MiFID

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The Markets in Financial Instruments Directive (MiFID) will introduce a single market and regulatory regime for investment services across the 25 member states of the European Union. The key objectives behind the Directive are threefold: i) to complete the EU single market for investment services and ii) to respond to changes/innovations in the securities markets and iii) to protect investors. See [1]. It will replace the Investment Services Directive (Directive 93/22/EEC).

MiFID is one of the cornerstones of the European Commission's Financial Services Action Plan - introduced in 1999 - whose 42 measures are bringing substantial changes to the regulation of the EU financial services markets. MiFID is also the most significant piece of legislation introduced under the 'Lamfalussy' procedure. which is designed to speed up the introduction of legislation based on a four-level approach recommended by a committee, known as the Committee of Wise Men, which was chaired by Baron Alexandre Lamfalussy. In addition to the Lamfalussy process there are three other 'Lamfalussy Directives' - as of June 2006 - which are the Prospectus Directive, the Market Abuse Directive and the Transparency Directive.

MiFID retains the principles of the EU 'passport' introduced by the Investment Services Directive (ISD) but introduces the concept of 'maximum harmonisation' which, amongst other things, places more emphasis on home state supervision(rather than the 'minimum harmonisation/mutual recognition' concept previously inherent in EU financial services legislation). The idea behind 'maximum harmonisation' is that Member States cannot be 'superequivalent' or 'gold-plate' EU requirements: a practice which has been seen as detrimental to the 'level playing field' in the EU. Another significant divergence from the ISD regime is the abolition of the so-called 'concentration rule' which permitted Member States to oblige investment firms to route all client orders through regulated exchanges. (Note: this option was not taken up by all EU states).

The MiFID Level 1 Directive Directive 2004/39/EC, which was implemented through the standard co-decision procedure of the Council of the European Union and the European Parliament sets out a relatively detailed 'framework' for the legislation. Some 20 articles of this directive stipulated the introduction of technical implementing measures (Level 2) which are to be adopted via a Directive and a Regulation. These technical implementing measures were adopted by the European Commission, following the receipt of technical advice from the Committee of European Securities Regulators and negotiations in the European Securities Committee with oversight by the European Parliament. The implementing measures were officially published on 2 September 2006 (see [2] and [3]). (Note: Under European law, a Directive has to be transposed into national law: a Regulation, on the other hand, is automatically binding on all Member States.)

1 Scope of MiFID
2 Key aspects of MiFID
3 MiFID in the United Kingdom
4 External links

[edit] Scope of MiFID

In order to determine which firms are affected by MiFID and which aren't, 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 at [4].

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 foreign exchange trades. This includes commodity and freight derivatives which are not covered by ISD.

That part of a firm's business that is not covered by the above is not subject to MiFID.

[edit] 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 classification: MiFID requires firms to classify clients as eligible counterparties, professional clients and retail clients (these have increasing levels of protection). Clear procedures must be in place to classify 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 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 that these requirements currently only apply to equities but it is widely expected that they will also apply to other products in the future.

Post-trade transparency: MiFID will require that firms will need to publish the price and volume of all trades, even if executed outside of a regulated market. Note that these requirements currently only apply to equities but it is widely expected that they will also apply to other products in the future.

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.

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).

[edit] MiFID in the United Kingdom

The Financial Services Authority (FSA) is responsible for the regulation of the securities industry in the United Kingdom. It will be incorporating MiFID into the FSA Handbook.

(As per the joint Treasury/FSA publication [5]) At time of writing (November 2006) the FSA has already published a number of papers to the market - see list below. It expects to make rules to implement MiFID in January 2007. The HM Treasury is also expected to make secondary legislation required to implement MiFID in time for the 31 January 2007 transposition deadline. Those changes will take effect as from 1 November 2007, the application date of MiFID.

[edit] External links

[edit] European Commission pages

[edit] FSA documents

[edit] Other Member States' implementation documents

French AMF consultation paper on best execution (July 2007) (English version)

[edit] Podcasts

The MiFID Podcast

[edit] Private sector papers

[edit] Articles

MiFID Cheat Sheet - October 31, 2005 Silicon.com story

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Category: Financial regulation