On 3 January 2018, several thousand European investment firms switched on new reporting systems, republished their execution policies and started recording client phone calls with fresh diligence. That was the application date of MiFID II, the second Markets in Financial Instruments Directive, and it still defines what an EU brokerage is allowed to do, say and sell. If you trade with a broker licensed anywhere in the EU, most of your account experience was designed to satisfy this text.
One rulebook, two legal instruments
MiFID II is formally Directive 2014/65/EU, transposed into the national law of each member state. It travels with a twin, MiFIR, a regulation that applies directly without national transposition and carries the transaction reporting, transparency and product intervention powers. ESMA, the EU markets authority, fills in the detail through technical standards and Q&As, and national regulators such as CySEC or BaFin supervise the firms. The result works as a single rulebook, which is also why a license from one member state can be passported across the whole bloc.
The scope is wide: brokers, portfolio managers, advisers and trading venues all sit inside it. For retail CFD and forex brokers, four areas dominate daily life: client categorisation, conduct of business, product governance and the data trail.
Client categories decide the protections
Every client is classified as retail, professional or eligible counterparty. Retail clients receive the full protection package: negative balance protection, leverage caps, risk warnings and the strictest disclosure. Professional clients give some of it up in exchange for fewer restrictions. Moving up requires the client to request it and to pass tests based on trading frequency, portfolio size and industry experience, and the broker must assess the request rather than rubber-stamp it. Regulators have sanctioned firms that pushed retail clients into professional status to escape the caps, so serious brokers treat opt-ups carefully.
Categorisation is also why the account-opening questionnaire exists. For complex products such as CFDs, the broker must run an appropriateness assessment on your knowledge and experience and warn you when the product does not fit. The questionnaire annoys everyone and protects everyone, in roughly equal measure.
Conduct: execution, costs and inducements
MiFID II requires firms to take all sufficient steps to obtain the best possible result when executing client orders, weighing price, costs, speed, likelihood of execution and settlement, size and nature. For retail clients the headline test is total consideration, meaning price plus all costs. The obligation is real enough that firms must maintain and publish an execution policy and monitor their own fills against it; we cover the mechanics in our best execution guide.
Costs and charges must be disclosed in aggregate, before the trade and annually after it, so a client can see what spreads, commissions and financing actually took from the account. Inducements, meaning payments a firm receives for routing business, are restricted and must be disclosed. None of this makes trading cheap, but it makes the cost visible, which was the point.
Product governance and intervention powers
Manufacturers of financial products must define a target market: who the product is for, who it is not for, and how it should be distributed. A CFD with high leverage cannot be marketed as a savings product for pensioners, and the paperwork has to prove the firm thought about that. On top of governance sits intervention: MiFIR gives ESMA and national regulators the power to restrict or ban products outright. That power produced the 2018 measures every trader knows, the 30:1 leverage caps, mandatory negative balance protection, the standardised risk warning with loss percentages, and the ban on deposit bonuses. The binary options ban came from the same article.
MiFID II is descriptive law, not a quality badge. A licensed firm can still execute poorly or fail; the directive raises the floor and creates the paper trail that lets a regulator prove it afterwards.
The data trail
Under MiFIR, firms report every transaction in reportable instruments to their regulator, typically by the next day, with dozens of fields identifying the instrument, the price, the client and the decision-maker. Legal entities need an LEI code to trade, summarised at the time as no LEI, no trade. Firms must record telephone conversations and electronic communications that relate to orders and keep them for years. The full reporting stack is its own subject, covered in our MiFIR and EMIR guide, but the practical takeaway is simple: an EU broker generates evidence constantly, and a regulator can reconstruct almost any client complaint from stored data.
What it means when you choose a broker
For traders, MiFID II is the reason an EU account comes with questionnaires, warnings and lower leverage than an offshore alternative. For founders planning a brokerage, it is the reason an EU license costs serious money to operate, since compliance staff, reporting systems and record-keeping run continuously whether or not clients trade. Neither side has to love it. Both sides should understand that the protections and the paperwork are the same thing viewed from different chairs, and that trading leveraged products remains high-risk under any rulebook.
"Traders complain about the questionnaires and the warnings. From the inside, MiFID II is mostly plumbing: reports, records and policies. The visible part is a fraction of the cost."
— Roman Onta, Executive Director, SINGUARD
Key Takeaways
- MiFID II has applied since 3 January 2018 and, together with MiFIR, forms the single rulebook behind every EU-licensed broker.
- Client categorisation decides your protections; retail status brings leverage caps, negative balance protection and appropriateness tests.
- Best execution, cost disclosure and product governance shape how brokers price, market and route every trade.
- Transaction reporting, LEI codes and call recording create a permanent evidence trail regulators can audit at any time.
Frequently Asked Questions
Who does MiFID II apply to?
MiFID II applies to investment firms authorised in the EU, including CFD and forex brokers, plus trading venues and firms providing portfolio management or advice. A broker licensed by any EU regulator, such as CySEC, must follow it, and the UK kept a close equivalent after Brexit under FCA rules.
What is the difference between MiFID II and MiFIR?
MiFID II is a directive, transposed into each member state's national law, covering authorisation, conduct and organisational rules. MiFIR is a regulation that applies directly across the EU and carries the transaction reporting, transparency and product intervention powers. In practice firms treat them as one rulebook.
Why do brokers make clients complete a questionnaire before trading?
MiFID II requires an appropriateness assessment for complex products such as CFDs. The broker must collect information about your knowledge and experience and warn you when the product appears inappropriate. The questionnaire is that assessment, and answering it honestly is what makes the warnings meaningful.