Introduction to MiFID

Markets in Financial Instruments Directive (MiFID) is an EU directive that will replace the existing Investment Services Directive (ISD), that is, Directive 93/22/EEC. It aims to create an integrated structure for a pan-European market for investment products.

In particular it aims to make cross-border trading in securities in Europe easier for financial institutions and investors by improving the passport rights created under the ISD. It also aims to extend the passport rights to new products and services (for example, commodity derivatives, credit derivatives, and financial contracts for difference).

In other words, under MiFID, market participants will be able to access the market in any EU country on the same terms and conditions as they transact business in their home country.

The directive also seeks to promote competition between trading venues by recognizing new types of trading venue, notably the multilateral trading facility (MTF) and by creating a common best execution regime.

MiFID comprises two levels of European legislation:

In Level 1, the Directive was adopted in April 2004.

In Level 2, the main Directive was supplemented by ‘technical implementing measures’ developed on the basis of advice provided by the Committee of European Securities Regulators (CESR) in 2005. Level 2 measures were officially published on 2 September 2006.

Applicants to MiFID

MiFID affects market participants providing core and non-core services.

Investment Services (Core)

The following are classified as investment services:

• Receiving and transmitting orders in one or more types of financial instrument
• Executing client orders
• Dealing on own account
• Providing investment advice
• Underwriting and/or placing financial instruments
• Operating multilateral trading facilities (MTFs)
• Portfolio management

Ancillary Services (Non-Core)

The following are classified as ancillary services:

• Safekeeping and administration of financial instruments (including custody and similar services)
• Extending credit to an investor in order to allow it to trade in a financial instrument where the firm offering credit is involved in the transaction
• Underwriting services
• Investment research and analysis
• Foreign exchange services in connection with the provision of investment services
• Corporate finance

Scope of MiFID

MiFID covers a wider range of securities than ISD. The full list of instruments covered by MiFID is as follows:

• Transferable securities (stocks, bonds, etc)
• Money market instruments (T-bills, CDs, etc)
• Units in collective investment undertakings
• Derivatives futures/forwards, options, swaps, and other derivatives)
• Credit derivatives (CDS, TRS, etc)
• Commodity derivatives (Both OTC and exchange-traded)
• Contracts for difference

In the next post, we will discuss the key features of MiFID.