MiFID II imposes additional requirements in respect of eligible counterparties, such as the obligation to act honestly, fairly and professionally, and to report periodically. This is likely to require amendments to the current policies and procedures in place with the counterparties.

Investment firms will no longer be able to automatically classify municipalities and local public authorities as professional clients or eligible counterparties unless they have opted to be treated as such and the firm has assessed them as having the requisite knowledge and experience.

Manufacturers of financial instruments will have to maintain a product approval process which will identify the target market for each product and assess all relevant risks. Firms which offer such products but do not manufacture them will have to understand the features of those products, including the identified target market.

Suitability and appropriateness

Suitability requirements apply to advised services and portfolio management. There is a more onerous obligation on investment firms to determine suitability and there is a requirement to provide periodic reports to clients.

Appropriateness requirements apply to non-advised services. The test will apply to shares and bonds (unless either are traded on a regulated market or MTF), all debt instruments that embed a derivative, structured UCITS and structured deposits that ‘incorporate a structure which makes it difficult for the client to understand the risk of return or the cost of exiting the product before term’.

Independent advice

Firms will have to inform clients whether their advice is provided on an independent basis.

Inducements

Investment firms which provide advice on an independent basis or provide portfolio management are banned from accepting or receiving fees, commissions or any monetary benefits paid or provided by any third party. MiFID II allows minor non-monetary benefits, such as training on the features of a product.

Best execution

The investment firms executing client orders are required to provide sufficient detail in respect of their execution policy, and they must summarise and make public (on an annual basis), for each class of financial instrument, the top five execution venues where they executed client orders in the preceding year.

Trading venues and systematic internalises are required to publish annual data relating to the quality of execution of transactions, including information on price, costs, speed and likelihood of execution for individual financial instruments.

Bundled services

Firms will have to inform clients whether they can buy the different components of bundled services separately, providing information about costs and charges in respect of each component.

Investment firms will have to provide information in respect of investment strategies and risks, whether the financial instruments are intended for retail or professional clients, execution venues, costs and other charges.

Telephone and electronic recording

Investment firms will have to try to record relevant telephone conversations, meetings and electronic communications concerning actual or proposed own account and client transactions, provided clients are notified of any such recording taking place.

Product intervention

ESMA, the EBA and member state regulators are given new powers to prohibit or restrict marketing, distribution or sale of certain financial instruments or financial activity or certain structured deposits where there is a significant investor protection concern.

The OTFs, unlike the regulated markets and the MTFs are required to exercise discretion when executing orders in respect of whether to place an order within the OFT or to retract it, and whether to match specific client orders with other orders in the system.

Investment firms and market operators operating an OTF are also subject to the investor protection obligation.

The definition of an SI is now wider, so that more firms will be treated as SIs. MiFIR sets out two quantitative thresholds: one for determining whether a firm deals on own account on a ‘frequent and systematic’ basis, and one for determining whether it does so on a ‘substantial basis’. Both must be present for a firm to be classified as an SI, and the category also extends to non-equity instruments.

Significant extension of the pre- and post-trade transparency regimes to a wider range of equity and non-equity instruments

OTFs will be subjected to the same transparency rules as other trading venues, to improve trading transparency in equity markets. Transparency requirements extended to "equity-like" transactions.

There is a new trading transparency regime for non-equity markets (that is bonds, structured finance products, derivatives and emissions allowances). The exact transparency regime will be tailored to the instrument in question.

Investment firms will be required to submit post-trade data to Authorised Reporting Mechanisms, who will report the details of transaction to regulators on behalf of investment firms to ensure the data is published in a way that facilitates its consolidation with data published by trading venues.

Algorithmic trading, market making and direct electronic access

MiFID II requires investment firms to notify their home regulator, as well as the regulators of the trading venues they trade on, that they are using algorithmic trading strategies.

Measures to promote access to clearing facilities and benchmarks to improve competition between central counterparties and trading venues.

Examples include; regulated markets, MTFs and OTFs in relation to their systems, controls, circuit breakers and rules relating to minimum tick size (that is, the smallest increment by which the price of a financial instrument can move). Trading venues will be required to publish annual data on execution quality

Inducements

Investment firms which provide advice on an independent basis or provide portfolio management are banned from accepting or receiving fees, commissions or any monetary benefits paid or provided by any third party. MiFID II allows minor non-monetary benefits, such as training on the features of a product.

SIs’ obligation to make public firm quotes for both equity and non-equity financial instruments traded on a trading venue for which they are SIs and for which there is a liquid market.

Reporting obligations relating to the size and purpose of a commodity derivative contract, to include empowering regulators to monitor and intervene at any stage in trading activity in commodity derivatives (including imposing position limits where there are concerns about disorderly markets).

Provisions to facilitate access to capital for small and medium sized enterprises (SMEs) and to facilitate further development of specialist markets to cater for the needs of SME issuers (known as SME markets or growth markets).