Process and regulations

The speed with which technological change impacts the financial markets means that supervisors have to monitor a highly dynamic environment. Rapid amendment and development of legislation is essential to this activity. For this reason, the Lamfalussy procedure was developed at the end of 2000, by a committee of experts, with Baron Alexandre Lamfalussy as Chair. Its objective was not only to simplify but also to speed up the way the European Commission (EC) enacts legislation.

MiFID II is also being prepared by this procedure. The procedure itself takes the form of a four-stage approach, with committees comprising of national experts working on different parts of the new legislation at different levels.

Level 1: Standard legislative procedure

At the first level, the EC submits a legislative proposal, based on its right to launch such an initiative. The proposal explains the basic political aspects the EC would like to see regulated, as well as the implementing bodies it would like to involve for level 2. Prior to the submission, a consultation round is held to enable stakeholders to learn about the EC's plans at an early stage. This allows them to comment on the proposal and contribute to vision developed by the EC.

The EC's proposal is then submitted to the European Parliament (EP) and subsequently to the Council of Ministers (CoM) for the initial reading. The EP can agree to the proposal with or without amending it (in the form of textual additions, modifications or deletions) and pass it to the CoM. Subsequently, the CoM can accept or reject the proposal as received from the EP. If the CoM rejects the proposal, the CoM adopts a consensus position which is followed by a second reading and a request to the EP to propose a new position. The EP can approve the consensus position of the CoM, reject it as a whole, or make amendments to it. Approval by the EP constitutes a formal final decision. Concurrently, rejection by the EP brings the legislative procedure to an end. However, in most situations the EP amends the consensus position. Then the CoM needs to accept the amendments, or reject some or all of them. If the CoM rejects, a conciliation committee is established (which conducts a third reading).

The proposal by the EC can take the form of a directive or a regulation. A directive requires Member States to achieve a particular result without dictating the means of achieving that result. Therefore, to be effective a directive needs to be implemented in national legislation. The directive is chosen over a regulation if specific national financial markets require to have legislation tailored to each country individually. An example of this is the MiFID (Markets in Financial Instruments Directive). A directive can be distinguished from regulations which are self-executing and do not require any implementing measures.

There is no question of this intermediate step if the opted form is a regulation. A regulation comes into force immediately, rendering translation into national legislation unnecessary. The form of a regulation is chosen if the markets concerned are organised internationally to such an extent that a uniform pan-country framework is considered desirable. An example of this is the MiFIR (Markets in Financial Instruments Regulation).

Level 2: Technical standards

The choice of basic political aspects is made at level 1. Specification of the aspects to be further developed as technical standards is produced at this level. Development of these standards takes place at level 2.

The technical standards are regulatory standards and/or implementing standards. Regulatory standards represent an elaboration of the level 1 text, and ensure harmonisation of the new legislation among the different countries. The purpose of an implementing standard is to define how the legislation is to be implemented, to ensure that all involved parties from the 28 countries ultimately comply uniformly with the regulation and that achieving a level playing field is done as effectively as possible. It is not allowed to develop policy or strategic choices in regulatory and implementing standards.

The technical standards are developed with the support from technical experts. The way in which they are engaged is specific to the type of financial services concerned. There are three European Supervisory Authorities (ESAs), with representatives from the national supervisors of all 28 EU countries. The decision on which ESA is competent to develop the technical standards (EBA, EIOPA or ESMA), and hence act as technical expert, is made at level 1. A technical standard is legally binding if the EC confirms this is the case. As regards MiFID II, ESMA, as one of the three ESAs, has been appointed to prepare the regulatory technical standards as well as the implementing technical standards.

Level 3: Feasibility of implementing the supervision in practice

At level 3, the regulations that are not worked out in the form of technical regulatory or implementing standards are translated by national supervisors into guidelines and recommendations. This ensures uniform and consistent application of the new legislation within a member state.

Level 4: Monitoring implementation

After a directive or regulation has been implemented, the EC is responsible for monitoring compliance by the various Member States, and for warning about differences in impact between countries. To this end, the EC gathers information, independently as well as with the help of the ESAs and market parties, on how a regulation has been implemented in the Member States. If it detects major differences between Member States, the EC can opt to introduce amendments to the regulation. In extreme cases, if the EC sees that a Member State has implemented a regulation incompletely or even incorrectly, or has failed to amend national laws that conflict with EU legislation, it can bring a case before the European Court of Justice.

The European Commission prepared the original proposal for MiFID II. It also played a major role in working out the Directive by drawing up delegated acts. The European Securities and Markets Authority (ESMA) also had an important role in detailing the Directive. ESMA prepared the technical standards based on the Directive, i.e. the regulatory technical standards (RTS) and the implementing technical standards (ITS).

Now that MiFID II has been adopted, the European Commission has to ascertain whether these European rules have been implemented in national legislation.
One of ESMA's duties is to determine whether national supervisors conduct supervision in accordance with the EU rules. ESMA itself has a supervisory role, for example, the provision of position limits for traders in commodity derivatives. It also has a coordinating role, it should detect and remove bottlenecks that impede supervision. In addition, ESMA has the authority to draw up recommendations and guidelines.

In the Netherlands, MiFID II has been implemented by the Ministry of Finance. For more information, please see ‘Implementation in national laws’.

Framework

MiFID II
Final level 1 text of the directive published in the Official Journal of the EU - June 12, 2014
Consolidated version

MiFIR
Final level 1 text of the regulation published in the Official Journal of the EU - June 12, 2014
Consolidated version

Supplementary rules

Most of the supplementary rules under MiFID II are in delegated acts drawn up by the European Commission and in technical standards of the European Securities and Markets Authority (ESMA).

For more information, please also look at ‘Lamfalussy procedure’.

Delegated acts
A delegated act is based on a recommendation from ESMA, and translated into legislation by the European Commission (EC). A delegated act can be either a delegated directive or a delegated regulation.

There is a single delegated directive. It does not operate directly, and has to be implemented in national legislation. In the Netherlands, this legislation is the Decree on Conduct of Business Supervision of Financial Undertakings under the FSA (BgfO). There are two delegated regulations. Each operates directly, so that implementation in national legislation is not necessary.

After the EC has published the delegated acts, they still need to receive endorsement by the Council and the European Parliament. These two bodies have three months in which to lodge objections.

Technical standards
In 2015, ESMA published the regulatory technical standards (RTS) and the implementing technical standards (ITS) for the Markets in Financial Instruments Directive II (MiFID II).

Implementing technical standards
On 11 December 2015, ESMA published the implementing technical standards (ITS) for the Markets in Financial Instruments Directive II (MiFID II). The ITS translate the regulations into practical terms for market parties, market infrastructure and national supervisors. Publication of the current ITS supplements two other sets of technical standards for the implementation of MiFID II. All the sets of technical standards have been submitted by ESMA to the European Commission for its approval.

The ITS specify standard forms, templates and procedures for the following:

Standard forms, templates and procedures for cooperation arrangements

Suspension and removal of financial instruments from trading on RM, a MTF or OTF

Standard forms, templates and procedures for the authorisation of data reporting services providers

Format and timing of weekly position reports

Weekly position reports

Standard forms, templates and procedures for competent authorities to cooperate in supervisory activities, on-site verifications, and investigations and for the exchange of information investigations, and for the exchange of information

Standard forms, templates and procedures for the consultation of other competent authorities prior to granting an authorisation

Procedures and forms for submitting information on sanctions and measures.

Regulatory technical standards
On 28 September 2015, ESMA published regulatory technical standards for MiFID II. The RTS have been submitted to the European Commission, which has three months to approve them through the endorsement procedure. After this, the European Parliament and the Council can still lodge objections against the standards.

This process releases the standards for transparency matters (pre-trade and post-trade transparency equity as well as non-equity instruments), microstructural matters, organisational criteria for trading venues, data publication and accessibility, transaction reporting, post-trading, commodity derivatives, and best execution.

More information
Implementing and delegated acts
Overview technical standards (RTS and ITS) under MiFID I, MiFID II and MiFIR

Guidelines

For a number of areas, ESMA has prepared guidelines, with the aim of harmonising EU supervision as regards certain MiFID II standards.

Q&As

ESMA develops questions and answers (Q&As) for the application of MiFID II/ MiFIR. It is a practical convergence tool used to promote common supervisory approaches and practices. ESMA will periodically review these Q&As on a regular basis to update them where required and to identify if, in a certain area, there is a need to convert some of the material into ESMA Guidelines and recommendations.