NETHERLANDS: AFM – Impact analysis MiFID II

Thursday May 21 2020

On 19^th May 2020, the Authority for the Financial Markets (AFM) issued recommendations for MiFID 2 revisions, in anticipation of EU changes. In anticipation of potential changes to the MiFID II regulation, the AFM has carried out a study that includes policy recommendations for the areas of equity, commodities and investor protection. These recommendations are available here. They concern changes to the regulatory framework of MiFID II (level 1 or level 2), suggestions for further ESMA guidance on level 3 and increased European convergence in supervision.

Central underlying themes for equity are whether transparency has increased sufficiently, what the impact is on liquidity and how the market structure has changed, as a consequence of MiFID II.

For commodities, the AFM investigated the impact of the introduction of position limits, position management controls and pre-trade transparency requirements for trading venues that trade in commodity derivatives in the Netherlands.

Additionally, the AFM found that the MiFID II regime has enhanced retail and professional investor protection throughout the European Union (EU).

Proposed amendments at level-1 and level-2

Position Limit regime:

Level 1 – The scope of the position limit regime should be amended and the focus should be only on physically settled benchmark contacts. Therefore the AFM suggests to replace “each contract” with “physically settled liquid contract”.

Level 2 – The position limit regime has proven to be hindering the development of new products and further growth of existing less liquid commodity derivatives. Therefore the AFM suggests that new contracts and illiquid contracts should be out of scope of the position limit regime.

Position Management regime

Level 1 – The AFM supports to add measures for trading venues to aggregate positions under common ownership. This will increase the effectiveness of the position management regime.

Pre-trade transparency regime commodity derivatives

Level 2 – The AFM suggests that the pre-trade transparency regime needs a more calibrated approach to transparency. Meaning that the sub-asset classes need to be more granular and the threshold methodology better aligned with the underlying commodity market and therefore should have different levels of ADNA and ADNT to determine if it is a liquid market.

Costs and charges

Level 2 –

• Article 50(9) The AFM suggests a clarification should be added that, as firms are required to provide the actual costs incurred by the client in the ex-post costs disclosures, they should monitor the client’s portfolio in a manner that allows to get as accurate as possible to the actual costs. As such, the day-to-day monitoring of client’s portfolios should be the minimum standard if firms are to be compliant with their costs and charges requirements.
• Article 50(1) The AFM supports the proposal by ESMA that eligible counterparties and professional clients should be allowed to opt-out completely of the ex-ante costs disclosure requirements in the provision of execution-only services.
• Article 50(10) The AFM believes that the illustration only serves its purpose if it shows the effect costs have on the return over multiple years. Therefore, detailed requirements should be included in level 2 which prescribe that firms should use the recommended holding period of the portfolio or the product and should illustrate an expected return for the exante disclosure. For the ex-post disclosure firms should be allowed to use the actual returns. While the discussion on further clarification on the elements of the illustration is ongoing, the AFM trusts that the long term effect of costs on accumulating returns is better presented when additional illustration is provided.

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