MERITS AND DRAWBACKS OF THE MARKETS IN FINANCIAL
DIRECTIVE II (MIFID II).
As we know, MiFID is the markets in financial instruments
directive (Directive 2004/39/EC). It has been put into effect across the
European Union since November 2007, brought about substantial changes in the
market. It regulate investment services by commercial banks and investment companies
and operation of traditional stock exchanges and alternative trading venues1. While MiFID created competition between these services and
brought more choice and lower prices for investors, shortcomings were exposed
in the wake of the financial crisis, which has led to problems for ensuring
investor protection and market surveillance. The reform of the MiFID regime
(MiFID II) aims to reinforce the current European rules on securities markets
and address these problems. In July 2014, the European Commission adopted new
rules revising the MiFID framework. These consist of a directive (MiFID 2) and
a regulation (MiFIR). this amendment has been adopted on 23 July 2016, and
MiFID II/MiFIR will start applying on 3 January 2018.
MiFID II seeks to improve the competitiveness of EU financial
markets by creating a single market for investment services and activities and
to ensure a high degree of harmonised protection for investors in financial
instruments2. Firstly, implementation of
MiFID II ensure that organised trading
happens on regulated platforms, and introduces rules on algorithmic and program
trading, which will benefit for the execution
of derivatives. Secondly, MiFIR sets out requirements on disclosure of data
on trading activity to the public and disclosure of transaction data to
regulators and supervisors, which make contributions to improve the transparency and oversight of financial markets –
including derivatives markets – and
addressing some shortcomings in commodity derivatives markets. Thirdly, MiFID
II makes for enhancing investor
protection and improving conduct of
business rules. Above of all,
implementation of MiFID II strengthens the supervision on the financial market.
MiFID II makes its contribution to the dawning era of Big Data – vast
exploitable data sets of computerised information – by requiring pre – and post
– contract price data to be disclosed and reported to the market for all the
securities trades it regulates3.
3 Kemp, R. (2014). MiFID II–A radical contribution to the development of
data law?. Computer Law & Security Review, 30(4), 445-446.
First of all, MiFID II will significantly increase the operating costs of investment institutions. As we know
this regulation have the clear stipulation covering a wide range of corporate
governance, trading venues, algorithmic transactions, direct electronic access,
quota and reporting of commodity derivatives positions, trading rules for
equity instruments, the transaction record preservation, the investor
protection and the suitability, the best execution, the inducement research
spin-off and so on. Second of all, MiFID II increases the accountability
of institutional investors, but also expands the scope of regulation of financial products. Formerly MiFID was
only applicable to the stock market, Mifid II expanded its core principles to
“non-equity products”, covering the stock market’s cash and
derivative products, fixed income, foreign exchange trading and commodity
trading. This is also the first time that restrictions on over-the-counter
bonds and derivatives have been made, and the price transparency and regulatory
requirements for these transactions are higher. Regulatory Countermeasures
after the financial crisis at the both G20 and European determined that markets
need to turn to greater transparency to reduce systemic risk4.
The last but not least, when the MiFID II rules take effect, it
will inevitably result in the leakage of information, and the desire to reduce
the information leakage will not exist again. Although the moves to increase
investor protection are generally welcome, consistent with the transparency
requirements has been regarded as costly, technologically
difficult and not suitable for all trading models. Especially for market participants
who seek to exchange large orders electronically.
Summing up, the key rules of Mifid II introduce: Fairer, safer
and more efficient markets. Against the backdrop of demands for improved
investor protection and market transparency with respect to trading. MiFID II
is believed to enhance market discipline and stimulate healthy competition.
However, consistent with the MiFID II transparency requirements has been seen
as costly, technologically difficult and not suitable for all trading models5. Overall,
this report envisages significant changes to the business structures, operating models and IT systems of
financial services firms.
4 Mensah, D. (2017). Dark execution strategies under MiFID II: A few
shades lighter?. Journal of Securities Operations & Custody, 9(4), 329-333.
5 MiFID II compliance – are we ready? Lukasz Prorokowski H.L. Prorokowski
Consultancy, Wroclaw, Poland, www.emeraldinsight.com/1358-1988.htm