DEFINITION of MiFID II

MiFID II is a legislative framework instituted by the European Union to regulate financial markets in the bloc and improve protections for investors with the aim of restoring confidence in the industry after the financial crisis exposed weaknesses in the system. It is a revised version of the Markets In Financial Instruments Directive, or MiFID, and was rolled out on January 3, 2018, more than six years after the European Commission adopted a legislative proposal for the revision.

BREAKING DOWN MiFID II

MiFID II will impose more reporting requirements and tests in order to increase transparency and reduce the use of dark pools and OTC trading. Under the new rules, trading volume of a stock in a dark pool is limited to 8 percent over 12 months. The new regulations also target high-frequency trading. Algorithms used for automated trading have to be registered, tested and have circuit breakers included. MiFID II also places restrictions on inducements paid to investment firms or financial advisors by any third party in relation to services provided to clients. Banks will no longer be able to charge for research and transactions in a single bundle, forcing fragmentation and possibly improving the quality of research available to investors. Brokers will have to provide more detailed reporting on their trades, including price and volume information, and store all communications, including phone conversations. MiFID II extends the scope of requirements under MiFID to more financial instruments.

Preparations for MiFID II cost firms an estimated total of $2.1 billion, according to a report by Expand, a Boston Consulting Group company, and IHS Markit.