MiFID II is a legislative framework instituted by the European Union (EU) to regulate financial markets in the European Economic Area (EEA) and improve protections for investors.
Its aim is to standardize practices across the EU and restore confidence in the industry.
One of the most influential laws enacted by the European Union to regulate the investment sector is the Markets in Financial Instruments Directive.
This directive, which is usually referred to as MiFID, has been in place since 2007 and has dramatically changed how the investment sector is run.
The original Markets In Financial Instruments Directive (MiFID) went into effect in November 2007.
The onset of the subsequent global financial crisis exposed some weaknesses in its provisions.
It focused too narrowly on stocks (ignoring fixed-income vehicles, derivatives, currencies, and other assets) and did not address dealings with firms or products outside the EU, leaving the rules about those to be decided by individual members.
Recently, the legislation was significantly updated, and it is now known as “MiFID II”.
MiFID II is intended to be a stronger version of the previous law, and it is focused mainly on increasing customer protection, making trading platforms more open, and ensuring that portfolios are properly managed.
MiFID II harmonizes the application of oversight among member nations and broadens the scope of the regulations.
With the updated version of MiFID, trading transactions and information will be more transparent than ever before.
MiFID II requires that all prices are clearly posted before and after trades are completed, no matter the type of trading platform on which transactions occur.
This gives investors access to a whole new scope of data and information and enables them to make more educated decisions regarding their clients’ portfolios.
Additionally, the new-and-improved MiFID II will also cover more types of financial instruments (rather than just shares).
Equities, commodities, debt instruments, futures and options, exchange-traded funds, and currencies all fall under its purview.
If a product is available in an EU nation, it is covered by MiFID II
Even if the trader wishing to buy it is located outside the EU.
Sellers will be required to clearly state their prices before and after all transactions, as well as other pertinent information.
The main purpose of this new requirement is to allow retail firms and their customers to find the best deals available by comparing prices and other factors from the newly available data.
MiFID II now covers structured deposits as well. Previously, structured deposits were not regulated by the European Union, despite the fact that they are quite a common investment and have several protection challenges.
With the introduction of the new regulations, companies that sell and purchase structured deposits will have to comply with certain rules regarding interactions with clients and oversight by supervisory bodies, as well as a variety of other stipulations.
Another major change in MiFID II is that some firms will be banned from accepting payments or benefits (“inducements”) from third parties.
Thus, if an individual (such as a consultant) or a firm provides financial advice on another individual’s behalf, they no longer will be able to keep any payment that they receive.
Instead, they will be forced to transfer this payment along to the actual investor. This provision marks a major change for the European financial sector.
MiFID II not only covers virtually all aspects of financial investment and trading but also covers virtually all financial professionals within the EU.
Bankers, traders, fund managers, exchange officials, and brokers—and their firms—all have to abide by its regulations. So do institutional and retail investors.
Regarding retail investors, the law will substantially increase the protection of retail investors and will severely limit the types of financial instruments with which retail investors can complete transactions without being legally obligated to consult a trader or similar professional.