Markets in Financial Instruments Directive (MiFID) 

MiFID II is a legislative framework instituted by the European Union (EU) to regulate financial markets in the bloc and improve protections for investors. Its aim is to standardize practices across the EU and restore confidence in the industry, especially after the 2008 financial crisis.



The 2nd Markets in Financial Instruments Directive (MiFID II) and the associated Regulation (MiFIR) came into effect across the EU on January 3, 2018 (replacing MiFID from 2007). When it was introduced, MiFID II was the most significant piece of financial regulation since the 2008 financial crisis, covering most of the financial services industry.

Its objective is to strengthen investor protection through increased transparency and reporting, enhanced governance rules and heightened regulation of markets. The regulatory text itself consists of both a Directive and Regulation, as well as myriad Regulatory Technical Standards (RTS), Implementing Technical Standards and Delegated Acts.


The precipitate size of this regulation, combined with the clarifications and guidance that continues to be published means compliance remains an challenge for many firms, as evidenced by the latest data from ESMA on sanctions and measures enforced by the National Competent Authorities (NCAs). A few of the key areas of the MiFID II framework that have proven challenging for firms comprise Transaction ReportingBest ExecutionRecord Keeping and Trade Reconstruction as highlighted below. 


Transaction reporting requirements existed under MiFID I, the scope and overall intention of the transaction reporting framework was greatly expanded  when MiFID II was introduced. 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 a NCA - the FCA in the UK - as quickly as possible, and no later than the close of the following working day. Transaction reporting data is then used by the FCA and other regulators to detect and investigate suspected market abuse, as well as to conduct supervision and to support the work of other regulatory authorities (such as the Bank of England).

*** transaction reporting is separate to trade reporting, a MiFID requirement for firms to report basic trade data to the market on a near real-time basis. ***

Changes to transaction reporting introduced by MiFID II:

  • Data reported – 65 pieces of data are required to be reported per transaction (only 13 of which were used in MiFID I), and range from basic economic information, to detailed data on the instrument itself, the trader or even the algorithm involved in the execution.
  • Instruments covered – all security derivatives and cash equities are now in scope of reporting.
  • Timelines and mechanisms – reports must be made via an Approved Reporting Mechanism (ARM) and by no later than the end of day the following day (T+1).
  • Type of transaction – no longer covering only market-side trades, the definition of ‘transaction’ now covers any purchase or sale of a reportable financial instrument, entering or closing a derivative contract in a financial instrument, and any change in notional amount of that contract. There are also some specific exclusions that do not require reporting, which only increases the overhead in reporting correctly.
  • Reporting responsibility – depending on a firm’s counterparty, the responsibility for reporting a transaction will fall on one or both parties, requiring sharing of trade information between firms.




Under MiFID II, firms are expected to implement ‘all sufficient steps’ to ensure the best possible results for their clients. When executing a client order, firms are expected to consider “costs, price, speed, size, likelihood of execution and settlement, nature or any other relevant consideration”.

As well as the required policies and procedures a firm must have in place to ensure these outcomes are reached, MiFID II requires firms to disclose far more information to demonstrate the quality of, and compliance with, its best execution responsibilities. Best Execution reports include:


  • Top 5 execution venues by volume, broken down by instrument class as defined in RTS 28. Reports must be published annually.
  • Assessments of the execution quality obtained on different execution venues as defined in RTS 27. Reports must be published on a quarterly basis (no later than 3 months after the end of each quarter) and include data for each trading day.
  • Execution venues must also publish a summary of the quality of their execution on a quarterly basis. 


To ensure that financial firms can demonstrate compliance with the MiFID II rules, there are requirements for them to store detailed & extensive records of their transaction, documents, and communications. The scope of the records that need to be kept significantly increased when MiFID II was introduced and includes:

  • every client order received (regardless of whether the transaction was completed)
  • complete transaction records
  • every ‘decision to deal’

Importantly, the scope of MiFID II's record keeping requirements extends to all communications (telephone conversations, emails, instant messages and meeting notes which relate to transactions or client orders).  All of these records must be kept in a ‘readily accessible’ medium, in a Write-Once-Read-Many (WORM) format, for a minimum of 5 years. This is all so the relevant NCA can access and review records as and when requested.

In practice, a firm may be asked at any point to provide all the records that relate to a particular trade or client order. The firm would then be expected to ‘reconstruct’ the trade, bringing together all the transaction/order details, conversations, emails, meeting minutes and more.

Given the typical deadline for completing a reconstruction is 72 hours after a request is made, the ability to access, identify and connect different records across different data formats is a significant challenge for most firms.



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