MiFID: The Markets in Financial Instruments Directive

2 mins

The Markets in Financial Instruments Directive (MiFID) was enacted in 2007 to replace the Investment Services Directive. MiFID has now been replaced by MiFID II, a new law.

The EU envisaged that the directive would assist to improve investment service competition while also improving consumer protection and providing uniform standards for all participating countries.


What is MiFID?

To integrate legislation for all investment services in the European Union's financial industry, the European Union adopted the Markets in Financial Instruments Directive. The purpose is to increase market competition and protect investors in the investment services business.


The Requirements of MiFID

AML regulations are one of the essential parts of MiFID that are supposed to aid in the regulation of the financial industry. The requirement of client classification is one of them. Firms are required under MiFID to categorise their clients in order to establish the amount of protection required for their types of accounts and investments.

Firms must also adhere to pre-trade and post-trade transparency under the directive. Pre-trade transparency requires order-matching system operators to make information on the five best pricing levels (on both the buy and sell sides) publicly available. Those in charge of quote-driven marketplaces must also make the best bids and offers public.

The concept of post-trade transparency is similar, but it differs slightly. MiFID requires corporations to reveal information about the price, time, and volume of all trades involving listed shares, even if they are not completed in an open market environment, by demanding post-trade transparency. Deferred publication may be permitted in certain circumstances, although this varies from case to case and must be handled on an individual basis.

Furthermore, MiFID mandates that investment firms complete "best execution" for all transactions. This means that the firm not only strives to obtain the best possible price for its client but also tries to keep costs and transaction time to a minimum. In these cases, several elements may be relevant; some additional considerations include the likelihood of execution and settlement.


The Effects of MiFID

Although MiFID succeeded in achieving one of its main objectives—increasing investment market transparency—its restrictions have resulted in some unanticipated outcomes in the financial sector. Previously, financial firms could only get information from one or two public exchanges. They can now acquire information from all outlets that have openly revealed their prices and data (and are sometimes obligated to do so). This adds a significant amount of unanticipated labour, especially if a company wants to maximise the benefits of the additional transparency. Financial data vendors have grown in popularity as a result of this problem. They assist financial organisations in dealing with data fragmentation and allowing them access to as many details as feasible.


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