The Commission is proposing to amend MiFID to take into account the new types of trading facilities, technological advances and methods of execution that exist in the post-MiFID world, but which are not currently regulated under MiFID.

Organised trading facilities. The Commission is looking to regulate organised trading facilities such as broker crossing systems and inter-dealer broker systems that bring together third-party interests and orders. This proposal is intended to capture operators of "dark pools" (for example, trading systems where there is no pre-trade transparency of orders in the system), which have attracted much regulatory interest. The proposals would exclude systems already regulated as regulated markets (RMs), multilateral trading facilities (MTFs) or systematic internalisers (SIs), and pure ad hoc over-the-counter (OTC) trading.

Automated trading. The Commission is taking a more interventionist approach than CESR to automated trading in response to perceived risks to the EU markets posed by automated and high frequency trading (HFT), and is proposing that MiFID be amended to provide a broad definition of automated trading (for background, see News brief “High frequency trading: the road to regulation”). HFT would be treated as a sub-category of this definition, and all persons involved in HFT over certain thresholds would be required to be authorised under MiFID.

MTFs and RMs. In keeping with the technical advice, and in response to concerns that MTFs are in some cases subject to a lighter regime than RMs (though competing in the same space), leading to an unlevel playing field, the Commission is proposing to align the organisational requirements in this situation.

Systematic internalisers. The Commission is proposing to amend MiFID to provide more objective criteria for determining when a firm is an SI and imposing more quote requirements (an SI is an investment firm which, on an organised, frequent and systematic basis, deals on own account by executing client orders outside a regulated market or an MTF). This is in response to concerns that the low number of firms registered as SIs is due to a lack of clarity in the definition.

The consultation and proposed amendments to MiFID form part of the wider package of reforms of EU financial services and, in relation to OTC derivatives, should be read alongside the Commission's proposals for a regulation on OTC derivatives, central counterparties and trade repositories and for a regulation on short selling and certain credit default swaps.

The Commission, in keeping with US requirements in the Dodd-Frank Wall Street Reform and Consumer Protection Act, is proposing a mandatory requirement for all clearing-eligible and sufficiently liquid derivatives contracts (as determined by the European Securities and Markets Authority), to be traded on an RM, an MTF or an organised trading facility.

The consultation also includes proposals for the extension of the MiFID pre- and post-trade transparency regime to all derivatives contracts when traded on an organised trading venue and also when traded OTC.

Following on from a considerable body of work by CESR assessing pre- and post-trade transparency in equity and non-equity markets, the Commission's proposals include the following:

The proposed revisions relating to the functioning of the commodity derivatives markets include imposing a position reporting obligation on organised trading venues which admit commodity derivatives, and narrowing the commodity derivatives exemptions in MiFID available to commercial users.

The Commission’s proposals include extending the transaction reporting (TR) regime to all instruments admitted to, and whose value correlates with the value of a financial instrument traded on, an RM, an MTF or an organised trading facility, as well as to commodity derivatives that are not admitted to trading or traded on an RM, an MTF or an organised trading facility. This is to bring the TR regime more in line with the scope of the Market Abuse Directive (2003/6/EC), since market supervision is the main purpose of the TR regime.

The Commission also proposes introducing provisions to enable regulated markets and MTFs to create specialised SME markets.

In light of the financial crisis and a number of alleged mis-selling cases, the Commission believes that a revision of provisions relating to the scope of MiFID, the conduct of business rules and the authorisation and organisational provisions is necessary.

The Commission is proposing:

Controversially, the Commission is reversing the position that CESR took in relation to some client categorisation issues, including proposing:

The consultation closes on 2 February 2011, which does not give firms much time to respond. The Commission proposes to publish legislative proposals for adoption in spring 2011.