MiFID II: What you need to know.
MiFID II comes into effect in January 2018, creating headaches for some and opportunities for others. In case you’ve been hiding from pretty much every major news outlet lately, we’ve summarized some key facts you need to know:
- MiFID II aims to strengthen the European financial markets, reducing systemic risk and the dangers of market disorder. It also aims to increase efficiency and reduce unnecessary costs for market participants.
- Under MiFID II, the exemption for proprietary trading firms will be narrowed so that high frequency trading firms and those who engage in algorithmic trading will also be regulated.
- Execution venues must publish standardized information on the quality of order execution.
- Investment firms will need to meet a higher standard of best execution, taking sufficient steps to achieve the best possible result for the client. Firms will need to provide information on the execution venues used, publishing their top five venues and the quality of execution they obtain.
- All telephone conversations and electronic communications regarding orders and transactions must now be kept for at least five years. And while there have long been questions about the use of social media and the security of apps, as highlighted in this recent article from the FT, regulators are clamping down on forms of communication that previously escaped scrutiny.
- The research unbundling requirements of MiFID II will cause disruption and changes in operations and technology in terms of how research is funded, assessed and paid for.
- According to the BBC, some are arguing that the complex MiFID II rules could be a big help to the UK after Brexit because they contain something called equivalence that allows financial companies from outside the EU to do business inside it, as long as their home country has the same standards of regulation. What is clear is that many UK firms will have to change how they adopt MiFID II rules until the consequences of Brexit are clearer.
MiFID II is demanding more transparency and accountability – something not seen in the financial services industry so far. How firms prepare themselves over the next few months is still to be seen, but it is estimated that it will cost them more than $2billion USD this year alone.