Michel Barnier, the European Union’s (EU) internal markets commissioner, said: “The crisis serves as a grim reminder of how complex and opaque some financial activities and products have become” and asserted that the joint directive and regulation would “end the reign of the OTC transactions”.

Thanks to widespread leaking of early drafts, the contents were not a complete surprise, but still Mifid has come a long way since it was launched in November 2007. The new version includes a directive and a regulation (the Markets in Financial Instruments Regulation or Mifir), the latter being necessary, the EC said “to minimise, where appropriate, discretions available to Member States across EU financial services directives”.

The regulation provides tough new rules for the derivatives markets. Transparency rules have been extended to derivative instruments, so that a multilateral trading facility (MTF) or organised trading facility (OTF), a new hold-all category that is designed to capture currently unregulated markets (see page 24 for more), have to make the prices and the depth of trading interests on their markets public on a continuous basis during normal trading hours.

All transactions in financial instruments must be reported to competent authorities with the exception of: instruments not admitted to trading nor traded on an MTF or OTF; instruments whose value does not depend on an instrument traded on an MTF or OTF; or assets which have no impact on such instruments.

Mifir also deals with EC’s commitment to an agreement by the G20 countries made in September 2009 that standardised OTC derivatives should move to exchanges or electronic trading platforms where appropriate.

The regulation will require trading in suitable derivatives to occur only on eligible platforms, defined as regulated markets, MTFs or OTFs. This obligation will be imposed on both financial and non-financial counterparties exceeding the clearing threshold in the European Markets and Infrastructure Regulation (EMIR).

Defining the eligible derivatives will be the task of the European Commission and the European Securities and Markets Authority (Esma) who will be responsible for outlining technical standards.

Another significant step for the regulation in its expansion to the derivatives markets is the inclusion of fair access provisions for clearing firms and venues to provide services for derivatives. Where the original Mifid encouraged competition between equity markets, Mifir is pushing for a similar environment in derivatives. Articles 28 and 30 of the proposed rules removes commercial barriers that can be used to prevent competition in clearing, included mandating open access to cross-margining on the same or economically similar contracts.

“Barriers may arise from central counterparties not providing clearing services to certain trading venues, trading venues not providing data streams to potential new clearers or information about benchmarks or indices not being provided to clearers or trading venues” the document notes, and the proposed provisions will prohibit discriminatory practices and barriers to competition.

They will also increase the supervision of products and services by allowing competent authorities to set permanent bans on financial products or activities or practices with coordination by Esma, and for ESMA to also temporarily ban products, practices and services. Esma is also given specific powers to manage or limit positions for market participants in extreme circumstances.

Sell-side trade body the International Swaps and Derivatives Association, said it welcomed the review of Mifid but voiced concern that the EC’s stance on organised trading of OTC derivatives “goes well beyond the spirit of the September 2009 G20 commitment that OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate.” It added that restrictions on OTFs “will hurt end user choice and market liquidity”.

“These restrictions would, in essence, limit the types of trades that can be transacted on single dealer platforms and would adversely affect the ability of firms to effectively manage their risks,” it said.

Conrad Voldstad, ISDA chief executive, added, “If you want to protect end users’ ability to access these markets, then you need a suitable range of venues on which to trade; limiting what you class as an eligible trading platform for OTC derivatives is not a good move.”

The Association for Financial Markets in Europe (AFME) also expressed concern that imposing blanket transparency obligations across non-equity markets failed to consider the high levels of transparency that already exist and are likely to damage liquidity.

In a statement it also noted that, “The definition of Organised Trading Facility needs to be carefully considered so it does not unduly restrict various types of important market making and trading activities. If operators are prevented from using their own proprietary capital to undertake client business, it could negatively affect the service provided by AFME members to business users and individual investors in equity, fixed income and derivatives markets.”

The proposals now pass to the European Parliament and the Council of the European Union for negotiation and adoption. Once adopted the regulation, the directive, and the technical rules implementing these will apply together as of the same date.