MiFID II, the markets in financial instruments directive and regulation, will reform the ways in which securities are traded in Europe. The European Commission, with the help of the European Securities and Markets Authority (ESMA), is now drawing up the necessary technical rules to ensure that the requirements under MiFID II are understood and applied in the same way across the EU.  Here, Peter Ohrlander, securities markets expert at the European Commission, explains what these rules are about, how they work and how they will contribute to safer and more efficient EU capital markets that can deliver financing to Europe's economy.

Safer, more efficient markets

MiFID II is a comprehensive set of rules that determines how securities in the EU – for instance shares, bonds and derivatives – are traded, especially on trading platforms or "stock exchanges" as they are known. It also sets the standards for investment services and for how firms providing such services or operating or acting on trading platforms are set up.

MiFID II will bring more trading of securities onto transparent trading platforms that treat investors according to the same high standards, to allow for better and fairer price formation. Loopholes will be closed so that "dark trading" – trading without disclosing prices in real time – is no longer an option for regular trading. Instead, it will be available where needed to protect investors or those providing liquidity to the markets.

Trading in commodity derivatives, which are contracts for future delivery of commodities such as metals or agricultural products, will be made more transparent and better-organised by limiting how big a position any investor can build up, and authorisation requirements will be broadened.

Requirements to make electronic trading systems more robust and tighter authorisation requirements will be introduced to keep pace with increasing use of rapid and computerised "high frequency" trading. MiFID II should also stimulate competition in trading and related services since the same security can be traded in different places. At the same time, by encouraging the compilation of trading data in one place (consolidated tape), MiFID II will make it easier to get the full picture of where to find the best deal.

Best interest of the client

When using the services of an investment firm, investors must trust that the service is provided in the best interest of the client and not for other reasons, for example commissions received by the firm from third parties. So under MiFID II , inducements are not allowed for portfolio management and independent advice and only permitted in other cases where they enhance quality. Reporting to and cooperation between EU supervisors as well as sanctions will be strengthened and there will be one-stop shop treatment (passport) for non-EU firms that want to access EU markets provided that their home countries have equivalent frameworks.   

These new rules should benefit the economy as a whole by improving the way capital markets work and, within the framework of the Capital Markets Union, contribute to the overall jobs and growth agenda. In this way, they are a key step on the road towards establishing a safer, more open, transparent and responsible financial system and restoring investor confidence in the wake of the financial crisis.

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