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MiFID I to MiFID II
From MiFID I to MiFID II/MiFIR
MiFID II is the generic term referring to the revision of the Markets in Financial Instruments Directive (2004/39/EC) which was originally introduced in 2007, more commonly known as MiFID I. Upon its application on 3 January 2018, the Directive (2014/65/EU) has been accompanied by the Markets in Financial Instruments Regulation (MiFIR, Reg. EU No. 600/2014). To avoid misunderstandings, Deutsche Börse consistently refers to either MiFID II/MiFIR, or to MiFID I where the old directive is concerned.
MiFID I was designed to set out:
- conducts of business and organisational requirements for investment firms,
- authorisation requirements for regulated markets,
- regulatory reporting to avoid market abuse,
- trade transparency obligation for shares, and
- rules on the admission of financial instruments to trading.
In 2014, the European Commission, the European Parliament and the Council of the European Union agreed on a revision of MiFID designed to enhance the efficiency, resilience and integrity of financial markets and to level the playing field within.
Constituting a comprehensive overhaul of the pre-existing Directive, MiFID II/MiFIR significantly widened the scope of application to include a broader group of firms and instruments than were affected under MiFID I.
In particular, MiFID II/MiFIR aim at:
- achieving greater transparency through the introduction of a pre- and post-trade transparency regime for non-equities as well as through a strengthening and broadening of the existing equities trade transparency regime,
- moving more trading to regulated venues supported by the creation of a new trading platform category (Organised Trading Facilities, OTFs) for derivatives and bonds and by imposing a trading obligation for shares on regulated venues,
- implementing the European Union’s G20 commitments on derivatives: mandatory trading of derivatives on regulated venues, introduction of position limits and reporting requirements for commodity derivatives, broadening the definition of investment firm to capture firms trading commodity derivatives as a financial activity,
- facilitating access to capital for small and medium-sized enterprises (SMEs) via the introduction of the SME Growth Market label,
- enhancing investor protection by e.g. banning the receipt of inducements, safeguarding independent advice, or introducing new product governance rules,
- adapting to technological progress with the regulation of high-frequency trading (HFT) by introducing requirements on trading venues and on firms using HFT,
- providing non-discriminatory access to trading and post-trading services, and
- strengthening pan-European regulatory supervision and cooperation between national competent authorities (NCAs).
The scope of MiFID II/MiFIR
While the impacts of MiFID II/MiFIR vary depending on the nature and the volume of investment services and activities a company is performing, no one single type of enterprise can be understood to be as such exempt from the regulation. By definition MiFID II/MiFIR apply to investment firms, credit institutions, certain non-financial counterparties, central counterparties (CCPs) and third-country firms providing investment services or activities within the European Union. By derogation from or, at least, amending these definitions, NCAs may reserve the right to make the final decision on whom they consider to qualify as an investment firm under MiFID II/MiFIR and what to consider as investment services and activities.
Their scope, degree of detail, interconnectedness and cross-referencing of regulatory provisions and their enforcement regimes make MiFID II/MiFIR very complex and difficult to understand in their entirety. Adding to this complexity, the set-up of the regulation is designed to evolve with certain provisions being phased in and parts of the so-called Level 2 legislation being subject to potential continuous changes.
A suitable approach to understanding the regulatory reforms under MiFID II/MiFIR may be to largely follow the categorisation by the European Commission, Parliament and Council and to map it to the various segments as outlined below.