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: Extending Article 26 requirements to Alternative Investment Fund Managers (AIFMs) and management companies executing financial instrument transactions.

Strengthening Obligations on National Competent Authorities (NCAs): NCAs to distribute reports to multiple authorities, including those responsible for supervising transmitting investment firms and trading venues.

Instruments in Scope: Expansion of scope to include certain off-venue OTC derivatives trades.

Transaction Identification Code (TvTIC): Inclusion in Level 1 legislation, requiring transaction reports to include a code generated by the trading venue.

Removal of Short Selling Flag: Alignment with UK supervisory priorities.

Branch Reporting and Pre-Trade Waiver Changes: Adjustment of text related to third country firm branch reporting and removal of the obligation to report applicable waivers.

Linking Requirement: Addition of requirements for linking specific transactions and identifying aggregated orders.requirements.

Research and Inducements: MiFID II introduces stricter rules on inducements, particularly concerning the payment for research and corporate access, to avoid conflicts of interest.

 Product Governance Requirements: Firms are required to have processes in place to ensure that financial products are designed to meet the needs of identified client groups and are distributed appropriately.

Data Reporting Services Providers (DRSPs): MiFID II introduces a new category of market participant, the DRSP, which includes consolidated tape providers, approved reporting mechanisms, and approved publication arrangements.

 Third-Country Firms: The regulation sets out conditions under which third-country firms (non-EU firms) may offer investment services or activities to EU clients.

 Harmonization Across the EU: MiFID II seeks to harmonize regulatory standards across the EU member states, aiming for a level playing field and increased competition across EU financial markets.

 Sustainability-Related Disclosures: More recent updates include requirements for sustainability-related disclosures, integrating considerations for environmental, social, and governance (ESG) factors in investment decisions and advisory processes.

 MiFID II represents a significant shift towards more robust regulatory oversight, transparency, and investor protection in the EU’s financial markets. It impacts a wide range of market participants, including investment firms, trading venues, and data reporting service providers.

 The Markets in Financial Instruments Regulation (MiFIR) complements the Markets in Financial Instruments Directive (MiFID) II and is a key component of the EU’s regulatory framework for financial markets. While MiFID II is a directive that requires member states to incorporate its provisions into their national laws, MiFIR is a regulation that applies directly across the EU without the need for domestic transposition. Here are the main aspects of MiFIR:

 Trade Transparency: MiFIR enhances the transparency requirements for equity and non-equity markets. It mandates real-time, public disclosure of trade data on trading venues and for off-venue trades.

 Transaction Reporting: One of the central features of MiFIR is the obligation for firms to report detailed information about all trades in financial instruments to their national competent authority. This reporting is more extensive than under MiFID and includes additional data elements.

 Access to Trading Venues and Central Counterparties (CCPs): MiFIR aims to promote competition and reduce costs by requiring trading venues and CCPs to provide non-discriminatory access to each other. This includes provisions for access to benchmarks used in trading and clearing of financial instruments.

 Mandatory Trading on Regulated Venues: MiFIR requires certain derivatives to be traded on regulated markets, multilateral trading facilities (MTFs), organized trading facilities (OTFs), or equivalent third-country venues. This is to increase transparency and oversight in the derivatives market.

 Product Intervention Powers: MiFIR gives powers to the European Securities and Markets Authority (ESMA) and national regulators to temporarily prohibit or restrict the marketing, distribution, or sale of certain financial instruments or financial activities if there is a significant investor protection concern or threat to the orderliness of markets or financial stability.

 Position Management in Commodity Derivatives: MiFIR allows regulators to manage the size of a position someone can have in commodity derivatives, helping to prevent market abuse and support orderly pricing and settlement conditions.

 Third-Country Firms Access: MiFIR sets out the conditions under which investment firms from third countries (non-EU countries) can provide services in the EU. This includes a requirement for an equivalence decision by the European Commission and registration with ESMA.

 Non-discriminatory Access to Market Data: MiFIR requires that data on trading activity and trade execution be consolidated and made available to the public in a non-discriminatory manner. This aims to improve market transparency and reduce information asymmetries among market participants.

 MiFIR plays a crucial role in achieving the objectives of increased transparency, improved investor protection, reduced systemic risk, and the promotion of competition in the EU financial markets. Its provisions are closely intertwined with those of MiFID II, and together they form a comprehensive regulatory framework for EU financial markets.