What is MiFIR?
The Markets in Financial Instruments Regulation (MiFIR) is a piece of EU financial regulation legislation that regulates the European financial markets. It operates in conjunction with the Markets in Financial Instruments Directive II (MiFID II). Both of these aim to improve transparency and increase investor protection within the EU markets.
MiFIR was enacted on the 3rd of January, 2018 and at the time it provided a uniform framework for all EU states to comply with. Since the adoption of Brexit in 2016, the UK has no longer been considered a member state but decided to “onshore” MiFIR and MiFID II as part of UK law.
As stated above, MiFIR is a regulatory document that provides a uniform framework for all EU member states to comply with. MiFID is a directive which allows more flexibility in the way its goals are achieved by member states. In the years since the UK has onshored these regulations, their contents have started to deviate quite significantly from their EU counterparts.
Since 2018 the EU and FCA have implemented updates to MiFIR and MiFID II. On the 28th of March 2024, the updated MiFIR and MiFID II came into force, and the transposition deadline for MiFID II has been set to September 2025.
The Objectives of MiFIR
The key objective of MiFIR is to improve transparency in financial markets. Through updated trade and transaction reporting measures, MiFIR enables investment firms to make informed decisions and assist regulators in identifying and addressing fraudulent activities within financial marketplaces.
By improving transparency and enhancing investor protection, MiFIR and MiFID II aimed to enhance competitiveness and investor protection within EU and UK markets.
Key Changes Introduced by MiFIR
The MiFIR was responsible for introducing several key changes:
- The Consolidated Tape
- Banning Payment for Order Flow
- Changes to Quoting Obligations and Reporting
The Introduction of the Consolidated Tape
With market competitiveness in mind, MiFIR and MiFID II aimed to produce a consolidated tape. This is an electronic system that provides almost real-time price information for financial instruments to any firm within the market. The USA has had a consolidated tape operating since the 1970s, allowing US investors to make informed decisions.
Entries to the consolidated tape provide the following information:
- Ticker symbol – the company or asset involved in the trade
- Trading volume – the volume of shares being traded
- Price information – the price per share for each trade
- Triangle pointer – shows whether the price per share is above or below the price at the previous day’s close.
- Additional number – shows how much higher or lower the trade’s price per share compared to the last close price.
While the framework for a consolidated tape was established in the original legislation, the implementation of this has faced delays. According to MiFIR review proposals, Consolidated Tape Providers will soon be phased in for different asset classes, starting with bonds. This is expected to take place as early as January 2025.
Banning Payment for Order Flow (PFOF)
Payment for order flow (PFOF) refers to the compensation received for routing certain orders to specific trading venues. Under article 39a of Regulation 2024/791, Payments for Order Flow are defined as fees, commissions or non-monetary benefits received for executing orders for a client or forwarding orders of a client to a third party.
PFOF was banned within the UK in 2012 by the FSA and was reinforced by the FCA when MiFID II took effect in 2018. The EU banned PFOF within European financial markets on the 28th of March 2024 with robust revisions to MiFIR and MiFID II. Currently, Germany has a temporary exemption from the ban which will follow through until the 30th June 2026.
Banning PFOF prevents the conflict of interest that the model presented, helping to ensure that clients do not pay more than they would with other brokers not receiving PFOF. This creates more competitive markets and helps ensure trades are executed in the client’s best interest.
Changes to Quoting Obligations and Reporting for Systematic Internalisers
Under new MiFIR changes, Systematic Internalisers (SIs) must publish firm quotes based on minimum quote size requirements, as outlined in Regulatory Technical Standards (RTS). For non-equity instruments, SIs are not required to publish pre-trade quotes, but they can publish on a voluntary basis if they wish.
Transaction Reporting Requirements
Investment firms must report transactions in financial instruments traded on trading venues, or where the underlier is traded on a trading venue. For investment firms based in the EU, only EU trading venues are considered, but for firms based in the UK, both EU and UK venues are considered. These reports are required to be sent to an Approved Reporting Mechanism (ARM) by the end of the next trading day.
MiFIR and MiFID II increased the number of fields required to be reported on every executed transaction from 23 to 65. This increase is designed to assist with market transparency improvements and also assist regulators in the detection and prevention of abusive trading.
Updates to MiFIR in 2024 mean that the scope for financial instruments that fall under MiFIR reporting obligations has been broadened. They now include additional OTC derivative types while retaining existing categories.
UK MiFIR Post-Brexit
Since Brexit, UK domestic law has assimilated the majority of MiFID II and MiFIR legislation. Additionally, the FCA now has the authority to adapt and amend these rules for UK financial markets.
On the 29th of June 2023, the UK government introduced FSMA23 (Financial Services and Markets Act). Moving forward this new regulatory framework will further diverge from EU MiFIR/MiFID II since it gives the UK the ability to amend or replace retained EU regulations.
The FCA created its own version of the Financial Instruments Reference Data System (FIRDS) that uses data from ESMA. All IT systems have undergone the same process as there are no longer any EU data-sharing agreements in place.
Next Steps and Future Outlook
With the transposition deadline for the MiFIR and MiFID II set for September 2025, changes are being transposed into national law across EU member states. There may be some differences in how these changes are implemented in the UK given the ability to diverge from EU regulations. Regardless of how much is implemented, these changes will likely have a significant impact on UK financial markets.
Some key changes to look out for include the implementation of a consolidated tape and changes to reporting procedures. As MiFIR evolves, the level of transparency and efficient data sharing will increase, and investor protections will remain a priority across European financial markets. The UK will be focused on adopting the necessary regulatory improvements to remain aligned with EU protections and ensure transparency and security for UK investors under assimilated EU laws.
