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On EU Markets In Financial Instruments Directive

Posted on:2011-03-24Degree:DoctorType:Dissertation
Country:ChinaCandidate:J LinFull Text:PDF
GTID:1116360305983350Subject:International law
Abstract/Summary:PDF Full Text Request
As it is said that Financial Services Action Plan is the milestone in the integration of E.U. financial service market, Markets in Financial Instruments Directive is the strongest draw with much ink. Transposition and implementation of MiFID by member states, indicate that the degree of integration of E.U. securities and derivatives market deepens practically and the value of legal system in E.U. financial services market show up. Under the legal framework of MiFID, cross-border capital raising and securities trading channel become smoother, market liquidity and transparency strengthen, investors are better safeguarded.Besides introduction, this thesis consists of six chapters.Chapter One, MiFID survey, which includes the background and legislative procedure, the main content, implementing measures and supervisory coordination. Background helps better understanding of the inner, external causes and value target. From deficiencies in ISD, to euro generation and FSAP, further to consultation with many participants, the legislative process of MiFID is the phase in which E.U. financial services markets develop rapidly and demand legal safeguard. The new Lamfalussy legislative procedure lays a straightforward path for the smooth introduction and reasonable provisions of MiFID. However, the Lamfalussy procedure is challenged by global financial crisis. Then, the thesis focuses on the main content of MiFID, including Scope and Definitions, Authorisation and Organisational Requirements, Operating Conditions, Market Transparency and Integrity. Particularly, the organizational requirement for investment firms, the'Best Execution'requirement and transparency are the core provisions. MiFID needs to be transformed in member states. As the second level legislation below Regulation, MiFID has legal binding force toward member states, while the later have freedom to choose form and method for transposition as long as the choice ensures the effect of MiFID. To make practical effect of MiFID, not only the conditions in itself need to be satisfied, but also it needs to be transposed into domestic legislation by member states. During this transposition process, the Committee of European Securities Regulators (CESR) plays a pivotal role. Through'Level 3'implementation measures including joint interpretation recommendations, guidelines, common standards and peer review, provide clear guideline and eliminate understanding ambiguity for MiFID transposition by member states, and coordinate between member states for performing supervisory responsibilities. First, member states adopt specific transposition measures. This thesis discusses four typical states:United Kingdom, Germany, France and Italy, analyzing how they transpose MiFID and the implementation situation. Second, supervisory coordination under MiFID. This relates to the division of supervisory responsibilities between member states as for specific matters. This thesis discusses the supervisory coordination regulations for regulated markets and multilateral trading facilities (MTF's), and branches of investment firms, while the later is much comprehensive, comprises not only the'Level 1'MiFID, but also the Memorandum of Understanding and Protocol drafted by'Level 3'committee CESR.Chapter Two, MiFID investor protection system. Generally speaking, the system for protect investors in financial markets comprise information disclosure, direct regulation for related entities, fraud prevention, insurance scheme for investors. The provisions about investor protection in MiFID could be classified into two parts: 'Provisions to ensure investor protection', mainly'Best Execution'; conflicts of interest, investment recommendations and information, market transparency and so on. E.U. securities market regulations develop on the basis of market integration and investor protection targets, aim to introduce transparency in financial markets, to provide stronger protection for investors and deal with insider trading and other trading fraud. Since FSAP, four directives on securities market have been adopted. First, Market Abuse Directive. It aims to prohibit insider trading and market manipulation and is essential to maintain investors'confidence. Second, Transparency Directive. It also helps to strengthen investors'confidence and sets up unified rules about the exact, full and timely information disclosed by issuers. Third, Prospectus Directive. Besides the'Single Passport'provides the issuers to raise capital in E.U. with lowest cost, the directive ensures that the prospectus is produced in complete and unified approach, thus safeguards the right of investors to acquire information related with issuers and listing companies and issued securities. Fourth, MiFID. It is regarded as the milestone in the development of investor protection system. The provisions about investor protection in MiFID are much more comprehensive than the other three directives about securities. However, no matter the conflicts of interest regulations, the direct provisions to ensure investor protection, or other provisions to protect investors through market transparency and integrity, the question as to which extent these provisions affect the operation of investment firms and thus effectively protect investors is not sure and need further analysis.Chapter Three, the legal effects of MiFID on trading venues and competition between them. Besides the traditional exchanges, there exist two other trading venues in E.U.:MTF's and systematic internalisers (SI's). Exchanges own a lot advantages. The representative London Stock Exchange, Deutsche Borse AG and NYSE Euronext occupy most market share. As new trading system, MTF's are products of securities trading electronicization and computerization and the true innovation. SI's gain much focus as they indicate the capacity to innovate and the potential to attract securities trading. The provisions in MiFID have influence upon the competition between the three venues:the elimination of'Concentration Rule', pre-and post-trading transparency and'Best Execution'requirement. The elimination of'Concentration Rule'affords trading venues the same starting line. Traditional exchanges no longer own the exclusive benefits endowed by'Concentration Rule'. After the starting line, trading venues must abide by just competition rules, including pre-and post-trading transparency and'Best Execution'requirement. Objectively speaking, trading venues face both challenge and opportunity:the set up of MTF's intensifies the competition with traditional exchanges, the stipulation of new trading venues speeds up the combination of stock exchanges, and the requirement of'best execution'obligation makes new trading venues glad and worry.Chapter Four, the legal organizational and operating requirements on investment firms. The organizational requirements of MiFID include general requirements, conflicts of interest regulation, outsourcing and so on. Investment firms could transfer the procedure, service and activity to service providers by way of specific outsourcing arrangement. While investment firms own the freedom right to outsource, they must assume the responsibility stipulated in MiFID and implementation directive. They should make pre-judgment about the performance capacity and effect of service providers before entering into outsourcing agreement or arrangement with service providers, and continuous supervision about the possible risks and the capacity of service providers to continuously perform after entering into outsourcing agreement or arrangement. To prevent and manage the conflicts of interest, the investment firms shall maintain and operate effective organizational and administrative arrangements, adopt all reasonable steps to identify any possible conflicts of interest. When such organizational and administrative arrangements are not sufficient to ensure the risks of damage to client interests will be prevented, the investment firms shall clearly disclose the general nature and/or sources of conflicts of interest to the client before undertaking business on its behalf. If it is said that the operating requirements for investment firms are important aspects of MiFID, the'Best Execution'requirement is the highlight of MiFID. The value of'Best Execution'relates not only to the interest of individual client, but also to social or market level about market efficiency and liquidity. Besides the many factors investment firms shall comprehensively considerate to perform'Best Execution'responsibility, MiFID implementing directive further indicates some criteria for judging the relative importance of each factor. Investment firms shall establish and implement an order execution policy and obtain the prior consent of their clients to the execution policy, in order to obtain the best possible result for their client orders. Furthermore, investment firms shall monitor the effectiveness of order execution arrangement and execution policy, identify or amend any defects, and regularly assess whether the execution venue in order execution policy provides best result for the client.Chapter Five, comparison between MiFID and Reg NMS. The philosophy of National Market System rules (NMS rules), i.e. the predecessor of Regulation NMS (Reg NMS), similar with that of MiFID with the aim to create a single market in financial services, is to create a national market system for securities trading in U.S. Reg NMS was adopted in 2005, which reflects the development of securities market in that period, Nasdaq stock market rised, market share owned by Alternative Trading System (ATS) increased, and technological innovation in trading developed. Reg NMS comprises four parts:order protection rule, access rule, sub-penny rule and market data rules and affects three kinds of entities:National Securities Exchanges, National Association of Securities Dealers, electronic communication network and ATS trading securities in national market system. The purposes of MiFID and Reg NMS are alike more or less. MiFID aims to improve investor protection and more transparency, create a single market for E.U. financial services, thus promote the competitiveness of E.U. in global capital market. Reg NMS aims to strengthen and modernize the regulatory framework of U.S. stock markets, create a unified national market system, thus maintain the competitive advantage of U.S. capital market. Both MiFID and Reg NMS seek a balance between promotion of order flow integration and enhancement of competition between trading venues. Besides the general terminology, MiFID and Reg NMS are different with regard'Best Execution', transparency and market data. First,'Best Execution'. As for the provision of'Best Execution'in Reg NMS, trading centers are directly responsible for executing orders with best possible price. Thus, market centers have responsibility to transmit order and markets need to connect and transmit orders with each other. While under MiFID, only investment firms need to be responsible for executing client orders with best possible result and markets need not to connect with each other. Besides, Reg NMS emphasizes strict price priority, while MiFID demands to comprehensively consider many criteria and characteristics. Second, transparency. The provisions of MiFID about pre-trade transparency are more extensive than those of Reg NMS. As for SI's or OTC market makers, the provisions of MiFID and Reg NMS are different in the way of making quote, the entities to perform obligations, the standard market size and the publication of limit order of clients. Also, the provisions about post-trade transparency are more detailed than those of Reg NMS. Third, market data. Both MiFID and Reg NMS stipulate the publication and management of quotes and trading data, including market data integration and how to manage the data.Chapter Six, MiFID inspiration. First, the conflicts of interest system has entered into the phase with definite law and regulation. However, we lack of law specifically for prevention and administration of conflicts of interest. The measures to prevent conflicts of interest are limited to information segregation system, ignoring other possible measures to prevent and administrate conflicts of interest. With reference to the conflicts of interest regulation of MiFID and its implementing directive, it is feasible to add conflicts of interest requirements in'Securities Firms'part of 'Securities Law', for example, securities firms should establish effective conflicts of interest policy proportionate with size and organization, the nature, size and complexity of business; they should identify possible conflicts of interest and clearly and timely disclose the conflicts of interest to clients. Second, the legal regulations of investor protection are mainly embodied in Securities Law, Supervision and Management of Securities Firms Regulation, Disposal of Risks in Securities Firms Regulation, Measures for Managing Funds for Securities Investor Protection, and some departmental rules. The legal system of investor protection of China has a general clear framework, scientific structure and roughly complete content, which provide safeguard for stable and healthy development of Chinese securities markets. However, there do exist some problems as to the scattered institutional framework, too generalized provisions and some regulations gaps. We should accelerate the introduction of'Investor Protection Regulation', and with reference to MiFID and its implementing directive, timely introduce client classification mechanism, detailed rules of general conduct of business and introduce'Best Execution'requirement when conditions permit. Finally, with the gradual openness and international development of securities market, Chinese securities exchange will face competitive pressure from foreign exchange and other trading platforms. Moreover, with constant improvement of securities market and the operation of MTF's and SI's in China, domestic securities exchanges will face challenge from other trading platforms. Therefore, domestic securities exchanges should steadily implement international development strategy, actively promote international process through cooperation with foreign exchanges and internationalization of securities market, and gradually innovate trading platform and increase technical support. Meanwhile, we should pilot the implementation of MTF's and introduce the system of SI's to internalize client orders when conditions permit.
Keywords/Search Tags:MiFID, Investor Protection, Best Execution, Multilateral Trading Facility, Systematic Internaliser
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