New EU rules aim to protect investors, strengthen markets

New rules to protect investors, improve market transparency and honesty and prevent another financial crisis went into effect on Wednesday in Europe.

The regulations are more than a million paragraphs long, took six years to write and approve and had to be delayed by a year. And despite Wednesday's start date, they still haven't been passed into national law by more than half the European Union's 28 member states.

The so-called MiFID II rules will have broad impact on how stocks, bonds and investments are traded.

MiFID II is the successor to an earlier, narrow set of Markets in Financial Instruments Directive or MiFID rules which went into force in November 2007 — just ahead of the global financial crisis that included the collapse of US investment bank Lehman Brothers.

The crisis quickly convinced European Union leaders that they needed a much more comprehensive set of rules to prevent another disaster. The new regime was approved in 2014, and was originally expected to take effect at the start of 2017. It was delayed a year after regulators said they would not be ready in time for the complex legislation.

Transparency and investor protection are key aspects of the new rules, which aim to ensure that investment firms act in accordance with the best interests of their clients when providing services. For instance, companies developing new investment products must define their target customers to ensure they are not marketed to investors for whom they are unsuitable.

All internal and external electronic communications and phone conversations have to be recorded, and, if necessary, provided to customers. Financial firms must disclose without being asked the total costs of products and services and the impact of costs on investment gains, and detail individual customer costs on request.

It requires lots of new data fields to record trades, and requires every trading company to apply for an identifying number that should help regulators crack down on market abuses.

The rules aim to push more trading on to public exchanges, where everyone can see the prices at which trades have been made. They will try to limit trading in so-called dark pools — trading forums not accessible to the general public — and over the counter trading, in which assets are priced and traded among dealers off major exchanges with fewer rules and less transparency. There are also new rules on computer and high-speed trading to keep them from destabilising financial markets.

The new rules aim to limit speculation in commodities such as oil, metals, and agricultural products to prevent financial speculation that can send food prices soaring. To do that, it introduces a harmonised EU-wide system that puts limits on the size of investor positions in derivatives based on commodities. Derivatives are financial products that are based on an underlying asset.

Countries that have fully implemented the directive by passing its provisions into national law and communicated that to Brussels are: Austria, Cyprus, the Czech Republic, Denmark, Estonia, France, Germany, Hungary, Ireland, Italy, Slovakia and the United Kingdom. The others either haven't passed the measures in full or have not communicated what they have done.