What Are the Key Differences between a MiFID I and a MiFID II Compliant RFQ Workflow?

Concept

From Handshake to High Frequency a New Regulatory Framework

The transition from the Markets in Financial Instruments Directive (MiFID I) to its successor, MiFID II, represents a fundamental re-architecting of the European financial markets’ operational and philosophical foundations. This evolution transformed the Request for Quote (RFQ) workflow from a practice rooted in bilateral, often opaque, communication into a highly structured, transparent, and data-intensive protocol. Under MiFID I, the RFQ process was largely governed by the principle of “reasonable steps” toward best execution, a standard that allowed for significant discretion and relied heavily on established dealer relationships. The workflow was mechanically simpler, with fewer prescribed data capture requirements and minimal obligations for pre-trade transparency.

MiFID II, implemented in January 2018, introduced a far more rigorous and prescriptive regime, driven by the core objectives of enhancing investor protection and increasing market transparency. It replaced the vague “reasonable steps” with the far more demanding “all sufficient steps” standard for best execution. This change alone necessitated a complete overhaul of the RFQ workflow.

Every stage of the process, from counterparty selection to the final trade report, became subject to stringent record-keeping and transparency mandates. The directive’s goal was to make bilateral or off-venue liquidity sourcing as robust and auditable as trading on a lit exchange, fundamentally altering the nature of price discovery in the process.

The shift from MiFID I to MiFID II converted the RFQ from a relationship-based dialogue into a systematic, evidence-based electronic protocol.

Systematic Internalisation and the New Market Structure

A pivotal concept introduced by MiFID II that directly impacts the RFQ workflow is the formalization of the Systematic Internaliser (SI) regime. An SI is an investment firm that, on an organized, frequent, systematic, and substantial basis, deals on its own account by executing client orders outside a regulated market, a Multilateral Trading Facility (MTF), or an Organised Trading Facility (OTF). While firms engaged in similar activities under MiFID I, the sequel created a quantitative, rules-based framework for identifying SIs and imposed specific obligations upon them.

For the RFQ workflow, this means that when a firm designated as an SI receives a quote request for an instrument it deals in, its response is bound by specific transparency rules. SIs are required to make their quotes public under certain conditions, contributing to overall market transparency. This was a significant departure from the MiFID I environment, where such quotes would have remained entirely private between the two counterparties. The introduction of the SI regime effectively created a new category of organized liquidity that bridges the gap between purely bilateral trading and fully public exchanges, forcing a systemic change in how RFQ counterparties are selected and how their quotes are handled within the trading workflow.

Strategy

The Mandate for Demonstrable Best Execution

The strategic core of the MiFID II-compliant RFQ workflow is the shift from asserting best execution to demonstrating it with verifiable data. Under MiFID I, a firm’s execution policy could be relatively high-level, relying on the established reputation of its chosen liquidity providers. The strategy was centered on maintaining strong relationships with a select group of dealers who were trusted to provide competitive pricing. The evidentiary burden was comparatively light, and audits of execution quality were less granular.

MiFID II obliterated this paradigm by mandating a detailed and systematic approach. The “all sufficient steps” requirement compels firms to design an RFQ strategy that is, by its nature, a data-gathering and analytical exercise. The selection of counterparties for an RFQ can no longer be based solely on historical relationships. Instead, firms must have a clear, documented policy for counterparty selection that considers a wide range of factors, including price, speed, and likelihood of execution.

This necessitates a pre-trade strategy that involves continuous monitoring and quantitative evaluation of liquidity providers. The workflow must be designed to capture not only the winning quote but all quotes received, along with timestamps and the rationale for the final execution decision. This transforms the RFQ process from a simple price-sourcing tool into an integral part of a firm’s compliance and risk management framework.

Under MiFID II, the RFQ workflow evolved from a tool for price discovery into a system for generating auditable proof of best execution.

Navigating the Complexities of Pre-Trade Transparency

A significant strategic challenge introduced by MiFID II is the management of pre-trade transparency obligations. MiFID I had very limited transparency requirements for non-equities and the RFQ process was almost entirely private. MiFID II, through the accompanying Markets in Financial Instruments Regulation (MiFIR), extended transparency rules to a much broader range of asset classes, including bonds, derivatives, and structured finance products.

This created a new strategic dimension for the RFQ workflow. Firms must now design their processes to account for when and how quote information must be made public. The rules are complex, with different requirements depending on the instrument’s liquidity classification and the trade size relative to Large-in-Scale (LIS) or Size Specific to the Instrument (SSTI) thresholds. A compliant RFQ strategy, therefore, requires a sophisticated pre-trade decision-making process:

• Instrument Classification ▴ The workflow must begin by identifying the instrument’s regulatory status. Is it liquid or illiquid? Is it subject to the derivatives trading obligation (DTO)? This classification determines the applicable transparency regime.
• Size Threshold Analysis ▴ Before sending the RFQ, the system must determine if the prospective trade size qualifies for a pre-trade transparency waiver under LIS or other provisions. This analysis dictates whether the quote solicitation process can remain private.
• Venue Selection ▴ The choice of executing via an SI, OTF, or MTF has strategic implications. An OTF, for example, allows for greater discretion in execution, which can be beneficial for complex or illiquid trades, but it comes with its own set of reporting and conduct rules. The RFQ strategy must align the choice of venue with the specific characteristics of the order.

This strategic layering adds significant complexity compared to the more straightforward, bilateral nature of the RFQ process under MiFID I.

A Comparative Analysis of Strategic Imperatives

The table below outlines the fundamental shift in strategic thinking required to adapt an RFQ workflow from MiFID I to MiFID II.

Execution

The Anatomy of a MiFID II Compliant RFQ Workflow

The execution of an RFQ under MiFID II is a far more granular and systematically controlled process than its MiFID I predecessor. Each step is governed by specific data capture and reporting requirements, transforming the workflow into a detailed, auditable sequence of events. The operational focus shifts from merely achieving a price to building a complete, time-stamped evidentiary record of the entire price discovery and execution lifecycle.

A typical workflow can be broken down into distinct operational phases, each with specific MiFID II-driven enhancements:

1. Order Inception and Pre-Trade Analysis ▴ Upon receiving a client order, the system must first enrich it with regulatory data. This involves identifying the instrument’s unique identifier (ISIN), assessing its liquidity status based on ESMA’s register, and determining if it falls under any trading obligations. The system then checks the order size against the relevant LIS and SSTI thresholds to determine if pre-trade transparency waivers can be applied. This automated analysis is a critical first step that was absent under MiFID I.
2. Counterparty Selection and Quote Solicitation ▴ Based on the firm’s best execution policy, a list of eligible counterparties is generated. The selection must be justifiable and recorded. The RFQ is then sent electronically, with the system logging the precise time of dispatch for each counterparty. MiFID II encourages competitive pricing, so workflows are often designed to query multiple dealers simultaneously.
3. Quote Reception and Management ▴ As quotes are received, they are captured with high-precision timestamps (often to the microsecond). The “collection window” concept allows the requester to wait for all invited counterparties to respond before a quote becomes executable, preventing information leakage. All quotes, including those not chosen, are stored. This contrasts with the MiFID I era, where only the executed price might be formally recorded.
4. Execution and Justification ▴ The trader or algorithm selects the best quote. The execution time is recorded with the same high precision. Crucially, if the best-priced quote is not selected, a justification must be recorded (e.g. due to settlement risk or better size availability on another quote). This “best price is not best execution” rationale must be documented, a requirement that formalizes a previously informal practice.
5. Post-Trade Reporting and Record Keeping ▴ Immediately following execution, the workflow bifurcates. A public post-trade report is sent to an Approved Publication Arrangement (APA) as close to real-time as possible. The content and timing of this report can be subject to deferrals based on the same LIS/SSTI criteria analyzed pre-trade. Concurrently, a more detailed regulatory transaction report is prepared and sent to the National Competent Authority (NCA) by T+1. This report contains a far greater number of data fields than was required under MiFID I.

Data Capture a Granular Comparison

The table below illustrates the exponential increase in data-capture requirements at the execution level, which is the defining operational difference between the two regimes.

MiFID II mandates that the process of execution is as important to record as the outcome itself.

Technological and Architectural Implications

Fulfilling these execution requirements necessitates a significant technological uplift. A MiFID I-era RFQ system, often reliant on voice, chat, or basic electronic messaging, is wholly inadequate. A MiFID II-compliant architecture requires several core components:

• Synchronized Clocks ▴ All systems involved in the trading workflow must have their clocks synchronized to Coordinated Universal Time (UTC) with a high degree of precision, as specified in RTS 25. This ensures the integrity of the timestamping data that underpins the entire audit trail.
• Centralized Data Repository ▴ A robust data warehouse is needed to store the vast amounts of information captured during the workflow. This repository must be easily queryable to reconstruct any trade lifecycle for regulators, clients, or internal compliance.
• Connectivity and Reporting Engines ▴ The system must have seamless, real-time connectivity to APAs for post-trade transparency reporting and robust engines for constructing and submitting the complex T+1 transaction reports to regulators.
• Smart Order Routing (SOR) Logic ▴ The pre-trade analysis phase requires integration with SORs or similar logic that can programmatically determine the correct execution venue (SI, OTF, MTF) and apply the relevant transparency rules based on instrument and order characteristics.

This technological framework ensures that the RFQ process is not merely a trading function but a fully integrated component of the firm’s regulatory compliance infrastructure.

Reflection

From Compliance Burden to Architectural Advantage

The transition from MiFID I to MiFID II was far more than a regulatory update; it was an enforced evolution in operational philosophy. The immense requirements for data capture, transparency, and reporting have compelled firms to dismantle legacy workflows and build new systems founded on principles of precision and auditability. The initial perception of this directive as a costly compliance burden has, for forward-thinking institutions, given way to a deeper understanding. The architecture required to satisfy MiFID II is the very same architecture that provides a superior level of operational control, execution intelligence, and risk management.

Viewing the MiFID II-compliant RFQ workflow not as a set of constraints but as a design specification for a high-performance trading system reveals its true value. The granular data captured for regulatory purposes becomes the raw material for advanced transaction cost analysis (TCA), enabling a more sophisticated and quantitative approach to liquidity provider evaluation. The mandatory transparency protocols, while complex, create a more level playing field and provide richer data for pre-trade decision-making. Ultimately, the framework compels firms to ask a fundamental question ▴ Is our operational infrastructure merely a means of executing trades, or is it a strategic asset that provides a demonstrable edge in the market?