Definition
MiFID II, short for Markets in Financial Instruments Directive II, is a legislative framework instituted by the European Union to regulate financial markets in the bloc and improve protections for investors. It aims to increase transparency in the industry and standardize the disclosure of trade details. Introduced in January 2018, it is a revision of the original MiFID, enacted in 2007.
Key Takeaways
- MiFID II is the Markets In Financial Instruments Directive, which is a legislative framework instituted by the European Union (EU) to regulate financial markets in the bloc – in order to increase transparency and provide greater protection for investors.
- The directive, effective from January 2018, impacts “investment intermediaries” that provide services to clients around the trading of shares, bonds, units in collective investment schemes, and derivatives.
- Key objectives of MiFID II include: promoting greater competition in previously closed markets like the derivative industry, enabling investors to see clear and effective pricing, ensuring non-discriminatory access to central counterparties (CCPs), and making certain that trading takes place on regulated platforms.
Importance
MiFID II, short for Markets in Financial Instruments Directive II, is crucial in the realm of finance because it’s a legislative framework instituted by the European Union to regulate financial markets and improve investor protections.
This enhanced version, a successor to its predecessor MiFID I, increase transparency across all asset classes, enforce stricter rules on trading venues, and order reporting.
It also gives consumers greater protections and strives to encourage more competition and efficiency in financial markets.
Therefore, its importance cannot be overstated as it significantly impacts how financial marketplaces operate and ensure fair systems for investors.
Explanation
MiFID II, an acronym for Markets in Financial Instruments Directive II, is a legislative framework instituted by the European Union (EU) with the purpose of ensuring financial market transparency, standardization, and increased protection for investors. Its primary role is to regulate firms that provide services to clients linked to financial instruments and the venues where those instruments are traded.
These regulations extend to investment services, hedge funds, retail and professional investors, and the entire spectrum of tradable financial instruments. The objective of MiFID II is to help empower investors and decrease the risk of any market collapse, following the previous financial crisis that occurred in 2008.
MiFID II is used as a comprehensive tool to create a system that is fair, transparent, and in line with technological advancements in the financial trading sphere. The regulation not only mandates detailed record-keeping but also demands particular practices for algorithmic trading and curbs on dark pools to make share trading more transparent.
In ensuring investor protection, MiFID II demands better disclosure of transaction costs and commissions, thus reducing hidden fees to investors. By doing so, MiFID II aims to create a more ethical, transparent and efficient financial market in the European Union.
Examples of MiFID II
Barclays: Barclays, a leading global bank, revised its internal systems and infrastructure to comply with the MiFID II regulations. They improved their record-keeping, reporting mechanisms, surveillance activities, and streamlined their order execution processes to ensure full transparency, cater to the interests of their clients, and protect them from any market abuses.
XTB Limited: XTB, an online financial trading platform, had to relook at their financial services and products in compliance with MiFID II. They had to reclassify their customers based on their level of understanding and experience in trading, to help provide the most pertinent services. This also included publishing annual information about the quality of execution of transactions and having an intermediary report for their clients.
Morgan Stanley: In order to comply with MiFID II, Morgan Stanley had to restructure its research pricing. They were required to separate research costs from execution costs, offering more transparency to their clients. This allowed clients to understand what they were paying for and the kind of services rendered to them.
FAQs on MiFID II
What is MiFID II?
MiFID II stands for the Markets in Financial Instruments Directive II, which is a legislative framework instituted by the European Union to regulate financial markets in the bloc, to improve efficiency, increase financial transparency, and offer a greater degree of protection for investors.
What is the purpose of MiFID II?
MiFID II was designed to take into account some developments in the financial world since the original directive, MiFID I. It seeks to provide a more transparent, competitive, and integrated financial market in the European Union.
Who does MiFID II apply to?
MiFID II applies to a wide range of firms including banks, investment firms, and commodity firms, as well as non-financial entities whose activities impact investment or trading decisions. Essentially, it affects any firm that provides services to clients linked to ‘financial instruments’ (shares, bonds, units in collective investment schemes, and derivatives), and the venues where these instruments are traded. It also has the potential to impact firms outside of the European Union, as their European clients may require them to demonstrate similar levels of compliance to MiFID II.
What are the main changes introduced by MiFID II?
MiFID II introduced a number of changes to the European financial markets structure. Key changes include greater transparency, stricter requirements for trading within established venues, direct electronic access controls, transaction and order reporting, new product governance, and investor protection rules.
What are the challenges of implementing MiFID II?
The main challenges of implementing MiFID II are associated with the scope and complexity of the regulations, demands for new systems and data, and the need for substantial changes in firms’ processes and procedures. MiFID II demands detailed record-keeping and reporting, and requires corporations to assess and ensure they are ready to meet these.
Related Entrepreneurship Terms
- Best Execution
- Transaction Reporting
- Market Structure
- Investor Protection
- Product Governance
Sources for More Information
- Financial Conduct Authority (FCA): They provide a wealth of information on MiFID II as the conduct regulator for nearly 60,000 financial services firms and financial markets in the UK.
- European Securities and Markets Authority (ESMA): ESMA’s purpose is to improve the protection of investors and promote stable and well-functioning financial markets in the European Union (EU). They have in-depth materials on MIFID II.
- Bloomberg: Bloomberg delivers business and markets news, data, analysis, and videos to the world. They often cover articles and insights into MIFID II.
- KPMG: This is a global network of professional firms providing Audit, Tax and Advisory services. They have several resources on MIFID II on their platform.
