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Procedure for the legal implementation of MiFID II/MiFIR

Procedure for the legal implementation of MiFID II/MiFIR

In the context of MiFID II/MiFIR, you will often come across the different “levels” of implementation. According to this approach which goes back to the so-called Lamfalussy Process, there are four levels of implementation of a financial services regulation. Whilst the implementation procedure has changed slightly since, the four-level framework remains.

Level 1 legislation

Since 1 January 2011, the European Securities and Markets Authority (ESMA) has been mandated with overseeing the technical implementation of MiFID II/MiFIR. The first consultations with market participants were however conducted by ESMA’s predecessor, the (independent) Committee of European Securities Regulators (CESR). The European Commission (EC), which had consulted separately, published its legislative proposals on how to amend MiFID (I) on 20 October 2011.

While the European Parliament (EP) partially agreed to these proposals in October 2012 and the Council agreed to the basic approach of the EC in June 2013, the three institutions entered into intense trilateral discussions, a so-called “trilogue”, in September 2013. The agreement they reached was announced on 14 January 2014.

The European Parliament Committee on Economic and Monetary Affairs (ECON) and the Permanent Representatives Committee (COREPER) approved the legislative texts in February/March 2014 and the EP voted in favour of this proposal in April. The Council subsequently adopted MiFID II/MiFIR on 13 May 2014. Twenty days after their publication in the Official Journal of the European Union (12 June), MiFID II/MiFIR became legally binding throughout the European Union on 2 July 2014.

The above decisions were all part of the first level of MiFID II/MiFIR legislation. According to the original time line, Level 1 legislation would have been followed by transposition into national legislation on 3 July 2016 and application among Member States on 3 January 2017 which, as we know, has been shifted to 3 January 2018.

Level 2 legislation

In April 2014, the EC mandated ESMA with drafting proposals on delegated and implementing acts. ESMA subsequently launched an open consultation by publishing discussion papers on technical standards and consultation papers on delegated acts. While delegated acts detail certain rules stipulated in MiFID II/MiFIR, the technical standards clearly define how firms have to comply operationally. ESMA consults with the Securities and Markets Stakeholder Group (SMSG) before submitting advice on delegated and implementing acts to the EC.

ESMA then publishes a consultation paper on draft regulatory technical standards (RTS).

In the meantime, the EC shall adopt ESMA’s advice on the delegated and implementing acts. In case neither the EP nor the Council object within three months of adoption by the EC the acts will come into effect.

Once the consultation regarding RTS has ended, ESMA submits their draft RTS to the EC with the latter having three months to decide whether or not to endorse it (vis-à-vis the EP and the Council). If the EC does not endorse the RTS, it will send them back to ESMA which will be given six weeks to amend the draft RTS and resend their opinion. If ESMA fails to reply within six weeks (to the satisfaction of the EC), the EC can reject the RTS. Once the EC has passed the RTS, the EP and the Council, in turn, have three months to adopt them.

ESMA is obliged to then submit draft implementing technical standards (ITS) to the EC. The approval procedure is identical to the one applicable in connection with the RTS.

The EC has to publish final delegated acts which will then have to be transposed into national law by the Member States. They will enter into force simultaneously with MiFID II/MiFIR becoming applicable across Europe.

Level 3 and 4 legislation

Simultaneously with the steps that constitute Level 2, national supervisory authorities, European authorities like ESMA, the European Banking Authority (EBA) and European Insurance and Occupational Pensions Authority (EIOPA) prepare joint interpretation recommendations and guidelines.

This process (Level 3) will have to be finished before the EC can finalise its advice. The EC has to make sure Member States comply with MiFID II/MiFIR and may sanction compliance failure accordingly. In doing so, the EC will collaborate with Level 3 stakeholders as well as the private sector.