Understanding the Recent Changes to MiFID II and MiFIR in 2024

In 2024, the European Union (EU) has implemented significant revisions to the Markets in Financial Instruments Directive (MiFID) and the Markets in Financial Instruments Regulation (MiFIR). These changes are pivotal for enhancing transparency, improving market structure, and streamlining compliance processes across the EU financial markets. Financial institutions and investment firms must adapt to these regulations as they navigate the complexities of compliance in an evolving landscape. In this post, we will explore the key updates to MiFID II and MiFIR, and the role of RegTech in facilitating compliance.

Key Updates to MiFID II and MiFIR

The updates to MiFID II and MiFIR represent a proactive approach to regulatory adjustments, aiming to address the ongoing challenges faced by market participants. Let's explore the main aspects of these updates.

Expanded Reporting Requirements

One of the most significant changes is the expansion of reporting requirements. The scope of transaction reporting has broadened, which now includes alternative investment fund managers (AIFMs) under MiFIR II. This change aims to improve reporting accuracy and timeliness, ultimately enhancing market integrity. By including AIFMs, the EU acknowledges the evolving nature of financial markets and the importance of comprehensive reporting across all types of financial entities.

Furthermore, the requirement for transaction reporting under MiFID II has become increasingly detailed, necessitating firms to provide more extensive data on trades. This heightened focus on accuracy is designed to reduce instances of market manipulation and ensure that regulators have the necessary information to monitor trading activities effectively.

The new reporting requirements are crucial for maintaining transparency within the financial services sector. Firms must ensure that they have robust systems in place to capture and report the required data accurately. This may involve investing in new technology or enhancing existing compliance tools to meet the expanded demands.

Market Data Transparency

Another critical update involves enhancements in data transparency for both equities and derivatives. The new regulations introduce reforms to how commodity derivatives are reported, aiming to reduce speculation and increase market resilience. Enhanced data transparency allows market participants to make more informed decisions, promoting a healthier trading environment.

Transparency in market data is vital for ensuring fair competition among market players. By providing comprehensive data on trading activities, regulators can better assess the dynamics of the financial markets, which contributes to overall market stability. These reforms will not only benefit institutional investors but also empower retail investors by providing them with the information they need to make informed choices.

Additionally, with the increased focus on transparency, firms must enhance their data management processes. This includes implementing effective data governance frameworks to ensure that all information is accurate, up-to-date, and easily accessible for regulatory reporting.

Best Execution Reports

In a bid to streamline compliance requirements, the EU has permanently removed the necessity for firms to publish best execution reports. Instead, this requirement has been replaced by consolidated data under a new consolidated tape framework. This change simplifies the reporting process for financial institutions while still ensuring that they are accountable for achieving best execution on behalf of their clients.

Best execution refers to the obligation of investment firms to execute client orders on the most favourable terms possible. By consolidating data reporting, firms can focus on meeting their best execution obligations without the additional burden of producing separate reports.

This new approach to best execution reporting reflects the EU's commitment to reducing regulatory burdens while maintaining the integrity of the financial markets. Firms will need to adapt their internal processes to comply with the new consolidated tape framework, ensuring that they can effectively report on their execution quality.

Systematic Internaliser (SI) Rules

The revisions also include changes to the quoting obligations for both equity and non-equity instruments. These adjustments provide more clarity on transaction responsibilities and streamline reporting processes. By refining the rules surrounding systematic internalisers, the EU aims to enhance market liquidity and transparency, ultimately benefiting all market participants.

The SI rules play a crucial role in defining the responsibilities of firms that frequently execute trades outside of traditional exchanges. By clarifying these obligations, the EU seeks to promote greater consistency in trading practices and reduce uncertainty in the market.

Moreover, the revised SI rules encourage greater participation from liquidity providers, which is essential for fostering a competitive trading environment. Firms must ensure they are well-versed in the new quoting obligations to avoid potential regulatory pitfalls.

The Role of RegTech in MiFID II and MiFIR Compliance

As regulatory demands continue to evolve, the financial industry is witnessing the rise of RegTech (Regulatory Technology). RegTech solutions are designed to help financial firms meet compliance requirements more efficiently and effectively through technology-driven platforms. In the context of MiFID II and MiFIR, RegTech plays a vital role in ensuring that firms can navigate these regulatory changes successfully.

Automated Reporting

The expanded scope of transaction reporting under MiFID II has placed a significant burden on compliance teams within financial institutions. RegTech platforms offer automated reporting solutions that streamline the process of data collection and submission. By automating these processes, firms can ensure they meet reporting deadlines while maintaining accuracy standards.

Automated reporting tools not only save time but also reduce the likelihood of human error, which can lead to regulatory penalties. As firms strive to comply with the new reporting requirements, RegTech solutions have become indispensable in facilitating efficient and reliable reporting.

Additionally, RegTech platforms can integrate with existing systems to provide real-time insights into trading activities. This enables firms to respond quickly to regulatory changes and ensure ongoing compliance with MiFID II and MiFIR.

Risk Management

Effective risk management is critical for financial institutions, especially in light of the complex regulatory landscape. RegTech solutions help firms analyse large datasets to identify potential regulatory risks before they become significant issues. By employing advanced analytics and machine learning techniques, these tools enable firms to proactively manage compliance risks.

RegTech also provides firms with the ability to monitor market activities in real time, ensuring that they remain compliant with evolving regulations. This proactive approach not only minimises the likelihood of regulatory breaches but also fosters a culture of compliance within financial institutions.

Trade Surveillance

With MiFID II requiring firms to demonstrate that they have achieved best execution on behalf of their clients, RegTech tools are invaluable for trade surveillance. These solutions use artificial intelligence (AI) and machine learning algorithms to monitor trades in real time, ensuring firms meet their obligations efficiently.

By leveraging RegTech for trade surveillance, firms can save time and resources while ensuring compliance with MiFID II and MiFIR regulations. Additionally, these tools can identify suspicious trading patterns and alert compliance teams to potential issues, allowing for timely intervention.

Data Protection and GDPR Compliance

As financial institutions handle sensitive client data, RegTech solutions are also instrumental in ensuring adherence to the General Data Protection Regulation (GDPR) alongside MiFID II requirements. These technologies help firms securely manage and process information, ensuring that they protect client data while complying with regulatory standards.

Data protection is a paramount concern for financial institutions, and RegTech tools enable firms to implement robust data governance frameworks. This not only facilitates compliance with GDPR but also enhances overall operational efficiency by ensuring that data handling practices are in line with regulatory expectations.

The integration of RegTech into financial institutions' operations not only simplifies compliance but also minimises operational disruptions. As regulatory demands continue to evolve, the reliance on RegTech is expected to grow, offering innovative solutions to complex compliance challenges. Financial institutions must embrace these technologies to stay ahead in a competitive market while ensuring they meet their regulatory obligations effectively.

Looking for Compliance and RegTech Professionals?

At Hunter Bond, we specialise in recruiting top-tier professionals in compliance and RegTech. If you're navigating regulatory changes or implementing new compliance strategies, get in touch with us to gain insights and access our network of specialised talent. Our expertise in compliance recruitment can help you find the right professionals to ensure your organisation remains compliant and competitive in this dynamic regulatory landscape.