Markets in Financial Instruments Directive

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In an effort to integrate the financial markets of the thirty European Economic Area member states and increase cross-border investment orders, the European Union has put into operation the Markets in Financial Instruments Directive (MiFID). The directive has a number of key elements that will apply to investment banks, brokers, portfolio managers and corporate finance companies, as well as some commodities and derivatives related companies.

The new directive is applicable to the European Economic Area that consists of the twenty-seven member states of the European Union, as well as Norway, Iceland and Liechtenstein. The MiFID has replaced the Investment Services Directive (ISD). While retaining some of the basic principles of the European Union passport that had been introduced by the ISD, MiFID has introduced the concept of “maximum harmonization”. This new concept focuses on home state supervision as opposed to the ISD which promoted a “minimum harmonization and mutual recognition” concept. The MiFID prohibits practices such as the granting of gold-plate status to any member, and in this way ensures that all members have the benefit of a level playing field. Another significant change was the abolishment of the previous “concentration rule”, which allowed member states to set as a requirement that investment companies must route client orders via regulated markets.

Key elements of MiFID include the authorizing and regulating of MiFID compliant companies in their home state. Authorized companies will make use of the MiFID passport to provide services to clients in any of the EU member states. All services offered will be regulated in the authorized provider’s home state. Companies are required to categorize their clients according to MiFID criterion and clear procedures must be put in place to do this, as well as to fulfill each client’s investment product requirements appropriately. Companies must execute an order for a client with the objective of obtaining the best possible result. This applies to execution price as well as other factors such as cost, speed, probability of execution and of settlement. There are also a number of pre-trade and post-trade transparency requirements that must be met. Systematic Internalizers will be viewed as mini-exchanges and will be subject to MiFID pre-trade and post-trade transparency requirements.

Although, the MiFID has been met with mixed reactions and has presented some IT implementation challenges, it is already seeing one of its objectives being fulfilled in the increased competition from new trading platforms, resulting in the lowering of trading fees at both the London Stock Exchange and the Deutsche Börse. It is anticipated that as the three largest EU member states, Germany, France and the UK are likely to process in excess of 100 million additional trades annually.

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