement with clients. For portfolio management there should be 
disclosure of inducements not a ban. 

30.  Require  trading  venues  to  publish  data  on  execution  quality  and  improve 
information  to  clients  on  best  execution  There  were  mixed  views  about  whether  data  on 
execution  quality  would  be  very  useful.  Some  believe  it  would  be  helpful  for  firms.  Others 
argued it should be mandatory. There was support for the idea that information to clients on 
best execution should be improved. 

31.  Strengthen  role  of  directors  in  relation  to  internal  control  functions  and  when 
launching new products and services There was support for proposals in this area. 

32. Require specific arrangements for portfolio management and underwriting  

33. Minimum regime for telephone and electronic recordings (129-132) 

There was support for further harmonisation. One respondent argued facilities are available to 
retain records for 10 years. Another thought 3 years was a reasonable period to retain records. 

Others  

(approximately 55 replies) 

1.  Align  requirements  for  venues  and  introduce  OTFs  Support  for  creation  of  OTFs 
including from issuers, capturing all transactions and that these are suitably regulated in line 
with  RMs  and  to  avoid  arbitrage.  Limited  support  for  possibility  of  genuinely  ad  hoc  OTC 
trading  to  be  excluded.  Generally  strong  support  for  the  measures  proposed,  though 
opposition  to  forcing  non-financial  counterparties  to  clear  derivatives.  One  respondent  felt 
that  OTFs  should  only  be  used  for  a  minority  of  bilateral  OTC  transactions,  with  RMs  and 
MTFs  absorbing  the  remainder  of  activity.  One  respondent  cautioned  against  including 
venues whose sole purpose is to arrange tailor-made, non-standardised products. Opposition 
to automatic conversion of OTFs to MTFs. 

2. Mandatory trading of clearing eligible and sufficiently liquid derivatives on organised 
venues  Considerable  support  for  cleared,  standardised,  eligible  and  sufficiently  liquid 
derivatives  to  be  traded  on  regulated  markets.  Large  size  of  OTC  markets  hampers  price 
formation.  ESMA  to  take  into  account  large  buy/  sell-side  imbalances  into  account.  All 
commodity derivatives should be exchange traded. Call for position limits, especially in the 
case of food derivatives. Blame against excessive speculation for commodity prices. Support 
for  OTC  markets  to  be  subject  to  proposed  transparency  requirements.  On  respondent 
suggested  following  EMIR.  Some  concerns  regarding  non-financials  and  support  for 
exempting them. 

3.  Introduction  of  tailored  regime  for  SME  markets  Some  opposition  on  grounds  of  the 
difficulty of developing a definition. 

4. Authorisation of and increase in organisational requirements for all HFT firms Broad 
support for more regulation of HFT, and concern that some market players might have access 
to information earlier than others. There was some concern regarding the potential negative 
effectives of HFT. 

5.  Additional  requirements  for  firms  providing  sponsored  or  direct  market  access 
Agreement  on  additional  requirements  and  desire  to  maintain  level  playing  field.  General 
support for these measures. 

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6.  Reinforcement  of  organisational  requirements  for  organised  venues  Call  for  risk 
controls  re.  automated  trading,  introduction  of  circuit  breakers,  specification  of  minimum 
order sizes and general concern of any party having privileged access to information. General 
support for further organisational and oversight requirements. 

7. Introduction of order-to-execution ratio Some support among those providing responses. 

8.  Harmonised  application  of  pre-trade  transparency  waivers,  reduction  of  post-trade 
delays and extension of transparency to shares traded only on MTFs or OTFs (including 
new  SME  markets)  General  support  for  increasing  transparency  in  line  with  G20 
commitments. Some are against maintaining large in size waivers. 

9.  Calibrated  pre-  and  post-trade  transparency  regime  for  bonds,  structured  finance 
products, and derivatives There is very strong support for pre- and post-trade transparency 
to be strengthened regardless of the venue to improve price formation and reduce information 
asymmetries.  "Burden  of  proof  that  higher  transparency  will  reduce  liquidity  should  be  on 
those arguing against!" Some called for the transparency proposals to go even further. Only 
one respondent felt that current transparency requirements were sufficient. 

10.  Unbundling  of  data,  ESMA  guidance  on  "reasonable  price",  introduction  of 
Approved  Publication  Arrangements  General  support.  Calls  to  guarantee  the  quality  of 
data; support for publication through a single consolidated tape. While transparency and data 
consolidation  is  seen  as  a  priority  in  equity  markets,  there  is  support  for  extending  the 
measures  to  bonds,  structured  products  and  standardised  derivatives.  There  was  support  for 
reducing the cost of data, unbundling data, and widespread concern about the contribution of 
market  fragmentation  to  the  increasing  cost  of  data,  with  some  calling  for  harmonisation  of 
information and format. There were calls to learn from the US consolidated tape. Respondents 
called for EMIR / MiFID consistency. 

11. Consolidated tape by approved commercial provider(s) There is strong support for this 
measure, with many raising concerns about market fragmentation increasing costs. There was 
further support for this measure, with some saying that this is of such high priority that the EU 
cannot  wait  for  commercial  providers  to  step  in,  with  several  respondents  favouring  the 
centralised  non-profit  solution.  Only  one  respondent  felt  that  there  was  no  need  for  a 
consolidated tape, preferring rather the improvement and harmonisation of existing data. 

12. Mechanism for banning products, services or activities There was significant support, 
but  generally  only  in  the  case  of  clearly  defined  situations.  One  respondent  did  not  support 
this  measure,  preferring  more  stringent  initial  criteria  for  product  approval.  One  respondent 
felt  that  banning  products  should  be  based  less  on  the  effect  on  the  market  as  a  whole,  but 
rather  on  the  underlying  product.  In  general,  respondents  felt  that  banning  a  product  should 
only be used as an exceptional measure. 

13.  Reinforcement  of  oversight  of  positions  in  derivatives,  including  possible  position 
limits There was some support for the adoption of hard position limits, but only in limited and 
clearly  pre-defined  situations.  There  was  significant  concern  that  more  and  more  actors  in 
commodity  markets  were  not  commercial  but  financial  players  whose  participation  in  the 
markets  is  fundamentally  removed  from  the  physical  realities  of  the  actual  commodities 
involved. There was support for applying position limits both at firm and vehicle level. 

14. Third country regime There was general support provided there was a strict assessment 
of equivalence, and fears that without such a regime, access to capital could be limited. 

326 

 
 
  
 
15. Common minimum rules for administrative sanctions and requirement for criminal 
sanctions  There  was  some  support,  though  also  some  concern  about  shifting  blame  from 
institutions  to  individuals.  There  was  support  for  whistleblowing  functions.  Some  felt  that 
administrative  sanctions  alone  would  not  act  as  a  deterrent  unless  they  were  significantly 
increased in scale. Respondents proposed transparency in respect of sanctions against firms. 

16.  Extension  of  transaction  reporting  to  all  instruments  admitted  to  trading  on 
organised venues and all OTC instruments the value of which correlates with these, as 
well as commodity derivatives There was concern among respondents to ensure that MAD 
be  extended  to  encompass  the  relationship  between  the  impact  of  commodity  derivative 
markets. 

17.  Require  reporting  through  Approved  Reporting  Mechanisms  and  enable  reporting 
of  derivatives  through  trade  repositories  A  number  of  respondents  agreed  with  the 
clarification and waiving requirements. 

18. Direct reporting to ESMA after transition There was some support for direct reporting 
to ESMA, provided there is sufficient resource involved. 

19.  Market  operators  to  store  order  data  There  was  some  support  for  market  operators 
being obliged to store data. 

20. Market operators to report on behalf of their non-MiFID members (72) 

21.  System  of  position  reporting  by  types  of  traders  on  commodity  derivative  markets 
There was general support for position trading by types of traders in order to assess impact 
and  the  expected  support  for  the  trading  of  the  vast  majority  of  commodity  derivatives  on 
exchanges,  in  line  with  most  respondents'  calls  for  significant  extension  of  transparency 
requirements. However, one respondent had concerns about confidentiality of order initiators. 

22. Narrow scope of commodity derivative exemptions There was some support for these 
measures, although one respondent felt that the current regime should be maintained. 

23. Classify emission allowances as financial instruments There was some support amongst 
respondents who answered this question. 

24. Require the application of key MiFID principles for national Article 3 regimes There 
was support for the application of key MiFID principles. 

25.  Extend  MiFID  conduct  of  business  and  conflict  of  interest  rules  to  structured 
deposits There was general support for extending the rules. 

26. Narrow list of non-complex products, specify when investment advice is independent, 
and require annual assessment of the advice provided There was some support for these 
measures, including informing clients of the basis on which advice is given, although some 
had  concerns  about  the  cost  of  more  documentation.  Some  favoured  intermediaries  simply 
confirming if the advice they gave was on a one-off or long-term basis, with requirements in 
line with this. A few responses felt that execution only regime should be abolished. There was 
general support for investors knowing the basis on which advice was given. 

27.  Apply  general  conduct  of  business  principles  between  eligible  counterparties  and 
exclude  municipalities  from  the  list  of  professional  clients  Some  respondents  feared  this 
would adversely affect municipalities if they were simply classed as retail investors and most 

327 

 
 
  
 
proposed  keeping  the  current  classifications.  There  was  limited  support  for  a  different 
categorisation that recognised the fact that such bodies manage public debt.  

28.  Reinforce  information  obligation  in  relation  to  complex  products  and  strengthen 
associated  reporting  requirements  Aside  from  seeking  clarification  on  what  constitutes  a 
complex product, respondents supported the additional information reporting requirements. 

29.  Ban  inducements  for  independent  investment  advice  and  portfolio  management 
There was some support and some opposition to banning inducements, with some calling for 
evidence  of  investor  detriment  in  this  respect.  In  addition  to  those  who  suggested  banning 
inducements,  some  said  that  there  should  be  very  clear  disclosure  of  any  direct  or  indirect 
inducements. 

30.  Require  trading  venues  to  publish  data  on  execution  quality  and  improve 
information to clients on best execution Respondents generally supported the requirement 
to publish this data. 

31.  Strengthen  role  of  directors  in  relation  to  internal  control  functions  and  when 
launching new products and services There was support for reinforcing the importance of 
directors  and  strengthening  of  the  regime  in  relation  to  control  functions,  but  some  felt  that 
the current regime simply needed firmer enforcement by supervisors. 

32.  Require  specific  arrangements  for  portfolio  management  and  underwriting  There 
was strong support for reducing and disclosing conflicts of interest. There was a mixture of 
support  and  opposition  to  the  title  transfer  collateral  arrangements  proposed  changes  in 
respect  of  professional  clients.  There  was  generally  more  support  for  allowing  professional 
clients to act on the same basis as they currently do. 

33. Minimum regime for telephone and electronic recordings Some opposed this because 
of the prior need to document in writing, however there was also support. 

328 

 
 
  
 
24. 

ANNEX 14: COMPARISON OF MIFID REVIEW WITH RELATED US NEW REGULATION  

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed 
into law. This Act aims to promote the financial stability of the United States by improving 
accountability and transparency in the financial system, to end too big to fail, to protect the 
American  taxpayer  by  ending  bailouts,  and  to  protect  consumers  from  abusive  financial 
services practices. 

In  order  to  achieve  this,  the  Dodd-Frank  Act  mandates  the  Securities  and  Exchange 
Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to write rules 
for a number of key parts of the financial sector. The most important of these is the area of 
OTC derivatives, where the SEC and CFTC were previously prohibited from setting financial 
rules.  The  SEC  has  regulatory  authority  over  security-based  swaps,  while  the  CFTC  has 
primary  regulatory  authority  over  all  other  swaps,  such  as  energy  and  agricultural  swaps. 
Other areas where new rules are being introduced include clearing and settlement, and trading 
rules. 

The  CFTC  and  SEC  are  required  to  act  jointly  to  define  key  definitional  terms  and  market 
intermediaries,  as  well  as  prescribe  requirements  for  trade  repository  recordkeeping,  and 
books and records requirements. 

The SEC and CFTC are required to consult with each other and the Federal Reserve Board in 
the  non-joint  rulemakings  (and  with  the  other  prudential  regulators  on  capital  and  margin 
rules).  The  CFTC,  SEC  and  U.S.  prudential  regulators  also  are  consulting  with  foreign 
regulatory authorities on the establishment of consistent international standards with respect 
to products and entities in this area. 

Most of these rulemakings are required to be completed within 360 days of enactment of the 
Dodd-Frank Act, which means by July 15, 2011. Both SEC and CFTC are likely to miss this 
deadline in a number of areas. The SEC and CFTC have published many proposed rules for 
consultation. In some areas, no proposals are as yet available. 

As things stand, the proposed revisions in the MiFID and the draft rules of the CFTC and the 
SEC would ensure very close alignment between the EU and the US. In terms of legislative 
approach,  the  structure  whereby  Dodd-Frank  establishes  general  rules  leaving  the  details  to 
SEC  and  CFTC  is  somewhat  similar  to  the  European  Lamfalussy  structure.  However,  in 
Europe the rule making powers for the European agencies are more limited. Another notable 
difference  between  Europe  and  the  US  is  that there  is  no  distinction  between  securities  and 
commodity  derivative  markets  in  Europe,  and  monitoring  and  enforcement  are  done  at  the 
national level and not at EU level. 

In terms of content, the Dodd-Frank act places restrictions on proprietary trading for banks, 
lays  down  rules  for  derivatives  clearing  and  derivatives  trading,  and  rules  for  consumer 
protection. These areas are covered by different pieces of EU legislation. 

There are no provisions in the proposed EU legislative reforms that would require EU banks 
to  limit  their  OTC  derivatives  business.  The  Dodd-Frank  Act  prohibits federal  assistance  to 
any  swap  dealer  or  major  swap  participant.  Insured  banks  are  exempt  if  they  limit  their 
derivatives  activities  to  hedging  and  dealing  in  interest  rate  swaps,  foreign  exchange 
transactions and a limited class of other derivatives business. Dodd-Frank also introduces the 
Volcker rule, restricting the proprietary trading operations of bank groups. 

329 

 
 
  
 
EU rules for derivatives clearing are being introduced through EMIR, which may apply to all 
derivatives  (not  just  OTC).  EU  rules  for  derivatives  trading  are  being  introduced  through 
MiFID,  which  captures  all  financial  instruments  trading  (not  just  derivatives).  Consumer 
protection is also being improved through MiFID, the notable difference with the US being 
that there will be no separate agency to supervise consumer interests. 

The SEC provides an overview of its regulatory proposals here http://sec.gov/spotlight/dodd-
frank.shtml 

The 
http://cftc.gov/LawRegulation/DoddFrankAct/index.htm 

proposals 

CFTC 

can 

be 

found 

here 

– 

TABLE  50:  Comparison  US  and  MiFID  proposed  revisions  of 
regulations 

Area 
Comparison 

of 

Current  and  proposed  legislation  in  the 
US 

Proposed revisions in the MiFID 

0. General 

Both the EU and the US are introducing a new type of trading platform which seeks to regulate all types of 
organised  trading.  In  the  US,  this  type  of  platform,  the  SEF,  is  limited  to  derivatives  trading  while  in 
Europe, the OTF will also be used for trading in all financial instruments. While in the US a platform needs 
to reach a certain volume before it is fully regulated (e.g. in terms of transparency), in Europe all trading 
platforms will be in scope. 

In line with the G20 commitments, the US and the EU are mandating that derivatives need to be traded on 
platforms.  Both  the  US  and  the  EU  are  intending  to  increase  transparency  in  the  derivatives  markets  by 
mandating trading to move on to transparent organised venues. The scope of derivatives covered in the EU 
and  the  US  would  broadly  include  all  derivatives  which  are  clearing  eligible  and  sufficiently  liquid  for 
trading on organised platforms, and the type of platforms that would be eligible to trade these instruments 
are set up according to the same basic structure.  

In both the US and the EU, trading on platforms needs to be transparent. The transparency requirements 
differ depending on the nature of the instrument (shares, bonds, and derivatives).  

For pre-trade transparency, the US requires pre trade transparency only for shares traded on exchanges or 
larger  ATSs.  For  other  instruments  pre-trade  transparency  is  required  of  the  trading  venue.  The  EU  will 
require more harmonised pre-trade transparency for all financial instruments and irrespective of the type of 
venue (whether traded on a regulated market, MTF, OTF or bilaterally over the counter). 

For post trade transparency, the US requires post trade transparency for shares and bonds, and, with Dodd-
Frank,  derivatives.  The  EU  will  require  post  trade  transparency  for  all  financial  instruments  and  again 
irrespective of where the instrument is traded. 

The US already has a consolidated tape in place for shares. A similar system will be set up in Europe for 
shares, but provided for by competing firms. Post trading information in the bonds markets is already being 
published in the US through the TRACE system. 

Regulators in both the US and the EU will have full access to records at all stages in the order execution 
process, from the initial decision by the investor to trade, through to its execution. This will be achieved by 

330 

 
 
  
 
 
an audit trail in the US, and in Europe by making the order trail fully accessible to competent authorities 
upon request through recordkeeping of orders by trading venues and by requiring reporting of transactions 
by investment firms to competent authorities. 

With regards to commodity derivatives, position limits are already in place in the US agricultural futures 
markets.  The  US  supervisor  (the  CFTC)  has  been  empowered  by  the  Dodd-  Frank  Act  to  extend  these 
position  limits  to  other  commodity  derivatives  markets  including  energy  and  OTC  markets,  whenever 
appropriate. Similarly in the EU, position limits would be set by national competent authorities under the 
coordination  of  ESMA  where  needed,  with  the  possibility  of  harmonisation  by  the  Commission  in 
delegated  acts.  While  the  US  already  has  a  system  that  makes  traders'  positions  by  categories  of  traders 
visible to the market, in the EU there will be a similar system implemented through the platforms. 

The  US  Rules  currently  provide  various  exemptions  for  third  country  firms  allowing  them  to  provide 
services  in  the  US  in  certain  situations  and  under  defined  conditions.  If  a  third  country  firm  wishes  to 
engage in any activity beyond the situations defined in the exemptions it will need authorisation. There is 
no special authorisation regime for third country firms. Unlike the US rules, the EU does not provide for 
any  exemptions  for  third  country  firms  to  provide  services  in  the  EU  in  defined  situations.  Instead  it  is 
proposed that third country firms must be authorised under a specific third country regime if they wish to 
provide any services in the EU. 

Finally, both the EU and the US are working to strengthen organisational requirements and best execution 
rules. 

1. Developments in market structures 

EU regulation does not distinguish organised 
trading  venues 
financial 
thereon.  Venues  for 
instruments 
trading  shares,  bonds,  and  derivatives  are 
defined in a general way. 

in 
traded 

terms  of 

Irrespective  of  the  types  of  instruments 
traded,  organised  trading  which  currently 
takes  place  OTC  would  be  moved  onto 
(OTF). 
"Organised  Trading  Facilities" 
Operating such a system that brings together 
buying  and  selling  interests  and  orders 
would become a regulated activity a ssuch. 

If  an  OTF  should  wish  to  allow  trading  in 
sufficiently  liquid  derivatives  and  eligible 
for  clearing,  it  needs  to  meet  requirements 
on multilateral participation (exluding single 
–dealer  platforms)  and  pre-  and  post-trade 
transparency. 

Organised 
trading 
venues 

regulation 

distinguishes 

US 
between 
securities  and  non-security  markets.  This 
distinction also applies to swap markets (i.e. 
OTC  derivatives  markets),  where  there  is  a 
distinction between security based and non-
security  based  swaps.  This  distinction 
follows  the  competences  of  the  SEC  and 
CFTC. 

In  order  to  ensure  that  all  derivatives  are 
traded in an organised way, the Dodd Frank 
Act  has  introduced  the  "Swap  Execution 
Facility"  (SEF).  Both  the  SEC  and  CFTC 
have  presented  proposals  to  further  define 
this  concept  for  their  respective  markets. 
The final form has not yet been determined. 

bringing 

A SEF would be a form of organised trading 
facility, 
together  multiple 
participants  and  excluding  single-dealer 
platforms. This platform would be subject to 
transparency  with 
real 
("block 
delays 
trade 
for 
exemptions").  The 
level  of  pre-trade 
transparency  will  depend  on  the  type  of 
the  SEF  definition  will 
trading  model 

time  post-trade 

trades 

large 

331 

 
 
  
 
 
Broker 
systems 

Trading  of 
OTC 
derivatives  

encompass. 

It is thought that for the most liquid swaps a 
SEF  would  be  similar  in  operation  to  a 
traditional  exchange,  whilst  for  less  liquid 
swaps  the  operation  would  be  more  similar 
to  that  of  an  execution  facility.  For  very 
illiquid  swaps  the  SEF  would  process,  and 
confirm/affirm trades. 

A broker trading system, such as a crossing 
system, needs to be registered as an 
Alternative Trading System. Below a 
threshold of 5% of trading volume in all 
securities the system trades, lighter 
requirements apply. Above that level, the 
system is considered a significant market 
whose best prices in shares should be 
transparent. Pre-trade transparency also 
applies for shares and only where the 
threshold of 5% is met. 

For the moment, the threshold is to be 
calculated on a security by security basis. 
However, a system that trades more than the 
volume threshold in a substantial number of 
securities could be considered to be a 
significant market. 

Dodd-Frank  requires  mandatory  centralised 
clearing  of  all 
liquid  and  sufficiently 
standardised  derivatives.  End  users  are 
exempt from this requirement when hedging 
commercial risk. There is also an exemption 
for  block  trades  under  certain  conditions. 
Eligibility  of  instruments  for  mandatory 
clearing  is  to  be  determined  by  CFTC  and 
SEC. 

Clearable  swaps  would  be  required  to  be 
traded  either  on  a  SEF,  or  a  designated 
contract market (DCM). The latter is similar 
to  the  concept  of  regulated  markets  in 
Europe,  except  they  are  limited  to  futures 
trading.  The  platforms  would  need  to  make 
firm  quotes  accessible  to  all.  Trading  could 
take place in an order book, on a request for 
quote or on a voice basis. 

332 

Matching of client orders by brokers will be 
brought  under  increased  regulation.  The 
operation  of  such  crossing  networks  would 
be  a  form  of  Organised  Trading  Facility. 
This  regime  is  limited  to  non-proprietary 
dealing. 

Broker  systems  are  regulated  based  on  the 
nature of their activity. No thresholds apply. 

EMIR  requires  centralised  clearing  for 
derivatives  trading  that  occurs  OTC  and  on 
certain  venues.  ESMA  will  determine 
clearing eligibility. 

All financial instruments eligible for clearing 
and that are sufficiently liquid would need to 
be  traded  on  an  organised  platform.  This 
includes 
the  existing  regulated  markets 
(RM),  multilateral  trading  facilities  (MTF), 
and  other  OTF.  Eligibility  requirements  are 
to be reviewed and implemented by ESMA. 

 
 
  
 
 
Market 
surveillance 
requirements 

Operators  of  national  exchanges  are 
required  to  have  independent  monitoring 
functions.  In  addition,  the  self  regulatory 
organisation FINRA carries out oversight in 
securities markets. 

SEFs would have to comply with a number 
of  core  principles,  which  include  that  they 
monitor trading. 

All  venues  and  facilities  will  have  the 
obligation  to  monitor  trading  in  order  to 
identify market abuse. 

Operators  of  regulated  markets,  MTFs  and 
other  organised  trading  facilities  (OTFs) 
which  trade  the  same  financial  instruments 
would  be 
to  cooperate  and 
exchange  information  in  order  to  better 
detect market abuse and misconduct. 

required 

Automated 
and 
HFT 
trading  and 
related 
issues 

The  Dodd-Frank  Act  gives  the  SEC  and 
CFTC  the  authority  to  prohibit  trading 
practices deemed to disrupt fair and orderly 
markets. 

The CFTC and SEC are currently reviewing 
rules on Automated Trading and HFT. They 
are  working  together  with  the  markets  to 
consider  recalibrating  the  existing  market-
wide circuit breakers. 

The SEC is assessing its circuit breaker pilot 
program for trading in individual securities. 
They  are  also  considering  additional 
mechanisms,  such  as  a  limit  up/limit  down 
procedure for individual trades. 

Persons  involved  in  "automated  and  high-
frequency trading" who are a direct member 
of  a  regulate  dmarket  or  MTF  will  be 
required  to  be  authorised  and  supervised  as 
investment firms. 

There  will  be  specialist  rules  for  firms 
involved  in  algorithmic  trading  including 
compliance, risk controls, and notification to 
regulators  of  algorithms.  In  addition  firms 
will be required to flag the use of algorithms 
in transactions and orders. 

Firms  providing  direct  electronic  access  to 
clients will need to meet various compliance 
and risk management requirements.  

SEC  requirements  focus  on  exchanges  and 
larger Alternative Trading Systems (ATSs). 

The  SEC  has  placed  requirements  on  firms 
providing  direct  electronic  access 
to 
markets.  This  restricts  the  giving  of  so 
called unfiltered or naked access to markets. 

Market operators (i.e. operators of regulated 
markets  and  MTFs)  will  need  to  have  risk 
controls  in  place  dealing  with  capacity  and 
resilience  of  their  systems  and  to  reduce 
risks  from  algorithmic  trading  and  direct 
electronic access. They will also need circuit 
breakers in place. 

Market operators will need to give equal and 
fair access to co-location facilities. 

Market  operators  will  also  need  to  ensure 
that  orders  do  not  exceed  specified  order  to 
transaction executed ratios and trades are not 
below  prescribed  minimum 
tick  sizes. 
Technical details need to be set by ESMA. 

The SEC has not proposed: 

- order to transaction ratios 

-  minimum tick sizes; or 

- the flagging of algorithms in orders. 

The CFTC has published proposals targeted 
at  specialist  automatic  trading  rules  as  part 
of  the  rules  for  the  newly  introduced  Swap 
Dealers  and  Major  Swap  Participants. 
Proposed 
procedures 
governing  use,  supervision,  maintenance, 
testing  and  inspection  of  programs.  They 
would  apply  to  all  algorithms  in  use, 

include 

rules 

333 

 
 
  
 
In  the  EU,  a  post-trade  consolidated  tape 
system for all types of financial instruments 
would be set up. 

The  conditions  for  the  application  of  the 
pre-trade  transparency  waivers  would  be 
clarified.  The 
in  scale  waivers, 
including  stubs  of  large  orders,  would  be 
reviewed.  

large 

Post  trade  information  would  need  to  be 
published  as  close  to  instantaneously  as 
technically  possible.  Real  time  reporting 
would be shortened from 3 to 1 minute(s), 
and  systems  are  to  publish  data  live  rather 
than in batches. 

for  deferred  post 

trade 
The  delays 
publication for large transactions would be 
reduced,  the  intra  day  period  would  be 
shortened  from  3  to  2  hours,  and  the  intra 
day  transaction  size  threshold  would  be 
lowered. 

Calibrated  pre  and  post  trade  transparency 
requirements  would  be  extended  to  all 
bonds  and  structured  products  with  a 
prospectus or which are admitted to trading 
either on a regulated market or MTF. 

including those sourced from third parties. 

2. Pre- and post-trade transparency & data consolidation 

Equity 
markets  

In the US the Consolidated Tape Association 
(CTA) oversees the dissemination of real-time 
trade  and  quote  information  in  New  York 
Stock  Exchange 
and  American  Stock 
Exchange listed securities. 

All exchanges which trade in these securities 
send  their  trades  and  quotes  to  a  central 
consolidator  where  the  Consolidated  Tape 
System 
(CTS)  and  Consolidated  Quote 
System (CQS) data streams are produced and 
distributed worldwide in real time. Combined, 
these data feeds provide the market with pre- 
and post-trade transparency information. 

includes 

information 

real-time 
This 
information on the best-priced quotations and 
real-time  reports  of 
they  are 
executed. 

trades  as 

Bonds  and 
Asset 
Backed 
Securities  

There  is  a  general  exception  from  the  public 
display  requirement  for  a  block  size  order. 
Trading  platforms  publicly 
their 
executed trades in the consolidated trade data. 

report 

The  SEC  has  proposed  requiring  real-time 
disclosure to include the identity of dark pools 
and  other  ATSs  on  the  reports  of  their 
executed trades. This should help investors to 
identify where liquidity is. 

In  July  2002  FINRA  introduced  the  Trade 
Reporting and Compliance Engine (TRACE). 

transactions 

information  on 

system  captures  and  disseminates 
The 
secondary 
consolidated 
market 
traded 
TRACE-eligible securities (investment grade, 
high  yield  and  convertible  corporate  debt) 
representing  all  over-the-counter  market 
activity in these bonds. 

in  publicly 

The  TRACE  does  not  provide  pre  trade  data 
and  only  provides  post  trade  information; 
such  as  date,  time,  price,  quantity.  The 
TRACE  does  not  provide  data  on  exchange 
executed  transactions.  There  is  a  delay  of  15 
to  30  minutes  depending  on  how  trades  are 

334 

 
 
  
 
 
 
OTC 
Derivatives 
including 
Swaps 

confirmed and executed. 

TRACE  has  been  recently  extended  to  some 
of the ABS products. 

CFTC and SEC proposals aim to increase pre-
trade  transparency  for  swaps,  notably  the 
order data provided by SEFs. 

In their draft rules RFQ trades would need to 
be  made  available  to  one  person  for  security 
based swaps, and to five for all other swaps. 

Real time prices and volume disclosure for all 
cleared  and  non  cleared  swaps  will  be 
required to enhance post trade transparency. 

Data  is  anonymised  so  that  the  identity  and 
positions of participants cannot be deduced by 
trades  are 
others  and  delays  for  block 
foreseen. 

3. Commodity derivatives markets 

Position 
Transparenc
y  

Position 
Limits 

publishes 

The  CFTC 
the 
currently 
Commitments  of  Traders  (COT)  report  on  a 
weekly  basis.  The 
reports  provide  a 
breakdown  of  each  Tuesday’s  open  interest 
for markets in which 20 or more traders hold 
positions  equal  to  or  above  certain  reporting 
levels  established  by  the  CFTC.  The  data  is 
broken  down  into  four  categories  of  traders: 
Swap 
Producer/Merchant/Processor/User; 
Dealers;  Managed  Money; 
and  Other 
Reportables.. 

Under  the  Dodd-Frank  Act,  the  CFTC  is 
required,  as  appropriate,  to  impose  position 
limits  on  energy,  metal  and  agricultural 
commodity derivatives. The mandate given to 
the CFTC to exercise this discretionary power 
is  broad:  to  combat  excessive  speculation,  to 
prevent  market  manipulation, 
to  ensure 
sufficient market liquidity, and to preserve the 
price  discovery  function  of  the  underlying 
market.  After  a  heated  debate,  the  CTC  has 
recently proposed rules to limit the amount of 
positions,  other 
fide  hedge 
positions, that may be held by any individual 
trader  in  28  core  commodity  derivatives 
contracts  traded  on  organized  trading  venues 
their  economically  equivalent  OTC 
and 

than  bona 

335 

Calibrated pre- and post-trade transparency 
requirements  would  be  extended  to  all 
derivatives eligible for central clearing, and 
those 
post-trade 
submitted to trade repositories.. 

requirements 

to  all 

Organised 
trading  venues  would  be 
required  to  publish  harmonised  position 
information  to  regulators  in  detail,  and  the 
public  in  aggregate  for  markets  with  a 
given  number  of  active  participants.  The 
positions  would  be  broken  down  into 
different  categories  of  traders  according  to 
tehir regulatory status. 

to 

The MiFID review also aims at reinforcing 
oversight  and  transparency  of  commodity 
derivatives  markets,  notably  by  requiring 
regulators 
comprehensive 
assert 
oversight  over  positions,  including  in  the 
shape  of  position  limits  when  deemed 
necessary. Platforms should adopt limits or 
alternative  arrangements 
in  support  of 
market integrity and liquidity, which could 
through  Commission 
be 
delegated acts. 

harmonised 

 
 
  
 
 
Dealing  on  own  account 
in  financial 
instruments  (excluding  by  executing  client 
orders, as a market maker, or as a member 
or  participant  of  a  regulated  market  or 
MTF)  and  the  provision  of  investment 
services  relating  to  commodity  derivatives 
as  an  ancillary  activity  to  another  main 
commercial  business  will  continue  to  be 
exempt. 

The  specific  exemption  for  commodity 
derivative trading firms would be deleted. 

Emission allowances would be classified as 
financial  instruments,  harmonising  their 
legal status across the EU, and bringing the 
spot  and  derivatives  markets  for  these 
contracts  under  an  integrated  regulatory 
framework. 

Investment  firms  are  required  to  send 
details  on  all  transactions  in  financial 
instruments  traded  on  regulated  markets  to 
regulators. 

The  scope  of  transaction  reporting  would 
be  extended  to  include  transactions  in  all 
financial  instruments  that  are  admitted  to 
trading on an MTF or other OTF, financial 
(OTC)  instruments  the  value  of  which 
depends  on  or  can  influence  the  value  of 
financial  instruments  that  are  admitted  to 
trading, and commodity derivatives. 

Trade  repositories  could  report  derivatives 
transactions on behalf of investment firms. 

Regulated 
vs.  exempt 
entities 

Spot  carbon 
trading 

derivatives.  These  rules  are  now  open  up  for 
public comment for two months.  

transaction 

if  one  party 

The  Dodd-Frank  Act  creates  an  end-user 
clearing exception that exempts clearing for a 
swap 
the 
transaction  is  not  a  financial  entity,  is  using 
the  swap  to  hedge  or  mitigate  commercial 
risk,  and  notifies  the  SEC  of  CFTC  how  it 
meets  its  financial  obligations  for  the  non-
cleared swaps. 

to 

The  Dodd-Frank  Act  provisions  for  Major 
Swap  Participants  and  Swap  Dealers  do  not 
apply  when  dealing  activity  remains  below 
the  de  minimis  exception  thresholds  set  by 
SEC and CFTC. 

by 

interagency  working  group 
A  Federal 
the  Dodd-Frank  Act 
mandated 
recommends  carbon  oversight 
is  brought 
under  the  existing  financial  regulation.  This 
would  apply  to  carbon  derivatives  markets 
and closely linked derivative markets, such as 
those based on energy commodities. 

4. Transparency towards regulators 

of 

Scope 
transaction 
reporting 

The reporting of transactions to regulators is 
generally done through data transmission by 
exchanges,  self  regulatory  bodies,  and  other 
market 
trade 
repositories.  Reporting  requirements  may 
differ for different types of instruments. 

participants 

such 

as 

OTC  trades,  including  in  bonds  and  in  the 
future  also  asset  backed  securities,  are  sent 
directly  to  FINRA.  This  uses  the  same 
system  as  for  post 
transparency, 
TRACE. 

trade 

In  line  with  the  enhancements  to  the  swaps 
market, the Dodd Frank Act also introduces 
the  requirement  for  the  reporting  of  swaps 
data  to  central  Swap  Data  Repositories.  In 
addition  to  providing  centralised  storage  of 
contracts  data,  regulatory  bodies  will  have 
access  to  this  data  for  monitoring  purposes. 
The  CFTC  would  rely  on  data  stored  in  the 
swap  data  repositories  to  carry  out  its 
surveillance duties. 

336 

 
 
  
 
Order  information  would  not  need  to  be 
reported,  but  would  need  to  be  stored  by 
the 
data 
under 
requirements. Such information would then 
be accessible upon request to regulators. 

platforms 

general 

Information 
on  the  order 
book 

In  the  US,  reporting  obligations  extend  to 
both  transactions  and  orders.  A  route  report 
needs  to  be  sent  each  time  an  order  is 
transmitted for further handling. 

The SEC is working on the set up of an audit 
trail to give the regulators an overview of the 
entire  order  book  among  different  trading 
platforms. 

For Nasdaq and OTC equity securities there 
is  an  integrated  audit  trail  of  order,  quote, 
and trade information, the Order Audit Trail 
System (OATS). 

5. Investor Protection 

of 

and 

Conduct 
business 
rules 
internal 
organizationa
l 
requirements 

The Dodd Frank Act provides for the SEC to 
strengthen  investor  protection  via  enhanced 
broker dealer regulation. 

This  includes  requirements  on  enhanced 
duty  of  care,  classification  of  clients,  and 
enhanced/harmonised  rules  for  the  SEC  to 
investigate 
of 
misconduct. 

prosecute 

cases 

and 

Conduct  of  business 
also 
introduced  for  the  newly  defined  Major 
Swap Participants and Swap Dealers. 

rules 

are 

Best 
execution 

in  equities 

In  the  US,  execution  platforms  are  required 
to  route  orders 
to  another 
platform  if  the  order  can  be  executed  at 
better  terms  there.  Market  participants  have 
access  to  a  consolidated  tape  for  equities. 
Execution  venues  are  required  to  publish 
execution quality data. 

The  broker  must  evaluate  the  orders  it 
receives from all customers in the aggregate 
and  periodically  assess  which  competing 
markets,  market  makers,  or  electronic 
communications  networks  (ECNs)  offer  the 
most favourable terms of execution. 

There 
execution 
requirements  for  Major  Swap  Participants 

specific 

best 

are 

337 

The  MiFID  revision  provides  enhanced 
clarification  of  the  conduct  of  business 
rules  already  present  in  the  MiFID.  This 
includes  specific 
investment 
rules  on 
advice, 
inducements,  classification  of 
clients, and dealing on own account. 

The  high  level  principle  to  act  honestly, 
fairly  and  professionally  would  apply  to 
dealings with all types of clients. 

be 

to  disclose 

enhanced.Inducements 

inducements 
Requirements 
would 
for 
portfolio  management  would  be  prohibited 
and 
be 
prevented  from  describing  themselves  as 
independent if they receive inducements.. 

advisers  would 

investment 

In  the  EU,  the  obligation  to  provide  best 
execution  falls  on  the  investment  firm  and 
applies to all financial instruments. 

In  addition  to  the  requirements  on  brokers 
to ensure best execution for clients, brokers 
must  also  provide  information  to  clients 
clearly setting out how they satisfy the best 
execution requirements for their clients.  

to 
Execution  venues  will  be  required 
publish 
quality 
on 
concerning  the  financial  instruments  they 
trade. 

execution 

data 

 
 
  
 
MiFID  contains  no  equivalent  exemptions 
for  third  country  firms  to  provide  services 
in  Europe  in  such  situations.  Instead,  it  is 
proposed  to  require  third  country  firms  to 
be  authorised  under  a  special  regime  for 
such  firms.  The  MiFID  revision  will 
introduce  a  third  country  regime  by  which 
the provision of services to retail clients by 
third  country  firms  always  requires  the 
establishment of a branch in the Union. The 
provision  of  services  without  branches  is 
only limited to non-retail clients. 

capital, 

Based  on  a  decision  of 
the  national 
competent  authority  that  the  third  country 
firm  is  subject  and  complies  with  legal 
requirements in a number of relevant areas 
(authorisation,  criteria  for  appointment  of 
managers, 
organisational 
requirements),  access  to  the  EU  could  be 
granted  subject  to  appropriate  cooperation 
third 
agreements  between 
country  authority  and  the  EU  competent 
authority  and  compliance  by  the  firm  with 
key  MiFID  operating 
investor 
protection conditions. 

the  relevant 

and 

The  proposal  recognises  that  EU  investors 
can receive services by third country firms 
at their own exclusive initiative. 

Third country 
access 

and Swap Dealers in the Dodd Frank Act. 

Foreign  persons  wishing 
to  provide 
investment services into the USare exempted 
to  be  registered  as  a 
from 
broker/dealer  in  the  US  in  various  defined 
situations, for example: 

the  need 

1) where the foreign person provides certain 
services to an investor in the US as a result 
of  unsolicited  or  indirect  contacts  from  the 
US investor, 

2)  where 
the  foreign  person  provides 
investment research to institutional investors 
in the US, 

3) where the foreign person directly contacts 
investors 
the  resulting 
the  US  but 
transaction  is  then  executed  through  a  US 
broker or dealer, 

in 

4) where the foreign person directly contacts 
certain categories of persons (e.g. registered 
broker  dealers,  banks,  certain  international 
organisations),  even  where  transactions  are 
not executed through a US broker or dealer, 

5)  where  a  foreign  private  adviser  has  less 
than 15 US clients and less than $25 million 
of  assets  under  management  attributable  to 
clients in the US. 

If the foreign firm provides services beyond 
these  exemptions  or  has  physical  operations 
in the US (such as an office or branch) it will 
usually  need  to  be  registered  as  a  broker 
dealer.  No  special  regime  exists  for  foreign 
authorised branches. 

There is no concept of mutual recognition of 
securities  regulatory  systems  under  U.S. 
laws. 

338 

 
 
  
 
25. 

ANNEX 15: COMPARISON MIFID REVIEW AND KEY IOSCO PRINCIPLES 

25.1.  Overview 

The  International  Organization  of  Securities  Commissions  (IOSCO)  is  an  association  of 
organisations  that  regulate  global  securities  and  futures  markets.  IOSCO  members  are 
committed  to  developing,  implementing  and  promoting  adherence  to  internationally 
recognised  and  consistent  standards  of  regulation,  oversight  and  enforcement  in  order  to 
protect  investors,  maintain  fair,  efficient  and  transparent  markets,  and  seek  to  address 
systemic risks. 

In  the  last  two  years,  IOSCO  has  conducted  specific  review  work  in  areas  of  key  market 
interest  (e.g.  Conflicts  of  Interest,  Direct  Market  Access  and  Transparency  of  Structured 
Products). Presented below is a high level overview of where the MiFID revision extends into 
areas  for  which  IOSCO  has  developed  international  principles  and/or  where  it  has  done 
review work on those principles. 

25.1.1.  Principles for Direct Electronic Access to Markets August 2010 

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD332.pdf 

themes  and  details 

Key 
Principles/ Review Work 

from 

IOSCO 

Alignment with the MiFID revision. 

in 

•  The  majority  of  principles  are  already 
addressed 
the  existing  MiFID 
provisions, which contains rules on the 
types  of  firms  which  may  be  admitted 
as members of regulated markets. 

•  The  MiFID  proposals  will  introduce 
specific  requirements  in  relation  to 
DMA  access  used  by  Automated 
Intermediaries  who 
Trading 
provide  DMA  for  Automated  Trading 
firms will be required to have in place 
robust risk controls and filters to detect 
errors or attempts to misuse facilities. 

firms. 

•  Published  in  August  2010,  in  this  paper 
IOSCO discusses the current market practises 
regarding direct electronic access also known 
as direct market access (DMA). A number of 
principles 
are 
proposed  which  are  designed  to  enhance  the 
controls over direct electronic access. 

specific  provisions 

and 

•  Although the details are of a technical nature, 
the following provide an overview of the key 
areas of focus. 

establishing 

•  Intermediaries:  should  have  binding  robust 
in  place  with  clients  and 
agreements 
minimum 
the 
standards 
customer's  creditworthiness,  knowledge  of 
applicable market rules and ability to comply 
and  ability  to  correctly  use  the  order  entry 
system. They should identify DMA customers 
to  the  markets  to  assist  in  surveillance.  They 
should  also  ensure  they  have  in  place  risk 
management controls over the client's trading. 

•  Markets:  should  provide  intermediaries  with 
adequate  real  time  information  to  enable  the 
intermediaries 
effective 
monitoring and risk assessment controls. They 

introduce 

to 

339 

 
 
  
 
should have systems and controls designed to 
integrity  concerns  (e.g. 
minimize  market 
disorderly  trading)  arising  from  direct  access 
customers' activities.  

•  Clearing  firms:  should  have  operations  and 
technical  capabilities  to  manage  risks  arising 
from direct access. 

25.1.2.  Guidelines for the Regulation of Conflicts of Interest Facing Market Intermediaries 

November 2010 

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD342.pdf 

Key  themes  and  details  from  IOSCO 
Principles/ Review Work 

Alignment with the MiFID revision. 

interest  are  contained 

•  Existing  MiFID  provisions  for  managing 
conflicts  of 
in 
Articles 13(3) and 18 of the MiFID Level 
1 and Articles 21 to 25 of the MiFID Level 
2.  These  provisions  are  aligned  with  the 
guidelines  provided  for  in  the  IOSCO 
paper. 

•  Whilst  current  provisions  are  already 
provided  for,  implementation  in  member 
states  differs.  In  line  with  the  general 
IOSCO  objective  of  harmonization  of 
conflicts  of  interest  rules,  the  MiFID 
review  provides  ESMA  with  powers  to 
implement  technical  standards  to  further 
promote  the  uniform  application  of  these 
provisions. 

•  In  November  2010,  IOSCO  published  a 
paper  exploring  guidelines  for  regulating 
conflicts  of  interest.  The  paper  builds  on 
existing  regulation  and  best  practice  from 
around  the  world  (including  provisions 
already  contained  in  the  MiFID)  and  sets 
out key areas for global harmonisation and 
improvement.  IOSCO  has  identified  the 
following as key areas: 

•  Active involvement by senior management 

of market intermediaries; 

•  Clear  and  concise  policies  to  be  adopted 

by intermediaries; 

•  Adequate disclosure to be made; 

•  Information  barriers  (Chinese  walls)  need 

to be created; 

•  Effective  procedures  to  manage  conflicts 

of interest must be put in place; 

•  Separation  of  remuneration  for  activities 

that entail conflicts of interest; 

•  Maintaining  record  of  activities  from 
which conflicts of interest have previously 
arisen and how they were managed. 

25.1.3.   Issues Raised by Dark Liquidity October 2010 

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD336.pdf 

340 

 
 
  
 
Key  themes  and  details  from  IOSCO 
Principles/Review Work 

Alignment with the MiFID revision. 

•  MiFID  already  contains  pre  and  post 
trade  transparency  requirements,  which 
ensure  that  firm  quotes  and  transactions 
are  made  public.  It  also  contains  the 
obligation for financial firms to report all 
trades  in  financial  instruments  that  are 
admitted  to  trading  on  regulated  markets 
to competent authorities. 

transparency 

•  The  MiFID  proposals  would  extend  pre 
trade 
actionable 
indications  of  interest  (i.e.  an  indication 
of  interest  that  includes  all  necessary 
information to agree on a trade). 

to 

•  Also,  post  trade  information  would  be 
published as close to instantaneously as is 
technically  possible.  Large  orders  would 
need to be published no later than the end 
of  the  trading  day,  and  only  the  very 
largest trades that occur late in the trading 
day  would  need  to  be  published  before 
the opening of the following trading day. 

•  In addition, execution venues would need 
to  publish  data  on  execution  quality 
they 
concerning  financial 
trade. 

instruments 

•  In  October  2010,  the  technical  committee 
of  IOSCO  published  a  consultation  report 
into  Dark  Pools.  The  report  provides  six 
draft  principles 
regulatory 
concerns: 

to  address 

•  The  price  and  volume  of  firm  bids  and 
offers should generally be transparent to the 
public; 

•  Information  regarding  trades  executed  in 
dark  pools  or  as  a  result  of  dark  orders 
entered  in  transparent  markets  should  be 
transparent to the public; 

•  Transparent  orders  should  have  priority 
over dark orders at the same price within a 
trading venue; 

•  Regulators  should  have  a  reporting  regime 
and/or  means  of  accessing  information 
regarding  orders  and  trade  information  in 
venues  that  offer  trading  in  dark  pools  or 
dark orders; 

•  Dark  pools  and  transparent  markets  that 
offer  dark  orders  should  provide  market 
participants  with  sufficient  information  to 
understand  how  their  orders  are  handled 
and executed; 

•  Regulators  should  periodically  monitor 
dark  pools  and  dark  orders 
their 
jurisdictions  to  ensure  the  efficiency  of 
price  formation  on  displayed  markets,  and 
take appropriate action as needed. 

in 

25.1.4.   Transparency of Structured Finance Products July 2010 

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD326.pdf  

Key  themes  and  details  from  IOSCO 
Principles/ Review Work 

Alignment with the MiFID revision. 

•  This report follows a period of consultation 
and  review  by  the  technical  Committee  of 
IOSCO;  it  lists  the  factors  that  market 
in  determining 
authorities  should  use 

•  The  MiFID  proposals  would  extend  pre- 
and  post-trade  transparency  requirements 
to  all  trades  in  structured  products  with  a 
to 
prospectus  or  which  are  admitted 

341 

 
 
  
 
which  structured  finance  products  should 
be  made  transparent,  and  how  this  could 
best be implemented. 

•  In  response  to  the  survey  part  of  the 
review,  IOSCO  found  that  most  market 
participants  felt  that  a  carefully  developed 
transparency  regime  with  a 
post-trade 
be 
implementation  would 
phased 
beneficial to market efficiency.  

trading  either  on  a  regulated  market  or 
MTF,  whether  executed  on  regulated 
markets,  MTFs, 
trading 
facilities or OTC. These new requirements 
would be differentiated by asset class. 

organised 

some 

form  of  post 

•  In  their  conclusions  and  recommendations 
IOSCO state that jurisdictions may wish to 
consider 
trade 
transparency regime. Such a regime would 
include  the  publication  of  trade-by-trade 
transparency information or publication of 
aggregate  trade  information  (such  as  high, 
low,  and  average  prices)  on  a  periodic 
basis. 

•  In  addition  to  the  proposals  on  post-trade 
transparency, 
that  some 
IOSCO  note 
member jurisdictions may find it helpful to 
also 
the 
factors 
availability  and  quality  of  information 
about  the  underlying  assets  of  Structured 
Finance  Products, 
through 
indices.  

including 

consider 

such 

as 

25.1.5.   Task Force on Commodity Futures Markets 

Final Report – March 2009 https://www.iosco.org/library/pubdocs/pdf/IOSCOPD285.pdf 

Report  to  the  G-20  –  June  2010  http://www.iosco.org/library/pubdocs/pdf/IOSCOPD324-
325.pdf  

Key  themes  and  details  from  IOSCO 
Principles/ Review Work 

Alignment with the MiFID revision. 

•  The  Task  Force  on  Commodity  Futures 
Markets  was  set  up  in  2008  by  the  G-8 
to 
Finance  Ministers,  as  a  response 
concern  over  price 
and 
volatility 
in  oil  and  food  products. 
Covering  a  wide  range  of  markets  and 
participants  the  work  by  the  Task  Force 
touches  both  physical  market  and 
financial market regulators.  

increases 

•  In  its  Communication  of  2  June  2010,  the 
Commission  set  out  a  wide  range  of 
initiatives 
commodity 
touching  upon 
derivatives  markets.  The  review  of  MiFID 
is  an  integral  part  of  this  effort  and 
complements others such as the proposal on 
short-selling  and  certain  aspects  of  credit 
default swaps and the review of the Market 
Abuse Directive. 

•  The  Task  Force's  most 

relevant 
recommendation  is  to  ensure  that  futures 

•  The MiFID proposals would: 

342 

 
 
  
 
market  regulators  have  the  necessary 
take 
legal  framework 
enforcement  action  with 
to 
manipulation. 

to  detect  and 

respect 

•  (Other 

in 

the 

and 
among 

recommendations 

are 
improvements 
transparency  with 
respect to the availability and quantity of 
information  on  commodities,  greater 
sharing 
cooperation 
of 
information 
futures  market 
regulators,  and  meeting  regularly  for  the 
purpose  of  informal  sharing  of  concerns 
on 
in 
commodity markets as well as the sharing 
of  market  surveillance  and  enforcement 
approaches.) 

developments 

trends 

and 

(a) 

(b) 

organised 

commodity 
Require 
derivative  trading  venues  to  design 
contracts 
that  ensures 
convergence between futures and spot 
prices; 

in  a  way 

Modify  or  remove  the  exemption  in 
the  MiFID  for  commercial  firms 
active  in  commodity  markets  and 
who provide investment services; 

(c) 

Increase transparency by: 

–  requiring  trading  venues  to  make 
available  to  regulators  (in  detail) 
the  public  (in  aggregate) 
and 
harmonised  position  information 
by  type  of  regulated  entity  to  the 
public; 

–  requiring 

the 

disclosure 

of 
harmonised  position  data  by  type 
of  regulated  entity  for  all  OTC 
commodity derivatives; 

–  extending  transaction  reporting  to 
commodity derivatives that are not 
admitted  to  trading  or  traded  on  a 
regulated  market,  a  MTF  or  an 
organised trading facility. 

343 

 
 
  
 
26. 

ANNEX 16: NUMBER OF INVESTMENT FIRMS AND CREDIT INSTITUTIONS IN THE EU 

We set out below the universe of investment firms in the EU. These data have been collected 
via  a  survey  of  the  national  competent  authorities.  Only  data  from  Lithuania  were  not 
available  —  the  data  on  its  distribution  of  activities  is  based  upon  the  median  from  across 
those 26 Member States reporting and the number of authorised firms in Lithuania (which is 
known). 

The data relate to the position at 30th June 2010 (or  as at 31st December 2009 when more 
recent data was not available). 

– 

TABLE 51: The Universe of EU Investment Firms 

Reception 
and 
transmission 
of orders

Execution of 
orders on 
behalf of 
clients

Portfolio 
management

Investment 
advice

Underwriting 
and placing

Dealing on 
own account

Total 
Number of 
Investment 
Firms

Austria
Belgium
Bulgaria
Cyprus
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Poland
Portugal
Romania
Slovakia
Slovenia
Spain
Sweden
United Kingdom

-

18
55
50
24
38
7
31
43
607
55
24
47
24
5

197
39
56
69
26
46
7
54
72
611
65
16
113
52
5

64
32
30
51
14
38
6
37
9
513
38
11
94
47
16
                      17                        11                        13 
75
34
                    195 
23
33
50
                      17                        17                        14 
20
65
97
884

103
43
211
25
12
60

24
93
113
2,237

21
54
100
1,064

83
20
75
25
9
60

199
34
61
45
23
85
6
53
35
690
63
15
114
105
4
                     17 
99
43
235
16
30
47
                     16 
22
124
103
2,171

-

29
23
14
14
1
6
18
25
49
19
5
11
56
4
                       6 
6
32
9
13
8
31
                       4 
20
65
38
376

-

11
20
37
15
13
3
10
28
310
22
13
24
17

-

                       5 
11
3
21
21
2
35
                       8 
22
43
21
409

4,383

2,567

2,503

4,455

882

1,124

199
48
61
84
26
90
8
59
81
706
67
26
144
113
20
21
111
64
276
48
37
60
18
24
151
142
2,337

5,021

We set out below the universe of credit institutions authorised to provide investment services 
in  the  EU.  These  data  have  again  been  collected  via  a  survey  of  the  national  competent 
authorities.  The  data  relate  to  the  position  at  30th  June  2010.  Here,  data  on  Belgium, 
Germany,  Luxembourg,  Lithuania  and  the  Netherlands  were  not  available.  These  gaps  have 
been  filled  in  the  same  way  as  above  in  order  to  gauge  the  approximate  size  of  the  overall 
number of banks authorised to be active. 

344 

 
 
  
 
                  
                   
                     
                  
                   
                   
                  
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                       
                     
                     
                       
                       
                       
                       
                       
                       
                       
                     
                     
                     
                     
                     
                     
                     
                     
                     
                       
                     
                     
                     
                     
                  
                  
                  
                  
                     
                  
                  
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                       
                     
                     
                  
                     
                     
                  
                     
                     
                  
                     
                     
                     
                  
                     
                     
                  
                       
                       
                     
                       
                       
                   
                     
                    
                  
                     
                     
                     
                       
                     
                  
                     
                     
                     
                     
                     
                       
                     
                  
                     
                
                     
                   
                 
                     
                     
                     
                     
                     
                     
                     
                     
                       
                     
                     
                       
                       
                     
                     
                     
                     
                     
                     
                     
                     
                    
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                  
                     
                     
                  
                  
                  
                     
                  
                     
                     
                  
               
               
                  
               
                  
                  
               
               
               
               
               
                  
               
               
 
– 

TABLE  52:  The  Universe  of  Credit  Institutions  Providing  Investment 
Services in the EU 

Reception 
and 
transmission 
of orders

Execution of 
orders on 
behalf of 
clients

Portfolio 
management

Investment 
advice

Underwriting 
and placing

Dealing on 
own account

79

237

769

722

22
8
12
99

22
11
12
112

22
11
13
693
19

781
                      58                        53                        38 
na
7
6
106
                        3                          3                          2 
                    171                      156                      112 
98
                1,024                      931                      672 
10
7
7
203
10
                      10                          9                          7 
                      82                        75                        54 
7
                    109                        99                        72 
2
56
8
                      11                        11                          9 
12
                      53                        47                        35 
18
39

17
19
11
529
18

34
49
8

21
38
7

78
46

74
45

13

15

7

7

781
                     56 
na
9
12
154
                       3 
                   165 
190
                   985 
13
16
9
684
8
                     10 
                     79 
7
                   105 
11
63
7
                     11 
14
                     39 
76
44

180
                     51 
na
3
12
154
                       2 
                   151 
224
                   902 
14
15
4
686
6
                       9 
                     73 
7
                     96 
10
41
7
                     11 
14
                     28 
27
38

722
                     49 
11
7
11
154
                       2 
                   144 
142
                   863 
16
18
12
528
17
                       8 
                     70 
3
                     92 
20
38
7
                     11 
15
                     45 
69
45

Austria
Belgium
Bulgaria
Cyprus
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Poland
Portugal
Romania
Slovakia
Slovenia
Spain
Sweden
United Kingdom

Total of CIs 
providing 
investment 
services

781
                      66 
25
12
12
154
5
307
275
                1,164 
23
20
18
712
21
                      11 
148
8
196
47
77
14
                      11 
15
207
141
46

3,679

3,125

2,378

3,551

2,765

3,119

4,516

345 

 
 
  
 
                  
                  
                  
                  
                  
                  
                  
                     
                     
                     
                     
                     
                       
                       
                       
                       
                       
                     
                     
                     
                       
                     
                     
                     
                     
                  
                     
                  
                  
                  
                  
                  
                      
                 
                  
                     
                     
                  
                  
                  
                  
                     
                     
                     
                     
                     
                     
                     
                     
                     
                       
                     
                     
                     
                     
                     
                     
                       
                       
                       
                     
                     
                  
                  
                  
                  
                  
                  
                  
                     
                     
                     
                       
                       
                     
                     
                 
                       
                       
                       
                       
                       
                       
                       
                 
                     
                     
                       
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                       
                       
                       
                       
                       
                       
                     
                     
                     
                     
                     
                     
                     
                     
                 
                     
                     
                     
                     
                     
                     
                  
                     
                     
                     
                     
                     
                     
                     
               
               
               
               
               
               
               
 
27. 

ANNEX  17:  LITERATURE  REVIEW  OF  MARKET  IMPACT  OF  HFT  AND  AUTOMATED 
TRADING  

Source: Europe Economics 

Hendershott, Jones and Menkveld  (2010) note that nearly every large broker-dealer offers a 
suite of algorithms to its institutional customers to help them execute orders and reduce the 
market  impact  of  orders,  not  least  by  slicing  large  orders  into  smaller  pieces.cdlxxxii  These 
algorithms  constantly  monitor  market  conditions  across  different  securities  and  trading 
venues,  are  highly  sophisticated  and  typically  determine  the  timing,  price,  quantity  and 
execution  venue.  A  mix  of  active  and  passive  strategies  is  generally  employed,  using  both 
limit  orders  and  marketable  orders,  and  hence  algorithmic  traders  are  sometimes  liquidity 
demanders and sometimes liquidity suppliers. 

Hendershott  and  Riordan  (2009)  note  that  the  trading  process  is  central  to  efficient  risk 
sharing and price efficiency and investigate how algorithmic trading is used and what role it 
plays  in  the  price  formation  process.cdlxxxiii  Using  a  sample  of  DAX  stocks,  with  data 
identifying  whether  or  not  each  trade’s  buyer  and  seller  generated  their  order  with  an 
algorithm,  the  authors  find  that  algorithmic  traders  are  more  sensitive  to  human  trading 
activity than humans are to algorithmic trading activity, which is consistent with algorithmic 
traders closely monitoring the market for trading opportunities. 

Brogaard (2010) investigates the behaviour and impact of high frequency traders, finding that 
they tend to follow a price reversal strategy driven by order imbalances and do not seem to 
systematically  engage  in  a  non-HFT  anticipatory  trading  strategy.cdlxxxiv  Furthermore,  HFTs 
appear to follow a distinct strategy that bears little resemblance to strategies followed by other 
types of traders. 

The  impact  of  automated  trading  and  HFT  on  the  market  is  currently  an  active  area  of 
research  and  hence  the  volume  of  literature  available  at  present  is  limited.  Nonetheless,  we 
have reviewed a number of working papers and published articles that have sought to assess 
the impact of automated and high frequency trading on market characteristics such as liquidity 
and volatility. A discussion of these papers is provided in the following paragraphs. 

Impact on liquidity 

Hendershott, Jones and Menkveld (2010) note that there has been a rapid growth in automated 
trading since the mid-1990s and that there has been a dramatic improvement in liquidity over 
the  same  time  period.  However,  the  authors  state  that  it  is  not  at  all  obvious  a  priori  that 
automated trading and liquidity should be positively related. The authors note: 

“If  algorithms  are  cheaper  and/or  better  at  supplying  liquidity,  then  AT  may  result  in  more 
competition  in  liquidity  provision,  thereby  lowering  the  cost  of  immediacy.  However,  the 
effects could go the other way if algorithms are used mainly to demand liquidity. Limit order 
submitters grant a trading option to others, and if algorithms make liquidity demanders better 
able  to  identify  and  pick  off  an  in-the-money  trading  option,  then  the  cost  of  providing  the 
trading option increases, in which case spreads must widen to compensate. In fact, AT could 
actually lead to an unproductive arms race, where liquidity suppliers and liquidity demanders 
both  invest  in  better  algorithms  to  try  to  take  advantage  of  the  other  side,  with  measured 
liquidity the unintended victim.” 

346 

 
 
  
 
As a result of the theoretical uncertainty regarding the relationship between automated trading 
and liquidity, a growing body of empirical literature has considered the issue. Indeed, mindful 
of the fact that correlation between automated trading and liquidity does not imply causation, 
Hendershott, Jones and Menkveld (2010) investigate the issue on the basis of NYSE data. The 
authors find that, for large stocks in particular, algorithmic trading narrows spreads, reduces 
adverse selection, and reduces trade-related price discovery. Hence, the evidence suggests that 
algorithmic  trading  leads  to  liquidity  improvements  and  enhances  the  relevance  and 
informative  content  of  quotes.  However,  no  significant  effect  is  identified  for  smaller-cap 
stocks, a finding that the authors suggest may be explained by weak instrumental variable and 
a consequent lack of statistical power rather than the idea that there may truly be no effect.  

Based  on  probity  models  of  algorithmic  trading,  Hendershott  and  Riordan  (2009)  find  that 
algorithmic  traders  are  more  likely  to  initiate  trades  when  liquidity  is  high  (where  high 
liquidity is measured by narrow bid-ask spreads and higher market depth). They further find 
that while liquidity demanding trades of algorithmic traders are not related to volatility in the 
prior  15  minutes,  algorithm-initiated  trading  is  negatively  related  to  volume  in  the  prior  15 
minutes.  These  results  suggest  that  algorithmic  traders  monitor  liquidity  and  information  in 
the market, consuming liquidity when it is cheap and supplying liquidity when it is expensive. 
Hence, algorithmic trading helps to smooth out liquidity over time. 

Impact on volatility 

Hendershott  and  Riordan  (2009)  note  that  while,  in  theory,  the  demanding  for  liquidity  by 
algorithmic  traders  during  times  when  liquidity  is  low  could  result  in  an  exacerbation  of 
volatility;  there  is  no  evidence  of  this  from  their  empirical  analysis.  Similarly,  while 
algorithmic trading could theoretically exacerbate volatility by not supplying liquidity when 
the  liquidity  dries  up,  they  again  find  no  evidence  for  this  hypothesis  and,  in  fact,  find  the 
opposite to be true. 

Brogaard  (2010)  finds  that  there  is  only  a  very  limited  change  in  the  trading  levels  of  high 
frequency traders in response to volatility increases and suggests that high frequency traders 
may dampen intraday volatility. Similarly, Hasbrouck and Saar (2010) find, using data in the 
millisecond  environment,  that  algorithmic  trading  is  especially  beneficial  in  reducing 
volatility for small stocks during stressful times.cdlxxxv 

Gsell (2008) using a simulation approach to assess the impact of algorithmic trading. He finds 
that that specific algorithmic trading concepts considered in the simulation have an impact on 
both  prices  and  volatility.cdlxxxvi  More  specifically,  low  latency  showed  the  potential  to 
significantly  lower  market  volatility  while  large  volume  orders  had  a  negative  impact  on 
prices. However, Gsell emphasises that only simple algorithmic trading strategies have been 
implemented within the simulation environment to date and hence it is not valid to conclude 
that  the  algorithms  actually  implemented  by  traders  are  not  capable  of  handling  large  order 
volumes  appropriately.  It  is  further  noted  that  more  sophisticated  algorithms  might  actually 
have a lower impact on the market than those implemented to date. 

However,  Zhang  (2010)  finds  that  HFT  may  be  harmful  to  market  volatility.cdlxxxvii  In 
particular, he finds that HFT is positively correlated with price volatility after controlling for 
various exogenous determinants of volatility, based on a sample of US stocks. He finds that 
the  positive  correlation  is  stronger  among  the  largest  3,000  stocks  by  market  capitalisation 
and  among  stocks  with  high  institutional  holdings.  The  correlation  is  found  to  be  stronger 
during periods of high market uncertainty. 

347 

 
 
  
 
Impact on price formation and price discovery 

Hendershott and Riordan (2009) examine the return-order flow dynamics for both algorithmic 
trades and human trades. The authors find that algorithmic liquidity demanding trades play a 
more significant role in discovering the efficient price than do human trades. The magnitude 
of  effect  appears  to  be  quite  significant:  algorithm-initiated  trades  have  a  more  than  20  per 
cent greater permanent price impact than human trades. Similarly, Brogaard (2010) finds that 
high frequency traders add substantially to the price discovery process. 

Hendershott and Riordan (2009) also examine the role of the quotes of algorithmic traders in 
the price formation process, finding that the quotes of algorithmic trader are relatively more 
important in the price formation process than the share of trading volume would suggest. The 
authors also find that algorithmic traders contribute more to the efficient price by having more 
efficient quotes and algorithmic traders demanding liquidity so as to move the prices towards 
the efficient price. 

Brogaard (2010) finds that high frequency traders provide the best bid and offer quotes for a 
significant portion of the trading day and do so strategically so as to avoid informed traders, 
but provide only one-fourth as much book depth as non-high frequency traders. 

348 

 
 
  
 
28. 

ANNEX 18: SUMMARY OF TRACE INITIATIVE AND ITS ANALYSIS 

Source: Europe Economics 

In  July  2002  the  National  Association  of  Securities  Dealers  (NASD)  initiated  the  Trade 
Reporting and Compliance Engine (TRACE) system. 

TRACE  was  fully  phased  in  by  January  2006,  and  offers  real-time,  public  dissemination  of 
transaction  and  price  data  for  all  publicly  traded  corporate  bonds  ––  including  intra-day 
transaction  data  and  aggregate  end-of-day  statistics  (most  active  bonds,  total  volume, 
advances  and  declines  and  new  highs  and  lows).cdlxxxviii  This  data  is  available  through  all 
major  market  data  vendors  and  on  certain  public  websites.  TRACE  currently  captures  and 
disseminates secondary market transaction information in over 30,000 eligible securities from 
2,000  firms  regulated  by  the  US  Financial  Industry  Regulatory  Authority  and  registered  to 
trade corporate bonds.cdlxxxix 

Impact of TRACE on the corporate bond market 

The  introduction  of  TRACE  transaction  reporting  and  the  subsequent  shift  in  the  post-trade 
transparency of the US corporate bond market provide a unique experiment for assessing the 
impacts of transparency. Three seminal studies examined the impacts of the TRACE reporting 
system on the US corporate bond market shortly after it was initiated.cdxc 

Edward, Harris, and Piwowar (2007) analyse the transactions costs of all bond trades reported 
to  TRACE  in  2003,  including  both  retail  and  institutional  trades.  They  estimate  cross-
sectional  regressions  where  the  dependent  variable  is  the  bond  spread  and  explanatory 
variables  include  variables  indicating  whether  the  bond  was  price  transparent.  They  also 
employ a pooled time-series model, in which they compare transactions costs for bonds that 
became  transparent  under  TRACE  with  those  for  comparable  bonds  that  were  either  never 
TRACE-transparent, or were TRACE-transparent throughout the whole period. 

Goldstein, Hotchkiss and Sirri (2006) conduct a real scale experiment in which they form a 
sample  of  90  BB  rated  bonds,  for  which  transparency  was  introduced,  and  compare  it  to  a 
matched sample of bonds for which transparency was not introduced to identify the effects of 
transparency.  

Bessembinder, Maxwell and Venkataraman (2006) focus on institutional trades (bonds traded 
by  insurance  companies),  and  compare  the  transaction  costs  for  bonds  with  prices 
disseminated by TRACE with non-disseminated bonds. 

The  studies  all  employ  similar  methodologies  for  assessing  the  impacts  of  TRACE, 
comparing the changes in transactions costs over time for different samples of bonds – those 
transparent  under  TRACE  and  those  not.  This  method,  known  as  difference  in  difference 
analysis,cdxci  enables  the  effects  of  TRACE  to  be  isolated  from  other  possible  changes  over 
time and thus provides a robust way of evaluating the impacts of increased transparency.  

The conclusions of the three studies are very similar: 

(a) 

Bid-ask spreads decrease with trade size. When estimating the transactions costs for 
the  respective  samples,  the  authors  found  that  larger  trade  sizes  incurred  smaller 
transactions costs. This result contrasts with the results obtained in the equity market, 

349 

 
 
  
 
(b) 

(c) 

(d) 

where transactions costs increase with risk and thus trade size. The authors suggest 
that this is explained by the differences in the two market structures, with the most 
important difference being transparency; smaller traders in an opaque market are less 
able to accurately evaluate the costs they pay. 

Increased  transparency  under  TRACE  significantly  reduces  transaction  costs 
(spreads).  With  the  exception  of  a  few  trade  size  groups,  the  spreads  of  all  bonds 
whose  prices  become  transparent  under  TRACE  decline  by  more  than  those  of  the 
control  groups.  Goldstein  et  al.  find  that  this  effect  is  strongest  for  small  and 
intermediate  trade  sizes  (between  101  and  250  bonds).  These  results  are  consistent 
with investors’ ability to negotiate better terms of trade with dealers once they have 
access to broader bond-pricing data. These results suggest that public traders benefit 
significantly  from  price  transparency.  If  transactions  costs  are  a  deterrent  to  retail 
interest, it can be expected that retail interest should increase with lower transaction 
costs  associated  with  transparency.  In  addition,  Bessembinder  et  al.  find  this  effect 
evident even with large institutional trades. 

Increased  transparency  does  no  effect  trading  volume.  Goldstein  et  al.  (2006)  were 
the  only  authors  to  measure  the  impact  of  increased  transparency  on  both  average 
daily  trading  volume  and  average  number  of  trade  per  day,  and  they  find  it  to  be 
insignificant for all trade sizes, as well as for investor and inter-dealer trades.  

Increased  transparency  does  not  reduce  liquidity.  Goldstein  et  al.  (2006)  find  that 
increased  transparency  has  either  a  neutral  or  positive  effect  on  liquidity,  as 
measured by trading volume or estimated bid-ask spreads. Edwards et al. argue that 
given the great liquidity observed in the relatively  more  transparent  equity  markets 
(where  the  management  of  inventory  problems  is  arguably  greater),  and  their 
empirical  results,  it  is  extremely  unlikely  that  increased  bond  market  transparency 
would lower liquidity.  

(e) 

Additional transparency is likely to encourage the creation of more efficient market 
structures and innovative dealing strategies that can further reduce transactions costs.  

In  addition  to  these  general  conclusions,  Bessembinder  et  al.  also  find  the  large  dealer  cost 
advantage  and  market  chares  previously  documented  in  other  studies  (see  Schultz  2001)  is 
reduced  post-TRACE,  which  may  have  implications  for  the  competitiveness  of  the  bond 
market. 

Consistent  with  the  existence  of  liquidity  externalities,  Bessembinder  et  al.  document  that 
trading  costs  for  non-TRACE  eligible  bonds  decreased  after  transaction  reporting  was 
initiated through TRACE in July 2002. For non-TRACE eligible bonds issued by firms in the 
same  industry  as  a  firm  with  at  least  one  bond  issue  eligible  for  TRACE  reporting  the 
reductions in trading costs are larger.  

The  table  below  summarises  the  empirical  results  for  the  three  studies  on  the  impacts  of 
TRACE in the US corporate bond market. 

350 

 
 
  
 
– 

TABLE 53: Summary of the empirical results obtained for the US bond 
market 

Study 

Data 

Measurement 
of 
cost 

transaction 

Transaction 
decrease  with 
size? 

cost 
trade 

Transparency 
transaction costs? 

reduces 

Basis points (per 
trade size) 

Per cent 

Yes  for  eligible  bond 
transactions 
$1 
million 

> 

3.4bp 
million) 
($5 million) 

($2 
7.5bp 

50% 

One-way 
trading 

Yes  for  non-eligible 
bond transactions ≥ $4 
million 

2.8bp 
million) 
($5 
9.5bp 
million) 

($4 
4.0bp 
million) 
($10 

20% 

Institutional 
(insurance 
company) 
trades 
corporate 
bonds 

in 

Bessembinder 
et al. (2006)* 

Goldstein  et 
al. (2006)†  

BBB-rated 
bonds 

Dealer  round-
trip (DRT) 

Varies  with  trade  size 
and  pre-dissemination 
level of activity 

0 – 67bp 

Edwards 
al. (2007)‡ 

et 

All 
corporate 
bonds  

One-way 
trading 

Yes  (includes  eligible 
and non-eligible) 

0.9bp ($10,000) 

2.9bp ($20,000) 

3.8bp 
($100,000) 

2.2bp 
million) 

($1 

25% 
(trades  of 
1,000 
bonds) 

7-10% 
(trades  of 
smaller 
sizes) 

* Use National Association of Insurance Commissioners (NAIC) data set.  

† Use TRACE data set. Includes 99.9% of 4888 total bonds trades (0.01% pertains to trading activity 
on NYSE’s Automated Bond System, not reported through TRACE) 

‡  Use  TRACE  data  set.  Model  uses  an  iterated  weighted  least-squares  method  requiring  that  a  bond 
trade at least nine times s.t. estimates may not be representative of less active bonds i.e. 20% (5,369 of 
27,342) of bonds are excluded. 

Other Impacts of TRACE 

TRACE data show strong retail participation in all credit qualities. For the past seven years, 
approximately 68 per cent of overall customer transactions are below $100,000 in par value, 
the  size  widely  used  by  the  industry  to  distinguish  between  retail  and  institutional  trades. 
While  retail-sized  transactions  represent  a  large  part  of  reported  trades,  they  account  for 
approximately 1.8 per cent of par value traded. Retail-sized transactions, especially those in 
Investment  Grade  securities,  have  significantly  contributed  to  the  recent  increases  in  the 
number  of  trades:  TRACE  now  records  twice  as  many  retail  sized  transactions  as  it  did  in 
2008.cdxcii
October 

351 

 
 
  
 
 
 
 
 
 
29. 

ANNEX 19: OVERVIEW OF MAIN LEGISLATIVE INITIATIVES IN THE FIELD OF SECURITIES MARKETS 

30. 

N MARKETS 

Name of Directive/Regulation 

Main objective of the 
text or its revision in 
case of existing text 

MiFID 

MAD 

Short selling 

Prospectus 

ICSD 

EMIR 

To improve transparency 
of financial markets for 
market participants and 
regulators, especially in 
the areas of bonds and 
derivatives, to extend 
market requirements to 
broker facilities, to 
regulate new forms of 
algorithmic trading and to 
increase the powers of 
regulators and to raise the 
level of investors 
protection 

To extend the scope of MAD to 
instruments traded on newer types 
of markets, broker facilities and 
OTC, to extend and improve the 
disclosure of information to the 
market regarding instruments 
admitted to trading on those 
various markets and facilities and 
reinforce the prevention, detection, 
investigation and sanctioning of 
insider trading and market 
manipulation 

To provide increased 
transparency to regulators 
and market participants on 
short selling activities for 
equities and sovereign 
bonds, to prevent settlement 
risk and to enable national 
regulators and ESMA to 
intervene in case of 
emergency to restrict or 
forbid certain practices 

To improve the 
disclosure of 
comprehensive 
pre-market 
information by 
publishing a 
prospectus when 
securities are 
offered to the 
public or admitted 
to trading on a 
regulated market  

To reinforce the 
investors protection 
in case of fraud or 
operational 
dysfunctioning by an 
investment firm 
resulting in an ability 
of this investment 
firm to render 
financial asset held 
on behalf of retail 
investors 

To improve the safety 
and transparency of  
OTC derivatives 
markets by mandating 
reporting of OTC 
derivative contracts to 
trade repositories and 
clearing through 
central counterparties 
(CCP) 

Transparency 
Directive 

To harmonise the 
transparency 
requirements in relation to 
information about issuers 
whose securities are 
admitted to trading on a 
regulated market.  

Topics 

In 

In 

In 

In 

In 

In 

In 

General structure of 
markets 

authorisation 

organisational 
requirements 

organisation of trading 

market surveillance by 

(cid:57) 

(cid:57) 

(cid:57) 

(cid:57) 

(cid:57) 

352 

(cid:57) 

(cid:57) 

 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Name of Directive/Regulation 

MiFID 

MAD 

Short selling 

Prospectus 

ICSD 

EMIR 

To improve transparency 
of financial markets for 
market participants and 
regulators, especially in 
the areas of bonds and 
derivatives, to extend 
market requirements to 
broker facilities, to 
regulate new forms of 
algorithmic trading and to 
increase the powers of 
regulators and to raise the 
level of investors 
protection 

To extend the scope of MAD to 
instruments traded on newer types 
of markets, broker facilities and 
OTC, to extend and improve the 
disclosure of information to the 
market regarding instruments 
admitted to trading on those 
various markets and facilities and 
reinforce the prevention, detection, 
investigation and sanctioning of 
insider trading and market 
manipulation 

To provide increased 
transparency to regulators 
and market participants on 
short selling activities for 
equities and sovereign 
bonds, to prevent settlement 
risk and to enable national 
regulators and ESMA to 
intervene in case of 
emergency to restrict or 
forbid certain practices 

To improve the 
disclosure of 
comprehensive 
pre-market 
information by 
publishing a 
prospectus when 
securities are 
offered to the 
public or admitted 
to trading on a 
regulated market  

To reinforce the 
investors protection 
in case of fraud or 
operational 
dysfunctioning by an 
investment firm 
resulting in an ability 
of this investment 
firm to render 
financial asset held 
on behalf of retail 
investors 

To improve the safety 
and transparency of  
OTC derivatives 
markets by mandating 
reporting of OTC 
derivative contracts to 
trade repositories and 
clearing through 
central counterparties 
(CCP) 

Transparency 
Directive 

To harmonise the 
transparency 
requirements in relation to 
information about issuers 
whose securities are 
admitted to trading on a 
regulated market.  

(cid:57) 

(cid:57) 

(cid:57) 

(cid:57) 

(cid:57) 

(cid:57) 

(cid:57) 

(cid:57) 

(cid:57) 

(cid:57) 

Main objective of the 
text or its revision in 
case of existing text 

market operators 

trade transparency to 
market participants 

trade transparency to 
regulators 

Specific clauses for 
SMEs/SME markets 

(cid:57) 

(cid:57) 

(cid:57) 

Commodities markets 

(cid:57) 

Transaction reporting 

(cid:57) 

(cid:57) 

(cid:57) 

353 

 
 
  
 
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
  
 
 
 
 
 
Name of Directive/Regulation 

MiFID 

MAD 

Short selling 

Prospectus 

ICSD 

EMIR 

To improve transparency 
of financial markets for 
market participants and 
regulators, especially in 
the areas of bonds and 
derivatives, to extend 
market requirements to 
broker facilities, to 
regulate new forms of 
algorithmic trading and to 
increase the powers of 
regulators and to raise the 
level of investors 
protection 

To extend the scope of MAD to 
instruments traded on newer types 
of markets, broker facilities and 
OTC, to extend and improve the 
disclosure of information to the 
market regarding instruments 
admitted to trading on those 
various markets and facilities and 
reinforce the prevention, detection, 
investigation and sanctioning of 
insider trading and market 
manipulation 

To provide increased 
transparency to regulators 
and market participants on 
short selling activities for 
equities and sovereign 
bonds, to prevent settlement 
risk and to enable national 
regulators and ESMA to 
intervene in case of 
emergency to restrict or 
forbid certain practices 

To improve the 
disclosure of 
comprehensive 
pre-market 
information by 
publishing a 
prospectus when 
securities are 
offered to the 
public or admitted 
to trading on a 
regulated market  

To reinforce the 
investors protection 
in case of fraud or 
operational 
dysfunctioning by an 
investment firm 
resulting in an ability 
of this investment 
firm to render 
financial asset held 
on behalf of retail 
investors 

To improve the safety 
and transparency of  
OTC derivatives 
markets by mandating 
reporting of OTC 
derivative contracts to 
trade repositories and 
clearing through 
central counterparties 
(CCP) 

Transparency 
Directive 

To harmonise the 
transparency 
requirements in relation to 
information about issuers 
whose securities are 
admitted to trading on a 
regulated market.  

(cid:57) 

(cid:57) 

(cid:57) 

(cid:57) 

(cid:57) 

(cid:57) 

(cid:57) 

(cid:57) 

(cid:57) 

(cid:57) 

354 

(cid:57) 

(cid:57) 

(cid:57)  

(cid:57) 

(cid:57) 

(cid:57) 

(cid:57) 

Main objective of the 
text or its revision in 
case of existing text 

Powers of regulators 

market surveillance 

oversight of positions 

ban on product and 
services 

Conduct of business 
rules 

authorisation 

corporate governance 

organisational 
requirements for specific 
activities 

 
 
  
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Name of Directive/Regulation 

MiFID 

MAD 

Short selling 

Prospectus 

ICSD 

EMIR 

To improve transparency 
of financial markets for 
market participants and 
regulators, especially in 
the areas of bonds and 
derivatives, to extend 
market requirements to 
broker facilities, to 
regulate new forms of 
algorithmic trading and to 
increase the powers of 
regulators and to raise the 
level of investors 
protection 

To extend the scope of MAD to 
instruments traded on newer types 
of markets, broker facilities and 
OTC, to extend and improve the 
disclosure of information to the 
market regarding instruments 
admitted to trading on those 
various markets and facilities and 
reinforce the prevention, detection, 
investigation and sanctioning of 
insider trading and market 
manipulation 

To provide increased 
transparency to regulators 
and market participants on 
short selling activities for 
equities and sovereign 
bonds, to prevent settlement 
risk and to enable national 
regulators and ESMA to 
intervene in case of 
emergency to restrict or 
forbid certain practices 

To improve the 
disclosure of 
comprehensive 
pre-market 
information by 
publishing a 
prospectus when 
securities are 
offered to the 
public or admitted 
to trading on a 
regulated market  

To reinforce the 
investors protection 
in case of fraud or 
operational 
dysfunctioning by an 
investment firm 
resulting in an ability 
of this investment 
firm to render 
financial asset held 
on behalf of retail 
investors 

To improve the safety 
and transparency of  
OTC derivatives 
markets by mandating 
reporting of OTC 
derivative contracts to 
trade repositories and 
clearing through 
central counterparties 
(CCP) 

Transparency 
Directive 

To harmonise the 
transparency 
requirements in relation to 
information about issuers 
whose securities are 
admitted to trading on a 
regulated market.  

Main objective of the 
text or its revision in 
case of existing text 

Investors protection 

product information 

(cid:57) 

protection of investments   

control of inducements 

(cid:57) 

Algorithmic and 
automated trading 

Authorisation 

risk control requirements 

(cid:57) 

(cid:57) 

(cid:57) 

355 

 
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
1 

 The  Mifid  review  is  based  on  the  "Lamfalussy  process"  (a  four-level  regulatory  approach  recommended  by  the  Committee  of 

Wise  Men  on  the  Regulation  of  European  Securities  Markets,  chaired  by  Baron  Alexandre  Lamfalussy  and  adopted  by  the  Stockholm 

European  Council  in  March  2001  aiming  at  more  effective  securities  markets  regulation)  as  developed  further  by  Regulation  (EU)  No 

1095/2010 of the European Parliament and of the Council, establishing a European Supervisory Authority (European Securities and Markets 

Authority): at Level 1, the European Parliament and the Council adopt a directive in co-decision which contains framework principles and 

which empowers the Commission acting at Level 2 to adopt delegated acts (Art 290 The Treaty on the Functioning of the European Union C 

115/47) or implementing acts (Art 291 The Treaty on the Functioning of the European Union C 115/47). In the preparation of the delegated 

acts the Commission will consult with experts appointed by Member States with the European Securities Committee. At the request of the 

Commission, ESMA can advise the Commission on the technical details to be included in level 2 legislation. In addition, Level 1 legislation 

may empower ESMA to develop draft regulatory or implementing technical standards according to Art 10 and 15 of the ESMA Regulation 

which  may  be  adopted  by  the  Commission  (subject  to  a  right  of  objection  by  Council  and  Parliament  in  case  of  regulatory  technical 

standards). At Level 3, ESMA also works on recommendations, guidelines and compares regulatory practice by way of peer review to ensure 

consistent  implementation  and  application  of  the  rules  adopted  at  Levels  1  and  2.  Finally,  the  Commission  checks  Member  States' 
compliance with EU legislation and may take legal action against non-compliant Member States. 

2 

3 

4 

Directive 2004/39/EC (MiFID Framework Directive)  

Directive 2006/73/EC (MiFID Implementing Directive) implementing Directive 2004/39/EC (MiFID Framework Directive) 

Regulation No 1287/2006 (MiFID Implementing Regulation) implementing Directive 2004/39/EC (MiFID Framework Directive) 

as regards record-keeping obligations for investment firms, transaction reporting, market transparency, admission of financial instruments to 
trading and defined terms for the purposes of that Directive (OJ L 241/1 2.09.2006) 

5 

Monitoring Prices, Costs and Volumes of Trading and Post-trading Services, Oxera, 2011 

See (COM (2010) 301 final) Communication From The Commission To The European Parliament, The Council, The European 

6 
Economic And Social Committee And The European Central Bank: Regulating Financial Services For Sustainable Growth, June 2010 

See 

7 
statement 
http://www.pittsburghsummit.gov/mediacenter/129639.htm 

Leaders' 

G-20 

of 

Pittsburgh 

Summit, 

24-25 

September 

2009, 

As a result, the Commission issued (COM (2009) 563 final) Communication by the Commission on ensuring efficient, safe and 

8 
sound derivatives markets: future policy actions, 20 October 2009 

9 

See (COM (2010) 484) Proposal on Regulation on OTC derivatives, central counterparties and trade repositories, September 2010 

See Report, High-level Group on Financial Supervision in the EU, chaired by Jacques de Larosière, February 2009, and Council 

10 
conclusions on strengthening EU financial supervision, 10862/09, June 2009 

11 

12 

Specific national discretions which have not been used by any Member State will not be part of this impact assessment. 

On transparency for non equity markets; commodity derivatives related work-streams; high frequency trading; waivers from pre-

trade transparency & dark pools/crossing networks; best execution/conduct of business rules; and data consolidation/consolidated tape. See 
Annex 10 for the list of participants. 

13 

The summary is enclosed in Annex 12 

356 

 
 
  
 
 
 
                                                 
See 

14 
http://circa.europa.eu/Public/irc/markt/markt_consultations/library?l=/financial_services/mifid_instruments&vm=detailed&sb=Title  

consultation 

responses 

review 

public 

the 

on 

of 

to 

MiFID: 

15 

16 

See Annex 10 for the full list of the reports published by CESR on the MiFID related issues 

These studies have been completed by two external consultants that were selected according to the selection process established 

within  the  rules  and  regulations  of  the  European  Commission.  These  two  studies  do  not  reflect  the  views  or  opinions  of  the  European 
Commission 

In accordance with the rules for the elaboration of impact assessments the minutes of the last meeting of the steering group have 

17 
been submitted to the Impact Assessment Board together with this impact assessment. 

18  

Annex I Section C of Directive 2004/39/EC 

19  
countries 

See Thomson Reuters Europe Monthly Market Share Report from January 2010 to December 2010 by 

20  

21  

22 

BIS Quarterly Review, June 2011 

BIS Quarterly Review, June 2011 

See CESR Technical advice dated 29 July 2010 and Report to the Minister for the Economy, Industry and Employment on the 

Review of the Markets in Financial Instruments Directive (MiFID), Pierre Fleuriot, February 2010, p 29 and Interview with J.Hardt, L'Echo, 
12 January 2010 

A systematic internaliser is an investment firm which, on an organised, frequent and systematic basis, deals on own account by 

23 
executing client orders. It is a form of bilateral trading. See Article 4.1(7) of Directive 2004/39/EC (MiFID Framework Directive) 

24 

See  MiFID:  Spirit  and  Reality  of  a  European  Financial  Markets  Directive,  Celent  and  Goethe  Universitat  Frankfurt  am  Main, 

September  2010  p  49  and  Report  to  the  Minister  for  the  Economy,  Industry  and  Employment  on  the  Review  of  the  Markets  in  Financial 
Instruments Directive (MiFID), Pierre Fleuriot, February 2010, p 31. 

25 
CESR/10-802, 29 July 2010, pp 34-35. Based on data collected by CESR from 11 investment firms.  

Technical Advice to the European Commission in the context of the MiFID Review – Equity Markets, 

26 
and US broker Rosenblatt Securities’ annual report on US dark trading 

See Tradenews article on " US dark pool regulations on ice as volumes grow" dated 4 February 2011 

According to the Act, "swap execution facility means a trading system or platform in which multiple participants have the ability 

27 
to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or the system…" 

28  
Joint Advisory Committee on emerging regulatory issues; 30 September 2010 

Findings regarding the market events of May 6, 2010; Report of the Staffs of the CFTC and SEC to the 

Article  2.1(d)  of  the  of  Directive  2004/39/EC  (MiFID  Framework  Directive)  for  persons  who  are  only  dealing  on  their  own 

29 
account 

30 
CESR/10-802, 29 July 2010 

Technical Advice to the European Commission in the context of the MiFID Review – Equity Markets, 

31 

High Frequency Trading Technology, A TABB Anthology, TABB Group, August 2009 

The September 2009 G20 summit concluded that "all standardized OTC derivative contracts should be traded on exchanges or 

32 
electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest."  

357 

 
 
  
 
                                                                                                                                                         
A  dark  order  can  be  defined  as  an  electronic  order  that  can  be  automatically  executed  and  for  which  there  in  no  pre-trade 

33 
transparency, cf. Issues raised by dark liquidity, Consultation Report, IOSCO, CR05/10, October 2010, p 4.  

34 

As regards to trading in equity markets, trading under pre-trade waivers have slowly increased over the last years from c.6% in 

2008  to  nearly  10%  end  of  2009.  This  means  that  as  of  today  a  bit  more  than  90%  of  trading  on  organised  public  markets  is  pre-trade 

transparent. OTC trading is not subject to any pre-trade transparency requirements. Mention trading executed on BCN which is included in 
OTC trading figures. 

35  
Frankfurt am Main, September 2010. 

MiFID:  Spirit  and  Reality  of  a  European  Financial  Markets  Directive,  Celent  and  Goethe  Universitat 

36  
It should be noted that the % of OTC trading in the equities markets is subject to debate as trades in the 
OTC space are not reported in a reliable way. This will be addressed by improving the content of the transaction 
reporting  (see  Annex  9.4).  According  to  a  recent  Association  for  Financial  Markets  in  Europe  report  (Market 
Analysis,  The  Nature  and  Scale  of  OTC  Equity  Trading  in  Europe,  April  2011),  the  often  reported  40%  of 
European  equities  trading  that  is  over-the-counter  (‘OTC’)  is  incorrect  and  have  estimated  the  proportion  of 
equities trading represented by ‘real’ OTC trades to be actually around 16%. 

37 

For  example,  the  large  in  scale  waiver  was  designed  to  accommodate  the  need  of  wholesale  market  participants  to  be  able  to 

execute large orders without too large a price impact. This waiver is essential in striking the right balance between market transparency and 
protecting legitimate interests of market participants who are essential contributors to the liquidity of markets.  

38 

Publication of trade reports  must generally take place in real-time, and in any case within 3  minutes, but for large transactions 

delays between 60 minutes and up to 4 trading days are allowed, depending on the liquidity of the share and the size of the transaction. See 
Technical Advice to the European Commission in the context of the MiFID Review – Equity Markets, CESR/10-802, 29 July 2010 

39 
2010 

40 

Technical  Advice  to  the  European  Commission  in  the  context  of  the  MiFID  Review  –  Equity  Markets,  CESR/10-802,  29  July 

These instruments are mostly depositary receipts, exchange traded funds and certificates issues by companies. 

Technical  Advice  to  the  European  Commission  in  the  Context  of  the  MiFID  Review:  Non-equity  Markets  Transparency, 

41 
CESR/10-799, 29 July 2010 

42 

Prior  to  MiFID  trade  data  would  typically  be  available  from  the  incumbent  exchange  in  each  Member  State  while  OTC  trades 

were sometimes not reported at all. MiFID on the one hand, has spurred competition among trading and reporting venues while on the other 

hand,  has  required  post-trade  reporting  of  OTC  trades  and.  This  has  made  the  trade  data  environment  more  complex  with  more  complete 

information but originating from far more diversified sources. Therefore, this has made proper trade data consolidation more important. See 

Technical Advice to the European Commission in the context of the MiFID Review – Equity Markets, CESR/10-802, 29 July 2010 p 28 for 
further information. 

43 

See e.g. Rapport du groupe de travail sur la volatilité des prix du pétrole, sous la présidence de Jean Marie Chevalier, Ministère de 

l'économie  et  de  l'emploi,  February  2010,  and  Rapport  d'étape:  Prévenir  et  gérer  l’instabilité  des  marchés  agricoles,  Jean-Pierre  Jouyet, 
Christian de Boissieu et Serge Guillon, 23 September 2010 

For example, European Parliament resolution on derivatives markets: future policy actions (A7-0187/2010), 15 June 2010, calls 

44 
for a ban on "purely speculative trading in commodities". 

Article  2(1)(i)  and  (k)  of  Directive  2004/39/EC  (MiFID  Framework  Directive)  exempts  the  same  firms  from  the  Capital 

45 
Requirements Directive (CRD) as well. 

358 

 
 
  
 
                                                                                                                                                         
See Rapport du groupe de travail sur la volatilité des prix du pétrole, sous la présidence de Jean Marie Chevalier, Ministère de 

46 
l'économie et de l'emploi, February 2010, p52f. 

This section also refers to other compliance units under the EU ETS like Certified Emission Reductions (CERs) stemming from 

47 
the Clean Development Mechanism (CDM) and Emission Reduction Units (ERUs) from Joint Implementation (JI) projects.  

48 

49 

As created by Directive 2003/87/EC of the European Parliament and of the Council. 

A  key  future  segment  in  the  primary  market,  auctions,  will  come  in  full  under  the  market  oversight  regime  set  out  by  the 

Commission  Regulation  (EU)  No  1031/2010  of  12  November  2010  on  the  timing,  administration  and  other  aspects  of  auctioning  of 

greenhouse gas emission allowances pursuant to Directive 2003/87/EC of the European Parliament and the Council establishing a scheme for 

greenhouse gas emission allowances trading within the Community, OJ L 302, 18.11.2010, p 1 (the Auctioning Regulation), irrespective of 

whether the auctioned product qualifies as a financial instrument or not. The Regulation stipulates that auctions shall only be conducted on 

an auction platform authorised as a regulated market by a MiFID supervisor and in accordance with rules implementing the MiFID to the 

extent relevant. Under the Regulation, reception, transmission and submission of bids provided by investment firms in that market is also to 

be governed by the MiFID. Cf. Art. 6(5) and 35 of the Auctioning Regulation. Moreover, to the extent that the allowance derivatives market 

is within the scope of financial markets legislation, it benefits from the regular safeguards and supervisory arrangements that apply to any 
other market for commodity derivatives. 

50 

E.g. Germany and France 

Article 25(3) of Directive 2004/39/EC (MiFID Framework Directive) and Articles 10 to 14 of Regulation No 1287/2006 (MiFID 

51 
Implementing Regulation). 

MAD is likely to be extended to financial instruments admitted to trading or only traded on MTFs as well as to instruments that 

52 
can influence the price of a financial instrument traded on a regulated market. 

53 

54 

55 

(COM (2010) 484) Proposal on Regulation on OTC derivatives, central counterparties and trade repositories, September 2010 

Article 50 of Directive 2004/39/EC (MiFID Framework Directive) 

Through  MiFID,  Member  States  already  have  the  power  to  carry  on  site  inspections  and  to  request  the  freezing  of  assets. 

Additional powers could consist in giving them the power to ask a judicial authority to enter private premises and seize documents relevant 
for the enforcement action. 

See  e.g.  Article  9  of  Regulation  (EU)  No  1095/2010  of  the  European  Parliament  and  of  the  Council,  establishing  a  European 

56 
Supervisory Authority (European Securities and Markets Authority) 

CESR Report on the mapping of supervisory powers, supervisory practices, administrative and criminal sanctioning regimes of 

57 
Member States in relation to the Markets in Financial Instruments Directive (MiFID), CESR/08-220, February 2009. 

58 

59 

Article 3 of Directive 2004/39/EC (MiFID Framework Directive) 

See  Consultation  of  Commission  services  on  legislative  steps  for  the  Packaged  Retail  Investment  Products  initiative  of  26 

November 2010 and (COM (2009) 204 final) Communication on Packaged Retail Investment Products, April 2009, Update on Commission 
work on Packaged Retail Investment Products, December 2009 and update in the form a working paper on 16 December 2009.  

60 

CESR,  CEIOPS  and  CEBS  have  also  developed  their  thinking  concerning  the  work  on  PRIPs.  See  CESR  /  CEBS  /  CEIOPS 

Report of the 3L3 Task Force on Packaged Retail Investment Products (PRIPs), CESR/10-1136 and CEBS 2010 196 and CEIOPS-3L3-54-
10, 6 October 2010, p 18  

359 

 
 
  
 
                                                                                                                                                         
Responses  to  Questions  15-18  and  20-25  of  the  European  Commission  Request  for  Additional  Information  in  Relation  to  the 

61 
Review of MiFID, CESR/10-860, 29 July 2010, p 3 

62 

63 

Article 19(6) of Directive 2004/39/EC (MiFID Framework Directive) 

This was underlined by 675 replies received from citizens to the MiFID consultation. Investors across Member States vary in their 

use  of  execution-only  services,  but  estimates  suggest  it  can  reach  up  to  a  third  of  all  retail  transactions  in  some  Member  States  (source: 
Europe Economics).  

64 

The  Final  Report,  Prepared  for:  European  Commission,  Directorate-General  Health  and  Consumer  Protection,  Synovate,  2011, 

recently assessed the quality of advice across the EU based on a mystery shopping exercise. Weaknesses emerged in the ability of advisors 

across  the  EU  to  recommend  suitable  products  to  investors.  Another  study,  Consumer  Decision-Making  in  Retail  Investment  Services:  A 

Behavioural  Economics  Perspective,  Final  Report,  Decision  Technology  Ltd,  N  Chater,  S  Huck,  R  Inderst,  November  2010,  sought 
behavioural economics insights on different factors relevant to investor decision making. 

65 

Article 26 (b) of Directive 2006/73/EC (MiFID Implementing Directive). 

Responses  to  Questions  15-18  and  20-25  of  the  European  Commission  Request  for  Additional  Information  in  Relation  to  the 

66 
Review of MiFID, CESR/10-860, 29 July 2010, p 6 

67 

Responses  to  Questions  15-18  and  20-25  of  the  European  Commission  Request  for  Additional  Information  in  Relation  to  the 

Review of MiFID, CESR/10-860, 29 July 2010, p 8. The report: Consumer Market Study on Advice within the Area of Retail Investment 

Services – Final Report, Prepared for: European Commission, Directorate-General Heath and Consumer Protection, Synovate, 2011 recently 

assessed the quality of advice across the EU based on a mystery shopping exercise. Weaknesses emerged in the ability of advisors across the 
EU to recommend suitable products to investors.  

68           See definitions and Annex II of Directive 2004/39/EC for further details  

69 

A  number  of  alleged  cases  of  misselling  of  derivatives  (normally  swaps)  and  other  complex  products  have  involved  the 

relationship between municipalities and large credit institution operating at national level and across the EEA. These cases have emerged in 

different Member States, such as France (department of Seine-Saint-Denis and others), Italy (City of Milan, Region of Apulia), Germany (a 
company owned by German cities including Ravensburg and Weingarten) and Norway.    

70 

CESR  Technical  Advice  to  the  European  Commission  in  the  context  of  the  MiFID  review  –  Investor  protection  and 

Intermediaries – CESR/10-859, p 18. Data gathering and analysis in the context of the MiFID review, Final Report for Directorate General 
Internal Market and Services, European Commission, PricewaterhouseCoopers, 13 July 2010, p 363  

71 

72 

Articles 13(2) and (3) of Directive 2004/39/EC (MiFID Framework Directive) 

It  has  to  monitor  that  firms  implement  and  maintain  policies  and  procedures  to  detect  and  minimize  the  risk  of  non-

compliance with their obligations under MiFID and to assess the adequacy and effectiveness of such policies and procedures. Cf Article 6 of 
Directive 2006/73/EC (MiFID Implementing Directive) 

73 
Article 7 of Directive 2006/73/EC (MiFID Implementing Directive) 

It has to identify risks relating to the firm's activities and set, where appropriate, the level of risk tolerated by the firm. Cf 

74 
mechanisms. Cf Article 8 of Directive 2006/73/EC (MiFID Implementing Directive) 

It  is  required  to  establish  an  audit  plan  to  evaluate  the  overall  adequacy  of  the  firm's  systems  and  internal  control 

75 

(COM (2010) 284 Final) Green Paper on Corporate Governance in financial institutions and remuneration policies 

360 

 
 
  
 
                                                                                                                                                         
Responses  to  Questions  15-18  and  20-25  of  the  European  Commission  Request  for  Additional  Information  in  Relation  to  the 

76 
Review of MiFID, CESR/10-860, 29 July 2010, p 4 

77 

The  review  of  the  published  annual  reports  of  financial  services  ombudsmen  did  reveal  some  problems  arising  in  relation  to 

discretionary  portfolio  management  services.  In  particular,  these  were  highlighted  by  the  ombudsmen  in  Belgium,  the  Czech  Republic, 

France, Germany, Ireland, Luxembourg, Spain and the UK. In the 2010 Annual Report published by the UK Ombudsman, it noted that the 

complaints made about discretionary portfolio management services typically involved the following issues: (i) A failing of administration of 

their  portfolio;  (ii)  The  portfolio  was  not  managed  in  a  ways  that  was  initially  agreed;  (iii)  A  failure  by  the  manager  to  diversify  the 

investments made in the portfolio; (iv) A manager that made too many, or too few, changes to the portfolio over a certain period of time. 

Only  a  few  of  the  ombudsmen  identified  the  number  of  cases  relating  to  discretionary  management.  For  instance,  the  German  private 

banking ombudsman identifies 274 cases relating to discretionary portfolio management (9 per cent of the cases it handled in the securities 
area, 4 per cent of its total cases workload); in Luxembourg seven of the cases settled related to this area (being three per cent of the total).  

CESR  Technical  Advice  to  the  European  Commission  in  the  context  of  the  MiFID  review  –  Investor  protection  and 

78 
Intermediaries – CESR/10-859, p 6; See also Annex 5.2.11 Table 32 

79  
Protection and Intermediaries, CESR/10-859, 29 July 2010, p.8 

Technical  Advice  to  the  European  Commission  in  the  context  of  the  MiFID  Review  –  Investor 

80  

Directive 2003/6/EC (Market Abuse Directive) 

81  
repositories, September 2010 

(COM  (2010)  484)  Proposal  on  Regulation  on  OTC  derivatives,  central  counterparties  and  trade 

82  
2010 

(COM  (2010) 482)  Proposal on  short  selling  and certain aspects  of  Credit  Default  Swaps,  September 

83  
market integrity and transparency, December 2010 

(COM (2010) 726) Proposal for a Regulation of the European Parliament and of the Council on energy 

84 

(COM (2009)114) Communication for the spring European Council, Driving European recovery, March 2009 

(COM  (2010)  301  final)  Communication  From  The  Commission  To  The  European  Parliament,  The  Council,  The  European 

85 
Economic And Social Committee And The European Central Bank: Regulating Financial Services For Sustainable Growth, June 2010, p 7 

86 

87 

88 

(COM (2010) 482) Proposal on short selling and certain aspects of Credit Default Swaps, September 2010 

(COM (2010) 484) Proposal on Regulation on OTC derivatives, central counterparties and trade repositories, September 2010 

Directive 2003/6/EC (Market Abuse Directive)  

(COM  (2010)  726)  Proposal  for  a  Regulation  of  the  European  Parliament  and  of  the  Council  on  energy  market  integrity  and 

89 
transparency, December 2010 

90 

Article 51 of Charter of Fundamental Rights of the European Union (2000/C 364/01) 

Article  9(5)  of  Regulation  (EU)  No  1095/2010  of  the  European  Parliament  and  of  the  Council,  establishing  a  European 

91  
Supervisory  Authority  (European  Securities  and  Markets  Authority),  amending  Decision  No  716/2009/EC  and  repealing  Commission 
Decision 2009/77/EC 

92  
other aspects of auctioning of greenhouse gas emission allowances 

Commission Regulation (EU) No 1031/2010 of 12 November 2010 on the timing, administration and 

361 

 
 
  
 
                                                                                                                                                         
93  

94  

95  

96  

97  

See Annex 2.1.2 Table 2 

See Annex 2.1.2 Derivatives markets 

Report on Trading of OTC Derivatives, OICV-IOSCO, FR03/11, February 2011 

Principles for Direct Electronic Access, Final Report, IOSCO, FR08/10, August 2010 

See Goethe Universität report on High Frequency Trading, Prof. Dr. Peter Gomber 

98  
trading platforms, investment firms and competent authorites, 20 July 2011, ESMA/2011/224 

Consultation paper, Guidelines on systems and controls in a highly automated trading environment for 

99  
ICE Futures Europe has started recently to publish information about the open position held by different 
types of traders for its Brent and gasoil futures and options. Euronext Liffe is expected to follow in the next few 
months for its soft commodities futures contracts. See article "Transparency boost for Brent", Finnacial Times, 
21 June 2011. 

100  

Article 48 of the Directive 2006/49/EC of the European Parliament and the Council of 14 June 2006 on the capital adequacy of 

investment firms and credit institutions. The review of the exemptions will take place before their expiry end of 2014. 

101  
CESR/08-752, 15 October 2008 

CESR/CEBS Technical Advice to the European Commission on the review of commodities business, 

102  
April 2011 

G20 Communiqué, Meeting of Finance Ministers and Central bank Governors, Washington DC, 14-15 

103 
2009 

104 

Recommendation 10, Report, High-level Group on Financial Supervision in the EU, chaired by Jacques de Larosière, February 

Regulation No 1287/2006 (MiFID Implementing Regulation) 

See 

105  
statement 
http://www.pittsburghsummit.gov/mediacenter/129639.htm 

Leaders' 

G-20 

See 

106  
statement 
http://www.pittsburghsummit.gov/mediacenter/129639.htm 

Leaders' 

G-20 

of 

Pittsburgh 

Summit, 

24-25 

September 

2009, 

of 

Pittsburgh 

Summit, 

24-25 

September 

2009, 

See 

107  
of 
http://www.g20.org/Documents2010/11/seoulsummit_declaration.pdf 

statement 

leader's 

G-20 

Seoul 

Summit, 

11-12 

November 

2010, 

Based on (COM (2010) 573), Strategy for the effective implementation of the Charter of Fundamental Rights by the European 

108 
Union, October 2010, particularly the check list.  

This  is  based  on  the  banking  sector  in  the  EU  having  operating  expenditure  of  about  €448  billion  in  2009.  OECD,  Income 

109 
statement and balance sheet, OECD Banking Statistics Database, 2010, and EE analysis. 

Study  on  the  Cost  of  Compliance  with  Selected  FSAP  Measures:  Final  Report,  Europe  Economics,  January  2009.  The  data 

110 
referred to are the medians gathered from a total sample of 40 banks and a further 18 investment banks.  

111 

A report by Morgan Stanley and Oliver Wyman in the context of US OTC derivative reform indicates that they expect the OTC 

derivative markets to be significantly reshaped by the reforms (which include similar central clearing requirements to the EMIR legislation in 

addition to exchange trading of derivatives). In relation to spreads, they assume that “the sell-side margin erosion will be largely offset by 

362 

 
 
  
 
                                                                                                                                                         
increased volumes, improved cost structure and balance sheet efficiency.” However, they do also emphasise that an unintended consequence 

of  enforced  exchange  trading  in  terms  of  a  severe  loss  in  liquidity  are  a  distinct  possibility.  (Source:  Derivative  uncertainty  likely  to  hit 
banks’ revenues, Financial Times, 21 March 2010) 

112 

See  Bessembinder  H,  Maxwell  W  and  Venkataraman  K  (2006)  ‘Market  transparency,  liquidity  externalities  and  institutional 

trading  costs  in  corporate  bonds’  Journal  of  Financial  Economics  Vol  82,  pp  251  –  288;  Goldstein  M,  Hotchkiss  E  and  Sirri,  E  (2006) 

‘Transparency and liquidity: a controlled experiment on corporate bonds’ The Review of Financial Studies Vol 20 (2), pp 235 – 273; and 

Edwards A, Harris L and Piwowar, M (2007) ‘Corporate bond market transaction costs and transparency’ The Journal of Finance, Vol LXII 
(3) 

Data  gathering  and  analysis  in  the  context  of  the  MiFID  review,  Final  Report  for  Directorate  General  Internal  Market  and 

113 
Services, European Commission, PricewaterhouseCoopers, 13 July 2010 

Citadel Securities, Nordic Trading Landscape Evolution – Impact of MiFID on Retail Flow Providers, February 2010; and Data 

114  
gathering  and  analysis  in  the  context  of  the  MiFID  review,  Final  Report  for  Directorate  General  Internal  Market  and  Services,  European 
Commission, PricewaterhouseCoopers, 13 July 2010 

The  impact  of  the  UK  FSA’s  Retail  Distribution  Review  (RDR)  dealing  with  the  regulation  of  inducements  when  advice  is 

115  
provided  could  be  used  a  reference  point.  It  should  be  mentioned,  however,  that  the  RDR  proposes  more  stringent  restrictions  on  the 

treatment  of  inducements  since  it  deals  homogeneously  with  inducements  provided  for  in  any  form  of  advice  (not  only  independent); 

furthermore, the RDR deals with products and entities which are not covered under MiFID (i.e. entities providing insurance products). In 

addition  it  also  includes  measures  on  professional  standards  (i.e.  professional  qualifications  of  advisors).  Lastly  it  should  be  taken  into 

account that there is a broader population of investment advisors in the UK, including a significant proportion of small advisors. Having said 

than, it is anticipated that, 23 per cent of UK advisory firms might exit the market as a result of the RDR, with a much higher ratio amongst 

the smallest advisers (those with annual incomes below €50,000). Overall, adviser numbers would fall by about 11 per cent. This includes, 

for instance, small providers which are close to retiring and will not find worthwhile to make investments to adapt to the new rules (Retail 
Distribution Review proposals: Impact on market structure and competition, Oxera, 2010). 

116 

European Fund Industry Breakfast Briefing, Thomson Reuters and Lipper, Ed Moisson, December 2010 

117 
for glossary of main terms employed in this Impact Assessment 

Cf. article 4 of Directive 2004/39/EC  for legal definitions of terms used in this Directive and annex 4 

118 
The concentration rule set out in Article 14 of Directive 1993/22/EEC (Directive on investment services 
in  the  securities  field)  enables  Member  States  to  require  orders  from  investors  in  that  Member  Sate  to  be 
executed only on regulated markets 

119 
All  European  Equities  Market  Activity  by  Trade  Type  (January  2010  to  January  2011),  Thomson 
Reuters, 
2011: 
http://thomsonreuters.com/products_services/financial/financial_products/equities_derivatives/europe/market_sh
are_reports/#tab2  

120  
A  systematic  internaliser  (SI)  is  an  investment  firm  which,  on  an  organised,  frequent  and  systematic 
basis, deals on own account by executing client orders. It is a form of bilateral trading. The core requirement for 
systematic  internalisers  is  to  publish  firm  quotes  in  shares  admitted  to  trading  on  a  regulated  market  that  are 
classified  as  'liquid'  under  MiFID  when  dealing  in  sizes  up  to  standard  market  size  (Article  27  of  Directive 
2004/39/EC  (MiFID  Framework  Directive)).    To  date,  only  10  investment  firms  have  been  registered  as 
systematic internalisers. CESR data suggests that systematic internalisers do not represent a large proportion of 
equity trading within Europe – with estimates in the region of 2% of all European equity trading. See: Impact of 
MiFID on equity secondary markets functioning, CESR/09-355, June 2009. 

121 
the MiFID Review, chaired by Pierre Francotte, Centre for European Policy Studies Brussels, February 2011 

MiFID 2.0: Casting New Light on Europe's Capital markets, Report of the ECMI-CEPS Task Force on 

363 

 
 
  
 
                                                                                                                                                         
122 
Financial Instruments Directive (MiFID), Pierre Fleuriot, February 2010, p 16 

Report  to  the  Minister  for  the  Economy,  Industry  and  Employment  on  the  Review  of  the  Markets  in 

123 

Impact of MiFID on equity secondary markets functioning, CESR/09-355, June 2009 

See 

124 
Reports: 
http://thomsonreuters.com/products_services/financial/financial_products/equities_derivatives/europe/market_sh
are_reports/#tab2 

Thomson 

Monthly 

Reuters 

Market 

Europe 

Share 

125 

The organisational requirements for regulated markets are set out in Article 39 of Directive 2004/39/EC 
(MiFID Framework Directive), while the corresponding requirements for MTFs are provided in Article 13 of the 
same Directive. The requirements for MTFs and regulated markets to monitor for disorderly conduct or conduct 
that may involve market abuse can be found in Articles 26 and 43 respectively of Directive 2004/39/EC (MiFID 
Framework Directive). 

126 
See  Technical  Advice  to  the  European  Commission  in  the  context  of  the  MiFID  Review  –  Equity 
Markets, CESR/10-802, 29 July 2010 and Report to the Minister for the Economy, Industry and Employment on 
the Review of the Markets in Financial Instruments Directive (MiFID), Pierre Fleuriot, February 2010, p 29 and 
Interview with J.Hardt, L'Echo, 12 January 2010 

127 
Article 13(4) of Directive 2004/39/EC (MiFID Framework Directive) stipulates that an investment firm 
shall  take  reasonable  steps  to  ensure  continuity  and  regularity  in  the  performance  of  investment  services  and 
activities.  To  this  end  the  investment  firm  shall  employ  appropriate  and  proportionate  systems,  resources,  and 
procedures. 

128  
CESR/10-802, 29 July 2010, p 33. 

Technical Advice to the European Commission in the context of the MiFID Review – Equity Markets, 

129  
Directive 2003/6/EC (Market Abuse Directive), on insider dealing and market manipulation. Adopted 
in early 2003, the Market Abuse Directive (MAD) has introduced a comprehensive framework to tackle insider 
dealing  and  market  manipulation  practices, jointly  referred  to  as  "market  abuse".  The  Commission  is  carrying 
out  a  review  of  the  Directive  aiming  at  clarifying  some  of  its  provisions  and  increasing  its  effectiveness.  A 
proposal for amending the Directive is scheduled to be adopted by the College before the summer. 

130 

Broker  Crossing  Networks  are  required  for  example  to  comply  with  conduct  of  business  and  best 
execution provisions (Articles 19, 20, 21 and 22 of Directive 2004/39/EC (MiFID Framework Directive)) as well 
as  to  publish  transactions  in  shares  admitted  to  trading  on  a  regulated  market  (Article  28  of  Directive 
2004/39/EC (MiFID Framework Directive)), to have arrangements in place to prevent conflicts of interest from 
damaging clients' interests (Article 18 of Directive 2004/39/EC (MiFID Framework Directive)) , and to notify 
competent authorities when they suspect a transaction might constitute insider dealing or market  manipulation 
(Article 6(9) of Directive 2004/72/EC (Market Abuse Directive)). 

131  
Investment  firms  operating  MTFs  are  subject  to  the  overall  organizational  requirements  applicable  to 
investment  firms  (Article  13  of  Directive  2004/39/EC  (MiFID  Framework  Directive)),  as  well  as  additional 
requirements  relating  to  the  trading  process  to  ensure  fair  and  orderly  trading  (Article  14  of  Directive 
2004/39/EC  (MiFID  Framework  Directive)).  MTFs  are  required  to  have  monitoring  tools  in  place  to  detect 
market abuse cases (Article 26 of Directive 2004/39/EC (MiFID Framework Directive)), and are subject to full 
pre-trade  and  post-trade  transparency  requirements  (Articles  29  and  30  of  Directive  2004/39/EC  (MiFID 
Framework Directive)).  

132 
See  MiFID:  Spirit  and  Reality  of  a  European  Financial  Markets  Directive,  Celent  and  Goethe 
Universitat Frankfurt am Main, September 2010, p 49 and Report to the Minister for the Economy, Industry and 
Employment on the Review of the Markets in Financial Instruments Directive (MiFID), Pierre Fleuriot, February 
2010, p 31. 

133 
Framework Directive) 

Article  27  for  SIs,  Article  29  for  MTFs  and  Article  44  for  RMs  of  Directive  2004/39/EC  (MiFID 

364 

 
 
  
 
                                                                                                                                                         
134 

Article 26 for MTFs and Article 43 for RMs of Directive 2004/39/EC (MiFID Framework Directive) 

135 
CESR/10-802, 29 July 2010, pp 34-35. Based on data collected by CESR from 11 investment firms.  

Technical Advice to the European Commission in the context of the MiFID Review – Equity Markets, 

136 
Financial Instruments Directive (MiFID), Pierre Fleuriot, February 2010 

See Report to the Minister for the Economy, Industry and Employment on the Review of the Markets in 

137 

138 

139 

140 

See Tradenews website and US broker Rosenblatt Securities’ annual report on US dark trading 

Electronic Trading of Bonds in Europe: Weathering the Storm, Celent, October 2009 

PWC estimates based on FESE data, from their report prepared for Commission services. 

PWC estimates based on data from UK FSA, from their report prepared for Commission services. 

141 

Report on trading of OTC Derivatives, OICV-IOSCO, FR03/11, February 2011, p 4 

142  

Report on trading of OTC Derivatives, OICV-IOSCO, FR03/11, February 2011, p 6 

143 
http://www.bis.org/statistics/ 

BIS, Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in 2007, see 

144 

Report on trading of OTC Derivatives, OICV-IOSCO, FR03/11, February 2011, p 9  

145  

Report on trading of OTC Derivatives, OICV-IOSCO, FR03/11, February 2011, p 8 

146  
for International Settlements 

BIS Quarterly Review, September 2010 International banking and financial market developments, Bank 

147 
The September 2009 G20 summit concluded that "all standardized OTC derivative contracts should be 
traded  on  exchanges  or  electronic  trading  platforms,  where  appropriate,  and  cleared  through  central 
counterparties by end-2012 at the latest."  

148 
Dodd–Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111-203, H.R. 4173), 21 July, 
2010  is  a  federal  statute  in  the  United  States  that  was  signed  into  law  by  President  Barack  Obama.  The  Act, 
which was passed as a response to the financial crisis, is the most sweeping change to financial regulation in the 
United States since the Great Depression. It was named after the two members of Congress, Barney Frank and 
Chris Dodd, because of their involvement in the drafting of this Act. 

149 
According  to  the  Dodd-Frank  Act,  "swap  execution  facility  means  a  trading  system  or  platform  in 
which  multiple  participants  have  the  ability  to  execute  or  trade  swaps  by  accepting  bids  and  offers  made  by 
multiple participants in the facility or the system…" 

150 

Although there is debate about how HFT could be defined, it is perhaps best defined as trading that uses 
sophisticated  technology  to  try  to  interpret  signals  from  the  market  and,  in  response,  executes  high  volume, 
automated trading strategies, usually either quasi market making or arbitraging, within very short time horizons. 
It usually involves execution of trades as principal (rather than for a client) and involves positions being closed 
out at the end of the day. 

151 
CESR/10-802, 29 July 2010 

Technical Advice to the European Commission in the context of the MiFID Review – Equity Markets, 

152 

High Frequency Trading Technology, A TABB Anthology, TABB Group, August 2009 

153 
the MiFID Review, chaired by Pierre Francotte, Centre for European Policy Studies Brussels, February 2011 

MiFID 2.0: Casting New Light on Europe's Capital markets, Report of the ECMI-CEPS Task Force on 

365 

 
 
  
 
                                                                                                                                                         
154 

Does bad liquidity drive out good liquidity?, Credit Agricole Chevreux, 24 November 2010 

155 
Two  years  after  MiFID: No turning  back  for  the  equities  markets,  Celent,  June 2009:  "In  the  case  of 
MTFs, the average size of transactions is between 750 and 1,000 shares per trade. This is much lower than the 
range of 2,500-4,000 shares per trade for the exchanges. " 

156 

Issues raised by dark liquidity, Consultation Report, IOSCO, CR05/10, October 2010 

157 

The 6 May 2010 "flash crash" is a possible case in point although the specific trigger of events appears 
not to relate directly to HFT. Cf Report of the staffs of the CFTC and SEC to the joint advisory committee on 
emerging regulatory issues, Findings regarding the market events of May 6 2010  

158 

Micro-structural issues of the European equity markets, CESR/10-142, April 2010 

159 
CESR/10-802, 29 July 2010 

Technical Advice to the European Commission in the context of the MiFID Review – Equity Markets, 

160 

Principles for Direct Electronic Access, Final Report, IOSCO, FR08/10, August 2010 

161 
Frankfurt am Main, September 2010. 

MiFID:  Spirit  and  Reality  of  a  European  Financial  Markets  Directive,  Celent  and  Goethe  Universitat 

162 

Rapport sur la révision de la Directive MiF, AMF, 11 June 2010 

163 
repositories, September 2010 

(COM  (2010)  484)  Proposal  on  Regulation  on  OTC  derivatives,  central  counterparties  and  trade 

164 
2010 

(COM  (2010) 482)  Proposal on  short  selling  and  certain aspects  of  Credit  Default  Swaps,  September 

165 

The September 2009 G20 summit concluded that "all standardized OTC derivative contracts should be 
traded  on  exchanges  or  electronic  trading  platforms,  where  appropriate,  and  cleared  through  central 
counterparties by end-2012 at the latest."  

166  
International Swaps & Derivatives Association et al., Input into the work of the IOSCO Task Force on 
OTC  Derivatives  Regulation:  Exchange  and  Electronic  Trading  (“ISDA  Memo”)  4  (December  2010)  (on  file 
with the IOSCO General Secretariat), quoted in Report on trading of OTC Derivatives, OICV-IOSCO, FR03/11, 
February 2011 

167 

To increase transparency, mitigate systemic risk, and protect against market abuse. 

168 

While  it  is  important  to  consider  which  different  kinds  of  trading  venues  correspond  to  the  G20 
characterisation  of  exchanges  and  electronic  trading  platforms,  this  focus  on  the  outcome  renders  the  issue 
slightly  less  relevant.  Therefore,  it  is  to  be  anticipated  that  while  different  jurisdictions  will  continue  to  have 
diverging  execution  arrangements  and  requirements,  they  will  make  regulatory  choices  in  favour  of  certain 
venues in accordance with internationally agreed principles, thereby minimising the risk of regulatory arbitrage. 

169  

Data presented by FESE at a European Commission SME Finance Forum in January 2011 

170 
According  for  instance  to  Article  2(1)(f)  of  Directive  2003/71/EC  (Prospectus  Directive),  'small  and 
medium-sized  enterprises'  means  companies,  which,  according  to  their  last  annual  or  consolidated  accounts, 
meet at least two of the following three criteria: an average number of employees during the financial year of 
less than 250, a total balance sheet not exceeding €43m and an annual net turnover not exceeding €50m. 

171 
Liquidity is a function of both volume and volatility. Liquidity is positively correlated to volume and 
negatively correlated to volatility. A stock is said to be liquid if an investor can move a high volume in or out of 
the market without materially moving the price of that stock. If the stock price moves in response to investment 
or disinvestments, the stock becomes more volatile. 

366 

 
 
  
 
                                                                                                                                                         
172 
For instance, concerning the Market Abuse Directive (MAD), some Member States have extended some 
or all the provisions of this Directive to MTFs. But in some Member States MTFs (e.g. AIM in the UK) benefit 
from an adapted regime to keep costs of listing down for SME issuers. Some stakeholders argue that if all the 
MAD obligations are extended without adaptation to instruments only traded on MTFs, small caps listed on, or 
considering  a  listing  on,  this  type  of  markets  would  face  higher  costs  to  access  the  market  (cf.  response  by 
European Issuers to public consultation, 27 July 2010, p 2).  

173 
Few markets such as London Stock Exchange's Alternative Investment Market (AIM), but recently also 
Bourse  de Luxembourg's  EuroMTF  attracts  even  third  country  issuers (see  Bourse de Luxembourg  Fact  Book 
2010, p 81); however, most other markets have only a regional or local focus. 

174 
See Mendoza, Securities Regulation in Low-Tier Listing Venues: the Rise of the Alternative Investment 
Market, Fordham Journal of Corporate and Financial Law, vol. XIII , pp 257, 326, where the example of AIM's 
subsidiary in Italy, AIM Italia, as a pan-European trading platform is given. 

175 

See Articles 14(6) and 40(5) of Directive 2004/39/EC (MiFID Framework Directive).. 

176 
One  first  example  for  a  pan-European  equity  market  for  SME’s  is  the  cooperation  between  Munich 
Stock Exchange and PLUS markets of UK with the aim of generating additional trading volumes and liquidity 
and potentially also expanding the service to non-equity securities. This network also provides access to all stock 
admitted to the London Stock Exchange's Alternative Investment Market (AIM). 

177 
According to the City of London, as of September 2009, over 3000 companies had joined AIM since 
1995, although the current number is substantially lower: fewer than 1300, of which 19% are from outside the 
UK. Most AIM-quoted companies have small  market values – approximately 25% of companies have a value 
under  £5 million  and  78%  have  a  market  value  of  less  than  £50 million.  The  City's  Role  in  Providing  for  the 
Public Equity Financing Needs of UK SMEs, G Openshaw, D Widger, Professor C Mason, L Jones, S Wells, 
City of London, March 2010, p 31 

According  to  Mendoza,  the  majority  of  the  delisting  in  AIM  was  due  to  either  a  listing  move  to  a  senior 
exchange  or  company  takeover/reverse  takeover  proceedings.  According  to  research  cited,  only  a  reduced 
number of firms delist because their shares have lost considerable value. See Mendoza, Securities Regulation in 
Low-Tier  Listing  Venues:  the  Rise  of  the  Alternative  Investment  Market,  Fordham  Journal  of  Corporate  and 
Financial Law, vol. XIII , pp 257, 283 et seq., in particular p 298.  

178 
PLUS-Quoted is  also  operating  in  the  London  market, but  focuses on smaller  companies  (most  of  its 
companies have a market cap of around £5 million). Additionally, it contemplates special proceedings for AIM 
companies' cross-listings. Allegedly, the cost of going and being listed in Plus-Quoted are lower than in AIM. 
Regulation is also lighter than in AIM. See The City's Role in Providing for the Public Equity Financing Needs 
of UK SMEs, G Openshaw, D Widger, Professor C Mason, L Jones, S Wells, City of London, March 2010, p 32 

179 
seq. 

An EU-Listing Small Business Act, March 2010, F Demarigny, MAZARS Group, March 2010, p 20 et 

180 

Article 27, 29 and 44 of Directive 2004/39/EC (MiFID Framework Directive) provides for the general 
obligation  of  systematic  internalisers,  MTFs  and  regulated  markets  to  make  pre-trade  transparency  data 
available. Article 29 and 44 of the same Directive make reference to 'the size or type of orders' and 'the market 
model for which pre-trade disclosure may be waived', in particular transactions that are concluded 'by reference 
to  prices  established  outside  the  systems'  of  the  regulated  market  or  MTF  and  "transactions  that  are  large  in 
scale".  The  waivers  for  pre-trade  transparency  are  further  defined  in  Article  18  and  20  of  Regulation  No 
1287/2006 (MiFID Implementing Regulation). 

181 

A  dark  order  can  be  defined  as  an  electronic  order  that  can  be  automatically  executed  and  for  which 
there  in  no  pre-trade  transparency,  cf.  Issues  raised  by  dark  liquidity,  Consultation  Report,  IOSCO,  CR05/10, 
October 2010, p 4.  

182  

Articles 18, 19 and 20 of Regulation No 1287/2006 (MiFID Implementing Regulation) 

367 

 
 
  
 
                                                                                                                                                         
183 

Issues raised by dark liquidity, Consultation Report, IOSCO, CR05/10, October 2010 

184 

Article 28, 30 and 45 of Directive 2004/39/EC (MiFID Framework Directive) provides for the general 
obligation of investment firms (including systematic internalisers), MTFs and regulated markets to make post-
trade transparency data available. 

185 

Article 28 of Regulation No 1287/2006 (MiFID Implementing Regulation) 

186 
January 2011 

The Structure, Regulation and Transparency of European Equity Markets under MiFID, CFA Institute, 

187 
Markets, CESR/10-802, 29 July 2010 

See  Technical  Advice  to  the  European  Commission  in  the  context  of  the  MiFID  Review  –  Equity 

188 
companies. 

These  instruments  are  mostly  depositary  receipts,  exchange  traded  funds  and  certificates  issued  by 

189 

Article 14(1) of Directive 2004/39/EC (MiFID Framework Directive) 

190 
Markets Transparency, CESR/10-799, 29 July 2010 

Technical  Advice  to  the  European  Commission  in  the  Context  of  the  MiFID  Review:  Non-equity 

191 
Initiatives mentioned by CESR in the bonds market include the data reporting/publication service of the 
International  Capital  market  Association  and  price  information  website  "investing-in-bondseurope"  by  the 
Securities Industry Financial Markets Association. 

192 
348, July 2009 

Transparency of corporate bond, structured finance product and credit derivatives markets, CESR/09-

193 
348, July 2009 

Transparency of corporate bond, structured finance product and credit derivatives markets, CESR/09-

194 

Prior to MiFID trade data would typically be available from the incumbent exchange in each Member 
State  while  OTC  trades  were  sometimes  not  reported  at  all.  MiFID  on  the  one  hand,  has  spurred  competition 
among  trading  and reporting  venues while on  the  other hand,  has required  post-trade reporting  of  OTC  trades 
and. This has made the trade data environment more complex with more complete information but originating 
from far more diversified sources. Therefore, this has made proper trade data consolidation more important. See 
Technical Advice to the European Commission in the context of the MiFID Review – Equity Markets, CESR/10-
802, 29 July 2010, p 28 for further information. 

195 

Commodity derivatives are financial instruments as provided in of Annex I Section C (5) to (7) and (10) 
of  Directive  2004/39/EC  (MiFID  Framework  Directive),  and  Articles  38  and  39  of  Regulation  No  1287/2006 
(MiFID Implementing Regulation) 

196 
market integrity and transparency, December 2010 

(COM (2010) 726) Proposal for a Regulation of the European Parliament and of the Council on energy 

197 

Inflation protection is doubtful, Financial Times, 13 December 2010 

198 
Policy Brief 9, June 2010 

Food  and  Agriculture  Organization  of  the  United  Nations  (FAO),  Economic  and  Social  Perspectives, 

199 
Jean Marie Chevalier, Ministère de l'économie et de l'emploi, February 2010  

See for example Rapport du groupe de travail sur la volatilité des prix du pétrole, sous la présidence de 

200  
(COM  (2010)  301  final)  Communication  From  The  Commission  To  The  European  Parliament,  The 
Council, The European Economic And Social Committee And The European Central Bank: Regulating Financial 
Services For Sustainable Growth, June 2010 

368 

 
 
  
 
                                                                                                                                                         
201 
2011 

(COM (2011) 25 final) Tackling the challenges in commodity markets and on raw Materials, February 

202  
(COM (2009) 591) Communication from the Commission to the European parliament, the Council, the 
European Economic and Social Committee and the Committee of the Regions A better functioning food supply 
chain  in  Europe  and  accompanying  Commission  Staff  working  document  (SEC  (2009)  1447)  Agricultural 
commodity derivative markets: the way ahead, 28 October 2009  

203 
These  commodity  traders  act  as  intermediaries,  selling  commodities  on  a  forward  basis,  and  hedging 
themselves in both the commodity and derivatives markets. They will therefore also be the counterparty to many 
derivatives 
the  Geneva  Trading  and  Shipping  Association  at: 
http://www.gtsa.ch/geneva-global-trading-hub/key-figures 

the  website  of 

trades.  See 

204 
The  December  2010  average  daily  volumes  for  maize  futures  contracts  in  Chicago  equalled  183,150, 
while the Paris maize contract average daily volume equalled 1,264 contracts. See: Monthly Agricultural Update 
and data supplied by NYSE-Euronext, CME Group, December 2010 

205 

206 

Task Force on Commodity Futures Markets, Report to G-20 and Final Report, IOSCO, March 2009 

Task Force on Commodity Futures Markets, Report to G-20 and Final Report, IOSCO, March 2009 

207 
repositories, September 2010 

(COM  (2010)  484)  Proposal  on  Regulation  on  OTC  derivatives,  central  counterparties  and  trade 

208 
extended to all derivatives (currently only OTC derivatives). 

As a result of current negotiations at the Council, the reporting obligation to trade repositories might be 

209 
1998 and 2008. See Commission Staff working paper, (SEC 2009) 905), 3 July 2009 for further information  

OTC  derivatives  markets  have  grown  10  times  (in  terms  of  notional  amounts  outstanding)  between 

210 
European Parliament resolution on derivatives markets: future policy actions (A7-0187/2010), 15 June 
2010  calls  on  the  Commission  to  develop  measures  to  ensure  that  regulators  are  able  to  set  position  limits  to 
counter disproportionate price movements and speculative bubbles, as well as to investigate the use of position 
limits  as  a  dynamic  tool  to  combat  market  manipulation,  most  particularly  at  the  point  when  a  contract  is 
approaching  expiry.  It  also  requests  the  Commission  to  consider  rules  relating  to  the  banning  of  purely 
speculative  trading  in  commodities  and  agricultural  products,  and  the  imposition  of  strict  position  limits 
especially with regard to their possible impact on the price of essential food commodities in developing countries 
and greenhouse gas emission allowances. 

211 
p 33  

Reforming OTC Derivative Markets - A UK perspective, UK FSA and HM Treasury, December 2009, 

212 
from the Capital Requirements Directive (CRD) as well. 

Article 2(1)(i) and (k) of Directive 2004/39/EC (MiFID Framework Directive) exempts the same firms 

213 

Rapport  du  groupe  de  travail  sur  la  volatilité  des  prix  du  pétrole,  sous  la  présidence  de  Jean  Marie 

Chevalier, Ministère de l'économie et de l'emploi, February 2010, p 52f. 

214 

CESR / CEBS Technical Advice to the European Commission on the review of commodities business, 

CESR/08-752 and CEBS 2008 152 rev, 15 October 2008. 

215 
This section also refers to other compliance units under the EU ETS like Certified Emission Reductions 
(CERs) stemming from the Clean Development Mechanism (CDM) and Emission Reduction Units (ERUs) from 
Joint Implementation (JI) projects.  

216 
As  created  by  Directive  2003/87/EC  of  the  European  Parliament  and  of  the  Council  establishing  a 
scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 
96/61/EC (13 October 2003). 

369 

 
 
  
 
                                                                                                                                                         
217 
credibility of the bloc's chief weapon in the fight against global warming, Financial Times, 15 February 2011 

Carbon  trading  –  an  outbreak  of  fraud  in  the  European  emissions  trading  scheme  has  battered  the 

218 
Romania, classified them as financial instruments.  

A  number  of  Member  States  qualify  emission  allowances  as  property  rights.  One  Member  State, 

219 
The problem of carbon emissions fraud first came to light in summer 2009, when cases were detected in 
France, UK and Netherlands. On 28 April 2010, the German authorities carried out a massive raid concerning  
230 targets including Deutsche Bank, premises of different companies as well as private houses. The searches 
were done because of suspicion of tax evasion in connection with the trade of emission rights (value added tax 
carrousel). This investigation started in spring 2009. Later in the year, investigations were launched and arrests 
took  place  also  in  Belgium  and  the  UK.  Lastly,  in  December  2010,  Italian  tax  police  started  investigating 
numerous small Italian firms for VAT fraud in carbon trading resulting in 500 million euros of unpaid tax. Italy’s 
energy markets operator GME suspended spot trade in European carbon permits on 1st December after it said it 
was looking into “abnormal trading” and “presumed irregular or unlawful behaviour,” following record trade in 
undervalued  spot  carbon  permits.  While  presenting  a  serious  problem,  this  type  of  fraud  is  not  specific  to  the 
carbon  market  and  has  in  the  past  occurred  on  other  markets  as  well.  The  Commission  worked  closely  with 
Member  States  to  combat  this  problem,  and  a  new  Directive  on  the  application  of  the  VAT  reverse  charge 
mechanism 
adopted 
(http://europa.eu/rapid/pressReleasesAction.do?reference=IP/09/1376)  on 16 March 2010 and came into force in 
April 2010 helping to close off opportunities for fraud. The Directive on reverse charges for emissions trading 
allows member states to implement, on an optional and temporary basis (up to 2015), a reversal of liability for 
the payment of VAT (value-added tax) on greenhouse gas emission allowances. The aim is to close off certain 
forms  of  tax  fraud,  in  particular  so-called  carousel  schemes  whereby  supplies  are  traded  several  times  by 
different suppliers without VAT being paid to the tax authorities. Applying a "reverse charge" principle allows 
liability  for  the  payment  of  VAT  on  emission  allowances  and  services  to  be  shifted  from  the  supplier  (as 
normally required by EU rules) to the customer. It should be stressed however that if a Member State applying 
the  VAT reverse  charge  is  automatically  closing off  the possibility  to  steal  VAT  from  its  budget,  the  national 
CO2 market can still be used to commit VAT fraud in another Member State who has not opted for the reverse 
charge mechanism, which explains why a strict control of national registries is of utmost importance.  

emissions 

trading 

was 

for 

220 
Directive  2005/60/EC  (Anti-Money  Laundering  Directive)  requires  credit  institutions  and  investment 
firms to verify the identity and nature of their clients or counterparties activities and, in doubt, refer the matter to 
relevant anti-money laundering authorities (cf. Art. 7, 8 and 20 in connection with Art. 2(1)). Given that other 
participants  in  the  carbon  market  are  not  currently  covered  by  the  AML  Directive,  concerns  have  been  raised 
about  the  market’s  exposure  to  money-laundering risks (cf. La régulation  des  marchés  du  CO2:  Rapport  de  la 
mission confiée à Michel PRADA, Inspecteur général des Finances honoraire, April 2010)  

221 
A  key  future  segment  in  the  primary  market,  auctions,  will  come  in  full  under  the  market  oversight 
regime  set  out  by  the  Commission  Regulation  (EU)  No  1031/2010  (Auctioning  Regulation)  on  the  timing, 
administration  and  other  aspects  of  auctioning  of  greenhouse  gas  emission  allowances  pursuant  to  Directive 
2003/87/EC of the European Parliament and of the Council establishing a scheme for greenhouse gas emission 
allowances trading within the Community, OJ L 302, 18.11.2010, p 1 (hereinafter: the Auctioning Regulation), 
irrespective of whether the auctioned product qualifies as a financial instrument or not. The Regulation stipulates 
that  auctions  shall  only  be  conducted  on  an  auction  platform  authorised  as  a  regulated  market  by  a  MiFID 
supervisor and in accordance with rules implementing the MiFID to the extent relevant. Under the Regulation, 
reception,  transmission  and  submission  of  bids  provided  by  investment  firms  in  that  market  is  also  to  be 
governed by the MiFID. Cf. Art. 6(5) and 35 of the Auctioning Regulation.  

Moreover, to the extent that the allowance derivatives market is within the scope of financial markets 
legislation, it benefits from the regular safeguards and supervisory arrangements that apply to any other market 
for commodity derivatives. 

222 

223 

E.g. Germany and France 

Article  25(3)  of  Directive  2004/39/EC  (MiFID  Framework  Directive)  and  Articles  10  to  14  of 

Regulation No 1287/2006 (MiFID Implementing Regulation). 

370 

 
 
  
 
                                                                                                                                                         
 
224 

MAD is likely to be extended to financial instruments admitted to trading or only traded on MTFs as 

well as to instruments that can influence the price of a financial instrument traded on a regulated market. 

225 
(Market Abuse Directive), CESR, June 2009, p 6 

Response  to  the  European  Commission's  call  for  evidence  on  the  review  of  Directive  2003/6/EC 

226 

Task Force on Commodity Futures Markets, Report to G-20 and Final Report, IOSCO, March 2009 

227 
the transactions between EEA financial regulators 

In November 2007, the Transaction Reporting Exchange Mechanism (TREM) was set up to facilitate 

228 

229 

Article 25(5) of Directive 2004/39/EC (MiFID Framework Directive) 

(COM  (2010)  484)  Proposal  on  Regulation  on  OTC  derivatives,  central  counterparties  and  trade 

repositories, September 2010 

230 

Article 50 of Directive 2004/39/EC (MiFID Framework Directive) 

231 
establishing a European Supervisory Authority (European Securities and Markets Authority) 

See  e.g.  Article  9  of  Regulation  (EU)  No  1095/2010  of  the  European  Parliament  and  of  the  Council, 

232 

Article 41 of Directive 2004/39/EC (MiFID Framework Directive) 

233 
This is subject to their general obligations under Community law and relevant international obligations, 
and  provided  that  national  provisions  do  not  result  in  treatment  more  favourable  than  that  given  to  European 
firms.  In practice,  this  means  that  third  country  firms  must  be  subject  to  a  regulatory  regime  which  is  at  least 
equivalent to that offered by the MiFID. 

234 

Report  on  the  mapping  of  supervisory  powers,  supervisory  practices,  administrative  and  criminal  sanctioning 
regimes of Member States in relation to the Markets in Financial Instruments Directive (MiFID), CESR/08-220, February 
2009. 

235  
Report  on  the  mapping  of  supervisory  powers,  supervisory  practices,  administrative  and  criminal 
sanctioning  regimes  of  Member  States  in  relation  to  the  Markets  in  Financial  Instruments  Directive  (MiFID), 
CESR/08-220, February 2009, pp 22-26 

236 
sector 

See (COM (2010) 716) Communication from the EC on Reinforcing sanctioning regime in the financial services 

237 
Perspective: Final Report, Decision Technology Ltd et al., November 2010, p 6 

Consumer  Decision-Making 

in  Retail  Investment  Services:  A  Behavioural  Economics 

238 

See  Consultation  by  Commission  Services  on  legislative  steps  for  the  Packaged  RetailInvestment 
Products  initiative,  26  November  2010  and  (COM  (2009)  204  final)  Communication  on  Packaged  Retail 
Investment  Products,  April  2009,  Update  on  Commission  work  on  Packaged  Retail  Investment  Products, 
December 2009 and update in the form a working paper on 16 December 2009.  

239 
CESR,  CEIOPS  and  CEBS  have  also  developed  their  thinking  concerning  the  work  on  PRIPs.  See 
CESR  /  CEBS  /  CEIOPS  Report  of  the  3L3  Task  Force  on  Packaged  RetailInvestment  Products  (PRIPs), 
CESR/10-1136 and CEBS 2010 196 and CEIOPS-3L3-54-10, 6 October 2010, p 18  

240 
on Commission work on Packaged Retail Investment Products, December 2009, p 44 

(COM (2009) 204 final) Communication on Packaged Retail Investment Products, April 2009, Update 

241 
Information in Relation to the Review of MiFID, CESR/10-860, 29 July 2010, p 3 

Responses  to  Questions  15-18  and  20-25  of  the  European  Commission  Request  for  Additional 

371 

 
 
  
 
                                                                                                                                                         
242 
Information in Relation to the Review of MiFID, CESR/10-860, 29 July 2010  p 2 

Responses  to  Questions  15-18  and  20-25  of  the  European  Commission  Request  for  Additional 

243 

Article 19(6) of Directive 2004/39/EC (MiFID Framework Directive) 

244 
This was underlined by 675 replies received from citizens to the MiFID consultation. Investors across 
Member States vary in their use of execution-only services, but estimates suggest it can reach up to a third of all 
retail transactions in some Member States (source: Europe Economics).  

245 

The  Final  Report,  Prepared  for:  European  Commission,  Directorate-General  Health  and  Consumer 
Protection, Synovate, 2011, recently assessed the quality of advice across the EU based on a mystery shopping 
exercise.  Weaknesses  emerged  in  the  ability  of  advisors  across  the  EU  to  recommend  suitable  products  to 
investors. Another study, Consumer Decision-Making in Retail Investment Services: A Behavioural Economics 
Perspective,  Final  Report,  Decision  Technology  Ltd,  N  Chater,  S  Huck,  R  Inderst,  November  2010,  sought 
behavioural economics insights on different factors relevant to investor decision making.  

246 

247 

248 

249 

250 

UK Financial Ombudsman Service, Annual Review 2009 – 2010 

Ombudsmann der Privaten Banken, Tätigkeitsbericht 2009 

Hellenic Ombudsman for Banking-Investment Services, Annual Report 2009 

Article 26 (b) of Directive 2006/73/EC (MiFID Implementing Directive). 

Responses  to  Questions  15-18  and  20-25  of  the  European  Commission  Request  for  Additional 

Information in Relation to the Review of MiFID, CESR/10-860, 29 July 2010, p 6 

251 

Responses to Questions 15-18 and 20-25 of the European Commission Request for Additional Information in Relation to the Review of MiFID, CESR/10-860, 

29 July 2010, p 8. In addition the Final Report, Prepared for: European Commission, Directorate-General Health and Consumer Protection, Synovate, 2011, recently assessed 

the quality of advice across the EU based on a mystery shopping exercise. Weaknesses emerged in the ability of advisors across the EU to recommend suitable products to 
investors. 

252 

253 

254 

Europe Economics: MiFID Review – Data Gathering and Cost-Benefit Analysis, Appendix 7 

Europe Economics: MiFID Review – Data Gathering and Cost-Benefit Analysis, Chapter 7 

Article  21  of  Directive  2004/39/EC  (MiFID  Framework  Directive)  and  Articles  44-46  of  Directive 

2006/73/EC (MiFID Implementing Directive) 

255 

For instance, the number of orders cancelled prior to execution or the speed of execution 

256 
Technical  Advice  to  the  European  Commission  in  the  context  of  the  MiFID  Review  –  Investor 
Protection and Intermediaries, CESR/10-859, 29 July 2010, p 18. Data gathering and analysis in the context of 
the MiFID review, Final Report for Directorate General Internal Market and Services, European Commission, 
PricewaterhouseCoopers, 13 July 2010, p 363  

257 

Articles 9 and  Articles 13(2) and (3) of Directive 2004/39/EC (MiFID Framework Directive); 

Articles 6, 7 and 8 of Implementing Directive 2006/73/EC (MiFID Implementing Directive)  

258 
See  (COM  (2010)  284  Final)  Green  Paper  on  Corporate  Governance  in  financial  institutions  and 
remuneration  policies;  Directorate  for  Financial  and  Enterprise  Affairs,  OECD  Steering  Group  on  Corporate 
Governance, Paper: Corporate Governance and the Financial Crisis: Conclusions and emerging good practices to 
enhance implementation of the Principles, February 2010, p 20 

259 
Information in Relation to the Review of MiFID, CESR/10-860, 29 July 2010, p 4 

Responses  to  Questions  15-18  and  20-25  of  the  European  Commission  Request  for  Additional 

260 

Articles 13 and 19 of Directive 2004/39/EC (MiFID Framework Directive) 

372 

 
 
  
 
                                                                                                                                                         
261 

Europe Economics: MiFID Review – Data Gathering and Cost-Benefit Analysis, Chapter 7 

262 
savings and investments, UK Financial Ombudsman Service 

Annual Review, financial year 2009 – 2010 of consumer complaints about insurance, credit, banking, 

263 

Annex  I,  Section  A(6)  and  (7)  –  Section  B(3)  and  (6)  of  Directive  2004/39/EC  (MiFID  Framework 

Directive) 

264 

Some  specific  practices  have  recently  attracted  attention.  Based  on  contributions  from  CESR 
(Responses to Questions 15-18 and 20-25 of the European Commission Request for Additional Information in 
Relation to the Review of MiFID, CESR/10-860, 29 July 2010) and market participants, these practices may be 
described as follows: 

- 
pre-sounding, i.e. discussion between investment firms and potential investors, prior to any public 
announcements, in order to assess the likely demand for bond issues. These preliminary contacts may 
lead to certain investors holding inside information; 

- 
inflating of orders and over-marketing of issues. The former consists of the investors overbidding 
for new securities in order to receive a good allocation of them in the case of oversubscription; the latter 
indicates  an  aggressive  marketing  by  the  investment  firm  concerning  an  inflated  order  book.  Both 
practices give an altered picture of the demand for an issue; 

- 
shadow book-building, that is testing the interest of investors before the announcement of an issue. 
This  practice  would  cause  the  shortening  of  the  official  book-building  process  and  would  not  allow 
investors to properly evaluate the new issues. 

Other issues sometimes mentioned concern the over-pricing, that is an over-estimation of the issue 
price and, more in general, a pricing which favours issuers rather than investors (or, also, institutional investors 
rather than issuers) and the unfair treatment of different investors (or categories of investors) in the allotment of 
the securities. 

265 
Protection and Intermediaries, CESR/10-859, 29 July 2010, p 6 

Technical  Advice  to  the  European  Commission  in  the  context  of  the  MiFID  Review  –  Investor 

266 
repositories, September 2010 

COM  (2010)  484  Proposal  on  Regulation  on  OTC  derivatives,  central  counterparties  and  trade 

267 
Innovation Framework Programme (CIP): http://ec.europa.eu/cip/  

More  information  on  the  programme  can  be  found  on  the  website  of  the  Competitiveness  and 

268 
See,  for  instance,  the  example  of  Deutsche  Börse's  Neuer  Markt,  in:  Burghof  and  Hunger,  Access  to 
Stock  Markets  for  Small  and  Medium  Sized  Growth  Firms:  the  Temporary  Success  and  Ultimately  Failure  of 
Germany’s Neuer Markt, October 2003 p 20 et seq. 

269 
On the new markets, see Goergen et al., The rise and Fall of the European New Markets: on the Short 
and  Long-run  Performance  of  High-tech  Initial  Public  Offerings,  ECGI  Finance  Working  Paper  N°27/2003, 
September 2003. 

270 
Market, Fordham Journal of Corporate and Financial Law, vol. XIII, pp 257, 291. 

Mendoza,  Securities  Regulation  in  Low-Tier  Listing  Venues:  the  Rise  of  the  Alternative  Investment 

271 
Market, Fordham Journal of Corporate and Financial Law, vol. XIII, pp 257, 274. 

Mendoza,  Securities  Regulation  in  Low-Tier  Listing  Venues:  the  Rise  of  the  Alternative  Investment 

272 
Article  29  Working  Party  in  its  Opinion  1/2006  on  the  application  of  EU  data  protection  rules  to 
internal whistle blowing schemes in the fields of accounting, internal accounting controls, auditing matters, fight 
against 
at 
http://ec.europa.eu/justice/policies/privacy/docs/wpdocs/2006/wp117_en.pdf  

available 

financial 

banking 

bribery, 

crime 

and 

373 

 
 
  
 
                                                                                                                                                         
 
273 
Article  29  Working  Party  in  its  Opinion  1/2006  on  the  application  of  EU  data  protection  rules  to 
internal whistle blowing schemes in the fields of accounting, internal accounting controls, auditing matters, fight 
against 
at 
http://ec.europa.eu/justice/policies/privacy/docs/wpdocs/2006/wp117_en.pdf  

available 

financial 

banking 

bribery, 

crime 

and 

274 
In  response  to  market  demand  NYSE  LIFFE  is  currently  trialling  a  similar  reporting  system  for  its 
agricultural  contracts  (see  http://www.euronext.com/fic/000/059/500/595009.pdf).  ICE  Futures  Europe  has 
introduced a similar facility for its oil contracts having a price linkage with US listed contracts, as a condition for 
continued access to US markets. 

275 
See e.g. "Populists vs. theorists: futures markets and the volatility of prices" David Jacks – Explorations 
in  Economic  History,  June  2006  and  Testimony  of  Steven  H.  Strongin,  Goldman  Sachs  to  the  US  Senate 
Subcommittee on Investigations, July 2009 

276 
(recast) 

Article 48 of Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions 

277 
While the information available on the size of these firms is limited, it is understood that the majority 
are  small  firms  or  even  sole-traders.  The  latest  available  data  indicates  that  in  Austria,  the  average  annual 
revenue from the relevant services is €105,000; in the UK the median firm generated €175,000 (with the average 
firm having revenue of €820,000 with some firms clearly well in excess of that). Furthermore, in a number of 
cases investment services represent a minority of income for these firms (so that, say, in Germany the majority 
of revenue is related to insurance and pension products). 

Article  9(5)  of  Regulation  (EU)  No  1095/2010  of  the  European  Parliament  and  of  the  Council,  establishing  a  European 

278  
Supervisory  Authority  (European  Securities  and  Markets  Authority),  amending  Decision  No  716/2009/EC  and  repealing  Commission 
Decision 2009/77/EC 

279 
Most  are  owned  and  operated  by  large  investment  banks  with  examples  being  (with  the  owner  in 
brackets): Sigma X (Goldman Sachs), DBA (Deutsche Bank), Citi Match (Citi Group), CS Crossfinder (Credit 
Suisse), NX (Nomura), JPM-X (JP Morgan Cazenove), MS Pool (Morgan Stanley) and UBS PIN (UBS) 

280 
In terms of the monitoring of trading we note that it is possible to purchase security market surveillance 
software  from  independent  software vendors  as  well  as  to  develop  in  a  bespoke  way.  For  example,  SMARTS 
Group  (itself  owned  by  NASDAQ  OMX)  provides  such  software  (in  varying  degrees  of  functionality)  to 
regulators, markets and individual broker-dealers. Subject to the functionality involved, a one-off cost of €200–
€600,000 may be applicable per affected entity, with on-going maintenance fees likely to be 20–30 per cent of 
the initial investment. Considering the six crossing systems that do not have or are not yet seeking MTF status 
and  the  10  to  12  non-MTF  electronic  platforms,  we  anticipate  one-off  costs  towards  the  lower  end  of  this 
spectrum, €3.2–€10.8 million in aggregate, with ongoing costs of €0.6-€3.2 million 

281 
Source: Europe Economics interview with a HFT. In addition this estimate is supported by a response to 
Micro-structural issues of the European equity markets, CESR/10-142, April 2010, in which it is stated that 35-
40 members of a major European exchange for cash equity trading are HFT firms.  

282 
We assume that 25 firms would require authorisation (so that senior management were judged fit and 
proper and capital adequacy tests were passed). Whilst the compliance cost of the fit and proper process would 
be de minimis for such a small population of firms the cost of holding increased capital may not be. The current 
levels  of  capital  holding  by  non-authorised  firms  is  not  known  —  however,  we  assume  an  increase  in  capital 
holding of €0.75 million per firm and an annual holding cost of five per cent then across the sub-set of 25 firms 
the on-going cost implication would be €0.9 million per annum. 

283 
With  regard  to  the  proposed  requirement  for  firms  involved  in  automated  trading  to  notify  their 
competent authority of the computer algorithm(s) they employ, including an explanation of its design, purpose 
and functioning about the notification of algorithms, it is considered that the costs would be relatively limited. It 
has  been  suggested  that  the  development  of  such  a  document  may  take  approximately  two  man-weeks. 
Assuming that the wage of the IT employee is around €100,000 per annum, this would imply an average cost of 

374 

 
 
  
 
                                                                                                                                                         
around €4,000 per firm. Assuming that there would be 250 firms affected by this proposal, the total cost would 
be approximately €1.0m. 

284  

285  
Page 4. 

LSE (2011), “Trading Services (On- Exchange and OTC) Price List With Effect From 1 April 2011”. 

LSE (2011), “Trading Services (On- Exchange and OTC) Price List With Effect From 1 April 2011”, 

286 

Based on the number of transactions 

287 
We estimate the number of dealers with automated pricing systems to be 54 for bonds and structured 
products,  and  34  for  derivatives.  Even  though  dealers  may  be  operating  in  all  markets,  we  assume  that  the 
pricing  systems  required  for  derivatives  to  be  substantially  different  to  that  for  bonds  and  SFP  (based  on 
information received from interviews with dealers), and thus there will not be overlap. This figure is estimated 
from information received in interviews by Europe Economics, and is in line with the overall assumptions about 
the number of market participants in each product group.  

288 
We estimate the number of smaller dealers with manual pricing systems to be 100 for bonds and SFPs 
and 76 for derivatives: information received from MTFs and electronic platforms suggests there is a far smaller 
number  of  dealers  on  these  platforms  with  manual  pricing  systems  (on  average  3)  but  that  overlap  between 
platforms will not be large (e.g. smaller dealers tend to belong to only one or two platforms), thus putting the 
total number of smaller, manual dealers at around 176 for platforms in all countries, not just those where Recital 
46 has not been exercised (as this does not apply to OTC markets).  

289 
Based  on  information  from  Data  gathering  and  analysis  in  the  context  of  the  MiFID  review,  Final 
Report for Directorate General Internal Market and Services, European Commission, PricewaterhouseCoopers, 
13 July 2010, this amounts to approximately 26 MTFs offering bonds and 20 offering derivatives. 

290 
We  assume  roughly  the  same  universe  of  firms  as  for  pre-trade  transparency.  Although  pre-trade 
responsibilities only apply to the sell-side, we assume the trade reporting will only be undertaken by one side of 
the  trade  (to  avoid  double  counting)  and  that  this  would  be  done  by  the  sell-side  (as  with  equities).  We  have 
included  50  additional  firms  from  the  buy-side  to  account  for  large  firms  that  would  be  likely  to  also  report 
trades automatically. Number of affected market participants based on interviews with stakeholders and cross-
checked with total number of market participants from FESE and International Financial Services London. 

291 
platforms, estimated at 1 to 1.5 hours a day per firm for 100 smaller dealers 

This  includes  the  time  spent  by  smaller  firms  in  manually  sending  information  to  the  trade  reporting 

292 
We  estimate  the  number  of  major  firms  that  would  develop  the  feeds  to  be  14;  the  number  of  other 
firms  with  automated  reporting  to  be  60  (20  dealers  and  40  large  buy-side  firms)  and  the  number  of  smaller 
dealers with manual reporting to be 76. 

293 

End in sight for European post-trade data impasse, The Trade News, 3 March 2010 

294 
For  example,  Eurex,  based  in  Germany,  has  contracts  for  interest  rate  and  equity  derivatives  and  has 
regulatory provisions to set position limits; and EDX in London has provisions to set limits, although these are 
not used in practice 

295 
and European Climate Exchange. 

To recap, these include NYSE Euronext.Liffe; Eurex; LME; ICE Futures; European Energy Exchange; 

296 
Euronext.Liffe 

These  are  Eurex;  Borse  Italiana;  EDX;  Mercado  Español  de  Futuros  Financieros  and  NYSE 

297 
The  29  MTF  and  10  electronic  platforms  trading  derivatives  would  need  to  create  or  enhance 
surveillance departments that would be responsible for requesting and processing information from traders and 
their  end  clients.  Depending  on  the  current  level  of  surveillance,  these  costs  may  be  minimal.  If  we  assume 
between  half  and  one  additional  employee  (FTE)  would  be  required  by  each  platform  to  carry  out  the 
information requesting and processing role, as well as communicate with the competent authority, then the on-

375 

 
 
  
 
                                                                                                                                                         
going cost for MTFs and electronic platforms is estimated at between just under €1.7 million and €3.1 million 
per year across the EU. These costs estimates are based on between 0,5 and 1 FTE per platform, with compliance 
staff costs of €80,000 each. 

298 
Assumes 250 traders across all MTFs and EPs with a requirement of between 5 and 10 days’ time each 
to handle additional information requests relating to this proposal. The estimate of 250 traders is based on the 
approximate number of trades in non-commodity derivative markets, in line with our overall assumption on the 
number of market participants (see our horizontal assumptions).  

299 
commodity derivative markets, the on-going costs of reporting would be additional.  

Note  that  even  if  there  is  some  overlap  between  traders  operating  on  both  commodity  and  non-

300 
If all members of MTF and electronic platforms are required to submit information about the contracts 
they enter into (and not just a few reporting members, as with position reporting by categories of traders), then 
the on-going costs of doing so could range between €20 million and €40 million per year. Assuming 1000 traders 
across all MTFs and electronic platforms, with a requirement of 0.25 to 0.5 FTE per year to handle information 
requests 

301 
Assuming one-off costs of between €75,000 and €100,000 per MTF, and 29 MTFs across the EU, we 
estimate total one-off costs to range from approximately €2 million to €3 million. Assuming on-going costs of 
between  1.5  and  3  additional  employees  and  IT  maintenance  costs,  we  estimate  on-going  costs  for  MTFs  of 
between €3.5 million to €7 million. 

302 
If we assume that electronic platforms used for OTC trading of derivatives do not currently have any 
position or market surveillance systems in place, the costs of being able to set position limits will be relatively 
large.  Based  on  information  from  exchanges  currently  engaged  in  position  management,  we  estimate  one-off 
costs of setting up electronic systems to collect, store and monitor position information at between €6 million 
and  €10  million  across  the  EU.  This  assumes  the  cost  of  IT  systems  to  be  between  €600,000  and  €1  million 
across the 10 main electronic platforms. On-going costs of maintaining such systems and staffing surveillance 
departments are estimated at between €3.2 million and €8.1 million. This assumes between 4 and 10 employees 
are needed, based on information received from 3 exchanges with surveillance departments, and that on-going IT 
costs are 10% of one-of IT costs. 

303 

Report on the mapping of discretions in MiFID, CESR/09-833, 2010 

304 
In  the  UK  (a  major  centre  of  OTC  derivative  trading)  the  following  are  excluded:  derivatives  based 
upon  with  a  basket  of  underlying  instruments;  derivatives  on  interest  rates;  derivatives  on  commodities  and 
foreign currency derivatives. 

305 
Finland,  Germany  and  Greece  also  apply  transaction  reporting  to  certain  financial  instruments  not 
admitted to trading on a regulated market. See Report on the mapping of discretions in MiFID, CESR/09-833, 
2010 

306 
Europe  Economics  has  modelled  the  current  annual  recurring  cost  in  the  EU  of  transaction  reporting 
based  upon  three  components:  an  internal  systems  cost;  labour  costs  and  data  cleaning  costs  (the  latter  are 
frequently  at  least  partly  outsourced  to  ARMs  in  a  number  of  jurisdictions,  e.g.  Germany  and  the  UK). 
Transaction reporting is heavily automated (although the success of that automation does seem to vary somewhat 
from firm to firm, driven in part by the mix of instruments traded). Labour costs were based upon a ratio of one 
Full Time Employee (FTE) being able to oversee between 22,000 and 27,500 transactions per day (this is well 
below  the  best  productivity  rate  Europe  Economics  found).  Data  cleaning  costs  were  proxied  by  payments  to 
ARMs which were taken as 0.6–1.2 cents per transaction. Internal system costs were related to labour costs in 
accordance with the market experience that we reviewed. 

307 
Indeed, they estimate that the number of transactions in instruments where the primary issuance was on 
an MTF to be about 6 million in 2009. Of these the majority (about 74 per cent) were reportable anyway due to 
the adoption of transaction reporting for such trades in certain jurisdictions (in particular, the UK). Once those 
markets that already have such instruments within scope are excluded they estimate the incremental change in 
volume of transactions to be about 0.2 per cent of the equity trades currently processed (1.5 million compared to 
871 million).  

376 

 
 
  
 
                                                                                                                                                         
308 
Based  upon  a  population  of  25  large  firms  incurring  5–7.5  days  of  IT  department  time,  75  medium 
firms using 3.5–5 days and 500 smaller firms requiring 2.5–3.5 days we expect that the one-off cost for set-up 
would be €0.7–1.1 million across the EU. 

309 
The publication Derivatives 2010, International Financial Services London, December 2010, identifies 
76 per cent of EU-based OTC derivatives trading is conducted from London or Spain (Ireland and Austria are 
not discretely identified).  

310 
Based  upon  information  collected  by  Europe  Economics  from  the  market  participants  they  have 
interviewed, an investment of up to €2 million (per firm)  would be required for the larger market participants 
(which tend to dominate such trade) to extend reporting from where it is conducted now to the whole EU. Such 
investment  has  been  scaled  back  for  smaller  market  participants  so  that  200  market  participants  would  invest 
€60-€75,000, 36 would invest €300,000-€400,000 and the largest fourteen (i.e. the so called G14) around €1.5–
€1.750 million. This gives an estimated one-off cost of €29–€41 million. To be clear, we are assuming that not 
all firms authorised to execute client orders (which is over 5,000) would be affected — rather that such activities 
are concentrated in a smaller number of firms which cover all instruments. 

311 
Information from ISDA on OTC transaction volumes (from the 2010 Benchmarking Survey) and from 
PwC on the share of the largest firms in specific markets lead Europe Economics to estimate a global population 
for derivatives transactions conducted OTC of 21 million. They estimate that once the EU share is taken the total 
would  be  about  13  million.  A  further  reduction  is  required  to  limit  the  population  to  those  derivatives  whose 
value correlates with a financial instrument admitted to trading or are related to the credit risk of a single issuer. 
This gives an estimate of about 6.5 million individual transactions in the EU per annum before deducting those 
transactions already being reported. 

312 

We use a figure of 1.1 million trades per annum. 

313 
Again, Europe Economics uses the ISDA 2010 Benchmarking Survey to provide a global figure and the 
report Derivatives 2010, International Financial Services London, December 2010 in order to estimate the EU 
share of this. 

314 
It  is  important  to  remember  that  it  is  the  number  of  transactions  executed  that  matters.  If  say  the 
notional value outstanding or the gross market value were compared, then OTC commodity derivatives would be 
only  0.6  per  cent  or  1.7  per  cent  respectively  of  all  derivatives  traded  OTC  (based  on  analysis  in  Triennial 
Central  Bank  Survey,  Foreign  Exchange  and  Derivatives  Market  Activity  in  2010,  Bank  for  International 
Settlements, September 2010 

315 
See  Press  Release:  Depositary  Receipts  Show  Resiliency  in 2009 on Higher Global  Trading  Volume, 
Program  Establishment,  Capital  Raisings  and  Price  Returns,  According  to  BNY  Mellon  Year-End  Industry 
Report,  BNY  Mellon  Depositary  Receipts,  13  January  2010.  This  gives  a  figure  of  19  billion  DRs  traded  in 
Europe, which is 0.9 per cent of the total number of equity shares traded in the EU (NB this is shares traded not 
the number of transactions in shares as discussed before). This represents about 15 per cent of the global total of 
DRs traded, implying a total value of €281 billion, or 2 per cent of the total value of equity trading in the EU 
(about €15 trillion in 2009). 

Secure 

316 
(see 
up 
http://www.phion.com/UK/company/Pages/default.aspx and http://www.backupdirect.net/offsite-data-storage by 
way of illustration).  

per  GB 

storage 

annum 

data 

cost 

€10 

can 

per 

to 

317 

Based on information from PwC and ISDA  

318 
September 2010, p 323 

 Data  gathering  and  analysis  in  the  context  of  the  MiFID  Review,  PricewaterhouseCoopers,  13 

319 
human oversight) to alert the surveillance team to unusual trading activity. 

For example, feedback from one MTF shows the use of an automated system of warnings (with some 

377 

 
 
  
 
                                                                                                                                                         
320 
Energy 

These  include  MTFs  such  as  CantorCO2E;  GFI  EnergyMatch;  MF  Global  Energy;  Tullet  Prebon 

321 
commodity exchanges worldwide 

Figure  based  on  Europe  Economics  research  and  PWC  report.  ISDA  estimates  there  are  48  large 

322 
Feedback from Europe Economics interviews with exchanges that have experience in position reporting 
by client categorisation suggests that if position reporting already takes place (as in the majority of exchanges) 
then  the  additional  costs  of  including  client  categorisation  will  be  negligible.  The  only  cost  that  would  be 
incurred would be on the part of the exchanges in compiling a COT report, estimated at about a quarter of a full-
time equivalent employee per year. Applying this to 15 commodity exchanges across the EU gives an on-going 
cost of €300,000 per year. 

323 
Using cost information provided by exchanges in the UK, and taking into account the estimated number 
of MTFs across the EU that currently do not have a position reporting regime, Europe Economics estimate one-
off costs of position reporting will be between €130,000 and €195,000. This assumes 13 main MTFs across the 
EU  that  do  not  currently  require  position  reporting,  and  a  one-off  cost  of  developing  systems  to  receive  and 
collate position reports of between €10,000 and €15,000. This incremental costs of a position reporting regime is 
relatively  low as  it  is  assumed  that  the  MTFs  already  operate  some  position  monitoring  systems  (e.g.  systems 
that allow them to  monitor trading and view deals being executed), and that the additional capacity needed to 
receive and collate reports will be relatively small. 

324 
On-going costs will be greater, given the staff costs required to collate and analyse position information 
as well as on-going IT maintenance costs. Europe Economics estimates on-going costs at between €1.8 million 
and €2.4 million per year across the EU. This assumes IT support and maintenance costs of between €1,000 and 
€1,500 per year, and just between 1.5 and two full-time equivalent employees per year, at €80,000 each. 

325 
Feedback from interviews indicates that reporting members are usually a subset of all members, and are 
mainly clearing firms. For example, only 20 per cent of ICE's members are involved in reporting (approximately 
42).  

326 
Costs to market participants (reporting traders) will include the time taken to prepare reports, which will 
depend  on  how  automated  their  systems  are  (if  systems  are  linked  electronically  to  the  exchange  or  regulator 
then  reports  are  sent  almost  automatically  from  the  back  office  and  on-going  costs  are  largely  limited  to  IT 
maintenance). In the case of electronic systems, one-off costs of implementing systems will be required. Given 
the fact that the largest commodity derivate traders already undergo position reporting through exchanges, and 
the fact that not all members are required to submit reports, we estimate that there are approximately 104 traders 
across the various commodity derivative MTFs in the EU who would be required to report positions on behalf on 
their clients. One-off costs for these traders are estimated at between €1.2 and €1.5 million, based on a cost of 
developing reporting feeds of between €12,000 and €15,000 per trader. On-going costs of IT maintenance and a 
small staff cost are estimated at approximately €2.2 million per year. 

327 
of £1:€1.18 

The overall impact of MiFID, UK FSA, November 2006. Values converted to Euros at an exchange rate 

328 

Article 35 of Commission Regulation (EU) No 1031/2010 (Auctioning Regulation) 

329 
compliance costs 

Costs  estimates  provided  by  Europe  Economics  based  o  their  previous  work  relating  to  the  FSAP 

330 
Based on Europe Economics costs estimates relating to being authorised as an OTF (see above): a one-
off cost of €200–€600,000 per affected platform, with on-going maintenance fees likely to be 20–30 per cent of 
the initial investment 

331 
For  example,  at  present  only  4%  of  114  members  of  Bluenext,  a  leading  spot  carbon  exchange  in 
France, are large industrial players with EU ETS compliance duties. Unlike large energy producers, these entities 
are  less  likely  to  develop  dedicated  trading  entities.  See  La  régulation  des  marchés  du  CO2:  Rapport  de  la 
mission confiée à Michel PRADA, Inspecteur général des Finances honoraire, April 2010, p 84. 

378 

 
 
  
 
                                                                                                                                                         
332 
Some 20% of 114 members of Bluenext, a leading spot carbon exchange in France, may be qualified as 
non-financial intermediaries. Source: La régulation des marchés du CO2: Rapport de la mission confiée à Michel 
PRADA, Inspecteur général des Finances honoraire, April 2010, p 84. 

333 
Based  on  The  overall  impact  of  MiFID,  UK  FSA,  November  2006  and  MiFID  Implementation  Cost 
Survey of the UK Investment Industry, LECG, October 2005. Values for both converted to Euros at an exchange 
rate of £1:€1.18 

334 
Investment Industry, LECG, October 2005. Values converted to Euros at an exchange rate of £1:€1.18 

These  estimates  have  been  developed  on  the  basis  of  MiFID  Implementation  Cost  Survey  of  the  UK 

335 
Europe  Economics  considers  that  this  tightening  may  affect  service  providers  operating  under  the 
Article 3(1) exemption in France, Germany, Greece and Romania. They have assumed that the completion of a 
more thorough-going authorisation pack would consume one to two days of time. Making due allowance for the 
differences in income between these Member States (so that the daily cost varies from about €44 in Romania to 
€178 in the Netherlands) they estimate that such an authorisation process would imply a one-off cost across all 
of the affected service providers in these countries of between €15 and €30 million. 

See 

reference 

336 
http://www.bundesfinanzministerium.de/nn_1776/DE/Wirtschaft__und__Verwaltung/Geld__und__Kredit/Kapit
almarktpolitik/18022011-Diskussionsentw-Finanzanlage-anl,templateId=raw,property=publicationFile.pdf;  The 
new statute is expected to be adopted by the German cabinet shortly. 

legislative 

consulted 

upon: 

draft 

was 

that 

the 

to 

337 
Data for the structured product markets comes from the European Commission (2008), representing 16 
Member  States.  Member  States  not  represented  are  Bulgaria,  Cyprus,  Estonia,  Greece,  Hungary,  Lithuania, 
Luxembourg, Latvia, Malta, Romania and Slovenia. Arete does not publish data on these on the grounds of lack 
of market development. We judge it unlikely that these uncovered markets are significant, either individually or 
in aggregate. 

338 
2008. 

Spain and France have only recently overtaken Belgium, which suffered a 43 per cent drop in sales in 

339 
Study  on  the Costs  and  Benefits  of  Potential  Changes  to  Distribution  Rules  for  Insurance  Investment 
Products  and  other  Non-MIFID  Packaged  Retail  Investment  Products:  Final  Report,  Europe  Economics, 
September 2010. 

340 
In  the  context  of  the  ongoing  work  on  PRIPS,  Europe  Economics  was  mandated  by  the  European 
Commission  to  assess  the  likely  cost  impact  of  the  application  of  MiFID’s  selling  rules  to  deposit-based 
structured  products  and  to  certain  types  of  insurance-based  investment  product  on  a  combined  basis.  They 
estimated the likely one-off impact of this to be €125–€175 million for banks, with recurring costs of €35–€60 
million. This took into account the fact that some banks had voluntarily adopted MiFID (or MiFID-like) conduct 
of business measures. In order to assess the impact relevant here they further disaggregated the impacts arising 
on  structured  term  deposits  separately  to  the  other  categories  of  non-MiFID  PRIP  (such  as  unit-linked  life 
insurance investment products) distributed by credit institutions. In their work they found that the gross sales of 
unit-linked and similar insurance-based investment products exceeded those of deposit-based structured deposits 
by  about  three  to  one.  On  this  basis  they  assume  that  the  one-off  impact  on  credit  institutions  of  this  option 
would be €31–44 million with recurring annual costs of €9–€15 million. 

341 
This market segment has experienced growth at 17 per cent annum between 2006 and 2008. If this trend 
continued this would imply a total market of €30 billion in 2010, with €27.7 billion distributed through credit 
institutions. 

342 
In  general,  execution  only  services  involve  little  face-to-face  interaction  between  providers  and  their 
clients.  In  the  UK,  for  example,  a  significant  proportion  of  the  execution  business  (upward  of  80  per  cent)  is 
carried out online.  

343 

Retail Investments Product Sales Data (PSD) Trend Report, UK FSA, August 2009 

379 

 
 
  
 
                                                                                                                                                         
344 
Based on the Eurostat data on the number of households directly investing in stock markets (best proxy 
for  the  number  of  execution  only  clients)  and  what  we  know  about  market  practice  in  Germany,  Italy  and 
Belgium  then we  have  a  population 1.6  to 2.2  million  clients.  Assuming  a  ratio  of  1:99 between  Newcits  and 
UCITS implies that perhaps only 16–22,000 customers would be affected by that option. we consider it unlikely 
that in excess of 50,000 customers would be affected across the EU as a whole. If the transition cost to another 
platform  is  taken  as  €2–€3  per  client  (based  upon  the  view  of  a  retail  bank  operating  both  an  execution  only 
platform and one with the in-built functionality for an online appropriateness test), then the one-off cost impact 
would be  about  €0.1—€0.15 million. We  remind  the  reader  that  this  is  on  the  assumption  that  pure execution 
only  providers  will  discontinue  provision of  these products  because (at the  moment)  these  are not  particularly 
significant in scale. 

345 

Source: Datamonitor Global Wealth Model 

346 
Moisson, December 2010 and Datamonitor Market Reports on “Financial Advice” in these countries. 

Analysis  based  on  European  Fund  Industry  Breakfast  Briefing,  Thomson  Reuters  and  Lipper,  Ed 

347 
Past studies have found that banks and direct (tied) sales forces normally required 10–15 minutes for 
product search whereas “whole of market” search has taken 45–60 minutes. Part of the difference is accounted 
for by the greater investment in technology made by banks and agents facilitating greater process automation and 
part is due to the restrictions in scope of the search. Nevertheless, there would likely be a consequence (say 10-
15  minutes)  as  additional  search  time  implied  for  any  investment  advisers  extending  their  search  from  a 
restricted one to something like “whole of market”. However, we believe that the practical effect of this policy 
option here is likely to be limited — indeed those advisers that are tied or multi-tied will be unable to lengthen 
search strategies, in the short-term at least, and banks providing advice on their own products will have a strong 
commercial rationale not to extend their search strategies in this way. Equally those that are not tied are likely to 
be conducting a broad search already. Given this, we do not estimate a cost impact due to the extension of search 
in this way. 

348 
individuals who are already receiving advice on an independent basis. 

40-45  million  mass  affluent  or  high  net  worth  individuals  less  the  7  -7.5  million  of  the  wealthy 

349 

Based on interviews with medium and large retail orientated banks this seems a reasonable assumption. 

350 
December 2009 

Economic  contribution  of  UK  financial  services  2009,  International  Financial  Services  London, 

351 

352 

The European Structured Retail Product Market 2009 Review, Arete Consulting, EUMR09, April 2009 

Based on an interview carried out by Europe Economics with a City of London based trade association 

353 
Adopting half to three-quarters of a day on average and applying this to the product numbers described 
above gives an aggregate cost of €50–€87 million (taking a medium-level compliance operative at a cost €65,000 
per annum). 

354 

Based on Europe Economics past work on the sale of non-MiFID PRIPS 

355 
Clients are likely to be involved with multiple product providers. We adopt three–four as a reasonable 
judgement  call.  At  a  cost  per  contact  of €1–€2  this  means  that  such  a  switch  would  have  an on-going  cost  of 
€1.5–€7.7 million. 

356 
7A  requirement  to  notify  investors  of  material  change  in  circumstances  is  likely  to  require  the 
modification of systems at product providers. However, we consider this likely to be limited in scale because the 
affected parties are likely to be involved also in discretionary portfolio management and similar activities where 
such a requirement is already built-in. We estimate that between 15 and 20 days of an IT professional (annual 
payroll costs of €100,000) would be necessary for each product provider, including project management of the 
changes. This would therefore result in a one-off cost of €1.7–€2.7 million. 

380 

 
 
  
 
                                                                                                                                                         
357 
March 2010. These figures combine the cost estimates of AR and DA financial advisers. 

FSA  estimate  of  incremental  compliance  costs  for  Retail  Distribution  Review  proposals,  UK  FSA, 

358 
The revenue from providing portfolio management services in the EU has been estimated to be at least 
€40  billion  (source:  Barnes  Reports,  “Worldwide  Portfolio  Management  Industry”,  2010;  this  covers  twenty 
Member States). However, this figure is not based upon bottom-up data drawn from the industry itself but rather 
represents  a  top-down  estimate  made  by  a  market  research  firm.  More  useful  data  are  available  for  the  UK. 
Europe  Economics  understands  from  a  trade  association  that  perhaps  three  million  discretionary  portfolio 
management  accounts  are  operated  in  the  UK,  although  perhaps  only  two-thirds  of  these  are  active.  The  total 
value of these accounts is thought to be about €350-€400 billion in the UK. Whilst fee structures can be complex 
and  tailored  to  individual  client  circumstances  an  approximate  annual  cost  of  about  1–1.2  per  cent  of  funds 
within the portfolio — this implies revenues not exceeding €3.5–4.8 billion in the UK. They understand from the 
same trade association that the typical UK portfolio manager would not have more than 150 clients (including 
non-active accounts). Given an estimated three million discretionary portfolio management clients in the UK this 
implies  20,000  portfolio  managers.  From  analysis  of  the  financial  reports  of  the  leading  specialist  portfolio 
managers  in  the  UK  they believe  that  there  is  one  member  of back-office  staff  to  two portfolio  managers,  i.e. 
there  are  30,000  workers  in  the  industry  in  the  UK.  Applying  the  average  revenue  per  worker  (portfolio 
managers  and  back-office  combined)  of  €150,000  gives  an  implied  revenue  on  discretionary  management 
activity of about €4.5 billion in the UK. This is about two-thirds of the UK-specific figure drawn from the same 
source as the Europe figure of €40 billion.  

359 
standard market practice excludes them. The use of inducements is prohibited in Italy.  

In  the  United  Kingdom,  although  the  use  of  inducements  is  not  currently  prohibited  by  regulation, 

360 
We estimate the Italian employee numbers as being equivalent (noting that average per capita financial 
wealth in Italy was €57,711 in 2009 versus £42,500 (€50,150at 1.18:1) in the UK — a ratio of 1.15:1: however, 
it  is  not  clear  that  the  underlying  population  of  customers  is  significantly  different)  to  obtain  20,000  as  our 
estimate for Italian portfolio managers. So the total unaffected is 40,000 portfolio managers (with 20,000 back 
office staff).  

361 
We assume that the additional monitoring for this measure would be relatively slight requiring one tenth 
of  an  additional  FTE  compliance  staff  for  every  100  employees.  For  60,000  front-office  staff,  that  implies  60 
additional compliance staff. At labour cost of €65,000 per additional compliance employee, these additional staff 
would cost €3.7m. 

362 

363 

A €125,000 annual salary equates to about €560 per working day assuming 225 working days in a year 

Based on interviews with two trading venues carried out by Europe Economics 

364 
There  are  currently  84  MTFs  dealing  in  instruments  other  than shares  alone. Together  with  regulated 
markets  and  organised  trading  systems  Europe  Economics  considers  that  an  estimated  population  of  120 
execution venues to be reasonable.  

365 
About 2,500 investment firms are authorised to conduct portfolio management services. Over one third 
of these are located in the UK with another 20 per cent in Germany (see Appendix 11). In addition, we estimate 
that 2,400 credit institutions are authorised for this service, with Austrian and German banks being particularly 
prominent. 

366 

367 

MiFID Implementation Cost Survey of the UK Investment Industry, LECG, October 2005 

MiFID Implementation Cost Survey of the UK Investment Industry, LECG, October 2005 

368 
Europe Economics research indicates under 100 non-international equity book-runners active in the first 
half of 2010. To make allowance for the debt markets and dormant interest (i.e. those firms which would wish to 
retain a capability even when not active) they assume that 10 per cent of those firms authorised (i.e. a total of 
3,647 as described in Annex 16, being 2,765 credit institutions and 882 investment firms) would undertake such 
a task 

381 

 
 
  
 
                                                                                                                                                         
369 
January 2009 

Study  on  the  Cost  of  Compliance  with  Selected  FSAP  Measures:  Final  Report,  Europe  Economics, 

370 
Only about five per cent of those firms authorised within the EU for underwriting or placing activity are 
located in Central and Eastern Europe. We take again take 15 per cent to be active (i.e. giving a population of 27 
firms against the 13 known to be active in equity issuance in the first half of 2010) and further assume that one 
quarter of these will require more substantial investment. The estimates of system implementation related to the 
UK  and  were  not  specifically  focused  on  underwriting  and  placing  —  therefore  we  scale  this  back  to  €125–
€250,000 per affected firm. This implies a one-off cost of €2–€4 million. 

371 
Although  in  some  countries  without  legislative  or  supervisory  requirements,  investment  firms  are 
required  to  keep  tapes  under  the  rules  of  regulated  markets.  For  instance  in  Ireland,  the  Irish  Stock  Exchange 
requires members to operate an effective telephone recording system and in Germany, Deutsche Börse requires 
specialists to tape every call related to the execution of their tasks. 

372  
shorter periods in force in various Member States currently.   

The legislative proposal is for three years, but the period considered for the cost estimate is to reflect the 

373 
proposals for Telephone Recording), UK FSA, May 2007 

Consultation  Paper  07/9:  Conduct  of  Business  regime:  non-MiFID  deferred  matters  (including 

The number of individuals given includes principal dealers and agency brokers (in respect of any type 
or client or counterparty) and the associated sales functions. The individuals may be working for a number of 
different kinds of firms, including banks, stockbrokers, investment management firms (including CIS and hedge 
funds) and insurance companies. 

The FSA also states: 

We  also  considered  the  possibility  of  imposing  similar  requirements  on  other  types  of  individuals 
working within financial services firms. Roles examined were those of investment  managers who do not have 
dealing  authority,  research  analysts,  corporate  finance  advisors,  and  retail  financial  advisors.  Our  analysis 
suggested  it  would  be  disproportionate  on  market  failure  and  cost-benefit  grounds  to  impose  recording 
requirements on these functions. 

374 
This estimate is based on a number of firms noting that they would not typically authorise the use of 
mobile  phones  for  the  conduct  of  business  even  if  robust  mobile  call  recording  solutions  were  available. 
Furthermore,  if  a  mobile  phone  recording  requirement  were  introduced  some  firms  said  they  would  consider 
limiting corporate mobiles to senior employees and fund managers to as to avoid recording costs. 

See 

375 
Commission 
http://ec.europa.eu/governance/impact/commission_guidelines/commission_guidelines_en.htm, 
Annexes to Impact Assessment Guidelines (‘The Annexes’) (2009)  

Assessment 

European 

Impact 

Guidelines, 
III: 

Part 

376 

377 

378 

379 

See ‘Box 1: Types of obligation’, The Annexes 49-50. 

See ‘Box 3: Types of required action’, The Annexes 51. 

See http://ec.europa.eu/governance/impact/docs/eu_cost_model_report_sheet_v2.xls 

Information received from interview with a dealer-to-client electronic platform regulated as an MTF.  

380 
rather than the data for a specific product. 

Please  note  this  is  for  illustrative  purposes  only  and  is  based  on  interviews  with  market  participants 

381 

Derivative uncertainty likely to hit banks’ revenues, Financial Times, 21 March 2010 

382 
billion-otc-derivative-revenue-question 

Citi Investment Research and Analysis (2010), accessed online at http://www.zerohedge.com/article/55-

382 

 
 
  
 
                                                                                                                                                         
 
 
 
383 

384 

385 

386 

Derivatives 2010, International Financial Services London, December 2010 

Exchange rate average for 2009 (0.71916) from Oanda.com 

Derivative uncertainty likely to hit banks’ revenues, Financial Times, 21 March 2010 

This is of course a very high-level estimate and would vary across derivative types. 

387 
As  highlighted  by  Annette  Nazareth,  Director  of  the  Division  if  Market  Regulation  of  the  SEC.  See 
European  corporate  bond  markets:  transparency,  liquidity,  efficiency,  Centre  for  Economic  Policy  Research, 
May 2006 

388 
transparency, liquidity, efficiency, Biais et al, Centre for Economic Policy Research, May 2006 

This  is  corroborated  by  empirical  research  by  Biais  et  al  in  European  corporate  bond  markets: 

389 

Naik et al. (1999) develop a model.  

390 
See  Bessembinder  H,  Maxwell  W  and  Venkataraman  K  (2006)  ‘Market  transparency,  liquidity 
externalities and institutional trading costs in corporate bonds’ Journal of Financial Economics Vol 82, pp 251 – 
288;  Goldstein  M,  Hotchkiss  E  and  Sirri,  E  (2006)  ‘Transparency  and  liquidity:  a  controlled  experiment  on 
corporate  bonds’  The  Review  of  Financial  Studies  Vol  20  (2),  pp  235  –  273;  and  Edwards  A,  Harris  L  and 
Piwowar,  M  (2007)  ‘Corporate  bond  market  transaction  costs  and  transparency’  The  Journal  of  Finance,  Vol 
LXII (3) 

391 
ICMA, June 2010 

Summary of Responses to the ICMA Survey on Corporate Bond Markets – Liquidity and Transparency, 

392 
ICMA, June 2010 

Summary of Responses to the ICMA Survey on Corporate Bond Markets – Liquidity and Transparency, 

393 
and institutional trading costs in corporate bonds’ Journal of Financial Economics 82 (2006) pp 251 – 288 

Bessembinder H, Maxwell W and Venkataraman K (2006) ‘Market transparency, liquidity externalities 

394 
Final Report of the IIF Committee on Market Best Practices: Principles of Conduct and Best Practice 
Recommendations  Financial  Services  Industry  Response  to  the  Market  Turmoil  of  2007-2008,  Institute  of 
International Finance, July 2008. 

395 
A report by the International Accounting Standards Board suggested that transactions prices in inactive 
markets may be inputs when measuring fair value. See IASB Expert Advisory Panel: Measuring and disclosing 
the fair value of financial instruments in markets that are no longer active, International Accounting Standards 
Board, October 2008 

396 
348, 10 July 2009 

Transparency of corporate bond, structured finance product and credit derivatives markets, CESR/09-

397 
and transparency in the European Corporate bond market’, ECB Occasional Paper Series No. 50, August 2006 

Lagana M, Perina M, Von Koppen-Mertes I and Persuad A, ‘Implications for liquidity from innovation 

398 

Articles 14(1) and 39(d) of the Directive 2004/39/EC (MiFID Framework Directive) 

399 
CESR/09-348, CESR, 10 July 2009 

Cited  in  Transparency  of  corporate  bond,  structured  finance  product  and  credit  derivatives  markets, 

400 

Source: Bloomberg  

401 
348, CESR, 10 July 2009 

Transparency of corporate bond, structured finance product and credit derivatives markets, CESR/09-

383 

 
 
  
 
                                                                                                                                                         
402 

1 = same as equities; 2 = no Recital 46 but some other requirements; 3 = no apparent transparency 

403 
http://ec.europa.eu/internal_market/securities/isd/mifid_implementation_en.htm 

Transposition 

MiFID 

state 

of 

play, 

see 

404 

Federation of European Securities Exchanges 

405 
Our difference-in-difference analysis, whereby we compare the change in relative spreads between the 
two groups before and after MiFID, accounts for any group-specific changes that would have occurred across the 
two  time  periods.  Our  student  ‘t-test’  for  the  significance  of  the  difference  gave  a  t-statistic  of  205.4,  which 
indicates that the difference-in-difference is significant at all levels. 

406 
(source: FESE 2009 and Europe Economics analysis) 

Non-public domestic and international bond trading turnover in 2009 estimated to be around €8 billion 

407 
Our  methodology  is  based  on  that  used  in  Bessembinder  et  al  (2006)  ‘Market  transparency,  liquidity 
externalities  and  institutional  trading  costs  in  corporate  bonds’  Journal  of  Financial  Economics,  Vol  82.  We 
multiply the relative spread saving by the total value of trading in bonds on exchanges where there is currently 
no MiFID-like transparency.  

408 
See  for  example  Data  gathering  and  analysis  in  the  context  of  the  MiFID  review  Final  Report  for 
Directorate  General  Internal  Market  and  Services,  European  Commission,  PricewaterhouseCoopers,  13  July 
2010 and European corporate bond markets: transparency, liquidity, efficiency, Biais et al, Centre for Economic 
Policy Research, May 2006 

409 
Internal Market and Services, European Commission, PricewaterhouseCoopers, 13 July 2010 

Data gathering and analysis in the context of the MiFID review’ Final Report for Directorate General 

410 
348, July 2009 

Transparency of corporate bond, structured finance product and credit derivatives markets, CESR/09-

411 
MiFID (as close to real time as possible).  

This  timing  of  the  reporting  is  significantly  longer  than  the  Commission  envisages  and  as  set  out  in 

412 
to trading on regulated markets (e.g. negotiated exclusively OTC).  

There have been efforts, however, by brokers to maintain a level of transparency for bonds not admitted 

413 
348, July 2009 

Transparency of corporate bond, structured finance product and credit derivatives markets, CESR/09-

414 
OTC Trade Reporting in Danish Fixed Income Instruments Version 1.1, September 2008 

NASDAQ  OMX  Guidelines  for  Members’  On-Exchange  Trade  and  Members’  and  Non-Members’ 

415 
OTC Trade Reporting in Danish Fixed Income Instruments Version 1.1, September 2008 

NASDAQ  OMX  Guidelines  for  Members’  On-Exchange  Trade  and  Members’  and  Non-Members’ 

416 
Neither  Markit,  its  affiliates  nor  any  data  provider  makes  any  warranty,  express  or  implied,  as  to  the 
accuracy of the data or services or as to results to be attained by subscriber or others from the use of the data or 
services. Neither Markit, its affiliates nor any of their data provider shall in any way be liable to any recipient of 
the  Markit  data  for  any  inaccuracies,  errors  or  omissions,  regardless  of  cause,  in  the  Markit  data  or  services 
provided hereunder or for any damages (whether direct or indirect) resulting therefrom. 

the  data  incorporated  in  the research  may  not be  used  for  investment  accounting  activities  defined as 
back  office  accounting  functions  customary  in  the  securities  industry,  including  but  not  limited  to,  trust 
accounting,  fund  accounting,  brokerage  activities,  trading  and  settlement  management  and  reporting,  order 
execution, inventory control, and general management of financial and operations functions. 

384 

 
 
  
 
                                                                                                                                                         
 
417 
In addition, investigation into the existence of impact assessments or analysis relating to similar Frank-
Dodd  regulations  in  the  US  has  yielded  no  results.  See  for  example  the  list  of  SEC  accomplishments  to  date, 
none of which  include  any formal  assessment  of  the proposals  Implementing  Dodd-Frank Wall  Street  Reform 
http://www.sec.gov/spotlight/dodd-
and  Consumer 
frank/accomplishments.shtml 

Protection  Act  —  Accomplishments, 

see: 

418 
markets, CESR/08-1014 

Consultation Paper: Transparency of corporate bond, structured finance product and credit derivatives 

419 
Occasional  paper  series  no.50:  Implications  for  liquidity  from  innovation  and  transparency  in  the 
European  corporate  bond  market,  European  Central  Bank  (Laganá,  Peřina,  von  Köppen-Mertes  and  Persaud), 
August 2006 

420 
as well as the volatility and unpredictability of this risk.  

The credit premium is the additional yield that investors demand as compensation for the risk of default 

421 
See,  for  example,  McCoy  (2004)  who  found  that  in  a  number  of  currency  markets  with  very  tight 
quoted  spreads  decreases  in  prices  increased  the  number  of  sellers  rather  than  stabilising  buyers),  cited  in 
Occasional  paper  series  no.50:  Implications  for  liquidity  from  innovation  and  transparency  in  the  European 
corporate bond market, European Central Bank (Laganá, Peřina, von Köppen-Mertes and Persaud), August 2006 

422 
See  Bessembinder  H,  Maxwell  W  and  Venkataraman  K  (2006)  ‘Market  transparency,  liquidity 
externalities and institutional trading costs in corporate bonds’ Journal of Financial Economics Vol 82, pp 251 – 
288;  Goldstein  M,  Hotchkiss  E  and  Sirri,  E  (2006)  ‘Transparency  and  liquidity:  a  controlled  experiment  on 
corporate  bonds’  The  Review  of  Financial  Studies  Vol  20  (2),  pp  235  –  273;  and  Edwards  A,  Harris  L  and 
Piwowar,  M  (2007)  ‘Corporate  bond  market  transaction  costs  and  transparency’  The  Journal  of  Finance,  Vol 
LXII (3) 

423 
Management, Vol. 35, Spring 2009 

Price  Transparency  in  the  U.S.  Corporate  Bond  Markets,  J  Tempelman,  The  Journal  of  Portfolio 

424 
managers and 2 insurance companies 

Interviews were conducted with 15 high-yield bond portfolio managers including 9 hedge funds, 4 asset 

425 

Provided by SIFMA 

426 
Management, Vol. 35, Spring 2009 

Price  Transparency  in  the  U.S.  Corporate  Bond  Markets,  J  Tempelman,  The  Journal  of  Portfolio 

427 
See  for  example  Latent  Liquidity  and  Corporate  Bond  Yield  Spreads,  S  Mahanti  A  Nashikkary  M 
Subrahmanyamz, 8 August 2007, which demonstrates that “the liquidity of the CDS contract influences both the 
liquidity of the bond and the bond price itself” (p 3).  

428 
Management, Vol. 35, Spring 2009 

Price  Transparency  in  the  U.S.  Corporate  Bond  Markets,  J  Tempelman,  The  Journal  of  Portfolio 

429 
Economic Perspectives, Vol 22, No.2, p 228 

Bessembinder,  H  and  Maxwell,  W  (2008)  ‘Transparency  and  the  corporate  bond  market’  Journal  of 

430 
Management, Vol. 35, Spring 2009 

Price  Transparency  in  the  U.S.  Corporate  Bond  Markets,  J  Tempelman,  The  Journal  of  Portfolio 

431  
Looking  at  investment  advisers  not  directly  employed  by  credit  institutions,  FECIF’s  White  Book 
highlights how few of its members are remunerated on a fee basis.  This may be as low as 1–2 per cent in Italy, 3 
per cent in Belgium, Germany and Spain and 5 per cent in the Netherlands. 

The  impact  of  the  UK  FSA’s  Retail  Distribution  Review  (RDR)  dealing  with  the  regulation  of  inducements  when  advice  is 

432  
provided  could  be  used  a  reference  point.  It  should  be  mentioned,  however,  that  the  RDR  proposes  more  stringent  restrictions  on  the 

385 

 
 
  
 
                                                                                                                                                         
treatment  of  inducements  since  it  deals  homogeneously  with  inducements  provided  for  in  any  form  of  advice  (not  only  independent); 

furthermore, the RDR deals with products and entities which are not covered under MiFID (i.e. entities providing insurance products). In 

addition  it  also  includes  measures  on  professional  standards  (i.e.  professional  qualifications  of  advisors).  Lastly  it  should  be  taken  into 

account that there is a broader population of investment advisors in the UK, including a significant proportion of small advisors. Having said 

than, it is anticipated that, 23 per cent of UK advisory firms might exit the market as a result of the RDR, with a much higher ratio amongst 

the smallest advisers (those with annual incomes below €50,000). Overall, adviser numbers would fall by about 11 per cent. This includes, 

for instance, small providers which are close to retiring and will not find worthwhile to make investments to adapt to the new rules (Retail 
Distribution Review proposals: Impact on market structure and competition, Oxera, 2010). 

433  

434 

Retail Distribution Review proposals: Impact on market structure and competition, Oxera, 2010 

European Fund Industry Breakfast Briefing, Thomson Reuters and Lipper, Ed Moisson, December 2010 

435  
opportunity for wealth managers". 

JP  Morgan  Asset  Management,  2010  "The  Retail  Distribution  Review:  The  challenge  and  the 

436  
%20Fund%20Fees%20-%207%20Dec10.pdf 

http://www.lipperfmi.com/FERIFMI/Information/Files/Breakfast%20Briefing%20-

437  
The  UCITS  market  by  itself  is  extremely  large:  with,  in  the  EU,  at  least  €5.1  trillion  in  assets  under 
management within UCITS and a further €1.7 trillion in non-UCITS investment funds (such as the Spezialfunds 
in Germany). Source: EFAMA 2010 Fact Book, “Trends in European Investment Funds, 8th Edition”. 

438 

The obligations of systematic internalisers to publish firm quotes are specified in Article 27 of Directive 
2004/39/EC, while more detailed requirements, including trade transparency, are laid out in Article 21 to 34 of 
Regulation 1287/2006. 

439 

Systematic  internaliser  is  defined  in  Article  4(1)(7)  of  Directive  2004/39/EC  (MiFID  Framework 
Directive),  while  Article  21  of  Regulation  No  1287/2006  (MiFID  Implementing  Regulation)  further  specifies 
criteria for determining whether an investment firm is a systematic internaliser. 

440 

441 

Articles 25, 29, 30, 44 and 45 of Directive 2004/39/EC (MiFID Framework Directive) 

In  Article  28  of  Directive  2004/39/EC  (MiFID  Framework  Directive)  and  any  relevant  new  Articles 

referred to in footnote 68 above. 

442 

443 

444 

By amending article 5 of Regulation No 1287/2006 (MiFID Implementing Regulation). 

By amending Article 25 of Directive 2004/39/EC (MiFID Framework Directive) 

Amending Article 25(4) of Directive 2004/39/EC (MiFID Framework Directive) and Article 13(4) of 

Regulation No 1287/2006 (MiFID Implementing Regulation)  

445 
CESR has already put forward numerous proposals including a third trading capacity (client facilitation) 
in addition to those of agent and principal, and standards for mandatory client and counterparty identifiers (Final 
Advice to the European Commission in the context of MiFID Review on transaction reporting, CESR/10-808) 

446 

447 

Annex I, section B of Directive 2004/39/EC (MiFID Framework Directive) 

Annex I, section B(1) of Directive 2004/39/EC (MiFID Framework Directive) 

448 

The Commission consulted on the possibility to classify this MiFID ancillary service as an investment 
service  in  the  context  of  proposals  on  legal  certainty  of  securities  holding  and  dispositions:  G2/PP  D(2009) 
Legislation on  legal  certainty  of  securities  holding  and  dispositions,  Consultation  document  of  the Services  of 
the 
see: 
http://ec.europa.eu/internal_market/consultations/docs/2009/securities-law/hsl_consultation_en.pdf 
and  DG 
Markt G2  MET/OT/acg D(2010)  768690, Legislation on  legal  certainty  of  securities  holding  and  dispositions, 

Internal  Market 

Directorate-General 

Services, 

2004, 

April 

and 

16 

386 

 
 
  
 
                                                                                                                                                         
Consultation  document  of  the  services  of  the  directorate-general  internal  market  and  services,  see: 
http://ec.europa.eu/internal_market/consultations/docs/2010/securities/consultation_paper_en.pdf 

449 

With an amendment to Annex I, Section A of Directive 2004/39/EC (MiFID Framework Directive) 

450 
Organisational  requirements  and  certain  conduct  of  business  obligations  (notably  general  information 
and  reporting  obligations)  would  be  particularly  important  in  providing  this  service  (Articles  13,  18,  19, 
paragraphs (1), (2), (3), (7) and (8) of Directive 2004/39/EC (MiFID Framework Directive)) 

451 

Paragraphs 3.4 and 6.3. 

452 

Additional  Information  in  Relation  to  Responses  to  Questions  15-18  and  20-25  of  the  European 
Commission  Request  for  Additional  Information  in  Relation  to  the  Review  of  MiFID,  CESR/10-860,  29  July 
2010 

453 

454 

455 

456 

Amending Article 4(1)(5) of Directive 2004/39/EC (MiFID Framework Directive) 

Article 4(1)(6) of Directive 2004/39/EC (MiFID Framework Directive). 

Article 2(1)(d) of Directive 2004/39/EC (MiFID Framework Directive). 

As established in recital 69 of Directive 2006/73/EC (MiFID Implementing Directive). 

457 
in Articles 4(1)(5) and 4(1)(6) of Directive 2004/39/EC (MiFID Framework Directive).  

The definition of "execution of orders on behalf of clients" and "dealing on own account" can be found 

458 

Currently  article  5(2)(a)  of  Directive  2006/49/EC  provides  that  a  firm  does  not  hold  financial 

instruments on own account if they are precisely matched. 

459 

460 

461 

Article 4(1)(6) of Directive 2004/39/EC (MiFID Framework Directive) 

Article 9 of Directive 2004/39/EC (MiFID Framework Directive) 

See:  (COM  (2010)  284  Final)  Green  Paper  on  Corporate  Governance  in  financial  institutions  and 

remuneration policies  

462 

463 

464 

465 

466 

467 

468 

Article 9 of Directive 2004/39/EC (MiFID Framework Directive) 

New provision in Directive 2006/73/EC (MiFID Implementing Directive) 

Article 2 (9) of Directive 2006/73/EC (MiFID Implementing Directive) 

Article 13 (3) and 18 of Directive 2004/39/EC (MiFID Framework Directive) 

For instance, the Lehman Brothers case 

Section 3, Chapter II of Directive 2006/73/EC (MiFID Implementing Directive) 

Recital 27 of Directive 2004/39/EC (MiFID Framework Directive) 

469 
assets: see Financial Services Authority Quarterly consultation (No 25), UK FSA, July 2010. 

We note that the UK Financial Services Authority is consulting on a similar proposal for retail clients 

470 

471 

472 

Article 19 of Directive 2006/73/EC (MiFID Implementing Directive) 

Article 32 (7) of Directive 2006/73/EC (MiFID Implementing Directive) 

Article 18 of Directive 2006/73/EC (MiFID Implementing Directive) 

387 

 
 
  
 
                                                                                                                                                         
473 

474 

Article 23(1) of Directive 2004/39/EC (MiFID Framework Directive) 

Tied agents are defined under article 4 (1) (25) of Directive 2004/39/EC (MiFID Framework Directive) 

475 
Protection and Intermediaries, CESR/10-859, 29 July 2010, p. 33 

Technical  Advice  to  the  European  Commission  in  the  context  of  the  MiFID  Review  –  Investor 

476 

477 

478 

479 

Article 23(1) of Directive 2004/39/EC (MiFID Framework Directive) 

Article 23(2) of Directive 2004/39/EC (MiFID Framework Directive)  

Article 32 (2), second paragraph, of Directive 2004/39/EC (MiFID Framework Directive) 

Article 31 (2) of Directive 2004/39/EC (MiFID Framework Directive) 

480 
Directive) as regards Articles 31 and 32 by stating that the exclusions do not apply in the case of tied agents. 

This would imply qualifying the exclusions in Article 1(2) of Directive 2004/39/EC (MiFID Framework 

481 
Namely, urging strong measures to counter speculation in commodity derivatives, and opposition to the 
option  raised  in  the  consultation  on  banning  "execution-only"  services  which  allows  investors  to  buy  and  sell 
certain  non-complex  products  directly  in  the  market  without  having  to  undergo  a  test  of  their  knowledge  and 
experience. 

cdlxxxii  Does Algorithmic Trading Improve Liquidity?, T Hendershott, C Jones, and AJ Menkveld, American 
Finance Association Journal of Finance, forthcoming 

cdlxxxiii  Algorithmic Trading and Information, T Hendershott, and R Riordan, NET Institute Working Paper No. 
09-08, September 2009 

cdlxxxiv  High  Frequency  Trading  and  its  Impact  on  Market  Quality,  J  Brogaard,  5th  Annual  Conference  on 
Empirical Legal Studies Paper, 22 November, 2010 

cdlxxxv 
30 December 2007 

Technology and Liquidity Provision: The Blurring of Traditional Definitions, J Hasbrouck and G Saar, 

cdlxxxvi  Assessing the Impact of Algorithmic Trading on Markets: A Simulation Approach, M Gsell, Centre for 
Financial Studies Working Paper No. 2008/49, June 2008 

cdlxxxvii  High-Frequency Trading, Stock Volatility, and Price Discovery, F Zhang, December 2010 

cdlxxxviii  Public dissemination of trade information was initially limited to investment grade bonds (rated BBB 
and  above)  with  issue  sizes  greater  than  $1  billion,  due  to  concerns  that  the  dissemination  of  such  data  for 
smaller and lower grade bonds might have an adverse impact on liquidity. 

cdlxxxix  Expansion of TRACE in the U.S. fixed-income OTC market, NO Persson, Director, TRACE and Fixed 
Income Strategy, FINRA 

cdxc 
See  Bessembinder  H,  Maxwell  W  and  Venkataraman  K  (2006)  ‘Market  transparency,  liquidity 
externalities and institutional trading costs in corporate bonds’ Journal of Financial Economics Vol 82, pp 251 – 
288;  Goldstein  M,  Hotchkiss  E  and  Sirri,  E  (2006)  ‘Transparency  and  liquidity:  a  controlled  experiment  on 
corporate  bonds’  The  Review  of  Financial  Studies  Vol  20  (2),  pp  235  –  273;  and  Edwards  A,  Harris  L  and 
Piwowar,  M  (2007)  ‘Corporate  bond  market  transaction  costs  and  transparency’  The  Journal  of  Finance,  Vol 
LXII (3) 

cdxci 
represents the isolated impact of TRACE. 

The  difference  between  the  changes  in  transaction  costs  over  time  for  Trace  and  non-Trace  bonds 

388 

 
 
  
 
                                                                                                                                                         
cdxcii 
Income Strategy, FINRA 

Expansion of TRACE in the U.S. fixed-income OTC market, NO Persson, Director, TRACE and Fixed 

389