The Markets in Financial Instruments Directive 2004/39/EC (known colloquially as "MiFID"[1]) as subsequently amended[2] is a European Union law that provides harmonised regulation for investment services across the 30 member states of the European Economic Area - the 27 EU member states plus Iceland, Norway, and Liechtenstein; the United Kingdom will continue to implement the directive during the transition period. The directive's main objectives are to increase competition and investor protection, and level the playing field for market participants in investment services. As of the effective date, 1 November 2007, it replaced the Investment Services Directive (ISD).[3]
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.
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 harmonization" 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.[4][5]
The MiFID Level 1 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.[6][7][8]
After its initial implementation, MiFID was intended to be reviewed. After extensive discussion and debate, in April 2014, the European Parliament approved both MiFID II, an updated version of the original MiFID law, and MiFID II's accompanying regulation, MiFIR.[9] The directive and regulation include fewer exemptions and expand the scope of the original MiFID to cover a larger group of companies and financial products.[10][11] Both MiFID II and MiFIR have been effective from 3 January 2018.
Background and history
MiFID was intended to replace the Investment Services Directive (ISD), which was adopted in 1993.[12] The law creates a single market for investment services and activities, which improves the competitiveness in EU markets.[12] While the original law did succeed in lowering prices and expanding choices for investors, weaknesses in ISD's structure became apparent during the financial crisis in 2008.[13]
MiFID was also intended to make changes to share trading, and it set guidelines for the use of related financial instruments.[12] The law was introduced in order to reduce systemic risk and strengthen existing investor protections.[14]
During the approval process for MiFID, a proposal from the European Commission (EC) was read by the European Parliament (EP) in March 2004.[15][16] In April 2006, the Commission published consultation responses it received in 2005. In June 2006, the Commission published a new draft of MiFID.[17] The EC and EP discussed any suggested amendments to approve Level One texts.[18] A second reading of the legislature, by both EP and EC, followed.[16]
MiFID was introduced under the Lamfalussy procedure, which was designed to accelerate the adoption of legislation based on a four-level approach recommended by the Committee of Wise Men. The Committee was chaired by Baron Alexandre Lamfalussy. There are three other "Lamfalussy Directives": the Prospectus Directive, the Market Abuse Directive, and the Transparency Directive.[19]
Level 1
The MiFID Level 1 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.[6][7] It also amends Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC and repeals Council Directive 93/22/EEC, Investment Services Directive (ISD) originally adopted in 1993.[20]
Level 2
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.[6][7]
Contents
Scope
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.
Celent, a financial services consultancy, estimated in 2007 that under MiFID, the three largest EU jurisdictions—France, (Germany), and the UK—would require publication of over 100 million additional trades annually, with spending increasing as well but at a slower rate, from €38million yearly to close to €50million.[21]
Substance
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 requires 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 requires 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).
Inducements and investment research
One of the most controversial aspects of MiFID II is that it severely restricts asset managers' ability to obtain investment research with client commissions.[22]
Best execution
MiFID II requires that firms take all sufficient 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. MiFID II's "all sufficient steps" test sets a somewhat higher standard than the previous "all reasonable steps" standard in MiFID.[23]
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).
Market fragmentation
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, Systematic Internalisers and other exchanges from around the European Economic Area (EEA). This results in an additional amount of work to benefit from the transparency that MiFID has introduced.
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 fulfill their new reporting liabilities.
Transposition
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.[24]
United Kingdom
The Financial Services Authority (FSA), now the Financial Conduct Authority (FCA), was the body responsible for regulation of the securities industry in the United Kingdom during the period of implementation. It incorporated MiFID into its Handbook of rules and guidance.[25]
France
The French government 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 Autorité des Marchés Financiers (AMF) has also applied MiFID to its General Regulations (Règlement Général).[26]
MiFID II/MiFIR
In April 2010, CESR issued consultation papers on MiFID review.[27] The consultation period was short and ended on 31 May 2010. There was one day of open hearings[28] in Paris on 17 May 2010. Public responses to the consultations are now available[27] although a number of institutions also submitted confidential responses.
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.[29] 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.[30]
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.[31]
In March 2012, MEP Markus Ferber suggested amendments to the European Commission's proposals, intended to strengthen restrictions on high-frequency trading and commodity price manipulation.[32][33] The Association for Financial Markets in Europe (AFME)'s formal response to Ferber particularly cited concern with the requirement that all algorithms run continuously as this would preclude the use of broker algorithms to execute client orders.[34] The creation of the Organized Trading Facility (OTF) rules have also caused concern because of their proposed ban on proprietary trading in broker crossing networks, which would prevent brokers from using their pools to unwind risk on behalf of a client or the bank itself.[35]
Both MiFID II and MiFIR entered into force on 2 July 2014. MiFID II replaced the Markets in Financial Instruments Directive 2004/39/EC (MiFID 1), which in turn replaced the Investment Services Directive (ISD). MiFID is complemented by Regulation (EU) No. 600/2014 on markets in financial instruments (‘MiFIR’)[36] The initial date for implementation by the Member States was 3 January 2017, however, in February 2016 the European Commission delayed this until 3 January 2018 to allow for the building of IT systems to enable enforcement of the new package.[37] Some banks and institutions advocated for a further delay to the implementations of MiFID II, with smaller organisations not yet equipped for the additional demands.[38] However, MiFID II came into force on the revised date of 3 January 2018.
Some analysts believe the impact of MiFID II will lead to global investment research expenditures falling by as much as $1.5bn annually when the rules come into force.[39]
Within days of coming into effect, Intercontinental Exchange announced plans to transfer trading in 245 energy futures contracts from London to the US, putting transactions under the oversight of US, rather than European, regulators.[40]
By 3 March 2021, the European Commission will need to present a report to the European Parliament and Council on the functioning of the directive. This will cover a broad range of issues, including the impact of requirements regarding algorithmic trading and the development in prices for pre and post trade transparency data.[41] The European Securities and Markets Authority is to support the Commission with this exercise.[42]
↑ Under European law, a Directive has to be transposed into national law: a Regulation, on the other hand, is automatically binding throughout all member states.
The Undertakings for Collective Investment in Transferable Securities Directive (UCITS) 2009/65/EC is a consolidated EU Directive, that allows collective investment schemes to operate freely throughout the EU on the basis of a single authorisation from one member state. EU member states are entitled to have additional regulatory requirements for the benefit of investors.
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. It is composed of four "levels", each focusing on a specific stage of the implementation of legislation.
The Freedom to Provide Services or sometimes referred to as free movement of services along with the Freedom of Establishment form the core of the European Union's functioning. With the free movement of workers, citizens, goods and capitals, they constitute fundamental rights that give companies and citizens the right to provide services without restrictions in any member country of the EU regardless of nationality and jurisdiction.
The Capital Requirements Directives (CRD) for the financial services industry have introduced a supervisory framework in the European Union which reflects the Basel II and Basel III rules on capital measurement and capital standards.
The Revised Payment Services Directive is an EU Directive, administered by the European Commission to regulate payment services and payment service providers throughout the European Union (EU) and European Economic Area (EEA). The PSD directive's purpose was to increase pan-European competition and participation in the payments industry also from non-banks, and to provide for a level playing field by harmonizing consumer protection and the rights and obligations for payment providers and users. The key objectives of the PSD2 directive are creating a more integrated European payments market, making payments safer and more secure and protecting consumers.
A multilateral trading facility (MTF) is a European regulatory term for a self-regulated financial trading venue. These are alternatives to the traditional stock exchanges where a market is made in securities, typically using electronic systems. The concept was introduced within the Markets in Financial Instruments Directive (MiFID), a European Directive designed to harmonise retail investors protection and allow investment firms to provide services throughout the EU.
The Committee of European Banking Supervisors (CEBS) was an independent advisory group on banking supervision in the European Union (EU). Established by the European Commission in 2004 by Decision 2004/5/EC, and its charter revised on 23 January 2009, it was composed of senior representatives of bank supervisory authorities and central banks of the European Union. On 1 January 2011, this committee was succeeded by the European Banking Authority (EBA), which took over all existing and ongoing tasks and responsibilities of the Committee of European Banking Supervisors (CEBS). The European Banking Authority was established by Regulation (EC) No. 1093/2010 of the European Parliament and of the Council of 24 November 2010.
The Alternative Investment Fund Managers Directive 2011/61/EU is an EU law on the financial regulation of hedge funds, private equity, real estate funds, and other "Alternative Investment Fund Managers" (AIFMs) in the European Union. The Directive requires all covered AIFMs to obtain authorisation, and make various disclosures as a condition of operation. It followed the global financial crisis. Before, the alternative investment industry had not been regulated at EU level.
The European Securities and Markets Authority (ESMA) is a European Union financial regulatory agency and European Supervisory Authority, located in Paris.
The Cyprus Securities and Exchange Commission, better known as CySEC, is the financial regulatory agency of Cyprus. As an EU member state, CySEC's financial regulations and operations comply with the European MiFID financial harmonization law.
The Transparency Directive, Transparency Obligations Directive or Directive 2004/109/EC is an EU Directive issued in 2004, revising an earlier Directive 2001/34/EC. The Transparency Directive was amended in 2013 by the Transparency Directive Amending Directive.
Re Lehman Brothers International (Europe) [2012] UKSC 6 is an English trusts law and UK insolvency law case, concerning the certainty of subject matter to create a trust.
The Capital Requirements Regulation(EU) No. 575/2013 is an EU law that aims to decrease the likelihood that banks go insolvent. With the Credit Institutions Directive 2013 the Capital Requirements Regulation 2013 reflects Basel III rules on capital measurement and capital standards.
Kawase is an online brokerage registered in Cyprus that provides financial trading contracts for difference (CFD) on the currency markets, shares, ETFs, major indices and commodities such as precious metals; gold and crude oil. Kawase accommodates its financial services to both retail and institutional clients. The company is regulated by CySEC and is authorised by a number of regulatory authorities thus falls under the European Union’s Markets in Financial Instruments Directive (MiFID).
Research Exchange Ltd is a FinTech company servicing the global asset management industry operating under the trading name RSRCHXchange. Its platform, RSRCHX, is an online marketplace for unbundled financial research. RSRCHX provides asset management firms with a cloud-based repository of reports. Launched in September 2015, RSRCHX incorporates elasticsearch, compliance checks and Commission Sharing Agreement (CSA) and credit card payment administration. RSRCHXchange is one of a number of FinTech start-ups offering products which relate to MiFID II, the European Union financial reforms intended as a response to the financial crisis to improve the functioning of financial markets and enhance investor protection. RSRCHXchange's technology differs from other financial services vendors because its research catalogue is not dependent on RIXML, the industry-developed language for tagging documents. RSRCHXchange specialises in research unbundling, one of the most contentious topics of the regulation.
The Financial Instruments Reference Database System (FIRDS) is published by the European Securities and Markets Authority (ESMA) and lists meta-information to all financial instruments included in the scope of MiFID II. This reference data is necessary to find metadata on a given financial instrument, uniquely identified by a so-called International Securities Identification Number (ISIN).
A Request for Quote (RfQ) is a financial term for certain way to ask a bank for an offer of a given financial instrument from a bank, made available by so-called Approved Publication Arrangement (APA) by the stock markets itself or by Financial data vendors as required in Europe by MiFID II and in effect since January 2018. A RFQ contains at least the ISIN to uniquely identify the financial product, the type, the amount, a currency, and the volume.
With MiFID II directive being in force in January 2018, Approved Publication Arrangements (APA) data should increase transparency in the OTC markets by publishing quotes for pre-trade transparency, and trades for post-trade transparency. An APA is an organisation authorised to publish trade reports on behalf of investment firms according to Article (4)(1)(52) MiFID II.
Stock market equivalence is granted by the European Union to those countries whose stock markets are deemed to be 'equivalent' to those of the EU countries. On 3 January 2018, the EU implemented the "Markets in Financial Instruments Directive II" which required all European investment firms & traders to trade the shares of a company listed in the EU on a stock exchange within the EU or an equivalent third country exchange. In order to gain equivalence, the trading venues of the concerned country should have a high level of investor protection and sound mechanisms to deal with insider trading. The main purpose of this measure is to protect the interests of investors based in the EU. Analysts have called it a pioneer in financial regulation with the potential to restructure the global financial system. As of 1 July 2019, only three jurisdictions had been granted equivalence: the United States of America, Australia and Hong Kong. Switzerland too was granted equivalence, but only temporarily, and the EU announced in early May 2019 that it would not renew equivalence for Switzerland after 1 July 2019. This was part of the wider Swiss-EU trade dispute.
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