How does revised MiFIR address PFOF?
On 8 March 2024, amendments to the Markets in Financial Instruments Regulation (MiFIR) were published in the Official Journal of the EU and will enter into force on 28 March 2024 (20 days after publication) and become directly applicable in all Member States. The published text is available here.
The amendments include the newly introduced Article 39a that prohibits investment firms from acting on behalf of retail clients and “opt-in” professional clients from receiving any payment for or benefit from executing client orders on a particular execution venue or forwarding client orders to a third party for execution on a particular execution venue, known as payment for order flow or PFOF. Financial intermediaries should select the trading venue or counterparty solely on the basis of achieving best execution for their clients and collecting a payment for ensuring the execution of client transactions on a particular execution venue seems incompatible with the principle of best execution.
Who falls within the scope of the PFOF provision?
Addressees of the prohibition are investment firms acting on behalf of clients:
Clients to whom the investment service is provided are not only retail clients within the meaning of Article 4 (1) (11) of the Markets in Financial Instruments Directive (MiFID II) (Directive 2014/65/EU), but also clients that have validly waived the level of protection applicable to retail clients and may thus be treated as professional clients in accordance with Section II of Annex II of MiFID II (referred to as “opt-in” professional clients). Third parties granting the payment are not in scope.
What kind of payments are covered by the PFOF prohibition?
The term “payment” comprises fees, commissions, or non-monetary benefits and corresponds to the inducement definition pursuant to Article 24 (9) MiFID II. It covers not only direct (re)payments, but also a waiver of fees and other benefits, such as better conditions for the execution of transactions. The payments must be provided for executing orders on a particular execution venue or for forwarding orders to any third party for the execution on a particular execution venue. Payments provided by third parties which are not in connection with the execution or forwarding are not in scope of the PFOF prohibition but the inducement regime under MiFID II will still apply to these payments. It is further questionable whether payments which are not linked to the execution on a "particular execution venue” are in scope of the PFOF prohibition. For example, in the case of a trade subsidy provided by the product manufacturer to the broker that exclusively benefits the client and there remains a choice for the client to select among several execution venues by giving an instruction on the execution.
What are the exemptions from the PFOF prohibition?
There is an exemption from the prohibition in subparagraph 2 of Article 39a (1) which stipulates that rebates or transaction fees (where permitted under the approved and public tariff structure of a trading venue in the Union or of a third-country trading venue) are permissible if they exclusively benefit the client.
What grandfathering rules are provided?
Until 30 June 2026, Member States may exempt investment firms under their jurisdiction from the prohibition where those investment firms:
Investment firms operating in multiple jurisdictions will then only be able to receive payments in connection with transactions of clients domiciled or established in a Member State that have made use of the grandfathering rule.
The German legislator intends to make use of the grandfathering and therefore published a draft bill for a new financial markets digitalisation act (Finanzmarktdigitalisierungsgesetz - FinmadiG) that amongst other things foresees that investment firms in Germany may continue to receive payments from third parties when providing investment services to clients in Germany until 30 June 2026.
What’s next?
It is yet uncertain how other Member States will react and whether they will use the grandfathering rule and what the consequences for cross-border-payments will be. It is quite likely that a number of Member States will follow the German example. However, some Member States have already indicated that they will not make use of any grandfathering and apply the prohibition of PFOF immediately. We are closely following developments in relation to PFOF and the revised MiFIR and MiFID requirements, please get in touch if you would like to discuss this further.
Authored by Jochen Seitz, Isobel Wright, and Anna Hersener.
