What Does 2020 Mean for MiFID II?

There have been many changes within the economic landscape in Europe and the United Kingdom since the first agreement that launched the Markets in Financial Derivatives (MiFID) protocols in 2007 were signed. MiFID was meant to provide a standard set of rules by which regulators in every EU country (including the UK at the time) would oversee firms licensed to carry out financial services in their individual borders. This provided room for unique interpretation of the articles of MiFID by each regulator and ended up with a situation where rules differed from one jurisdiction to another within the EU. Furthermore, the regulatory lacunae that existed in MiFID I were exploited by many companies to engage in risky investments, many of which ended belly up in the 2008 global financial crisis. 

As a result of the problems that these risky setups created, as well as the LIBOR scandal in the UK, the MiFID I protocols had to be revised. This was achieved in 2014 with the introduction of the MiFID II document, as well as the Markets in Financial Instruments and Amending Regulations (MiFIR) directives of 2014. MiFID II and MiFIR were to take effect in 2018 and provided expanded regulatory directives and articles that were meant to cover the loopholes of MiFID I, and conseqeunty brokers that are regulated in Europe, like TRADE.com fall under MiFID directive. Two notable articles in MiFID II called for improved retail investor protection (on the retail side of the equation) and increased transaction reporting (institutional angle). The leverage caps and restrictions on binary options and CFD trading by the European Securities and Markets Authority in 2018 were part of measures taken to improve the protection of retail investors. Other measures mandated negative balance protection, display of the percentage of traders that lose money on platforms and prohibition of all forms of incentivized trading. The recent introduction of regulation of the trading of cryptocurrencies within the EU borders is another fallout of the MiFID II and MiFIR articles. 

However, there has been major agitation from industry stakeholders, calling on the European Commission to amend MiFID II and MiFIR to adjust to evolving situations in the financial markets and the EU's economic landscape. The European Commission has responded and looks set to amend MiFID II in 2020. Therefore, 2020 may be the year that will herald the clamoured changes to the existing MiFID II and MiFIR articles.

Why is MiFID II Being Amended?

MiFID II has also come under some criticism. A lot of the criticism has centred on transaction reporting, cost of data and the scope of distribution of such data as well as investor protection rules (which were tweaked by ESMA in 2018). Some of the heaviest knocks on MiFID II have come from investors and retail brokers. MiFID II was supposed to provide investor protection by tightening the leverage cap and stopping reckless trading by retail traders. This was also meant to ensure that only investors with a certain level of financial strength would be allowed to trade the financial markets. This seems to have produced the converse effect. Many traders, unable to afford the new margin requirements imposed by the tighter leverage caps, are moving to offshore brokers who offer flexible leverage provisions in droves. This has affected revenues of EU-based retail brokers as a consequence. Offshore brokers which are unregulated in the main do not offer the protection and assurance that leading European licensed brokers like TRADE.com can offer. ESMA even admitted in a review of the first three months of the implementation of the modern rules that the share of retail traders who were profitable actually decreased in the first month of implementation! ESMA eliminated the restrictions it imposed on CFD contracts in the 3rd quarter of 2019, apparently admitting that its so-called efforts at protecting retail investors had only served to kill business for EU brokers. 

It is also pertinent to state that since MiFID II came into being, some other major political events that will alter the investment landscape in Europe have occurred. One of such events is the exit of the United Kingdom from the European Union in January 2020, otherwise known as Brexit. The January 2020 Brexit was the conclusion of a 42-month long drawn process. This process started with the 2016 Brexit referendum and has stretched on to include several negotiating rounds, a UK election and finally, the legal ratification of the exit of Brexit by the UK Parliament. More trade negotiations were to be carried out by both parties in 2020 with a December 31 completion deadline.

The MiFID Amendment Process

European Commission has launched a review process of the existing MiFID II/MiFIR regulatory framework, to bring it more in tune with the current state of affairs. The first phase of the review process is a public consultation. This consultation, which will be issued to the trading public and non-professional stakeholders as well as the professionals, seeks to obtain opinions on what their experience with MiFID II and MiFIR has been from the 2018 implementation date to the present. The consultation will also gather feedback from professionals on the technical aspects of MiFID II and MiFIR articles. 

The amendment may also focus on what happens to regulatory frameworks within the EU and the UK, given that many financial brokers based in jurisdictions such as Cyprus and Malta, additionally have branches within the United Kingdom. 

These remain the questions that the latter part of 2020 will have to answer when it comes to MiFID II. The amendments will be accomplished. It is just a matter of when this will be achieved, and the extent to which the European Commission will adjust the existing protocols.