Mifid II explained
From January, one of the EU’s most ambitious — yet controversial — packages of financial reforms will be rolled out.
The Markets in Financial Instruments Directive — or Mifid II — is designed to offer greater protection for investors and inject more transparency into all asset classes; from equities to fixed income, exchange traded funds and foreign exchange.
The extensive piece of legislation, seven years in the making, already has more than 1.4m paragraphs of rules, which will grow as regulators complete the final standards in coming months.
They reach across the financial services industry, from banks to institutional investors, exchanges, brokers, hedge funds and high-frequency traders.
One of the most high-profile aspects of the legislation involves how asset managers pay for the research they use to make investment decisions. For the first time, fund managers will have to budget separately for research and trading costs, a move known as unbundling. Regulators decided the current — more opaque — system was detrimental for fund managers’ clients: pension funds and retail investors who foot the bill for trading costs.
Another big change is the requirement for investment firms to report more information about most trades immediately, including price and volume. Banks will also have greater responsibilities around reporting their transactions: traders must be identifiable even if an order is not executed, for example.
Other areas targeted by Mifid II include surveillance and “best execution”. All voice and text communications relevant to a trade must be stored for a minimum of five years for example, while banks and brokers will be forced to show customers that they were offered the best available price for a deal.