EU Financial Markets Law

Lecture timetable
Regulatory Framework of Securities Markets in the EU: Regulatory Principles, MiFID/MiFIR, MAR/CSMAD, Overview of recent developments
Regulatory Framework of Securities Markets Primary Market: Definition of Securities, Registration, Public Offer of Securities, Prospectus, Crowdfunding
Regulatory Framework for Securities Secondary Market: Post-listing disclosure, Market Abuse, Anti-Money Laundering
Discussion class 1
Regulatory framework for Investment Services: client classification and provision of services, differentiation between investment services and ancillary investment services, Investment service providers (conduct of business rules), Tests before providing investment services, PRIPS
Regulatory Framework for Investment Funds: Structure of fund management, Types, rules and peculiarities of different investment funds, alternative fund rules (AIFMD)
Discussion class 2

EU regulatory framework
Directive 2004/39/EC Markets in Financial Instruments Directive (MiFID)
Directive 2004/109/EC Transparency Directive (TD)
Directive 2003/6/EC Market Abuse Directive (MAD)
Directive 2003/71/EC Prospectus Directive (PD)
Directive 2002/47/EC Financial Collateral Directive
Regulation 648/2012 European Market Infrastructure Regulation (EMIR)

EU regulatory framework

EU regulatory framework
Directive 2004/39/EC Markets in Financial Instruments Directive (MiFID):
Directive 2014/65/EU on markets in financial instruments
Regulation (EU) No 600/2014 on markets in financial instruments
Both adopted 15.04.2014, Member State must adopt rules by 27.01.2017

EU regulatory framework
Directive 2003/6/EC Market Abuse Directive (MAD)
Regulation (EU) No 596/2014 on market abuse
Directive 204/57/EU on criminal sanctions for market abuse
Both adopted 15.04.2014
Will enter into force July 2016

EU regulatory framework
Directive – not directly applicable, has to be transposed into Member State law:
Minimum/maximum harmonization
Actual direct application in technical issues: sufficiently exact rules
Regulation – directly applicable (no additional Member State law must be passed)

EU Regulatory framework
Tenents of EU law
Establishment of an internal market
Free movement of capital
Capital markets not exclusive competence, interference subject to principle of subsidiarity

Historical overview
1957 Treaty of Rome established the principle of free movement of capital
This did not bring about any significant law-making in the field of capital markets
1966 Segre Report:
Significant shortcomings in Member State laws relating to financial sector
Need for a EU approach

Historical overview
Cassis de Dijon judgment (C-262/81): if an instrument was acceptable in one MS then it ought to be considered to be acceptable in another MS
The principle was expanded to the field of services by Citadel v Cine-Vog Films judgment in 1982
1985 Commission issued a White Paper “Completing the Internal Market”

Historical overview
Investment Services Directive in 1993
Financial Services Action Plan 1999:
ISD was clearly outdated by 1999
Need for faster and more modern EU level legislation
Lamfalussy Report of 2001
4 level methodology for creation of EEU directives
Originally aimed at securities markets but has mainly been implemented on financial services

General Principles
Lamfalussy methodology
Framework principles (MIFID)
Implementing measures (ESMA consultation papers, MID and MIFID Regulation)
Cooperation between the national supervisors through EU level guidelines (CESR rules)
Implementation

Implementation
Recent EU rules (MiFID/MiFIR) has raised the importance of acts of lower hierarchy
Delegated acts
RTS
Guidelines
EU supervisors are responsible for drafting of the acts - ESMA

General Principles of EU rules
Passporting
Banks, investment funds, fund managers
Prospectuses
General principles
Provision of investment services
Fit&Proper rules

MiFID General Principles
Composition of securities markets:
Concentrating not only on classical regulated markets but also on MTF’s and systematic internalizers
Principle-based approach
Shift from detailed rules on provision of financial services to more principles-based regulation
More to the local regulator to decide how detailed rules to establish
Passporting

MiFID General Principles
Mifid regulatory framework:
Mifid itself (2004/39/EC)
Mifid implementation directive (2006/73/EC)
Mifid implementation regulation (1287/2006)
CESR/ESMA guidelines implemented by member State FSAs

MiFID General Principles
Transposition into local law
See as overview
http://ec.europa.eu/internal_market/securities/isd/mifid_implementation/index_en.htm
Different Member States:
FSMA 2000 in UK
WpHG/WpÜG in Germany
VPTS in Estonia
Laki sijoituspalveluyrityksistä, Laki arvopaperimarkkinalain in Finland

MiFID General Principles
Anticipated benefits
Competition between market service providers and securities markets generally
Improved investor protection
Increased transparency for customers as to the practices of services providers, their obligations and costs
Increased transparency as to the available investment markets in relation to pre-transaction information

MiFID General Principles
Anticipated benefits
More effective and approximate regulation between Member States across EU
Principle-based regulation makes the core principles of financial regulation more evident

MiFID General Principles
Contents of MiFID can be divided into three categories
Authorisation and organisation of investment firms
Conduct of business obligations in Mifid
Securities Markets and market transparency

MiFID General Principles
Exemptions (art 2)
Insurance undertakings
Persons providing investment services exclusively for their parent undertakings, for their subsidiaries or for other subsidiaries of their parent undertakings
Investment service provided in an incidental manner in the course of a professional activity and that activity is regulated by legal or regulatory provisions or a code of ethics governing the profession which do not exclude the provision of that service
ECB and central banks

MiFID General Principles
Exemptions (art 2)
Persons who do not provide any investment services or activities other than dealing on own account unless they are market makers or deal on own account outside a regulated market or an MTF on an organised, frequent and systematic basis by providing a system accessible to third parties in order to engage in dealings with them
Employee-participation schemes
Investment advice in the course of providing another professional activity not covered by Mifid and provision of such advice is not specifically remunerated

Market definitions
Regulated market
Classical notion of a exchange
Operated and/or managed by a market operator
Brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments a way that results in a contract, in respect of the financial instruments admitted to trading under its rules and/or systems, and which is authorized and functions regularly;

Market definitions
MiFID itself gives only rough principles on:
Organizational requirements (including compliance)
Fit&Proper rules
Pre-trade and post-trade transparency
Rules on access to the regulated market and obligation to comply with the FSA (suspension and removal orders, see art 41)

Market definitions
Authorization needed
Disclosure of a programme of operations setting out inter alia the types of business envisaged and the organisational structure as a prerequisite (see also art 43), also fit&proper tests
Member State FSAs have the right to withdraw the authorisation

Market definitions
Organizational requirements (art 39)
Rules on COI
Risk avoiding and identification systems
Arrangements for the sound management of technical operation of the system
Rules and procedures providing for fair and orderly trading and establish objective criteria for the efficient execution of orders
Sufficient financial resources to facilitate its orderly functioning

Market definitions
Multilateral trading facility (MTF)
Multilateral system, operated by an investment firm or a market operator,
Brings together multiple third-party buying and selling interests in financial instruments in a way that results in a contract
General pre-trade and post-trade transparency requirements apply (art 30)

Market definitions
Requirements for MTFs
Transparent and non-discretionary rules and procedures for (art 14)
fair and orderly trading and establish objective criteria for the efficient execution of orders
Criteria for determining the financial instruments that can be traded under its systems
Access to its fasility
Inform its users of their respective responsibilities for the settlement of the transactions executed in that facility

Market definitions
Requirements for MTFs
General obligations to protect integrity of the market (art 25)
Organisational requirements for investment firms (art 13, see further)
Obligation to comply immediately to FSAs instruction to suspend or remove a financial instrument from trading (art 14)
Obligation to render compliance systems (art 25)

Market definitions
See list of AIMs/MTFs - http://mifiddatabase.esma.europa.eu/Index.aspx?sectionlinks_id=22&language=0&pageName=MTF_Display&subsection_id=0
Criteria for Regulated Market vs First North in the Baltics
See http://www.nasdaqomxbaltic.com/en/exchange-information/listing-center/how-to-get-listed/first-north-vs-regulated-market/

Market definitions
‘Systematic internaliser’
Investment firm - any legal person whose regular occupation or business is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis
Deals on organized, frequent and systematic basis on own account by executing client orders outside a regulated market or an MTF

Market definitions
Hence following requirements
The internalizing activity must be performed on an organized and frequent basis in a systematic manner;
The activity has a material commercial role for the firm, and is carried on in accordance with non-discretionary rules and procedures;
The activity is carried on by personnel, or by means of an automated technical system, assigned to that purpose, irrespective of whether those personnel or that system are used exclusively for that purpose;
The activity is available to clients on a regular or continuous basis.

Market definitions
Reasons for being SI:
SI can create a market in a specific financial instrument, create its own business hours and trading rules. Market makers will have to operate through a regulated market and only during the market business hours.
SIs can stimulate a market in instruments not listed in the 'local' market´.
See further: Hingway, Anand Ravindra , Purandare, Rajshekhar and Bharathulwar, Shravan V., MiFID and Systematic Internalization (June 26, 2008). Available at SSRN: http://ssrn.com/abstract=1151649 or http://dx.doi.org/10.2139/ssrn.1151649

Market definitions
See ESMA database: http://mifiddatabase.esma.europa.eu/Index.aspx?sectionlinks_id=16&language=0&pageName=MiFIDSystematicSearch&subsection_id=0

Obligations before the client
Applicable to investment firms and also in large extent to credit institutions
Organizational obligations
Direct obligations before the client:
Before investment decision
Client order handling

Organizational requirements
General obligations
Proper organisation of business
Compliance with all relevant legal requirements
Responsibility of management
Risk management
Adequate resources of personnel and material
Emergency plan

Organizational requirements
Directive 2006/73/EC (‘Mifid implementation directive’):
Risk management
Internal audit
Compliance
Senior management liability
COI
Outsourcing

Organizational requirements
Obligation to have an apt system of handling complaints
2006/73/EC art 10
Additional guidelines by EFSA: http://www.fi.ee/public/kaebused.pdf
Coherent system of compliance
2006/73/EC art 6
Additional guidelines by ESMA/EFSA from 21.01.2013. http://www.fi.ee/public/0finantsinstrumentide_turgude_direktiivis_MiFID_satestatud_vastavuskontrolli_funktsiooni_kasitlevate_nouete_teatud_aspektide_kohta.pdf

General conduct of business rules
Investor protection through conduct of business rules and organisational requirements for investment firms:
Still responsible decisions on well informed basis by clients allowed
Authorisation and ongoing supervision of investment firms
Client may ignore information, fail to compare, save on qualified advice, take unreasonable decisions

General conduct of business rules
An investment firm shall act honestly, fairly and professionally in accordance with the best interests of its clients (art 18)
Service provider has to grant clients‘ interests preference to his own economic interests (art 18)
Avoid conflicts of interests
Disclose unavoidable conflicts of interests

General conduct of business rules
Minimum requirements for information and marketing
All information, including marketing communications, addressed by the investment firm to clients or potential clients shall be fair, clear and not misleading
Marketing communications should be clearly identifiable
Investment research, which does not fulfill organizational requirements, has to be labeled as marketing communication

General conduct of business rules
Information provided has to be:
Understandable for clients, no contradictions
Describe benefits and risks
No „hiding“ of relevant information or warnings
Comparisons of financial instruments by significant criteria
Warning with information on costs and taxes

General conduct of business rules
Suitability test (investment advice, portfolio management)
Obtain information about
Client‘s knowledge, experience in investment field
Investment objectives (duration, purpose, readyness to assume risk)
Financial situation (regular income/expenses, assets)
Test: transaction envisaged is
Comprehensible regarding risks involved
Consistent with investment objectives and fin. Situation

General conduct of business rules
Appropriateness test (other investment services)
Obtain information about client‘s knowledge, experience in investment field
Test: transaction envisaged is comprehensible for client regarding risks involved
Otherwise: warning
Transaction/investment service inappropriate or
Appropriateness test impossible
No prohibition to execute orders

General conduct of business rules
Client
Natural or legal person
Prospective client
Reclassification possible
Retail client: maximum protection
Professional client: no testing of ability to assume risks and establishment of experience
Eligible counterparties: minimal duties

General conduct of business rules
Professional clients
investment firms
UCITs
insurance companies
public (int.) institutions
large undertakings: 2 out of 3
20 mill. € balance sheet total
40 mill. € net turnover
2 mill. € own funds
Optional: agreement + experience + turnover

General conduct of business rules
Best execution principle (art 21)
Obligation to take all reasonable steps to obtain, when executing orders, the best possible result for their clients taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order.
Whenever there is a specific instruction from the client the investment firm shall execute the order following the specific instruction.

General conduct of business rules
Best execution principle (art 21)
Obligation to monitor the effectiveness of their order execution arrangements and execution policy in order to identify and, where appropriate, correct any deficiencies.
Obligation to notify clients of any material changes to their order execution arrangements or execution policy.

Authorization of investment firms
Rather similar procedure in relation to banks and fund managers
Authorization from the local FSA has to be submitted
Cross-border services are allowed
FSA can withdraw the authorization
Similar rules on majority shareholding
Fit&Proper tests for directors and also to some extent shareholders

EU movements
Single Supervision Mechanism for banks:
Large banks shall be supervised by the ECB
EU wide measures such as single supervision resolutions (incl imposition of fines)
Reform of capital markets law
MiFID into MiFID II
MAD into MAR/CSMAD

EU movements
MiFID II
EC proposal 20.10.2011, the directive and regulation adopted April 2014
Specified COI rules (question on inducements)
Additional rules on internal control and reporting
Larger ambit of application

EU movements
EU into ‘trendy’ areas
Alternative Funds directive
Outside regulated market traded facilities – EMIR (European Market Infrastructure Regulation)
FX aka Forex aka Foreign Exchange: EMIR + public consultation on spots and derivatives
Crowdfunding: public consultation