Markets in Financial Instruments Directive - MiFID

The Markets in Financial Instruments Directive (MiFID) as subsequently amended is a European Union instrument which provides a harmonised regulatory regime for investment services across the 30 member states of the European Economic Area (the 27 Member States of the European Union 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 (ISD).

MiFID is the cornerstone of the European Commission’s Financial Services Action Plan 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 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. There are three other ‘Lamfalussy Directives’ — the Prospectus Directive, the Market Abuse Directive and the Transparency Directive.

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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 Directive 2004/39/EC, implemented through the standard co-decision procedure of the Council of the European Union, 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, based on technical advice from the Committee of European Securities Regulators and negotiations in the European Securities Committee with oversight by the European Parliament. Implementation measures in the form of a Commission Directive and Commission Regulation, were officially published on 2 September 2006.

Scope of MiFID

In order 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).

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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, Germany, 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.

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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 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).

MiFID in the United Kingdom

The Financial Services Authority (FSA) is responsible for the regulation of the securities industry in the United Kingdom. It has incorporated MiFID into its Handbook of rules and guidance…….

MiFID in France

The French legislator has transposed the MiFID especially by the ordinance n°2007-544 of 12 April 2007 and the decree n°2007-901 and 2007-904 of 15 May 2007 modifying the French Monetary and Financial Code. The Financial Market Authority (AMF) has transposed also the MiFID in its General Regulation (Règlement Général).

Licence

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