3 Ways MiFID II is Reshaping How U.S. Firms Trade in Europe

By: William Fenick

Since November 2007, the European market has been governed by the Markets in Financial Instruments Directive (MiFID), a regulatory framework intended to bring greater competition into the market and make trading safer for investors. And soon, nearly a full decade after the original legislation took effect, the European market will operate under a new cornerstone piece of legislation.

The Markets in Financial Instruments Directive II (MiFID II) standard, set to take effect in January 2017, or now, potentially January 2018, will build on its predecessor by extending regulatory reach beyond the equities marketplace to other markets. The goal of MiFID II is to eventually transform the European market so it’s more in line with the U.S. market, in turn, making it a more attractive investment target for U.S. financial firms.

Here are three ways MiFID II will broaden the reach of MiFID I and change the European market:

1. Greater Transparency

MiFID I modernized the experience of trading in Europe, through multilateral trading facilities (MTFs) and major technology infrastructure upgrades. MiFID II will go one step further by extending regulation beyond the equities marketplace into other markets, and by increasing transparency across all asset classes (equity, equity-like and non-equity instruments). This increase in public disclosure will further protect investors and level the playing field.

2. New Best Execution Standards

Under MiFID I, investment firms are held accountable for providing clients with ideal outcomes, based on the order’s price, cost, speed, size, nature and likelihood of being executed. These factors will still apply under MiFID II, but firms will face even stricter scrutiny, including a requirement to disclose their top five execution venues from the prior year. Compliance with these new best execution principles will require increased reporting.

3. More Reliable Market Structure

Historically, the European market structure is complex, due to it comprising multiple countries, currencies, cultures and regulatory bodies. MiFID II will build on MiFID I by further democratizing the European trading landscape and introducing organized trading facilities (OTFs), which will regulate additional trading activity that currently occurs outside the scope of existing trading venues.

What MiFID II Means for U.S. Traders

While MiFID II will make the European market more familiar and appealing to U.S. traders, there are still local nuances and investment practices unique to the region that only a European partner would be accustomed to. A colocated data center situated in the right EU gateway, outfit with technological capabilities and able to facilitate interconnectivity, will help financial firms to seamlessly enter the European market and generate optimal return for their clients, without running afoul of MiFID II.