5.III.1.4.1 Level 1 text: introduction of quantitative elements

MiFID II adds quantitative elements to the definition of an SI on Level 1 (and Level 2). With MiFID I the EU ultimately decided not to include quantitative elements, among other things, given the complexity involved in assesing whether or not an investment firm would qualify as a SI (see chapter 4 above). After MiFID I entered into force only a limited amount of investment firms qualified as an SI. CESR made no judgement as to the low number of SIs during the MiFID I review.1 However, CESR did question the clarity of the SI-definition, given its qualitative nature. The qualitative nature left room for regulatory arbitrage.2 As a solution, CESR recommended the Commission to retain the MiFID I criterion ‘according to non-discretionary rules and procedures’ in the SI definition, but also to clarify it. In addition, CESR suggested the Commission to consider whether quantitative thresholds needed to be established to determine whether the activity of internalisation had a ‘material commercial relevance for the market’.3

The Commission followed the position of CESR. The Commission considered and ultimately added quantitative thresholds to the MiFID II proposal. The Commission added the quantitative criteria to ensure the objective and effective application of the SI regime.4 The Commission added that the qualitative criteria of the MiFID I Implementing Regulation (including ‘non-discretionary rules and procedures’) needed to be maintained in the SI-definition.5 The European Parliament accepted the Commission’s MiFID II Proposal.6 Within the Council, most Member States also supported a more detailed SI definition in order to minimize regulatory arbitrage risks.7 A main change compared to the proposal of the Commission and European Parliament, was that the Council’s proposals no longer covered any reference to the qualitative criteria of the MiFID I Implementing Regulation. Hence, the Council made no (implicit) reference to ‘non-discretionary rules and procedures’ for the SI-definition.8 The position of the Council reflected the aim of removing any discussion on the terms ‘non-discretionary’ in the context of SIs (as was the case under MiFID I). The Council instead emphasized a quantitative SI-definition.9 The proposal of the Council is evident in the final MiFID II text. MiFID II adds several quantitative elements to the SI-definition. Neither MiFID II, nor MiFIR, make explicit that the SI-definition needs to include the qualititative criteria of the MiFID I Implementing Regulation (including ‘non-discretionary rules and procedures)’. The rationale of the quantative MiFID II approach for SIs is to enhance the amount of legal certainty and to minimise regulatory arbitrage apparent under MiFID I.