The Markets in Financial Instruments Directive (MiFID), which came into effect on 1st November 2007, introduced major changes to the European regulatory framework. The review of MiFID (aka MiFID II or MiFID 2) was subsequently undertaken by the European Commission (EC).

On 14th January 2014 informal political agreement was reached on MiFID II/MiFIR, followed by formal adoption by the Parliament on 15th April. The final Level 1 text was published in the Official Journal of the EU on 12th June 2014, with entry into force twenty days later. MiFID II was to apply from 3rd January 2017 (30 months from entry into force), but in June 2016 a 12-month delay was agreed. MiFID II applies from 3rd January 2018.

ESMA’s Final Report Draft Regulatory and Implementing Technical Standards were published on 28th September 2015 and, with ensuing delays in 2016, publication into the Official Journal took place at the end of March 2017.

The key areas of MiFID II are:

Changes in Market Structure
EU market structure will change, in particular around OTFs and OTC.

• MiFID II introduces the Organised Trading Facility (OTF) as a new type of trading venue for non-equities. An OTF is a multilateral trading venue like the Regulated Market or MTF and is subject to similar requirements for pre- and post-trade transparency and market surveillance, but with some discretion over how orders are placed and executed.
• MiFID II refines the definition of OTC making it more difficult for firms to trade away from trading venues or outside of a systematic internaliser

Pre- and post-trade transparency
MiFID II introduces transparency requirements for non-equities and significant changes for equities.

• There will be consistent application of the existing pre-trade transparency waivers scheme across the EU, and for equities the introduction of % volume caps on some dark trading
• Operation of a MiFID II data reporting service will be subject to authorisation. Organisational requirements and conditions will apply to Approved Publication Arrangements (APA) for post-trade data publication, to Consolidated Tape Providers (CTP) for collection and aggregation of post trade data and to Approved Reporting Mechanisms (ARM) for transaction reporting to competent authorities.
• Competing CTPs are envisioned, initially for equities, with provision for a public procurement process to establish a consolidated tape if suitable CTPs do not emerge
• There will be more granular flagging introduced on trade reports and on transaction reports, including algo ids and waiver ids
• For non-equities pre- and post-trade transparency requirements are introduced taking account of the different characteristics and market structures of specific types of instrument and calibrated for different types of trading systems

Open access
Open access requirements in MiFID II will open up the vertical silo but with some additional transition periods.

• Under MiFID II the open access regime requires non-discriminatory access at reasonable cost to benchmark providers and clearing houses
• Competing venues will be able to connect to existing CCPs to trade and clear the same products as on the incumbent exchanges on a non-discriminatory and transparent basis, including collateral requirements and fees
• Trading venues will also be required to provide open access, including data feeds, on a transparent and non-discriminatory basis to CCPs that wish to clear transactions executed on that trading venue
• However, regardless of the open access regime, for derivatives multiple CCPs connecting directly to each other (interoperability) is not part of the arrangement

Automated trading
MiFID II defines algorithmic and high-frequency trading and traders face different requirements.

• Algorithmic trading requires effective systems and controls for firms and trading venues based on existing ESMA Guidelines
• Additional requirements are introduced for HFT including registration of all entities engaged in HFT and specific record keeping obligations
• Exchanges will have to implement regimes to identify algorithms involved in submitting orders

Commodity derivatives
MiFID II will impose new rules on commodity derivatives positions.

• National Competent Authorities (e.g. the FCA) are required by ESMA to impose a new position limits regime for commodity derivatives
• Venues that offer trading of commodity derivatives are subject to a new position reporting regime, including reporting on positions of all beneficial owners

Last updated 7th January 2020