The key requirements for firms operating under the EU's Markets in Financial Instruments Directive (MiFID 2) include trading financial instruments only on multilateral and regulated trading platforms or those that adhere to the transparency requirements of over-the-counter(OTC) trading . Additionally, MiFID 2 aims to increase transparency and investor
protection by establishing stricter reporting requirements and improving the execution of client orders .
Firms must also implement appropriate risk management procedures and
maintain records of transactions and client communications . Overall, MiFID 2 seeks to strengthen the regulatory framework for the financial industry in Europe and enhance market integrity .
Mifid 2 compliance
The second Markets in Financial Instruments Directive (MiFID II), effective from 3rd January 2018, is seen as the largest regulatory initiative undertaken by the European Union since 2008.
It reshapes European capital markets and impacts investment firms from commercial and operational perspectives.
Key Impacts of MiFID II:
Transaction Reporting: Transaction reporting enables investment firms to send trade details of each transaction to regulators no later than the next business day. Under the new framework, transaction reporting broadens due to the extension of reportable products, venues, data fields,
and reportable transactions. Data management plays a crucial role in ensuring compliance with transaction reporting.
Product Governance: Product governance constitutes one the most significant changes to product distribution in European finance, impacting both MiFID investment firms and non-MiFID entities, such as UCITS management companies and AIFMs. Implementing the required processes for product governance involves complex interactions between manufacturers and
distributors, and firms should not underestimate the difficulty of implementing it correctly, especially in a cross-border context.
General Inducement Rule and Unbundling of Research: The general inducement rule requires investment firms to avoid retaining third-party payments or non-monetary benefits that do not enhance service quality or prevent the firm from acting in the best interest of its clients.
Unbundling of investment research and execution services aims to eliminate potential conflicts of interests that may arise from "soft commissions."
Best Execution: Best execution under MiFID II strengthens the requirement for investment firms to take "all sufficient steps" as opposed to "reasonable steps" to obtain the best possible results for their clients. It also extends the scope of best execution to non-equity asset classes and
mandates annual publication of the top five execution venues by trading volume for each class of financial instruments. Key challenges include ensuring adequate systems and controls, managing data, providing evidence of optimal best execution arrangements, broker selection and monitoring, managing client documentation, handling product complexity, and establishing governance.
Market Infrastructure: MiFID II introduces significant changes to trading venues, including Regulated Markets (RMs), Multilateral Trading Facilities (MTFs), and Systematic Internalisers (SIs), enhancing the transparency of EU Capital Markets and creating a more level playing field.
It introduces the Organised Trading Facility (OTF) for multilateral trading in non-equity instruments, aligns the requirements for MTFs with those for RMs and OTFs, and increases trade transparency requirements.
MiFID II also introduces a new trading obligation for derivatives, increases obligations for SIs, and extends the organizational requirements applicable
to RMs and MTFs to OTFs.
With MiFID II fundamentally changing the functioning of European capital markets, it is hard to predict the practical implications of the new rules. However, increased transparency is expected to impact market liquidity, enhance competition, and further accentuate the importance of data
management and system capabilities.
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