On 25 November 2021, the European Commission (the Commission) published its long-awaited legislative proposal for a review of the Markets in Financial Instruments Regulation (MiFIR Review Proposal). This note summarises ten key issues market participants should know about the proposed amendments to the MiFIR framework:

  1. Changes to the CTP regime

As expected, the much-anticipated centrepiece of the MiFIR Review Proposal are changes to the consolidated tape provider (CTP) regime. By way of background, the regime originally introduced under the Markets in Financial Instruments Directive (MiFID), and subsequently transferred to MiFIR, did not result in the establishment of commercial CTPs in the European Union. Pointing to risks for market participants stemming from a need to navigate across fragmented markets and attempting to fix the deficiencies of the current regime, the Commission proposes to significantly change the current regime by moving away from a model based on competing consolidators consolidating market data from various execution venues. Its objective behind the proposals is to facilitate the emergence of one CTP for each asset class (shares, ETFs, bonds and derivatives).

  1. CTP regime and market data consolidation: single, independent consolidator for each asset class

In accordance with the Commission’s proposal, a CTP model based on a single consolidator would operate a centralised “hub and spoke model” for each asset class (shares, ETFs, bonds and derivatives). As such, data consolidators would collect data for specific instruments from geographically separated venues, consolidate the data in one centralised data centre, and then disseminate them from such a central location to subscribers in other locations. The single consolidator would be selected by the European Securities and Markets Authority (ESMA) following a competitive tender process and be appointed for a five-year term. A separate selection procedure would be organised for each asset class. The intention behind such process is to select a consolidator “that is entirely independent of both market data contributors and market data companies”.

  1. CTP regime and market data contribution: mandatory contributions with “minimum revenue targets” incumbent on market data consolidators

The Commission proposes to base the new CTP regime on a mandatory contributions model, whereby all market data sources would have to make standardised core market data available to market data aggregators. Market data is to be provided “in a harmonised format, through a high quality transmission protocol, and as close to real-time as is technically possible”. In order to compensate market data contributors (who are not to receive “any remuneration for the market data provided other than the revenue sharing”), the Commission foresees “minimum revenue targets” underpinning the revenue participation schemes that would form part of the selection process for a single consolidator. In a corresponding MiFID II Review Proposal the Commission proposes targeted amendments to oblige investment firms and market operators operating a multilateral trading facility (MTF) or organised trading facility (OTF), as well as regulated markets, to have arrangements in place to ensure they meet the data quality standards in line with the amended provisions of MiFIR.

  1. ESMA to specify the notion of “reasonable commercial basis” for market data

Noting diverging interpretations that have emerged to date in respect of the “reasonable commercial basis” for market data distribution, the Commission proposes to mandate ESMA to specify content, format and terminology. By way of background, the current MiFIR provisions governing the distribution of market data require market operators and investment firms operating a trading venue to make pre and post-trade data available to the public on reasonable commercial basis. While the notion had been further specified in a secondary legislation, including the obligation to provide market data on the basis of cost, on a non-discriminatory basis, in relation to per-user fees, in an unbundled, disaggregated and transparent manner, and more recently in the ESMA Guidelines on MiFID II / MiFIR obligations on market data, the Commission sees room for further improvements and harmonisation of market practices.

  1. Prohibition of payment-for-order-flow

In line with ESMA’s public statement issued earlier this year that warns about risks stemming from payment for order flow (PFOF) and certain practices by “zero-commission brokers”, the Commission proposes to prohibit PFOF in the expectation that “in the absence of PFOF, retail orders will be sent to a pre-trade transparent market (regulated market or MTF) for execution”. The prospective ban has already generated some reaction from European lawmakers. In his statement following the publication of the MiFIR Review Proposal, Markus Ferber (coordinator for EPP political group at the European Parliament’s ECON committee, and a former rapporteur on the MiFID II / MiFIR package), referred to the proposed ban as a “nuclear option” and suggested that legislators will “have to have a very close look if this is really justified”. In a similar tone, his compatriot albeit with a different political affiliation, Sven Giegold (Greens) commented  that with the PFOF ban “the European Commission is doing consumers a disservice”. Given these and other reactions, there appears to be an interesting debate ahead.

  1. Adjustments to the scope of STO and DTO

In line with the ESMA recommendations, the Commission proposes to clarify the scope of the share trading obligation (STO) and limit it to shares that are admitted to trading on an EEA regulated market. It also proposes to establish an EU “official list” of shares subject to the STO. In respect of derivatives and responding to industry concerns regarding misalignment between the scope of the derivatives trading obligation (DTO) and the scope of derivatives clearing obligation under the European Markets Infrastructure Regulation (EMIR), the Commission proposes to align both frameworks in order to ensure legal certainty between the two obligations, in particular with respect to the scope of the entities that are subject to the clearing and trading obligation. In addition, the Commission proposes to amend the DTO regime by introducing a possibility to suspend it for certain investment firms that would be subject to overlapping obligations when interacting with non-EU counterparties on non-EU platforms.

  1. Removal of “open access” obligation for ETDs

Acknowledging that “certain provisions of the current regulatory framework have created legal uncertainty for market participants”, including the open access regime that has been suspended numerous times, the Commission considers it necessary to remove this regime for exchange traded derivatives (ETDs)  “in order to foster competition, innovation and development of exchange-traded derivatives in the EU on one side and building further clearing capability in the EU”. By way of background, the introduction of the open access regime for ETDs was one of the most controversial elements of the MiFID II / MiFIR legislative review back in 2013-2016, with the Commission advocating strongly in favour. It is therefore interesting to read in the explanatory memorandum of the MiFIR Review Proposal that “innovation in exchange-traded derivatives is not served by the “open access” obligation, as this rule removes incentives to launch new exchange-traded derivatives contracts if competitors do not have to make the upfront investment”. This seems to echo what some market infrastructure operators had been arguing all along.

  1. Transparency: targeted changes to the regime for equities and non-equities

Regarding the pre-trade transparency regime for equities, the Commission proposes to replace the double volume cap (DVC) mechanism with a single volume cap set at 7% of trades that are executed under the reference price waiver or the negotiated trade waiver. In respect of non-equities, the key proposal focuses on the deferral regime. The Commission proposes to shorten and harmonise publication deferrals for non-equity post trade reports, whereby market operators and investment firms operating a trading venue may be authorised to defer the publication of the price of transactions until the end of the trading day, or the volume of transactions for a maximum of two weeks. The Commission also proposes to remove the discretion given to Member State competent authorities to defer for up to four weeks post-trade reports for non-equities. Replacing this is Union wide thresholds. However, Member State competent authorities will still have discretion with regard to sovereign debt.

  1. Multilateral trading systems: authorisation obligation

Noting that the inclusion of the definition of “multilateral trading system” originally within the MiFID II framework led to creating an unlevel playing field between regulated markets, MTFs and OTFs on one hand, and unregulated platforms on the other, the Commission proposes to move the relevant provisions from MiFID II (a directive) to the MiFIR framework (and thus eliminate any discretion in their application as permitted by the directive). It also proposes to provide further clarification regarding the obligation for multilateral systems to operate with a trading venue licence.

  1. Next steps

The MiFIR Review Proposal, which is part of the Commission’s broader Capital Markets Union reform package, will be transferred to the European Parliament and to the Council (Member States) for review and adoption. With both legislators being able to submit substantive amendments, and in the light of highly divergent views (both between the legislators and the industry) on some of the key elements of the proposal, as well as the amount of industry focus the MiFIR Review Proposal has generated to date, the upcoming legislative review is expected to remain the priority initiative for the co-legislators and for financial market participants in the months to come. Given the complexity – and controversy – of some of the proposals, the legislative process may take anything between 18-24 months to complete.