European Commission proposes MiFID II unbundling rollback

Research on bonds and certain stocks would be exempt from trading rules under new proposals from the European Commission, as part of a COVID-19 recovery package.

The changes would apply to unbundling rules under the Markets in Financial Instruments Directive II, the commission said in a news release and set of related documents published Friday.

MiFID II, which went into effect in January 2018, aims to promote investor protection, best execution and transparency in European trading markets. One of the rules saw the unbundling of payments for trade execution and investment research.

“The proposed changes to MiFID II will contribute to Europe's recovery by facilitating investments in the real economy and freeing up resources for both firms and investors,” the commission said.

Rules governing the provision of research on small- and midcap firms and fixed-income instruments will be “partially revisited,” it said. “The exceptional circumstances resulting from the coronavirus pandemic have instilled a sense of urgency into the debate on investment analysts’ research.”

Increasing access to research on small and midsize European companies — defined as those with a market capitalization of under €1 billion ($1.1 billion) — “will promote more investment for the economic recovery,” the commission said.

The commission is also proposing the introduction of new rules under MiFID II to ensure information provided to clients — particularly financial institutions — is more targeted to their needs. There would also be a shift for investment firms to provide electronic information disclosures to clients from the current paper-based standard.

The commission added that the proposed changes “need to enter into force as soon as possible and cannot wait for the more in-depth MiFID review,” which is scheduled for next year.

Amendments would need to be transposed into national laws before they became applicable. The proposals now move to the European Parliament and European Council for agreement and adoption.

Commission documents acknowledged that the rules had already been “identified as being overly burdensome or hindering the development of European markets” in a recent MiFID II consultation.

Trade associations and market participants had highlighted a decline in research coverage for small- and midcap firms and in fixed-income instruments.

Should the proposal to allow joint payments for execution and research be implemented, money managers would have to enter into an agreement with their research providers and must also inform clients of the change.

The proposals form part of the commission’s “capital markets recovery package.” Other proposals include the introduction of an “EU recovery prospectus,” aimed to facilitate the raising of capital in public markets; and improvements to securitization rules to support lending to small and medium businesses.