what is mifid ii 
mifid ii is one of the most important pieces of legislation enacted in finance and investing this century rolled out in 2018 by the european union eu to regulate financial markets while increasing protections for investors it aimed to standardize financial practices across the eu and restore confidence in the industry especially after the 2008 financial crisis it focuses on three key areas service model product development and product placement 12understanding mifid iimifid ii amends the original markets in financial instruments directive mifid from a decade before it rolled out on jan 3 2018 six years after the european commission the eu s executive branch adopted the legislative proposal mifid ii set out goals for greater transparency in the member states and the markets in financial instruments regulation put into force at the same time enacts rules for financial institutions within the eu colloquially mifid ii is used for both and we ll use the term to cover both eu enactments in what follows 32the original mifid went into effect in november 2007 the global financial crisis exposed its weaknesses soon after critics said it focused too narrowly on stocks ignoring fixed income vehicles derivatives currencies and other assets mifid also did not address dealings with firms and investment products from outside the eu leaving rules about those to the discretion of eu member nations 2mifid ii standardizes oversight of the financial industry among member nations and greatly broadens the scope of the eu s regulation of securities markets in particular it imposes more reporting requirements and tests to increase transparency and reduce the use of dark pools private financial exchanges that allow investors to trade without revealing their identities and over the counter otc trading 4the regulations extend mifid s earlier requirements to more financial instruments equities commodities debt instruments futures options exchange traded funds and currencies all fall under its purview if a financial product is available in the eu it is covered by mifid ii even if say the trader wishing to buy it is located outside the eu that s the cost eu companies spent preparing for mifid ii according to the boston consulting group the wall street journal reported 3mifid ii covers virtually all aspects of financial investment and trading and all financial professionals working in the eu bankers traders fund managers exchange officials and brokers and their firms all have to abide by its regulations as do institutional and retail investors applied largely to equities markets73 articlesdrafted in 2004 and became law from 2007 to 2018did not address dealings with firms or products outside the euapplies to all types of securities and derivatives97 articlesproposed in 2012 and in force since 2018applies to any firms wanting to access and trade in eu products regardless of where they are basedkey regulations of mifid iimifid ii brought sweeping changes to trading and investing here are some of the most important a major goal of mifid ii was to move trading out of the shadows from over the counter otc trading and dark pools to regulated trading platforms mifid ii created a new trading venue the organized trading facility to capture previously unregulated trades in addition investment firms that want to execute client orders must be a multilateral trading facility mtf mifid ii limited the trading volume of a stock in a dark pool to 8 of the total trading volume of that stock anywhere over 12 months such pools are private financial exchanges for trading securities that allow institutional investors to trade large blocks of securities without any details being made public until later 2while the stated purpose of dark pools is to enable large trades without impacting the market with news of them this also made them all but immune to oversight mifid ii aims to balance the need for privacy in large transactions that could be contravened by publicity and the market and the public s need for transparency and information on trading activities 2transparency was another major goal of the financial legislation for starters regulated markets and mtfs are required to publish the bid and offer prices of securities continuously but the legislation goes much further 2banks and brokerages can no longer charge for research and transactions in a single bundle making it clearer to clients what each costs individually and hopefully improving the quality of research available to institutional and retail investors alike 54this sounds quite technical but the effects wouldn t be if the legislation s aims were met mifid ii restricts the inducements paid to investment firms or financial advisors by third parties for indirect access to their customers this is meant to reduce major conflicts of interest when banks and investor services offer advice and services these must now be offered in the client s best interest not unknown third parties for example firms paying brokerages commissions on clients they sign up for their funds without such regulations there s a risk that financial advisors might recommend products or services not because they are the best options for their clients but because they offer the most lucrative commissions or other benefits to the advisors more broadly investment firms are now required to take all sufficient steps to obtain the best possible results for their clients and to act in their best interest that includes being upfront about commissions and fees 6investment firms must give regulators reports containing the details of each transaction they execute by the following day they also must keep records of all communications including phone conversations this enables regulators to monitor potential market abuses better 2transaction reporting is not just required for sell side firms such as brokers the counterparties who initiate the trade also must do so 2mifid ii places far greater scrutiny on algorithmic trading and high frequency trading hft to improve transparency in the market prevent manipulation or abuse and ensure fair trading practices given the regulation firms had to adjust their trading strategies invest far more in compliance and infrastructure and maintain detailed records of their trading activities and algorithms let s break this down further 