MiFID 2 explained

MiFID II, short for the Markets in Financial Instruments Directive II, is a European Union (EU) financial regulation that came into effect on January 3, 2018. It is a significant update and expansion of the original MiFID (MiFID I) regulation, aimed at enhancing transparency, investor protection, and the functioning of financial markets within the EU. MiFID II introduces a wide range of rules and requirements for financial firms and market participants. Here are some of the key aspects of MiFID II:

1. Increased Transparency: MiFID II seeks to improve transparency in financial markets by requiring more detailed reporting and disclosure. It mandates that pre-trade and post-trade information, including trade execution data, be made available to the public and regulators. This enhances market transparency and helps investors make more informed decisions.

2. Expanded Product Coverage: MiFID II extends its regulatory scope to cover a broader range of financial instruments and trading venues. It includes not only traditional securities like stocks and bonds but also derivatives and other complex financial instruments.

3. Investor Protection: The regulation places a strong emphasis on investor protection. It requires firms to assess the suitability of products for individual clients and provide more comprehensive information about investment products, including costs and charges.

4. Market Structure Reforms: MiFID II introduces changes to market structure to enhance competition and reduce market fragmentation. It promotes trading on regulated venues such as Multilateral Trading Facilities (MTFs) and Organized Trading Facilities (OTFs).

5. Algorithmic and High-Frequency Trading (HFT): The regulation introduces stricter rules for algorithmic and HFT trading activities, including requirements for registration, market-making obligations, and circuit breakers to prevent excessive volatility.

6. Best Execution: Investment firms are required to take all reasonable steps to achieve the best possible outcome for their clients when executing orders. This entails considering factors such as price, costs, speed, and likelihood of execution.

7. Position Limits: MiFID II imposes position limits on commodity derivatives to prevent market abuse and excessive speculation.

8. Transaction Reporting: Firms are obligated to report all transactions promptly and accurately to competent authorities. This helps regulators monitor market activity for potential misconduct.

9. Research Unbundling: MiFID II introduces rules for the unbundling of research and execution costs. Asset managers are required to separate research payments from execution costs, increasing transparency in how research is paid for.

10. Record-Keeping: Firms are required to maintain extensive records of transactions, communications, and client interactions to ensure compliance with regulatory requirements.

MiFID II represents a major overhaul of European financial markets regulation, with the aim of making markets more transparent, efficient, and resilient while protecting investors. It has had a significant impact on financial firms operating within the EU and has also influenced regulations in other parts of the world due to its extraterritorial reach for some activities.