Home Business Insights & Advice Explaining the MiFID regulation

Explaining the MiFID regulation

by John Saunders
17th Oct 22 2:13 pm

Good regulations and clearly defined operating bounds are critical elements for success in any industry, and the financial markets in the European Union are no different. However, because of the composition of the EU, it was especially challenging for regulators to govern the sector and standardise operations in all the EU nations. But with the assistance of the Markets in Financial Instruments Directive (MiFID), the EU has implemented standard operating procedures that make the sector much more manageable.

MiFID is an EU initiative to standardise, regulate and improve transparency in the European financial markets. It was first introduced in 2007, with further revisions done in 2018 to bring it up to date. The regulations administer compliance requirements for all financial firms and aim to protect investors from financial misappropriation like the one seen in 2008. This piece will explore more on MiFIDs and what they mean.

We have also put together a trading guide with the top forex brokers in the UK to help you get started with trading.

What is MiFID

MiFID is the EU’s regulations governing the conduct of financial institutions in the union. It standardises financial rules and creates transparency in the EU’s financial markets to protect consumers. Furthermore, they level the financial market ground and make the EU financial service industry fairer for all players.

The MiFID first took effect in 2007, just before the 2008 market crash. However, the subsequent crash exposed some weaknesses in the first iteration of the MiFID, and EU regulators quickly moved to rectify them. The regulations have seen many changes over the years, but the most significant was in 2018, with the introduction of the MiFID ii.

MiFID ii builds on the foundation set by the initial draft by broadening the regulations mandate and scope of work. For instance, it aims to mitigate and reduce dark pools, private and anonymous financial exchanges, to a maximum of 8% volume in 12 months. They also aim to minimise over-the-counter trading, which can be controversial sometimes.

Furthermore, the MiFID regulations now stipulate how EU financial institutions interact with their counterparts from other regions. The lack of a uniform regulatory framework unfairly gave the upper hand to non-EU members, but with standardisation, they can now be more competitive.

Who does the MiDIF affect?

The MiFID also works hand in hand with MiFIR, Financial Instruments Regulation, to envelop all aspects of financial trading, investing and professions. Some of the financial professionals include bankers, traders, investment fund managers, brokers, exchange officials, and retail and institutional investors. Furthermore, the mandates extend to all financial institutions and advisors in the sector from the EU.

One more notable mandate is the restriction placed on banks and brokerages. They now have to show their pricing for transactions and research clearly, unlike previously when they bundled them together. This is improving transparency and introducing accountability in the EU’s financial sector. The EU also hopes these steps improve the quality of research and financial services in the union.

Brokers also have to be more accountable for their trading and are required to report their activities in more detail. For instance, the regulations put an emphasise on electronic trading because accounting and recording information for archiving is easier. Furthermore, traders are also required to record and store all communications with their clients.

In addition, MiFID delineates financial clients as either retail, professional, and eligible counterparties. It also states what information each should access from brokers and other financial institutions. Retail and professional investors and traders are thought to be informed enough to know and understand the risks involved in the industry, while eligible counterparties might require some hand-holding.

Last words on MiFID

The financial market is a complex and entangled web of different players in the sector. When you add in the unique political dynamic that’s the European Union, you have a recipe for undue red tape and complicated political manoeuvring. However, the EU seems like it has taken all the right lessons from years of financial excellence as well as crises like the one witnessed in 2008.

For the most part, the EU has implemented the MiFID regulations, which have gone a long way to make the union a formidable force in the financial sector.

 

The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.

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