The European financial market has been through significant regulatory changes in the last decade—namely the enactment of Markets in Financial Instruments Directive (MiFID) and the European Market Infrastructure Regulation (EMIR). The goal of these new laws and regulations is to help rebuild and maintain an efficient and stable financial system in Europe.
However, many financial experts have conducted research on the impacts of MiFID II and EMIR on the European financial market. Research has shown that trade reforms introduce barriers that hinder economic growth rather than enable it. Of course, this varies across countries, but this has proven true in the European financial market specifically.
As a result, the European Commission has gone to great lengths to implement trade reform, particularly surrounding post-trade services with MiFID II and EMIR.
In this article, we will explain what MiFID and EMIR are; the differences between the two; and what they mean for companies, corporations, firms, and trade repositories.
What is EMIR?
EMIR is a European law that was proposed and implemented in order to increase supervision, improve visibility and transparency, and reduce overall reporting risks associated with the derivatives market. The introduction and enactment of EMIR applies to all companies, investment firms, banks, and trade repositories within the European derivatives market.
EMIR focuses on three primary objectives: reporting, clearing, and risk mitigation. However, the scope of MiFID II is limited to OTC derivatives. The clearing obligation under EMIR also applies to FCs and NFCs both of which need to clear OTC derivative trades through an authorized CCP.
According to Article 9 of EMIR, the primary objectives of EMIR include the following:
- Increased safety and transparency via regulated execution and reporting to Trade Repositories
- Reduced counterparty credit risk via risk mitigation standards for contracts not cleared
- Mitigate operational risks via the use of electronic means for timely confirmation
What Does EMIR Mean for Companies and Firms?
Companies, investment firms, banks, and counterparties are now required to submit reports to their assigned, respective trade repositories for regulation. These reports must include any and all information related to exchange-traded derivatives, OTC derivative trades, intragroup trades, and contract-related transactions.
The following firms and organisations are now required to submit reports:
- Financial counterparties (FCs)
- Non-financial counterparties (NFCs)
- TCEs
The reporting party may be the counterparty to the trade, or a third-party (such as a CCP or trading platform).
The only exemptions to the EMIR reporting requirements are BIS, ESCB members, and other entities involved in managing public debt and intragroup transactions.
How Does EMIR Work?
Again, according to Article 9 of EMIR, all derivative contracts related to post-trade transactions must be reported to a trade repository registered and authorised by ESMA. The good news is that reporting can be done by counterparties or a third-party vendor or platform, which provides companies and firms with a resource to aid in the reporting process.
To illustrate how a company or firm would follow the new EMIR reporting requirements, when an investment firm enters into a derivative contract, this then leads to two possible reporting options:
1) The investment firm is the counterparty to the trade; thus, the counterparty would be required to submit an EMIR report.
2) The investment firm is not the counterparty to the trade. In this case, the investment bank acts on the account of and on behalf of the client to execute the trade; therefore, the firm is not expected to submit a report under EMIR.
What is MiFID?
Now that you understand more about what EMIR is, how it works, and what it means for companies and firms, what is MiFID? How is it different from EMIR?
The goals of MiFID are similar to EMIR. MiFID is another regulation that was enacted in 2007 to help increase the transparency across the financial markets across the European Union as well as standardize the regulatory disclosures required for particular markets. Similar to EMIR, the scope of MiFID is focused on OTC transactions.
Even though MiFID was put into force a year before the financial crises of 2008, many changes have been made since then as a result, such as MiFID II. The goal of MiFID II is to offer greater protection for investors and inject more transparency into all asset classes: from equities to fixed income, exchange-traded funds, and foreign exchange.
Even though MiFID went into force in 2007, MiFID II wasn’t enacted until January 3rd, 2018. It took almost a decade to review and audit the existing requirements of MiFID, propose and finalise MiFID II, and get it approved by the European Commission as well as other European institutions before its official launch in 2018.
How Does MiFID II Work?
Again, similar to EMIR, the goal of MiFID II is to ensure fairer, safer, and more efficient markets and facilitate greater transparency for all participants within those markets. This would be carried out through stricter and more rigorous and thorough reporting requirements for investment firms and counterparties.
The primary objectives of MiFID II include the following:
- Increased pricing transparency for off-exchange markets
- Volume caps for equity “dark pools”
- Splitting payments for trading commissions
- Stricter standards for investment products to help protect investors
How is MiFID II Different from EMIR?
So, how is MiFID II different from EMIR? Although the goals between the two are similar, the reporting requirements differ. Therefore, it’s important for investment firms, banks, and companies to carefully review the reporting requirements of each to ensure compliance.
As we mentioned briefly above, most firms and organisations are permitted to work with third-party vendors to aid companies in auditing and establishing new processes, operations, and standards that comply with reporting requirements as well as to help submit accurate reports to trade repositories.
What Does This Mean for Companies and Firms?
All in all, it is true that both EMIR and MiFID II pose numerous challenges to investment firms, banks, and companies. Many of the challenge areas included having the proper IT infrastructure, data reporting resources and processes, as well as a number of financial and legal issues.
As a result, in order to comply with MiFID II and EMIR, many companies and firms have been forced to completely overhaul their existing processes, adopt new technology and software, and partner with third-party vendors to help them become more transparent and efficient organisations.
FAQs
However, there are distinct regulatory drivers behind each regime: MiFIR transaction reporting is primarily used to detect market abuse whilst EMIR trade reporting is used primarily to monitor for systemic risk.
What is the difference between MiFID and MiFIR? ›
The main difference between MiFID and MiFIR is that the directive (MiFID) sets out the goals that EU member states should strive to meet, whereas the regulation (MiFIR) imposes rules that all countries must follow. MiFID II is a legislative act that sets out goals that all countries in the EU need to achieve.
What is the key difference between MiFID 1 and MiFID 2? ›
What Is the Difference Between MiFID and MiFID II? MiFID II enhanced the transparency and reporting requirements of the older MiFID regulation. One key difference is the expansion of its scope: while MiFID applied largely to equities markets, MiFID II applies to all types of securities and derivatives.
What is the difference between MiFID trade and transaction reporting? ›
The main difference relates to the respective audience and purpose: trade publication (TP) (also often called “trade reporting”) is directed to the public and made for disclosure purposes, whereas transaction reporting (TR) is made to regulators for oversight of transactions.
How do you tell if a firm is a MiFID firm? ›
A MiFID firm is one that is:
- An investment firm with its head office in the UK; or.
- A CRD credit firm providing investment services; or.
- A collective portfolio management investment firm.
MiFID sets out the authorisation requirements for investment firms, including detailed information that firms must provide to the relevant national regulator. MiFID also contains some rules relating to changes of control over investment firms.
Is MiFID applicable to USA? ›
MiFID II, however, only applies to asset managers that have a physical presence in Europe and that are operating under a MiFID permission and regulated by a European regulator. As a result, US asset managers are not directly regulated by MiFID.
Does MiFID apply to the US? ›
If you are a non-UK firm, for example the UK branch of a US firm, MiFID does not apply to you. However, if MiFID would have applied to you if you had been incorporated or formed in the United Kingdom, you will be a third country investment firm under the FCA's rules.
Does MiFID II apply to US firms? ›
MiFID II does not necessarily apply to US firms, as it is an EU directive. It is also enshrined in UK law and regulated by the Financial Conduct Authority (FCA), having been implemented before Brexit.
What is MiFID II in simple terms? ›
What is MiFID II? MiFID II is the revision of the Markets in Financial Instruments Directive (MiFID), originally published in 2004. It is the foundation of financial legislation for the European Union, designed to assist traders, investors, and other participants in the financial sector.
MiFID II places restrictions on inducements paid to investment firms or financial advisors by any third party in relation to services provided to clients.
Who does MiFID apply to? ›
Background to MiFID
MiFID II governs the provision of investment services in financial instruments. It applies to investment firms, wealth managers, broker dealers, product manufacturers and credit institutions authorised to carry out MiFID activities.
What is MiFID best execution rule? ›
MiFID's best execution regime requires investment firms to take all reasonable steps to obtain the best possible result for their clients, taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to order execution.
What is reportable under MiFID? ›
Under MiFID II/MiFIR, operators of all trading venues (including Multilateral Trading Facilities, MTFs, and Organised Trading Facilities, OTFs) must report transactions traded on their platform when executed through their systems by a firm which is not subject to the regulation.
What is MiFID reporting requirements? ›
MiFID II Transaction Reporting requires investment firms to report complete and accurate details of their transactions to their competent authorities, no later than the close of the following working day.
Does MiFID II apply to private equity? ›
Although the majority of private equity managers are not MiFID entities, the MiFID framework also has implications for the whole private equity industry, given its wide scope and the extent to which other pieces of legislation – including the AIFMD – cross-reference its provisions.
What have been the main changes as we moved from MiFID I to MiFID II? ›
EU MiFID II 'Quick Fix' Directive
The main changes were to, phase-out of paper-based communication, exempt costs and charges disclosure for eligible counterparties and professional clients, disapply research charges, and suspend best execution reports for venues (RTS 27).
Who is exempt from MiFID? ›
Yes, you could fall within the article 2.1(d) MiFID exemption but not if you: are a market maker (please see Q41 below); are a member of, or a participant in, a regulated market or an MTF (except that non-financial entities can be members or participants as described in the answer to Q40A);
Which countries are equivalent to MiFID II? ›
In this context, the Regulation has now provided for a first list of “equivalent” jurisdictions: i.e. Canada, Switzerland, the United States, Japan, Hong Kong and finally Singapore.
Who regulates MiFID? ›
In June 2014 the European Commission adopted new rules revising MiFID framework. These consisted of a directive (MiFID II) and a regulation (MiFIR). The revised MiFID rules also strengthen investor protection by introducing requirements on the organisation and conduct of those involved in these markets.
The obligations do not apply to a non-EU firm. However, if a non-EU firm is providing services to an EU client, it will need to consider the local licensing regime of the jurisdiction in which the client is based. The obligations do not apply to a non-EU firm.
How do I comply with MiFID II? ›
To demonstrate MiFID compliance, supervision review personnel at financial firms must manage and review large amounts of data, searching for any evidence of potential malfeasance and flagging risk-laden content for further review.
Is MiFID II still in force? ›
MiFID II was required to be transposed into UK law by 3 July 2017. MiFIR had direct effect.
What is MiFID II requirement? ›
MiFID II requires investment firms trading in commodity derivatives to provide to the relevant competent authority a complete breakdown of their positions as well as those of their customers. Position holders are to be identified in the same way as for transaction reporting purposes.
Does MiFID apply to Canada? ›
Under MiFID II, non-European entities including those in North America & Canada are impacted by a “Beneficial” or “Exposed” criterion. They are either: Beneficial (ultimate) owners of European-based companies, or beneficiaries of funds or portfolios of European investments.
What is the purpose of the EMIR report? ›
EMIR mandates reporting of all derivatives to Trade Repositories (TRs). TRs centrally collect and maintain the records of all derivative contracts. They play a central role in enhancing the transparency of derivative markets and reducing risks to financial stability.
What is MiFID transaction reporting? ›
The obligation to report transactions under MiFIR requires investment firms that execute transactions in financial instruments to report “complete and accurate details of such transactions to the competent authority as quickly as possible, and no later than the close of the following working day”.
Who needs to do MiFID reporting? ›
MiFID II Transaction Reporting requires investment firms to report complete and accurate details of their transactions to their competent authorities, no later than the close of the following working day.
Who is exempt from EMIR reporting? ›
Trades within one and the same legal entity are NOT reportable. If at least one of the counterparties is a non-financial counterparty (NFC), an application for exemption of reporting of intra-group trades may be submitted to the relevant Financial Supervisory Authority.
Who does the EMIR apply to? ›
To whom does EMIR apply, and who is the competent authority? EMIR applies to CCPs and their clearing members, financial counterparties and trade repositories. In particular cases, EMIR also applies to non-financial counterparties and trade platforms.
EMIR reports typically contain 26 fields of counterparty data and 59 fields of additional data.
What is MiFID compliance? ›
MiFID compliance requires firms to capture all communications surrounding transactions, including email, telephone calls, social media and in-person meetings.
Does MiFID apply to US clients? ›
If you are a non-UK firm, for example the UK branch of a US firm, MiFID does not apply to you. However, if MiFID would have applied to you if you had been incorporated or formed in the United Kingdom, you will be a third country investment firm under the FCA's rules.
Is MiFID applicable to us? ›
MiFID II, however, only applies to asset managers that have a physical presence in Europe and that are operating under a MiFID permission and regulated by a European regulator. As a result, US asset managers are not directly regulated by MiFID.
Who is in scope for MiFID? ›
Following investment services and activities are in scope of MiFID II. Reception and transmission of orders in relation to one or more financial instruments. Execution of orders on behalf of clients. Underwriting of financial instruments and /or placing of financial instruments on firm commitment basis.
