MiFID II is legislation instituted by the European Union (EU) to regulate financial markets in the bloc and improve protections for investors. It standardizes practices across the EU and restores confidence in the financial industry, especially after the 2008 financial crisis
The original Markets In Financial Instruments Directive (MiFID) went into effect in 2007. It wasn’t long before the subsequent global financial crisis had exposed some weaknesses in its provisions. It focused too narrowly on stocks (ignoring fixed-income vehicles, derivatives, currencies, and other assets) and didn’t address dealings with firms or products outside the EU, leaving the rules about those to be decided by individual members.
Why? It’s About Transparency, Accountability and Oversight
MiFID II harmonizes the application of oversight among member nations and broadens the scope of the regulations. It imposes more reporting requirements and tests in order to increase transparency and reduce the use of dark pools (private financial exchanges that allow investors to trade without revealing their identities) and over-the-counter (OTC) trading.
Banks and brokerages can’t charge for research and transactions in a single bundle, forcing a clearer sense of the cost of each, and hopefully improving the quality of research available to investors. Brokers must provide more detailed reporting on their trades— 50 more pieces of data — including price and volume information. They also must store all communications, including any phone conversations. Electronic trading is encouraged because it’s easier to record and track.
Who? Virtually All Professionals, Traders and Firms
It covers virtually all aspects of financial investment and trading and virtually all financial professionals within the EU. Bankers, traders, fund managers, exchange officials, and brokers—and their firms—all must abide by its regulations as well as institutional and retail investors.
What? More Financial Instruments. More Processes.
Under the new MIFID II rules, the trading volume of a stock in a dark pool is limited to 8% over 12 months. It also targets high-frequency trading. Algorithms used for automated “flash” trading must be registered, tested, and incorporate circuit breakers.
MiFID II extends the scope of requirements to more financial instruments. It now encompasses equities, commodities, debt instruments, futures and options, exchange-traded funds, and currencies. If a product is available in an EU nation, it’s covered by MiFID II—even if a trader wishing to buy it is located outside the EU.
MiFID II places restrictions on inducements paid to investment firms or financial advisors by any third party in relation to services provided to clients.
At the end of the day, MiFID II is all about making the European financial world make more sense out of how it conducts its business, in addition to creating a transparently level trading playing field for both institutions and private investors.
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