MiFID II and MiFIR: Key differences and similarities

In brief:

• MiFID and MiFIR are interrelated but while MiFID is a directive, MiFIR is a legislative act.
• MiFIR focuses on the technical aspects of reporting and transparency, while MiFID II addresses broader investor protection and business conduct.
• Both MiFIR and MiFID have been amended, with the changes taking effect from January 2025.

What is MiFIR?

The Markets in Financial Instruments Regulation (or MiFIR) is a legislative act that sets out a centrally imposed set of rules to be followed by all European Union (EU) member states. 

One of MiFIR’s key objectives is to enhance transparency in financial markets. This is achieved through various measures, including:

• Pre- and post-trade transparency: MiFIR mandates reporting of buy and sell orders for certain financial instruments, providing greater visibility into market activity.
• MiFIR Transaction reporting: Detailed trade data needs to be reported to a central repository, allowing regulators and market participants to monitor market trends and potential irregularities.
• Best execution requirements: Investment firms must take all reasonable steps to secure the best possible results for clients when executing their orders.

Overall, MiFIR plays a vital role in promoting a more transparent and efficient financial market environment across the EU.

MiFIR amendments 

MiFIR was amended in January 2024 following significant debate and will take effect from Jan. 17, 2025. The amendments primarily focus on pre-and post-trade transparency (for equities, non-equities, and derivatives), and the data reporting service providers associated with the consolidated tape system. On account of these amendments, MiFIR has now been dubbed MiFIR 2.

What is MiFID?

The second Markets in Financial Instruments Directive (abbreviated to MiFID II) was introduced in 2018, building upon the original MiFID regulation established in 2007. 

The 2008 global financial crisis exposed weaknesses in the transparency of the securities markets, and demanded regulatory change. MIFID II was introduced as a means to strengthen the EU’s financial regulation in order to boost transparency, build more resilient markets, and protect investors. 

MIFID II is a crucial piece of legislation within the EU’s financial regulatory landscape. Specifically, MiFID II broadens the EU’s purview over the securities markets in relation to a wide range of financial instruments. It does this through a robust framework that sets out a series of goals for EU countries to achieve. 

MiFID II amendments 

MiFID II, along with MiFIR, was amended in January 2024 following a lengthy legislative review and has now been published in the Official Journal of the European Union. On account of this, MiFID II is now being referred to as MiFID III. 

Key differences and similarities between MiFID II and MiFIR

Fundamentally, MiFID and MiFIR are underpinned by the same objective; to strengthen transparency and risk awareness in the EU’s securities markets and consequently enhance investor protection. 

The core difference between MiFID II and MiFIR is that MiFID is a directive, while MiFIR is a regulation. 

Directives require member states to translate them into national law. In contrast, as a regulation, MiFIR becomes directly applicable in each member state.

Where does MiFIR and MiFID II apply?

The combination of MiFID MiFIR apply to a wide range of players in the EU’s financial services sector:

• Regulated investment firms: This includes businesses like investment banks, wealth managers, and brokerage firms offering MiFID services within the EU.
• Cross-border service providers: Even firms based outside the EU but offering investment services to clients in the EU need to comply.
• Market participants: This encompasses data reporting service providers, investment and fund managers, along with traders and exchange officials.
• Global investment businesses: Firms with a global reach must also comply with MiFID II and MiFIR if they’re conducting investment activities within the EU.

Does MiFID II apply to the U.K.?

Previously, EU member states, including the U.K., were required to implement MiFID II into their national laws by July 3, 2017. The U.K. achieved this through amendments to existing legislation and the creation of rules and guidance by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA).

With the U.K.’s exit from the EU, a new approach was needed. During the Brexit process, the U.K. “onshored” the existing MiFID framework into its own domestic law. This essentially means that the core principles of MiFID II were incorporated directly into U.K. regulations.

This move ensured a smooth transition for financial services firms operating in the U.K., as the core regulatory structure remained familiar. It’s important to note that while the U.K.’s MiFID framework is similar to the EU’s, some divergence may occur as the EU updates its regulations in the future, as it has done this year.

Does MiFID II apply to the U.K.? 

MiFIR continues to be relevant in the U.K. following the end of the Brexit transition period. This is because, unlike directives, regulations are automatically incorporated into national law. Therefore, MiFIR became part of U.K. domestic law on Jan. 3, 2020, ensuring a smooth continuation for financial services already subject to its rules.

The U.K. has implemented MiFIR through various means, including:

• Legislative amendments: Existing laws were adjusted to reflect the requirements of MiFIR.
• FCA and PRA rules and guidance: These regulatory bodies issued specific rules and guidance to clarify how MiFIR would be applied in the U.K.
• Financial Ombudsman Service (FOS) adjustments: The FOS, which handles financial disputes, also amended its rules to account for businesses subject to MiFIR falling within its voluntary jurisdiction.

UK MiFIR uses a multi-pronged approach to ensure a comprehensive implementation. It’s important to be aware that, while the core principles remain, the U.K. has some flexibility to diverge from future EU updates to MiFIR regulations.

Summary 

While both regulations aim to strengthen EU financial markets, they target different aspects. MiFID II sets the overarching framework for investor protection and conduct of business. MiFIR, on the other hand, focuses on the technical side of things by establishing standardized reporting requirements. By understanding these key distinctions, you can ensure your firm adheres to both regulations and operates within a compliant and transparent environment.

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