MiFID II Explained: A Comprehensive Guide for Investors

MiFID II is the revision of the Markets in Financial Instruments Directive (MiFID), originally published in 2004. It is the foundation of financial legislation for the European UnionEconomic UnionAn economic union is one of the different types of trade blocs. It refers to an agreement between countries that allows products, services, and workers to cross borders freely. The union is aimed at eliminating internal trade barriers between the member countries, with the goal of economically benefitting all the member countries., designed to assist traders, investors, and other participants in the financial sector. The primary goal of MiFID II is to keep financial markets strong, fair, effective, and transparent.

History of the MiFID

The original MiFID was established in 2004. It became effective across the entirety of the European Union in 2007. Since its inception, the legislation’s been used as a tool to help create unified and fair financial marketsFinancial MarketsFinancial markets, from the name itself, are a type of marketplace that provides an avenue for the sale and purchase of assets such as bonds, stocks, foreign exchange, and derivatives. Often, they are called by different names, including "Wall Street" and "capital market," but all of them still mean one and the same thing. in the EU. The MiFID includes several important directives:

1. Outlines the requirements necessary to regulate trade markets
2. Provides codes of conduct and operational requirements for investment institutions
3. Mandates transparency for all trades
4. Indicates the rules and processes to be followed in the event of financial or operational abuse of financial markets
5. States the rules for trade instruments’ admission into the trading arena

At the end of 2011, the European Commission – which established and oversaw the original MiFID – created a proposal for revisions to the MiFID, a proposal that resulted in the MiFID II after more than two years of debate, rebuttals, and negotiations. The EU Parliament and the EU Council voted to uphold the final set of revisions, and the MiFID II was published officially in mid-2014.

Who and What the MiFID II Covers

The simple answer to who and what the MiFID II covers is: everyone and everything within the financial community.

To break it down further, the MiFID affects:

• Funds and fund managersPortfolio ManagerPortfolio managers manage investment portfolios using a six-step portfolio management process. Learn exactly what does a portfolio manager do in this guide. Portfolio managers are professionals who manage investment portfolios, with the goal of achieving their clients’ investment objectives.
• All trading exchanges
• Banks and bank managers
• Any venues for trading
• Pension funds
• Traders
• Brokers
• Investors

The other primary concern is the markets that the MiFID II addresses, which are:

• Fixed income
• Equities
• FuturesFutures ContractA futures contract is an agreement to buy or sell an underlying asset at a later date for a predetermined price. It’s also known as a derivative because future contracts derive their value from an underlying asset. Investors may purchase the right to buy or sell the underlying asset at a later date for a predetermined price.
• Exchange-traded goods
• All retail derivatives

Final Word

MiFID II – the revision of the original – was intended to make the rules and regulations surrounding financial markets in the EU clearer and more effective. Greater transparency was also a significant concern. Perhaps the most important reasons for the creation of MiFID II are the revisions made to fall in line with ever-growing and changing technology.

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