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The Markets in Financial Instruments Directive 2004/39/EC or MiFID is a European law that provides harmonised regulation for investment services across the 30 member states of the European Economic Area.
The main objectives of the Directive is to increase competition and consumer protection in investment services. As of November, 1st 2007, it replaced the Investment Services Directive. 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. So what does MiFID mean to you?
MiFID Regulation Requires:
Authorisation, regulation & passporting
Firms covered by MiFID will be authorised and regulated in their "home state" (broadly, the country in which they have their registered office). Once a firm has been authorised, it will be able to use the MiFID passport to provide services to customers in other EU member states. These services will be regulated by the member state in their "home state" (whereas currently under ISD, a service is regulated by the member state in which the service takes place).
Client categorisation
MiFID requires firms to categorise clients as "eligible counterparties", professional clients or retail clients (these have increasing levels of protection). Clear procedures must be in place to categorise clients and assess their suitability for each type of investment product. That said, the appropriateness of any investment advice or suggested financial transaction must still be verified before being given.
Client order handling
MiFID has requirements relating to the information that needs to be captured when accepting client orders, ensuring that a firm is acting in a client's best interests and as to how orders from different clients may be aggregated.
Pre-trade transparency
MiFID will require that operators of continuous order-matching systems must make aggregated order information on "liquid shares" available at the five best price levels on the buy and sell side; for quote-driven markets, the best bids and offers of market makers must be made available. (Note consideration is being given to extending these requirements to other financial instruments. Under Article 65(1) of Directive 2004/39/EC, the European Commission is due to submit a report to the European Parliament and to the Council on extending pre- and post-trade transparency requirements to transactions in financial instruments other than shares by October 2007.)
Post-trade transparency
MiFID will require firms to publish the price, volume and time of all trades in listed shares, even if executed outside of a regulated market, unless certain requirements are met to allow for deferred publication. (Note see comment above regarding extension of these requirements to other financial instruments).
Best execution
MiFID will require that firms take all reasonable steps to obtain the best possible result in the execution of an order for a client. The best possible result is not limited to execution price but also includes cost, speed, likelihood of execution and likelihood of settlement and any other factors deemed relevant.
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