European Commission confirms roll back of MiFID II rules in recovery package

MiFID II unbundling and best execution reporting requirements will be scaled back under new recovery package from the European Commission.

The European Commission has confirmed that it will remove certain requirements under MiFID II as part of a package aimed at advancing Europe’s recovery from the COVID-19 pandemic.

Unbundling research requirements are at the heart of the move to scale back the rules, with other changes including a suspension of best execution reporting requirements.

The requirements targeted under the package are rules that have already been highlighted by market participants under the MiFID II review as being not fit for purpose or too burdensome. 

“These amendments refer to a number of requirements that were already identified (during the MiFID/MiFIR public consultation) as being overly burdensome or hindering the development of European markets,” the Commission said. “The current crisis makes it even more important to alleviate unnecessary burdens and provide opportunities to nascent markets.”

Under the changes, the Commission has proposed that asset managers be exempt from unbundling when paying for research on small- and mid-cap companies and in fixed income, including rates, credit and loan research. Small- and mid-cap issuers will be defined as having a market capitalisation of less than €1 billion, calculated over a 12-month period.

The Commission said the move to reduce research requirements in Europe will serve to increase research coverage of small- and mid-caps and for bonds.

MiFID II’s rules on research payments requiring have been controversial since they were introduced in 2018, and regulators hold conflicting views on the impact unbundling has had on the institutional research marketplace. Critics of the rules have argued that unbundling has had limited impact on transparency, reduced research coverage and quality, and dented liquidity in certain stocks.

Elsewhere, the European Commission’s recovery package includes a temporary suspension of best execution reporting. An amendment will be made to remove the requirements to publish the best execution reports until 2022. The Commission noted that 70% of respondents to the MiFID II review consultation who gave input on best execution indicated that the reports are not useful. Production of the reports is also costly and time consuming. 

The European Securities and Markets Authority (ESMA) confirmed in April that best execution RTS 27 and RTS 28 reporting requirements would be eased as firms adapted to the impact of the coronavirus pandemic. A review will also be undertaken in 2021 to decide how best execution reporting should be adapted or if they should be removed completely.

The recovery package also included amendments to the energy derivatives market in a bid to boost euro-denominated trading, and to allow companies to cover their risks. There will also be exemptions to cost and charges disclosure rules, which aim to free up resources for firms dealing with fallout from the coronavirus pandemic.  

“One way of doing so is to help businesses raise capital on public markets,” European Commission executive vice president, Valdis Dombrovskis, commented on the package. “Today’s targeted amendments will make it easier for our businesses to get the funding they need and to invest in our economy. Capital markets are vital to the recovery, because public financing alone will not be enough to get our economies back on track.”