The Markets in Financial Instruments Directive (2014/65/EU) (“MiFID”) and the Markets in Financial Instruments Regulation (600/2014/EU) (“MiFIR”), together known as “MiFID II”, come into force today.
MiFID II is directly applicable and the UK will implement it by means of the following statutory instruments:
- the Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2017 (“the MiFI Regs”)
- the Data Reporting Services Regulations 2017 (“the DRS Regs”)
- another Order amending the RAO: the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2017, SI 2017/488).
The original MiFID established a framework for investment intermediaries which provide services relating to financial instruments (i.e. shares, bonds, units in collective investment schemes and derivatives). It also provided a regulatory underpinning for the organised trading of financial instruments.
MiFID II applies lessons learned from the financial crisis with the goals of strengthening investor protection and improving the functioning of financial markets. It will affect retail investors, banks and brokers, among others. In summary, it introduces market structure requirements, transparency requirements, rules on research and inducements, new product governance requirements for manufacturers and distributers of MiFID ‘products’ and the introduction of a harmonised commodity position limits regime.
One key aim of MiFID II is to shift much over-the-counter trading (e.g. by telephone) onto regulated electronic trading venues. Regulators prefer electronic venues because they have better audit and surveillance trails. Financial institutions will be obliged to report much more extensive information about trades and this information will need to be submitted almost immediately upon the occurrence of the trades. Trades will be timestamped, some to microseconds. The documents for reporting transactions will include over 65 fields and will facilitate challenges about whether banks and brokers offered retail investors the best available prices for their trades. The information must be retained for at least 5 years.
Another core aspect of MiFID II is ‘unbundling’, namely requiring fund managers to budget separately for research and trading costs. Previously, fund managers received the research which they used to make investment decisions for free, but usually built the cost into trading fees which were paid by their clients. This was felt by European regulators to lead to a conflict of interest, with a potential adverse effect on fund managers’ investment decisions. Their clients (whether retail investors or pension funds) will henceforth have to make direct payments for research.
The new rules cover trading whenever there is an underlying product that is listed in the EU, irrespective of where the fund manager is located.