Markets in Financial Instruments Directive (MiFID)

One of the last major pieces of the Financial Services Action Plan still to be implemented is the Markets in Financial Instruments Directive. It is designed to reduce barriers to cross-border share trading, facilitate investment and thereby boost the EU economy. Financial institutions, however, are concerned that the changes required will entail heavy costs.

Background

The MiFID, a cornerstone of the Financial Services Action Plan, was proposed in November 2002 to update the existing Investment Services Directive (ISD) of 1993. It was designed to cope with, and to further enable, the increased level of cross-border investment transactions, which had shown an annual increase of 20-25% in the years from 1996. 

The 1993 ISD only applied to a specified number of financial instruments and investment services. It did not cover commodities derivatives. Consequently some member states had imposed licensing for a wider range of activities, causing uncertainty and expense for companies operating across borders.

MiFID will set a comprehensive regulatory regime, impose higher standards and include commodities derivatives. It therefore aims to produce greater European harmonisation of laws and encourage capital market integration in the EU.

MiFID was adopted in April 2004 and, once implemented, securities trading throughout the EU should become more efficient, quicker, cheaper and will afford greater protections for investors.

Issues

Single Passport

The idea of a single passport is very simple: that an investment firm, once authorised by the competent authority in its home member state, should then be able to operate through-out the EU under the continuing supervision of that home authority. 

Applicable rules

The overall aim of MiFID is to establish a comprehensive and harmonised regulatory regime covering transactions wherever they take place in the EU. It will also open up the shares market to greater competition. The directive widens the list of financial instruments which are subject to its regulation, seeking to bring as many types of instrument as possible under the same set of rules. Also, for the first time, the admission of any instruments to trading will be covered by a set of minimal requirements. 

The directive also reverses the 1993 "host state" rule, requiring compliance with rules of the member state in which business is done. Under MiFID, a company, whether offering services in another member state through a branch or cross-border, may follow the rules of the "home state" in which it is based. 

In addition, the directive sets minimum standards for the powers of national regulatory authorities and establishes procedures for cooperation amongst authorities in the investigation of breaches of the rules.

Investor protection

MiFID ensures a higher level of protection for investors through:

  • Licensing requirements for a wider range of services and activities to do with financial instruments trading;
  • best execution obligations on providing the best value for the client;
  • new rules for handling clients’ orders;
  • requirements for managing conflicts of interest, and;
  • obligations on transparency and the information to be provided to investors.


Implementing measures

MiFID was formulated using the Lamfalussy process which involves two basic levels of legislative process and was designed to cope with complex financial legislation. MiFID itself is a 'level 1' measure, adopted using the usual EU legislative process involving the Commission, Council and Parliament. It sets out a set of overarching general obligations on member states. 

The detailed implementing measures are formulated at 'level 2' and are contained in a set of commission documents arrived at through a process of extensive consultation with the European Securities Committee (finance ministers from the EU states) and advice given by the Committee of European Securities Regulators (CESR), which is an independent body of securities regulators. The Implementing Regulation and Implementing Direcive were formally adopted and published in the Official Journal on 2 September 2006. Level 1 requirements and level 2 measures will come into force on 1 November 2007.

Complexity, impact on the industry and deadlines

MiFID will entail massive changes to the way market players conduct business, both in the rules to which they comply and how they do so. Substantial adaptation of IT systems will be required by all players: investments firms, banks, regulated markets and clearing and settlement intermediaries.

The scale of the changes involved, both for member states and for industry, led the Commission, in June 2005, to decide to modify the original timetables. The deadline for transposition of the MiFID provisions by member states has been delayed until January 2007. Similarly, firms and markets have until November 2007 to ensure their structures and procedures comply. 

Internal Market Commissioner Charlie McCreevy on 10 October 2006 warned member states to implement MiFID on time to meet the November 2007 target date. He said: "The Commission will launch immediate infringement procedures against any member state which fails to transpose on time. There will be no exceptions." Some of the member states had indicated that they would not be able to transpose MiFID on time. 

However, a recent study by business software group HandySoft revealed that almost two-thirds (60%) of European financial institutions were expected not to meet the MiFID November 2007 deadline.

Positions

In the view of Internal Market Commissioner McCreevy, MiFID will be the catalyst for significant market changes. In a November 2005 speech, he said MiFID would "dramatically increase levels of competition among and between execution venues and investment firms. It will definitely increase cross-border competition and lower costs for issuers and investors of accessing capital markets."

MiFID, as well as Basel II, has been subject to procedural wrangling between the Parliament, Commission and Council. Parliament felt it was in danger of being sidestepped when the proposed European constitution, which would have enshrined a right for Parliament to have a say in the implementing legislation, foundered.  Parliament threatened to block the whole directive unless the issue was resolved. It was finally decided that Parliament should have a right to "call-back" any implementing measures with which it was unhappy until April 2008.

Industry has been concerned at the complexity of the requirement imposed by MiFID and has been promoting industry-wide compliance. In June 2005, four major associations, FIX Protocol Ltd, ISITC Europe, the Reference Data User Group and SIIA/FISD, joined together to form the MiFID Joint Working Group. This group commissioned a report measuring the state of readiness of London investment firms for the directive. The key finding of the report was that, at the end of 2005, firms were not by any measure ready and that there was still much work to be done.

The Federation of European Banks has made the point that because of the complexity of the directive, transitional measures may be appropriate. It has also urged the Commission to maintain legal certainty and to avoid excessive detail and prescription in implementing measures. 

Timeline

  • Implementing measures were formally adopted and published in the Official Journal on 2 September 2006.
  • On 10 October 2006 Internal Market Commissioner Charlie McCreevy sent out a warning to member states falling short on transposition and urged them to meet the November 2007 implementation target.
  • Transposition by member states by 31 January 2007.
  • On 14 February 2007, the Commission launched a website to provide answers to stakeholder questions on MiFID.
  • On 24 April 2007, Internal Market Commissioner McCreevy urged member states to implement the MiFID directive, which so far only Romania, the UK and Ireland had transposed.
  • Market participants need to prepare their systems and organisation in line with MiFID requirements by 1 November 2007, but some member states are likely to miss this deadline.

 

Further Reading

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