The EU Markets in Financial Instruments Directive (MiFID) came into force on 1 November 2007. The United Kingdom, Ireland and Romania were the only Member States to transpose the Directive on time, by 31 January 2007. The following Member States missed the 1 November deadline: Czech Republic, Estonia, Finland, Greece, Hungary, Latvia, Lithuania, Poland, Portugal, Slovenia and Spain.
In a major development under MiFID, EU Member States can no longer require investment firms to route orders only to stock exchanges. This exposes exchanges to competition from the following:
- Multilateral trading facilities, i.e., non-exchange trading platforms (witness the birth of Chi-X and Project Turquoise)
- Systematic internalisers, i.e., banks or investment firms that systematically execute client orders internally on their own account (rather than via exchanges)
Similar pre- and post-trade transparency requirements will apply across the playing field. This should help transform the landscape for the trading of securities, give investors access to a greater number of trading venues and promote greater competition and efficiency.
MiFID also updates the “single passport” for investment firms, first introduced by the Investment Services Directive (ISD) in 1995.
The list of passportable services and investments has been extended to include investment advice and nonfinancial derivatives such as commodity derivatives, respectively. Entities covered by MiFID will include investment banks, portfolio managers, stockbrokers, corporate finance firms, many futures and options firms, and some commodities firms. Venture capital firms that operate funds and/or provide services exclusively intra-group will likely not be covered.
Using the single passport, investment firms incorporated and regulated in an EU Member State will be able to establish branches and offer crossborder services in other Member States without having to satisfy local registration requirements in a wider range of cases than under the ISD. MiFID clarifies some of the jurisdictional uncertainties under ISD by delineating the allocation of responsibility between home State and host State.
To ensure a smooth transition from ISD to MiFID, existing ISD passports were recognised as MiFID passports from 1 November 2007. However, MiFID does not provide for a transitional regime in the event of late transposition by either host or home state, or both. The Committee of European Securities Regulators has recently issued guidance in this regard, suggesting that certain MiFID rights might have “direct effect” so as to prevail over any conflicting national law. The Committee has also cited the obligation of Member States and their national authorities to give effect to rights envisaged by a non-transposed directive once the transposition deadline has expired (indirect effect) as best they can.
Under MiFID, investor protection rules are strengthened and harmonised at a high level so that investors can feel confident using the services of investment firms, regardless of where in the European Union they originate. The main areas are as follows:
- Conduct of business requirements for firms, e.g., client classification (eligible counterparty, professional and retail), their obligations towards each category of client, their obligation to assess whether the products and services they provide are suitable or appropriate for their client, and to secure best execution for their clients (i.e., the best possible result with the emphasis on best price for retail investors)
- Organisational requirements for firms and markets, e.g., compliance, risk, internal audit, management of conflicts of interest and limitations on outsourcing, especially outsourcing to non-EU countries
- Transaction reporting
- Transparency requirements for the trading of shares