RegTech Insight Knowledge Hub

MiFID II knowledge hub


In a nutshell: Markets in Financial Instruments Directive II (MiFID II) builds on the original MiFID of 2007 to improve the competitiveness of European markets by creating a single market for investment services and activities, and ensuring protection for investors in financial instruments.

Read on in our Knowledge Hub ‘Everything you need to know’ section to understand the full details of what MiFID II is all about, who it impacts, the key requirements, the technical and data challenges it presents, and the outlook.

You can also take a look at all the latest content we have related to MiFID II.

Our Knowledge Hub delivers everything you need to know about the MiFID II directive, with a full overview, key resources, and a list of solutions providers.

Key resources


MiFID II: The True Cost of Research Unbundling – Part One

The implementation of MiFID II in 2018 catalysed a maelstrom of regulatory modifications for financial institutions. One of the biggest changes was the requirement to separate the cost of investment research and corporate access from the cost of trade execution – forcing providers to drastically alter their models in order to comply with the explicit…

Six Ways to Stay Ahead of Financial Regulators with RegTech

By Burt Esrig, Managing Director and Michael Lehman, Partner, ACA Compliance The RegTech industry has exploded, with over 250 RegTech businesses worldwide and $1bn invested last year, as firms look to beat the regulators and the competition. But firms still aren’t doing enough. There have been $26 billion in fines for non-compliance with AML, KYC and sanctions regulations over the past decade….

No Enforcement Doesn’t Mean No Problem, Warns FCA on MiFID II Compliance

The question of regulatory enforcement is a tough one, and the FCA has come in for its fair share of criticism over how it has handled the compliance requirements for the radical new fee disclosure requirements brought in by MiFID II in January last year. The regulator has been adamant in its stance that MiFID…

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White papers

MiFID II Unbundling’s Silver Lining: Leveraging Streaming Big Data Analytics to Differentiate Execution Services

European MiFID II regulation’s unbundling of broker research from execution services raises the question of how execution service providers can differentiate what they offer once research is no longer part of their relationship with buy-side clients. Best-execution provisions and the performance of brokers’ platforms could become the primary differentiator. This raises a follow-up question –…

MiFID II: Industrialising the Response Using UL BRIDGE

Many firms within the scope of Markets in Financial Instruments Directive II (MiFID II) struggled to meet the regulation’s deadline of January 3, 2018 and are now waking up to the fact that many of the processes put in place for implementation day are not sustainable. To achieve and maintain MiFID II compliance over time…

MiFID II: Navigating the Emerging Liquidity Landscape

The September 1 deadline for full implementation of the Systematic Internalisation (SI) regime marked the beginning of a whole new liquidity landscape, with firms on both sides of the equation grappling to understand the long-term implications of the new system on Europe’s financial markets. Navigating these waters in the coming months will be challenging for…

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Recorded Webinar: Balancing compliance and value in data management initiatives

You can listen to the recording of this webinar by registering on this page. Over the past few years, about 90% of data management has been dedicated to the operational requirements of data governance and regulatory compliance, but this is changing rapidly as financial institutions look to exploit and drive business value from data. At…

Recorded Webinar: How to find common ground for data management across multiple regulations

We’ve asked over many years how financial institutions can find common ground for data management processes to meet the requirements of multiple regulations, such as MiFID II, MiFIR, EMIR, MAR and BCBS 239. While this is a goal most firms have aspired to, the reality of pressing deadlines for regulation after regulation meant firms had…

Recorded Webinar: The future of communications surveillance for regulatory compliance

Don’t miss this opportunity to view the recording of this recently held webinar. Communications surveillance is fundamental to compliance, challenging to implement, and complex to sustain. Has your organisation got it right, or are you struggling to move on from a tactical approach put in place to satisfy Markets in Financial Instruments Directive II (MiFID…

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MiFID II handbook, third edition – How compliant are you?

Six months after Markets in Financial Instruments Directive II (MiFID II) went live, how compliant is your organisation? If you took a tactical approach to cross the compliance line on January 3, 2018, how are you reviewing and renewing systems to take a more strategic approach and what are the business benefits of doing so?…

Directory of MiFID II Electronic Trading Venues 2018

The inaugural edition of A-Team Group’s Directory of MiFID II Electronic Trading Venues 2018 offers a guide to the European landscape resulting from new market structure introduced by the January 3, 2018 implementation of Markets in Financial Instruments Directive II (MiFID II). The directory provides detailed profiles of more than 70 venue operators and their…

The Trading Regulations Handbook

Need to know all the essentials about the regulations impacting trading infrastructure? Welcome to the first edition of our A-Team Trading Regulations Handbook which provides all the essentials about regulations impacting trading operations, data and technology. A-Team’s Trading Regulations Handbook is a great way to see at-a-glance: All the regulations that are impacting trading technology…

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Everything you need to know about: MiFID II

What is MiFID II?

MiFID II comprises a set of sweeping and controversial reforms building on MiFID (and, prior to that, the Investment Services Directive of 1993) to protect investors in EU markets and improve transparency across all asset classes.

It amends many existing provisions covering the conduct of business and organisational requirements for providers of investment services, and specifies requirements and organisational rules that must be applied to different types of trading venues. It also makes substantial changes to the pre- and post-trade transparency of EU financial markets.



  1. Market structure
  2. Trading venues
  3. Trading infrastructure
  4. Transparency and reporting
  5. Financial instruments reference data system (FIRDS)
  6. Markets in Financial Instruments Regulation (MiFIR)
  7. Reference and market data management

Section 1: Market structure

At a glance

The key objectives of MiFID II are market transparency and investor protection. As such, at the heart of the directive’s framework lie a number of structural updates that expand the scope of the regulation, improve transparency and accountability, increase supervision and enforce enhanced sanctions for non-compliance.

Key updates

Product governance: Additional financial instruments beyond those covered by MiFID are included within the regulatory scope of MiFID II. These include: structured deposits, certain packaged retail investment products, all emissions allowances, and the sale of financial instruments issued by investment firms. Conflict of interest rules regarding insurance-based investment products are also introduced under MiFID II, although for the most part these products remain regulated by the Insurance Mediation Directive. The definition of ‘non-complex’ instruments has been amended to exclude structured UCITS, and there is anew ‘target market’ concept that requires investment managers to ensure their products are designed to meet the needs of end users.

Investor Protection: Investment firms must provide independent advice, defined as covering a sufficient range of financial instruments (not limited to in-house products) and without any inducements from third parties. Notably, Article 24 of MiFID II prohibits for the first time the practice of ‘retrocessions’. Rules on inducements and commissions are tightened, and in the case of firms providing independent investment advice or portfolio management services, inducements and commissions are banned. Clients must receive a detailed suitability assessment and regular performance reports. Pre- and post-trade client information must be enhanced to include details on fees and commissions paid and received by the investment firm.

Supervision and sanctions: Under MiFID II sanctions, fines and penalties are made public and increased in severity in order to act as a deterrent. Regulators also have the power to control and/or reduce position limits for certain products, including commodity derivatives, where they deem this applicable or necessary. MiFID II gives national regulators increased powers, including the ability to permanently ban financial products, activities and/or practices.

Governance and senior management: MiFID II introduces stricter requirements for corporate governance and for both executive and non-executive directors, including:

  • The concept of a management body – the governing body of an investment firm or data services provider that incorporates all the supervisory and managerial functions.
  • New criteria for qualified senior management, directors and supervisors.
  • New rules on remuneration at investment firms that are designed to ensure remuneration does not create conflict with the duty to act in the best interests of clients. Changes to research rules allow investment firms to accept third-party research only when they pay for it directly or from a ring-fenced research account.
  • Increased powers for compliance officers.

Harmonised regime: International firms or firms operating across the EU must have a separate branch established in each EU country in which they operate if they wish to service retail or professional clients. For eligible counterparties, no branch is required and an EU funds passport can be used.


Section 2: Trading venues

At a glance

MiFID II prioritises transparency, and as such, moves as much trading as possible from unregulated venues to regulated facilities. On this basis, the regulation reorganises the infrastructure by which financial instruments can be traded, to ensure that the market structure is ‘properly regulated and authorised’ under a series of specific trading venue categories: namely regulated markets, multilateral trading facilities (MTFs), organised trading facilities (OTFs) and systematic internalisers.

Key updates

Multilateral trading facilities (MTFs): MiFID II makes changes to MTF guidelines to better align their activities with those permitted in regulated markets, particularly when those markets and MTFs are similar in size. The directive also enforces the capability to identify and manage conflicts of interest, including the use of systems to recognise and mitigate resulting operational risks and the management of technical operations of systems accordingly.

Under the EU’s Market Abuse Regulation (MAR) – which took effect in 2016 and makes reference to rules and guidelines that also appear in MiFID II or are the basis of MiFID II provisions – some other requirements are specified for MTF access. These include: making MTF access publicly available and non-discriminatory; having arrangements to make sure MTF systems function appropriately; setting contingency plans for disruptions; and making arrangements to manage conflicts of interest.

Organised trading facilities: MiFID II establishes a new type of trading venue, organised trading facilities (OTFs). OTFs are a third type of multilateral trading system (in addition to MTFs and regulated markets) in which multiple buying and selling interests can interact to make contracts. OTFs are distinct under MiFID II because they are used only for bonds, structured finance products, emission allowances or derivatives. Regulated market operators may operate OTFs. OTFs have other unique traits, among them: the execution of orders on a discretionary basis; the ability to facilitate negotiation between clients; a ban on operators trading against their proprietary capital; and a ban on acting as a systematic internaliser (SI) or connecting with a SI.

Systematic internalisers: MiFID II makes two key changes to the systematic internaliser (SI) regime. The first relates to the expansion of the instruments included, while the second governs pre-trade transparency requirements for trading bonds and derivatives through SIs. MiFID II opens up SIs to handle equity-like instruments, such as depositary receipts, certificates and exchange-traded funds, as well as non-equity instruments such as bonds, derivatives, emission allowances and structured finance products. SIs are also subject to provisions of Markets in Financial Instruments Regulation (MiFIR), such as the obligation to make firm public quotes and disclose identification thresholds.

Derivate trading requirements: The derivatives trading requirements of MiFID II are set out?in an accompanying regulation, Markets in Financial Instruments Regulation (MiFIR). The regulation is designed to increase market transparency and ensure investment firms trading in over-the-counter (OTC) liquid derivatives do so on organised venues. For derivatives contracts to trade on?a venue, the contracts must be cleared through a central counterparty and deemed sufficiently liquid. MiFIR sets two tests to determine the trading obligation:?a venue test and a liquidity test. The venue test requires a class of derivatives to be traded on at least one qualifying?or admissible trading venue. The liquidity test determines whether a derivative is sufficiently liquid and whether there is enough third-party buying and selling interest.


Section 3: Trading infrastructure

At a glance

MiFID II aims to transform trading efficiency through a complex set of changes that upgrade and improve underlying infrastructure. The orderly functioning of markets is promoted through a series of specific provisions for algorithmic and high frequency trading; improved oversight and transparency is addressed by the introduction of more extensive reporting; reforms to reduce systemic risk and speculative activity are applied through quantitative limits and restrictions; and revamped monitoring and testing requirements introduce checks and balances.

Key updates

Algorithmic trading: MiFID II specifically addresses issues relating to algorithmic and high frequency trading (HFT), setting out how these activities are to be conducted in European markets. It introduces strict definitions of algorithmic and HFT, identifying trading strategies that are subject to supervisory oversight and setting in place rules on governance, trading software and risk management. The directive lists a multitude of requirements for firms involved in algorithmic trading and intending to undertake a market making strategy, including:

  • The development of a written agreement with a trading venue declaring the firm’s intent to involve itself in market making and its market making responsibilities.
  • The development of sufficient systems and controls to ensure the fulfilment of obligations as specified under the agreement.

High frequency trading rules: MiFID II revises the definition of high-frequency algorithmic trading and sets a requirement for registration to trade using high-frequency algorithmic trading techniques based on German regulator Bafin’s existing definitions. As part of the definition of high-frequency algorithmic trading, two exemptions included in MiFID are removed: the exemption of dealing for one’s own account for commodity derivatives, emission allowances or related derivatives; and the exemption allowing companies to trade commodity derivatives on their own accounts if that trading activity is not their main business.

MiFID II defines high-frequency algorithmic trading as a technique used to execute large numbers of transactions in seconds or fractions of seconds by using infrastructure to minimise latency; or system determination of order initiation, generation, routing or execution without human intervention on individual trades or orders. Firms designated as using a high-frequency algorithmic trading technique on one EU venue will be treated as though they are doing the same on all EU trading venues.

Licensing: MiFID II includes a form of licensing for proprietary trading firms and others engaging in algorithmic trading and HFT that requires them to:

  • Implement pre-trade risk controls – including kill switches – to rein in automated trading models.
  • Identify algorithms for monitoring.
  • For regulated markets and other execution venues (MTFs and OTFs), introduce their own measures to lessen the impact of flawed algorithms.

Monitoring: MiFID II addresses the practice of direct exchange access (DEA), where a broker allows a non-member client to use its trading code to?send orders electronically to a trading venue. Specifically, it requires brokers to check that trading venues have appropriate systems and controls in place to ensure client orders do not exceed pre-defined trading and credit thresholds. It also requires monitoring of DEA to prevent market abuse.

Best execution: The overarching principle of MiFID II is investor protection Firms are required to take ‘all sufficient steps’ to achieve the best results for their clients – a change in wording from MiFID, which required them to take ‘all reasonable steps’. The change involves an increase in front-office accountability as well as the implementation of systems and controls to counteract any potential issues.

Article 27 of the directive also contains an ‘obligation to execute orders on terms most favourable to the client’. Best execution existed under the MiFID regime, but under MiFID II it has evolved to encompass more categories of financial instruments. Article 27 specifically requires firms to execute orders on the most favourable terms to clients: considering ‘price, costs, speed, likelihood of execution and settlement, size, nature or any other relevant consideration’. ESMA requires firms to ‘check the fairness of the price’ by gathering market data and comparing it with ‘similar or comparable products’.

Firms are responsible for the annual disclosure of the five execution venues they most frequently use for each subclass of financial instrument they trade. Article 27 also states that ‘any firm routing client orders to a particular trading venue or execution venue shall not receive any remuneration, discount or non-monetary benefit’.  This is in order to avoid breaching rules around conflict of interests and inducements.There is also an expanded monitoring obligation for execution quality in which trading venues must publish related data without charge.

Communications recording: MiFID II includes provisions governing the recording of trading-related electronic and voice communications. The requirements go beyond earlier regulations, introducing prescriptive rules about recording, storing and accessing all voice and electronic communications – including mobile communications – that may pertain to a transaction. This is broader than earlier requirements to record and store communications that resulted in a trade.

In line with other requirements of the regulation, recording applies across all asset classes. Recording from mobile devices includes voice, text messaging and any phone-?or tablet-based instant or other messaging application used in trading-related conversations, such as chat, email, Bloomberg Messaging, WhatsApp or Skype.  Regula

tors require firms to store and archive records so that they can be easily accessed in response to regulatory enquiries to reconstruct trading communications. Records must be kept for five years or up to seven years if requested by a competent authority. MiFID II also specifies a timestamp granularity for voice-based trading of one second, with a maximum divergence from the benchmark Coordinated Universal Time (UTC) of one second.

Dark pools: MiFID II controversially introduced highly restrictive Double Volume Caps (DVCs). DVC limits are set on a monthly basis and are divided into two parts in order to increase transparency within dark pools. A venue cap of 4% applies to the total volume of dark trading of an instrument traded in the EU, while a global cap of 8% applies to all anonymous trading of instruments operating under one or both waivers in the EU. ESMA measures volume caps against a 12-month rolling period, publishing monthly updates. It is empowered by MiFIR to collect information that it deems necessary and to calculate actual traded volumes before publishing its findings. Firms must publish information on a timely basis and in an accurate manner, or risk suspension of a waiver.

Systematic internalisation: Under MiFID II, Systematic Internalisers (SIs) are subject to extended transparency requirements and regulation across a wider variety of instruments. MiFID II defines an SI as a firm that deals on its own account by executing client orders on instruments outside the scope of regulated markets or MTFs and does so on ‘an organised, frequent, and systematic basis’. Firms do not need regulatory authorisation to carry out systematic internalisation, but they must apply for an SI licence if they cross quantitative thresholds. Under MiFID II Article 27, the SI regime expands to include equity-like and non-equity like instruments, encourages more SI quote publication for greater pre-trade transparency, and bolsters best execution.

Time synchronisation: MiFID II includes a requirement to standardise trading venues’ and customers’ business clocks to harmonise timestamps on post-trade data, transaction data and order event auditing. Regulators believe timestamping will allow them to identify the sequence of events within a trade in cases where market manipulation may have occurred or when execution has gone awry.The date and time of a trade must be synchronised to UTC, or Coordinated Universal Time, and ‘reportable events’ must be recorded for regulatory purposes.

High-frequency algorithmic trading firms are? required to save time-sequenced records of their algorithmic trading activities and each trading algorithm used for at least five years. This translates into the need for accurate time-stamping, algorithm tagging and extensive records retention.

The regulation’s scope encompasses trading venues and their members and participants, and applies to reportable events that take place on a trading venue, although it exempts OTC transactions. Operators of trading venues must use timestamps accurate up to?100 microseconds if their gateway-to-gateway latency is under 1 millisecond. HFT market participants must meet the 100 microsecond standard. Algorithmic (but not HFT) participants need a clock accurate to 1 millisecond. Manual trading and voice trading have a timestamp speed of 1 second, with a divergence limit of 1 second. Members of a trading venue are required to have an equivalent standard of accuracy to the trading venue in the system that they use to connect to the venue.


Section 4: Transparency and reporting

At a glance

MiFID II and MiFIR are intended to improve transparency for regulators of financial markets. Requirements therefore include pre-trade and post-trade disclosure of order details, as well as transaction reporting that includes identifying reference and post-trade data, and the identification of waivers for large orders, illiquid instruments, short selling and commodity derivatives. The Legal Entity Identifier (LEI) replaces BIC or internal codes in reporting.

Key updates

Pre-trade transparency: MiFIR extends pre-trade transparency rules of MiFID to apply to depository receipts and exchange-traded funds, certificates and similar instruments trading on a venue, bonds and structured products trading on a regulated market or with a published prospectus, and emission allowances and derivatives. MiFID II and MiFIR together extend pre-trade transparency obligations to organised trading facilities (OTFs), regulated markets and multilateral trading facilities (MTFs). They permit ‘carve outs’ to allow for deferral of pre-trade data. Authorities may waive obligations to publicise pre-trade information for block trades, actionable indications of interest large enough?to expose liquidity providers to undue risk, derivatives not subject to trading obligations, and other instruments without a liquid market.

Post-trade transparency obligations are also extended to make price, volume and time of transactions available to all trading venues, although block trade information disclosure may be deferred by authorities.

MiFID II requires qualifying firms to report order data to Approved Publication Arrangements (APAs), which publish consolidated order data on a commercial basis.Firms are also required to report trade information – price, volume and time of execution – for all transactions they conduct to their chosen APAs in near real time. Finally, firms are required to file more detailed post-trade transaction reports to Approved Reporting Mechanisms, such as those operated by Euroclear, TRAX, London Stock Exchange/Unavista, Getco Europe, Abide Financial and Bloomberg.

Transaction and trade reporting: MiFID II expands on the EU-wide harmonised transaction reporting regime introduced by MiFID adding requirements including identification of waivers for large orders, illiquid instruments, short selling and commodity derivatives. While MiFID reporting applied to trading?on regulated markets, MiFID II reporting includes any instruments traded on any venue throughout the EU,?as well as underlying instruments that are traded. This includes over-the-counter (OTC) transactions of these instruments, as well as any index or basket of instruments that contains any single instrument traded on any EU venue. An exemption is introduced for investment managers transmitting orders to brokers for execution, under the condition that the transmission includes details of the trade, clients involved and designation of any short sales. Firms will have to report either directly to regulators or through ARMs.

The fields and information required as part of MiFID II reporting also increase significantly, reaching at least 81 in number, up from 23 under MiFID. Additional fields include algorithm identification codes, natural person identifiers and trader identification codes. Foreign exchange, interest rates and commodity derivatives are also added to the instruments covered by the directive.


Section 5: Financial Instruments Reference Data System

 At a glance

The Financial Instruments Reference Data System (FIRDS) is a data collection system set up by the European Securities and Markets Authority (ESMA) in cooperation with EU national competent authorities (NCAs) to collect and publish reference data efficiently and in a harmonised way across the EU. The system went live on July 17, 2017, ahead of the January 3, 2018 MiFID II compliance deadline.

Key updates

The system covers all financial instruments within the scope of MiFID II and is a requirement of MiFIR, under which trading venues and systematic internalisers must submit instrument reference data in a uniform format to NCAs.FIRDS links data feeds between ESMA, NCAs and about 300 trading venues across the EU. These authorities transmit the data to ESMA, which publishes the data on its website for public access and provides it to NCAs in downloadable files. The data is not only published by ESMA, but is also used for purposes such as the calculation of transparency and liquidity thresholds, and position reporting of commodity derivatives.


Section 6: Markets in Financial Instruments Regulation

At a glance

Markets in Financial Instruments Regulation (MiFIR) is an EU regulation associated with MiFID II. It aims to harmonise securities trading and improve investor protection across the EU.

Key updates

Reporting: While MiFID II focuses on market infrastructure, MiFIR builds out transaction reporting requirements by?setting out a number of reporting obligations, and complements the directive’s commitment to trading data transparency. Under MiFIR, instruments that must be reported include all derivatives admitted to regulated markets, including previously exempt commodity, foreign exchange and interest rate derivatives, all instruments traded on MTFs and OTFs, and all instruments that could change the value of instruments trading on any of these venues.

The regulation adds a number of fields to transaction reports, including fields designed to help spot short-selling traders, and trader and algorithm fields designed to identify the individual or program executing a transaction.Transactions must be reported using the ISO 20022 formatting standard. Firms will need to accommodate this standard, which will be used to submit data from all stages of order execution to relevant regulatory authorities.

Disclosure: MiFIR has extensive implications for disclosure practices. Relevant data to include in a report might involve the bid and offer prices and the extent to which the parties invested in the trade, the volume and time of the trade execution, and any noted systemic issues. The public and regulatory authorities must be made aware of this information on instruments such as equities and over- the-counter (OTC) and exchange-traded derivatives (ETD) on a continuous basis for transparency purposes. MiFIR does have exemptions relating mainly to the volume of a trade. For example, there are exemptions on regulating block trades and trades exceeding a specific size regarding certain instruments.

Data transparency: MiFIR mandates data transparency. Most of its requirements are around post- trade data processes, but it also covers some pre-trade transparency requirements, such as equal access to trading opportunities data. The regulation’s post-tradetransparency requirements call for alterations to the trading environment as data such as prices, quotes, execution times and volumes must be published publically.


Section 7: Reference and market data management

At a glance

MiFID II and MiFIR introduced a number of changes to the methods of classification and identification of data, as well as updates on how this data should be managed, referenced and reported.  These include financial instrument classification, new identifiers for OTC derivatives, the Legal Entity Identifier and personal identifiers for individuals.

Key updates

Financial instrument classification: The classification of financial instruments (CFI) within the scope of MiFID II is based on the International Organisation for Standardisation’s ISO 10962 standard. CFI codes can only be allocated by the Association of National Numbering Agencies (ANNA). CFI codes are important to the transparency and reporting aspects of the regulation and allow regulators to identify specific instrument groups.

The CFI is also key to MiFIR liquidity requirements that cover most asset classes. In this instance, classification?is required to decipher whether instruments are liquid enough to fall within the regulation’s pre-trade and post- trade transparency rules.

The structure of the CFI is based on data that is defined when a financial instrument is issued and remains unchanged during the instrument’s lifetime. It consists of six alphabetical characters: the first character indicates category, such as equities or futures; the second indicates specific groups within each category, such as ordinary shares and preferred shares in equities; and the third to sixth characters indicate the most important attributes for each category, for example voting rights, ownership restrictions and payment status for equities. Updated CFI codes meeting the requirements of the regulation and directive have been issued on a global basis since July 1, 2017.

OTC derivatives: MiFIR requires OTC derivatives to be traded on regulated markets, MTFs or OTFs. This mandate also includes a requirement for OTC derivatives to carry identifiers that can be used in transaction reporting. The International Organisation?for Standardisation’s (ISO) International Securities Identification Number (ISIN) was selected in 2015 to identify OTC derivatives. In October 2016 the Association of National Numbering Agencies (ANNA), the issuer of ISINs for securities, set up the ANNA Derivates Service Bureau (DSB). The DSB platform is an extension of the automated allocation engine developed by ANNA for ISINs and is designed to provide near real-time allocation of ISINs for OTC derivatives and generate additional attributes including Classification of Financial Instrument (CFI) codes and Financial Instrument Short Name (FISN) standard values. Market participants must register to use the service, which provides access including FIX connectivity and a web interface.

Legal Entity Identifier: The Legal Entity Identifier (LEI) is a requirement of MiFIR that came into force on July 3, 2018. Firms subject to the regulation’s transaction reporting obligations must ensure that any client eligible for an LEI has one before a transaction in a financial instrument subject to the regulation is executed on their behalf. These financial instruments include shares, bonds, collective investment schemes, derivatives and emission allowances. LEIs can be obtained from organisations accredited by the Global LEI Foundation (GLEIF) as authorised Local Operating Units (LOUs) – or LEI issuing organisations – for the global allocation of LEIs. LEIs must be renewed on an annual basis by providing any updated information on the entity to the LOU, which then verifies the reference data attached to the identifier.

Personal Identifiers:The LEI was not designed for use by individuals and cannot be used by individuals within the scope of MiFID II and MiFIR. Instead, individuals, whether they are clients, decision makers or traders, must be identified using a national identifier. In the UK, National Insurance Numbers are used to identify individuals.

Data publishing and the consolidated tape: In line with MiFIR transparency requirements, investment firms must disclose pre-trade and post-trade details of orders submitted to, and transactions conducted on, a trading venue, be it a regulated market, MTF or OTF. Under the regulation’s provisions, firms can publish their own trade reports to the market, but most report through an Approved Publication Arrangement (APA), a category of Data Reporting Service Providers (DRSPs) designed to publish trade reports on behalf of investment firms. As well as disseminating trade data to the market, MiFIR requires APAs to send the data to a consolidated tape provider, another category of DRSPs. While a consolidated tape has not yet been established, commercial providers are expected to come forward leading to the provision of one of more consolidated tapes.

Who are the regulators?

MiFID II is a European Union Law that is applicable across all 31 member states of the EU as well as Iceland, Norway, and Lichtenstein (together making up the European Economic Area). Made up of MiFID (2014/65/EU) and the Markets in Financial Instruments Regulation (MiFIR – 600/2014/EU), it is an EU regulation and as such is binding and directly applicable in all eligible countries without the need for domestic legislative intervention.

At a European level, the regulation is enforced by the European Securities and Markets Authority (ESMA). At a national level, the regulation is enforced by national regulators – in the case of the UK, the Financial Conduct Authority (FCA).


Who needs to know?

MiFID II applies to all financial services firms manufacturing, distributing, advising or conducting any business related to financial instruments within the European Economic Area, as well as any international firms providing cross-border services within the EU. Firms within the scope of the directive include investment managers, wealth managers, trading venues, data reporting service providers, and any firm providing investment services or performing investment activities within the EU or into the EU from abroad.


Key technological challenges

Data management: The scale and complexity of MiFID II requires a strategic approach to data management that tackles challenges such as sourcing required data, managing multiple identifiers and meeting transaction reporting obligations, while delivering operational and business benefits from compliance. There is also need for strong data governance, good data quality and agility to respond to regulatory changes.

Data centralisation: A strategic approach to data management should begin with the breakdown of data siloes and creation of a centralised repository of required reference data.This will provide support for compliance with other regulations that are aligned with MiFID II, ease the burden of data management, and improve data accuracy, consistency and timeliness. Regulations closely aligned with MiFID II and MiFIR,?and having some overlap, include European Market Infrastructure Regulation (EMIR) and Market Abuse Regulation (MAR).

Data sourcing: Sourcing the unprecedented volume of data required by MiFID II and MiFIR is a significant issue. Much of the data comes from existing internal systems, such as client, trading and banking systems, but a significant volume flows from external sources. The challenges here are sourcing market data and standard data such as Legal Entity Identifiers (LEIs), Classification of Financial Instruments (CFI) codes, and Market Identifier Codes (MICs). ISINs to identify OTC derivatives must also be sourced, as well as personal data.

Data quality:The scale and scope of MiFID II present a data quality challenge, but also a turning point for firms with legacy and siloed back-end systems that can be a barrier to seamless regulatory reporting. In terms of MiFID II, a shortfall in data quality means?MiFID II trade reporting agencies, Approved Publication Arrangements (APAs) and Approved Reporting Mechanisms (ARMs), may send back failed trades based on faulty data, firms must pay the price of manual reconciliation, and regulators could take a tough stance on non-compliance. Many firms are responding to MiFID II by centralising data on a single platform, increasing automation and taking a strategic approach to data management for regulatory compliance. This should ease the problems of data quality.

What solutions can be used?

The scope and scale of Markets in Financial Instruments Directive II (MiFID II) and Markets in Financial Instruments Regulation (MiFIR) make it improbable that a single solutions vendor can fulfil the complete compliance requirements of all firms that must adhere to the regulations. That said, sizeable solutions and services vendors have pulled together and extended their data management and trading capabilities to meet many MiFID II obligations, while smaller providers offer less comprehensive coverage, but equally important solutions that often address key pain points of implementation.

Systematic Internalisation: Firms operating as systematic internalisers (SIs) under MiFID II need to establish several elements of functionality. They need an order-matching engine to report trades to an appropriate Approved Publication Arrangement (APA), publish quotes and react to requests for quotes. The order-matching engine must also link to elements of trading systems that support SI required market making and quoting functions. To execute on the quoting and reporting requirements of the SI rules, SIs need to integrate a client order management function to ensure all necessary information is captured for reconciliation purposes. From a technology standpoint, SI solutions need speed and accuracy to publish and adjust quotes in fast market conditions.

Pre- and Post-Trade Reporting:The transparency requirements running through pre- and post-trade reporting require firms to operate internal reporting mechanisms with easy access to all required datasets. The datasets must include details of the trade, as well as high-quality reference data describing the assets and counterparties involved in the transaction, in order to deliver pre-trade reports to designated APAs and posttrade reports to Approved Reporting Mechanisms (ARMs). Firms have opted to adapt existing trade reporting platforms to meet the extended requirements of MiFID II. Alternatively, and particularly as the MiFID II compliance deadline closes in, they have opted to use third-party vendor solutions offering transparency services including pre- and post-trade reporting. The reference data utility model also supports MiFID II pre-trade and post-trade reporting by gathering required data from multiple sources and creating an aggregated and enriched data feed that meets its participants’ requirements.

Transaction Reporting:Transaction reporting under MiFID II/MiFIR requires price, volume, time of trade and reference characteristics of all data points, as well as codes mandated by MiFID II for instruments and entities. The data needs to be structured and validated before it is delivered to an ARM for onward reporting to regulators or for direct reporting to regulators. There are a number of solution options for transaction reporting. Firms may have opted to extend existing reporting platforms by enhancing internal data models to ensure data fields required are available and can be linked to required data sources. Interfaces to ARMs or regulators must also be built. Vendor enterprise software solutions take this approach, typically adding logic for MiFID II reporting to order or execution management systems and interfaces to ARMs. Regulatory reporting platforms operated by third-party service providers have also been extended to support MiFID II transaction reporting. These ease the internal burden of managing regulatory change and fulfil transaction reporting in line with MiFID II – and any changes to the regulation – on behalf of user firms.

Best Execution: To demonstrate proof of best execution and ensure trades adhere to published best execution policies, firms need a timestamping solution as well as the ability to store order and transaction data throughout the trade lifecycle for a period of up to seven years. The storage requirement is designed to support regulatory calls for trade reconstruction. To collect, normalise, analyse and present such large volumes of data, firms need a tick database with advanced analytic tools. A tick database using time series technology is preferable to more rigid relational database technology as it more easily supports functions including high precision timestamping and time ordered querying. A time series database also offers greater flexibility to support changing storage requirements.

Clock Synchronisation: MiFID II timestamping obligations involve synchronising clocks that measure activity on all internal systems in the trading process. This provides a compliant trading architecture with accuracy throughout the full order lifecycle: from trading application to market access gateway to exchange gateway to matching engine and back. Trading firms and venues need to design time synchronisation capabilities at the one millisecond level as a bare minimum to comply with the regulation’s timestamping requirements.

Trading Communications: MiFID II extends voice recording requirements with a focus on mobile voice and messaging communications. While some firms aim to comply with mobile communication requirements by using ‘manage by policy’ strategies that limit or ban the use of mobile devices by traders, these strategies fail to recognise the growing value and potential competitive advantage of mobile communication. Large firms with existing fixed line surveillance systems tend to prefer onsite solutions and have typically extended these to cover mobile communications. Smaller firms with fewer resources often favour cloud-based solutions, but whatever the medium, the technological solution needs to be able to record all messages across systems, store messages in a secure and durable way, and allow flexible access to meet regulatory requirements to retrieve data. An in-network mobile device management (MDM) platform – in preference to an application layer – achieves these needs and can provide the functionality and flexibility needed to integrate more mobile devices, add mobile communication applications, and sustain competitive advantage.

Research Unbundling:The MiFID II requirement to unbundle research services from execution services has generated desktop application and cloud-based solutions. Despite different delivery mechanisms, these solutions offer similar functionality in terms of communication between buy-side firms and sell-side research suppliers, and the ability to support Commission Sharing Arrangements (CSAs) and Research Payment Accounts (RPAs). One emerging cloud-based platform curates research from independent providers and allows users to consume the research by paying a per user subscription. The platform operates dynamically to make all research available to all users in real time, but does not include investment bank research, thus meeting the unbundling requirements of MiFID II.

Vendor solutions

This is by no means an exhaustive list of suppliers related to MiFID II because it is such a far-reaching regulation. But this list is based on those vendors who have actively engaged in MiFID II activities with us in recent years.

Refinitiv -A wide range of services including best execution analytics; trading venues; APA and publication services; HFT and structural change; investor protection; LEI profiling; pre- and post-trade transparency; reference data; regulatory automation and workflow mapping; research, permissioning and unbundling; SI determination; and transaction reporting and record-keeping.

Smartstream RDU – Reference data facility managing data holistically across legal entity, security, instrument, corporate action and pricing data through a shared service model.

AutoRek – Financial controls and regulatory data management platform with an automated control framework.

BearingPoint – Reporting solution ((ABACUS/Transactions) to support investment firms in meeting their MiFID II/MiFIR regulatory reporting requirements.

Broadridge – A suite of MiFID II services under the FundAssist business (a regulatory and distribution solutions provider to the investment industry) including trade and transaction reporting, and a facility to aggregate and process investor and product data, calculate the personalised cost information and produce end investor statements.

Corvil – UTC clock-synchronized data capture, real-time monitoring, order lifecycle tracking, unexecuted orders to transactions ratio alerting, compliance validation and security analytics.

ExactPro – Trading software testing: including functional and non-functional testing, test tools, test automation and environment support.

Eze Software – Front office reporting solution, best execution analysis, commission management tools, transaction and trade reporting, and more.

IHS Markit – Benchmarking for best execution and transaction cost analysis, research evaluation and acquisition, transaction reporting, regulatory outreach and data exchange.

Itiviti – ‘Itiviti Analyst’ solution covering Market Abuse Regulation, algo monitoring, best execution, market maker compliance, MiFID II parameters, transaction cost analysis and more.

OneTick – Data management, storage and database solutions for transaction cost analysis, quantitative research, algo trading signal generation, strategy backtesting, managed content, market surveillance and more.

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