MiFID II / MiFIR Compliance
MiFID II and MiFIR represent transformative EU legislation, enforced since January 2018, designed to overhaul financial market transparency, boost investor safeguards, and foster market competition.
What are MiFID II and MiFIR?
MiFID II (Markets in Financial Instruments Directive II) and MiFIR (Markets in Financial Instruments Regulation) are cornerstone legislations by the European Union, enforced from January 2018. They aim to increase transparency across the European financial markets, enhance investor protection, and promote competition. MiFID II / MiFIR extends the scope of the original MiFID to cover a wider range of financial instruments and venues, introduce new requirements on market structure, trading, and reporting, and strengthen the conduct of business rules for financial entities.
Features of MiFID II/ MiFIR
The MiFID II / MiFIR regulation explores various facets of compliance within the financial markets:
Enhanced Market Transparency and Integrity
The measures involve requirements for pre- and post-trade transparency, rules on trading venues and systematic internalisers, and increased supervisory powers for regulators. The framework is also aimed at preventing market abuse and promoting fair and effective competition between different types of trading venues. MiFID II/MiFIR is a significant overhaul of the original MiFID legislation, reflecting changes in the trading environment since the financial crisis.
Improved Investor Protection
MiFID II/MiFIR are regulatory frameworks in the European Union that aim to provide greater transparency and protection for investors . They have introduced new rules on the provision of investment services and activities by banks and investment firms, including requirements for client classification, product governance and disclosure of costs and charges . These regulations also enhance the powers of national regulators and provide for the establishment of a single rulebook.
Stricter Rules on Trading Activities
MiFID II and MiFIR significantly tighten the rules on trading activities. These regulations mandate that firms must record all communications that may result in a transaction for at least five years. This includes electronic communications such as emails and instant messages, as well as phone calls. They also impose stricter controls on algorithmic trading and high-frequency trading, to minimize the risk of market abuse or manipulation.
Detailed Reporting Requirements for Transactions
The requirements mandate firms to report detailed and accurate information about their transactions to National Competent Authorities (NCAs) within a day of the transaction.
This includes all financial instruments traded on a regulated market, an MTF or an OTF, and any financial instruments where the underlying is a financial instrument traded on a regulated market .
Regulation of Financial Market Infrastructures
MiFID II (Markets in Financial Instruments Directive II) and MiFIR (Markets in Financial Instruments Regulation) are EU legislations that regulate firms providing services linked to financial instruments and the venues where those instruments are traded. These legislations aim to increase transparency, standardize the regulatory disclosures required for specific markets, and shift trading towards regulated platforms.
Implications of MiFID II/ MiFIR
Financial entities, including investment firms, banks, and trading venues, are required to implement significant changes to their trading infrastructure, data reporting practices, and client relationship management to comply with these regulations, thereby ensuring a more transparent, competitive, and integrated EU financial market.
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Grand: Enhancing MiFID II/ MiFIR Compliance
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How Grand Helps
Each module in Grand.io's GRC software suite plays a pivotal role in ensuring comprehensive compliance with the MiFID II/MiFIR regulation, addressing specific aspects like market transparency, investor protection, trading activities, detailed transaction reporting, and the regulation of financial market infrastructures.
Frequently Asked Questions
To align your transparency reporting with the MiFID II/MiFIR requirements, you need to focus on several key areas. Firstly, ensure your reporting covers OTC derivative contracts and the clearing process through central counterparties, as this is key to improving the safety and transparency of OTC derivatives markets.
Secondly, harmonize your transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market. This is to improve transparency of financial markets for market participants and regulators. Lastly, consider the regulation's focus on new forms of algorithmic trading and the importance of increasing the powers of regulators for better investor protection.
To meet MiFID II/MiFIR investor protection rules, firms must take several steps. First, firms need to ensure they provide clear, comprehensive and understandable information about financial products and services to clients . Second, they must undertake and document a suitability assessment for each client to verify that the products being sold align with the client's financial situation, investment objectives, and risk tolerance.
Third, firms need to establish and implement robust governance arrangements and internal procedures, including a compliance function, to ensure they meet the regulatory requirements . Lastly, firms are required to regularly review and update their policies and practices to ensure continued compliance with the evolving regulations .
To comply with MiFID II/MiFIR's rules on algorithmic trading, firms must implement robust systems and controls to manage their algorithms. This includes comprehensive testing of algorithms before deploying them, and continuous monitoring of algorithmic trading activities to identify and manage risks.
Firms must also keep detailed records of all algorithmic trading activities and systems for at least five years.
Additionally, under MiFID II/MiFIR, algorithmic trading firms are required to provide a detailed description of their algorithmic trading strategies, parameters, and trading limits to the relevant competent authorities. In case of direct electronic access (DEA) provision, firms should carry out a proper risk assessment.
The changes needed for transaction reporting under MiFID II/MiFIR involve daily transaction reporting by each investment firm. These reports should be submitted close to real-time on the second following day to the national financial supervisory (NCA) and should include details about the place, timing, parties involved, beneficiaries, and the amount.
The NCA will then exchange this information within the EU. Furthermore, digitalisation and streamlining of withholding tax (WHT) reclaim procedures are anticipated to decrease costs of transaction reporting. However, the same source also indicates that the new reporting obligations may increase current reporting costs to tax authorities by approximately 5%.
