MiFID / MiFIR (Market in Financial Instrument Directive / Regulation)

Objectives

The preparatory work on MiFID II and MiFIR began one year after the entry into force of MiFID. The regulator has focused on correcting the weaknesses observed during the 2008 financial crisis and adapting to new market practices and developments (emergence of high-frequency trading, commodity price volatility, increased use of other-the-counter transactions). The aims therefore are to improve security, transparency and the way in which the financial markets work, while enhancing investor protection.

The European Commission has started the process of revising the MiF Regulation and Directive. Initial proposals were published on 25 November 2021 with the aim of adopting the text by the end of 2022. The recast aims to implement the Capital Markets Union by enhancing market transparency, improving investor access to key market data and supporting the competitiveness of European financial centres.

Main provisions

The MiFID II/MiFIR regulatory package consists chiefly of a directive and a regulation:

• Directive 2014/65 UE of 15 May 2014 ("MiFID II") governs the activities of investment firms, sets out investor protection rules and lays down minimum requirements regarding penalties.
• Regulation 600/2014 of 15 May 2014 ("MiFIR") addresses in particular the organisation of markets, access to the European market for third-country investment firms and the powers of supervisory authorities.

Initially scheduled for 2017, MiFID II entered into force on 3 January 2018.

These provisions are supplemented by numerous level 2 and 3 texts.

SCOPE OF APPLICATION

The provisions of MiFID II and MiFIR affect, to varying degrees, all participants in the asset management value chain, all financial instruments and all investment firms.

All parties involved, investment firms and asset management companies must change their governance practices, as well as their systems for assessing employee skills, managing conflicts of interests and recording data.

GENERAL PRINCIPLES

MiFID II sets out a new framework for investment services and financial instruments. The issues addressed can be grouped together according to the two main objectives.

Protect investors

Main provisions	Clarification
Modification of current requirements of "suitability" and "appropriateness"	According to criteria specified by ESMA : recommend to the client (or potential client) only the investment services and financial instruments that are in accordance with his risk tolerance and ability to bear losses  Long-term adequacy, mandatory periodic assessment
New notion of product governance which defines two kinds of obligations for product manufacturers and distributors	Define a positive target market and a negative one  Exchange information on a yearly basis to assess the distribution strategy
Evolution of investment advice : Independent investment advice and non independent investment advice	Independent investment advice has to assess a sufficiently diverse range of financial instruments available on the market. Inducements are banned Non-independent investment advice can be provided by a distributor for example. Inducements are, under certain conditions, possible
Prohibition for investment firms to receive inducements with the exception of payments or non-monetary benefits which meet the following requirements	Enhance the quality of the service provided to the client and disclose the inducements ex-ante and ex-post to the client
Best execution Reinforce MiFID I requirements	MiFID I required to take all « reasonable steps », MiFID II requires to take all « sufficient steps » to obtain, when executing orders, the best possible result for clients Scope of financial instruments expanded (non-equity instruments, OTC operations) Criteria have to be precised and detailed Qualitative and quantitative information have to be published on a yearly basis
Best execution and best selection policies are clearly distinguished	Two policies communicated to clients and available (on the firm’s website for instance)
Costs and charges related to investment services, ancillary services and financial instruments	Related to Investment services and / or ancillary services Related to financial instrument
Obligation to report to the client when the overall value depreciates by 10%	Overall value of a portfolio Leveraged financial instruments depreciation registered on the account of a non-professional client
Safeguard client’s assets and keep all necessary recordings	Client asset protection reinforced by new prohibitions (prohibition against entering into title transfer collateral arrangements (TTCAs) with retail clients, appointment of the Single Officer) Data recording and record keepings requirements are enhanced (scope concerns investment services only, Minimum archiving period : 5 years for all recordings)

The obligations relating to fees and charges pursuant to MiFID II dovetail with those introduced by PRIIPs. Find out more.

Increase transparency

Main provisions	Clarification
Market structures are reformed, two new types of « venues » are introduced	Organised Trading Facility (OTF), multilateral system which is not a regulated market or an MTF and in which multiple third-party buying and selling interests in bonds, structured finance products, emission allowances or derivatives are able to interact in the system in a way that results in a contract Systematic internalizer (SI) : investment firm which, on an organised, frequent systematic and substantial basis, deals on own account when executing client orders outside a regulated market, an MTF or an OTF without operating a multilateral system
High Frequency Trading has to be regulated
New pre and post trade requirements apply to all market players	Pre-trade transparency apply to trading venues and SI Post-tade transparency also applies to investment firms that execute OTC transaction
Enlarge transaction reporting obligations	All financial instruments are concerned, all trading venues are under the scope (regulated markets, OTF, MTF, OTC) Identify precisely the client, stakeholders in decision-making and execution process Trade reports to be published directly or through an ARM (Approved Reporting Mecanism) In France, asset management companies performing collective asset management are not subject to transaction reporting obligations anymore
Set up a reporting on commodities positions	Daily and weekly reportings sent out to the markets and AMF The reporting also aims at preventing and detecting market manipulation and abusive practices
Reinforce transaprency: risk management	New requirements for General Clearing Members (GCM) and providers providing Direct Electronic Access (DEA) GCM are required to monitor « as close to real time as possible » clients ‘ positions concerning securities A delegated regulation under MIFID and EMIR introduces clarification on indirect clearing arrangements

CHALLENGES AND SOLUTIONS

You can count on CACEIS to guide you through the implementation of MiFID II. Please do not hesitate to contact your usual sales contact for further information.

FIND OUT MORE

• AMF has a page dedicated to the revision of the Markets in Financial Instruments Directive (MiFID II).
• ESMA has a page dedicated to MiFID II on its website.