1st July 2014

MiFID

Markets in Financial Instruments Directive (MiFID)

The Markets in Financial Instruments Directive (MiFID) was created in 2004 to replace the Investment Services Directive, and it was implemented in 2007. A new law, known as MiFID II, has since replaced MiFID.

The EU hoped that the directive would help to increase competition amongst investment services while also boosting consumer protection and providing harmonious regulations for all participating states.

What is MiFID?

MiFID Requirements

There are several key aspects of MiFID that are meant to aid the regulation of the financial industry. One of these is the requirement of client categorization. Due to MiFID, firms are required to place their clients into categories in order to determine the level of protection that is needed with their types of accounts and investments.

MiFID also requires that firms abide by both pre-trade and post-trade transparency. Pre-trade transparency means that those who operate order-matching systems must make information regarding the five best pricing levels (on both buy and sell side) available to all. Similarly, those who run quote-driven markets must make the best bids and offers publicly available.

Post-trade transparency is a similar concept, but differs slightly. By requiring post-trade transparency, MiFID requires that firms release information regarding the price, time, and volume of all trades pertaining to listed shares, even if they are not executed in an open market scenario. There are certain circumstances where deferred publication may be granted, but that varies from case to case and must be dealt with on an individual level.

Additionally, MiFID requires that investment firms complete “best execution” when dealing with all transactions. This means not only that the firm strives to achieve the highest price for its client, but also that it tries to limit costs and the time taken to complete a transaction. Many factors may be deemed relevant in these scenarios; some additional considerations include the likelihood of execution and settlement.

The Effects of MiFID

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