What is MiFID II (2024)

FAQs

What is MiFID 2 in simple terms? ›

MiFID II sets out to: Ensure trading takes place on regulated platforms. Draw up rules on algorithmic and high-frequency trading. Increase transparency and oversight of financial markets and address shortcomings in commodity derivatives markets.

MiFID II regulates off-exchange and over-the-counter trading, essentially pushing it onto official exchanges. Increasing transparency for trading costs and improving record keeping for transactions are among the key aims of the regulations.

MiFID, or the Markets in Financial Instruments Directive, was a set of European regulations governing equities markets in the European Union. It was intended to enhance transparency and reporting requirements to protect European investors.

The overarching Mifid II best execution obligation requires firms to take all sufficient steps to obtain the best possible result, taking into account a range of execution factors, when executing client orders or placing orders with (or transmitting orders to) other entities to execute.

MiFID provides national regulators with specific product intervention powers to prevent the sale of products in certain circ*mstances. Further, MiFID also provides ESMA with powers to take measures on a pan-European basis, in more limited circ*mstances.

MiFID II aims to reinforce the rules on securities markets by. ensuring that organised trading takes place on regulated platforms. introducing rules on algorithmic and high frequency trading.

MiFID II broadens the scope. of transaction reporting to capture: – Financial instruments admitted to trading or traded. on an EU trading venue or for which a request for admission has been made.

Financial instruments' are defined in Article 4(1)(15) of MiFID II as those “instruments. specified in Section C of Annex I”. These are inter alia 'transferable securities', 'money. market instruments', 'units in collective investment undertakings' and various. derivative instruments.

Execution costs are then separately regulated by 'best execution' rules. The scope of MiFID II's territorial reach means that it will only apply directly to U.K. and EU-regulated investment firms.

The MiFID II client categorisation is a framework that classifies clients of investment firms into three categories: eligible counterparties, professional clients, and retail clients.

What is the MiFID compliance? ›

MiFID compliance requires firms to capture all communications surrounding transactions, including email, telephone calls, social media and in-person meetings.

The obligation to report transactions under MiFIR requires investment firms that execute transactions in financial instruments to report “complete and accurate details of such transactions to the competent authority as quickly as possible, and no later than the close of the following working day”.

Our main findings suggest that MiFID II introduction reduces analyst coverage in the EU. Unexpectedly, the reduction is stronger for large cap stocks, whereas the low share of commissions generated by small-cap stocks would have actually suggested to sell-side analysts to reduce their efforts on small-cap coverage.

Background to MiFID

MiFID II governs the provision of investment services in financial instruments. It applies to investment firms, wealth managers, broker dealers, product manufacturers and credit institutions authorised to carry out MiFID activities.

Given the international reach and inter- connectedness of global financial markets, it comes as no surprise that the legislation's impact extends beyond the EU (including the EEA) to other regions, such as Asia-pacific and North America, where firms either provide or receive services from EU financial counterparties.