Trading online is highly fluid, not just because of the dynamic nature of the global markets and economies, but also the constantly evolving laws and regulations. At AvaTrade, our clients are our top priority and as part of our commitment to our traders, we are always staying abreast of these regulatory changes to ensure that we remain fully compliant.
Fundamentals of MiFID
The first version of MiFID (Markets in Financial Instruments Directive) came into effect across the EU in 2007 and it is the cornerstone of the EU’s financial markets regulation. The aim of MiFID was to improve competitiveness for investment services and provide protection for investors in financial instruments by establishing:
- A code of conduct and organizational requirements for investment firms
- Authorisation requirements for regulated markets
- Reporting to prevent market abuse
- Trade transparency for shares
- Rules on the admission of financial instruments for trading
Over the years, there have been various proposals and debates around the revision of MiFID, and the final legislative texts were finally adopted by the EU Parliament in June 2014. This revised version, which includes MiFIR (Markets in Financial Instruments Regulation), became collectively known as MiFID II and it came into effect in January 2018.
Assisting in the technical standards, advice, and implementation of the regulation is ESMA (European Securities and Markets Authority), an independent EU Authority. ESMA continues to play an active role by creating a supervisory culture and practices, including the development of Q&A’s (questions and answers) to help organizations in the implementation of MiFID II. ESMA, while independent, reports to various EU bodies, including the EU Parliament.
Introduction of MiFID II
At the beginning of 2018, MiFID II came into effect for investments firms. This new legislative framework was designed to not only strengthen investors protection but to provide additional transparency; the fairer, safer, more resilient, and efficient functioning of the financial markets.
In summary, some of the key issues that MiFID II addresses:
- Removal of trading bonuses – under the new regulation, brokers cannot offer trading bonus incentives to clients.
- Professional trader classification – based on a questionnaire that clients complete and other criteria, clients must be classified as either retail or professional traders. Depending on the client’s classification, they are entitled to different features and benefits. For example, the amount of leverage.
- Reduction in leverage for retail clients – while leverage can be a great tool to maximize profits, it can also magnify losses. Overall, the amount of leverage that can be given to clients who are classified as ‘retail clients’, has been reduced.
- Avoiding conflict of interest – one of the key concerns that MiFID addresses is the avoidance of conflict of interest between brokers and their clients. The aim is to ensure that brokers continuously act in the best interest of their clients.
- Registering of automated trading algorithms – under the new regulation, algorithms used for automated trading have to be tested, registered and have protection measures built-in.
- Greater transparency and reporting – brokers must provide more detailed reporting on trades, including volume and price, as well as keep records of all communications and conversations with their clients.
- Communication simplicity and clarity – all communications, especially marketing communications, must be clear, fair and not misleading. Plus, the risks of investing in financial instruments must also be clearly stated.
The new regulation has been in the making for many years, with many iterations and will continue to adapt and evolve. The entire MiFID document is almost 7,000 pages, but the essence of this framework is to ensure a fair, transparent and more secure environment for all stakeholders, especially investors. The above is a highlight of just some key areas that MiFID II deals with. AvaTrade clients can have complete peace of mind knowing that AvaTrade complies with these regulations and will always act in their clients’ best interests.
For more information detailed information on MiFID, please visit: https://www.esma.europa.eu/policy-rules/mifid-ii-and-mifir