MiFID II in a Nutshell
The Markets in Financial Instruments Directive (‘MiFID II’) and the accompanying legislation, Markets in Financial Instruments Amending Regulation (‘MiFIR’), came into force on 3 January 2018. The objectives of this directive are to increase market transparency, efficiency and safety in the financial markets.
MiFID II applies to EU investment firms and to financial activities undertaken in the EU. However, there is an extra-territorial aspect to the directive as well. A non-EU branch of an EU firm would be in-scope, as would any transaction done on an EU infrastructure or venue. Indirectly, third country entities, which transact with an EU entity, would also have to comply with the directive, to the extent that the EU entity would need to comply.
Some of the key themes of MiFID II include:
Investor Protection: the directive includes stringent controls over disclosure, communication and marketing and transparency to investors.
Organisational Requirements: reporting requirements will be felt mainly by the back office teams, as transactions will have to be reported on in an attempt to increase transparency in the financial markets. Application for a Legal Entity Identifying Number (‘LEI Number’) will be required in order for reporting to be properly conducted. Pre- and post-trade reporting requirements for bonds, structured finance products, emissions allowances and derivatives will be required. This will include reporting on quotes and details of executed transactions in near real-time.
Research: new legislation will forbid the use of client commissions to pay for research.
One thing is for sure: MiFID II requires automated systems in order for many aspects of the directive to be complied with. It is anticipated that the industry will move towards more standardised OTC derivative contracts, enabling them to be centrally cleared and easily reported within the required timeframes proposed by the directive. South African entities may find that their European counterparts will encourage and incentivise entering into such standardised transactions. Without an LEI Number South African entities will find it nearly impossible to transact with their European counterparts, as this is a fundamental requirement under MiFID II. LEI Numbers have to be renewed annually, so this will be an ongoing administrative task.
DeriviDoc provides training on regulatory aspects and requirements in the OTC derivatives market. Look out for our courses on the Financial Markets Act, EMIR and Dodd Frank, as well as our dedicated courses on central clearing – all of which should keep you up-to-date and in-the-know about new and evolving regulation in the OTC derivatives market.