MiFID II is an EU directive that came into full force in January 2018. MiFID stands for Markets in Financial Instruments Directive. The original MiFID strived to harmonize legislation and regulation in the EU in order to increase competition and add to consumer protection, as well as to reduce systemic risk, and it was implemented in 2004. In 2014, MiFID II was approved. MiFID II includes fewer exemptions and expands the scope of MiFID to cover a larger group of companies and products. The scope of MiFID was authorization regulation and passporting, client categorization, client order handling, pre and post-trade transparency and best execution. As the market fragmented where more trading venues were set up following the introduction of the initial MiFID rules, it has become harder to see all prices in the market, hence making it significantly harder to ensure transparency and best execution, which resulted in the rules being reviewed and the development of MiFID II. It could be said that while MiFID I mainly created costs for financial companies by increasing compliance costs, MiFID II has affected the revenue side of financial firms. The main issue here is around the new legislation regarding commissions and fees. The main rule change is around the prohibition of inducements, which are payments made by a product provider such as an asset manager or investment bank to a distributor such as a financial advisor for selling its products. This creates a conflict of interest for the distributor as it may be incentivized to sell products that are not in the best interest of the client. By prohibiting inducements, also called retrocessions, MiFID II aims to ensure that investment firms act in the best interest of their clients and avoid conflicts of interest. Some of the other main changes resulting from MiFID II are as follows, increased investor protection. MiFID II includes more stringent requirements in relation to ensuring firms act in the best interests of their clients. Stricter governance rules in relation to how investment firms are organized internally. Stricter sanctions including giving regulators the power to ban financial products, activities, or practices and larger fines to be meaningful for large firms, and the creation of a new category of execution venue called an organized trading facility OTF, with the aim of ensuring all dark pools for non-equity investments are captured within the scope of the regulations. Derivatives play an important role in the economy, but they also bring certain risks. These risks were highlighted during the 2008 financial crisis when significant weaknesses in the over the counter OTC derivatives markets became evident.

Derivatives are financial contracts between counterparties. Many of these contracts are entered into off exchanges in the OTC markets where the two parties to the trade agree the contract terms between themselves bilaterally. Prior to the 2008 financial crisis, all OTC derivatives had greater counterparty risk than derivatives traded over an exchange. As if one party defaults. There is no central party to ensure the trade is still honored for the party, which didn't default as would be the case for exchange traded contracts. The aim of EMIR is to encourage less complex OTC derivatives to be centrally cleared. This has increased transparency for regulators to enable them to understand in real time the transactions being entered into across the market, allowing them to more easily identify systemic risks before they become a larger problem. This also reduces counterparty and operational risk for the banks and other financial services firms operating in the OTC derivatives market.

EMIR introduces reporting requirements to make derivatives markets more transparent. Under the regulation, detailed information on each derivative contract has to be reported to trade repositories and made available to supervisory authorities. Trade repositories have to publish aggregate positions by class of derivatives for both OTC and listed derivatives. The European Securities and Markets author is responsible for surveillance of trade repositories and for granting and withdrawing accreditation.

EMIR introduces rules to reduce the counterparty credit risk of derivatives contracts. In particular, all standardized OTC derivatives contracts must be centrally cleared through central clearing counterparties or CCPs. If a contract is not cleared by a CCP, risk mitigation techniques must be applied by the bank. CCPs must comply with stringent prudential organizational and conduct of business requirements. The regulation also requires market participants to monitor and mitigate the operational risks associated with trade in derivatives, such as fraud and human error, for example, by using electronic means to promptly confirm the terms of OTC derivatives contracts.