Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2014/65/EU as regards information requirements, product governance and position limits to help the recovery from the COVID-19 pandemic
Date: 2020-07-24
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: economic recovery, epidemic, financial control, financial instrument, financial legislation, infectious disease, investment company, investment protection, provision of services

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   EUROPEAN COMMISSION  Brussels, 24.7.2020  COM(2020) 280 final 2020/0152 (COD)  Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2014/65/EU as regards information requirements, product governance and position limits to help the recovery from the COVID-19 pandemic (Text with EEA relevance) {SWD(2020) 120 final}  
 
 
EXPLANATORY MEMORANDUM 

1. 

1.1. 

CONTEXT OF THE PROPOSAL 

Reasons for and objectives of the proposal 

EU  Member  States  have  been  severely  affected  by  the  economic  crisis  resulting  from  the 
COVID-19 pandemic. This calls for a quick reaction to support capital markets participants. 
In the Communication of the Commission of 13 March 2020, entitled ‘Coordinated economic 
response to the COVID-19 outbreak’, the Commission highlighted the importance of ensuring 
the liquidity of the EU financial sector and countering a threatening recession through actions 
at all levels. Furthermore, on 27 May 2020, in its Communication entitled ‘Europe’s moment: 
Repair  and  Prepare  for  the  Next  Generation’  ,  the  Commission  presented  key  instruments 
supporting  the  recovery  plan  for  Europe,  including  measures  that  aim  at  kick-starting  the 
economy and helping private investment. This Communication also stressed that liquidity and 
access to finance will be a continued challenge for companies. 

The  objective  of  this  targeted  amendment  is  to  provide  for  the  best  possible  conditions  for 
European  economies  to  emerge  from  the  current  COVID-19  pandemic.  The  rules  on 
investments  services  can  play  a  key  role  in  promoting  the  recapitalisation  of  European 
companies  as  they  emerge  from  the  crisis.  The  modified  commodities  regime  will  allow 
companies  in  the  real  economy  to  react  to  market  volatility  while  also  enabling  nascent 
commodity contracts, which is  also  important  to promote the international  role of the Euro. 
The present review is driven by two key objectives:  

  Facilitating investments in the real economy and  

  Allowing for a rapid recapitalisation of European companies.  

To  ensure  that  financial  institutions  and  intermediaries  can  fulfil  their  essential  function  in 
financing  the  real  economy,  targeted  adjustments  of  certain  requirements  of  Directive 
2014/65/EU  (‘MiFID  II’)  are  appropriate.  Already  in  2019,  stakeholders  had  warned  the 
Commission that several aspects of the MiFID II distribution rules were either unnecessary or 
perceived  as  overly  burdensome.  The  current  COVID-19  pandemic  makes  it  even  more 
important  to  remove  formal  burdens  where  they  are  not  strictly  necessary.  A  more  finely 
calibrated view of investor requirements would also leave more resources for dealing with the 
consequences  of  the  COVID-19  pandemic.  The  Commission  therefore  strives  to  recalibrate 
those areas to strike the right balance between a sufficient level of transparency towards the 
client, the highest standards of protection and acceptable compliance costs for firms.  

In that context, this amendment to MiFID II applying to investments in financial instrument 
has the aim of removing administrative burdens that result from documentation and disclosure 
rules  that  are  not  counterbalanced  by  corresponding  increases  in  investor  protection.  It  also 
recalibrates the position limit and corresponding hedging exemption regime to foster nascent 
euro denominated markets.  

1.2. 

Consistency with existing policy provisions in the policy area 

While laying down extraordinary measures to soften the impact of the COVID-19 pandemic 
and help the economic recovery, this proposal remains in line with the overarching objectives 
of MiFID II to foster market transparency and integrity and to promote investor protection.  

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1.3. 

Consistency with other Union policies 

This  legislative  proposal  amending  MiFID  II  is  part  of  a  set  of  measures  to  facilitate  the 
economic  recovery  postCOVID-19  pandemic,  which  includes  also  legislative  proposals 
amending  the  Prospectus  Regulation1  the  Securitisation  Regulation2  and  the  Capital 
Requirements Regulation3. 

This legislative proposal also aims to complement the objectives of the Capital Markets Union 
to  diversify market-based sources  of financing for European companies  and facilitate cross-
border investments.  

Furthermore,  this  initiative  must  be  consistent  with  any  additional  proposals  that  the 
Commission aims to develop in different policy areas to soften the impact of the COVID-19 
pandemic on capital markets, including the key instruments supporting the recovery presented 
in  the  Commission  Communication  entitled  ‘Europe’s  moment:  Repair  and  Prepare  for  the 
Next Generation’ of 27 May 2020. 

2. 

LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY 

2.1. 

Legal basis 

The proposed amendment is built on the same legal basis as the legislative act that  is being 
amended,  i.e.  Article  53(1)  TFEU  which  allows  the  adoption  of  measures  for  the 
approximation  of  national  provisions  concerning  the  access  to  the  activity  of  investment 
firms, regulated markets and data service providers. 

2.2. 

Subsidiarity (for non-exclusive competence)  

Under Article 4 TFEU, EU action for completing the internal market must be appraised in the 
light  of  the  subsidiarity  principle  set  out  in  Article  5(3)  of  the  Treaty  on  European  Union 
(TEU).  The  objectives  pursued  by  the  proposed  measures  aim  at  supplementing  already 
existing EU legislation and can therefore best be achieved at EU level rather than by different 
national initiatives. Financial markets are inherently cross-border in nature and are becoming 
more so. The conditions according to which firms and operators can compete in this context, 
including on investor protection, need to be common across borders and are all at the core of 
MiFID  II today. Because of this integration, isolated national intervention would be far less 
efficient and would lead to the fragmentation of markets, resulting in regulatory arbitrage and 
distortion of competition. For instance, different levels of investor protection across Member 
States  would  fragment  markets,  compromise  efficiency,  and  lead  to  harmful  regulatory 
arbitrage.  

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Regulation  (EU)  2017/1129  of  the  European  Parliament  and  of  the  Council  of  14  June  2017  on  the 
prospectus  to  be  published  when  securities  are  offered  to  the  public  or  admitted  to  trading  on  a 
regulated market, and repealing Directive 2003/71/EC (OJ L 168, 30.6.2017, p. 12). 
Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying 
down a general framework for securitisation and creating a specific framework for simple, transparent 
and  standardised  securitisation,  and  amending  Directives  2009/65/EC,  2009/138/EC  and  2011/61/EU 
and Regulations (EC) No 1060/2009 and (EU) No 648/2012 (OJ L 347, 28.12.2017, p. 35). 
Regulation  (EU)  No  575/2013  of  the  European  Parliament  and  of  the  Council  of  26  June  2013  on 
prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 
648/2012 (OJ L 176, 27.6.2013, p.1). 

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2.3. 

Proportionality 

The  proposal  takes  full  account  of  the  principle  of  proportionality,  namely  that  EU  action 
should  be  adequate  to  reach  the  objectives  and  does  not  go  beyond  what  is  necessary.  The 
proposed  measures  to  lighten  the  burden  on  investment  firms  respect  the  principle  of 
proportionality.  In  particular,  the  need  to  balance  investor  protection,  efficiency  of  the 
markets and costs for the industry has been central in laying out these requirements. Not only 
have all the proposed options been individually assessed against the proportionality objective, 
but  also  the  lack  of  proportionality  of  the  existing  rules  has  been  presented  as  a  separate 
problem.  The  amendments  are  therefore  compatible  with  the  principle  of  proportionality, 
taking into account the right balance of the public interest at stake and the cost-efficiency of 
the measure. 

2.4. 

Choice of the instrument 

The  measures  are  proposed  to  be  implemented  by  amending  MiFID  II  through  a  Directive. 
The proposed measures indeed refer to or develop further already existing provisions inbuilt 
in those legal instruments. Article 53(1) of TFEU allows for the adoption of acts in the form 
of  a  Directive.  Amendments  to  Directive  2014/65/EU  can  therefore  only  be  achieved,  by 
virtue  of  a  Directive  of  the  European  Parliament  and  of  the  Council  amending  Directive 
2014/65/EU. 

3. 

RESULTS 
CONSULTATIONS AND IMPACT ASSESSMENTS 

EX-POST 

EVALUATIONS, 

OF 

STAKEHOLDER 

3.1. 

Impact assessment  

This  proposal  is  not  accompanied  by  a  separate  impact  assessment.  Given  the  urgency  of 
measures  to  be  taken  to  help  the  recovery,  the  impact  assessment  was  replaced  by  a  cost-
benefit  analysis  included  in  the  Staff  Working  Document  supporting  the  Capital  Markets 
Recovery Package.  The  proposal primarily aims at  providing, for  exceptional reasons in  the 
context  of  the  current  COVID-19  pandemic,  for  a  streamlined  application  of  the  regulatory 
requirements, keeping high safeguards for retail clients while allowing for more flexibility for 
wholesale  clients  and  ensure  that  fully  functioning  commodity  markets  can  play  their 
important  role  in  the  recovery  of  EU  economies.  An  analysis  of  the  proposed  measures  is 
included in the Staff Working Document supporting the Capital Markets Recovery Package. 

3.2. 

Fundamental rights 

The  proposal  respects  the  fundamental  rights  and  observes  the  principles  recognised  by  the 
Charter of Fundamental Rights of the European Union, in particular the freedom to conduct a 
business  (Article  16)  and  consumer  protection  (Article  38).  As  this  initiative  aims  at 
alleviating  the  administrative  burden  placed  on  investment  firms  while  maintaining  existing 
high  standards  for  retail  clients,  this  initiative  would  contribute  to  improving  the  right  to 
conduct a business.  

4. 

BUDGETARY IMPLICATIONS 

The initiative is not expected to have any impact on the EU budget. 

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5. 

5.1. 

OTHER ELEMENTS 

Implementation plans and monitoring, evaluation and reporting arrangements 

As  the  amendment  aims  at  mitigating  the  effects  of  the  COVID-19  pandemic  an  early 
application  of  the  amendment  would  be  most  beneficial.  It  is  therefore  expected  that  the 
proposed amendment should start applying at the earliest opportunity.  

In parallel,  the European Markets  and Securities  Authority (ESMA) will  continue to  collect 
the necessary data for monitoring the effects of the COVID-19 pandemic on investment firms 
and  investment  activities  in  Europe  and  how  the  pandemic  affects  markets  and  supervisory 
practices. This will allow for the future evaluation of the new policy tools. Additionally, the 
Commission services will continue to carefully monitor the latest developments and to engage 
in the relevant fora, such as the European Securities Committee (ESC).  

Compliance and enforcement will be ensured on an ongoing basis where needed through the 
Commission  launching  infringement  proceedings  for  lack  of  transposition  or  for  incorrect 
transposition or application of the legislative measures. Reporting of breaches of EU law can 
be channelled through the European System of  Financial Supervision  (ESFS), including the 
national competent authorities and ESMA. 

5.2. 

Detailed explanation of the specific provisions of the proposal 

5.2.1.  Amendments to information requirements 

The proposed amendments carefully recalibrate specific requirements in order to strike a more 
appropriate  balance  between  protecting  investors  on  the  one  hand  and  facilitating  the 
provision of high-quality investment services on the other hand. To ensure that retail clients 
receive a high level  of investor protection, the amendments  will carefully  calibrate between 
retail clients, professional clients and eligible counterparties. While limited alleviations would 
cut across investor categories (e.g. the phase-out of paper based information), the majority of 
the amendments to the current rule-book will focus on providing alleviations for professional 
clients and eligible counterparties.  

The following table provides an overview of the proposed changes and identifies the investor 
categories affected by these changes:  

Amendments to information requirements 

Phase-out  of 
method for communication.  

the  paper-based  default 

Costs  and  charges  disclosure:  Introduction 
of  an  exemption  for  eligible  counterparties 
and for professional clients for other services 
than 
and  portfolio 
management.  

investment 

advice 

The new paragraphs in Article 24 will ensure 
that  documents  are  provided  in  electronic 
format. Retail clients, however, can opt-in to 
paper based information.  

from 

Pursuant  to  Articles  29a  and  30,  eligible 
counterparties  and  professional  clients  are 
the  costs  and  charges 
exempted 
requirements  where  other  services 
than 
investment  advice and portfolio management 
are concerned. In addition, in case of distance 
communication  all  clients  using  all  services 
should  be  able,  under  certain  conditions,  to 
receive  costs  and  charges  information  just 
after the transaction (Article 24(4)).  

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Article  25(6)  is  added  to  the  measures  that 
and  professional 
eligible 
clients  are  exempted  from,  and  to  which 
professional clients can opt in. 

counterparties 

A new subparagraph is added to Article 27(3) 
that  temporarily  dis-applies  the  reporting 
obligation.  

Alleviate  ex-post  reporting  requirements: 
in  particular,  the  end-of  day  loss  reporting 
requirement  promotes  a  short-term  view 
among  inexperienced  investors  and  fosters 
“herd  behaviour”  which  is  not  conducive  to 
taking 
the  market. 
informed  views  of 
Professional clients are allowed to opt-in. 

Suspend  best  execution  reports:  In  their 
current  form  best  execution  reports  are  not 
read  by  investors,  while  buy-side  investment 
firms receive all the relevant information via 
other means (e.g. via brokerage meetings). To 
reduce the burden of producing those reports, 
this  obligation  will  be  suspended,  pending  a 
thorough  analysis  with  regard  to  a  possible 
streamlining of the reports.  

Alleviate  cost  benefit  analysis:  As  part  of 
the  suitability  assessment,  firms  are  required 
to obtain information about the client in order 
to perform a cost-benefit analysis in case they 
‘switch’ between products in the course of an 
ongoing relationship. For professional clients 
this is overly burdensome.  

A new paragraph to Article 25(2) is inserted, 
setting  the  requirements  for  the  cost-benefit 
analysis  as  they  are  currently  laid  down  in 
Article 54(11) of Delegated Regulation  (EU) 
2017/565,  adding  an  exemption  combined 
with  a    possibility  to  opt-in  for  professional 
clients 

the 
Product  governance: 
financing  of  the  economy  bonds  with  make-
whole  clauses  will  be  exempted  from  the 
product governance regime.  

facilitate 

to 

Article  16(3),  subparagraphs  2  until  6  and 
Article  24(2)  will  not  apply  to  corporate 
bonds with make-whole clauses. 

Detailed description of the measures:  

(a) 

Phase-out of the paper-based default method for communication  

Currently, MiFID II requires that all investor reports and information is provided in a “durable 
medium”,  which  includes  electronic  formats  (e.g.  E-mail),  but  paper  remains  the  default 
method for communication (where durable medium is required). Given that clients are widely 
able  to  view  their  investment  portfolios  online  (or  contact  their  investment  firm  where 
necessary),  providing  them  with  a  plethora  of  paper-based  statements  has  become 
superfluous.  Compliance  with  this  requirement  introduced  under  MiFID  II  imposes  a 
considerable cost burden on banks and slows down the investment process.  

Not only have some firms experienced difficulties in relation to the provision of paper-based 
disclosures  to  clients  during  the  COVID-19  pandemic,  but  this  default  option  for 
communication is also not aligned with the objectives of the Commission’s Green Deal and 
its Digital  Finance Agenda.  As the economic downturn caused by the  COVID-19 pandemic 
has  made  it  even  more  urgent  to  facilitate  the  investment  process  to  increase  the  funding 
alternatives  for  European  companies  and  to  enable  investment  firms  to  use  resources  more 
efficiently,  the  default  option  of  all  client  communication  should  consist  in  an  electronic 
format  (either  E-Mail,  a  dedicated  webpage  or  an  electronic  mailbox).  The  chosen  default 
option should then be used for the provision of all information documents to ensure that the 

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client has all his or her information easily available in one place. Paper-based communication 
should  therefore  be  phased  out  as  soon  as  possible.  Retail  investors  will  still  have  the 
possibility to opt-in and receive their information by paper if they so wish.  

(b) 

Introducing  an  exemption  for  eligible  counterparties  and  professional  clients  from 
the cost and charges information  

Costs  and  charges  information  is  supposed  to  provide  investors  with  basic  levels  of 
transparency regarding pricing and to enable them to compare different offers. Currently, the 
information requirements on cost and charges apply for all client categories alike. However, 
professional clients, eligible counterparts and ESMA4 have unanimously and repeatedly told 
the Commission  that these requirements have no benefit where other services than portfolio 
management and investment advice are concerned. These clients have a different relationship 
with their investment firms than retail clients do; in many cases these market participants are 
familiar  with  the  market  conditions  and  prices  of  the  various  providers  but  also  define  the 
conditions  of  the  transaction  in  question  themselves.  Professional  clients  and  eligible 
counterparties furthermore generally place a large number of high-value orders compared to 
those  placed  by  retail  investors  and  attach  great  importance  to  swift  order  execution. 
Wholesale clients thus put, on their own volition, investment advisers and brokerage firms in 
competition when requesting pricing for their trades. This provides these investor groups with 
more  influence  and  control  of  the  prices  than  the  average  retail  client.  By  alleviating  the 
requirement for information that is claimed not to be used neither by eligible counterparties 
nor  by  professional  counterparties,  the  information  will  be  individualised  and  provide 
wholesale clients with the data they need.  

Cutting red tape has become even more urgent during the COVID-19 pandemic, which placed 
the EU’s economy and financial system under strain. Streamlining the investment process for 
wholesale clients is likely to channel alternative financing option to those enterprises that are 
in need of new equity. With the addition of a new Article 29a and the amendment to Article 
30(1) of MiFID II, eligible counterparties and professional clients will be fully exempted from 
receiving  the  costs  and  charges  disclosures  on  other  services  than  investment  advice  and 
portfolio management. For retail clients the requirement remains unchanged.  

(c) 

Allow  for  a  delayed  transmission  of  cost  information  when  using  distant 
communication channels  

Article  24  of  MiFID  II  provides  for  detailed  information  requirements.  Many  transactions 
with  all  categories  of  clients  tend  to  be  concluded  over  the  phone  or  by  online  means.  All 
client  categories  have  come  to  expect  immediate  execution  of  such  “distance  orders”  as  a 
standard feature of investment services. The supply of ex-ante cost information translates into 
time lags and the risk of adverse price movements between receipt and execution of an order. 
Often,  the  requirement  of  systematic  ex-ante  cost  disclosures  would  be  disadvantageous  to 
clients.  These  circumstances  would  neither  allow  nor  warrant  ex-ante  cost  information, 
especially  as  the  client  would  bear  the  market  risk  of  adverse  price  movements  in  the  time 
between preparation and provision of the ex-ante cost information. 

The  COVID-19  pandemic  has  accelerated  the  usage  of  electronic  investment  services  and 
therefore  the  need  for  an  efficient  and  fast  trade  execution  online  and  on  the  phone.  As  the 
current  application  of  the  ex-ante  costs  disclosure  requirements  leads  to  delays  in  the 

4 

https://www.esma.europa.eu/press-news/esma-news/esma-advises-european-commission-inducements-
and-costs-and-charges-disclosures 

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execution of transactions for participants for whom time is of essence and these effects may 
therefore have a negative impact on best execution clients should be enabled to provide their 
consent to a delayed transmission of the cost information documents.  

(d) 

Alleviations for service reports 

MiFID  II  requires  investment  firms  to  send  ex-post  statements  to  clients  concerning  the 
services  they  have  received.  Eligible  counterparties  and  professional  clients  should  be 
exempted  from  receiving  the  ex-post  statements  all  together.  Professional  clients,  however, 
should be enabled to opt into receiving these statements. Giving these clients the ability to opt 
in  will  ensure  that  those  who  want  to  receive  these  statements  may  continue  to  do  so  and, 
conversely, those who do not derive any benefit from receipt of such standardised disclosures 
do not receive them.  

For  example,  Article  25(6)  of  MiFID  II  obliges  firms  to  provide  post-transaction  service 
reports to  clients.  These  reports include the loss-reporting  reports that  are triggered by 10% 
portfolio losses. These reports have deemed not useful or even confusing for certain clients, 
especially  when  markets  are  extremely  volatile,  as  was  the  case  during  the  COVID-19 
pandemic.  Instead  of  forwarding  reports  that  are  triggered  by  volatility  or  by  a  mere 
administrative  deadline,  the  COVID-19  pandemic  has  shown  that  individualised  and  timely 
information is of much higher relevance to wholesale clients. To allow both firms and clients 
to focus on providing and receiving (i.e. actively progressing) the information that is relevant 
to them, in particular during challenging market environments, these reports will therefore no 
longer apply with regard to eligible counterparties, while professional clients have the choice 
to receive them or not. 

(e) 

Opt in for professional investors to cost benefit analysis in case of switching 

Article  25(2)  of  MiFID  II  requires  firms  to  perform  a  suitability  assessment  when  they 
provide  investment  advice  or  portfolio  management.  This  provision  applies  to  retail  clients 
and to professional clients. Eligible counterparties are excluded in Article 30(1). With regard 
to clients that are professional clients on request5, firms need to obtain such information as it 
is  necessary  to  have  a  reasonable  basis  for  determining  that  the  specific  transaction  to  be 
recommended,  or  entered  into,  meets  the  investment  objectives  of  the  client,  including  the 
client’s  risk  tolerance,  and  that  the  client  is  financially  able  to  bear  any  related  investment 
risks consistent with his investment objectives. With regard to professional clients as listed in 
Annex II, paragraph I of MiFID II, firms may assume that the client is able to financially bear 
the investment risks.  

In  case  of  ongoing  relationships,  firms  are  currently  required  to  undertake  a  costs-benefit 
analysis of certain portfolio activities, which involve a “switching” between products. In this 
context,  before  executing  a  product  switch,  investment  firms  are  required  to  obtain  the 
necessary information from the client and be able to demonstrate that the costs outweigh the 
benefits. Suitability testing in case of a product switch is viewed as applying to all portfolio 
activity rather than those switches for which is was designed, such as the sale and purchase of 
an “equivalent” product (for example the sale of a European Equity investment fund and the 
purchase of a European Equity ETF with broadly the same features).  

To facilitate the rapid capitalisation of the real economy, the process for wholesale clients to 
change their investment strategies should be as swift as possible. If switching becomes easier, 

5 

Based on Annex II, chapter II, paragraph II MiFID. 

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this  will  also  incentivise  wholesale  clients  to  invest  in  other  and  new  business  models  and 
therefore help a broader range of firms at an early stage in the recovery process. Professional 
clients  should therefore be allowed to  choose whether this  measure applies  to  them. To this 
end,  the  substantive  requirements  as  they  are  currently  laid  down  in  Article  54(11)  of 
Delegated  Regulation  (EU)  2017/565  will  be  added  to  Article  25(2)  of  MiFID  II,  and  a 
reference  to  this  provision  will  be  included  in  the  list  of  provisions  professional  clients  are 
exempted from but can opt-in to.   

(f) 

Product governance  

The  product  governance  requirements  currently  apply  to  all  financial  instruments  and 
regardless of the client, even though there seems little benefit in assessing the particularities 
of  a  plain  vanilla  bond  when  transactions  take  place  between  eligible  counterparties.  In  its 
guidelines  on  product  governance6,  ESMA  has  already  partially  addressed  this  lack  of 
proportionality by explicitly recommending further flexibility for “non-complex products”.  

Stakeholders to the MiFID  II consultation have submitted evidence that product  governance 
rules  for  certain  instruments,  which  are  often  referred  to  as  “plain  vanilla”  issuances,  have 
prevented an optimal allocation of capital by means of vibrant secondary markets. In the light 
of  the  current  crisis  caused  by  the  COVID-19  pandemic,  it  is  indispensable  to  facilitate  the 
issuing of capital. Issuers and investors must be equipped with the right tools to easily issue 
new capital and to easily get access to an increased investor base. The earlier these tools are 
operational, the better for companies and investors alike. 

This  proposal  is  therefore  lifting  the  product  governance  requirements  for  simple  corporate 
bonds  with  make-whole  clauses  (which  are  investor-protective  features).  The  aim  of  this 
exemption, which would need to be complemented by a clear rule that a make-whole clause 
does  not  of  itself  make  these  instruments  a  packaged  retail  and  insurance-based  investment 
product  (PRIIP), is  to  make more plain vanilla corporate bonds  available to  retail  investors. 
This  targeted  exemption  will  allow  issuers  to  tap  a  broader  base  of  investors,  allow 
sophisticated  retail  investors’  to  access  a  larger  choice  of  instruments  and  it  will  retain 
protection  for  all  categories  of  investors,  however  categorised,  when  accessing  complex 
products. It is an essential part of a recovery package that retail clients can obtain exposure to 
fixed  income  products,  as  such  products  are  essential  for  diversification  and  risk-reduction 
reasons.  

(g) 

Best-execution reports  

Article  27(3)  of  MiFID  II  requires  that  each  trading  venue  and  systematic  internaliser  for 
financial  instruments  subject  to  the  trading  obligation  in  Articles  23  and  28  of  Regulation 
(EU) No 600/2014 (‘MiFIR’) and each execution venue for other financial instruments, makes 
available to the public data relating to the quality of execution of transactions on that venue 
periodically.  These  periodic  reports  need  to  include  details  about  price,  costs,  speed  and 
likelihood of execution for individual instruments, which are  further described in  Delegated 
Regulation  (EU) 2017/575 (‘RTS 27’). Stakeholders indicate that the reports are rarely read 
by investors, evidenced by very low numbers of downloads from their website. It is therefore 
assumed that investors cannot or do not make any meaningful comparisons between firms on 
the basis of this data. Buy-side firms informed us furthermore that they receive all the relevant 
information on best execution through other means (e.g., via brokerage meetings). The current 

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crisis has increased the urgency to address problems with regard to the costly production of 
the  best  execution  reports.  This  is  evidenced  by  ESMA’s  statement  that  firms  may  need  to 
deprioritise  efforts  for  the  publication  of  these  reports  due  to  the  exceptional  circumstances 
created by the COVID-19 pandemic.7 

Therefore,  the  requirement  to  publish  the  best  execution  report  should  be  suspended.  This 
would free up resources  currently used for production of the report, without requiring firms 
and  venues  to  invest  in  costly  implementation.  This  option  does  not  lead  to  a  decrease  of 
investor protection since investors currently do not read the reports at all and buy-side firms 
receive  the  relevant  information  through  other  means.  In  the  context  of  the  full  review  of 
MiFID II in 2021, the Commission will assess whether the requirement to publish the report 
should be deleted permanently, or if the reports need to be reintroduced in a revised manner. 

5.2.2.  Measures affecting energy derivatives markets  

The proposed amendments carefully recalibrate the position limit regime and the scope of the 
hedging exemption in order to ensure that nascent euro denominated markets are able to foster 
and allow producers and manufacturers are able to hedge their risks whilst safeguarding the 
integrity of commodity markets, except for agricultural commodities, in particular those with 
food for human consumption as an underlying. 

The following table provides an overview of the proposed changes:  

Amendments in the field of commodities markets (except agriculture) 

Amend  position  limits:  in  its  current  form, 
the  position  limit  regime  has  negatively 
affected  the  liquidity  in  new  commodity 
markets.  To  ensure  that  new  commodity 
markets  can  develop,  position  limits  are 
limited 
commodity 
agricultural 
derivatives  or 
commodity  derivatives 
designated as significant or critical.  

to 

Change  Article  57  whereby  the  scope  of 
position  limits  would  be  amended  to  only 
apply 
and 
significant or critical contracts.  

agricultural 

contracts 

to 

to 

define 

standards 

ESMA  will  be  mandated  to  develop  draft 
regulatory 
those 
agricultural  derivatives  subject  to  position 
limits  and  to  define  critical  or  significant 
derivatives  subject  to  position  limits.  For  the 
critical  or significant  derivatives, ESMA will 
take into account a gross size of open interest 
of 300 000 lots on average over one year, the 
number  of  market  participants  and 
the 
agricultural 
commodity.  For 
underlying 
derivatives,  particular  focus  will  be  on  those 
derivatives 
for  human 
consumption as underlying. 

that  have 

food 

Delete  concept  of  “Same  contract”:  for 

Amend Article 57(6) on position limits for 

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the  “same  contracts”  and  Article  58(2)  on 
position reporting to the central competent 
authority for same contracts. 

Amend  Article  57(8)  to  extend  access  to 
information in letter (b) to positions held in 
related  contracts  on  other  trading  venues 
and 
and  OTC 
participants, where appropriate. 

through  members 

venues 

trading 

competing 
commodity 
derivatives based on the same underlying and 
sharing  the  same  characteristics,  the  current 
definition of “same contract” is detrimental to 
the  less  liquid  market.  To  ensure  a  level 
playing  field,  the  concept  of  “same  contract” 
is  deleted  and 
replaced  with  a  more 
cooperative  approach  between  competent 
authorities (CAs). 

Reinforce  position  management  controls: 
significant  dissimilarities  exist  in  the  way 
positions  are  managed  by  trading  venues. 
Therefore, position management controls will 
be reinforced where necessary.  

ESMA will be mandated to further clarify the 
content  of  position  management  controls 
taking  into  account  the  characteristics  of  the 
relevant trading venues. 

Introduce  a  narrowly  defined  hedging 
exemption:  

In  Article  57(1)  a  hedging  exemption  is 
introduced for  

–  This  hedging 

exemption  would  be 
available  where,  within  a  predominantly 
commercial  group,  a  person  has  been 
registered as an investment firm and trades 
on behalf of the group.  

–  A  position 

limit  exemption 

is  also 
introduced  for  financial  and  non-financial 
counterparties  for  positions  resulting  from 
transactions 
fulfil 
to 
undertaken 
mandatory liquidity provisions.  

ESMA  will  be  mandated  for  the  narrowly 
defined  hedging  exemption  and  the  liquidity 
provision exemption to determine a procedure 
setting how persons may apply the respective 
exemption.  

Exclude  securitised  derivatives  from  the 
position  limit  regime  as  the  current  position 
limit  regime  fails  to  recognise  the  unique 
characteristics of those instruments. 

Simplify  the  ancillary  activity  test  as  the 
quantitative tests  of the  ancillary activity  test 
are particularly complex and have not altered 
the  status  quo  in  terms  of  persons  that  are 

-  financial  counterparties  acting  as  the 
market facing entity of a commercial group 
for the positions held to reduce the risks of 
the commercial entities of the group;  

- financial and non-financial counterparties 
for  positions  which 
are  objectively 
measurable  as  resulting  from  transactions 
entered into to fulfil obligations to provide 
liquidity on a trading venue, in accordance 
with letter (c) of the fourth subparagraph of 
Article 2(4). 

In Article 57(1) an exemption is introduced 
for  financial  instruments  defined  in  point 
(44)(c)  of  Article  4(1)  which  relates  to  a 
commodity or an underlying referred to in 
section C(10) of Annex I. 

Article  2(1)(j)  will  be  changed  in  order  to 
delete all quantitative elements. 

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eligible for the exemption. 

The measures set out for positon limits and the hedging exemption for energy derivatives are 
interlinked. To the extent that position limits play a useful role, they should not prevent the 
commercial companies from entering into risk reducing transactions. Therefore, reducing the 
scope of the position limit regime to only the most developed commodity derivatives leaves 
less need for hedging exemptions. That is why the Commission considers targeted measures 
regarding  the  hedging  exemption  in  combination  with  the  position  limits  for  critical 
benchmark derivatives.  

(a) 

Position limit regime for critical benchmark contracts 

The COVID-19 pandemic and its economic consequences have exacerbated the issues in the 
MiFID  II  position  limit  regime  and  its  inflexibility.  Various  position  limits  in  commodity 
derivatives markets  are  proven to  be out  of date, whilst  adjusting them to  accommodate  for 
rapidly  changing  market  conditions  requires  the  completion  of  lengthy  change  processes. 
Position limits would be limited to derivatives with agricultural derivatives, in particular food 
for human consumption, as underlying  and  commodity derivatives traded on trading venues 
and  in  economically  equivalent  OTC  (EEOTC)  derivatives  designated  as  significant  or 
critical. 
The  Commission  will  mandate  ESMA  to  draft  regulatory  technical  standards  (RTS)  to 
determine the derivative characteristics in order to qualify as a significant or critical derivative 
and to define those agricultural derivatives subject to position limits, in particular those with 
food  for  human  consumption  as  underlying.  For  the  significant  and  critical  derivatives,  the 
criteria include an open interest of 300 000 lots over one  year, the number of active market 
participants,  and  the  underlying  commodity.  An  open  interest  threshold  for  derivatives  of  a 
sufficiently high number of lots over a one-year period will ensure that only  derivatives the 
price  of  which  serves  as  a  benchmark  for  the  underlying  commodity  are  captured.  The 
relevant threshold for critical derivatives will be set at 300 000 lots, this ensures that only the 
appropriate  significant  or  critical  commodity  derivatives  traded  in  the  EU  remain  subject  to 
position limits. The other criteria will be determined in Level 2.  

(b) 

Targeted hedging exemption 

Under  the  current  market  circumstances,  market  participants  can  develop  an  urgent  need  to 
obtain  hedging  exemptions.  However,  in  crisis  conditions  they  may  struggle  to  prepare  and 
submit  an  application  for  a  hedging  exemption  before  a  position  limit  unduly  restricts  their 
trading activity. MiFID II does not allow hedging exemptions for any financial entities. Prior 
to MiFID II, some commercial groups decided to register as an investment firm the entity that 
trades  on  their  behalf  for  the  risk  reducing  transactions  of  the  commercial  entities  of  the 
group.  Because  they  are  now  financial  entities,  these  entities  within  a  predominantly 
commercial group are not eligible for the hedging exemption. The hedging exemption should 
be available where, within a predominantly commercial group, a person has been registered as 
an investment firm and trades on behalf of that commercial group. The exemption applies to 
the positions  held by that  financial counterparty that  are objectively measurable  as  reducing 
risks  directly  related  to  the  commercial  activities  of  the  non-financial  entities  of  the  group. 
This hedging exemption should not be considered as an additional exemption to the position 
limit regime but rather as a “transfer” to the financial counterparty of the group of the hedging 
exemption otherwise available to the commercial entities of the group.  

In certain circumstances, as the COVID-19 pandemic has shown, the provision of liquidity is 
challenging even for the most liquid derivatives. Therefore, the Commission also introduces a 

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position  limit  exemption  for  financial  and  non-financial  counterparties  that  are  under 
mandatory  liquidity  provision  obligations.  This  exemption  mirrors  the  exclusion  of 
transactions  entered  to  fulfil  obligations  to  provide  liquidity  on  a  trading  venue  from  the 
ancillary activity test.  

(c) 

Qualitative Ancillary Activity Test 

Market participants that trade in commodity derivatives on a professional basis can make use 
of  an  exemption  from  authorisation  as  an  investment  firm  when  their  trading  activity  is 
ancillary  to  their  main  business.  Market  participants  have  to  notify  annually  the  relevant 
competent authority that they make use of this exemption and provide the necessary elements 
to  satisfy the quantitative tests.  These quantitative tests  are particularly  complex and during 
the crisis present a significant burden for market participants working in business continuity 
mode. The ancillary activity test will be considerably simplified. The proposed simplification 
of the current and highly technical quantitative ancillary test is to return to a solely qualitative 
test.  In  addition,  the  ancillary  activity  exemption  with  regard  to  trading  of  emission 
allowances on EU and third-country trading venues will be reviewed to ensure that it supports 
the  well-functioning  and  objectives  of  the  EU  emission  trading  system  (EU  ETS). 

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2020/0152 (COD) 

Proposal for a 

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

amending Directive 2014/65/EU as regards information requirements, product 
governance and position limits to help the recovery from the COVID-19 pandemic 

(Text with EEA relevance) 

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 53(1) thereof, 

Having regard to the proposal from the European Commission, 

After transmission of the draft legislative act to the national parliaments, 

Having regard to the opinion of the European Economic and Social Committee, 

Acting in accordance with the ordinary legislative procedure, 

Whereas: 

(1) 

(2) 

(3) 

8 
9 

The COVID-19 pandemic is severely affecting people, companies, health systems and 
the  economies  of  Member  States.  The  Commission,  in  its  Communication  to  the 
European Parliament, the European Council, the Council, the European economic and 
social committee and the Committee of the regions of 27 May 2020 entitled ‘Europe's 
moment:  Repair  and  Prepare  for  the  Next  Generation’8  stressed  that  liquidity  and 
access to finance will be a continued challenge in the months to come. It is therefore 
crucial to support the recovery from the severe economic shock caused by the COVID-
19  pandemic  by  introducing  targeted  amendments  to  existing  pieces  of  financial 
legislation.  This  package  of  measures  is  adopted  under  the  label  “Capital  Markets 
Recovery Package”. 
Directive  2014/65/EU  of  the  European  Parliament  and  the  Council9  on  markets  in 
financial  instruments  was  adopted  in  2014  in  response  to  the  financial  crisis  that 
unfolded  in  2007-2008.  That  Directive  has  substantially  strengthened  the  financial 
system in the Union and guaranteed a high level of protection of investors across the 
Union.  Further  efforts  to  reduce  regulatory  complexity  and  investment  firms’ 
compliance costs and to eliminate distortions of competition should be considered. 

As  regards  the  requirements  that  were  intended  to  protect  investors,  Directive 
2014/65/EU  has  not  fully  achieved  its  objective  to  adapt  measures  that  take  the 
particularities  of  each  category  of  investors  (retail  clients,  professional  clients  and 
eligible counterparties) sufficiently into account. Some of those requirements have not 

COM/2020/456 final of 27.5.2020. 
Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets 
in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (OJ L 173, 
12.6.2014, p. 349). 

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(4) 

(5) 

(6) 

(7) 

always enhanced the protection of investors but at  times  rather,  hindered the smooth 
execution  of  investment  decisions.  It  is  therefore  necessary  to  amend  certain 
requirements in that Directive to better balance the requirement to protect investors on 
the one hand and to facilitate the provision of investment services and the performance 
of investment activities on the other. 

Product  governance  requirements  can  restrict  the  sale  of  corporate  bonds.  Corporate 
bonds with a “make whole clause” are generally considered safe and simple products 
that  are  eligible  for  retail  clients.  Such  a  “make  whole  clause”  protects  investors 
against  losses  in  case  an  issuer  opts  for  early  repayment  by  ensuring  that  those 
investors  are  provided  with  a  payment  equal  to  the  net  present  value  of  the  coupons 
they  would  have  received  if  the  bond  would  not  have  been  called.  The  product 
governance  requirements  should  therefore  no  longer  apply  to  corporate  bonds  with 
such “make-whole clauses”. 

The  call  for  evidence,  launched  by  the  European  Securities  and  Markets  Authority 
(ESMA), on the impact of inducements and cost and charges disclosure requirements 
under  Directive  2014/65/EU  and  the  public  consultation  of  the  Commission  both 
confirmed 
that  professional  clients  and  eligible  counterparties  do  not  need 
standardised  and  mandatory  cost  information  as  they  already  receive  the  necessary 
information  when  they  negotiate  with  their  service  provider.  That  information  is 
tailored to their needs and often more detailed. Eligible counterparties and professional 
clients  should  therefore  be  exempted  from  those  cost  and  charges  disclosure 
requirements,  except  with  regard  to  the  services  of  investment  advice  and  portfolio 
management  because  professional  clients  entering  into  portfolio  management  or 
investment  advice  relationships  are  do  not  necessarily  have  sufficient  expertise  or 
knowledge to be exempted from the costs and charges disclosures.  

Investment firms are currently required to undertake a costs-benefit analysis of certain 
portfolio activities in case of ongoing relationships with their clients in which financial 
instruments  are  switched.  Investment  firms  are  thereby  required  to  obtain  the 
necessary information from the client and to be able to demonstrate that the benefits of 
such  switching  outweigh  the  costs.  As  this  procedure  is  overly  burdensome  for 
professional clients, who tend to switch on a frequent basis, they should be exempted 
from  this  requirement,  while  maintaining  the  possibility  to  opt-in.  As  retail  clients 
need a high level of protection, that option should be limited to professional clients. 

Clients  with  an  ongoing  relationship  with  an  investment  firm  receive  mandatory 
service reports, either periodically or based on triggers.  Neither investment firms nor 
their professional clients find such service reports useful. Those reports have proved in 
particular  unhelpful  for  professional  clients  in  extreme  volatile  markets,  as  those 
reports are provided in a high frequency and number. Professional clients often react 
to  those  service  reports  either  by  not  reading  those  reports,  or  by  making  fast 
investment  decisions  rather  than  continuing  with  a  long-term  investment  strategy. 
Eligible  counterparties  should  therefore  no  longer  receive  such  service  reports, 
Professional  clients,  however,  should  have  the  possibility  to  opt-in  to  those  service 
reports. 

(8) 

Directive 2014/65/EU introduced reporting requirements on how orders were executed 
on terms most favourable to the client. Those technical reports contain large amounts 
of  detailed  quantitative  information  about  the  execution  venue,  the  financial 
instrument, the price, the costs and the likelihood of execution. They are rarely read by 
investors, as is evidenced by the very low numbers of downloads from the websites of 

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the  investment  firms.  As  they  do  not  enable  investors  to  make  any  meaningful 
comparisons  on  the  basis  of  those  data,  the  publication  of  those  reports  should  be 
temporarily suspended. 

(9) 

In order to facilitate the communication between investment firms and their clients and 
thus  the  investment  process  itself,  investment  information  should  no  longer  be 
provided  on  paper  but  should,  as  a  default  option,  be  provided  electronically.  Retail 
clients  should  however  be  able  to  request  the  continued  provision  of  information  on 
paper.  

(10)  Directive  2014/65/EU  allows  persons  that  trade  in  commodity  derivatives,  emission 
allowances  and  derivatives  on  emission  allowances  on  a  professional  basis  to  make 
use  of  an  exemption  from  authorisation  as  an  investment  firm  when  their  trading 
activity  is  ancillary  to  their  main  business.  Those  persons  applying  for  the  ancillary 
activity test are required to notify the relevant competent authority annually that they 
make  use  of  that  possibility  and  provide  the  necessary  elements  to  satisfy  the  two 
quantitative  tests  that  determine  whether  its  trading  activity  is  ancillary  to  its  main 
business. The first test compares the size of an entity's speculative trading activity to 
the total trading activity in the Union on an asset class basis. The second test compares 
the size of the speculative trading activity, with all asset classes included, to the total 
trading  activity  in  financial  instruments  by  the  entity  at  group  level.  There  is  an 
alternative form of the second test, which consists of comparing the estimated capital 
used for the speculative trading activity to the actual amount of capital used at group 
level for the main business. Those quantitative tests are particularly complex and have 
not  altered  the  status  quo  in  terms  of  persons  that  are  eligible  for  the  exemption. 
Therefore, the exemption should  rely solely on qualitative elements.  Persons that are 
eligible  for  the  exemption,  including  market  makers,  are  dealing  on  own  account  or 
providing  investment  services  other  than  dealing  on  own  account,  to  customers  or 
suppliers  of  their  main  business.  The  exemption  is  available  for  both  cases 
individually  and  on  an  aggregate  basis  where  this  is  an  ancillary  activity,  when 
considered on a group basis. That exemption should not be available for persons who 
apply a high-frequency algorithmic trading technique or are part of a group the main 
business  of  which  is  the  provision  of  investment  services,  or  banking  activities,  or 
acting  as  a  market  maker  in  relation  to  commodity  derivatives.  All  provisions 
regarding the quantitative elements should be deleted. 

(11)  Competent authorities currently have to establish and apply position limits on the size 
of a net position which a person can hold at all times in commodity derivatives traded 
on  trading  venues  and  in  economically  equivalent  Over-The-Counter  (EEOTC) 
contracts designated by the Commission. As the position limit regime has proved to be 
unfavourable  for  the  development  of  new  commodity  markets,  nascent  commodity 
markets should be excluded from the position limit regime. Instead, the position limits 
should  only  apply  to  those  commodity  derivatives  that  are  deemed  significant  or 
critical  commodity  derivatives  and  their  EEOTC  contracts.  Significant  or  critical 
derivatives are energy commodity derivatives with an open interest of at least 300 000 
lots  over  a  one-year  period.  Due  to  its  critical  importance  for  citizens,  agricultural 
commodities that have an underlying that is for human consumption, and their EEOTC 
contracts,  will  remain  under  the  current  position  limit  regime.  ESMA  should  be 
mandated  to  develop  draft  regulatory  standards  to  define  agricultural  commodities 
with  an  underlying  for  human  consumption  subject  to  position  limits  and  critical  or 
significant  derivatives  subject  to  position  limits.  For  significant  and  critical 

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derivatives, ESMA should take into account the 300 000 lots open interest over a one-
year period, the number of market participants and the underlying commodity. 

(12)  Directive  2014/65/EU  does  not  allow  hedging  exemptions  for  any  financial  entities. 
Several  predominantly  commercial  groups  who  set  up  a  financial  entity  for  their 
trading purposes found themselves in a situation where their financial entity could not 
carry out  all the trading for the group, as  the financial entity was not eligible for the 
hedging  exemption.  Therefore,  a  narrowly  defined  hedging  exemption  for  financial 
counterparties  should  be  introduced.  That  hedging  exemption  should  be  available 
where, within a predominantly commercial group, a person has been registered as an 
investment firm and trades on behalf of that commercial group. To limit this hedging 
exemption to only those financial entities that trade for the non-financial entities in the 
predominantly  commercial  group,  that  hedging  exemption  should  apply  to  those 
positions held by that financial entity that are objectively measurable as reducing risks 
directly related to the commercial activities of the non-financial entities of the group.  

(13)  Even in liquid contracts, only a limited number of market participants typically act as 
market makers in commodity markets. When those market participants have to apply 
position  limits  they  are  not  in  a  positon  to  be  as  effective  as  market  markers. 
Therefore,  an  exemption  from  the  position  limit  regime  should  be  introduced  for 
financial  and  non-financial  counterparties  for  positions  resulting  from  transactions 
undertaken to fulfil mandatory liquidity provisions.  

(14)  The  current  position  limit  regime  does  not  recognise  the  unique  characteristics  of 
securitised derivatives. Securitised derivatives  should  therefore  be excluded from  the 
position limit regime. 

(15)  Since  the  entry  into  force  of  Directive  2014/65/EU,  no  same  commodity  derivative 
contracts have been identified. Due to the concept of “same contract” in that Directive, 
the  methodology  for  determining  the  other  months’  limit  is  detrimental  to  the  venue 
with  the  less  liquid  market  when  trading  venues  are  competing  on  commodity 
derivatives  based  on  the  same  underlying  and  sharing  the  same  characteristics. 
Therefore,  the  reference  to  “same  contract”  in  Directive  2014/65/EU  should  be 
deleted. Competent authorities should be able to agree that the commodity derivatives 
traded on their respective trading venues are based on the same underlying and share 
the same characteristics, in which case the baseline for the other months’ limit on the 
most liquid market for that commodity derivative can be used as the baseline limit for 
setting the other months’ position limit for the competing contracts traded on the less 
liquid venues.  

(16)  Significant dissimilarities exist in the way positions are managed by trading venues in 
the  Union.  Therefore,  position  management  controls  should  be  reinforced  where 
necessary. 

(17) 

In  order  to  ensure  the  further  development  of  Euro  denominated  EU  commodity 
markets, the power to adopt acts in accordance with Article 290 of the Treaty on the 
Functioning of the European Union should be delegated to the Commission in respect 
of which agricultural  commodity derivatives  should  be subject  to position limits  and 
which critical or significant derivatives should be subject to position limits, in respect 
of  a  procedure  for  which  persons  may  apply  for  a  hedging  exemption  for  positions 
resulting  from  transactions  undertaken  to  fulfil  mandatory  liquidity  provisions,  in 
respect  of  a  procedure  for  which  financial  entities  that  are  part  of  a  predominantly 
commercial  group  may  apply  for  a  hedging  exemption  for  positions  held  by  that 
financial entity that are objectively measurable as reducing risks directly related to the 

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commercial  activities  of  the  non-financial  entities  of  the  group,  in  respect  of  the 
clarification  of  the  content  of  position  management  controls.  It  is  of  particular 
importance  that  the  Commission  carries  out  appropriate  consultations  during  its 
preparatory work, including at expert level, and that those consultations are conducted 
in accordance with the principles laid down in the Interinstitutional Agreement of 13 
April 2016 on Better Law-Making10. In particular, to ensure equal participation in the 
preparation  of  delegated  acts,  the  European  Parliament  and  the  Council  receive  all 
documents  at  the  same  time  as  Member  States'  experts,  and  their  experts 
systematically have access to meetings of Commission expert groups dealing with the 
preparation of delegated acts.  

(18)  The EU Emissions Trading System (ETS) is the Union’s flagship policy for achieving 
the decarbonisation of the economy in line with the European Green Deal. Trading in 
emission allowances and derivatives thereof is subject to Directive 2014/65/EU and to 
Regulation  (EU)  No  600/2014  and  represents  an  important  element  of  the  Union’s 
carbon market. The ancillary activity exemption under Directive 2014/65/EU enables 
certain market participants to be active in emission allowance markets without having 
to be authorised as investment firms, provided certain conditions are met. In view of 
the  importance  of  orderly,  well-regulated  and  supervised  financial  markets,  the 
significant role of the ETS in achieving the Union’s sustainability objectives, and the 
role  that  a  well-functioning  secondary  market  in  emission  allowances  has  in 
supporting  the  functioning  of  the  ETS,  it  is  essential  that  the  ancillary  activity 
exemption  is  appropriately  designed  to  contribute  to  those  objectives.  This  is 
particularly relevant where trading in emission allowances takes place on third country 
trading  venues.  In  order  to  ensure  the  protection  of  the  Union’s  financial  stability, 
market integrity, investor protection and the level playing field, and to ensure that the 
ETS continues to function in a transparent and robust manner to ensure cost-effective 
emission  reductions,  the  Commission  should  monitor  the  further  development  of 
trading  in  emission  allowances  and  derivatives  thereof  in  the  Union  and  in  third 
countries, assess the impact of the ancillary activity exemption on the ETS, and where 
necessary, propose any appropriate amendment as regards the scope and application of 
the ancillary activity exemption. 

(19)  Directive 2014/65/EU should therefore be amended accordingly. 

(20)  The  objectives  pursued  by  this  amendment  aim  at  supplementing  already  existing 
Union  legislation  and  can  therefore  best  be  achieved  at  Union  level  rather  than  by 
different  national  initiatives.  Financial  markets  are  inherently  cross-border  in  nature 
and are becoming more so. Because of that integration, isolated national intervention 
would be far less efficient and would lead to the fragmentation of markets, resulting in 
regulatory  arbitrage  and  distortion  of  competition.  Since  the  objectives  of  this 
Directive,  namely  to  refine  already  existing  Union  legislation  ensuring  uniform  and 
appropriate requirements that apply to investment firms throughout the Union, cannot 
be sufficiently achieved by the Member States but can rather, by reason of their scale 
and  effects,  be  better  achieved  at  Union  level,  the  Union  may  adopt  measures,  in 
accordance  with  the  principle  of  subsidiarity  as  set  out  in  Article  5  of  the  Treaty  on 
European Union. In accordance with the principle of proportionality, as set out in that 
Article, this Directive does not go beyond what is necessary in order to achieve those 
objectives.  

10 

OJ L 123, 12.5.2016, p. 1. 

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(21) 

In accordance with  the Joint Political  Declaration of 28 September 2011 of Member 
States  and  the  Commission  on  explanatory  documents11,  Member  States  have 
undertaken  to  accompany,  in  justified  cases,  the  notification  of  their  transposition 
measures  with  one  or  more  documents  explaining  the  relationship  between  the 
components  of  a  directive  and  the  corresponding  parts  of  national  transposition 
instruments. With regard to this Directive, the legislator considers the transmission of 
such documents to be justified, 

HAVE ADOPTED THIS DIRECTIVE: 

Article 1 
Amendments to Directive 2014/65/EU 

Directive 2014/65/EU is amended as follows: 

(1) 

Article 2 is amended as follows: 

(a) 

in paragraph 1, point (j) is replaced by the following:  

“(j) 

persons: 

(i) 

dealing  on  own  account,  including  market  makers,  in  commodity 
thereof, 
derivatives  or  emission  allowances  or  derivatives 
excluding persons who deal on own account when executing client 
orders; or 

(ii)  providing investment services, other than dealing on own account, 
in  commodity  derivatives  or  emission  allowances  or  derivatives 
thereof to the customers or suppliers of their main business; 

provided that 

– 

– 

– 

– 

for each of those cases individually and on an aggregate basis, the 
activity  is  ancillary  to  their  main  business,  when  considered  on  a 
group basis; 

those persons are not part of a group the main business of which is 
the  provision  of  investment  services  within  the  meaning  of  this 
Directive,  the  performance  of  any  activity  listed  in  Annex  I  to 
Directive 2013/36/EU, or acting as a market-maker for commodity 
derivatives; 

those  persons  do  not  apply  a  high-frequency  algorithmic  trading 
technique; 

those  persons  report  upon  request  to  the  competent  authority  the 
basis  on  which  they  have  assessed  that  their  activity  under  points 
(i) and (ii) is ancillary to their main business.”`; 

(b)  paragraph 4 is deleted; 

(2) 

Article 4(1) is amended as follows: 

(a) 

the following point (8a) is inserted: 

11 

OJ C 369, 17.12.2011, p. 14. 

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18 

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“(8a) ‘switching of financial instruments’ means selling a financial instrument 
and buying another financial instrument  or  exercising  a right  to  make a 
change in regard to an existing financial instrument;”; 

(b) 

the following point (50a) is inserted: 

“(50a)  ‘corporate  bonds  with  make-whole  clauses’  means  corporate  bonds 
with a clause that obliges the issuer in case of early repayment to return 
to the investor the principal amount of the bond and the net present value 
of the coupons the investor would have received in case the bond had not 
been called;”; 

(c) 

the following point (62a) is inserted: 

“(62a)  ‘electronic format’ means any durable medium other than paper;” 

(3) 

in Article 16(3) the following subparagraph is added: 

“The requirements laid down in the second to fifth subparagraphs of this paragraph 
shall not apply to corporate bonds with make-whole clauses.”; 

(4) 

Article 24 is amended as follows: 

(a) 

In paragraph 2, the following subparagraph is added: 

“This paragraph shall not apply to corporate bonds with make-whole clauses.”; 

(b) 

In paragraph 4, the following subparagraph is added: 

“Where the agreement to buy or sell a financial instrument is concluded using 
means  of  distance  communication,  the  investment  firm  may  provide  the 
information on costs and charges in an electronic format without undue delay 
after  the  conclusion  of  the  transaction,  provided  that  all  of  the  following 
conditions are met:  

(i) 

(ii) 

the  investment  firm  has  given  the  client  the  option  of  delaying  the 
conclusion of the transaction until the client has received the information; 

the  client  has  agreed  to  receive  the  information  shortly  after  the 
conclusion of the transaction.”; 

(c) 

the following paragraph 5a is inserted: 

 “5a. 
Investment  firms  shall  provide  all  information  required  by  this 
Directive  to  clients  or  potential  clients  in  electronic  format,  except  where  the 
client  or  potential  client  is  a  retail  client  or  potential  retail  client  who  has 
requested  receiving  the  information  on  paper,  in  which  case  that  information 
shall be provided on paper and free of charge. 

Investment firms shall inform retails clients or potential retail clients that they 
have the option to receive the information on paper. 

Investment  firms  shall  inform  existing  retail  clients  that  used  to  receive  the 
information  required  by  this  Directive  on  paper  about  the  fact  that  they  will 
receive that information in electronic form at least eight weeks before sending 
that information in electronic form. Investment firms shall inform the existing 
retail clients that they have the choice to either continue receiving information 
on  paper  or  to  switch  to  information  in  electronic  format.  Investment  firms 
shall  also  inform  existing  retail  clients  that  an  automatic  switch  to  the 

EN 

19 

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electronic format will follow where they do not request the continuation of the 
provision of the information on paper within that eight weeks period.”;  

(5) 

in Article 25(2), the following subparagraph is added: 

“When  providing  investment  advice  or  portfolio  management  services  that  involve 
switching  of  financial  instruments,  investment  firms  shall  analyse  the  costs  and 
benefits of the switching financial instruments, and inform the client whether or not 
the  benefits  of  such  switching  of  financial  instruments  are  greater  than  the  costs 
involved in such switching.”; 

(6) 

in Article 27(3), the following subparagraph is added: 

“The reporting requirement laid down in this paragraph shall however not apply until 
[date of entry into force of this amending Directive + 2 years].”; 

(7) 

the following Article 29a is inserted: 

“Article 29a 
Services provided to professional clients 

(1)  The  requirements  laid  down  in  point  (c)  of  Article  24(4),  shall  not  apply  to 
services  provided  to  professional  clients  except  for    investment  advice  and 
portfolio management. 

(2)  The requirements laid down in the third subparagraph of Article 25(2) and  in 
Article 25(6) shall not apply to services provided to professional clients, unless 
those  clients  inform  the  investment  firm  in  writing  that  they  wish  to  benefit 
from the rights provided for in those provisions. 

(3)  Member States shall ensure that investment firms keep a record of the written 

requests referred to in paragraph 2.”; 

(8) 

in Article 30, paragraph 1 is replaced by the following: 

“1.  Member States shall ensure that investment firms authorised to execute orders 
on behalf of clients, to deal on own account, or to receive and transmit orders, have 
the  possibility  to  bring  about  or  enter  into  transactions  with  eligible  counterparties 
without being obliged to comply with Article 24, with the exception of paragraph 5a, 
Article 25, Article 27 and Article 28(1), in respect of those transactions or in respect 
of any ancillary service directly relating to those transactions.”; 

(9) 

Article 57 is amended as follows: 

(a)  paragraph 1 is replaced by the following: 

“1.  Member States shall ensure that competent authorities, in line with the 
methodology  for  calculation  determined  by  ESMA  in  regulatory  technical 
standards adopted in accordance with paragraph 3, set and apply position limits 
on the size of a net position which a person can hold at all times in agricultural 
commodity  derivatives  and  critical  or  significant  commodity  derivatives  that 
are  traded  on  trading  venues,  and  in  economically  equivalent  OTC  contracts. 
The limits shall be set based on all positions held by a person and those held on 
his or her behalf at an aggregate group level in order to:  

(a)  prevent market abuse; 

(b) 

support  orderly  pricing  and  settlement  conditions,  including  preventing 
market  distorting  positions,  and  ensuring,  in  particular,  convergence 
between  prices  of  derivatives  in  the  delivery  month  and  spot  prices  for 

EN 

20 

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the  underlying  commodity,  without  prejudice  to  price  discovery  on  the 
market for the underlying commodity.; 

The position limits shall not apply to: 

(a)  positions held by, or on behalf of, a non-financial entity, and which are 
objectively  measurable  as  reducing  risks  directly  relating  to  the 
commercial activity of that non-financial entity.; 

(b)  positions held by, or on behalf of, a financial entity that is part of a non-
financial  group  and  is  acting  on  behalf  of  this  non-financial  group  and 
which are objectively measurable as reducing risks directly relating to the 
commercial activity of that non-financial group; 

(c)  positions held by financial and non-financial counterparties for positions 
that are objectively measurable as resulting from transactions entered into 
to fulfil obligations to provide liquidity on a trading venue as referred to 
in point (c) of the fourth subparagraph of Article 2(4); 

(d) 

securities as  referred to  in  point (44)(c) of Article 4(1)which relate to  a 
commodity or an underlying as referred to in section C(10) of Annex I.”; 

ESMA  shall  develop  draft  regulatory  technical  standards  to  determine  a 
procedure  for  financial  entities  that  are  part  of  a  predominantly  commercial 
group and who may apply for a hedging exemption for positions held by that 
financial  entity  that  are  objectively  measurable  as  reducing  risks  directly 
related  to  the  commercial  activities  of  the  non-financial  entities  of  the  group. 
ESMA  shall  develop  draft  regulatory  technical  standards  to  determine  a 
procedure  setting  out  how  persons  may  apply  for  a  hedging  exemption  for 
positions resulting from transactions entered into to fulfil obligations to provide 
liquidity on a trading venue. 

ESMA  shall  submit  those  draft  regulatory  technical  standards  to  the 
Commission by [9 months after entry into force of this Directive]. 

Power  is  delegated  to  the  Commission  to  adopt  the  regulatory  technical 
standards referred to in the first subparagraph in accordance with Articles 10 to 
14 of Regulation (EU) No 1095/2010;."; 

(b)  paragraphs 3 and 4 are replaced by the following: 

“3. 
ESMA shall develop draft regulatory technical standards to specify the 
agricultural  commodity  derivatives  and  critical  or  significant  commodity 
derivatives  referred  to  in  paragraph 1,  and  to  determine  the  calculation 
methodology that competent authorities are to apply when establishing the spot 
month  position  limits  and  other  months’  position  limits  for  physically  settled 
and  cash  settled  commodity  derivatives  based  on  the  characteristics  of  the 
relevant derivative concerned. 

When  specifying  critical  or  significant  commodity  derivatives,  ESMA  shall 
take into account the following factors: 

(a) 

(b) 

(c) 

the size of open interest of 300 000 lots on average over one year 

the number of market participants; 

the commodity underlying the derivative concerned. 

EN 

21 

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When  determining  the  calculation  methodology  referred  to  in  the  first 
subparagraph, ESMA shall take into account the following factors: 

(a) 

(b) 

(c) 

(d) 

(e) 

(f) 

the deliverable supply in the underlying commodity; 

the overall open interest in that derivative and the overall open interest in 
other financial instruments with the same underlying commodity; 

the number and size of the market participants; 

the  characteristics  of  the  underlying  commodity  market,  including 
patterns of production, consumption and transportation to market; 

the development of new derivatives; 

the  experience  of  investment  firms  or  market  operators  operating  a 
trading venue and of other jurisdictions regarding the position limits.  

ESMA  shall  submit  the draft  regulatory  technical  standards  referred  to  in  the 
first subparagraph to the Commission by [9 months after entry into force of this 
Directive].  

Power  is  delegated  to  the  Commission  to  adopt  the  regulatory  technical 
standards referred to in the first subparagraph in accordance with Articles 10 to 
14 of Regulation (EU) No 1095/2010.  

4. 
A competent authority shall set position limits for critical or significant 
contracts  in  commodity  derivatives  traded  on  trading  venues  and  for 
agricultural  commodity  derivatives  based  on  the  methodology  for  calculation 
determined  in  regulatory  technical  standards  adopted  by  the  Commission 
pursuant  to  paragraph  3.  That  position  limit  shall  include  economically 
equivalent OTC contracts. 

A competent authority shall review position limits where there is a significant 
change  on  the  market,  including  significant  change  in  deliverable  supply  or 
open  interest,  based  on  its  determination  of  deliverable  supply  and  open 
interest,  and  reset  the  position  limit  in  accordance  with  the  methodology  for 
calculation  laid  down  in  the  regulatory  technical  standards  adopted  by  the 
Commission pursuant to paragraph 3;."; 

(c)  paragraphs 6, 7 and 8 are replaced by the following: 

“6.  Where  agricultural  commodity  derivatives  and  critical  or  significant 
commodity  derivatives  based  on  the  same  underlying  and  sharing  the  same 
characteristics are traded in significant volumes on trading venues in more than 
one jurisdiction, the competent authority of the trading venue where the largest 
volume  of  trading  takes  place  (‘central  competent  authority’)  shall  set  the 
single position limit to be applied on all trading in that derivative. The central 
competent  authority  shall  consult  the  competent  authorities  of  other  trading 
venues on which that derivative is traded in significant volumes on the single 
position  limit  to  be  applied  and  any  revisions  to  that  single  position  limit. 
Competent authorities that do not agree with the setting of the single position 
limit  by  the  central  competent  authority  shall  state  in  writing  the  full  and 
detailed  reasons  why  they  consider  that  the  requirements  laid  down  in 
paragraph 1 have not been met. ESMA shall settle any dispute arising from a 
disagreement between competent authorities. 

EN 

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The competent authorities of the trading venues where agricultural commodity 
derivatives and critical or significant commodity derivatives that are based on 
the same underlying and that share the same characteristics are traded, and the 
competent authorities of position holders in those derivatives, shall put in place 
cooperation arrangements, which shall include the exchange of relevant data, in 
order to enable the monitoring and enforcement of the single position limit. 

7. 
ESMA shall monitor at least once a year the way competent authorities 
have implemented the position limits set in accordance with the methodology 
for  calculation  established  by  ESMA  under  paragraph  3.  In  doing  so,  ESMA 
shall  ensure  that  a  single  position  limit  effectively  applies  to  the  agricultural 
commodity derivatives and critical  or significant contracts  based on the  same 
underlying  and  sharing  the  same  characteristics  irrespective  of  where  it  is 
traded in line with paragraph 6. 

8. 
Member  States  shall  ensure  that  an  investment  firm  or  a  market 
operator operating a trading venue which trades  commodity derivatives apply 
position management controls, including powers for the trading venue to: 

(a)  monitor the open interest positions of persons;  

(b)  obtain  information,  including  all  relevant  documentation,  from  persons 
about  the  size  and  purpose  of  a  position  or  exposure  entered  into, 
information  about  beneficial  or  underlying  owners,  any  concert 
arrangements,  and  any  related  assets  or  liabilities  in  the  underlying 
market, including,  where appropriate, positions held  in  related contracts 
on other trading venues and OTC through members and participants;  

(c) 

(d) 

require  a  person  to  terminate  or  reduce  a  position,  on  a  temporary  or 
permanent basis, and to unilaterally take action to ensure the termination 
or reduction of the position where the person does not comply with such 
request; and  

require a person to provide, on a temporary basis, liquidity back into the 
market  at  an  agreed  price  and  volume  with  the  express  intent  of 
mitigating the effects of a large or dominant position. 

ESMA shall develop draft regulatory technical standards to specify the content 
the 
of  position  management  controls, 
characteristics of the trading venues concerned. 

into  account 

thereby 

taking 

ESMA  shall  submit  those  draft  regulatory  technical  standards  to  the 
Commission by [9 months after entry into force of this Directive].  

Power  is  delegated  to  the  Commission  to  adopt  the  regulatory  technical 
standards referred to in the first subparagraph in accordance with Articles 10 to 
14 of Regulation (EU) No 1095/2010. ;"; 

(10) 

in Article 58, paragraph 2 is replaced by the following: 

“2.  Member  States  shall  ensure  that  investment  firms  trading  in  commodity 
derivatives  or  emission  allowances  or  derivatives  thereof  outside  a  trading  venue 
provide the central competent authority referred to in Article 57(6), on at least a daily 
basis, with a complete breakdown of their positions taken in commodity derivatives 
or  emission  allowances  or  derivatives  thereof  traded  on  a  trading  venue  and 
economically equivalent OTC contracts,  as well  as  of those of their  clients  and the 
clients of those clients until the end client is reached, in accordance with Article 26 

EN 

23 

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of Regulation  (EU)  No  600/2014  and, where applicable, of Article 8 of  Regulation 
(EU) No 1227/2011.". 

(11) 

in Article 90, the following paragraph 1a is inserted: 

“1a.  Before  31  December  2021,  the  Commission  shall  review  the  impact  of  the 
exemption laid down in Article 2(1), point (j), with regard to emission allowances or 
derivatives  thereof,  and  shall  accompany  that  review,  where  appropriate,  with  a 
legislative proposal to amend that exemption. In this context, the Commission shall 
assess the trading in EU emission allowances and derivatives thereof in the EU and 
in  third  countries,  the  impact  of  the  exemption  under  Article  2(1),  point  (j),  on 
investor  protection,  the  integrity  and  transparency  of  the  markets  in  emission 
allowances  and  derivatives  thereof  and  whether  measures  should  be  adopted  in 
relation to trading that takes place on third country trading venues.". 

Article 2 
Transposition 

(1) 

Member States shall adopt and publish by [9 months from the entry into force of this 
Directive]  the  laws,  regulations  and  administrative  provisions  necessary  to  comply 
with this Directive. They shall forthwith communicate to the Commission the text of 
those measures. 

Member States shall apply those measures from [12 months from the entry into force 
of this Directive]. 

(2) 

Member States shall communicate to the Commission the text of the main provisions 
of national law which they adopt in the field covered by this Directive. 

Article 3 
Entry into force 

This Directive shall enter into force on the twentieth day following that of its publication in 
the Official Journal of the European Union. 

Article 4 
Addressees 

This Directive is addressed to the Member States. 

Done at Brussels, 

For the European Parliament 
The President 

For the Council 
The President 

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