Market in Financial Instruments Directive

The Market in Financial Instruments Directive (MiFID) is a key piece of legislation for the regulation of investment services across the European Economic Area (EEA).

It aims to create a more competitive and integrated financial market in the EU, enhancing investor protection, transparency, and efficiency within the financial markets.

Key Aspects of MiFID:

Scope and Coverage: MiFID applies to a wide range of financial instruments, including shares, bonds, derivatives, and various other types of securities. It affects all firms providing investment services or activities, such as brokerage firms, investment banks, portfolio managers, and certain types of financial advisors.

Investor Protection: MiFID has stringent rules designed to protect investors, particularly retail investors. These include requirements for firms to assess the suitability and appropriateness of products for clients, clear communication of risks, and provisions for handling client funds.

Market Transparency and Efficiency: MiFID enhances market transparency by requiring firms to report trading activity, both pre- and post-trade. It also established the concept of “best execution,” obliging firms to take all sufficient steps to obtain the best possible result for their clients when executing orders.

Regulation of Trading Venues: MiFID established a regulatory framework for various types of trading venues, including regulated markets, multilateral trading facilities (MTFs), and organized trading facilities (OTFs). This has increased competition among venues and provided more options for market participants.

Passporting: One of the major benefits of MiFID is the “passporting” regime, which allows firms authorized in one EEA member state to provide services or establish branches in other EEA states without needing separate authorizations.

MiFID II and MiFIR:

MiFID was later updated and expanded by MiFID II (the second version) and the Markets in Financial Instruments Regulation (MiFIR), which came into effect in January 2018. These updates addressed several shortcomings of the original MiFID, especially in light of the financial crisis of 2008. MiFID II introduced stricter transparency requirements, expanded the scope to cover more asset classes, and increased oversight of trading activities.

MiFIR, complementing MiFID II, focuses more on transparency, reporting requirements, and the regulation of trading venues.