MiFID II is a wide-ranging regulatory framework that shapes how investment services are provided across the EU and UK
MiFID II is the updated version of the Markets in Financial Instruments Directive, designed to strengthen transparency, investor protection, and oversight in financial markets. It applies to a broad range of firms and introduces detailed rules for trading, reporting, governance, and client identification. For legal entities active in EU or UK financial markets, understanding MiFID II is essential for regulatory compliance and operational readiness.
What MiFID II Is?
MiFID II is a legislative framework governing how investment services and activities are provided in the European Economic Area. It sets rules for firms that trade financial instruments, operate trading venues, or provide services such as brokerage, portfolio management, and investment advice. Its scope is wider and more detailed than the original directive, which it replaced in 2018.
What does MiFID stand for?
MiFID stands for Markets in Financial Instruments Directive. The name reflects its purpose: to set harmonised rules for the markets in which financial instruments are traded, and the firms that participate in them. MiFID II is the second iteration of this regulatory package, expanding both the reach and granularity of the original framework.
Why MiFID II replaced the original MiFID?
The original MiFID, introduced in 2007, modernised EU financial markets but proved insufficient after the global financial crisis. Gaps emerged in areas such as transparency in non-equity asset classes, oversight of complex trading technologies, and protection for retail investors. MiFID II was developed to close these gaps and create a more resilient and consistent regulatory environment.
Core objectives of the MiFID II regulation
MiFID II focuses on three main objectives. It aims to increase transparency across markets, especially in fixed income and derivatives. It strengthens investor protection through stricter governance, suitability rules, and cost disclosures. Finally, it enhances market integrity, including new rules for algorithmic trading and stronger supervisory powers for regulators.
MiFID II Summary for Companies and Investment Firms
MiFID II introduces rules that affect a broad range of organisations. While investment firms are directly regulated, companies, funds, and other entities trading financial instruments may also be indirectly affected, particularly through reporting and identification requirements.
Who MiFID II applies to
MiFID II applies to investment firms, trading venues, portfolio managers, broker-dealers, data reporting service providers, and market operators. It also impacts firms outside the EEA that trade with EU clients or execute transactions in EU-traded instruments. Companies and trusts that trade financial instruments covered by MiFID II may face obligations such as the need to obtain a Legal Entity Identifier.
Key regulatory changes introduced in 2018
The 2018 introduction of MiFID II delivered significant changes. Transparency requirements expanded from equity markets to also cover bonds, derivatives, and structured products. New trading venue types were created, including the Organised Trading Facility.
Reporting obligations increased, with firms needing to provide more granular transaction data. Additionally, stricter rules around product governance, costs, and client communication were introduced.
How MiFID II and MiFIR work together
MiFID II is the directive, while MiFIR (Markets in Financial Instruments Regulation) is the accompanying regulation. MiFIR contains directly applicable rules, such as mandatory use of LEI for transaction reporting and transparency requirements for trading venues. Combined, MiFID II and MiFIR create a coherent, detailed regulatory system covering both conduct and market structure.
Main Requirements Under MiFID II
MiFID II sets detailed obligations that firms must meet daily. These requirements shape how trades are executed, reported, and monitored, and how firms interact with clients.
Transparency and reporting obligations
Firms must publish pre-trade and post-trade information for a wide range of instruments. Transaction reporting is significantly expanded, requiring over 60 data fields per trade in some cases. Accurate identification of clients and counterparties is essential, which is why the LEI is mandatory for eligible entities.
Rules for trading venues, OTFs, SIs, and OTC trading
MiFID II created and refined several types of trading venues. The Organised Trading Facility covers non-equity instruments, while the Multilateral Trading Facility and Regulated Market continue to support a broad range of instruments.
Systematic Internaliser rules now apply to firms that execute client orders on their own account. OTC trading is more tightly controlled to improve transparency and reduce systemic risk.
Conduct, governance, and investor-protection standards
Firms must adopt strong governance frameworks. This includes clearer product governance rules, enhanced suitability assessments, stricter handling of inducements, and more transparent communications. Disclosures must clearly describe risks, costs, and charges to ensure clients can make informed decisions.
Algorithmic and high-frequency trading rules
Firms engaging in algorithmic or high-frequency trading must maintain robust systems and controls. Requirements include real-time monitoring, stress testing, kill switches, and detailed documentation. Regulators expect firms to demonstrate that algorithms do not create disorderly markets.
Best execution and cost transparency requirements
MiFID II places great emphasis on ensuring clients receive the best possible outcome for their trades. Firms must annually publish their top trading venues and provide detailed cost and charge disclosures. The goal is to give clients greater visibility of execution quality and total transaction costs.
LEI Requirements Under MiFID II
LEI rules are one of the most practical aspects of MiFID II for legal entities. Having and maintaining a valid LEI is essential for counterparties involved in many types of financial transactions.
Why MiFID II requires a Legal Entity Identifier
MiFID II requires the use of LEI to ensure that every entity involved in a transaction can be uniquely identified. This improves market transparency, supports regulatory monitoring, and reduces the risk of reporting errors. LEIs are used in transaction reports, client records, and regulatory submissions.
The “No LEI, No Trade” rule
Under the MiFIR reporting framework, firms cannot execute a trade on behalf of a legal entity that does not have a valid LEI. This applies across the EU and, in practice, also across the UK. Firms must ensure that all clients who are legal entities have an active LEI before trading.
Which entities must obtain and maintain an LEI
Any legal entity trading financial instruments covered by MiFID II must hold a valid LEI. This includes companies, funds, trusts, partnerships, charities, and other registered organisations. If you’re unsure whether your entity falls into this category, our guide “who needs an LEI number” provides a clear overview. Renewal is required annually to keep the LEI active and keep transaction reporting compliant.
Practical Implications for Firms
MiFID II has wide operational impact. Understanding whether your firm is in scope and what processes must change is a critical compliance step.
EU vs UK rules after Brexit
After Brexit, the UK retained most MiFID II rules within its domestic framework. UK firms trading in the EU may need to comply with both regimes simultaneously. Similarly, EU counterparties trading in the UK face dual expectations. Both systems still require LEI reporting for in-scope transactions.
Assessing whether your organisation is in scope
The first step for firms is determining whether their activities fall within MiFID II’s scope. This includes assessing whether the firm executes transactions, provides investment services, or interacts with EU or UK clients in a way that triggers reporting or identification obligations.
Data, record-keeping, and client-identification expectations
MiFID II emphasises accurate and complete data. Firms must maintain detailed records, implement procedures for verifying client identity, and ensure consistent use of LEIs across reporting systems. Audit trails must capture communications, orders, and execution outcomes.
Common compliance challenges
Many firms face challenges with the volume and complexity of reporting, integrating LEI data across systems, and managing cross-border obligations. Smaller firms often struggle with cost transparency rules and product governance documentation. Ongoing training and system updates are essential.
How Companies Can Stay Compliant
Firms can stay compliant with MiFID II by maintaining accurate reporting processes, keeping client-identification data up to date, and ensuring governance controls support consistent oversight.
Clear internal procedures help reduce reporting errors, prevent trade delays linked to inactive LEIs, and support smooth regulatory reviews.
Steps to ensure accurate reporting
Firms should implement structured processes to verify the accuracy of their transaction reports. This includes validating counterparty information, ensuring LEIs are active, and performing periodic data reconciliations. Strong monitoring systems help identify inconsistencies early.
Maintaining a valid LEI and annual renewal
A valid LEI must be renewed every year to remain active. Firms should keep track of renewal dates and ensure that client entities also maintain active LEIs. This reduces trade delays and ensures smooth reporting under both EU and UK regimes.
Preparing for audits and regulatory checks
Regulators expect firms to demonstrate effective systems and controls. Preparations include maintaining clear documentation, keeping policies updated, recording governance decisions, and retaining detailed logs of trading and client interactions. Audits often focus on reporting accuracy and client-identification processes.
FAQ
What is MiFID II?
MiFID II is a regulatory framework governing how investment services are provided in the EU and UK, and it requires legal entities involved in financial transactions to follow strict transparency and reporting rules.
Is MiFID II still in force after Brexit?
Yes. Both the EU and the UK continue to apply versions of the MiFID II framework. While the UK may diverge over time, the core requirements for trading, reporting, and LEI usage remain aligned for now.
What is the difference between MiFID II and MiFIR?
MiFID II is the directive that sets broad rules for investment services and market structure. MiFIR is the regulation containing directly applicable obligations such as transaction reporting, transparency rules, and mandatory LEI use.
Do all firms trading in the EU or UK need an LEI?
Any legal entity executing transactions covered by MiFID II is required to have an LEI. Without an LEI, firms cannot trade on behalf of that entity due to the “No LEI, No Trade” rule.
