The Markets In Financial Instruments Directive

[Jodee Bouman]

AmandaBellucco-Chatham is an editor, writer, and fact-checker with years of experience researching personal finance topics. Specialties include general financial planning, career development, lending, retirement, tax preparation, and credit.

For banks that provide asset management or investment services, MiFID II requires financial instruments to be traded only in multilateral and regulated trading platforms, or those that adhere to the transparency requirements of OTC trading. These rules are intended to protect investors and eliminate dark trading of securities.

MiFID II enhanced the transparency and reporting requirements of the older MiFID regulation. One key difference is the expansion of its scope: while MiFID applied largely to equities markets, MiFID II applies to all types of securities and derivatives.

After the United Kingdom left the European Union, the two economies had two substantially similar regulatory regimes, but they lost their ability to trade easily. British firms lost their license to provide financial services to EU clients and vice versa. It also created duplicate reporting requirements for the two areas.

MiFID 1 was a cornerstone of the European Commission's Financial Services Action Plan, whose measures changed how EU financial service markets operate. It is the most significant piece of legislation introduced in the Lamfalussy process designed to accelerate the adoption of legislation based on a four-level approach recommended by the Committee of Wise Men chaired by Baron Alexandre Lamfalussy. There are three other "Lamfalussy Directives": Directive 2003/71/EC, replaced with Regulation (EU) 2017/1129 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, the market abuse directive, and Directive 2004/109/EC on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market.

MiFID 1 retained the principles of the EU "passport" introduced by Directive 93/22/EEC but introduced the concept of "maximum harmonization", which places more emphasis on home state supervision. This is a change from the prior EU financial service legislation, which featured a "minimum harmonization and mutual recognition" concept. "Maximum harmonization" does not permit states to be "super equivalent" or to "gold-plate" EU requirements detrimental to a "level playing field". Another change was the abolition of the "concentration rule" in which member states could require investment firms to route client orders through regulated markets.[2]

MiFID 1, implemented through the standard co-decision procedure of the Council of the European Union and the European Parliament, set out a detailed framework for the legislation. Twenty articles of this directive specified technical implementation measures (Level 2). These measures were adopted by the European Commission based on technical advice from the Committee of European Securities Regulators and negotiations in the European Securities Committee, with oversight by the European Parliament. Implementation measures in the form of a Commission Directive and Commission Regulation were officially published on 2 September 2006.[3][4][5]

After its initial implementation, MiFID 1 was intended to be reviewed. After extensive discussion and debate, in April 2014, the European Parliament approved both MiFID 2, an updated version of MiFID 1, and its accompanying Regulation (EU) No 600/2014.[6] The directive and regulation include fewer exemptions and expand the scope of MiFID 1 to cover a larger group of companies and financial products.[7][8] Both MiFID 2 and Regulation (EU) No 600/2014 have been effective from 3 January 2018.

MiFID 1 was intended to replace Directive 93/22/EEC, which was adopted in 1993.[9] The law creates a single market for investment services and activities, which improves the competitiveness in EU markets.[9] While the original law did succeed in lowering prices and expanding choices for investors, weaknesses in ISD's structure became apparent during the financial crisis in 2008.[10]

MiFID 1 was also intended to make changes to share trading, and it set guidelines for the use of related financial instruments.[9] The law was introduced in order to reduce systemic risk and strengthen existing investor protections.[11]

During the approval process for MiFID 1, a proposal from the European Commission (EC) was read by the European Parliament (EP) in March 2004.[12][13] In April 2006, the Commission published consultation responses it received in 2005. In June 2006, the Commission published a new draft.[14] The EC and EP discussed any suggested amendments to approve Level One texts.[15] A second reading of the legislature, by both EP and EC, followed.[13]

MiFID 1 was introduced under the Lamfalussy procedure, which was designed to accelerate the adoption of legislation based on a four-level approach recommended by the Committee of Wise Men. The Committee was chaired by Baron Alexandre Lamfalussy. There are three other "Lamfalussy Directives": the Prospectus Directive, the Market Abuse Directive, and the Transparency Directive.[16]

MiFID 1, implemented through the standard co-decision procedure of the Council of the European Union and the European Parliament, sets out a detailed framework for the legislation.[3][4] It also amends Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC and repeals Council Directive 93/22/EEC, Investment Services Directive (ISD) originally adopted in 1993.[17]

Twenty articles of this directive specified technical implementation measures (Level 2). These measures were adopted by the European Commission, based on technical advice from the Committee of European Securities Regulators and negotiations in the European Securities Committee with oversight by the European Parliament. Implementation measures in the form of a Commission Directive and Commission Regulation were officially published on 2 September 2006.[3][4]

Level 3 texts are explanatory material issued by regulators and national bodies that set out regulators' approaches to interpretation of level I and II material.They usually do not carry the force of law, but regulators often require explanations for departures from their interpretation. Level 3 texts are sometimes referred to as "soft law". ESMA has issued a large number of level 3 texts on MiFiD II in the form of documents and questions and answers.[18]

To determine which firms are affected by MiFID 1 and which are not the directive distinguishes between "investment services and activities" ("core" services) and "ancillary services" ("non-core" services). More detail on the services in each category can be found in Annex 1 Sections A and B of MiFID 1.

If a firm performs investment services and activities, it is subject to MiFID 1 in respect to both of these and also of ancillary services (and it can use the MiFID 1 passport to provide them to member states other than its home state). However, if a firm only performs ancillary services, it is not subject to MiFID 1 but also can not benefit from the MiFID 1 passport.

MiFID 1 covers almost all tradable financial products except for certain foreign exchange trades. This includes commodity and other derivatives such as freight, climate and carbon derivatives, which were not covered by ISD.

Although MiFID 2 was intended to increase transparency for prices, the fragmentation of trading venues has had an unanticipated effect. Where once a financial institution was able to see information from just one or two exchanges, they now have the possibility (and in some cases the obligation) to collect information from a multitude of multilateral trading facilities, Systematic Internalisers and other exchanges from around the European Economic Area (EEA). This results in an additional amount of work to benefit from the transparency that MiFID 2 has introduced.

The number of additional pricing sources introduced by MiFID 2 means that financial institutions have had to seek additional data sources to ensure that they capture as many quotes/trades as possible. Numerous financial data vendors have worked with the MiFID 2 Joint Working Group and Regulators to make sure that they are able to help financial institutions to deal with the fragmentation and benefit from the increased transparency while helping them to fulfill their new reporting liabilities.

MiFID 2 and its accompanying implementing directive were transposed in full and on time, with minor exceptions. The European Commission has published a transposition table linking to lists of national provisions which transpose directives.[22]

Prior to Brexit, the UK FCA was proactive in pursuing enforcement actions under MiFID 2, especially concerning the accurate and timely reporting of transactions.[24] The FCA brought numerous cases involving serious infringements to MiFD 2 before British courts, which usually resulted in the imposition of fines on major financial institutions like UBS and Goldman Sachs. Such institutions were often found by the courts to have failed in reporting millions of transactions.

Post-Brexit, the UK is no longer bound by MiFD 2. However, to maintain market stability and ensure smooth cross-border financial services, the UK initially incorporated MiFID 2 into its domestic law under the European Union (Withdrawal) Act.[25] Thus, the FCA continues to enforce MiFID-like rules domestically.

In April 2010, CESR issued consultation papers on MiFID 2 review.[29] The consultation period was short and ended on 31 May 2010. There was one day of open hearings[30] in Paris on 17 May 2010. Public responses to the consultations are now available[29] although a number of institutions also submitted confidential responses.

On 8 December 2010, following a public hearing held in September 2010, the European Commission released a substantial public consultation relating to the review of MiFID 2, accompanied by a press release and frequently asked questions.[31] The public consultation period was scheduled to close on 2 February 2011. On 26 May 2011, the Commission was reported to be working to present its proposals before the end of 2011.[32]

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