Enhanced transparency, investor protection and risk reduction
MIFID II was initially intended to be an overhaul of MIFID I. However, when the financial crisis erupted in 2008, it became clear that an overhaul would simply not do. With MIFID II the European Legislator intends to reshape the financial industry totally, from trading all the way down in the value chain to custody. Enhanced transparency, investor protection and risk reduction are the key objectives under MIFID II.
The most important modifications under MIFID II are:
I. Improved investor protection by means of:
- Best Execution
The financial crisis impacted everybody. A lot of investors lost money because they were uninformed and unaware of the risk and consequences risk-taking could have. Therefore a lot of emphasis now lies on investor protection. Transparency is one essential step in providing investors with the needed information. Next to that, investors should be able to rely on their service provider for providing them with the best possible service. The European legislator therefore strengthened the rules surrounding best execution. Where Mifid I demanded that all reasonable effort should be made in providing best execution, Mifid II now demands that all sufficient steps be taken. This one word difference makes a world of difference in providing investors with the guarantee that they will receive best execution.
- Pre- and Post-trade Transparency and Reporting
The pre- and post-trade transparency and reporting regime, will result in a massive amount of data becoming available to the public and the regulator. Pre-trade reporting will be the responsibility of trading venues and SI’s. Post-trade reporting can also be done by execution venues but will be the responsibility of the investment firm. A distinction must be made in reporting to the regulator by the Authorised Reporting Mechanism (ARM) and reporting to the “market” by the Authorised Publication Agreement (APA).
- Transaction cost analysis
- Independent Investment advice
- Recording voice and electronic trading
- Experience staff
- Capability test (Out of scope for AFS)
- Product governance (Out of scope for AFS)
II. The organised Trading facility (OTF)
MIFID II introduces a new type of trading venue: the Organised Trading facility (OTF). An OTF is a multilateral system just like a Regulated Market or MTF. In an OTF, third party buying and selling interests in bonds, structured finance product, emissions allowances or derivatives are able to interact in the system in a way which results in a contract. The biggest difference lies in the ability of the market operator of an OTF to use discretion in the matching methodology.
III. Direct market Access (DMA) and ALGO trading
IV. Third country policy (Out of scope for AFS)