The Markets in Financial Instruments Directive, commonly referred to as Mifid, is a sweeping set of European regulatory changes first introduced in 2007 to increase transparency in financial markets and improve investor protection.
Among other things, Mifid requires greater disclosure of trading information, such as trade prices and volumes, providing investors with more accurate and up to date information. The regulation also established requirements for firms to assess their clients’ knowledge, experience and risk tolerance before offering financial products or services.
In addition, Mifid introduced the concept of “best execution”, requiring investment firms to take all reasonable steps to achieve the best possible outcome for their clients when executing orders.
A major limitation of Mifid was that it focused primarily on stocks and did not include the vast amount of financial products available in the market, such as over the counter (OTC) derivatives. OTC transactions are done between two parties without any exchange in the middle to supervise the act. As a result, there was less regulatory oversight and much less transparency for the parties engaging in an OTC trade.
Mifid II
In 2018, Mifid II was introduced to address various issues and challenges that had emerged since the implementation of Mifid. For example, it expanded the product scope to all types of securities, including debt securities, derivatives, and structured instruments.
Another key aspect of Mifid II is that it required investment firms to unbundle research and execution costs. Before Mifid II was introduced many investment firms would bundle the costs of research services into the overall trading commission that clients paid when executing trades, creating a potential conflict of interest.
To address this issue, Mifid II required investment firms to explicitly charge for research services rather than including them in the overall cost of transactions. The unbundling of payments for research and execution are thought to have had a .