What Is MiFID II and How Does It Affect Investment Companies?

If there is one thing at which the EU excels it is in the creation of regulations and statutes that appear in the form of unpronounceable acronyms. MiFID ii is a case in point, and is something that anyone who is even peripherally involved in the investments sector will be aware of. But what is the regulation setting out to achieve and how does it materially affect the day to day activities of businesses working in this industry? Let’s peel back the letters and find out.

The word 'regulations' written by hand

Objectives

MiFID ii has a number of stated objectives. The overarching idea, however, is that is should promote harmonised regulation across the various financial markets within the EU and bring better investor protection through enhanced supervisory powers. One of the most fundamental ways of achieving these lofty goals is through enhanced transparency.

Transparency by LEI number

The regulations stepped up the requirements for LEI registration – this is the legal entity identifier that businesses working in the investments sector must have. Essentially, MiFID ii broadened this requirement to cover a wider range of businesses from 01 January 2018. It is simple and inexpensive to register LEI code through an online agency and can be done in a matter of minutes.

A trading chart

Transparency through infrastructure

MiFID ii led to a significant shake-up of market infrastructure across the trading sector. Specifically, it introduced an Organised Trading Facility (OTF), which encompasses areas of non-equity trading that were formerly outside the remit of MiFID. New OFTs aligned the rules surrounding Multilateral Trading Facilities (MTFs) and Regulated Markets (RMs). MiFID ii also implemented new rules relating to high frequency trading to enhance both pre- and post- trade transparency.

Transparency in reporting

The new regulations significantly increased the reporting obligations of investment firms to regulators, building on rules that were initially introduced under MiFID in 2007. Both the scope of products eligible for reporting and the data to be reported were extended. Under MiFID ii, transaction reporting is required for any and all products that investment companies trade on OTFs, RMs and MTFs. The extra data requirements include information relating to the individual trader making the transaction, the algorithm used to make the trading decision and a number of other technical factors.

Stamping a legal document

Transparent product governance

The past decade has seen a dramatic rise in the number of new financial products being developed by investment firms. Under MiFID ii, these firms are treated as manufacturers, and they are required to go through the same governance process when developing a product as a company that creates any other product. Specifically, this means identifying target markets, implementing a product review and approval process, managing distribution channels and monitoring how the product is received and whether its performance is satisfactory.

Protecting investors

Finally, MiFID ii has ramped up investment companies’ obligations to protect the interests of their customers. While MiFID stipulated that they must take “reasonable steps” to get the best possible outcomes, MiFID ii changes the wording to “all sufficient steps.” This raising of the bar is more than just words. Firms must publish annual data showing the quality of service they have delivered according to key transaction parameters.

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