The MiFID is the Markets in Financial Instruments Directive and it is a law enacted by the European Union that was intended to help regulate investment services among those states that are members of the European Economic Area. This includes all of the 28 member states of the European Union, in addition to Liechtenstein, Norway and Iceland.
The primary goal of this directive is to protect consumers and increase competition within the investment services sector. While the MiFID is not itself a regulator, no EEA member state regulator can license an investment firm that is not in compliance with its rules.
The MiFID contains a concept of an “EU passport” that allows a compliant subject entity to do business in other EEA member states. This idea was introduced by its predecessor, the Investment Services Directive or ISD, but it also emphasizes supervision by the state an entity is based in.
The MiFID was adopted in 2004 and became effective on November 1st of 2007. It replaced the Investment Services Directive, which had been in place in 1993 and created a single European market for investment-related services and activities.
The MiFID has two basic levels. Level 1 details the framework of the entity, while Level 2 describes the technical elements of the law that are constructed around Level 1.
The law was intended to increase competition within the investment services sector and reduced pricing for such services were in fact observed, along with an expansion of choices for investors to take advantage of.
The MiFID was primarily intended to cover investment services and activities, which are considered “core” services, but it also has an impact on ancillary services that are considered “non-core” services.
Virtually all financial products that can be traded are covered by the MiFID, although an exception is made for certain forex transactions. This expands upon the ISD’s coverage by including commodity trades, as well as those in freight, climate and carbon derivatives. Furthermore, if a company does business in areas unrelated to those covered above, then such activities are not subject to the MiFID.
With respect to foreign exchange, the current MiFID rules exempt spot forex transactions, but they do cover the rolls performed on spot forex contracts, which are considered a form of foreign exchange derivative. Under the new MiFID II package due to be implemented in early 2018, brokers who offer forex, CFDs, binary options and traditional currency options in the Over the Counter or OTC market will also be subject to certain regulations.
The full text of the MiFID can be found at this link:
The MiFID also has several key requirements that together form the basis of what subject entities have to conform to. These include the following areas:
- Firms that provide investment services are authorized and regulated by the country where their registered office is situated. Such authorization then permits them to use the MiFID passport to do business in other EEA member states.
- Investment clients need to be categorized as eligible counterparties, professional clients or retail clients that have different degrees of protection under the MiFID so that appropriate advice or transactions can be suggested.
- Information about client orders must be captured to make sure the clients’ best interest is being taken care of.
- Transparency is required regarding transaction pricing, both before and after a trade is entered into.
- It established a process to make sure clients get the best possible result when executing an order.
- It attempted to promote orderly market trading behavior and more structured markets.
MiFID in the News
Some links to recent news and informational articles that prominently mention the MiFID and/or MiFID II follow: