On 21 December 2016, the Federal Cabinet (Bundeskabinett) adopted the government draft of the German Second Financial Markets Amendment Act (Zweites Finanzmarktnovellierungsgesetz). This law transposes in particular the Markets in Financial Instruments Directive II (MiFID II)¹ into national law.

Legislators had transposed its predecessor, MiFID I², into national law almost ten years ago. As the basic legal framework for trading in financial instruments, MiFID II provides for significantly tighter regulation than MiFID I, particularly in view of the large number of clarifying implementing acts. MiFID II was the European legislators' response to the financial crisis, as well as to technology-driven changes in the market infrastructure and an increased need for comprehensive investor protection.

The Second Financial Markets Amendment Act contains extensive amendments in particular to the Securities Trading Act, as well as to other regulatory frameworks, such as the German Stock Exchange Act (Börsengesetz) and the German Banking Act (Kreditwesengesetz).

The trading venues under supervision now also include organised trading facilities (OTFs) in order to close gaps in the supervision of trading platforms. Another new requirement is that data reporting services providers will have to be authorised and supervised on an ongoing basis in order to guarantee reliable, transparent and cost-effective access to important market data for financial market participants.

Securities trading regulation

The Second Financial Markets Amendment Act also includes rules on monitoring trading in commodity derivatives. To this end, the Securities Trading Act will include a dedicated section on position reporting and the control of the corresponding positions of the trading participants. In addition to transparency requirements, it will also have rules on position limits for commodity derivatives.

The obligation to provide pre- and post-trade transparency will in future cover a large number of additional financial instruments. In the past, this had only related to shares and certificates representing shares. Exemptions from the pre-trade transparency requirements have been defined more narrowly and will be handled more consistently. In addition, with the introduction of MiFID II, the form and contents of reports provided by investment firms to the supervisory authorities on transactions entered into will be adjusted and harmonised further throughout Europe.

Share and derivatives trading is subject to the additional fundamental obligation to trade on organised trading venues (with defined exceptions) in order to increase transparency. Moreover, new legal requirements are intended to help improve competition among trading venues and central counterparties. In regulating high-frequency trading, German legislators have proactively already laid down some requirements of MiFID II in national law. Further technical details are contained in the defining rules issued by the European Commission.

Conduct of business rules

There will also be changes to the conduct of business rules and organisational requirements of the Securities Trading Act, which are intended to enhance investor protection: for the first time, MiFID II sets out EU-wide harmonised rules for independent investment advice. In the past, legislators had regulated this as fee-based investment advice at the national level. Institutions providing this service may generally not accept any commissions. In exceptional cases, commissions may be accepted if they are passed on to customers. What is more, the advice in this context must be based on a sufficiently broad range of products that is not limited to just a few financial instruments. At the same time, the Second Financial Markets Amendment Act will further differentiate the requirements for commission-based advice and the obligations of investment services enterprises to provide information.

Product governance

The second far-reaching amendment is the introduction of product governance requirements³. The processes to be set up to this end will apply even before the issuers provide any investment services, i.e. at the time the financial instrument is produced. The intention is to give BaFin the ability to consistently monitor the entire product lifecycle of a financial instrument. The future requirement to determine the target market for a financial instrument is intended to ensure that investors are offered financial products that match their needs. The rules on product intervention contained in MiFID II were implemented in Germany when the Retail Investor Protection Act (Kleinanlegerschutzgesetz) came into effect in 2015.

Moreover, legislators have significantly increased the range of sanctions available for infringements of supervisory law.⁴

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