The Markets in Financial Instruments Directive (MiFID) sets out the institutional framework of operation for the harmonisation of markets in financial instruments in Europe.
Below you may find more detailed information on what it is and how it affects you as an investor.
- What is MiFID II?
- From MiFID I to MiFID II
- To whom does MiFID II apply?
- What are the MiFID II provisions about?
- How does the MiFID II framework benefit investors?
- Which products and services are covered by MiFID II?
- Are there any changes directly affecting investors?
- Will the way my transactions with AstroBank Limited are carried out change after the implementation of MiFID II?
What is MiFID II?
The original Markets in Financial Instruments Directive (MiFID I) was transposed into Cyprus law through the Investment Services and Activities and Regulated Markets Law of 2007 (L. 144(I)/2007) and entered into force on the 1st of November 2007. In 2011, the European Commission adopted a legislative proposal for the revision of MiFID, which took the form of a revised Directive and a new Regulation. As a result, Directive 2014/65 EU on Markets in Financial Instruments, and Regulation (EU) No. 600/2014 on Markets in Financial Instruments, commonly referred to as MiFID II and MiFIR, were adopted by the European Parliament and the Council of the European Union. The new legislative framework has been transposed into domestic law through the Investment Services and Activities and Regulated Markets Law of 2017 (L. 87(I)/2017) which entered into force on the 3rd of January 2018.
From MiFID I to MiFID II
The amendment to the MiFID I Directive was made necessary following the financial crisis of 2008 and the advancements in technology. Furthermore, it sought to address issues and shortcomings created by MiFID I.
MiFID I aimed to harmonise the initial authorisation and operating requirements for investment firms, including conduct of business rules. It also provided for the harmonisation of some conditions governing the operation of regulated markets. MiFID II broadens the scope of MiFID I to other financial instruments and trading venues and extends to market participants and activities not regulated under MiFID I whilst aiming to strengthen the transparency framework, such as through the RTS28 and RTS27 publication requirements whereby the Bank, as a provider of investment services, must annually publish information on the identity of execution venues and on the quality of execution, amongst other technical standards.
The transparency regime under the MiFID II framework has been extended to require pre- and post-trade disclosure of transactions.
To whom does MiFID II apply?
MiFID II applies to the following market participants:
• credit institutions when providing investment services and/or performing investment activities
• investment firms
• market operators
• data reporting service providers
• third country firms providing investment services or performing investment activities through the establishment of a branch in the European Union
• all financial counterparties as defined in Article 2(8) of the European Markets Infrastructure Regulation (EMIR) and to all non-financial counterparties falling under Article 10(1)(b) of EMIR
• Central Counterparties (CCPs) and persons with proprietary rights to benchmarks.
Additionally, European providers of MiFID services which have branches outside the EEA may be affected by MiFID since their interactions with EEA firms may mean they are indirectly impacted by MiFID II.
What are the MiFID II provisions about?
The purpose of the new legislative framework is to strengthen the protection of investors and to improve the functioning of financial markets making them more efficient, resilient and transparent. Another key purpose of MiFID II is to introduce controls around the over the counter (OTC) market by establishing Organised Trading Facilities (OTFs) to capture trades that would otherwise be executed OTC thus increasing pre- and post-trade transparency.
MiFID II extended the MiFID I requirements in a number of areas including:
• New market structure requirements
• New and extended requirements in relation to transparency
• New rules on research and inducements
• New product governance requirements for manufacturers and distributors of financial instruments and structured deposits (‘MiFID products’)
• Introduction of a harmonised commodity position limits regime.
How does the MiFID II framework benefit investors?
The protection of investors is strengthened through the introduction of new requirements on product governance and independent investment advice, the extension of existing rules to structures deposits and the improvement of requirements in several areas, including on the responsibility of management bodies, inducements, information and reporting to clients, cross-selling, remuneration of staff, and best execution.
Also, MiFID II provisions have an immediate positive impact on investors as they provide for:
• the categorisation of investors according to their investment knowledge and experience
• the achievement of the best result for the investor in the execution of his/her orders
• the evaluation of the suitability and appropriateness of investment transactions, so that investors can be presented with the investment solution that is right for them without undertaking any greater risk than they are willing to
• the notification of investors about commissions and possible inducements
• the notification of investors about the Bank’s Conflict of Interest Policy
• the publication of the top five execution venues in terms of trading volumes for all executed client orders.
Which products and services are covered by MiFID II?
MiFID II concerns all investment products / services such as:
• Transferable securities
• Money-market instruments
• Units in collective investment undertakings
• Forward rate agreements
• Financial contracts for differences
• All emission allowances
• Structured products, etc.
Non-investment products such as deposits, loans and current transactions in foreign exchange and merchandise are excluded.
Are there any changes directly affecting investors?
The provisions of MiFID II have been implemented by the Bank as part of its existing commitment to provide high-quality customer service which is also evident in its policy framework. Principles regarding the honest, fair and professional treatment of all investors are already at the core of our business.
The effect of the new legal framework will benefit the investors due to the availability of all necessary information, and the increased protection offered to individual investors, who may not have sufficient knowledge and experience.
Will the way my transactions with AstroBank Limited are carried out change after the implementation of MiFID II?
• Client Categorisation
The three client categories under MiFID II are the same as those under MiFID I. Therefore, clients will be categorised as Retail, Professional and Eligible Counterparties.
With the introduction of MiFID II, the following clients will be informed of their categorisation:
- New clients, and
- Clients whose categorisation has changed under MiFID II. An example is certain municipalities and local public authorities which could have been categorised as professional clients under MiFID I will now be considered as Retail Clients under MiFID II.
The protection afforded to clients will differ according to their categorisation. In this respect Retail Clients are granted the most protection and receive the most information compared to Professional Clients and Eligible Counterparties. Any communication with clients must be fair, clear and not misleading.
• Appropriateness and suitability testing
For each client, an investment profile must be created on the basis of the clients’ personal needs, characteristics and objectives which will determine their targets and expectations from their investments, as well as the amount of risk they are willing to undertake. From that point onwards, all the products and services proposed will be consistent with their investment profile. Additionally, under MiFID II rules, for certain types of complex investments, clients may be asked additional questions before they investing in them, to ensure that the product is appropriate for them and that they fully understand how the product works. The Bank must understand the client’s knowledge and experience in the investment field relevant to the specific type of product or service required.
• Best execution
The protection of investors is reinforced through the obligation to undertake all sufficient steps to obtain the best possible result for clients when executing orders. In this respect, the price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order are taken into account.
• Conflicts of interest
The Bank has established policies, procedures and controls to identify and to prevent or manage conflicts of interest between itself and its clients or between clients that arise as a result of the Bank providing investment services and activities and ancillary services and/or any other banking services to its clients. Also, the Bank must disclose whether advice is given on an independent or a non independent basis.
• Costs, associated charges and inducements
Clear information on all costs and charges associated with financial instruments will be provided. Additionally, during the provision of investment or ancillary services to its clients, the Bank may receive or pay fees, commissions or other non-monetary benefits (Inducements) for or to third parties. The Bank shall inform clients of the actual amounts of payments or benefits received and paid, on an annual basis.
• Harmonisation of the European investment markets
Through MiFID I, the European Union established a comprehensive set of rules on investment services and activities with the aim to promote financial markets that are fair, transparent, efficient and integrated. This ensured a high degree of harmonised protection for investors in financial instruments, such as shares, bonds or derivatives. However, following the 2008 financial crisis it was clear that a more robust regulatory framework was needed to further strengthen investor protection and to address the development of new trading platforms and activities. Consequently, MiFID II aims to reinforce the rules on securities markets by:
- ensuring that organised trading takes place on regulated platforms
- introducing rules on algorithmic and high frequency trading
- improving the transparency and oversight of financial markets, including derivatives markets, and addressing some shortcomings in commodity derivatives markets
- enhancing investor protection and improving conduct of business rules as well as conditions for competition in the trading and clearing of financial instruments.