So many compliance officers are asking why the EU regulators are bringing in MiFID II and MiFIR, "we already have a MiFID" stated one compliance officer who works for a very large investment bank. If compliance officers are asking these questions, I dread to think what the brokers are asking, hence I thought to provide a quick summary on why MiFID II is here.
Let’s just analyse why regulators are bringing on MiFID II for a minute, the existing regulatory landscape has been shaped by various overlapping pieces of legislation, the principal ones being EMIR* and MiFID I**.
Since the introduction of MiFID I there have been: unique complex derivative instruments, an influx of new investors within alternative markets, off-exchange private liquidity providers and dark pools leading to a fragmented market, high frequency trading firms using loopholes within MiFID I to circumvent the directive.
The scope of MiFID I is no longer appropriate and further strengthening of investor protection is needed. One of the consequences of MiFID I was the expansion in OTC trading, off-exchange products and lightly regulated or even unregulated so-called ‘dark’ pools threatening the integrity of the very market; increasing systemic risk by default.
The letter of the law was being followed, but not the spirit of the law; hence we have MiFIR as well as MiFID II.
MiFID II brings with it a number of objectives:
Achieving greater transparency through the introduction of pre and post trade transparency regime for non-equities and strengthening as well as broadening of the existing equities trade transparency regime.
Brining OTC trading onto regulated venues by the creation of a new category of platform called the Organised Trading Facilities (OTF). This will capture and regulate trades and orders for 'bonds, structured finance products, emissions allowances and derivatives'
Regulating high frequency algorithmic trading thereby promoting orderly markets
Introduction of position limits and reporting requirements for commodity derivatives (in aide to reduce systemic risk)
Broadening the definition of investment firm to capture trading commodity derivatives as a financial activity
Strengthening the protection of investors through the enhancement of the rules on inducements, a ban on inducements for independent advice and new product governance rules
Introducing provisions on non-discriminatory access to trading and post-trading services in trading of financial instruments notably for exchange-traded derivatives.
As a brief overview, the above seven points should cover most of the MiFID II objectives, please feel free to add anything further within the comments box as and when anyone wishes to cover anything I may have missed.
*EMIR lays down mandatory central clearing and reporting requirements for certain OTC derivative contracts and established uniform requirements for the performance of activities of central counter-parties and trade repositories.
**MiFID I came into force back in 2007, which covered (principally) Business Conduct (best execution, client categorisation, suitability, inducements, investment advice, commodity derivatives, reporting requirement, client order handling, marketing and transaction reporting); Organisation (licensing, cross-boarder passporting, compliance arrangements, risk management, outsourcing, record keeping, client assets and auditors, controllers and governance); Equity transparency (systemic internalisation, pre-trade and post-trade transparency).
Sources: MiFIR recital (4,6,8), MiFID II article 1, 28(1) and MiFID II - Seb Malik