The Markets in Financial Instruments Directive 2004/39/EC
(known as "MiFID") as subsequently amended is a European Union law that provides harmonised regulation for investment services across the 30 member states of the European Economic Area
The European Economic Area was established on 1 January 1994 following an agreement between the member states of the European Free Trade Association and the European Community, later the European Union . Specifically, it allows Iceland, Liechtenstein and Norway to participate in the EU's Internal...
(the 27 Member States of the European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
plus Iceland, Norway and Liechtenstein). The main objectives of the Directive are to increase competition and consumer protection in investment services. As of the effective date, 1 November 2007, it replaced the Investment Services Directive.
MiFID is the cornerstone of the European Commission's Financial Services Action Plan
The Financial Services Action Plan is a key component of the European Union's attempt to create a single market for financial services. Created in 1999 and to last for a period of six years, it contained 42 articles related to the harmonization of the financial services markets within the European...
whose 42 measures will significantly change how EU financial service markets operate. MiFID is the most significant piece of legislation introduced under the 'Lamfalussy' procedure
The Lamfalussy Process is an approach to the development of financial service industry regulations used by the European Union. Originally developed in March 2001, the process is named after the chair of the EU advisory committee that created it, Alexandre Lamfalussy...
designed to accelerate the adopting of legislation based on a four-level approach recommended by the Committee of Wise Men chaired by Baron Alexandre Lamfalussy
Baron Alexandre Lamfalussy , is a European economist and central banker.Born in Hungary, Lamfalussy studied at the Catholic University of Leuven and Nuffield College, Oxford, where he received his doctorate in economics...
. There are three other 'Lamfalussy Directives' — the Prospectus Directive, the Market Abuse Directive and the Transparency Directive.
MiFID retained the principles of the EU 'passport' introduced by the Investment Services Directive (ISD) but introduced the concept of 'maximum harmonization' which places more emphasis on home state supervision. This is a change from the prior EU financial service legislation which featured a 'minimum harmonization and mutual recognition' concept. 'Maximum harmonisation' does not permit states to be 'super equivalent' or to 'gold-plate' EU requirements detrimental to a 'level playing field'. Another change was the abolition of the 'concentration rule' in which member states could require investment firms to route client orders through regulated markets.
The MiFID Level 1 Directive 2004/39/EC, implemented through the standard co-decision procedure of the Council of the European Union
The Council of the European Union is the institution in the legislature of the European Union representing the executives of member states, the other legislative body being the European Parliament. The Council is composed of twenty-seven national ministers...
, and the European Parliament, sets out a detailed framework for the legislation. Twenty articles of this directive specified technical implementation measures (Level 2). These measures were adopted by the European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
, based on technical advice from the Committee of European Securities Regulators and negotiations in the European Securities Committee
The European Securities Committee advises the European Commission in the field of securities.The ESC held its first meeting in September 2001. It is run by the European Commission and usually meets each month...
with oversight by the European Parliament
The European Parliament is the directly elected parliamentary institution of the European Union . Together with the Council of the European Union and the Commission, it exercises the legislative function of the EU and it has been described as one of the most powerful legislatures in the world...
. Implementation measures in the form of a Commission Directive and Commission Regulation, were officially published on 2 September 2006.
Scope of MiFID
To determine which firms are affected by MiFID and which are not, MiFID distinguishes between "investment services and activities" ("core" services) and "ancillary services" ("non-core" services). More detail on the services in each category can be found in Annex 1 Sections A and B of the MiFID Level 1 Directive.
If a firm performs investment services and activities, it is subject to MiFID in respect both of these and also of ancillary services (and it can use the MiFID passport to provide them to member states other than its home state). However if a firm only performs ancillary services, it is not subject to MiFID (but nor can it benefit from the MiFID passport).
MiFID covers almost all tradable financial products with the exception of certain foreign exchange trades. This includes commodity and other derivatives such as freight, climate and carbon derivatives, which were not covered by ISD.
That part of a firm's business that is not covered by the above is not subject to MiFID.
Under MiFID, Celent estimates that the three largest EU jurisdictions (France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
, and the UK) will surface over 100 million additional trades annually. Spending will increase as well, but at a slower rate: from €38 million yearly to close to €50 million, according to figures published by Celent 23 January 2007.
Key aspects of MiFID
Authorisation, regulation and passporting: Firms covered by MiFID will be authorised and regulated in their "home state" (broadly, the country in which they have their registered office). Once a firm has been authorised, it will be able to use the MiFID passport to provide services to customers in other EU member states. These services will be regulated by the member state in their "home state" (whereas currently under ISD, a service is regulated by the member state in which the service takes place).
Client categorisation: MiFID requires firms to categorise clients as "eligible counterparties", professional clients or retail clients (these have increasing levels of protection). Clear procedures must be in place to categorise clients and assess their suitability for each type of investment product. That said, the appropriateness of any investment advice or suggested financial transaction must still be verified before being given.
Client order handling: MiFID has requirements relating to the information that needs to be captured when accepting client orders, ensuring that a firm is acting in a client's best interests and as to how orders from different clients may be aggregated.
Pre-trade transparency: MiFID will require that operators of continuous order-matching systems must make aggregated order information on "liquid shares" available at the five best price levels on the buy and sell side; for quote-driven markets, the best bids and offers of market makers must be made available. (Note consideration is being given to extending these requirements to other financial instruments. Under Article 65(1) of Directive 2004/39/EC, the European Commission is due to submit a report to the European Parliament and to the Council on extending pre- and post-trade transparency requirements to transactions in financial instruments other than shares by October 2007.)
Post-trade transparency: MiFID will require firms to publish the price, volume and time of all trades in listed shares, even if executed outside of a regulated market, unless certain requirements are met to allow for deferred publication. (Note see comment above regarding extension of these requirements to other financial instruments).
Best execution: MiFID will require that firms take all reasonable steps to obtain the best possible result in the execution of an order for a client. The best possible result
Best execution refers to the obligation of an investment services firm executing orders on behalf of customers to ensure that the prices those orders receive reflect the optimal mix of price improvement, speed and likelihood of execution...
is not limited to execution price but also includes cost, speed, likelihood of execution and likelihood of settlement and any other factors deemed relevant.
Systematic Internaliser: a Systematic Internaliser is a firm that executes orders from its clients against its own book or against orders from other clients. MiFID will treat Systematic Internalisers as mini-exchanges, hence, for example, they will be subject to pre-trade and post-trade transparency requirements (see above).
Fragmentation of market
Although MiFID was intended to increase transparency for prices, the fragmentation of trading venues has had an unanticipated effect. Where once a financial institution was able to see information from just one or two exchanges, they now have the possibility (and in some cases the obligation) to collect information from a multitude of multilateral trading facilities
A Multilateral Trading Facility is a specific type of European financial trading system. The concept was introduced within the Markets in Financial Instruments Directive , a European financial law, and describes a trading venue that brings together buyers and sellers in a non-discretionary way...
, Systematic Internalisers and other exchanges from around the European Economic Area
EEA or Eea may refer to:* Eea or Electron affinity, the energy required to detach an electron from a singly charged negative ion* River Eea, in Cumbria, England* EEA Helicopter Operations, a Dutch subsidiary of CHC Helicopter...
. This results in an additional amount of work to benefit from the transparency that MiFID has introduced.
Dealing with fragmentation
The number of additional pricing sources introduced by MiFID means that financial institutions have had to seek additional data sources to ensure that they capture as many quotes/trades as possible. Numerous financial data vendors have worked with the MiFID Joint Working Group and Regulators to make sure that they are able to help financial institutions to deal with the fragmentation and benefit from the increased transparency, while helping them to fulfil their new reporting liabilities.
Transposition of MiFID
MiFID and its accompanying implementing Directive were transposed in full and on time, with minor exceptions. The European Commission has published a transposition table linking to lists of national provisions which transpose Directives.
MiFID in the United Kingdom
The Financial Services Authority
The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
(FSA) is responsible for the regulation of the securities industry in the United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
. It has incorporated MiFID into its Handbook of rules and guidance.
MiFID in France
The French legislator has implemented MiFID by modifying the French Monetary and Financial Code, in particular by ordinance number 2007-544 of 12 April 2007, and the decrees 2007-901 and 2007-904 of 15 May 2007. The Financial Market Authority (AMF) has also applied MiFID to its General Regulations (Règlement Général).
In April 2010 CESR
The Committee of European Securities Regulators was an independent committee of European Securities regulators established by European Commission on June 6 of 2001...
issued consultation papers on MiFID review. The consultation period was short and ended on 31 May 2010. There was a day of open hearings in Paris
Paris is the capital and largest city in France, situated on the river Seine, in northern France, at the heart of the Île-de-France region...
on 17 May 2010. Public responses to the consultations are now available although a number of institutions submitted confidential responses too.
On 8 December 2010, following a public hearing held in September 2010, the European Commission released a substantial public consultation relating to the review of MiFID (MiFID II), accompanied by a press release and frequently asked questions. The public consultation period was scheduled to close on 2 February 2011. On 26 May 2011, the Commission was reported to be working to present its proposals before the end of 2011.
On 20 October 2011, the European Commission adopted formal proposals for a Directive on markets in financial instruments repealing Directive 2004/39/EC of the European Parliament and of the Council (MiFID II Directive), and for a Regulation on markets in financial instruments (MiFIR) which would also amend the proposed European Market Infrastructure Regulation [EMIR] on OTC derivatives, central counterparties and trade repositories.
- Alternative Investment Fund Managers Directive
The Alternative Investment Fund Managers Directive is a proposed European Union law which will put hedge funds and private equity funds under the supervision of an EU regulatory body. These kinds of business vehicle have not been subject to the same rules to protect the investing public as mutual...
- Undertakings for Collective Investment in Transferable Securities Directives 2001/107/EC and 2001/108/EC
- Reg NMS (Similar US legistlation to MiFID)
- European company law
European company law is an emerging field of legal scholarship, which concerns the formation, operation and insolvency of corporations within the European Union. There is presently no substantive European company law as such, although a host of minimum standards are applicable to companies...
- UK company law and German company law
German company law is an influential legal regime for companies in Germany. The primary form of company is the public company or Aktiengesellschaft . The private company with limited liability is known as a Gesellschaft mit beschränkte Haftung...
- Institutional investor
Institutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets...
- Investment Company Act of 1940
The Investment Company Act of 1940 is an act of Congress. It was passed as a United States Public Law on August 22, 1940, and is codified at through . Along with the Securities Exchange Act of 1934 and Investment Advisers Act of 1940, and extensive rules issued by the Securities and Exchange...