Markets in Financial Instruments Directive (MiFID)

Glossary

MiFID

The Markets in Financial Instruments Directive, commonly known as MiFID, is the European regulatory framework governing investment services and the trading of financial instruments. It applies to organisations such as investment firms, banks, brokers, asset managers and trading venues. Its main aims are to protect investors, improve market transparency, promote competition and create more consistent rules across European financial markets. MiFID covers financial instruments including shares, bonds, investment funds, derivatives, money-market instruments and emission allowances. It affects how firms categorise clients, assess investments, execute orders, disclose costs, manage conflicts of interest and report transactions.

MiFID I:

MiFID I was the original directive, introduced in 2007.

It created a more integrated European market for investment services and allowed authorised firms to operate across the European Economic Area through regulatory passporting. It also introduced important concepts such as:

- Client categorisation
- Suitability and appropriateness assessments
- Best execution
- Conduct-of-business standards
- Multilateral trading facilities

However, changes in market structure, the growth of electronic trading and weaknesses exposed by the global financial crisis led to a major revision.

MiFID II:

MiFID II replaced MiFID I and has applied since January 2018.

It significantly expanded the original rules. MiFID II places greater obligations on firms to act in clients’ best interests and strengthens requirements relating to:

- Product governance and target markets
- Disclosure of investment costs and charges
- Suitability and appropriateness assessments
- Best execution
- Conflicts of interest and inducements
- Recording communications
- Algorithmic and high-frequency trading
- Governance, compliance and record-keeping

MiFID II also introduced a new type of trading venue, the organised trading facility, and extended regulation across more products and market activities.

MiFIR:

MiFIR, the Markets in Financial Instruments Regulation, operates alongside MiFID II.

The distinction is important. MiFID II is a directive that must be implemented through national laws and regulations, while MiFIR is directly applicable across EU member states.

MiFIR focuses mainly on market transparency, trading and reporting. It includes rules on:

- Pre-trade and post-trade transparency
- Transaction reporting
- Trading obligations for certain shares and derivatives
- Systematic internalisers
- Access to trading venues
- Regulatory product intervention

Together, MiFID II and MiFIR form the wider MiFID II framework.

MiFID client types:

MiFID divides clients into three main categories.

Retail clients receive the highest level of regulatory protection and the most detailed information and disclosures.

Professional clients are considered to have greater knowledge and experience. They receive fewer protections because they are assumed to be better able to understand investment risks.

Eligible counterparties are generally sophisticated financial institutions dealing with firms in areas such as order execution or dealing on own account. They receive the lowest level of conduct-of-business protection.

MiFID trading types:

MiFID also distinguishes between different trading arrangements.

A regulated market is a formally authorised exchange.

A multilateral trading facility, or MTF, brings together multiple buyers and sellers under non-discretionary rules.

An organised trading facility, or OTF, is mainly used for bonds and derivatives and allows the operator some discretion over how trades are arranged.

A systematic internaliser, or SI, is an investment firm that regularly executes client orders against its own capital outside a formal trading venue.

UK MiFID:

Following Brexit, the MiFID framework was incorporated into UK law.

UK MiFID retains many of the same principles, including investor protection, best execution, transparency and transaction reporting. However, the UK and EU regimes are now separate and may continue to diverge as each jurisdiction reforms its rules.