How Europe makes investments safer - July 15, 2018

How Europe makes investments safer
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The European Union is making the financial sector safer: with MiFID 2, the EU is now among the best regulated markets and provides the safest environments for investors. The regulations can also make things more transparent and easier to understand. Six months after the launch of the new regulation, there are already some important experiences.

The second iteration of Markets in Financial Instruments Directive (MiFID for short) was launched at the beginning of the year. It contains thousands of pages of new regulations for banks and other financial providers. With MiFID 2, the EU​ now​ is among the best regulated markets of the world, which can provide the safest environments for investors from the smallest to the biggest funds.

What does it do?

On paper, the new set of regulations had two purposes. One was to make European financial markets and participants stronger. This also means that if a 2008-like financial crisis ever happened again, banks and providers would be more resistant to collapses during those hard times.

The EU also wanted to create better environment for investors with MiFID 2. To achieve this, they made several aspects of trading and pricing more transparent. This means that end users can see and understand better how they are being charged for services and what they can expect for that in return. This transparency can be especially important when Ponzi schemes and other dubious investments are having their renaissance.

This doesn’t only benefit regular people: greater transparency also helps pension and investment managers to make better decisions about their own funds. With this, we’re back at the first point: to create a stronger and fairer market in the EU.

What has changed exactly?

The MiFID 2 reformed several things on the market. An important change is concerning brokers. With the new set of rules, they altered how brokers can charge for analyses and trades. This means that the prices of services are far more transparent.

Fixed-income transactions also became more transparent. These steps help investors to compare services, which could lead them to ask for cheaper solutions or to better choose their providers.

After 6 months with the new system, the European Securities and Markets Authority (ESMA) also points out that “the number and volume of transactions in dark pools has significantly decreased”. It’s important to point out that dark pools aren’t illegal, far from it. It’s just a section of the market where price data isn’t public, therefore it’s not transparent as the EU wants it to be.

They also say that while „many market participants were concerned that the MiFID II transparency provisions may disrupt financial markets and reduce available liquidity, so far we have not observed any of this”.

Fine tunes may come

Not everyone loves the MiFID 2 and several participants believe that it needs changes. Some brokers argue that dark pools, for example, are important for large investors, who do large trades.

German banks in the meanwhile say that the extra protection for investors isn’t really needed, and sometimes it makes their job too hard, which isn’t good for the customer either. And there are those who see some extra tasks, but they say that so far nothing has changed. They also believe that the pessimists were wrong: though small falls in trading volumes were seen at first, the introduction of MiFID 2 went relatively smoothly.

Against all the cons, the EU seems to be satisfied with the new system. Although even ESMA admits that “While there are clear positive achievements under MIFID II already, we also have to acknowledge that there are some areas where improvements are needed”. One task they name is to better regulate Systematic Internalisers, a concept introduced by MiFID 2 itself. These are investment firms that trade outside of a regulated market. This may mean that further steps are taken to make trading even more transparent.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.