What is MiFID?

The Markets in Financial Instruments Directive (MiFID) was designed to create a single market for financial instruments – such as derivatives and equities – across the 30 states of the European Economic Area. The hope is that MiFID will make cross-border sales simpler and cheaper, offer better protection for consumers and make markets more transparent and efficient.

Who created it?

Seven years ago the European Union said that it wanted to become the “most competitive and dynamic knowledge economy in the world” by 2010. As part of that aim, the European Commission started to make widespread legislative changes affecting financial markets. MiFID was of the new pieces of legislation created by the Commission. It became law in April 2004. It replaces and extends the 1995 Investment Services Directive.

When does it take effect?

Tomorrow. Each state was given responsibility for transposing the EU legislation into national law by January 31 this year, although only Britain, the Republic of Ireland and Romania complied. At least 23 of the 30 states are expected to be ready tomorrow, but Spain, Hungary, the Czech Republic and Poland are lagging behind. The EU said that it had started legal action against some states for being too slow to implement MiFID.

What are the main points of MiFID?

It will allow banks and new trading platforms to compete with established stock exchanges. This will break the monopoly that bourses in France, Italy and Spain have enjoyed in domestic share-dealing. Instead, they will compete for business across Europe with new entities, such as multilateral trading facilities (MTFs), which are off-exchange order-matching systems, and systematic internalisers (SIs), the directive’s name for any investment firm that trades against its own capital.

National regulators will give local firms “passports” that will allow them to trade in any other country. Andrew Miller, the managing director of Arcontech, the MiFID software firm, says: “Basically, anyone with approval from the local regulator can open up for trade.”

In return, MiFID puts greater responsibility on trading bodies. For example, any company offering an order-matching service – a system that matches appropriate “sell” and “buy” requests from clients – has to make public the best prices available. MiFID requires all trading bodies to publish the price, volume and time of all trades in listed shares, even those not done on a stock exchange. All firms have to ensure that they achieved “best execution” for their clients.

Previously, off-exchange trades, which comprise between 40 per cent and 50 per cent of all trading, have had far less scrutiny than trading on the exchanges. Being forced to publish their prices will encourage the trading facilities to offer better bid and offer spreads, which is a benefit for buyers.

These new responsibilities mean that firms must step up their compliance and record-keeping procedures, as well as meet new conduct-of-business rules that require them to classify their clients by groups and ensure that they are marketed to and sold to in the most appropriate way.

Who is affected?

MiFID applies to almost all asset classes, including equities, equity derivatives, money markets and some commodities, but not foreign exchange. Investment and retail banks, fund managers, stockbrokers, stock exchanges and other trading houses will be affected because investment services and activities are a core part of their business. MiFID may also have a knock-on effect on insurance companies and financial advisers. An estimated 2,400 to 4,000 companies are hit by the directive, according to the Financial Services Authority.

Countdown

102 pages in the MiFID directive and implementing measures

1.9m Google references to MiFID

£1bn estimated cost of compliance in UK

€6bn estimated cost of compliance in the European Union

4,200 estimated number of companies affected in UK

30 countries implementing MiFID 2004/ 39/EC official title for MiFID

3 years between creation and implementation of MiFID

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