Mifid II is one of the EU’s most ambitious and contentious regulatory reform in decades, with far reaching consequences for nearly all aspects of Europe’s financial industry.
In the wake of the 2008 financial crisis, the scheduled update to the original Markets in Financial Instruments Directive (Mifid), became the “beast” of a vehicle it is now (with thousands pages of rules and guidance) seeking to address key financial stability issues identified by the G20.
After seven years in the making and a year’s extension, Mifid II will come into force in just under two months on the 3rd January 2018. Here are the key changes I believe the market should be aware of:
The new product governance requirements, introduce a new concept of “target market”, meaning managers must aim to ensure that their products are designed with particular categories of end-investors’ needs in mind.
They extend to all Mifid firms involved in the manufacturing and distribution of financial products, but also indirectly apply to non-Mifid firms that distribute to, or collaborate with, Mifid firms.
Managers will now have to state the intent of their funds, while providing detailed information of the target market and distributors will be responsible for providing information regularly to managers to ensure a continual dialogue and exchange of information among themselves.
In a similar vein, the demand to seek best execution under MiFID I has been bolstered as part the new directive. The requirement to take all ‘reasonable steps’ to see best execution, when carrying out transactions on behalf of clients, has been elevated to taking all ‘sufficient steps’.
This is more than just a semantic shift and will involve a strengthening of front-office accountability, as well as systems and controls to identify any potential deficiencies.
Additionally, firms will have to publish data on the quality of each execution and further customise and simplify their execution policy.
The considerably heightened new requirements on transaction reporting fall under the implementing regulation MiFIR, which forms part of the Mifid II package. It demands that firms report granular details of the transactions they execute to regulators as quickly as possible, and no later than the close of the following working day.
The scope of assets that firms will have to report on is also far broader than before.
Obligations will now apply to transactions conducted on any ‘trading venue’ and not just on European Economic Area (EEA) regulated markets, as was previously the case. Furthermore, the amount of data that must be reported will greatly increase, from 23 to over 65 reportable fields.
There are also new trade reporting obligations, which are not to be confused with the changes above. A key difference between the two is that unlike transaction reporting, trade reporting occurs in near real-time.