European Commission Proposal of 25 November 2021 for a MiFID II amendment removes the licensing requirement for persons dealing on own account on a trading venue by means of direct electronic access (DEA) to the extent that they do not provide or perform any other investment services.
Article 1(2) of the European Commission Proposal of 25 November 2021 for a Directive of the European Parliament and of the Council amending Directive 2014/65/EU on markets in financial instruments (COM(2021) 726 final) modifies Article 2(1), point (d), point (ii) of MiFID II by deleting any references to the DEA.
Explanatory Memorandum to the said European Commission Proposal clarifies that:
“Article 1(2) removes the licensing requirement for persons dealing on own account on a trading venue by means of direct electronic access (DEA) to the extent that they do not provide or perform any other investment services. This change is in line with a recommendation by ESMA in the Report on algorithmic trading”.
The said European Commission legislative proposition refers to the dealing on own account exemption under MiFID II (Article 2(1)(d)(ii)) and can be considered as a move in the right direction, nevertheless, involves some ambiguities.
The said Article 2(1)(d)(Ii) of MiFID II current wording is:
"are members of or participants in a regulated market or an MTF, on the one hand, or have direct electronic access to a trading venue, on the other hand, except for non-financial entities who execute transactions on a trading venue which are objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of those non-financial entities or their groups"
and the European Commission proposes to replace it with the following:
‘(ii) are members of or participants in a regulated market or an MTF;’.
Where and why the text:
"except for non-financial entities who execute transactions on a trading venue which are objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of those non-financial entities or their groups"
has been lost?
I'm afraid that the said hedging exemption may be important for some participants of the financial instruments markets (with the exception of commodities derivatives, emission allowances or derivatives thereof, because with respect to these instruments dealing on own account exemption does not apply).
Unfortunately, Recital 5 as well as Explanatory Memorandum accompanying the legislative proposition do not explain this puzzle.
Interestingly, this missing part has been added to Article 2(1)(d)(ii) of MiFID II quite recently - by the Directive (EU) 2016/1034 of the European Parliament and of the Council of 23 June 2016 (it was absent in the original MiID II).
The motives for this amendment, according to Recital 12 of the said Directive 2016/1034, were:
"The exemption set out in point (d) of Article 2(1) of Directive 2014/65/EU should be extended to include non-financial entities who are members of or participants in a regulated market or a multilateral trading facility (MTF), or have direct electronic access to a trading venue when executing transactions on a trading venue which are objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of those non-financial entities or their groups".
Are they not actual at present?
Explanatory Memorandum to the said European Commission Proposal of 25 November 2021 also mentions that the change "is in line with a recommendation by ESMA in the Report on algorithmic trading”.
But this is misleading - ESMA MiFID II/MiFIR review report of 28 September 2021 on Algorithmic Trading (ESMA70-156-4572) said nothing on the need to remove hedging exemption from Article 2(1)(d)(Ii) of MiFID II.
ESMA only proposed "to delete the exception to the exemption from authorisation as investment firm set out in Article 2(1)(d)(ii) of MiFID II for persons having DEA to a trading venue" (p. 29).
Hence, it would be very useful if the legislators or regulators explain why the passage at issue has been deleted from Article 2(1)(d)(ii) of MiFID II and what are the consequences of this regulatory change.
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Directive 2014/65/EU MiFID II Article 2(1), point (d), point (ii)
Article 1 Directive 2014/65/EU is amended as follows: 2. in Article 2(1), point (d), point (ii) is replaced by the following: Recital 5 Article 2(1), point (d), point (ii), of Directive 2014/65/EU, exempts persons dealing on own account from the requirement to be licensed as an investment firm or credit institution, unless those persons have direct electronic access to a trading venue. Articles 17(5) and 48(7) of Directive 2014/65/EU require that providers of direct electronic access are licensed investment firms or credit institutions. Investment firms or credit institutions that do provide direct electronic access are responsible for ensuring that their clients comply with the requirements laid down in Articles 17(5) and 48(7) of Directive 2014/65/EU. That gatekeeper function is effective and makes it unnecessary for clients of the direct electronic access provider, including persons dealing on own account, to become subject to Directive 2014/65/EU. In addition, removing that requirement would contribute to a level playing field between third country persons accessing EU venues via direct electronic access, for which Directive 2014/65/EU does not require a license, and persons established in the Union. |