November 11, 2016    3 minute read

MiFID II: What It Means For EU Markets

A United States Of Europe?    November 11, 2016    3 minute read

MiFID II: What It Means For EU Markets

The MiFID II (Markets in Financial Instruments Directive) is the EU legislation that governs firms (like banks, investment companies, interdealer brokers, stockbrokers, etc.) which provide services to clients connected to financial instruments and the places where those devices are dealt with.

From MiFID I To MiFID II

The new legislation ought to have come out in early 2017, but it has been delayed to January 3rd, 2018. With MiFID II, the EU also introduces a new European regulation called the Markets in Financial Instruments Regulation (MiFIR).

What Is New?

MiFID II introduces significant changes such as:

  • an increase of transparency in markets;
  • more structured markets;
  • orderly trading behaviour within markets;
  • clearer and plainer costs of trading and investing

Good Or Bad News For Asset Managers?

What are the concerns for portfolio managers? Product governance and product intervention.

As concerns the first one, it is stated that companies that manufacture and distribute financial products act in the clients’ best interests during all the stages of the life-cycle of products or services. The MiFID II requirements on product governance cover arrangements which firms must adopt when they are manufacturing products, when they are deciding about the products and services they mean to offer to clients or when they are offering or recommending such products to customers.

The European Securities and Markets Authority (ESMA) has made a list of six categories – which can be easily consulted on its website – that manufacturers of financial instruments should use as a “guideline” to define the target market for their products including: the type of client to whom the product is intended for, his knowledge and experience in the area, his financial situation (with a particular care on his ability to bear losses), his risk tolerance and compatibility of the risk/reward profile of the product with the target market, his objectives and needs.

The second one, product intervention, is about forbidding – or restricting – the marketing or the distribution of a certain instrument (including structured deposits) or any kind of financial practice, in or from an EU Member State. Besides, according to Norton Rose Fulbright, both the European Banking Authority (EBA) and ESMA have similar powers to those described above for Member State national regulators. Any ban or any restriction can be exercised both on the EU as a whole or simply in relation to a particular member state.

This power can only be used in certain circumstances, namely when there are fears regarding possible damage to the investors. This occurs when the existing regulatory requirements are not suited to deal with the issue, when member states’ national regulators have failed to deal with the issue or when both ESMA and EBA ensure that the action will not damage either the efficiency of the market or the investors in a manner disproportionate to the benefits of exercising the power. Otherwise, the same action will not create the risk of taking advantage of a price difference between two or more markets.

Conclusions

This new legislation will shape a new future for EU capital markets, the real economy will surely benefit from it and the markets will be safer, more open and responsible, trying to regain the long-lost faith of the investors. MiFID I contributed to creating a capital markets union, and MiFID II will shape an even more defined legislation between member states to create conditions for partner countries to come together and plan a course towards the possible creation of the United States of Europe.

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