MiFID - RONIN Partners

What is MiFID

The Markets in Financial Instruments Directive (MiFID) is setting out a new institutional framework of operation for the harmonisation of markets in financial instruments in Europe. Below you may find more detailed information on what it is and how it affects you as an investor.

What is MiFID II? Why MiFID II replaced MiFID I?

The development of financial markets has exposed the need to strengthen the framework for the regulation of markets in financial instruments, including where trading in such markets takes place over-the-counter (OTC), in order to increase transparency, better protect investors, reinforce confidence, address unregulated areas, and ensure that supervisors are granted adequate powers to fulfil their tasks. In order to address the potentially detrimental effect of those weaknesses in corporate governance arrangements, Directive 2004/39/EC (MiFID I) was supplemented by more detailed principles and minimum standards. Those principles and standards took into account the nature, scale and complexity of investment firms. To this end, MiFID I was therefore partly be recast by Directive 2014/65 (MiFID II) and partly replaced by Regulation (EU) No 600/2014 of the European Parliament and the Council (MIFIR). Together, both legal instruments form the legal framework governing the requirements applicable to investment firms, regulated markets, data reporting services providers and third country firms providing investment services or activities in the European Union. MiFID II has effect in the national legislation of EU countries from 3^rd of January 2018.

What are some of the new benefits that MiFID II offers to professional and eligible counterparty investors?

Higher protection: Professional clients are allowed to request to investment firms in written non-professional treatment for one or more transactions regarding one or more financial instruments or a total re-categorization to be retail clients. Additionally, eligible counterparties shall have the right to request, either on a general form or on a trade-by-trade basis, treatment as professional or retail clients under specific articles of MiFID II. Product Governance: MiFID II provides that investment firms must act in accordance with the best interests of their clients. Investment firms should accordingly understand the features of the financial instruments offered or recommended and establish and review effective policies and arrangements to identify the category of clients to whom products and services are to be provided. Investment firms which manufacture financial instruments must ensure that those products are manufactured to meet the needs of an identified target market of end clients within the relevant category of clients, take reasonable steps to ensure that the financial instruments are distributed to the identified target market and periodically review the identification of the target market of and the performance of the products they offer. Investment firms that offer or recommend to clients financial instruments not manufactured by them must also have appropriate arrangement in place to obtain and understand the relevant information concerning the product approval process, including the identified target market and the characteristics of the product they offer or recommend. That obligation should apply without prejudice to any assessment of appropriateness or suitability (regarding only retail clients) to be subsequently carried out by the investment firm in the provision of investment services to each client, on the basis of their personal needs, characteristics and objectives. Portfolio management: For portfolio management services the client must be informed where the overall value of the portfolio as evaluated in beginning of each reporting period depreciates 10% and thereafter at multiples of 10% no later than the end of the business day in which the threshold is exceeded. Clients complaints: Under MiFID II, investment firms must implement and maintain effective and transparent procedures for the reasonable and prompt handling of complaints or grievances received also from professional clients and eligible counterparties, keep a record of each complaint or grievance, describe transparently the complaints procedure and measures taken for their resolution, publish a relevant policy and keep a complaint form in the website. OTF: Introduction of new multilateral system titled organized trading facility which is not a regulated market or an MTF and in which multiple third party buying and selling interests in bonds, structured finance products emission allowances or derivatives are able to interact in the system in a way that results in a contract.

What other benefits MIFID II offers?

Categorization of investors according to their investment knowledge and experience.
Achievement of the best result for the investor in the execution of his/her orders. The client consents to a written Best Execution Policy of the investment firm before the provision of services.
Management and mitigation of conflicts of interest. Where some residual risk of detriment to the client’s interests nonetheless remains, clear disclosure to the client of the general nature and/or sources of conflicts of interest to the client and the steps taken to mitigate those risks should be made before undertaking business on its behalf. The client consents to a written Conflicts of interest Policy of the investment firm before the provision of services.
Evaluation of the suitability and appropriateness of investment transactions, so that each investor can be presented with the investment solution that is really right for him, and so that he does not undertake greater risk than he would be willing to (for retail clients).
Notification of the investor about commissions and possible inducements.
Notification for risks incurred when investing.
Periodic and annual reporting obligations to clients in relation to their transactions and their assets.
Safeguarding of clients financial instruments and funds under strict regulations and appropriate consents where required when clients assets may lose the protection of MiFID II standards.

Which services does the MiFID concern?

Main services:

Reception and transmission of orders in relation to one or more financial instruments
Execution of Orders on Behalf of clients
Dealing on Own Account
Portfolio Management
Investment Advice

Ancillary services:

Safekeeping and administration of financial instruments, including custodianship and related services
Granting credits or loans to one or more financial instruments, where the firm granting the credit or loan is involved in the transaction
Advice to undertakings on capital structure, industrial strategy and related matters and advice and services relating to mergers and the purchase of undertakings
Foreign exchange services where these are connected to the provision of investment services
Services Related to Underwriting
Investment services and activities as well as ancillary services where these are connected to the provision of investment or ancillary services.

Which financial instruments does the MiFID concern?

Transferable securities
Money-market instruments
Units in collective investment undertakings;
Options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, emission allowances or other derivatives instruments, financial indices or financial measures which may be settled physically or in cash;
Options, futures, swaps, forwards and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties other than by reason of default or other termination event;
Options, futures, swaps, and any other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market, an MTF or OTF, except for wholesale energy products traded on an OTF that must be physically settled;
Options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be physically settled not otherwise mentioned in point 6 herein and not being for commercial purposes, which have the characteristics of other derivative financial instruments;
Derivative instruments for the transfer of credit risk;
Financial contracts for differences;
Options, futures, swaps, forward-rate agreements and any other derivative contracts relating to climatic variables, freight rates or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties other than by reason of default or other termination event, as well as any other derivative contracts relating to assets, rights, obligations, indices and measures not otherwise mentioned in this term herein, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are traded on a regulated market, OTF, or an MTF;