Markets in Financial Instruments Directive (MiFID)
MiFID comes under article 51(3) which was made by the European union to standardized regulations in the European union’s (EU) financial market for all investment services. It increases transparency across the European Union financial market. The directives were drafted in 2004 and have been in force in the European Union since 2007. MiFID seeks to improve investor security and equal opportunity by implementing a collection of universal regulations and standards for financial institutions.
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What are the Markets in Financial Instruments Directive (MiFID)?
MiFID was replaced by MiFID II to accommodate additional regulations in 2018. The primary focus was on stocks but changes have been brought about in MIFID II. It also set out standards of conduct that have to be followed by financial firms. It also implemented new standards such as the pre and post-trade transparency requirements. MIFID is applicable to financial instruments in transactions like money market instruments, transferable securities, derivative instruments for the transfer of credit risk and options, swaps, futures, or any other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market and/or MTF.
How Does It Work?
One of the most important requirements is Client categorization. Firms are required to place their clients into categories based on the level of protection their account and investments need. Pre-trade transparency signifies that those firms which operate under the order marching systems must make information regarding the five best pricing levels available to all and those who run quote driven market must make the best bids and offers publicly available.
MiFID requires firms to release information regarding the price, time, and volume of all trades pertaining to listed shares even if they are not traded n the open market. One of the important rules all firm must follow is that firms must complete the best execution while dealing with all transactions
Organizations Covered by MiFID:
MiFID II only applies to those investment firms who have a physical presence in Europe and have been operating under the MIFID permission and are regulated by a European regulator. However, non-European clients who compete for European client assets face tough competition as they expect the level of transparency that they are receiving from investment firms in Europe. To determine which firms are affected by MIFID and which are not, MIFID differentiates between investment core services and non-core services. Core services include portfolio management services, dealing with an own account, investment advice, execution of the orders on behalf of the clients, and receipt and transmission of orders related to financial instruments. Non-core services include underwriting services, investment research, financial analysis, and safeguarding and administration of financial instruments.
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Key aspects of MiFID:
Market structure: More trading has been moved to regulated venues which are supported by the creation of a new trading category which is OTFs for derivatives and bonds. Also, a trading obligation has been imposed on regulated venues for shares. Implementation of the European unions G20 commitments on derivatives.
Investor Protection: Investor protection has been enhanced by banning the receipts of inducements, safeguarding independent advice, or introducing new product governance rules.
Transparency: Greater transparency is achieved by a pre-and post-trade transparency regime for non-equity. Strengthening and broadening the already present equity trade transparency regime.
Reporting: Strengthening pan-European regulatory supervision and cooperation between national competent authorities (NCAs).
Although MiFID did achieve one of its major goals which was to increase the transparency in the market the regulations have also spurred some unexpected results in the financial market.
Author -Sanjana Rau
About the author- Started my journey of self even when the odds were against me, keen observation, a cool temper, and sports worked the best for me.