The Markets in Financial Instruments Directive II (MiFID II) is a European Union (EU) regulation that was implemented in January 2018. It is designed to increase transparency and investor protection in the financial services industry. MiFID II has clearly had a significant impact on the financial services industry, particularly in terms of the way firms operate and the services they offer.
One of the main impacts of MiFID II is the increased transparency it has brought to the financial services industry. MiFID II requires firms to provide more detailed information about their services, including fees and charges, and to make this information available to clients. This has enabled clients to make more informed decisions when selecting a financial services provider.
MiFID II has also had an impact on the way firms operate. It has introduced a number of new requirements, such as the need for firms to have a compliance officer and to conduct regular risk assessments. These requirements have increased the cost of doing business for firms, as they must now invest in additional resources to ensure they are compliant with the regulation.
In addition, MiFID II has had an impact on the services offered by firms. It has introduced a number of restrictions on the types of services that firms can offer, such as the prohibition of certain types of derivatives and the requirement for firms to provide more detailed information about their services. This has resulted in some firms having to reduce the range of services they offer, while others have had to invest in new technology and processes to ensure they are compliant with the regulation.
Exploring the Benefits of Mifid II Regulation for Investors
One of the key benefits of MiFID II for investors is that increased transparency. The regulation requires firms to provide investors with more detailed information about the products they are trading, including the costs associated with trading. This allows investors to make more informed decisions and helps to reduce the risk of market abuse.
Because MiFID II is designed to increase transparency and reduce the risk of market abuse, it generaly means that investors receive the best possible price when trading financial instruments. The regulation also requires firms to provide investors with more detailed information about the products they are trading, including the costs associated with trading.
Additionally, MiFID II requires firms to provide investors with more detailed information about the risks associated with the products they are trading. This helps to ensure that investors are aware of the risks they are taking when investing in financial instruments.
Examining the Challenges of Implementing Mifid II Regulation in the EU
The implementation of MiFID II has presented a number of challenges for the EU. First, the regulation is complex and far-reaching, covering a wide range of topics such as market structure, transparency, investor protection, and market abuse. This complexity has made it difficult for firms to understand and comply with the regulation.
Second, MiFID II requires firms to collect and report a large amount of data. This data must be collected in a timely and accurate manner, which can be difficult for firms to achieve. Additionally, the data must be stored securely and made available to regulators upon request.
Third, MiFID II requires firms to implement new systems and processes to ensure compliance with the regulation. This can be costly and time-consuming, and firms may need to invest in new technology and personnel to ensure compliance.
Finally, MiFID II has created a number of new obligations for firms, such as the requirement to provide pre- and post-trade transparency. This has created additional costs for firms, as they must now invest in systems and processes to ensure compliance with these new requirements.
Overall, the implementation of MiFID II has presented a number of challenges for the EU. Firms must invest in new systems and processes to ensure compliance with the regulation, and must also collect and report a large amount of data. Additionally, the complexity of the regulation has made it difficult for firms to understand and comply with the regulation. Despite these challenges, the EU is committed to ensuring that MiFID II is implemented effectively and that investors are adequately protected.
A raft of changes in 2022
The EC published the ‘Quick Fix’ Directive in response to the Covid-19 pandemic, which included changes to paper-based communication, exempt costs and charges disclosure, disapply research charges, and suspend best execution reports. EU proposals to amend MiFIR/MiFID include dark trading, market data, and the establishment of a Consolidated Tape Provider. UK MIFID responded by publishing its first consultation paper on changes to UK MiFID’s conduct and organisational requirements. The final policy statement published in November 2021 (PS21/2) confirmed changes in two areas: best execution reporting and research. In July 2021, HM Treasury published two important publications, the UK Wholesale Markets Review (WMR) and changes to the Markets in Financial Instruments (Capital Markets) (Amendment) Regulations 2021.
The European Commission announced the Capital Markets Union 2020 Action Plan, comprising 16 actions, in 2020, and in 2021, it announced a package of legislative proposals to amend the MiFID II and MiFIR.
ESG also added in 2022
The MiFID II ESG product governance amendments in force from 22 November 2022 require firms to take into account ESG factors throughout their product governance processes. These amendments are particularly impactful for firms providing ESG-focused products such as Green, Social and Sustainability bonds/asset-backed securities and funds with a sustainability-based investment strategy.
Banks and other providers must now consider sustainability factors in their product approval process and other product governance and oversight arrangements for each financial instrument that is intended to be distributed to clients seeking financial instruments with a sustainability-related profile.
The MiFID II ESG amendments require firms to consider sustainability factors when identifying the potential target market for a product. Distributors must ensure they only offer or recommend products compatible with the needs, characteristics, and objectives of an identified target market and that the intended distribution strategy is consistent with the identified target market.
Firms do not have to consider sustainability factors in their negative target market assessments. The practical impact of these amendments remains to be seen.
MiFID II and Brexit
The British government is launching a review of investment research, including on the effect of rules that separated payment for investment research from services tied to trading. The review is concerned that there has been a decline in levels of investment research, making it harder to value companies and leaving London less attractive for businesses wanting to go public. European asset managers have cut research spending by three quarters from pre-Mifid II levels, and some companies in the UK market are being ignored. The EU plans to unwind Mifid II unbundling rules for companies with revenues under €10bn, but the UK will be left behind unless the country moves quickly. The investment research market is facing a conundrum due to the Mifid II rules being reversed.
Asset managers have already spent time and money complying with them, and the UK has already moved to “rebundle” research on companies valued at less than £200mn. The US market has better research, while UK pension funds are seeking reliable dividends from large and well-known companies. Changes to Mifid II should be pursued as part of a package of reforms to revitalise the equity market.
US banks struggling
Big Wall Street banks are struggling to respond to EU regulations governing investment research due to the SEC’s refusal to extend a temporary waiver to the way the rules are applied. The waiver stemmed from the EU’s 2018 Markets in Financial Instruments Directive, which required investors to pay separately for investment research and trading services. US banks have been accepting payments from Mifid-compliant clients, but have been protected by the SEC’s letter from registering as investment advisers. The costs and complications of reorganising to register would depend on each bank’s individual arrangements, but were not insurmountable. The SEC’s no-action letter was intended as a temporary stop-gap while the industry ironed out any issues.
Sifma appealed to the SEC to ease its stance, pointing to European debates on rolling back some Mifid provisions. US investor advocates have thrown their support behind the SEC in the hope that forcing brokers to register as investment advisers could open the door for unbundling research and trading costs. Mifid II has forced bankers and their clients into frank conversations about the value of research, but critics argue that it forces fund managers to pay for services they don’t want. Mifid II has also forced bankers and their clients into frank conversations about the value of research.
What’s next for MiFID II?
The UK made immediate changes to remove ineffective and distortionary regulatory requirements for the UK market. The WMR also sets out wider proposals for capital market reforms, such as the development of the consolidates tape, the regulatory perimeter and rules governing trading venues, recalibrating the transparency regime for fixed income and derivatives, amending the Reference Price Waiver (RFW) to encourage best execution, amending the tick size regime, and simplifying the systematic internaliser (SI) regime.
The ECON committee adopted its report for the interinstitutional negotiations on 2 March 2023, which includes new provisions on derivative market margins. The report suggests that the link between SIs and price post-trade discovery be removed, and a public list provided by the ESMA be introduced.
The report gives ESMA further powers to assess the calibration of the threshold of the single volume cap of dark trading and draft the RTS of data consolidation by CTPs.
The report proposes to amend the MiFID directive to include provisions requiring investment firms to perform their activities on an organised, frequent, systematic and substantial basis, or to opt-in under the systematic internaliser regime.
Financial Times – Wall St struggles to meet Mifid rules as waiver comes to an end. (n.d.). Financial Times. Retrieved May 23, 2023, from https://www.ft.com/content/2400b520-afa3-45ec-9767-a35805b4f98a
Financial Times – Ditching Mifid research rules will help London market but is no panacea. (n.d.). Financial Times. Retrieved May 23, 2023, from https://www.ft.com/content/a3c424f0-aea7-42e1-bd9c-2032ace7b44c