The Legal Framework for Financial Instruments Under MiFID II: Key Considerations for Market Participants

By Dr Kelly Fenech, Founding Partner GKF Legal September 2025

In the intricate world of European financial markets, the Markets in Financial Instruments Directive II (MiFID II) serves as a foundational pillar, delineating the scope of financial instruments and shaping the regulatory environment for banking and investment services. Enacted to enhance transparency, investor protection, and market integrity following the financial crisis, MiFID II has profoundly influenced how financial entities operate across the EU. As we reflect on its implementation in late 2025, with ongoing adaptations to digital innovations and post-Brexit dynamics, it remains imperative for firms to grasp the nuances of financial instruments as defined in Annex I Section C of the Directive.

At GKF Legal, our Financial Services Practice has counselled numerous clients—from investment firms to corporate issuers—on compliance with MiFID II, helping them navigate classifications that impact licensing, reporting, and trading obligations. This article offers a pragmatic examination of financial instruments under MiFID II, covering their definitions, key characteristics, historical development, and practical ramifications. Our intent is to provide clarity for practitioners and stakeholders, underscoring that precise categorisation is not merely academic but essential for mitigating regulatory risks.

Defining Financial Instruments: The Core Criteria

MiFID II, in Article 4(1)(15), defines financial instruments as those listed in Section C of Annex I, encompassing a broad array of assets designed to facilitate capital raising, risk management, and investment. This exhaustive list ensures regulatory oversight over instruments that could affect market stability or investor interests.

Transferable Securities: The Bedrock of Capital Markets

At the forefront are transferable securities, as outlined in Article 4(1)(44), which include securities negotiable on the capital market—excluding payment instruments—such as:

• Shares in companies or equivalent securities, including depositary receipts for shares;
• Bonds or other securitised debt, along with depositary receipts for such securities;
• Any securities conferring rights to acquire or dispose of the above, or leading to cash settlements based on securities, currencies, interest rates, yields, commodities, or other indices.

For an instrument to qualify, it must exhibit transferability, standardisation, and negotiability.

• Transferability: While unrestricted transfer is not mandatory, the instrument must be capable of legal transfer between parties. Restrictions, such as requiring issuer consent, do not disqualify it, provided the core ability to convey ownership exists. For instance, shares with limited transfer clauses in private companies may still fall within scope if they meet other criteria.
• Standardisation: This requires a degree of uniformity, enabling fungibility among instruments of the same class. A low threshold applies: securities sharing essential features—like issuer, maturity, and rights—qualify, even if minor variations exist. Conversely, bespoke instruments crafted for a single investor, lacking comparability with others from the same issuer, are excluded.
• Negotiability on the Capital Market: The instrument need only be inherently suitable for organised trading, not actually traded. This forward-looking test captures assets with potential market appeal, promoting broad regulatory coverage.

In practice, this category includes domestic and foreign shares (assessed via functional equivalence for investor protection), as well as depositary receipts like American Depositary Receipts (ADRs) or Global Depositary Receipts (GDRs), which facilitate cross-border investment.

Debt Instruments and Related Securities

Debt securities form another critical subset, including bearer bonds (issued in series for standardised trading) and order bonds (payable to a specified person or by endorsement). Depositary receipts for debt securities also qualify. However, pure payment instruments—such as cheques or electronic money— are expressly excluded, as they serve transactional rather than investment purposes.

The Directive clarifies that issuing debt securities does not inherently constitute deposit-taking, provided it falls within exemptions, thus avoiding overlap with banking regulations.

Derivative and Other Instruments

MiFID II extends to a variety of derivatives and specialised assets:

• Money-Market Instruments: Short-term debt with maturities up to 397 days, including treasury bills, commercial paper, certificates of deposit, and repurchase agreements. These are defined in Delegated Regulation (EU) 2017/565, emphasising liquidity and low risk.
• Units in Collective Investment Undertakings: Shares or units in funds, enabling pooled investment.
• Derivatives: Options, futures, swaps, forwards, and contracts for differences, relating to securities, currencies, interest rates, commodities, or other indices. This includes credit risk transfer instruments.
• Emission Allowances: Units under Directive 2003/87/EC for the EU Emissions Trading Scheme, treated as financial instruments when traded. A distinction arises between verified reductions (compliance-driven, regulated) and voluntary offsets (often outside MiFID II if not on organised platforms).

These expansions reflect MiFID II’s aim to capture evolving market products, ensuring comprehensive supervision.

The Development of Financial Instrument Definitions: From MiFID I to II

The concept of financial instruments has matured since its inception in Directive 93/22/EEC and refinement in MiFID I (2004/39/EC). MiFID I focused on core equities and bonds, but MiFID II (2014/65/EU), effective from 2018, broadened the scope to address post-crisis vulnerabilities, incorporating derivatives, structured products, and emission allowances. This evolution prioritises functional equivalence over form, assessing foreign instruments (e.g., from the UK or Switzerland) based on investor safeguards rather than strict nomenclature.

For equity-like instruments, MiFID II includes shares in Societas Europaea (SE) entities and preferred shares, regardless of transfer restrictions. Debt-like instruments now encompass inflation-linked or dual-currency bonds, with clearer boundaries to prevent misclassification.

This progressive widening enhances market resilience but demands vigilance: misclassifying an instrument could trigger unintended regulatory obligations, such as transaction reporting under MiFIR.

Practical Implications and Market Relevance

Financial instruments under MiFID II are pivotal for capital formation, hedging, and portfolio diversification. They enable efficient fundraising via bonds or shares and risk mitigation through derivatives. However, classification impacts everything from authorisation requirements to market abuse rules.

For instance, emission allowances illustrate the Directive’s adaptability: compliance units are fully regulated, fostering a transparent trading ecosystem, while voluntary credits often escape scrutiny unless structured as derivatives.

Institutions must conduct thorough assessments, particularly for hybrid or innovative products, to ensure compliance. At GKF Legal, we advocate regular reviews, especially amid digital transformations like tokenised assets, which may intersect with MiCAR.

Concluding Reflections

A solid understanding of MiFID II’s financial instruments is indispensable for navigating the EU’s complex markets. This framework not only defines regulatory perimeters but also drives innovation within safe bounds. As markets evolve, staying abreast of interpretations—such as those from ESMA or national authorities—remains key.

For tailored advice on MiFID II compliance or instrument classification, GKF Legal stands ready to assist. Contact us for a confidential consultation at info@gkflegal.com or visit. In an era of regulatory flux, expert guidance is paramount.

Dr Kelly Fenech is a Founding Partner in GKF Legal’s Financial Services Practice, specialising in EU financial markets law. The views expressed are his own and do not constitute legal advice.