What is MiFID II

MiFID II  Definition

Markets in Financial Instruments Directive II (MiFID II) are the nucleus of European securities market legislation. The aim of MiFID II is to make financial markets more stable, efficient, and transparent facilitating protection of investors. The European Commission implemented MiFID II, in early January 2018, with a set of improvised rules for the structure of markets and the trading of financial tools. Embarking on its central theme of transparency, MiFID II prescribes guidance of business standards for the provisioning of investment services and products.

MiFID II further seeks to bluntly address few of the shortcomings displayed by the financial crisis, due to lack of transparency in derivatives and another over-the-counter stock market. The MiFID II legislation also takes into account the rise in algorithmic trading, high-frequency trading, and other financial market developments, limiting the effects of such activities on financial markets. The reform aspects of MiFID II also include investor protection standards, in order to tackle inconsistency in interests for the provisioning of financial guidance. MiFID II applies position limits in commodity markets so as to restrict speculative activities from rising. ESMA (European Securities and Markets Authority) along with European Commission is associated with the development of technical standards in order to implement MiFID II. Stringent rules will make sure that dark trading of shares and other equity instruments restricting efficiency and generation of equitable prices are no longer allowed.

MiFID II legislation

MiFID II is applicable to all the European Economic Area (EEA), such as the financial institutions and business houses that are related directly to the MiFID services. The legislation will also affect European Union’s financial markets, based anywhere, including providers of custodial services and asset management. It also applies to investment managers of pension funds and to certain extent credit institutions that are part of the EEA. MiFID II further applies to firms who are indirectly impacted by EEA, i.e. European providers who are in regular communication with EEA firms but have their branches functioning outside the EEA. The legislation also extends to structured deposits and investor protection provision. The MiFID II extends its services to a wider range of equity and non-equity products for all the 28 European Union, member states that fall within the EEA. Some of the key features administered through MiFID II legislation are:

• Investor Protection: The MiFID II determines the inducements strengthening the rules on the same. It also includes organizing business requirements as well as addresses evaluation for aptness of investment services and products by a financial mentor. Moreover, the data provided must be published in standardized format and execution venues be clearly defined. The data should also be comparable and suitable for investment firms as well as other market participants using them.
   
• Data Publication and Approach: The legislation introduces complete data collection, reporting, and authorizes the emergence of consolidated tape providers (CTP). The unavailability of CTPs has been observed in Europe during MiFID I. This will help in improving transparency, linking fragmented equity markets, as well as lowering search and access cost.

• Trade Transparency Waivers: This features exempts corporate bonds from the general obligation to reveal sizes of orders that are huge, negotiated transactions, orders on recommendation price system, and orders through order management facility.

Therefore, introducing MiFID II within the European markets is basically to make the financial market base more investor-friendly, transparent, and flexible for recovery from financial crisis. The European Markets Infrastructure Regulation (EIMR) looks forward to making the European Union’s over-the-counter market more secure, as well as the Securities Financing Transactions Regulation (SFTR), which seeks to modulate European Union’s shadow banking sector.