MiFID/MiFIR

Here’s an overview of MiFID II and its main deliverables:

Increased Transparency: MiFID II significantly increases the transparency requirements for financial markets. It extends the scope of transparency to a broader range of asset classes and requires more detailed reporting of transactions and trading data to regulators and the public.

• Market Structure Reforms: The regulation introduces changes to the structure of financial markets. It encourages trading of financial instruments on regulated platforms and limits the use of dark pools (private financial forums or exchanges for trading securities) to ensure more trading occurs in transparent environments.
• Investor Protection: A key element of MiFID II is heightened investor protection. It includes stricter rules on product governance and suitability, ensuring that firms act in the best interests of their clients. There’s a particular focus on complex financial products to ensure that only suitable products are sold to each type of investor.
• Commodity Derivatives: MiFID II introduces new regulations for commodity derivatives, including position limits to prevent market abuse and ensure fair and orderly trading. 
• Record Keeping and Reporting: Firms are required to keep detailed records of all services, activities, and transactions to enable the competent authority to monitor compliance with MiFID II 

On 3 October 2023, the European Securities and Markets Authority’s (ESMA) guidelines on the MiFID II product governance requirements came into force.

The guidelines apply in relation to the manufacturing or distribution of financial instruments and structured deposits. In particular, the guidelines apply in relation to the following requirements:

• Article 9(3) of MiFID II.
• Article 16(3) and 16(6) of MiFID II.
• Article 24(1) and 24(2) of MiFID II.
• Articles 9 and 10 of Commission Delegated Directive (EU) 2017/5932 (MiFID II Delegated Directive).

Changes to MiFID II and MiFIR

• Broadening Reporting Scope: Extension to all AIFMs, and management companies that execute financial instrument transactions covered by Article 26.
• Strengthening Obligations on National Competent Authorities (NCAs): NCAs are to report to multiple authorities including those responsible for the supervision of AM, transmitting investment firms and trading venues and SIs
• Instruments in Scope: Addition of off-venue OTC derivative trades in scope.
• Transaction Identification Code (TvTIC): TvTIC in Level 1 legislation, requiring a generated code by the trading venue within the transaction report.
• Removal of Short Selling Flag: Alignment with UK supervisory priorities.
• Branch Reporting and Pre-Trade Waiver Changes: Text amended in relation third country firm branch reporting (no obligation) and pre-trade waiver to report relevant waivers also removed.
• Linking Requirement: Addition of requirements on linking individual transactions and identifying aggregated orders.
• Research and Inducements: Introduces stricter rules around inducements (particularly relating to research and corporate access), to avoid conflicts of interest.
•  Product Governance Requirements: Firms required to have processes in place to, among other things, ensure that financial products are designed to meet the needs of an identified target market or client group and that the financial instruments are distributed accordingly.
• Data Reporting Services Providers (DRSPs): MiFID II introduces a new category of market participant, a data reporting services provider (DRSP), which includes consolidated tape provider, approved reporting mechanism, and approved publication arrangement.
•  Third-Country Firms: Conditions on which 3rd Country Firms (non-EU firms) may provide investment services/activities to EU clients.
•  Harmonization Across the EU: Aims to harmonise regulatory standards across the EU member states, creating a level playing field and increased competition across EU financial markets.
•  Sustainability-Related Disclosures: Further recent changes require sustainability-related disclosures that integrate ESG considerations into investment decisions and advisory processes.

MiFID II is a step change towards increased regulatory oversight, transparency, and deepened investor protection in the EU financial markets. It impacts many participants, including, investment firms, trading venues, and data reporting service providers.

Markets in Financial Instruments Regulation (MiFIR) complements MiFID II and is a part of the EU’s legislative reform package for financial markets. While MiFID II is a directive that requires transposition into national law by each member state, MiFIR is a regulation that applies directly across the EU without the need for national transposition. MiFIR sets out:

•  Trade Transparency: MiFIR increases transparency in equity and non-equity markets requiring the real-time, public reporting of trade data for on-venue and off-venue trades.
•  Transaction Reporting: A significant proportion of MiFIR is focused on the requirement for firms to report to the NCA detailed information about all transactions in financial instruments. This reporting is more comprehensive than that currently required under MiFID and includes a greater number of data elements.
•  Access to Trading Venues and Central Counterparties (CCPs): o foster competition, and to reduce costs, MiFIR requires trading venues and CCPs to offer non-discriminatory access to each other including appropriate access to benchmarks used to trade and clear financial instruments.
• Mandatory Trading on Regulated Venues: There is a requirement for certain derivatives to be traded only on regulated markets, MTFs, OTFs or equivalent third country venues, to increase transparency and oversight of the derivatives markets.
• Product intervention Powers: MiFIR grants ESMA and National Regulators powers to temporarily prohibit or restrict the marketing, distribution or sale of certain financial instruments or financial activity where there is a significant investor protection concern, risk to financial stability or threats to orderly markets.
• Position Management in Commodity Derivatives: Provides regulators with the ability to manage the size of a position someone can hold in commodity derivatives that help to prevent market abuse and support orderly pricing and settlement.
• Third-Country Firms Access: Conditions under which 3rd country investment firms (non-EU countries) can offer services in the EU, requiring equivalence decision by the EC and registration with ESMA.
• Non-discriminatory Access to Market Data: Requires the consolidation and publication of trading data and trade execution data in a non-discriminatory fashion to end-users, seeking to improve transparency in the markets, reduce information asymmetries amongst market participants.

MiFIR is a key component in delivering on the objectives of enhanced transparency, investor protection, systemic stability and promoting competition across financial markets in the EU. MiFIR requirements are closely linked with those of MiFID II and together they both form the comprehensive reform of the EU financial markets.