In a Nutshell… Mifid II
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Mifid II is a revision to the original Markets in Financial Instruments Directive that became effective on November 1st, 2007, replacing the 1993 Investment Services Directive.
Mifid is a European Union law that provides harmonised regulation for investment services across the 31 member states of the European Economic Area (that is, the 28 EU member states plus Iceland, Norway and Liechtenstein). The directive’s main objectives are to increase competition and consumer protection in investment services.
Mifid II, however, introduces a number of significant and controversial changes to the original law. European regulators say these changes will help prevent a repeat of the 2008 financial crisis by boosting transparency and will ensure that smaller investors get a better deal when placing trades.
The law’s area of coverage is comprehensive and includes equities, fixed income, commodities, currencies, futures, exchanged traded products, and retail derivatives such as contracts-for-difference. In short, if a financial product is either listed in the EU or is related to an underlying security that is listed in the EU, it will fall under Mifid’s scope.
It will require banks to unbundle the price paid for brokerage services and investment research in order to encourage clients to choose brokers based on trade price and execution alone (…up to now, the cost of research was built into trading fees meaning clients might end up giving their business to the banks with the best tips); it will change how trades are documented and executed, placing limits on trading in “dark pools” (which are private markets in which investors buy and sell large blocks of shares without revealing beforehand the size of their orders or the price paid. Under Mifid II only 8% of volume in any stock can change hands this way); it will also change the type and amount of information that brokers must collect and share — including the passport numbers of their traders, conversations related to a deal, and, for the first time ever, bond traders must tell the market about deals they’ve done within 15 minutes of them taking place.
There is a clear preference within Mifid regulations to push more trading towards electronic venues and away from the telephone, where audit and surveillance trails are lax.
Both Mifid II and its accompanying regulation, Mifir, entered into force on July 2nd, 2014. The initial date for implementation by the Member States was originally January 3rd, 2017; however, in February 2016 the European Commission delayed this by one year until January 3rd, 2018 to allow for the building of IT systems to enable enforcement.
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This article is also available over audio on NOA, along with a wide selection of professionally narrated articles covering Mifid from Bloomberg and The Financial Times.
