Better regulated and transparent financial markets

SUMMARY OF:

Directive 2014/65/EU on markets in financial instruments

WHAT IS THE AIM OF THE DIRECTIVE?

Known as the markets in financial instruments directive (MiFID II), it aims at making financial markets in the European Union (EU) more robust and transparent.
It creates a new legal framework that better regulates investment and trading activities on financial markets and enhances investor protection.

KEY POINTS

1.
Ensuring financial products are traded on regulated venues
The aim is to close loopholes in the structure of financial markets. A new regulated trading platform is established to capture the maximum of unregulated trades: the organised trading facility (OTF)*, which exists alongside other trading platforms such as regulated markets.
2.
Increased transparency
The rules strengthen the transparency requirements that apply before and after financial instruments are traded, for instance when market participants have to publish information regarding the prices of financial instruments. These requirements are calibrated differently depending on the type of financial instrument.
3.
Limiting speculation on commodities
Speculation on commodities – a financial practice that can lead to the prices of basic products (such as agricultural products) soaring – is restricted by introducing a harmonised EU system setting limits on the positions held in commodity derivatives. National authorities may limit the size of a position that market participants can hold in commodity derivatives.
4.
Adapting rules to new technologies
Under the new rules, controls must be established for trading activities that are performed electronically at a very high speed, such as high-frequency trading*. Potential risks from the increased use of technology are mitigated by a combination of rules aiming to ensure these trading techniques do not create disorderly markets.
5.
Reinforcing investor protection
Investment firms should act in accordance with the best interests of their clients when providing them with investment services. These firms should safeguard their clients’ assets or ensure the products they manufacture, offer or recommend are designed to meet the needs of final clients. Investors will also be provided with increased information on products and services offered or recommended to them. Moreover, firms must ensure that staff pay and incentives received by, or paid to, the firms to recommend a particular financial product are not organised in a way that goes against clients’ interests.
6.
Initial capital
Amending Directive (EU) 2019/2034 on the prudential supervision of investment firms (see summary) harmonises the required level of initial capital of investment firms operating OTFs and multilateral trading facilities* (MTFs).
7.
Authorisation and supervision
The European Securities and Markets Authority (ESMA) is responsible for authorising and supervising undertakings that intend to provide data reporting services, following amendments introduced by Directive (EU) 2019/2177.
8.
Crowdfunding service providers
Legal persons authorised as crowdfunding service providers under Regulation (EU) 2020/1503 are excluded from the scope of Directive 2014/65/EU.
9.
Small and medium-sized enterprise growth markets
Amending Regulation (EU) 2019/2115 introduces new rules to actively promote the use of small and medium-sized enterprise (SME) growth markets, a new type of trading venue created under Directive 2014/65/EU and a subcategory of MTFs. These are designed to improve SMEs’ access to capital and enable them to grow, and to encourage the development of specialist markets catering to the needs of SME issuers with growth potential.
10.
COVID-19 pandemic
To help recovery from the pandemic, amending Directive (EU) 2021/338 simplified certain MiFID rules that appeared not useful or too burdensome. The periodic reporting due to be published by trading and execution venues and systematic internalisers* was suspended until February 2023. The amending act also introduced some changes to the position limit regime for commodity derivatives to support the emergence and growth of euro-denominated commodity derivative markets.
11.
Digital operational resilience
Amending Directive (EU) 2022/2556 aligns the provisions of the directive, and several other related directives, with the requirements on ICT risk for financial entities set out in the digital operational resilience of the financial sector (DORA) regulation, Regulation (EU) 2022/2554 (see summary).

Delegated and implementing acts

The European Commission has adopted a series of delegated and implementing acts, including the following.

Delegated Directive (EU) 2017/593, as amended by Delegated Directive (EU) 2021/1269, which deals with aspects of investor protection:
- safeguarding clients’ funds and financial instruments;
- product governance*;
- monetary and non-monetary compensation; and
- the integration of sustainability factors into the product governance obligations.
Delegated Regulation (EU) 2017/565 on organisational requirements and operating conditions for investment firms, as amended by Delegated Regulations (EU) 2021/1253 as regards the integration of sustainability factors, risks and preferences and (EU) 2021/1254 on organisational requirements and operating conditions for investment firms.
Implementing Regulation (EU) 2016/824 on technical standards for describing the functioning of MTFs and OTFs and their notification to ESMA.

FROM WHEN DO THE RULES APPLY?

The directive had to be transposed into national legislation by 3 July 2017 and the rules have applied since 3 January 2018 (postponed by 1 year by Directive (EU) 2016/1034).

BACKGROUND

For further information, see:

Investment services and regulated markets – Markets in financial instruments directive (MiFID) (European Commission)
Implementing and delegated acts - MiFID II (European Commission).

KEY TERMS

Organised trading facility. A multilateral system which is not a regulated market or a multilateral trading facility (see below), and in which multiple third-party buying and selling trading interests in bonds, structured finance products, emission allowances or derivatives are able to interact in the system.

High-frequency trading. A type of trading that uses computer programs to perform trades at high speed using rapidly updated financial data.

Multilateral trading facility. A facility in which multiple third parties buying and selling trading interests in financial instruments are able to interact in the system.

Systematic internaliser. Systematic internalisers are investment firms which deal on their own account when executing client orders outside a regulated market, multilateral trading facility or organised trading facility without operating a multilateral system, on an organised, frequent, systematic and substantial basis.

Product governance. This ensures that firms that manufacture and distribute financial instruments and structured deposits act in their clients’ best interests.

MAIN DOCUMENT

Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (recast) (OJ L 173, 12.6.2014, pp. 349–496).

Successive amendments to Directive 2014/65/EU have been incorporated into the original text. This consolidated version is of documentary value only.

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