The European Union has improved the Markets in Financial Instruments Directive to increase transparency in the financial markets and achieve sustainable economic growth. The European Union has run MiFID since 2007. Also, in 2018, it was replaced by MiFID II, an updated legal regulation.
It is a European regulation that enhances transparency in financial markets and standardizes regulatory disclosures for companies operating in the European Union to achieve sustainable economic growth in Europe. MiFID regulation has taken new measures, such as businesses' transparency requirements when trading, and financial firms have set behavior standards to follow. The MiFID ii directive Directive was prepared in 2004 and came into force in 2007. It has generally revealed the following; execution of business and organization requirements for investment firms, authorization for regulated markets, regulatory reporting to prevent market misuse, rules on transparency for commercial shares, and the acceptance of financial instruments to trade.
When it came into force, it could not meet adequate regulations in the field of investment. As a result, a new arrangement called MiFID2, compatible with the latest technologies, emerged in 2018. MiFIDii regulation the gaps in the arrangement. MiFID II aims to become a more powerful version than the previous law. It focuses on transaction reporting and requirements and focuses on enhancing the client's protection, properly managing portfolios, and making trading platforms more open. In addition, the Markets in Financial Instruments Regulation (MiFIR) works with the MiFID and MiFID 2 to extend the conduct rules to other types of assets.
MiFID2 affects all investment services, including banks and non-banks. In other words, it briefly covers all kinds of financial services. This Directive does not directly regulate private investors but instead regulates firms that operate on behalf of individuals. MiFID2 promotes infrastructure improvement while helping them provide the most transparent and valuable service to their customers. In addition to these, fixed income markets, derivative markets, treasury transactions, accounting are also affected by MiFID2.
Before MiFID ii regulations, investment companies could only collect information from one or two public exchanges. Together with MiFID 2, they can collect information from all sales points as long as they publicly disclose their prices and details. Thus, financial institutions can access as much information as possible.
Companies within the scope of MiFID can be organized in their own country. After a company is issued, it can use the MiFID passport to provide services to customers in other EU member states. MiFID requires companies to classify customers as professional customers or retail customers. Clear procedures should be available to categorize customers and evaluate regulations that are appropriate for each investment product. It recommends that a firm act in the customer's interests regarding the information received when accepting custom orders.
In MiFID II, asset managers' ability to conduct investment research with customer commissions is severely restricted, so this issue is often discussed. MiFID2 requires firms to take all necessary steps to achieve the best possible result in fulfilling a customer's order. The best possible outcome is not limited to the execution price but includes cost, speed, probability of execution and resolution, and other relevant factors. Also, MiFID 2 treats Systematic Internalizers as mini-exchanges.
With MiFID , transparency in the stock market has been significantly increased. Commercial data and public disclosure of the market have become mandatory, and new regulations for non-equity products have entered into force, including pre and post-trade regulations.
In MiFID, an improved market structure has been designed mainly to close the previous regulation gaps. Trade has shifted to regulated platforms. With this arrangement, when Investment firms place customer orders over the systems, their transactions should be registered as Multilateral Trade Facility (MTF). Also, an Organized Trade Facility (OTF) has been created as a multilateral trading platform to synchronize MTFs with Regulated Markets (RMs).
New requirements for the protection of customer assets and monitoring of products have occurred. The marketing and distribution of financial products have become prohibited or restricted by the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA). With the regulation, new and improved codes of conduct regarding customer information developed. Finally, the Insurance Mediation Directive (IMD) has been amended to provide new regulations for insurance-based investment products.
Reporting of all transactions has now become mandatory. The degree of required details in the report is also more extensive. Firms need to regularly check their reporting framework using a test system to ensure that reporting is done correctly. Reporting requirements have become essential for regulators and risk managers.