Markets in Financial Instruments Directive (MiFID)

What Is the Markets in Financial Instruments Directive (MiFID)?

The Markets in Financial Instruments Directive (MiFID) is an European regulation that increases the transparency across the European Union's financial markets and normalizes the regulatory disclosures required for firms operating in the European Union.

MiFID executed new measures, for example, pre-and post-trade transparency requirements, and set out the standards of conduct to be trailed by financial firms. MiFID has a defined scope that principally centers around stocks. The directive was drafted in 2004 and has been in force across the European Union (EU) starting around 2007. MiFID was supplanted by MiFID II in 2018.

Figuring out the Markets in Financial Instruments Directive (MiFID)

The stated aim of MiFID is for all EU members to share a common, robust regulatory system that safeguards investors. MiFID happened a year before the 2008 financial crisis, however changes were made considering the crisis that came to fruition in MiFID II. One issue in the original drafts was that the regulatory approach in dealing with countries outside of the European Union was surrendered to every member state. This implied that a few firms outside of the EU could enjoy a competitive upper hand over firms inside the union as a result of the more straightforward regulatory oversight.

This issue was tended to through MiFID II, which was executed in January 2018 and harmonized the rules for all firms with EU clients. MiFID centers principally around stocks, which was viewed as a limitation, since it did exclude the immense amount of financial products accessible in the market, like over the counter (OTC) derivatives.

OTC transactions are finished between two parties with practically no exchange being in the middle to act as a supervisor. Accordingly, there was less regulatory oversight and significantly less transparency for the parties participating in an OTC trade. Executing MiFID II brought a lot more financial products under its domain. The Markets in Financial Instruments Regulation (MiFIR) works related to MiFID and MiFID II as a regulation as opposed to a directive to broaden the codes of conduct past stocks to different types of assets.

Client Classifications under the Markets in Financial Instruments Directive (MiFID)

One of the key parts of MiFID is the classification of clients into specific client types. There are three types of client types: professional clients, retail clients, and eligible counterparties. The goal for the classifications is that the regulatory protection for the clients ought to mirror the various levels of risks for every client type. The thought is that various types of clients, or investors, will have various levels of financial information, thus ought to be given various levels of protection while dealing with a financial body, like a bank. Eligible counterparties are given the least protection and retail clients are given the highest.

Contingent upon the client type, the client is furnished with various levels of data, which are fundamental for how they might interpret the specific risks of a transaction as well as the overall clarifications and subtleties of that transaction.

European Union Regulatory Harmonization

MiFID is just one part of the regulatory changes clearing the EU and impacting the compliance departments of the multitude of financial firms, e.g., insurers, mutual fund suppliers, and banks operating there. Taken along with other regulatory drives, similar to the General Data Protection Regulation (GDPR) and MiFIR, the EU is completely finishing its vision of a transparent market with clear rights and protections for EU residents.

Likewise with any regulatory system, a large number of the rules are changes to existing regulations, for example, the requirements for disclosure where a conflict of interest exists. In any case, several best practices, similar to the arrangement of a single officer to shield client interests from inside the firm, are currently explicit requirements for firms that need to access the EU market.

Features

• MiFID is part of the regulatory changes clearing the EU and impacting the compliance departments of all financial firms that work there.
• MiFID has been in force across the European Union beginning around 2007.
• MiFID was supplanted by a refreshed regulatory directive, MiFID II, in 2018.
• Stocks are the primary focal point of MiFID yet the product scope has been expanded under MiFID II.
• The goal of the Markets in Financial Instruments Directive (MiFID) is to increase transparency across EU financial markets and to normalize regulatory disclosures for firms.