The Markets in Financial Instruments Directive (MiFID) is a regulatory framework developed to harmonize the regulation of financial markets and investment services within the EU. MiFID II is an updated version of the directive, which came into effect on January 3, 2018. It replaced the original MiFID, expanding and strengthening the regulations.
MiFID II aims to enhance transparency, investor protection, and the integrity of financial markets. It imposes various obligations on financial institutions and market participants, including investment firms, trading venues, and data reporting services providers.
ESMA plays a crucial role in implementing and enforcing MiFID II regulations across the EU. It provides guidance, develops technical standards, conducts supervision, and promotes consistent application of the rules to ensure a level playing field and protect investors in the European financial markets.
The main provisions of MiFID II include:
Transaction reporting: Investment firms are required to report details of all transactions executed on financial instruments to the competent authorities. This enhances transparency and helps detect market abuse.
Records retention: There is an obligation to retain secure audited and accessible records for a minimum period of five years from the date of the communication.
Best execution: Investment firms must take all reasonable steps to achieve the best possible result for their clients when executing orders. This includes considering price, costs, speed, likelihood of execution, and settlement.
Investor protection: MiFID II introduces stronger investor protection measures, such as providing clear information on investment products, assessing suitability and appropriateness of investment recommendations, and introducing stricter rules for product governance.
Trading obligations: Certain standardized derivatives must be traded on regulated venues, such as organized trading facilities (OTFs) or regulated markets, to increase transparency and improve access to trading venues.
Pre- and post-trade transparency: MiFID II extends the transparency requirements to a wider range of financial instruments, including non-equity instruments, by mandating pre- and post-trade transparency reporting. This helps investors make more informed investment decisions.
Research unbundling: MiFID II separates the cost of investment research from other services provided by investment firms, requiring greater transparency in research pricing and preventing potential conflicts of interest.
For more information see esma.europa.eu