The European Union is remarkable in its ability to govern a diverse population. One of its governing laws and bodies is the MiFID, which the EU later revised as MiFID II. It aims to regulate European financial markets and ensure transparency. In this way, it operates similar to the Dodd-Frank Wall Street Reform and Consumer Protection Act in America.
The European Parliament passed this legislation in 2004 and implemented it in 2007. In 2018, a reform created MiFID II. The reform includes the Markets in Financial Instruments Regulation. Similar to the American equivalent, the directive’s primary goals are to increase competition and protect investors in financial markets across its covered areas.
To achieve these goals, MiFID sets requirements for financial firms that provide investment services, such as trading, advising, and market making. It also establishes rules surrounding the transparency of transactions and standardizes financial instruments.
The directive applies to all 27 member states of the EU. It also applies to three European Economic Area countries:
In the covered areas, MiFID II affected every entity that plays a role in the financial markets of the EU and the EEA. Companies based in other countries receive no exemptions. They must abide by the rules as long as they do business in the covered areas.
While the United Kingdom was still part of the European Union, it was required to transpose MiFID into law by 2017. The U.K. intends to retain the laws it subscribed to while part of the EU. However, it now has the opportunity to make changes that better meet its specific needs. Now known as a third country, however, it has lost many benefits MiFID provides.
For example, the UK has lost benefits under the passport regime. Put simply, UK firms no longer have valid licenses that allow them to serve clients within the European Union. They might also lose the right to trade in specific markets.
Some member states might need to make a case-by-case decision on UK firms, but France has called for creating a more harmonized approach. Meanwhile, the UK allows firms based in the EU to do business without a license as long as those firms comply with the Overseas Persons Regime.
When the European Union revised MiFID, it did so to enhance protections. The modified body of laws achieved this by addressing five main areas.
Inducements are payments or other benefits a firm receives for recommending a financial product, such as commission. Firms must now disclose details on these arrangements. The unbundling of research means that firms must pay for research separately from execution services. These measures ensure that firms act in their clients’ best interests.
These include new requirements for trading platforms and the introduction of a double volume cap for trading in certain types of securities. The goal is to reduce the risk of market manipulation and ensure that markets function efficiently and fairly. Firms must also provide greater details about their costs.
Firms must ensure their clients receive the best possible outcome when executing a trade. To do this, firms must consider several factors, including costs, speed, and the likelihood of execution.
Under MiFID II, firms must report several details about each transaction to the authorities. These include the type of instrument traded, the venue where the trade took place, and the price. The aim is to increase transparency and allow for better supervision of the markets.
Firms must put processes in place to ensure the products they sell are suitable for their clients. This protects investors from being sold products that are not appropriate for their needs or that involve higher risks than they signed up for. It also provides protection against fraud.
Like most other industries, communication is one of the core points for financial business operations. For example, financial professionals discuss transactions with their clients and discuss trade positions internally. Firms must capture and archive these conversations to comply with MiFID requirements and provide proof of specific incidents in the event of investigations.
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