The new European Union Markets in Financial Instruments Directive II (MiFiD II) came into force on 3 January 2018. The new set of rules adopted in 2014 will be applied across the European Union. MiFiD II aims to define and refine the common legal framework for financial markets, in addition to creating more transparency and ensuring investor’s protection. Together with the Markets in Financial Instruments Regulation (EMIR), which has been in place since 2014 and subsequently amended in 2016, the package contains over 7000 pages of legislation and is seen as the biggest reform of the financial sector since the 2008 crisis.
How does MiFiD II differ from its 2007 predecessor, MiFiD I? Below is an outline of the changes you can expect:
- Wider scope for trade reporting: The new rules extend the scope of instruments beyond equities and bonds: commodities, currencies and credit products as well as their derivatives now fall under the scope of the Directive. Additionally, the new transaction reporting regime places increased demands on financial institutions to report information on transactions that they have executed;
- Market structure: MiFID II expands the status of what is considered an organized trading venue. In addition to Regulated Markets and Multilateral Trading Facilities, the new inclusion is called “Organized Trading Facility” (OTF) and refers to a third type of multilateral system. Multiple third-parties buying and selling interests in bonds, structured finance products, emission allowances or derivatives are able to interact in a way that results in a contract. Equities are not permitted to be traded through an OTF;
- Transparency: The new regime divides transparency requirements into pre (related to quotes) and post trade (related to transactions) requirements. MiFiD I imposed transparency requirements to shares only, and MiFiD II expands the scope to all other financial markets instruments (other equity and non-equity instruments) achieving a full transparency regime;
- Investor protection: MiFiD II introduces a number of organisational requirements associated with the protection of client assets, including the establishment of a compliance function which will monitor the development and periodic review of product governance. The new regime also provides for strengthened conduct rules such as an extended scope for appropriateness tests and reinforced information to clients.
With the new set of rules up and running, the European Securities and Markets Authority (ESMA) is encouraging those affected by this new regime to prepare and to ensure compliance with the new rules. For more information on MiFiD II, you can consult the European Commission’s webpage.