Markets in Financial Instruments Directive (MiFID)
Oct 22, 2023 By Triston Martin

In order to succeed in the Investment Services Directive, the MiFID, also referred to as the Markets in Financial Instruments Directive, was drafted in 2004 and published in 2007, after which it was finally put into effect. MiFID has subsequently been superseded by a further iteration of the law known as MiFID II.

The European Union (EU) had high hopes that the directive would strengthen consumer protection, increase competition among investment services, and provide more harmonized laws for all participating nations.

What is (MiFID)?

The MiFID, more frequently referred to as MiFID, is a piece of legislation developed mainly through the European Union to standardize the laws that apply to all investment services offered in the financial market of the European Union. The goal is to boost investor safety while also increasing competition for markets operating in the financial services industry.

Interpreting the Regulation on MiFID

MiFID's objective is to provide all EU members with a uniform, practical regulatory framework that safeguards investors. MiFID went into existence within a year of the 2008 recession, while MiFID II reflects improvements made in response to the crisis. In the earlier versions, the appropriate standard for interacting with non-European Union nations was left to the discretion of each member state. Due to the simplified regulatory scrutiny, enterprises outside the EU might have a competitive edge over those within the union.

This issue was resolved by MiFID II, which went into effect in January 2018 and standardized the requirements for all businesses with EU customers. MiFID focuses exclusively on equities, which was a restriction since it excludes the vast majority of market-available financial instruments, such as over-the-counter (OTC) derivatives.

OTC transactions are conducted between two parties outside an intermediary exchange acting as supervisors. As a consequence, there was far less regulatory monitoring and visibility for the parties involved in an OTC transaction. The implementation of MiFID II expanded the directive's scope to encompass a greater variety of financial instruments. As legislation instead of a directive, the Marketplace in Financial Instruments Directive combines MiFID and MiFID II to expand the norms of behavior beyond stocks to other forms of assets.

Distinctions of Clients According to MiFID

Categorizing customers into various distinct customer kinds is one of the essential parts of MiFID. There are three categories of customers to choose from: professional, retail, and qualifying counterparties. The objective of the categories is to ensure that the regulatory security provided to customers accurately reflects the various degrees of the danger posed by the various kinds of customers. When conducting business with a financial institution like a bank, customers should be afforded varying degrees of protection because types of consumers or investors will bring varying degrees of expertise to the table regarding their understanding of various aspects of finance. The level of protection given to eligible counterparties is the lowest, while the level given to retail customers is the greatest.

The client receives various levels of data appropriate for their comprehension of the particular dangers associated with a money transfer, as well as the comprehensive explanations and particulars of that transaction. These levels of information vary according to the customer's type of client.

European Union Harmonization of Regulations

MiFID seems to be just one component of the regulatory reforms sweeping the EU and affecting the conformity divisions of all financial institutions, such as insurers, collective fund providers, and banks, who operate there. Together with other legislative measures such as the Data Protection Directive legislation and the Markets in Financial Instruments Regulation (MiFIR), the EU realizes its goal of a competitive marketplace with defined rights and safeguards for EU residents.

As with every other regulatory system, many of the guidelines are modifications to existing legislation, such as the reporting requirements in which a contradiction occurs. Nonetheless, some best practices, such as the designation of a single witness to safeguard client interests from within the business, are now explicit criteria for enterprises seeking entry to the EU market.

Impact of the MiFID

Although MiFID successfully accomplished one of its primary objectives, i.e., boosting the asset class's openness, the restrictions it imposed have led to some unanticipated outcomes in the financial industry. Traditionally, financial firms could only obtain information through one or two distinct marketplaces that made such information publicly available. They can now (and sometimes even compelled) collect information from all retailers and vendors who have made their prices and data publicly available.

This results in an unanticipated increase in the amount of work that needs to be done. This is especially true for businesses that want to derive the most potential value from the newly available transparency. In order to find a solution to this problem, a growing number of people are turning to financial data providers. They assist financial institutions in overcoming the challenges posed by information segmentation and make it feasible for these institutions to access the most significant number of facts conceivable.

Requirements of MiFID

Numerous important parts of MiFID have been intended to help with the regulation and supervision industry, including the legislation about AML. These aspects include the necessity of classifying the customers into different groups. As a result of MiFID, businesses are forced to classify their customers into several groups to ascertain the appropriate level of security for the various accounts and assets that their customers hold.

Additionally, MiFID mandates that businesses maintain before and after trade visibility. In order to comply with the requirements of pre-trade openness, individuals that manage order-matching systems are obligated to make information on the five best affordable levels (on both the buy and sell-side) accessible to everyone. Those in charge of running quote-driven markets are also obligated to make the most competitive buy and sell orders viewable.

Post-trade integrity is a similar but significantly distinct idea to pre-trade accountability. Even if the trades in question did not occur within the context of an open market, companies are required by MiFID to reveal details considering the cost, duration, and volume of all transactions involving listed shares because post-trade clarity is a requirement of the regulation. There are several scenarios where a postponement of publication may be requested; nevertheless, the specifics of these scenarios vary from instance to instance and need to be addressed individually.

In addition, MiFID mandates that investment companies carry out "best execution" procedures whenever they engage in any transaction. This indicates that the company's primary objective is to secure the best possible price for its customer while minimizing the amount of money spent and time necessary to close a deal. The possibility of implementation and resolution are two additional criteria to consider in these situations, among the many that may be considered significant.