Chapter 18: Key Takeaways — MiFID II, MiFIR, and Best Execution Compliance

The MiFID II/MiFIR Framework at a Glance

MiFID II (Directive 2014/65/EU) and MiFIR (Regulation 600/2014/EU) form the foundational legislative framework for EU securities markets. They came into force on 3 January 2018, replacing MiFID I (Directive 2004/39/EC, in force since November 2007).

• MiFID II is a directive: it requires transposition into national law by each EU member state and governs investment services, venue authorisation, investor protection, and market structure.
• MiFIR is a regulation: it applies directly and uniformly across all EU member states and governs transaction reporting, pre-trade and post-trade transparency, and mandatory trading obligations.
• The standard was upgraded from MiFID I's "all reasonable steps" to MiFID II's "all sufficient steps" for best execution — a deliberate tightening of the obligation.

Transaction Reporting Under Article 26 MiFIR: Key Fields

The complete template contains 65 mandatory fields (Commission Delegated Regulation (EU) 2017/590 — RTS 22). The table below presents the most significant fields by category.

Key principle: A report with a missing or invalid LEI will be rejected by the ARM or flagged as a data quality failure by the NCA. The "no LEI, no trade" rule for corporate clients must be enforced at onboarding.

The Five Best Execution Factors (Article 27 MiFID II)

Investment firms must consider all five factors when executing client orders. The relative weight given to each factor will differ by client type (retail vs. professional), instrument class, and order characteristics.

Note: Price is treated as the most important factor for retail clients in liquid instruments unless the client's instruction or the nature of the order dictates otherwise. For institutional clients trading large orders, size and likelihood of execution often become the dominant factors.

Venue Type Comparison

OTF key distinction: OTF operators may exercise discretion in order matching and may not execute equity instruments. They are designed for bond and derivatives markets where voice-broker intermediation has historically been important.

SI key distinction: SIs deal on their own account — they are not multilateral systems. The Double Volume Cap does not apply to SI trading, which is why many large bank market-makers migrated from dark MTFs to SI status post-MiFID II.

RTS 27 vs. RTS 28: The Best Execution Reporting Framework

UK-EU MiFID II Divergence: Key Points

Post-Brexit, the UK "onshored" EU MiFID II/MiFIR into UK domestic law (UK MiFID II / UK MiFIR). Divergence has increased since 2021 under the FCA's Wholesale Markets Review (WMR) and related reforms.

Approved Reporting Mechanism (ARM) vs. Approved Publication Arrangement (APA)

These two infrastructure roles are frequently confused:

MiFID II Practitioner Compliance Checklist

Use this checklist to assess a firm's MiFID II compliance posture:

Transaction Reporting

• [ ] All investment firm LEIs are current and registered in GLEIF
• [ ] All corporate clients subject to the reporting obligation have valid LEIs on file ("no LEI, no trade" enforced)
• [ ] ARM is connected and receiving reports; T+1 submission is confirmed
• [ ] Algorithmic trading determination has been documented for all trading strategies; Fields 26-28 are correctly populated
• [ ] TVTIC is captured from venue confirmations and populated in reports for on-venue trades
• [ ] Instrument scope determination is updated for new instruments and new venue admissions
• [ ] Reconciliation process exists between trade records and ARM submission confirmations

Best Execution

• [ ] Best execution policy has been reviewed and updated within the past 12 months
• [ ] Policy reflects the current venue universe (all connected venues listed)
• [ ] Policy distinguishes UK and EU regulatory regimes if firm has cross-jurisdictional activity
• [ ] SOR is configured to evaluate multiple venues; single-venue routing is documented and justified
• [ ] Execution quality benchmarking is conducted retrospectively (arrival price slippage, VWAP analysis)
• [ ] Exception process exists: executions outside tolerance are reviewed and documented
• [ ] RTS 28 report was published by 30 April deadline and covers prior calendar year's top-5 venues
• [ ] Annual execution policy review has been conducted and minuted

Venue and Transparency

• [ ] Pre-trade transparency waivers in use are documented and authorised
• [ ] If firm operates as an SI, SI determination is performed quarterly using the prescribed methodology
• [ ] SI quotes meet firmness and size obligations for liquid instruments
• [ ] OTC trade post-trade reporting is conducted via APA within required timeframes

Common Regulatory Findings (FCA and ESMA Thematic Reviews)

1. Missing or incorrect LEIs — Particularly for natural person identification (concatenated code format errors) and for legal entities whose LEIs have lapsed
2. Stale best execution policies — Not updated to reflect new venues, new instruments, or post-Brexit regulatory divergence
3. Late RTS 28 publication — Consistently published after the 30 April deadline
4. Single-venue routing without justification — SOR routing to one preferred venue; no documented rationale and no retrospective analysis
5. No retrospective execution quality analysis — Firms can demonstrate process (SOR configured) but not outcomes (execution quality actually achieved)
6. Algorithmic trading indicator misclassification — Inconsistent application of the algorithmic trading definition; some automated execution classified as non-algorithmic

Next: Chapter 19 — Market Abuse Regulation (MAR), Trade Surveillance, and Communications Monitoring