Explaining MiFID II, a Work In Progress

Until recently the MiFID II regulatory framework has been looked upon by brokers as something that is too far away to be concerned about. Nearing the end of 2017, industry insiders should look closely at the upcoming changes and assess how much their business can be impacted by the changes.

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The changes to the regulatory framework are vast and spread across a variety of different financial markets participants. The main aspect that we are going to look into in this article are brokers, however the changes could indirectly affect investment banks, portfolio managers and Market Makers Market Makers Market makers or called dealing desk brokers represent a type of broker that internalize flows and are taking the opposite side of a transaction submitted by their clients. The market making broker is only quoting a feed of prices to its clients. These feeds may or may not be the exact same as the prices quoted on the interbank market.Any order a client enters is processed internally and never goes out to the market, except in rare cases where a market making brokerage identifies a client as a v Market makers or called dealing desk brokers represent a type of broker that internalize flows and are taking the opposite side of a transaction submitted by their clients. The market making broker is only quoting a feed of prices to its clients. These feeds may or may not be the exact same as the prices quoted on the interbank market.Any order a client enters is processed internally and never goes out to the market, except in rare cases where a market making brokerage identifies a client as a v Read this Term, among others.

Finance Magnates has delved into the MiFID II regulatory scope with the help of Daniel Simpson, Head of Research at JWG, an independent think tank focused on regulatory matters.

MiFID II has been designed by an army of lawyers to extend the reach of the original MiFID framework which was implemented in 2007. In the aftermath of the global financial crisis, the European Union’s authorities have sought to implement additional changes in order to minimize the risks for the financial system and to protect consumers (or at least that is what the European Commission likes to believe).

The requirements are serious departures from business today

The challenges associated with MiFID II compliance are numerous and vary for different institutions.

Commenting on the main topics for retail brokers, Mr Simpson said: “The requirements around complete cost transparency are serious departures from business today, they essentially require firms to reveal sales margin to investors and such transparency will reveal how competitive products are from a price perspective in a way that is unheard of.”

Pre- and Post-Trade Transparency

The only institutions that are exempt from delivering full post- and pre-trade transparency requirements under MiFID II are the central banks. All other institutions have to be able to provide an adequate record of the trade process “as soon as electronically possible”. A designation that is quite real-time these days.

Quotes before the execution of a trade have to be public, which is likely to somewhat impact ‘last look’ for market makers. At the same time all brokers that are making markets could also be affected due to the pre- and post-trade transparency requirements.

Trade reconciliations should become much faster and easy for brokers and for clients, not only due to this aspect of MiFID II, but also due to the record keeping requirements.

Record Keeping, Surveillance and Trade Reconstruction

The Orwellian ‘Big Brother' aspect of MiFID II is one of the most demanding aspects for brokers. While everything is done for the benefit of the client, the risk of personal data being accessed by certain third parties is increased in the world of constant cyber attacks.

Brokers will have to keep records for every communication with the client for a minimum of 5 years, with telephone conversations mandated to be kept for a minimum of 7 years. On the bright side the 'market rigging' problems that have been engulfing the financial industry could be substantially decreased, if not eliminated.

With the data from brokers every trade can be reconstructed in full, and the surveillance methods apply to all devices that are used by a trader. Institutional traders won’t be allowed to use personal devices for any sort of corporate communication, but how firms will be enforcing the requirement remains a mystery.

“I think there a bit of a tension between data privacy rules and other rules, particularly around market transparency and transaction reporting. For instance some of the fields required under MiFID II for transaction reporting directly conflict with data privacy rules in other jurisdictions, for example the US. This causes significant legal challenges for investment firms,” said Dan Simpson regarding this aspect of the new regulatory framework.

Best Execution

The best execution practice legislation in MiFID II is a subtle change to MiFID I in terms of wording, however it's a pretty big one in terms of effect. While companies have been required to take “all reasonable steps” to provide best execution to its clients, after the introduction of MiFID II they will have to take “all sufficient steps”.

Elaborating on the best execution aspect of MiFID II, Simpson said: “There is a much greater emphasis under MiFID II around the transparency and proof required for best execution in ways that it a much more challenging requirement to meet than it is today.”

Some brokerages are likely to have to materially change their procedures and infrastructure in order to comply with the new regulatory framework, as the best execution requirements bring in a new level of transparency for retail investors, where companies will have to disclose something called by European legislators “total consideration”.

Total consideration is related to costs and it includes all the costs that the firm incurs in order to execute a client’s order. Those include trading venue fees, clearing, settlement and others. Brokers will be allowed to withhold their own fees from the best execution requirement.

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Regulation Regulation Like any other industry with a high net worth, the financial services industry is tightly regulated to help curb illicit behavior and manipulation. Each asset class has its own set of protocols put in place to combat their respective forms of abuse.In the foreign exchange space, regulation is assumed by authorities in multiple jurisdictions, though ultimately lacking a binding international order. Who are the Industry’s Leading Regulators?Regulators such as the UK’s Financial Conduct Authority ( Like any other industry with a high net worth, the financial services industry is tightly regulated to help curb illicit behavior and manipulation. Each asset class has its own set of protocols put in place to combat their respective forms of abuse.In the foreign exchange space, regulation is assumed by authorities in multiple jurisdictions, though ultimately lacking a binding international order. Who are the Industry’s Leading Regulators?Regulators such as the UK’s Financial Conduct Authority ( Read this Term in FX and MiFID II in particular have been taking center stage across the board in the financial services industry. It is not without reason that most of the London Summit speakers consider it the hottest issue on their desks right now.

At the London Summit, Finance Magnates will offer an expanded panel discussion with experts in various areas, shedding light on the host of requirements and regulatory regimes in play.

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