What is MiFID?

The Markets in Financial Instruments Directive (MiFID) will introduce a single market and regulatory regime for investment services across the 30 member states of the European Economic Area (the 27 Member States of the European Union plus Iceland, Norway and Liechtenstein). There are 3 objectives to be met by the Directive. First, to complete the process of creating a single EU market for investment services. Second, to respond to changes and innovations which have occurred in securities markets. Third, to protect investors by making markets deeper, more competitive and more robust against fraud and abuse. [1]. It will replace the Investment Services Directive (Directive 93/22/EEC).

MiFID is the cornerstone of the European Commission's Financial Services Action Plan whose 42 measures will significantly change how EU financial service markets operate. MiFID is the most significant piece of legislation introduced under the 'Lamfalussy' procedure designed to accelerate the adopting of legislation based on a four-level approach recommended by the Committee of Wise Men chaired by Baron Alexandre Lamfalussy. As of June, 2006 there are three other 'Lamfalussy Directives' - the Prospectus Directive, the Market Abuse Directive and the Transparency Directive.

MiFID retains the principles of the EU 'passport' introduced by the Investment Services Directive (ISD) but introduces the concept of 'maximum harmonization' which places more emphasis on home state supervision. This is a change from the prior EU financial service legislation which featured a 'minimum harmonization and mutual recognition' concept. Maximum harmonisation' does not permit states to be 'super equivalent' or to 'gold-plate' EU requirements detrimental to a 'level playing field'. Another change is the abolition of the 'concentration rule' in which member states could require investment firms to route client orders through regulated exchanges. (Note: this option was not taken up by all EU states).

The MiFID Level 1 Directive Directive 2004/39/EC, implemented through the standard co-decision procedure of the Council of the European Union, and the European Parliament, sets out a detailed framework for the legislation. Twenty articles of this directive specified technical implementation measures (Level 2). These measures were adopted by the European Commission, based on technical advice from the Committee of European Securities Regulators and negotiations in the European Securities Committee with oversight by the European Parliament. Implementation measures in the form of a Commission Directive and Commission Regulation, were officially published on 2 September 2006 (see [2] and [3]). (Note: Under European law, a Directive has to be transposed into national law: a Regulation, on the other hand, is automatically binding throughout all member states.)

In order to determine which firms are affected by MiFID and which are not, MiFID distinguishes between "investment services and activities" ("core" services) and "ancillary services" ("non-core" services). More detail on the services in each category can be found in Annex 1 Sections A and B of the MiFID Level 1 Directive.

If a firm performs investment services and activities, it is subject to MiFID in respect both of these and also of ancillary services (and it can use the MiFID passport to provide them to member states other than its home state). However if a firm only performs ancillary services, it is not subject to MiFID (but nor can it benefit from the MiFID passport).

MiFID covers almost all tradable financial products with the exception of foreign exchange trades. This includes commodity and freight derivatives which are not covered by ISD.

That part of a firm's business that is not covered by the above is not subject to MiFID.

Under MiFID, Celent estimates that the three largest EU jurisdictions (France, Germany, and the UK) will surface over 100 million additional trades annually. Spending will increase as well, but at a slower rate: from €38 million yearly to close to €50 million, according to figures published by Celent 23 January 2007.

Useful Reading: