Knowledge Hub
for Growth

What is the MiFID II Directive?

The MiFID II Directive is a financial regulation governing data reporting service providers, investment firms, and trading venues. MiFID II requires that investment firms be authorised by a national competent authority (NCA) in the EU and sets out business rules and organisation requirements for these firms. MiFID II also specifies a regulatory regime for securities markets and introduces a new type of trading venue. Here we’ll go into more detail on how the MiFID II could impact your firm and how you report on corporate transactions.

What is the MiFID II directive in simple terms?

In simple terms, MiFID II is an EU regulatory framework designed to regulate financial markets and improve protections for investors. MiFID II aims to standardise practices throughout the EU and brings a larger number of firms under the supervision of an EU financial regulator.

Where does the MiFID II Directive come from?

The MiFID II Directive (2014/65/EU) and the Markets in Financial Instruments Regulation (600/2014) (MiFIR) repeal and recast the Markets in Financial Instruments Directive (2004/39/EC) (MiFID).

MiFID II and MiFIR together form the legal regulatory framework governing financial markets in the EU. They set the regulatory requirements for investment firms, trading venues, data report service providers and non-EU firms (known as ‘third-country’ firms) providing investment services in the EU.

As an EU regulation, MiFIR directly changes the law in the UK. By contrast, MiFID II takes effect through UK implementing legislation.

When did MiFID II come into force?

The majority of MiFID II requirements have applied to firms in the UK since 3 January 2018. Originally the MiFID II legislation was to come into force in January 2017 but the deadline was extended over concerns that firms and national authorities would not be in a position to comply with MiFID II requirements.

Both MiFID II and MiFIR became binding EU law on 2 July 2014. However, MiFID II, as an EU Directive, required transposition into national law before it became effective.

Who does MiFID II apply to?

MiFID II applies to the following firms:

  • Investment firms
  • Operators of trading venues
  • Data Reporting Service Providers
  • Third-country firms

What are the MiFID II requirements for Investment Firms?

MiFID II requires investment firms to be authorised by a regulator and imposes obligations relating to operating conditions, conduct of business, trade transparency and transaction reporting. Additional rules apply to investment firms categorised as Systematic Internalisers (SIs). These include rules on pre-trade transparency, including making firm quotes public.

What are the MiFID II requirements for Operators of Trading Venues?

MiFID II and MiFIR place a number of requirements on the operators of trading venues. These include rules on the process and finalisation of transactions, rules on best execution, monitoring firms’ compliance with venue rules and the suspension and removal of financial instruments.

What are the MiFID II requirements for Data Reporting Service Providers?

MiFID II introduced a new type of service (data reporting) that is subject to authorisation and supervision within the EU. The rules require that data reporting services register with a national regulator before providing data reporting services. MiFID II also sets minimum standards for the management body of a data reporting service provider including that the management body be of sufficiently good repute and possess sufficient knowledge.

Why MiFID II matters

MiFID II covers virtually all assets and professions within EU financial services. It regulates off-exchange and over-the-counter (OTC) trading and brings much more activity onto official exchanges.

MiFID II requires that financial firms assess the suitability and appropriateness of financial products to their customers. This includes assessing if a client has the ability to bear the losses incurred from a product and their tolerance of the risk involved.

Suitability is to be assessed on an individual product level and in the context of a client’s financial portfolio. This requires a firm to consider whether a product is suitable for a customer by taking into account products that an individual may already hold before offering new investments.

Firms are also required to gauge their clients’ understanding of financial products as either retail, professional or eligible counterparties. This classification will partly determine the products that may be offered to a client.

MiFID II also requires that firms record a wide range of telephone and electronic communications with customers. These communications must be archived and supervised by firms. Firms must produce these records in a timely manner, if required to do so by a regulator such as the FCA.

Under MiFID, all records pertaining to a trade or transaction, including phone calls, emails, SMSs messages and social media, must be retained. These recording requirements even extend to internal communications, as well as external.

Any firm falling within the definition of ‘investment firm’ must comply with MiFID II’s requirements, even if it operates on a purely domestic basis.  

What does MiFID II mean for trading?

Under MiFIR, there is an obligation on a range of different counterparties to trade certain derivative contracts only on a specified trading venue. The purpose of this rule was to move derivative trades from over-the-counter (OTC) transactions (transactions between two parties) to regulated trading venues. EMIR, a related piece of EU legislation, also requires that many of those derivatives are centrally cleared.

The obligation to trade derivatives on a trading venue applies where the derivatives are admitted to at least one specified trading venue and there is a sufficiently large pool of liquidity to trade. The following derivatives of varying tenors are subject to the trading obligation:

  • EUR fixed-to-float interest rate swaps
  • USD fixed-to-float interest rate swaps
  • GBP Fixed-to-float interest rate swaps
  • Index CDSs

The rules apply to financial counterparties as well as certain qualifying non-financial counterparties. These firms must ensure that derivatives caught by the trading obligation are only concluded on a regulated market, a multilateral trading venue or through a Systematic Internaliser.

MiFID II also imposes obligations on operators of the above trading venues to make public specified information on the price and depth of trading on these derivatives. Trading venues must also make public specified information on these derivatives after the transaction has completed.

How does MiFID II affect investment firms?

MiFID II requires investment firms to comply with various organisational requirements, as well as rules on conflicts of interest, acting in clients’ best interests and remuneration.

Under Article 16 of MiFID II, investment firms must maintain and operate effective measures to avoid conflicts of interest from adversely impacting the interests of its clients. Firms must also take steps to ensure continuity and regularity of its services, including those operational functions that are outsourced to other companies.

Investment firms must keep records of all services, activities and transactions it undertakes and must keep recordings of all telephone conversations and other electronic communications.

With respect to remuneration, investment firms must ensure that they do not remunerate their staff in a way that conflicts with its duty to act in the best interests of its clients. For example, investment firms must not set sales targets or bonuses that incentivise staff to recommend a particular financial instrument to a retail client when another would be better suited to a client’s needs.

Finally, investment firms must ensure that the products they sell are designed to meet the needs of a target market and that the distribution strategy is compatible with that market. Firms should also ensure that they understand the financial instruments they offer or recommend and that they assess whether the products are suitable for its clients.  

About our expert

John Pauley

John Pauley

Financial Services Partner
John is a specialist solicitor with extensive expertise in financial services regulation. He advises financial institutions, services providers, and merchants on regulated activities including payments, e-money, consumer credit, data protection, anti-money laundering, and gambling operations.

What next?

When faced with complex transactions and financial regulation, rely on our specialist finance solicitors for support. Call us on 0800 689 1700, email us at, or fill out the short form below with your enquiry.

Your data will only be used by Harper James Solicitors. We will never sell your data and promise to keep it secure. You can find further information in our Privacy Policy.

Our offices

A national law firm

A national law firm

Our commercial lawyers are based in or close to major cities across the UK, providing expert legal advice to clients both locally and nationally.

We mainly work remotely, so we can work with you wherever you are. But we can arrange face-to-face meeting at our offices or a location of your choosing.

Head Office

Floor 5, Cavendish House, 39-41 Waterloo Street, Birmingham, B2 5PP
Regional Spaces

Stirling House, Cambridge Innovation Park, Denny End Road, Waterbeach, Cambridge, CB25 9QE
13th Floor, Piccadilly Plaza, Manchester, M1 4BT
10 Fitzroy Square, London, W1T 5HP
Harwell Innovation Centre, 173 Curie Avenue, Harwell, Oxfordshire, OX11 0QG
1st Floor, Dearing House, 1 Young St, Sheffield, S1 4UP
White Building Studios, 1-4 Cumberland Place, Southampton, SO15 2NP
A national law firm

Like what you’re reading?

Get new articles delivered to your inbox

Join 8,153 entrepreneurs reading our latest news, guides and insights.


To access legal support from just £145 per hour arrange your no-obligation initial consultation to discuss your business requirements.

Make an enquiry