MiFID II (Markets in Financial Instruments Directive II)

(Markets in Financial Instruments Directive II)


The EU’s revised Markets in Financial Instruments Directive (MiFID) and Markets in Financial Instruments Regulation (together MiFID II) will go-live on 3 January 2018. MiFID II seeks to make financial markets in Europe more resilient, transparent and investor-friendly and is part of a number of measures enacted in response to the financial crisis. These include the European Markets Infrastructure Regulation (EMIR), which seeks to make the EU’s OTC derivative market safer, and the Securities Transactions Regulation (SFTR) which seeks to regulate the EU’s shadow-banking sector.


In October 2011, the European Commission tabled proposals to revise the Markets in Financial Instruments Directive (MiFID II) with the aim of making financial markets more efficient, resilient and transparent, and to strengthen the protection of investors. On 14 January 2014, an agreement in principle was reached by the European Parliament and the Council on updated rules for MiFID II.

On 10 February 2016, the European Commission proposed a one year extension of the MiFID II implementation date from January 2017 to 3 January 2018. The twelve month delay was proposed due to the exceptional technical implementation challenges faced by regulators and market participants.

What does MiFID II reform mean?

The MiFID II reform means that organised trading of financial instruments must shift to multilateral and regulated trading platforms or be subject to transparency requirements where traded over-the-counter (OTC). Strict transparency rules will ensure that dark trading of shares and other equity instruments which undermine efficient and fair price formation will no longer be allowed.

To whom does MiFID II apply?

MiFID II applies to MiFID firms, i.e. those Financial Services businesses undertaking MiFID Business anywhere in the European Economic Area ('the EEA'). It will affect all participants in the EU's financial markets, whether they are based in the EU or elsewhere, including providers of asset management and custodial services.

MIFID II also applies to European providers of MiFID services in the European Economic Area (EEA)1 , such as investment managers of pension funds, European firms which provide MiFID services and to a certain extent credit institutions. It has some application for UCITS management companies and AIFMs where they provide certain investment services. Additionally, European providers of MiFID services which have branches outside the EEA may be affected by MiFID as even if not established in the EEA, their interactions with EEA firms may mean they are indirectly impacted by MiFID II.

MiFID II also applies to all financial instruments and certain investor protection provisions now apply to structured deposits. A number of trading venue and trading-related requirements have been extended to include a wider range of equity and non-equity products.

1This includes the 28 EU member states and, once incorporated into the EEA Agreement and transposed into national law, Iceland, Norway and Liechtenstein.

How does MiFID align with the MAD and MAR rules?

MiFID and MAD both look at the competitiveness, efficiency and integrity of EU financial markets. They need to be updated in tandem to ensure that they are fully coherent and support each other's objectives and principles. The political agreement reached on MAR is subject to agreement on MiFID II, because the new MiFID rules contain part of the regulatory framework on which MAR is based. Notably, it is hoped that the new MiFID will ensure that all types of organised trading are regulated. The MAR will apply market abuse rules to all organised trading. Moreover, the pan-EU competition facilitated by MiFID has given rise to new challenges in terms of cross-border supervision. Harmonisation of the rules and competent authorities' powers is therefore a necessary step.

MiFID II and Brexit

As a member of the G20, the UK is obliged to implement legislation to meet the group’s commitments and reform agenda which have, in part, contributed to MiFID II. In fact, many of changes to MiFID have been made at the behest of the UK’s FCA which reiterated its position by issuing a statement on the morning of the referendum result that all firms should continue to work on its implementation.

Moreover the triggering of Article 50, now earmarked for the end of March 2017, initiates a two-year negotiation process which will continue beyond the 3 January 2018 implementation date. During this period, the UK will still be a full member of the EU.

Last updated: 21 February 2017

Client relationship

We have summarised the key MiFID II client impact areas below.

1. Client classification

Local public authorities and municipalities are now categorised as retail clients (RC), which will determine the type of products and services available to them. They may however request to opt up to elective professional counterparties (PCs) but will not be able to opt up to eligible counterparties (ECPs) once they are elective PCs.

i This includes the 28 EU member states and, once incorporated into the EEA Agreement and transposed into national law, Iceland, Norway and Liechtenstein.

2. Documentation and data

  • Additional client data is required to meet multiple obligations (e.g. LEIs, information relating to suitability and appropriateness and trade reporting data).
  • In-scope clients will need to agree new and updated legal documentation; and clients who trade with multiple financial institutions will have to undertake a comprehensive repapering exercise with each firm.


Member States may adopt specific criteria to assess the knowledge and expertise of local public authorities and municipalities; and their capacity to opt-up to the PC category.

3. The manufacture and distribution of products


Product governance in relation to design, distribution and life-cycle management will be formalised.

Terms of business

Terms of business will be required when co-manufacturing with a non EU entity and there will be changes to the terms of business with distributors to reflect updated roles and responsibilities.

Manufacturers and distributors

  • Governance process to be formalised (product design, distribution & life-cycle management).
  • Product-specific testing to inform the manufacturing process.
  • Product reviews and information-sharing requirements to capture investor feedback.
  • Changes to terms of business with distributors to reflect updated roles and responsibilities and formalise the revised governance process.
  • Terms of business required when co-manufacturing, including with a non-EU entity.
  • Manufacturers and distributors to formally consider the appropriate target market for products they manufacture / distribute.


  • Definition of target market is not set in stone
  • Feedback loop process
  • Definitions of events which are material and ‘scenario analysis’ testing

4. Permitted inducements

  • Independent advisers and asset managers cannot receive inducements unless they are “minor non-monetary benefits”, or they pay for them. The list of “minor non-monetary benefits” is prescriptive and includes generic information, corporate issuer research and de minimis hospitality. Minor non-monetary benefits include:
    • Information relating to a financial instrument or investment service, (generic in nature or personalised to reflect the circumstances of the individual client).
    • Market colour and non-research short-term sales materials are considered minor non-monetary benefits which can be received.
    • Materials from issuers to promote new issuances / ongoing materials.
    • Participation in training events on the benefits and features of a specific financial instrument or investment service.
    • Hospitality of a de minimis value.
    • Other reasonable and proportionate non-monetary benefits specified by the relevant member state.
  • For independent advisers and asset managers, substantive research is an inducement unless it is paid for from a firm’s own funds or through a client funded research payment account and disclosed to clients (see related topic ‘Research unbundling’).
  • The quality enhancement and client best interest test, as well as the disclosure of the inducement, remain from MiFID.


  • Jurisdictions may differ in the way the rules are implemented e.g. Member States can specify additional minor non-monetary benefits.
  • Some services may be difficult to qualify as inducements or non-monetary benefits.
  • Interpretation as to what qualifies as enhancing the quality of service.

5. Research unbundling

Independent advisers and portfolio managers can only receive research and sales if both are paid for either:

  • directly out of their own resources (hard dollar / P&L); or
  • through a client funded Research Payment Account (RPA).

Practically, this will mean:

  • conclusion of agreements relating to the operation of RPAs; and
  • research and sales to be paid separately from execution (unbundled costs and charges).


  • How will agreements for RPAs be used to accommodate rules?
  • The FCA’s latest consultation paper suggests that in the UK the regulation will be extended to cover a broader range of firms e.g. collective portfolio managers.
  • Regulatory conflicts with other regulation e.g. US rules mean that under MiFID II, EU asset managers cannot receive US research.

6. Suitability & Appropriateness


MiFID II brings in more onerous obligations on investment firms to determine suitability (including of bundled packages of products).


  • Appropriateness requirements apply to the provision of execution-only services.
  • MiFID II widens the range of ‘complex’ products, for which an appropriateness assessment is required.
  • Appropriateness requirements do not apply when dealing with eligible counterparties nor do they apply when providing execution-only services for non-complex products.

The three pillars of Appropriateness

Client categorisation

  • If you are re-categorised as an RC, we may need additional information to carry out our appropriateness tests.
  • If you are an ECP, there will no change and we can continue to act towards you as we currently do.

Product complexity

  • MIFID II lowers the threshold of what is considered a ‘complex’ product. All products which embed a derivative will be considered complex.
  • For bundled products / services, the overall package must be appropriate.

Execution method

  • DEA execution channel requires appropriateness tests to ensure a client possesses the relevant knowledge and experience to trade electronically.

7. Costs and charges

  • All products and services are in scope of the costs and charges requirements.
  • Costs related to underlying market risk are excluded.
  • In specified circumstances, some limited application may be agreed, for example, it may be possible to agree a narrower application for eligible counterparties.
  • Investment firms are obliged to provide clients with pre-trade and post-trade disclosures:
    • costs and charges to be aggregated into a percentage and cash amount; and
    • an itemised breakdown can be requested by clients
  • Clients must be informed of any anticipated spikes, or fluctuations in costs.


  • A practical interpretation has yet to be agreed by industry forums.
  • How mark-ups will be treated in cost and charges disclosures is subject to industry debate.

8. Market structure

Systematic Internaliser (SI) Regime

  • SIs are investment firms that deal on own account when executing client orders on an ‘organised, frequent, systematic & substantial basis’ outside of a trading venue.
  • Specific volume thresholds under MiFID II have been introduced to determine whether a firm is an SI.
  • In some cases, firms may also elect to become an SI for commercial reasons, even when not obliged to do so.
  • Pre-trade transparency publication obligations apply to trades conducted by SIs in liquid products below volume thresholds.

Exchanges & Trading Venues

  • The transparency obligations for Multilateral Trading Facilities (MTFs) (a venue which existed under MiFID I) has been extended from shares to cover a wider range of products.
  • MiFID II introduces the new venue “Organised Trading Facility” (OTF) for non-equity instruments.
  • All venues will be subject to pre-trade and post-trade transparency requirements.

Trading Obligations

  • Shares must be traded on a RM, MTF or through an SI.
  • Standardised derivatives mandated for both central clearing under EMIR and trading under MiFIDII must be traded on venues (MTF, OTF or RM).


  • The range of instruments that will be subject to the derivatives trading obligation.
  • The list of instruments that are ‘Traded on a Trading Venue’ (TOTV) and therefore subject to the SI transparency regime/share trading obligation.
  • Third Country trading venue equivalence.

9. Algorithmic and Electronic Trading

Algorithmic trading and DEA

  • MiFID II prescribes new rules for firms engaging in algorithmic trading. They must have effective systems and risk controls to ensure trading systems are resilient, have enough capacity, are subject to thresholds and limits which prevent sending erroneous orders.
  • Where HSBC is a DEA provider its obligations will include:
    • Implementing policies to ensure DEA clients comply with trading venue rules
    • Applying controls (similar to those mentioned above for algo trading) to the DEA flow
    • Carrying annual due diligence of DEA clients
    • Requiring DEA clients who delegate their access to have equivalent due diligence requirements in place

Clock sync & High Frequency Trading

  • For information, trading venues and their members and participants are required to synchronise business clocks to varying degrees of granularity depending on what is traded.
  • Additional time-sequenced record-keeping applies to HFT activity.


  • Provision of algo ID and personal data for transaction reports.
  • Disparate venue certification approach.

10. Best Execution

  • Top 5 execution venues by MiFID II product classification must be published annually (‘RTS 28’ reporting). This includes the reporting of Securities Financing Transactions (SFTs).
  • Where a Systematic Internaliser (SI), liquidity provider or market maker, HSBC must publish data relating to the quality of execution on a quarterly basis (‘RTS 27’ reporting).
  • Uptick to ‘sufficient steps’ must be taken to ensure the best possible results when acting on behalf of clients. The following considerations must be taken into account:
    • the price, costs and speed
    • the likelihood of execution and settlement
    • the nature of the order
  • The proposed price for OTC products, including those which are bespoke, must be based on market data; and compared to similar products where possible. Additional consideration must be given to whether the order involves a securities financing transaction.
  • The trade collection dates for Top 5 Venue reporting (RTS 28) are challenging.
  • Uncertainties

  • Further regulatory guidance might be released.

11. Transaction Reporting

  • Broader scope of financial transactions now need to be reported.
  • Both counterparties (investment firms) to a trade must report transactions data (65 fields, which include investor details) to regulators.
  • Reportable data includes information on the person or algorithm responsible for the investment decision and execution.
  • Transaction Reporting may be done through an investment firm’s own arrangements, an Approved Reporting Mechanism (ARM) or by the trading venue through which the transaction was completed no later than the close of the following working day.

Last updated: 7 March 2017


In October 2011, the European Commission tabled proposals to revise the original Markets in Financial Instruments Directive (MiFID) with the aim of making financial markets more efficient, resilient and transparent, and to strengthen investor protection.

On 15 May 2014, the second Markets in Financial Instruments Directive (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR) were published in the Official Journal of the European Union.

These FAQs will attempt to clarify some of the key issues surrounding both MiFID II and MiFIR.

Why is there a new legislation?

Since its implementation in November 2007, MiFID has been the cornerstone of capital markets regulation in Europe. Like most European legislation, MiFID contained an obligation on the European Commission to review the implementation and impact of MiFID after a number of years. MiFID II / MiFIR is intended to address the shortcomings of the original MiFID, to extend the scope of MiFID, to respond to lessons learned during the financial crisis and to cater for market and technological developments since 2004.

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What is the MiFID II / MiFIR legislation?

MiFID II / MiFIR is an EU regulatory framework consisting of two pieces of legislation: a Directive (MiFID II), and a Regulation (MiFIR) aimed at increasing investor protection by creating a more efficient, risk-aware and transparent market for investment services and activities. MiFID II comprises of 3 levels. Level 1: MiFID II and MiFIR (the framework of the reform) have been finalised. Level 2: RTS and Delegated Acts (the detail of the reform) are expected to be finalised in phases around Q2 2016. Level 3: Q&As and Guidelines (the clarification of the reform) is expected from January 2016 onwards. Many of the rules in MiFID II will also have to be implemented by EU member states into national legislation and regulation.

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To whom does MiFID II / MiFIR apply?

Those Financial Services businesses undertaking MiFID business anywhere in the European Union (‘EU’) including:

  1. Investment firms, such as HSBC Bank plc
  2. Market operators and firms operating certain trading platforms
  3. Central Counter-parties (CCPs) and persons with proprietary rights to benchmarks
  4. Third-country firms providing investment services or activities within the EU
  5. Certain unregulated entities which enter into commodity derivative transactions
  6. Data service providers

MiFID II will also affect all counterparties in the EU’s financial markets, whether they are based in the EU or elsewhere, including providers of asset management and custodial services.

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When will MiFID II / MiFIR begin?

The European Parliament endorsed MiFID II and MiFIR on 15 April 2014, and the Council of the European Union adopted the legislation on 13 May 2014. The MiFID II legislation was published in the Official Journal on 12 June 2014. Both MiFID II and MiFIR entered into force on 2 July 2014 (20 days after publication). EU Member States are required to implement MiFID II in their national legislations within 24 months after the entry into force of MiFID II (currently June 2016).

Firms must comply with MiFID II / MiFIR from 3 January 2018.

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What are the significant changes proposed by MiFID II / MiFIR?

The significant changes proposed to the Markets in Financial Instruments Directive include:

Market structure

  • MiFID II seeks to extend price transparency, by imposing a range of requirements on firms which trade European financial instruments.
  • It seeks to ensure that trading platforms in the EU are regulated, either as Regulated Markets (RMs), as Multilateral Trading Facilities (MTFs) or as a new venue type, the Organised Trading Facility (OTF), which is a multilateral trading facility system (with some discretionary characteristics) for non-equity instruments.
  • It extends the scope of the existing MiFID ‘Systematic Internaliser’ category (SI) and increases transparency requirements for SIs across a range of financial instruments including bonds and derivatives.
  • There is a requirement for investment firms to trade EU listed and EU traded equities on a RM, MTF, OTF or as an SI. The legislation also envisages a similar requirement in relation to certain (yet to be defined) standardised and liquid OTC derivatives.
  • It aligns requirements for RMs, MTFs and OTFs.
  • It introduces compliance obligations on firms undertaking algorithmic trading, high frequency trading and/or providing direct electronic access (comprising direct market access and sponsored access).

Transparency and Transaction Reporting

  • MIFID II increases equity market transparency by significantly restricting the scope for dark pool trading.
  • New pre- and post-trade transparency requirements will apply to trading in fixed income instruments and derivatives. The extent of requirements will be determined by reference to deemed liquidity of the instrument type.
  • It widens the scope of obligations in relation to transaction reports made to regulators for market abuse monitoring purposes (wider scope of transactions, extension to include orders which were passed to a broker for execution, extension of the level of detail required in the reports).

Business Conduct, Supervision and Product Scope

  • Stronger investor protection is achieved by introducing strict organisational requirements in relation to product governance, conflicts of interest and inducements  which also require more detailed involvement by the firm’s management body.
  • Regulatory scope is extended to cover structured deposits for investor protection purposes.
  • Regulators will have the ability to ban products or services that threaten investor protection, financial stability or the orderly functioning of markets.
  • Administrative sanctions strengthened to ensure effectiveness and harmonisation.

Commodity Derivatives

  • To meet G20 commitments, MiFID II provides additional supervisory powers and a harmonised position-limits regime for commodity derivatives to improve transparency, support orderly pricing and prevent market abuse. This regime applies to users of relevant commodity derivatives, including unregulated users, with no specific end-user exemption.

Non-EU (or ‘Third Country’) Investment Firms

  • Certain Member States may require non-EU firms who wish to service retail and elective professional clients to establish a branch (which will have to be MiFID-regulated) in that Member State. Please note that any such requirement will likely apply where seeking to provide services to local authorities or municipalities in such Member States.
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Are there changes to the MiFID exemptions?

A number of exemptions on which many entities rely are being amended or restricted within the MiFID II / MiFIR reforms. Among others:

Dealing on own account exemption

  • This exemption has been amended so that it will no longer be available to persons who deal on own account in commodity derivatives or emission allowances. Members of and participants in an RM or MTF, persons who have market access to a trading venue, and persons engaged in high frequency trading will also be unable to continue to rely on this exemption.

Commodities dealer exemption & ‘Locals’ exemption

  • Both have been removed under MiFID II.

Commodity related systems

This has been amended to include persons acting as service providers on behalf of transmission system operators, and limited to relevant activities in commodity derivatives.

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Are there changes to the MiFID client classifications?

Under MiFID, clients can be categorised as i) eligible counterparties ii) professional clients or iii) retail clients. MiFID II does not change the category of a client, or the various monetary thresholds and experience levels that eligible counterparties and professional clients are required to meet. However, there is a change in relation to municipalities and local authorities.

Municipalities and local authorities are now required to be treated as retail clients, although they can elect treatment as a professional client if they meet certain qualitative and quantitative tests. Therefore, some re-classification may be required in relation to these clients.

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What should HSBC clients be doing to prepare for the new reforms?

  • Clients should start planning towards January 2018, despite the fact that until the Level 2 legislation is in final form and published in the Official Journal, exact details are unclear. Even then, additional information will be provided by ESMA through Level 3 guidelines and Questions & Answers, some of which will likely be issued after 3 January 2018.

HSBC therefore recommends clients to continue navigating through the expected reforms via their respective Legal teams.

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What are the key challenges for HSBC clients?

MiFID II and MiFIR represent both a considerable challenge and a significant opportunity, for firms to improve their organisation and their way of doing business. The regulations are extensive and very complex, presenting three major hurdles:

  • Provisions for investor protection will require firms to reshape their business models and cope with major new demands.
  • Provision for pre- and post-trade transparency: Companies will need to take appropriate steps to master the greater transparency requirements demanded by MiFID II / MiFIR and to account for any consequential changes to liquidity in the markets.
  • Internal organisational set-up and risk control.

In addition, there could be a need for significant systems build from scratch to assist with the new requirements, including the transparency requirements in relation to fixed income and derivatives, or where a line of business becomes subject to a new set of regulatory rules, such as the commodity derivatives position limits regime.

Re-papering is also inevitable due to new legal requirements and compliance procedures.

Clients and internal staff may not know exactly what is required from the legislation until relatively late in the process, potentially leaving firms with little time to implement and comply.

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What is a Systematic Internaliser (SI) and how are the criteria changing for MiFID II?

The definition of a Systematic Internaliser (SI) is unchanged from MiFID: An investment firm which, on an organised, frequent systematic and substantial basis deals on own account when executing client orders outside a regulated market, an MTF or an OTF without operating a multilateral system. However, under MiFID, there was no specification of the individual key terms and firms were generally able to conclude that they were not SIs.

The specific thresholds and tests introduced by MiFID II will mean more firms are likely to find they meet the criteria of an SI. The SI category is also broadened in terms of scope, capturing trades in a variety of instruments including depository receipts, exchange-traded funds (ETFs) and also non-equities, such as bonds, structured financial products and derivatives.

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What is a Regulated Market (RM)?

A Regulated Market is a multilateral system, (as defined by MiFID), which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments in a way that results in a contract. For example, the London Stock Exchange (LSE).

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What is a Multilateral Trading Facility (MTF)?

A Multilateral Trading Facility is any system or facility operated and/or managed by an investment firm in which third party buying and selling trade interests are able to interact in the system.

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What is an Organised Trading Facility (OTF)?

An Organised Trading Facility is a new concept under MiFID II. The OTF is a multilateral trading system operated by an investment firm or a market operator which allows trading in non-equity instruments (MiFID II does not permit trading of equities on an OTF). In contrast to the MTF, an OTF operator may exercise some discretion over execution; however the discretion is limited to (a) when deciding to place or retract an order on the system they operate; and (b) when deciding not to match a specific client order with other orders available in the systems at a given time.

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How does MiFID II / MiFIR align with other regulations?

The revised EU Market Abuse Regulation (MAR) and Criminal Sanctions for Market Abuse Directive (CSMAD).

MiFID II and MAD/MAR both seek to ensure the competitiveness, efficiency and integrity of EU financial markets. They have been updated in tandem to ensure that they are fully coherent and support each other's objectives and principles. MiFID II and CSMAD / MAR have therefore been given the same extension of scope in terms of instruments. CSMAD imposes criminal liability for market abuse. It requires implementation into local law.

MAR and CSMAD come in to force on 3 July 2016.

Title VII Dodd-Frank Act

MiFID II covers areas addressed by various pieces of US financial markets regulation such as the Securities Exchange Act and the Commodity Exchange Act. Like Title VII of the Dodd Frank Act, which amends these texts in order to implement G20 commitments made in the wake of the financial crisis, the review of MiFID both amends provisions already in force and adds measures in light of the financial crisis and other market developments. MiFID II and EMIR (European Market Infrastructure Regulation) together seek to implement the post-financial crisis G20 commitments which are implemented by Title VII Dodd Frank Act, although the implementation is in a number of areas not consistent between the EU and US.

Interrelated regulatory reporting requirements

Many regulations impose reporting obligations on firms; there are instances where there are interrelations between the two, whereby clients will only need to report once to meet both requirements however there are some cases when firms will have to comply separately with both. Firms must keep up to date of each of the regulatory reporting obligations to ensure they adhere to their obligations.

An example whereby the regulators are attempting a level of alignment for reporting obligations concerns a transaction which has been reported in accordance with EMIR to a trade repository, which operates as an Approved Reporting Mechanism (ARM) for MiFID II purposes, and where the report contains the details required by MiFID II and is transmitted to the competent authority by the trade repository within the time limit set in MiFID II. Such a report should be deemed to satisfy both the EMIR and MiFID II reporting obligations.

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Last updated: 21 April 2016