The European Union (EU) is undergoing significant regulatory changes in its financial markets with the recent review of the Markets in Financial Instruments Directive (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR). These frameworks are pivotal in improving market transparency, investor protection, and efficiency across European financial markets. The current review introduces new rules and changes to address emerging challenges, streamline market data, and increase the overall competitiveness of EU markets.
The texts of MiFID II/MiFIR review entered into force on 28 March 2024, while the transposition deadline for the MiFID II amendments is set on 29 September 2025. The amendments introduced to Level 1 include a substantial number of Level 2 measures that are to be developed over the next 6 to 18 months. The regulatory changes will also require several amendments to the ESMA IT-systems and relevant MIFIR registers.
During the implementation phase of the MiFID II/MiFIR review, ESMA will be consulting the public on a range of technical standards that will be published sequentially in several consolidated consultation paper (CP) packages. The date for the entry into application of the Level 2 measures is subject to their adoption by the European Commission and approval by the European Parliament and the Council of the EU and where needed, an implementation period will also be provided.
Goals of the MiFID II and MiFIR Review
The MiFID II and MiFIR review aims to improve the functioning of EU capital markets as part of the broader Capital Markets Union (CMU) project. The main objectives are:
- Enhancing Market Transparency: Improving access to market data and ensuring it is clear, high-quality, and available to all investors.
- Consolidating Data Sources and Reducing Fragmentation: Simplifying data sources and reporting mechanisms to centralise access to market data, making it more efficient for participants.
- Strengthening Investor Protection: Clarifying product governance rules and investor safeguards to ensure better outcomes for retail and institutional investors.
- Improving Market Efficiency and Resilience: Streamlining trading, reporting, and data publication rules to improve the efficiency and integrity of EU financial markets.
Key Changes in the MiFID II and MiFIR Review
1. Market Data Transparency and the Consolidated Tape
One of the most important changes is the revision of the “consolidated tape” regime. A consolidated tape (CT) is essentially a single source of market data that provides a comprehensive view of prices and trading volumes on financial instruments across all EU trading venues. Data fragmentation has made it difficult for investors to access reliable and timely data, leading to inefficiencies and higher costs.
The revised rules, empower ESMA to organise a selection procedure for a single entity to provide a CT for each specified asset class. This aims to increase transparency, reduce data costs, and level the playing field by ensuring that all investors have access to uniform information.
2. Introduction of the Designated Publishing Entity
The review introduces the status of a Designated Publishing Entity (DPE). A DPE status would allow an investment firm to be responsible for making a transaction public through an Approved Publication Arrangement (APA) without having the need to take the status of Systematic Internaliser (SI). Where neither party to a transaction/both parties are DPEs, the entity selling the financial instrument would be responsible for making transactions public via the APA.
3. Best Execution Reporting
Execution Venues and Investment Firms were required to publish detailed reports related to the quality of execution of transactions on their venues and the obligation to execute orders on terms most favourable to the client. These so-called ‘best execution reports’ (a.k.a. RTS 27 & RTS 28 reports) are rarely read and/or used by investors. ESMA previously issued public statements calling authorities to deprioritise supervisory actions on the obligation to publish RTS 27/28 reports. The review completely removes the obligation to publish the said best execution reports. This deletion comes in the light of the CT, which should cover information normally included in the best execution report.
4. Payment for Order Flow Ban
Payment for Order Flow (PFOF) has been a contentious issue in financial markets. PFOF is a practice where brokers receive payments from third parties (typically market makers/liquidity providers) for directing client orders to them. While some argue that PFOF helps investors get better prices, critics contend that it creates conflicts of interest, as brokers may route orders based on the highest payment rather than the best execution for clients.
The review of MiFID II and MiFIR moves toward stricter regulation of PFOF by enhancing transparency around order routing practices and best execution. Under the new rules, PFOF will be banned for retail clients (and professional clients on request), reflecting a commitment to protect smaller investors from potential conflicts of interest. Brokers will have to ensure that orders are executed in the best interests of their clients without financial incentives from third parties influencing the routing of those orders.
5. Pre- and post-trade transparency (derivatives)
The review introduces separate provisions addressing pre-trade transparency requirements for derivatives. This mandates market operators and investment firms to disclose relevant transaction information to the public and adhere to pre-trade transparency obligations outlined therein. Furthermore, the review revises the post-trade transparency regime accordingly. Specifically, the scope of Over-The-Counter (OTC) derivatives is now included in post-trade transparency.
6. Transaction Reporting
The revised MiFIR has expanded the scope of the reporting obligation to now include certain OTC derivatives, irrespective of whether such transactions are carried out on the trading venue.
The following types of instruments denominated in EUR, JPY, USD, or GBP are now captured by the MiFIR reporting obligation.
- OTC derivatives declared by the EU as subject to the clearing obligation under EMIR, and where those derivatives are interest rate derivatives have specific tenors (years till maturity).
- OTC derivatives – Credit Default Swaps that reference a Global Systematically Important Bank (G-SIB) and that are centrally cleared or, that reference an index comprising G-SIBs and that are centrally cleared.
Implications for Market Participants
The MiFID II and MiFIR review will have broad implications for all market participants, including:
- Financial Institutions and Brokers: They will need to adapt to the updated requirements for order routing, data reporting, and transparency. The ban on PFOF for retail clients will also impact their business models and order execution strategies.
- Investors: Investors stand to benefit from enhanced transparency through the consolidated tape, and improved access to quality data.
- Trading Venues and Data Providers: With the establishment of the DPE and new data transparency rules, trading venues and market data providers will need to align their operations with the updated data reporting requirements and pricing structures.
- Regulators and Authorities: The streamlined reporting obligations and access to the consolidated tape will provide regulators with better-quality data to monitor market behaviour and detect irregularities or abuses more effectively.
Conclusion
The MiFID II and MiFIR review marks a critical step in the evolution of the EU’s financial regulatory framework. By enhancing transparency through the CT and the DPE, improving investor protection with a PFOF ban for retail clients, and simplifying data reporting, the review aims to create a more efficient, transparent, and fair capital market across the EU. These changes will help build more robust financial markets, provide better services to investors, and promote a level playing field for all market participants.
How MAP S.Platis can help
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With a multidisciplinary team, we offer comprehensive, tailored solutions to help you navigate MiFID II and MiFIR review requirements. Our services are designed to meet the individual needs of each client and include:
- In-depth regulatory impact analysis on your business and operations
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- Review and update of existing policies and procedures
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