EUROPEAN PARLIAMENT
2004
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2009
Session document
20.3.2006
B6-0000/2006
MOTION FOR A RESOLUTION
pursuant to Rule 81 of the Rules of Procedure
by the Committee on Economic and Monetary Affairs
on the draft Commission regulation implementing Directive 2004/39/EC of the
European Parliament and of the Council as regards record-keeping obligations
for investment firms, transaction reporting, market transparency, admission of
financial instruments to trading, and defined terms for the purposes of that
Directive
on the draft Commission directive implementing Directive 2004/39/EC of the
European Parliament and of the Council as regards organisational requirements
and operating conditions for investment firms, and defined terms for the
purposes of that Directive
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B6-0000/2006
on the draft Commission regulation implementing Directive 2004/39/EC of the
European Parliament and of the Council as regards record-keeping obligations for
investment firms, transaction reporting, market transparency, admission of financial
instruments to trading, and defined terms for the purposes of that Directive
and
on the draft Commission directive implementing Directive 2004/39/EC of the European
Parliament and of the Council as regards organisational requirements and operating
conditions for investment firms, and defined terms for the purposes of that Directive
The European Parliament,
– having regard to European Parliament and Council Directive 2004/39/EC on markets in
financial instruments,
– having regard to the statement made by Commission President Prodi on 5 February 2002,
– having regard to its resolution of 5 February 2002 on the implementation of financial
services legislation1,
– having regard to the Commission's draft implementing measures,
– having regard to Rule 81 of its Rules of Procedure,
1.
Asks the Commission to take into account the following observations on the draft
implementing regulation:
i) Exclusion of some secondary market transactions from transaction and trade reporting
obligations
Regarding delays in publishing large transactions, an amendment of Article 5(c) is
important to reduce market impact. The Article rightly excludes from transaction and
trade reporting obligations primary market transactions such as issuance, allotment, and
subscription. Some very large block transactions are similar in character to primary
market transactions, the main difference being that they are carried out in the secondary
market rather than the primary market.
Article 5(c) should therefore be widened to include secondary market significant
distributions and related transactions. The existing EU definition (in Commission
Regulation 2273/2003, Art 2.9, MAD implementing measures) clearly distinguishes
significant distributions from ordinary trading activity. Only a few hundred transactions
each year in EU capital markets would fall under it. Recognising that the ordinary trade
reporting rules are not appropriate for transactions related to such distributions would not
compromise the price formation process in EU secondary equity markets, but would
facilitate the unwinding of inefficient cross-holdings and increase the volume of tradable
1
Adopted texts P5_TA(2002)0035
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securities on EU public markets.
ii) Client identifiers as part of the transaction report
Article 25 in Directive provides rules among others on record keeping Article 25(2) and
transaction reporting Article 25(3) to competent authorities. Article 12(4) of the draft
regulation would allow Member States to require investment firms to include the identity
of their client in the transaction report. This is not standard practice throughout the EU
and it would impose significant additional costs. Furthermore, the 2004/39/EC Directive
only requires firms to keep the data on their clients and transactions, but it does not
require them to report this data together with transaction reports. A standstill clause, to
the effect that Member States where it is not currently enforced could not adopt it, would
be a compromise. Either way, other EU provisions (e.g. MAD) would still permit
regulators to request this information if they justified the demand appropriately (e.g.
suspicious activity).
iii) Use of SI-personnel for non-SI business
It is not realistic to expect personnel to be devoted exclusively to systematic internaliser
activities and firms shouldn't be prevented from using the same personnel for systematic
internaliser and non- systematic internaliser business as per Article 20(3)b. An
amendment here would be in line with Recital 53 of the 2004/39/EC Directive and
Article 20.1(b) of the draft regulation which rightly acknowledges that the firm may use
the same personnel and technical system for both systematic internaliser and nonsystematic internaliser activity.
iv) Post-trade publication of portfolio trade data
Appropriate treatment of portfolio trades should be provided for in Article 28(3) to avoid
disrupting firms’ ability to service portfolio clients’ needs. As a portfolio trade is a single
trade, consisting of many shares, regard should be had to the total size of the portfolio
trade, not to the size of each component. It would be unreasonable not to set any limits to
the delay in their reporting at all.
It is therefore necessary to provide for a deferral of trade reporting which gives due
recognition to the risks to which firms expose themselves, by referring to the categories
of constituent elements and to the delays allowed in Table 4 Annex II.
v) Availability of pre-and post-trade data
The venues available for post-trade reporting are a fundamental element of the MiFID
regime and are based on the principle of regulated markets being designated as one of a
range of possibilities for such disclosure. Article 29(a) of the Level 2 text endangers the
correct application of the Level 1 text by seeming to exclude regulated markets other than
the ones which have admitted the instrument to trading from the categories of venues
available for reporting.
vi) Delays in publishing large transactions
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In addition, it may be necessary to amend table 4 of Annex II to allow more time for
firms that provide liquidity for very large trades to reduce their risk positions before
having to report the trade to the market. However, as discussions between market players,
Member States and regulators are still very much ongoing on this point, it is prudent to
return to this with possible amendments at a later stage.
2.
Asks the Commission to take into account the following observations on the draft
implementing directive:
i) Best execution on an order-by-order basis
Recital 56 of the draft directive requires the application of best execution policy on an
order-by-order basis. This could contradict the necessity of having a global best execution
policy.
ii) Best execution applies only when firm actually executes orders
Recital 58 should be amended to bring it into line with Article 21 of Directive
2004/39/EC provisions that best execution should apply only when executing orders. The
Commission phrasing overly collates the concepts of "dealing on own account" and
"execution of client orders".
iii) Best execution specificities applicable to asset managers
Recital 63 should be brought into line with best execution obligations for portfolio
managers. These obligations arise out of the portfolio manager’s duty to act in the best
interests of its clients under Article 19(1) of MiFID rather than a duty of best execution
under Article 21 and this should be specified.
iv) Misuse of client information
The second sentence of Recital 66 provides that any use of information relating to a
pending order should be considered a misuse for the purposes of order handling
provisions. This language is too categorical, and in particular would prevent uses of
information which are specifically permitted under MAD and MiFID for example in the
order-handling provisions in the implementing Directive. A clarification is necessary.
v) Service providers located in third countries
The draft directive imposes restrictions on firms outsourcing portfolio management to
service providers located in third countries. Under Article 15, they may do so only if the
provider is authorised and subject to prudential supervision and only if there are
appropriate cooperation agreements between the competent authorities concerned. When
these conditions are not met investment firms are required to give the responsible
competent authority prior notification of any arrangement for the outsourcing and the
authority can object to it “within a reasonable time”. In the event of an objection, it
should have to provide a written reasoned justification to the firm in question.
vi) Inducements
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The wording of Article 26 would prohibit a wide range of payments (payment by an
executing broker of fees to exchanges, information vendors or other providers of services
it requires to do its business) which do not involve a conflict with the best interests of
clients. Furthermore, it is very difficult in practice to ascertain that such a fee "enhances
the quality of the relevant service".
vii) Professional/retail clients' information requests
The boundary between professional/retail clients has to be kept clear.
viii) Inclusion of derivatives in non-complex products
Article 19(6) of the Directive 2004/39/EC allows member states to authorise investment
firms to provide services on an execution only basis although the article limits execution
only services to non-complex products. The Commission's definition excludes derivatives
as such. In many countries retail clients trade heavily in warrants and certificates, mostly
on an execution only basis through Internet venues or through call centers. These
products are defined as derivatives but from a risk perspective you can compare these
products more to shares. Warrants fulfill also the other requirements in the Commission’s
draft definition article 39 (b – d) for non-complex products. Additionally the definition by
the Commission leaves out subscription rights and redemption rights, which also are
generally traded through execution only venues, with no complaints as to a lack of
understanding of the products' nature. A sentence needs to be added providing for the
application of the conditions in subparagraphs (b) to (d) to apply to some derivatives as
well.
ix) Best execution
In Article 44 on best execution criteria, the phrase "acting in its capacity as such" is
somewhat redundant, and covered by the definition of a systematic internaliser in the
draft regulation.
x) Best execution for portfolio managers
The best execution obligations of a portfolio manager differ from those of a broker. The
different nature of portfolio management functions is now acknowledged by the
Commission in Recital 63 of the implementing Directive but the wording of Article 45 of
the Directive fails to make this distinction clear and therefore should be improved.
Furthermore, Article 45 acts to extend the scope of the Directive 204/39/EC (Art. 21) best
execution provision to portfolio managers when transmitting orders to another investment
firm for execution, despite the fact that Art. 21 of the Directive 204/39/EC covers only
execution of orders.
This is not to dispute the fact that portfolio managers have obligations under these
circumstances, but these obligations should be consistent with the provisions of Recital
63 of the Directive, and these obligations arise out of the portfolio manager’s duty to act
in the best interests of its clients under Article 19(1) of Directive 204/39/EC rather than a
duty of best execution under Article 21. Thus, a portfolio manager’s obligation should
rather be seen as the oversight of best execution, on the basis of Article 19 (1).
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3. Proposes the following modifications to the draft proposal for a regulation:
Text proposed by the Commission
Modifications by Parliament
Modification 1
Article 5, point (c)
(c) primary market transactions (such as
issuance, allotment or subscription) in
financial instruments falling within Article
4 (1) (18) (a) and (b) of Directive
2004/39/EC.
(c) transactions (such as
issuance, underwriting, allotment or
subscription) relating to a significant
distribution of financial instruments falling
within Article 4 (1) (18) (a) and (b) of
Directive 2004/39/EC; for the purposes of
this sub-paragraph, initial or secondary
offers of financial instruments should be
considered significant distributions if they
are publicly announced and distinct from
ordinary trading both in terms of the
amount in value of the securities offered
and the selling methods employed.
Modification 2
Article 12, paragraph 4
4. Member States may also require a report
of a transaction made in accordance with
Article 25(3) and (5) of Directive
2004/39/EC to identify the clients on
whose behalf the investment firm has
executed the transaction.
4. Where national provisions on
transaction reporting require it as of the
date of entry into force of this Directive,
Member States may also require a report of
a transaction made in accordance with
Article 25(3) and (5) of Directive
2004/39/EC to identify the clients on
whose behalf the investment firm has
executed the transaction.
Modification 3
Article 20, paragraph 3, point (b)
(b) The transaction are carried out
otherwise than by personnel or outside the
systems habitually used by the firm
concerned for any business that it carries
out in the capacity of a systematic
internaliser.
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(b) The transaction are carried out outside
the element of the systems usually used by
the firm concerned for any business that it
carries out in the capacity of a systematic
internaliser.
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Modification 4
Article 28, paragraph 3
3. Information relation to a portfolio trade
shall be made available with respect to
each constituent transaction as close to real
time as possible, having regard to the need
to allocate prices to particular shares.
3. Information relation to a portfolio trade
shall be made available with respect to
each constituent transaction as close to real
time as possible, having regard to the need
to allocate prices to particular shares.
Publication of information relating to a
portfolio trade may be deferred if any
constituent of that transaction permits a
delay in accordance with Table 4 in the
Annex, in which case the delay shall
apply in relation to all the executions
which are part of a the portfolio trade.
Modification 5
Article 29, point (a)
(a) the facilities of a regulated market
which has admitted the share to trading or
an MTF where the share is traded;
(a) the facilities of a regulated market or an
MTF;
4. Proposes the following modifications to the draft proposal for a directive:
Modification 6
Recital 56
(56) When establishing its execution policy
in accordance with Article 21(2) of
Directive 2004/39/EC, an investment firm
should determine the relative importance of
the factors mentioned in Article 21(1) of
that Directive, or at least establish the
process by which it determines the relative
importance of these factors, so that it can
deliver the best possible result to its clients.
In order to give effect to that policy, an
investment firm should select the execution
venues that enable it to obtain on a
consistent basis the best possible result for
the execution of client orders. An
investment firm should apply that policy
with a view of obtaining the best possible
result on an order by order basis. For
retail clients, this means obtaining the best
possible result in terms of the total
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(56) When establishing its execution policy
in accordance with Article 21(2) of
Directive 2004/39/EC, an investment firm
should determine the relative importance of
the factors mentioned in Article 21(1) of
that Directive, or at least establish the
process by which it determines the relative
importance of these factors, so that it can
deliver the best possible result to its clients.
In order to give effect to that policy, an
investment firm should select the execution
venues that enable it to obtain on a
consistent basis the best possible result for
the execution of client orders. An
investment firm should apply that policy
with a view of obtaining the best possible.
For retail clients, this means obtaining the
best possible result in terms of the total
consideration, representing the price of the
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consideration, representing the price of the
financial instrument and the costs related to
execution.”
financial instrument and the costs related to
execution.”
Modification 7
Recital 58
(58) Dealing on own account with clients
by an investment firm may constitute the
execution of client orders, and therefore
subject to the requirements under Directive
2004/39/EC and this Directive and, in
particular those obligations in relation to
best execution as set out in Article 21 and
Recital 33.
(58) Dealing on own account with clients
by an investment firm should be
considered as the execution of client
orders, and therefore subject to the
requirements under Directive 2004/39/EC
and this Directive and, in particular those
obligations in relation to best execution.
Modification 8
Recital 63
(63) This Directive is not intended to
require a duplication of effort as to best
execution between an investment firm
which provides the service of reception and
transmission of order or portfolio
management and any investment firm to
which that investment firm transmits its
orders for execution. Accordingly, without
derogating from the obligation of the first
firm to its client to deliver best execution,
it is intended that the first firm should,
when transmitting orders to other entities
for execution, take all reasonable steps to
select entities that are most likely to deliver
the best possible result in the execution of
those orders. An investment firm which
transmits orders to another firm for
execution should also monitor the
execution quality delivered by the other
firm and take the necessary steps to correct
any deficiencies when they arise. Subject
to the proper fulfilment of these duties, the
first firm should be entitled to rely on the
ability of the second firm to deliver best
execution.
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(63) This Directive is not intended to
require a duplication of effort as to best
execution between an investment firm
which provides the service of reception and
transmission of order or portfolio
management and any investment firm to
which that investment firm transmits its
orders for execution. Accordingly, without
derogating from the obligation of the first
firm to act in accordance with the best
interests of its clients pursuant to Art.
19(1) of Directive 2004/39/EC, it is
intended that the first firm should, when
transmitting orders to other entities for
execution, take all reasonable steps to
select entities that are most likely to deliver
the best possible result in the execution of
those orders. An investment firm which
transmits orders to another firm for
execution should also monitor the
execution quality delivered by the other
firm and take the necessary steps when
they arise. Subject to the proper fulfilment
of these duties, the first firm should be
entitled to rely on the ability of the second
firm to deliver best execution.
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Modification 9
Recital 66
(66) For the purposes of the provisions of
this Directive concerning client order
handling, client orders should not be
treated as otherwise comparable if they are
received by different media and it would
not be practicable to be treated
sequentially. For the further purposes of
those provisions, any use by an investment
firm of information relating to a pending
client order in order to deal on own
account in the financial instruments to
which the client order relates, or in related
financial instruments, should be considered
a misuse of that information.
(66) For the purposes of the provisions of
this Directive concerning client order
handling, client orders should not be
treated as otherwise comparable if they are
received by different media and it would
not be practicable to be treated
sequentially. For the further purposes of
those provisions, any use by an investment
firm of information relating to a pending
client order in order to deal on own
account in the financial instruments to
which the client order relates, or in related
financial instruments, except as expressly
permitted under Directive 2004/39/EC or
Directive 2003/6/EC, may be considered a
misuse of that information.
Modification 10
Article 15, paragraph 2 a (new)
In the event that the competent authority
objects to such an arrangement, it shall be
required to provide the firm with a
reasoned justification in writing
supporting its objection.
Modification 11
Article 26, paragraph 1
Member States shall ensure that investment
firms are not regarded as acting honestly,
fairly and professionally in accordance
with the best interests of a client if, in
relation to the provision of an investment
or ancillary service to the client, they pay
or are paid any fee or commission, or
provide or are provided with any nonmonetary benefit other than the following:
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Member States shall ensure that investment
firms are not regarded as acting honestly,
fairly and professionally in accordance
with the best interests of a client if, in
relation to the provision of an investment
or ancillary service to the client, they pay
or are paid any fee or commission, or
provide or are provided with any nonmonetary benefit the receipt of which is
likely materially to conflict with a duty of
the recipient (or his employer) to the
client other than the following:
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Modification 12
Article 26, paragraph 1, point (a)
(a) a fee, commission or non-monetary
benefit paid or provided to or by the client
or a person acting on behalf of the client;
deleted
Modification 13
Article 29, paragraph 8
8. If a professional client requests it, an
investment firm shall provide that client
with any type of information which the
firm is required under the Directive or
this Regulation to provide to a retail
client.
deleted
Modification 14
Article 39, paragraph (a)
(a) it does not fall within Article
4(1)(18)(c) or points (4) to (10) of Section
C of Annex I to Directive 2004/39/EC;
(a) it does not fall within Article
4(1)(18)(c) or points (4) to (10) of Section
C of Annex I to Directive 2004/39/EC,
except for derivatives which are admitted
to trading on a regulated market
and which fulfil the conditions outlined in
subparagraphs (b) to (d) below;
Modification 15
Article 44, paragraph 1, subparagraph 2
For the purposes of this Article and Article
46, ‘execution venue’ means a regulated
market, a MTF, a systematic internaliser
acting in its capacity as such, or a market
maker or other liquidity provider.
For the purposes of this Article and Article
46, ‘execution venue’ means a regulated
market, a MTF, a systematic internaliser,
or a market maker or other liquidity
provider.
Modification 16
Article 45, title
Best execution: application to portfolio
management and reception and
transmission of orders
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Oversight of best execution for portfolio
management and reception and
transmission of orders
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Modification 17
Article 45, paragraph 1
1. Member States shall require investment
firms, when providing the service of
portfolio management, to comply with
obligations analogous to those imposed
under Articles 21 and 22(1) of Directive
2004/39/EC when carrying out
transactions that result from decisions to
deal, as if references in those Articles to
executing orders were references to
carrying out transactions that result from
decisions by the investment firm to deal in
financial instruments on behalf of its
client.
1. Member States shall require investment
firms, when providing the service of
portfolio management, to comply with the
obligations imposed under Article 19 (1) of
Directive 2004/39/CE, which requires
investment firms to act in accordance with
the best interests of their clients, in any
case and namely when transmitting their
clients’ orders to another investment firm
for execution.
Modification 18
Article 45, paragraph 2
2. Member States shall require investment
firms, when providing the service of
reception and transmission of orders, to
comply with obligations analogous to
those imposed under Articles 21 and 22(1)
of Directive 2004/39/EC when receiving
and transmitting client orders, as if
references in those Articles to executing
orders shall be treated as references to
transmitting orders to another entity for
execution.
2. Member States shall require investment
firms, when providing the service of
reception and transmission of orders, to
comply with the obligations imposed under
Article 19 (1) of Directive 2004/39/CE,
which requires investment firms to act in
accordance with the best interests of their
clients, in any case and namely when
receiving and transmitting their clients’
orders to another investment firm for
execution.
Modification 19
Article 45, paragraph 2 a (new)
2a. For the purposes of paragraphs (1)
and (2) an investment firm which
transmits orders to another entity for
execution should take all reasonable steps
to select entities that are most likely to
deliver the best possible result in the
execution of those orders, monitor the
execution quality delivered by the other
entity and correct any deficiencies in its
own execution policy when they arise.
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5. Instructs its President to forward this resolution to the Council and Commission.
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