In Depth

The dawn of Mifid II: the biggest financial markets reform in a decade

In Depth: European banks and financial firms hope new rules will give them an edge over US rivals

A major regulatory shake-up of EU financial markets comes into force tomorrow - and Europeans are expecting the new rules to give them an advantage over their American rivals.

What is Mifid II?

The revised Markets in Financial Instruments Directive (Mifid II) is a massive legal overhaul across the entire EU bloc that aims to make markets more transparent and competitive. The directive covers banks, brokers and asset managers and a large swathe of the work they all do, ranging from stock trading to how analysts’ research is bundled and billed.

The legislation will make markets more investor-friendly, Bloomberg says, offering more information on fund managers’ fees, the execution of trades and the pricing of bonds and derivatives. Regulators will also have more precise market data to help them avert anomalies such as “flash crashes”.

According to CNBC, the changes affect investors buying or selling stocks, bonds, commodities, foreign exchange or exchange-traded funds. European firms are not the only ones involved. Banks in Asia and the US that sell financial instruments to EU clients will have to abide by the rules. Options that have an underlying asset listed in Europe also fall under the legislation, as do stocks that have a separate listing in Europe.

“Once the bugs are ironed out, Europe will emerge with a system much better suited to modern investing - arguably surpassing the US, long considered the global leader in sophistication and transparency,” Bloomberg says.

Why has it taken so long to implement?

The European Commission initiated the changes after the collapse of Lehman Brothers, and the 2008 financial crisis.

Once agreed, the rules proved to be a €2.5bn (£2.2bn) headache for the sector to implement, requiring a major IT revamp. Dozens of trading and compliance systems had to be upgraded, and the execution will be just as laborious. For example, the Financial Times says, investors must fill in up to 65 data fields and identify traders even if an order is not executed.

What happens to UK financial firms post-Brexit?

Mifid II allows for non-EU financial firms to operate across the Continent as long as they are based in a regime with “equivalent” regulation, Moody’s says.

This opens the door for UK banks to keep their passporting rights - which allow UK banks, insurers and asset managers to sell services freely across the EU - but is only likely if the UK adopts EU rules.

EU chief Brexit negotiator Michel Barnier has said financial services couldn’t be included in a UK-EU trade agreement, but Theresa May has said there would be a “greater recognition of the role the City plays in the financial provisions for Europe as a whole” during negotiations.

“Whether or not the trade talks extend to finance, the EU may use market access for UK banks and insurers as leverage on other issues,” Bloomberg reports.

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