Mifid II is an overhaul of the Markets in Financial Instruments Directive, and has been designed in such a way so as to offer enhanced protection for investors as well as instil greater transparency into the way financial markets operate, across all asset classes, be it equities, bonds, foreign exchanges as well as exchange traded products.
The directive, one of the EU’s largest package of financial reform, which is a detailed and comprehensive form of legal masterpiece, has taken almost seven years to complete and is expected to be dynamically altered after it comes into force on 03 January 2018, as teething issues will be seen to with the passing of time.
The first version of Mifid was originally introduced with the purpose of creating a single financial market within the EU, with the attempt of coming up with a framework which could compete with that in force, at the time, in the US. Its use was to primarily lower transaction costs to investors with the scope of leaving investors with greater spending power and could spur on growth. However, the timing of the first version was unfortunate, and was right in the middle of the 2007/2008 financial crisis.
The newer version, Mifid II, is more of an ambitious project, and is expected to target structural issues, tacking practically all aspects of trading and exchanges within the EU. The directive also has been crafted in such a way so as to steer investors away from placing trade orders via the phone and the push to use electronic platforms and venues, which have more tangible and reliable surveillance and audit trail.
This also means that each trade will have a unique transaction reference, will be timestamped and institutions will have to report more information regarding to transaction details. Transaction data, which could include information in up to 65 distinct and unique fields, will need to be stored up to a period of a least 5 years, whilst banks, brokers and trading venues will need to provide tangible evidence that illustrates to their customers that the transactions were carried out at the best available price, what is known as best-execution.
Impacting all service providers, from banks to large institutional investors, brokers, asset managers and exchanges, the directive is also targeted at impacting the legislation of how asset managers finance external research, and how this research is utilised to take investment decisions. To date, asset managers never needed to fork out a penny to receive research, such as written reports, financial models, and calls with analysts. As a first, asset managers will need to cater for research costs in their budgets as a separate cost from trading costs.
(In the second article, I will touch upon Mifid II in greater detail)
Disclaimer: This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.