MiFID II aims to bring greater transparency and protection for investors across the financial markets. It introduces enhanced protections for all types of investors, from retail to professional, and expands the range of financial instruments covered.

Impact Beyond Europe

Markets directly affected include France, Greece, Malta, and the UK. Although it is a law in the Eurozone, MiFID II’s new rules have a far-reaching, global impact. The regulation applies across the European Union (EU) and is also relevant for countries in the European Economic Area (EEA) that are not part of the EU. This means that any firm in the EEA conducting investment activities or services in financial instruments will be subject to the new rules.

The regulation also indirectly impacts regions beyond Europe, such as APAC. MiFID II doesn’t directly apply to non-EEA firms, but it is relevant primarily when employees are involved in the origination of EEA-underwritten MiFID II products and services, such as debt and equity insurance.

MiFID II generally lacks extraterritorial effect, but:

  1. It would apply if a non-EEA entity were conducting MiFID investment services with respect to MiFID products in the EEA.
  2. Specific provisions have express extraterritorial impact, e.g., transaction reporting requirements apply to all branches of EEA entities.

There are four main areas of impact:

  1. Research — Considered an inducement under MiFID II, the receipt of free research is banned.

  2. Reporting — Transaction reporting must now include additional trade details, including cost elements. All periodic statements must be issued at least quarterly. Investors will be notified when there is a 10% depreciation in a discretionary portfolio, FX operations, or FX forward contracts.

  3. Best Execution — Investors will now have visibility into the quality of execution received and the venues used.
  4. Manufacturing and Distribution — Investors must be assigned Target Market attributes. Products must also be analyzed for their Target Market to prevent sales to unsuitable investors.

1. Research Unbundling

MiFID II introduces further restrictions for portfolio managers and independent investment advisers. They can only receive research and sales services if these are paid for either:

  • Directly from their own resources, or
  • Through a client-funded Research Payment Account (RPA).

This prevents potential conflicts of interest. Some bank analysts are nervously anticipating the changes, fearing job losses, while analysts at smaller or independent companies see it as an opportunity for fair compensation.

2. Reporting

MiFID II is introducing quarterly reports related to holdings and discretionary portfolio management. New requirements mandate that firms holding accounts with leveraged financial instruments (LFIs) or other contingent liability transactions (CLTs) must report to investors if the initial value of the instrument depreciates by 10%, and then by additional multiples of 10%.

A broader scope of financial transactions must now be reported. Both counter-parties (investment firms) involved in a trade must report transaction data, which includes investor details, to regulators.

3. Best Execution

Best Execution refers to a regulatory duty for firms to take all sufficient steps to obtain the best possible result for clients, considering factors like price, costs, speed, and likelihood of execution and settlement.

4. Manufacturing and Distribution

Investors need to be categorized when on-boarded for the purpose of conducting investment activities or providing investment services. This categorization affects the regulatory obligations of firms.

MiFID II also introduces the requirement for both manufacturers and distributors to identify a target market for the products they create or distribute. This analysis must also consider any negative target market, which refers to the customers to whom a product should not be sold.

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