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
EU official documents
- Eur-Lex:Directive on markets in financial instruments(Directive 2004/39)(21 April 2004) [FR] [FR] [DE]
- Commission:Investment services: entry into force of MiFID a boon for financial markets and investor protection(29 October 2007) [FR] [FR] [DE]
- Commission:Markets in Financial Instruments Directive (MiFID): Frequently Asked Questions(29 October 2007)
- Commission:Your questions on MiFID(21 August 2007)
- RAPID:Frequently Asked Questions on MiFID: Draft implementing "level 2" measures(6 Feb 2006)
- RAPID:Investment Services: final adoption of Directive is boost for investment firms and their clients(27 April 2004) [FR] [FR] [DE]
- Eur-Lex:Proposal for a directive extending the transposition and application deadlines for Markets in financial Instruments (MiFID)(COM(2005)253) (14 June 2005) [FR] [FR] [DE]
- RAPID:Directive on markets in financial instruments (“MiFID”): Commission extends transposition deadline and continues consultation on implementing measures [FR] [FR] [DE]
- RAPID:Proposal for Directive on investment services and regulated markets - frequently asked questions(19 Nov 2002) [FR] [FR] [DE]
- DG Internal Market:Investment Services and regulated markets
- DG Internal Market:Implementing measures to the Markets in Financial Instruments Directive (MiFID)
- RAPID:Speech by Charlie McCreevy:Towards a Better Regulated European Capital Market(16 Dec 2005)
- RAPID: Speech by Charlie McCreevy:Stock market consolidation and security markets regulation in Europe(30 Nov 2006)
- DG Internal Market:White Paper on Enhancing the Single Market Framework for Investment Funds(16 November 2006) [FR] [FR] [DE]
- Eur-Lex:Implementing Regulation for MiFID(2 September 2006) [FR] [FR] [DE]
- Eur-Lex:Implementing Directive for MiFID(2 September 2006) [FR] [FR] [DE]
- Commission:Website to answer stakeholder questions on MiFID(14 February 2007)
International Organisations
- International Monetary Fund (IMF):Euro Area Policies: Selected Issues(31 July 2007)
Governments
- UK Financial Services Authority (FSA):Markets in Financial Instruments Directive
- UK Financial Services Authority (FSA):Planning for MiFID(Nov 2005)
- UK Financial Services Authority (FSA):MiFID timetable
Business & Industry
- European Banking Federation (EBF):Response to MiFID Level 3: Use of Reference data standard codes in transaction reporting(15 January 2007)
- Federation of European Banks:Comments on the latest draft proposals for implementing MiFID(12 Oct 2005)
- Federation of European Banks:Statement on the 1st Mandate of MiFID Level 2 Consultation(31 Aug 2004)
- Association of Private Client Investment Managers and Stockbrokers (APCIMS):The Directive on Markets in Financial Instruments
- British Bankers Association:BBA Response to CESR Consultation Paper CP06-669 - The Passport Under MIFID(12 February 2007)
- The MiFID Joint Working Group:MiFID Readiness Survey
NGOs and Think-Tanks
- Centre for European Policy Studies (CEPS):MiFID Revolution or Delayed Execution(4 September 2007)
- Centre for European Policy Studies (CEPS):Financial Market Data and MiFID(30 March 2007)
- Centre for European Policy Studies (CEPS):MiFID: A regulatory doomsday?(10 January 2007)
- Centre for European Policy Studies (CEPS):The MiFID Revolution(15 November 2006)
Other
- HandySoft Global Corp.:Two thirds of EU institutions will not meet MiFID deadline(15 March 2007)
- McKinsey:Getting ready for Europe's new investor protection rules(July 2007)
Non-assigned links
- CESR:Technical Advice on Possible Implementing Measures of the Directive on Markets in Financial Instruments: 1st Set of Mandates where the deadline was extended and 2nd Set of Mandates(April 2005)
- CESR:Technical Advice on Possible Implementing Measures of the Directive on Markets in Financial Instruments 1st Set of Mandates(Jan 2005)
- CESR:Level guidelines and recommendations for the implementation of MiFID(February 2007)