Who wins at Mifid II?

International Financial Law Review
By Olly Jackson
29 January 2018

The new Markets in Financial Instruments Directive (Mifid II) has received widespread criticism for its effects on research costs, increased transparency rules, and access to trading and clearing systems. The directive is so wide-ranging that it affects all types of investment firms.

In the area of research, it’s believed it goes as far as causing job losses for analysts, as firms zero in on protecting their value and reducing costs, now that clients are to be charged separately as opposed to being charged with brokering commissions.

Yet the directive could provide some businesses with opportunities. Mifid I first introduced the multilateral trading facility (MTF) – a platform where multiple third parties can buy and sell interests in financial instruments – and led to trading venues challenging the dominance of established exchanges. Hogan Lovells financial institutions partner Michael Thomas said that there was a huge proliferation of trading venues that substantially took business away from these exchanges. He said that organised trading facilities (OTFs), created under Mifid II, could influence the market in a similar manner.


OTFs are multilateral trading systems that are not MTFs or regulated markets: they specialise in instruments including structured finance, bonds and derivatives. Equities cannot be traded on these platforms.

“Mifid I had a number of benefits for firms using trading venues, as they had more choice as to where to do their trades,” said Thomas. “It is possible that new platforms mandated by Mifid II, such as OTFs, could have a similar impact.”

However, Mifid II’s official aim is for customers of financial services to be the ones to benefit most from the new requirements.

The key is whether firms provide investment-related services or perform investment activities. This is a very wide-ranging net that could be even bigger than it first appears. A firm may still be indirectly affected if, for example, non-financial firms that use services of EU investment firms need to provide information to those firms to enable them to make appropriate records and reports required by Mifid II.

Thomas stops short of saying Mifid is damaging, pointing out that its purpose to harmonise rules governing investment-related services and activities across the EU is positive. If this can be achieved, then it will be largely worthwhile.


  • Organised trading facilities could have as big an impact on the industry as multilateral trading facilities and benefit firms using trading venues;
  • Small firms are likely to suffer most as the big costs will disproportionately hit boutiques and smaller funds;
  • The post-trade transparency requirement will affect banks more than other firms.

Difficulties of implementation

The scale of the directive cannot be underestimated and has required an enormous effort from the industry to prepare for it. In October last year the EU began infringement proceedings against 19 member states for failing to implement Mifid II. This failure can in part be attributed to the directive’s size and complications that make it very difficult for a small firm to adopt the required changes in a limited time period.

There are also different interpretations on the various provisions, with different firms taking different approaches. It will require time and regulatory clarification to get to a common position. Further complications are likely to arise as a result of Brexit, and certain thresholds and tests will need to be reassessed. Some people have even suggested that a third Mifid will need to be implemented after the UK’s withdrawal from the EU.

As of January 8, only 50% of the EU had implemented the directive that should have been put into law in 2016. Thomas says that it will take time and regulatory clarification to get to a common position across Europe. On the day of the deadline, the EU granted the UK and Germany an extra 30 months to comply with trading and clearing regulations, and six more months to secure a legal entity identifier, despite insisting that no allowances were going to be made months previously.

Smaller firms

AxiomSL product manager Gaurav Chandra said that the regulators did not think through the variables when implementing Mifid II and as a result smaller firms have been most affected. “Needless to say, it’s the smaller firms that have faced the most challenges such as boutique asset managers and smaller funds,” he said. “Regulators want to enhance transparency and ensure consumer protection but it’s been a costly and difficult process for many firms.”

“Along with significant infrastructure costs to ensure compliance with pre and post trade transparency rules, additional compliance costs have been incurred which have been extremely high,” he added.

Mifid II has introduced a post-trade transparency requirement. One of the rules’ main objectives was to extend transparency requirements to other instruments like depositary receipts or bond, and this is likely to impact some firms more than others. Some are not geared up for that kind of reporting; a lot of banks had to invest in infrastructure to meet and build proper real-time record keeping.

“It’s all been about manual processes up until now,” said Chandra. “With end of day manual feeds, banks could get away with doing CSV uploads: however, with pre-trade transparency requirements, the manual processes will no longer be sufficient and clients will have to transform dramatically to be compliant.”

“This could be either through on-boarding external vendors to meet specific monitoring and reporting requirements or investing in existing platforms to upgrade all relevant systems to ensure compliance,” he added.

Mifid II will overhaul the financial services industry and make the most widespread changes to the industry in decades, but the upheaval could actually benefit some firms in financial services, but as is often the case, smaller firms are likely to suffer most.

As published in IFLR.