Markets in Financial Instruments Directive – MiFID

Legal systems have adopted four generic approaches to protection of investors in financial markets: (1) information disclosure, (2) direct regulation of institutions, firms, brokers, and organised exchanges operating the markets, (3) prevention of fraud, and (4) sanctions for violations and enforcement. The economic rationale for investor protection is to induce investors to take risks. Markowitz in his revolutionary discovery of “modern portfolio theory” predicated his theory upon the natural tendency of investors to avoid risk. A risk-averse investor will place savings in low risk instruments, such as fixed income securities, or zero risk instruments such as highly rated sovereign debt securities, rather than engage in investments carrying higher expected returns. To induce investors to take risks and invest in equity requires the alternative of receiving greater economic reward under conditions of controlled levels of risk. Legal systems track this finance theory by enacting rules to promote investor confidence in financial markets.

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