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What is MIFID II and what it deals with?

Recently updated on 20 Feb 2023

16 Feb 2023 - Forex Litigation - Min Read 7 min
What is MIFID II and what it deals with?

MIFID II (Second Markets in Financial Instruments Directive) is a European Union directive that regulates the market for financial instruments in the EU.

It was introduced in 2018, replacing its predecessor, to adapt market rules to the evolution of financial technologies.

The first Mifid became known on November 1, 2007 before the thrive in online trading. Thus, it was necessary to integrate it with new chapters and definitions.

The implementation of the old Mifid had resulted in reduction in trading costs for traders, but it was merely an incentive and did not protect investors in any way.

MIFID II establishes rules, applicable to European Union countries, aimed precisely at protecting Forex investors.

The intention is to promote information as the greatest possible form of protection.

MIFID II is an important step forward in consumer protection and helps create a safer and fairer investment environment in Europe.

Safety comes through transparency of trades and orders, including the surfacing of hidden costs, through the supervision of trading algorithms, and through clear regulation of new financial instruments (not yet fully regulated), such as CFDs. contracts for difference.

What applies to all traders and brokers alike, is the need to submit to specific requirements for admission to Trading.

National and supranational regulation authorities (such as Esma, the European Financial Markets Authority, and EBA, the European Banking Authority) will be able to prohibit or restrict the sale and placement of certain financial instruments that could expose investors or the financial stability of the system to excessive risk, as has already happened with binary options.

Mifid II: retail clients or professional clients

Mifid II requires investment firms to classify their clients as “retail clients” or “professional clients” according to specific criteria.

Professional clients become so only upon their specific request, subject to compliance with at least two of the following criteria (verbatim from the Mifid II Directive):

  • The client has conducted significant transactions in the relevant market at an average frequency of 10 transactions per quarter over the previous four quarters;
  • The value of the client’s portfolio of financial instruments, including cash deposits and financial instruments, exceeds EUR 500,000;
  • The client works or has worked in the financial sector for at least one year in a professional position that assumes knowledge of the transactions or services envisaged.

Criteria aside, there remains the discretion of the investment firm, which may reserve the right not to promote the client as a professional: “any reduction in the protection afforded by the firms’ standard conduct of business rules shall be considered valid only if after making an appropriate assessment of the client’s expertise, experience and knowledge the investment firm may reasonably believe, having regard to the nature of the transactions or services envisaged, that the client is capable of making investment decisions and understanding the risks he or she is undertaking.”

The remaining clients are considered retail, and to them financial intermediaries must provide an appropriate level of protection, starting with more detailed information about the risks associated with investments.

It is important to know that if you choose to become a professional client you face the loss of the protection applied to retail clients.

Mifid II is not applicable only to Europeans

Although Mifid II is a European directive, it could also have implications for non-European companies offering investment services or trading in financial instruments to EU clients.

If a non-European company offers investment services or trading of financial instruments to EU clients through a branch located within the EU, it could be subject to Mifid II rules.

If a non-European company offers investment services or trading in financial instruments to EU clients through a “permanent establishment” located within the EU, it could be subject to Mifid II rules.

Thus, if a non-European firm offers investment services or trading in financial instruments to EU clients, it is required to check whether it is subject to Mifid II rules and take the necessary steps to comply with EU rules.

Mifid II introduces an “equivalence” regime for third countries, this implies that, European authorities, can declare that the rules of a third country are equivalent to EU rules, and in this specific case, companies from that third country could be exempted from the application of Mifid II.

The discriminator often comes down to who takes the initiative, i.e., whether it is the investor who seeks out the broker or vice versa: “If a third-country firm provides services at the sole initiative of a person established in the Union, the services should not be provided in the territory of the Union. If a third-country firm seeks to procure clients or potential clients in the Union or promotes or advertises investment services or activities in the Union together with ancillary services, the relevant services should not be provided at the exclusive initiative of the client.”

How can MIFID be applied?

MIFID II affects the Forex market in several ways:

  1. Presentation of financial products
  2. Price transparency
  3. Personnel controls
  4. Execution of investor orders
  5. Resolution of conflicts of interest
  6. Risk management
  7. Protection of personal data

1 – Presentation of financial products

Regarding the presentation of financial products, MIFID II establishes specific rules to ensure that consumers can understand the risks and benefits associated with such products.

Specifically, companies offering Forex investment products must provide complete and clear information on the risks and costs associated with such products.

Disclosure schedules need to be clearer and more comprehensive, and detailed reports and histories should be provided on a regular basis.

Brokers technically could not give advice, but they should assess the degree of preparedness of clients and sell them suitable products based on that.

2 – Price transparency

Price transparency: firms must make public the purchase and sale prices of a given financial instrument, and especially make immediately manifest any hidden costs that may emerge in the process.

MIFID II requires transparency for regulated markets and over the counter (OTC) market participants to ensure that investors have access to complete and accurate information about the prices and liquidity of different financial instruments.

3 – Personnel controls

Personnel controls ensure that trained traders can be relied upon.

All those working in the financial markets must be up to the mark and know what they are selling.

Supervisors will ensure that every member of the staff of the firms under analysis is able to offer the best possible service, demanding professionalism, and specific skills.

In addition, they will not be able to be incentivized based on the type of product they sell, because, as has often been the case, this causes them to advertise the financial instruments that make them the most money, to the detriment of the customer.

4 – Execution of investor orders

Execution of investor orders must be done in a fair and transparent manner. Companies offering Forex investment products must ensure that orders are executed at the most favorable price possible for investors.

5 – Resolution of conflicts of interest

Firms offering Forex investment products must ensure that their business interests do not affect the quality of service provided to investors.

“… investment firms shall take all appropriate measures to identify and prevent or manage conflicts of interest that may arise … at the time of the provision of any investment service … Conflicts of interest arising from the receipt of undue inducements from third parties or from the remuneration and incentive plans of the investment firm itself are also subject to this rule.”

Should the organizational or administrative arrangements made by the investment firm, to prevent conflicts of interest detrimental to the interests of its clients, are not sufficient to avert that clients’ interests may be harmed, it is required to clearly inform clients, before acting on their behalf, of the possibility of such conflicts of interest arising and the measures taken to mitigate such risks.

6 – Risk Management

MIFID II establishes rules for risk management in Forex. For example, firms offering Forex investment products must ensure that investors are adequately informed about the risks associated with these products and are able to manage their level of risk exposure.

It becomes important for financial intermediaries to establish the level of risks associated with financial products, to ensure that clients are adequately informed about the risks, and to ensure that internal procedures are in place to manage risk.

7 – Protection of personal data

Last but not least, MIFID II’s principle: investors’ personal data must be treated safely and confidentially.

Boccadutri International Law Firm carefully follows the Forex market and the regulations that affect it to best assist its clients.

For further information, we invite you to visit our Forex News section.

You will find our Comprehensive Guide to Forex ,but also, the advice of lawyer Boccadutri on Forex investing, clarifications on the nature of financial levers, warnings on how fake forex lawyers take advantage of those who have already been scammed or the means used by scammers, such as the case with the tinder forex scam, indications on how to report a trading company or how to recognize a forex scam.

If you are curious about this topic or if you have been involved in situations related to your investments, do not hesitate to contact our Forex Department lawyers.

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Calogero Boccadutri

Calogero Boccadutri is the Managing Partner of Boccadutri International Law Firm. He has trial experience in Forex, Personal Injury and Administrative litigation.

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