MiFID II and Thomas Murray Monitoring


Possibly the most complex piece of capital markets legislation to hit the markets since the Dodd-Frank Act in the US in 2010 is nearly upon us, the European Union’s revamping and extending of the Markets in Financial Instruments Directive (MiFID I) promulgated in 2004, with effect in November 2007. That was one very long decade ago, given events in financial markets over the period.

Financial market professionals working in the EU and outside it will be affected, some heavily. Its immediate, most visible impacts are on transaction order transparency pre-trade, transaction reporting post-trade, and the separation of research from bank/broker trading commissions. The changes will likely go further: as with most rearrangements in the intricate chains of financial services, there will be knock-on effects beyond the immediate targets of the authorities, though what they will be is hard to define beforehand.

Thomas Murray’s clients are usually in business lines not directly related to these matters. The firm’s focus has historically been on post-trade infrastructures and asset safety/asset servicing areas; but within our clients’ organisations, responsibilities will be modified and shifted around in significant ways as from 3 January 2018. The firm’s position as a leader in providing expert third-party, independent monitoring of providers of infrastructure, registry, and custody services will take on yet greater meaning.

What are MiFID II and MiFIR supposed to do?

The first new point to note is that this time around, the EU’s Directive will be accompanied by a corresponding Regulation. The legal distinction is critical: a directive must be progressively transposed into the EU member-states’ legal framework, whereas a regulation has immediate legal validity across the 28 countries. The policy point is that the Commission is stepping up the game with a more solid, enforceable, and immediate legal base.

Whatever one may think of MiFID I and its affects, or its two sequels in the form of MiFID II and MiFIR, one must take note of the European Commission’s website stated reasoning. This is offered in summary form on the EU’s website:

‘MiFID is the markets in financial instruments directive (Directive 2004/39/EC). In force since November 2007, it is a cornerstone of the EU's regulation of financial markets. It governs

  • provision of investment services in financial instruments by banks and investment firms
  • operation of traditional stock exchanges and alternative trading venues

While MiFID created competition between these services and brought more choice and lower prices for investors, shortcomings were exposed in the wake of the financial crisis.

In June 2014, the European Commission adopted new rules revising the MiFID framework. These consist of a directive (MiFID 2) and a regulation (MiFIR).

MiFID 2 aims to reinforce the current European rules on securities markets by

  • ensuring that organised trading takes place on regulated platforms
  • introducing rules on algorithmic and high frequency trading
  • improving the transparency and oversight of financial markets – including derivatives markets - and addressing some shortcomings in commodity derivatives markets
  • enhancing investor protection and improving conduct of business rules as well as conditions for competition in the trading and clearing of financial instruments

Building on the rules already in place, the revised MiFID rules also strengthen the protection of investors by introducing requirements on the organisation and conduct of actors in these markets.

MiFIR sets out requirements on

  • disclosure of data on trading activity to the public
  • disclosure of transaction data to regulators and supervisors
  • mandatory trading of derivatives on organised venues
  • removal of barriers between trading venues and providers of clearing services to ensure more competition
  • specific supervisory actions regarding financial instruments and positions in derivatives

The application date of MiFID II and MiFIR, initially scheduled for 3 January 2017, has been extended to 3 January 2018.’

The question then is, how can Thomas Murray help?

Thomas Murray’s fundamental mission is third-party, expert monitoring and assessments

The topic that led to the founding of Thomas Murray in 1994 was expert independent review of custody services for American institutional investors venturing beyond the ‘classic’ post-war markets of Canada, Western Europe, and Japan. The United States Securities and Exchange Commission stipulated that bank custody services meet certain requirements more or less equal to the standards provided in the home market before public funds could enter those third countries. Then as now, much of the impetus for the firm’s services has been driven by legal and regulatory changes in key jurisdictions.

Since that time, Thomas Murray, in collaboration with industry expert groups, has continuously updated questionnaires to refine and deepen the information clients require for the ever more complex matters of custody and asset servicing across the world, as provided to them by third-parties. To assure that the firm’s knowledge base remains current, TM runs advisory engagements to assist institutional investors in selecting their custody arrangements, which requires delving into the service offers.

From bank custody the firm went on to progressively to develop capacities to provide risk assessments of central securities depositories, and then central clearing houses, and on to multiple infrastructures and service providers in the post-trade area. To ease their regulatory compliance burden while assuring access to fair and exact information, Thomas Murray has been mandated by its clients to monitor sub-custodian banks, transfer agents, prime brokers, cash correspondents. These monitoring programmes, together with the capital market information subscription products, have led Thomas Murray to expand its geographical coverage, too. It now follows 103 marketplaces.

As MiFID II and MiFIR come into effect and the compliance burden jumps considerably, it seems logical that Thomas Murray will be called upon yet more by clients for outsourcing of as much monitoring as they can delegate, in order to focus their internal resources so that they can grapple with the as yet unknown impacts of the new EU environment. Rapidly, too, Thomas Murray may find openings for new areas of monitoring as new patterns emerge. Areas that appear ripe for the firm to explore are the exactness and exhaustiveness of transaction reporting by third parties, and the compliance of fund distributors with their new obligations.


If one considers that MiFID II and MiFIR may be MiFID I on steroids, then the uncertainty introduced risks being extraordinary. With the world being what it is, the transitions in the EU will not take place in isolation: there are too many variables to consider in predicting the value of MiFID II, but certainly the rush of articles around the world testifies to a great wariness as to what compliance obligations and impacts on lines of business will be – never mind MiFID II’s value in promoting efficient capital raising and risk management in Europe’s public markets. That last point seems to be the least of the questions being asked.

Any change in public policy creates winners and losers, and in this regard MiFID II and MiFIR will be no different. As with the original MiFID only considerably more so, those able to position themselves to benefit from increasing complexity and cover or pass on the attendant costs to others are likely to consider the Directive and Regulation as a positive thing.

In addition to the monitoring, there is one particular objective in MiFIR worth examining very closely for the firm’s ongoing assessments, and that is the potential further strain on CCP risk books as the authorities push to erode the tie between trading venue and clearing house. For public markets, it is the clearing area where the operators have their capital at risk, as they take counterparty contract risk directly onto their books for the duration of the derivative contract. Logically, there is better liquidity and so pricing information on the exchange or platform where the transaction was concluded; if cleared elsewhere, will the risk managers have the right information and the same ease of position management? In whose interest will it be to break down the tie between trading venue and clearing book? This question goes to the heart of the Thomas Murray CCP risk assessments, which cover 30 of these infrastructures around the world, a subscription product offered by the firm since September 2013.


Compliance is not an option: in the next articles posted on the Thomas Murray Data Services website, detailed examples will be given of the kinds of services now provided that could be adapted to meet clients’ new MiFID II needs.


The author, Thomas Krantz, is Senior Advisor, Capital markets, in the firm of Thomas Murray; and served as Secretary General of the World Federation of Exchanges (2000-2012). The views expressed are his own, and not necessarily those of the firm.

Tags: MiFID IMiFID IIMiFIRmonitoringRegulationEuropean CommissionCCP