What is MiFIDII?
The Markets in Financial Instruments Directive (MiFID) was first adopted in 2004 to harmonise the regulation of investment services across the European Economic Area (EEA). MiFIDII, the second iteration, came into force on 3January2018 and expands the original framework in three main directions:
- Transparency: Greater pre and posttrade transparency for a broader range of instruments, including bonds, structured products and derivatives.
- Investor Protection: Stricter suitability and appropriateness tests, enhanced disclosure of costs and risks, and the introduction of the product governance regime.
- Market Structure: New categories of trading venues (Organised Trading Facilities OTFs), tighter rules on algorithmic and highfrequency trading, and stronger requirements for data reporting.
MiFIDII applies to:
- Investment firms providing advisory, execution, or portfolio management services.
- Credit institutions engaging in ancillary investment activities.
- Trading venues operating in the EU.
- Data providers and thirdparty service firms that support market functions.
What is MiFIR?
The Markets in Financial Instruments Regulation (MiFIR) runs alongside MiFIDII and is directly applicable in all EU Member States without the need for transposition into national law. While MiFIDII is a directive that sets out what must be achieved, MiFIR details how many of those requirements are to be met, especially in the areas of market access and data collection.
Key pillars of MiFIR include:
- Access to Trading Venues: Mandatory public access to regulated markets, multilateral trading facilities (MTFs) and OTFs for eligible participants.
- Transparency Requirements: Realtime reporting of quotes and trades (the transaction reporting regime) and the public dissemination of posttrade data.
- Position Limits & Reporting: Position limits for commodity derivatives and a requirement to report all transactions to approved Trade Repositories.
- Market Abuse Measures: Extends the scope of market abuse rules to cover new products and introduces stricter insiderlist management.
Key Differences Between MiFIDII and MiFIR
| Aspect | MiFIDII (Directive) | MiFIR (Regulation) |
|---|---|---|
| Legal nature | Needs transposition into national law. | Directly applicable EU law. |
| Primary focus | Organisational requirements, investor protection, conduct of business. | Market infrastructure, transparency, reporting and trading venue obligations. |
| Scope of instruments | Broad, covering securities, derivatives, commodities, and certain cryptoassets. | Specific emphasis on transparency for listed & OTC instruments, plus commodity derivatives limits. |
| Implementation mechanisms | Memberstate legislation, often with national nuances. | Uniform rules across all EU states. |
Impact on Market Participants
Investment Firms
Firms must obtain a MiFID licence (or register as an ancillary activity) and implement robust compliance frameworks covering:
- Client categorisation and suitability assessments.
- Product governance ensuring products are designed for the target market.
- Recordkeeping up to 7 years for most data, 10 for communications with clients.
- Algorithmic trading controls, including a written algorithmic trading strategy and pretrade risk checks.
Trading Venues
Operators of regulated markets, MTFs and OTFs must:
- Provide transparent orderbook information (Level 1 & Level 2 data).
- Allow nondiscriminatory access to qualified participants.
- Maintain realtime trade reporting to the public transparency platform.
Data Providers & Trade Repositories
They face new licensing, governance and dataquality obligations. Trade repositories must validate reports, store them securely and make aggregated data available to regulators.
Investors
Retail investors benefit from clearer cost disclosures, simplified risk warnings and a betterstructured complaints process. Professional clients receive enhanced information on liquidity and execution quality.
Implementation Timeline
| Date | Milestone |
|---|---|
| 3Jan2018 | MiFIDII and MiFIR become fully applicable. |
| JanApr2018 | Initial tradereporting rollout; most firms required to submit reports to trade repositories. |
| July2019 | Thirdcountry equivalence decisions for nonEU venues. |
| Jan2020 | Full implementation of the OTF regime. |
| Jan2021 | Position limits for commodity derivatives become enforceable. |
| Oct2022 | Revised productintermediary rules for certain cryptoassets introduced. |
| May2024 (expected) | Review of the smallstockexchange exemption under MiFIR. |
Further Resources
- European Commission MiFIDII and MiFIR overview
- European Securities and Markets Authority (ESMA) Guidelines and technical standards
- European Banking Authority (EBA) Regulatory technical standards (RTS) documents
- International Organization of Securities Commissions (IOSCO) Global marketstructure research
- Professional commentaries e.g., MiFIDII: The Practical Guide (Oxford University Press, 2020).
The information presented here is a highlevel summary and does not constitute legal advice. Market participants should consult the full texts of the legislation and seek professional counsel for compliance.
