On 3 January 2018, the Markets in Financial Instruments Directive (MiFID II) entered into application. It sets new rules for trading on financial markets, including equities, fixed income and derivatives. The main hallmark of the new rules is an increased focus on transparency and investor protection. All financial operators are covered, from trading exchanges to global and smaller investment banks. While MiFID I already dealt with trading and investment advice, MiFID II brings the rules into the 21^st century. Trading in derivatives, algorithmic trade strategies and high-frequency firms are now also covered by the new rules.     

Increased transparency

Restoring investor confidence following the financial crisis is one of the main aims of MiFID II. The new rules strengthen transparency in the stock markets, regulate high-frequency trading and focus on better protection for retail clients. To achieve more transparency, MiFID II introduces an obligation to trade shares and certain derivatives on exchanges instead of over-the-counter.

Shares: The trading obligation for shares requires that trades be executed on stock exchanges or inside certain investment banks. These trades can also be executed on exchanges in non-EU countries whose rules are equivalent to those of the EU. To facilitate cross-border trade, the European Commission has adopted equivalence decisions for those countries whose shares are traded systematically and frequently in the EU. 

Derivatives: The trading obligation also applies to certain derivatives that are very frequently traded, such as interest rate swaps.  Non-EU venues are also eligible once the Commission has adopted an equivalence decision. So far, only the US has been recognised as equivalent. This is due to the fact that the US and the EU are the main jurisdictions that have implemented their G20 commitments.  

Better investor protection

Thanks to MiFID II, retail investors will get more and better information. Independent financial advisors will no longer be able to receive payments from other financial service companies. This will ensure that advisors promote funds or products because they are a good option for the investors, and not because they receive a fee in return. Investment firms will also have to ensure that trades are carried out in the best interest of customers. 

Although there were some delays, by the time the rules entered into application on 3 January half of the Member States had managed to either fully or at least partially transpose MiFID II into their national legal systems. The Commission has been closely monitoring the situation and has launched infringements procedures against the remaining Member States.  Transposition should be completed by the end of 2018. However, the sheer scope and breadth of the MiFID II reforms will invariably require fine-tuning and amendments as the new rules are applied. 

The entry into application of MiFID II is a significant move forward for EU financial markets and a milestone in the EU's capital markets union project. It also constitutes an important step for the EU in fulfilling its G20 commitments.

Read more on MiFID II