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Markets in Financial Instruments Directive 2014
2014/65/EU
commonly known as MiFID 2 (Markets in financial instruments directive 2), is a legal act of the
European Union The European Union (EU) is a supranational political and economic union of member states that are located primarily in Europe. The union has a total area of and an estimated total population of about 447million. The EU has often been ...
. Together with Regulation (EU) No 600/2014 it provides a legal framework for securities markets, investment intermediaries, and trading venues. The directive provides harmonised regulation for investment services of the member states of the European Economic Area — the
EU member states The European Union (EU) is a supranational political and economic union of member states that are located primarily in Europe. The union has a total area of and an estimated total population of about 447million. The EU has often been d ...
plus
Iceland Iceland ( is, Ísland; ) is a Nordic island country in the North Atlantic Ocean and in the Arctic Ocean. Iceland is the most sparsely populated country in Europe. Iceland's capital and largest city is Reykjavík, which (along with its s ...
,
Norway Norway, officially the Kingdom of Norway, is a Nordic country in Northern Europe, the mainland territory of which comprises the western and northernmost portion of the Scandinavian Peninsula. The remote Arctic island of Jan Mayen and th ...
, and
Liechtenstein Liechtenstein (), officially the Principality of Liechtenstein (german: link=no, Fürstentum Liechtenstein), is a German-speaking microstate located in the Alps between Austria and Switzerland. Liechtenstein is a semi-constitutional monarchy ...
. Its main objectives are to increase competition and
investor protection An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Typ ...
, and level the playing field for market participants in investment services. It repeals Directive 2004/39/EC (MiFID 1). MiFID 1 was a cornerstone of the
European Commission The European Commission (EC) is the executive of the European Union (EU). It operates as a cabinet government, with 27 members of the Commission (informally known as "Commissioners") headed by a President. It includes an administrative body ...
's
Financial Services Action Plan The Financial Services Action Plan (FSAP) is a key component of the European Union's attempt to create a single market for financial services. Created in 1999 and to last for a period of six years, it contained 42 articles related to the harmoni ...
, whose measures changed how EU financial service markets operate. It is the most significant piece of legislation introduced in the
Lamfalussy process The Lamfalussy process is an approach to the development of financial service industry regulations used by the European Union. Originally developed in March 2001, the process is named after the chair of the EU advisory committee that created it, ...
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 Alexandre, Baron Lamfalussy (; 26 April 1929 – 9 May 2015) was a Hungarian-born Belgian economist who served as President of the European Monetary Institute (EMI) from 1994 to 1997, which was the forerunner to the European Central Bank (ECB). ...
. 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. MiFID 1, implemented through the standard co-decision procedure of the
Council of the European Union The Council of the European Union, often referred to in the treaties and other official documents simply as the Council, and informally known as the Council of Ministers, is the third of the seven Institutions of the European Union (EU) as ...
and the
European Parliament The European Parliament (EP) is one of the legislative bodies of the European Union and one of its seven institutions. Together with the Council of the European Union (known as the Council and informally as the Council of Ministers), it adopts ...
, 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 The Committee of European Securities Regulators (CESR) was an independent committee of European Securities regulators in the Lamfalussy process established by the European Commission on June 6, 2001. The role of this committee was to * Improve t ...
and negotiations in the
European Securities Committee The European Securities Committee (ESC) advises the European Commission in the field of securities. The ESC held its first meeting in September 2001. It is run by the European Commission and usually meets each month. It assists the Commission in a ...
, 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. After its initial implementation, MiFID 1 was intended to be reviewed. After extensive discussion and debate, in April 2014, the
European Parliament The European Parliament (EP) is one of the legislative bodies of the European Union and one of its seven institutions. Together with the Council of the European Union (known as the Council and informally as the Council of Ministers), it adopts ...
approved both MiFID 2, an updated version of MiFID 1, and its accompanying Regulation (EU) No 600/2014. The directive and regulation include fewer exemptions and expand the scope of MiFID 1 to cover a larger group of companies and financial products. Both MiFID 2 and Regulation (EU) No 600/2014 have been effective from 3 January 2018.


Background and history

MiFID 1 was intended to replace Directive 93/22/EEC, which was adopted in 1993. The law creates a single market for investment services and activities, which improves the competitiveness in EU markets. 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. MiFID 1 was also intended to make changes to share trading, and it set guidelines for the use of related financial instruments. The law was introduced in order to reduce
systemic risk In finance, systemic risk is the risk of collapse of an entire financial system or entire market, as opposed to the risk associated with any one individual entity, group or component of a system, that can be contained therein without harming the ...
and strengthen existing investor protections. During the approval process for MiFID 1, a proposal from the
European Commission The European Commission (EC) is the executive of the European Union (EU). It operates as a cabinet government, with 27 members of the Commission (informally known as "Commissioners") headed by a President. It includes an administrative body ...
(EC) was read by the
European Parliament The European Parliament (EP) is one of the legislative bodies of the European Union and one of its seven institutions. Together with the Council of the European Union (known as the Council and informally as the Council of Ministers), it adopts ...
(EP) in March 2004. In April 2006, the Commission published consultation responses it received in 2005. In June 2006, the Commission published a new draft. The EC and EP discussed any suggested amendments to approve Level One texts. A second reading of the legislature, by both EP and EC, followed. MiFID 1 was introduced under the Lamfalussy procedure, which was designed to accelerate the adoption of legislation based on a
four-level approach The Lamfalussy process is an approach to the development of financial service industry regulations used by the European Union. Originally developed in March 2001, the process is named after the chair of the EU advisory committee that created it, ...
recommended by the Committee of Wise Men. The Committee was chaired by Baron
Alexandre Lamfalussy Alexandre, Baron Lamfalussy (; 26 April 1929 – 9 May 2015) was a Hungarian-born Belgian economist who served as President of the European Monetary Institute (EMI) from 1994 to 1997, which was the forerunner to the European Central Bank (ECB). ...
. There are three other "Lamfalussy Directives": the Prospectus Directive, the Market Abuse Directive, and the Transparency Directive.


Level 1

MiFID 1, implemented through the standard co-decision procedure of the
Council of the European Union The Council of the European Union, often referred to in the treaties and other official documents simply as the Council, and informally known as the Council of Ministers, is the third of the seven Institutions of the European Union (EU) as ...
and the European Parliament, sets out a detailed framework for the legislation. 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.


Level 2

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 The Committee of European Securities Regulators (CESR) was an independent committee of European Securities regulators in the Lamfalussy process established by the European Commission on June 6, 2001. The role of this committee was to * Improve t ...
and negotiations in the
European Securities Committee The European Securities Committee (ESC) advises the European Commission in the field of securities. The ESC held its first meeting in September 2001. It is run by the European Commission and usually meets each month. It assists the Commission in a ...
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.


Contents


Scope

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 nor can it 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 Cargo consists of bulk goods conveyed by water, air, or land. In economics, freight is cargo that is transported at a freight rate for commercial gain. ''Cargo'' was originally a shipload but now covers all types of freight, including tran ...
,
climate Climate is the long-term weather pattern in an area, typically averaged over 30 years. More rigorously, it is the mean and variability of meteorological variables over a time spanning from months to millions of years. Some of the meteorologi ...
and carbon derivatives, which were not covered by ISD. That part of a firm's business that is not covered by the above is not subject to MiFID 1. Celent, a financial services consultancy, estimated in 2007 that under MiFID 1, the three largest EU jurisdictions— France, ( Germany), and the UK—would require publication of over 100 million additional trades annually, with spending increasing as well but at a slower rate, from €38 million yearly to close to €50 million.


Substance

;Authorisation, regulation and passporting: Firms covered by MiFID 1 will be authorised and regulated in their "home state" (broadly, the country in which they have their registered office). Once a firm has been authorised, it will be able to use the MiFID 1 passport to provide services to customers in other EU member states. These services will be regulated by the member state in their "home state" (whereas currently under ISD, a service is regulated by the member state in which the service takes place). ;Client categorisation: MiFID 1 requires firms to categorise clients as "eligible counterparties", professional clients, or retail clients (these have increasing levels of protection). Clear procedures must be in place to categorise clients and assess their suitability for each type of investment product. That said, the appropriateness of any investment advice or suggested financial transaction must still be verified before being given. ;Client order handling: MiFID 1 has requirements relating to the information that needs to be captured when accepting client orders, ensuring that a firm is acting in a client's best interests and as to how orders from different clients may be aggregated. ;Pre-trade transparency: MiFID 1 requires that operators of continuous order-matching systems must make aggregated order information on "liquid shares" available at the five best price levels on the buy and sell-side; for quote-driven markets, the best bids and offers of market makers must be made available. (Note consideration is being given to extending these requirements to other financial instruments. Under Article 65(1) of MiFID 1, the European Commission is due to submit a report to the European Parliament and to the Council on extending pre and post-trade transparency requirements to transactions in financial instruments other than shares by October 2007.) ;Post-trade transparency: MiFID 1 requires firms to publish the price, volume ,and time of all trades in listed shares, even if executed outside of a regulated market, unless certain requirements are met to allow for deferred publication. (Note see comment above regarding extension of these requirements to other financial instruments). ;Inducements and investment research: One of the most controversial aspects of MiFID 2 is that it severely restricts asset managers' ability to obtain investment research with client commissions. ;Best execution: Directive 2014/65/EU requires that firms take all sufficient steps to obtain the best possible result in the execution of an order for a client. The best possible result is not limited to execution price but also includes cost, speed, the likelihood of execution and likelihood of settlement and any other factors deemed relevant. MiFID 2's "all sufficient steps" test sets a somewhat higher standard than the previous "all reasonable steps" standard in MiFID 1. ;
Systematic Internaliser Systematic may refer to: Science * Short for systematic error * Systematic fault * Systematic bias, errors that are not determined by chance but are introduced by an inaccuracy (involving either the observation or measurement process) inherent ...
: A
Systematic Internaliser Systematic may refer to: Science * Short for systematic error * Systematic fault * Systematic bias, errors that are not determined by chance but are introduced by an inaccuracy (involving either the observation or measurement process) inherent ...
is a firm that executes orders from its clients against its own book or against orders from other clients. MiFID 2 will treat Systematic Internalisers as mini-exchanges, hence, for example, they will be subject to pre-trade and post-trade transparency requirements (see above).


Market fragmentation

Although MiFID 2 was intended to increase transparency for prices, the fragmentation of
trading venue An exchange, bourse (), trading exchange or trading venue is an organized market where (especially) tradable securities, commodities, foreign exchange, futures, and options contracts are bought and sold. History 12th century: Brokers on the ...
s 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 A financial data vendor provides market data to financial firms, traders, and investors. The data distributed is collected from sources such as stock exchange feeds, brokers and dealer desks or regulatory filings (e.g. an SEC filing). History Fin ...
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.


Transposition

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.


United Kingdom

The
Financial Services Authority The Financial Services Authority (FSA) was a quasi-judicial body accountable for the regulation of the financial services industry in the United Kingdom between 2001 and 2013. It was founded as the Securities and Investments Board (SIB) in 1985 ...
(FSA), now the
Financial Conduct Authority The Financial Conduct Authority (FCA) is a financial regulatory body in the United Kingdom, but operates independently of the UK Government, and is financed by charging fees to members of the financial services industry. The FCA regulates financ ...
(FCA), was the body responsible for the regulation of the securities industry in the United Kingdom during the period of implementation. It incorporated MiFID 2 into its Handbook of rules and guidance.


France

The French government has implemented MiFID 2 by modifying the French Monetary and Financial Code, in particular by ordinance number 2007-544 of 12 April 2007, and the decrees 2007-901 and 2007-904 of 15 May 2007. The Autorité des Marchés Financiers (AMF) has also applied MiFID 2 t o its General Regulations (''Règlement Général'').


Directive 2014/65/EU / Regulation (EU) No 600/2014

In April 2010, CESR issued consultation papers on MiFID 2 review. The consultation period was short and ended on 31 May 2010. There was one day of open hearings in Paris on 17 May 2010. Public responses to the consultations are now available 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. 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. On 20 October 2011, the European Commission adopted formal proposals for a "Directive on markets in financial instruments repealing MiFID 1 of the European Parliament and of the Council", and for a "Regulation on markets in financial instruments", which would also amend Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories. In March 2012, MEP
Markus Ferber Markus Ferber (born 15 January 1965) is a German engineer and politician who has been serving as a Member of the European Parliament (MEP) since 1994. He is a member of the Christian Social Union, part of the European People's Party. In addition ...
suggested amendments to the European Commission's proposals, intended to strengthen restrictions on
high-frequency trading High-frequency trading (HFT) is a type of algorithmic financial trading characterized by high speeds, high turnover rates, and high order-to-trade ratios that leverages high-frequency financial data and electronic trading tools. While there is no ...
and commodity price manipulation. The
Association for Financial Markets in Europe The Association for Financial Markets in Europe (AFME) is an industry advocacy organization that represents wholesale market participants in Europe, including the European Union and the United Kingdom. It was formed in 2009 by the merger of the Lo ...
(AFME)'s formal response to Ferber particularly cited concern with the requirement that all algorithms run continuously as this would preclude the use of broker algorithms to execute client orders. The creation of the Organized Trading Facility (OTF) rules have also caused concern because of their proposed ban on
proprietary trading Proprietary trading (also known as prop trading) occurs when a trader trades stocks, bonds, currencies, commodities, their derivatives, or other financial instruments with the firm's own money (instead of using depositors' money) in order to ma ...
in broker
crossing network A crossing network is an alternative trading system (ATS) that matches buy and sell orders electronically for execution without first routing the order to an exchange or other displayed market, such as an electronic communication network (ECN), whi ...
s, which would prevent brokers from using their pools to unwind risk on behalf of a client or the bank itself. Both MiFID 2 and Regulation (EU) No 600/2014 entered into force on 2 July 2014. MiFID 2 replaced MiFID 1, which in turn replaced Directive 93/22/EEC. MiFID 2 is complemented by Regulation (EU) No. 600/2014 on markets in financial instruments The initial date for implementation by the Member States was 3 January 2017, however, in February 2016 the European Commission delayed this until 3 January 2018 to allow for the building of IT systems to enable enforcement of the new package. Some banks and institutions advocated for a further delay to the implementations of MiFID 2, with smaller organisations not yet equipped for the additional demands. However, MiFID 2 came into force on the revised date of 3 January 2018. Some analysts believe the impact of MiFID 2 will lead to global investment research expenditures falling by as much as $1.5 billion annually when the rules come into force. Within days of coming into effect,
Intercontinental Exchange Intercontinental Exchange, Inc. (ICE) is an American company formed in 2000 that operates global financial exchanges and clearing houses and provides mortgage technology, data and listing services. Listed on the Fortune 500, S&P 500, and Russell ...
announced plans to transfer trading in 245 energy futures contracts from London to the US, putting transactions under the oversight of US, rather than European, regulators. By 3 March 2021, the European Commission will need to present a report to the European Parliament and Council on the functioning of the directive. This will cover a broad range of issues, including the impact of requirements regarding algorithmic trading and the development in prices for pre and post trade transparency data. The European Securities and Markets Authority is to support the Commission with this exercise.


See also

*
Directive 2011/61/EU Directive 2011/61/EU is a legal act of the European Union on the financial regulation of hedge funds, private equity, real estate funds, and other "Alternative Investment Fund Managers" (AIFMs) in the European Union. The Directive requires all co ...
*
EU law European Union law is a system of rules operating within the member states of the European Union (EU). Since the founding of the European Coal and Steel Community following World War II, the EU has developed the aim to "promote peace, its valu ...
*
European company law European company law is a part of European Union law, which concerns the formation, operation and insolvency of companies (or corporations) in the European Union. The EU creates minimum standards for companies throughout the EU, and has its own cor ...
*
German company law German company law (''Gesellschaftsrecht'') is an influential legal regime for companies in Germany. The primary form of company is the public company or ''Aktiengesellschaft'' (AG). A private company with limited liability is known as a ''Gesells ...
*
Institutional investor An institutional investor is an entity which pools money to purchase securities, real property, and other investment assets or originate loans. Institutional investors include commercial banks, central banks, credit unions, government-linked ...
*
Investment Company Act of 1940 The Investment Company Act of 1940 (commonly referred to as the '40 Act) is an act of Congress which regulates investment funds. It was passed as a United States Public Law () on August 22, 1940, and is codified at . Along with the Securities Exchan ...
* Reg NMS (similar United States legislation to MiFID) * Request for quote *
Stock market equivalence Stock market equivalence is granted by the European Union to those countries whose stock markets are deemed to be 'equivalent' to those of the EU countries. On 3 January 2018, the EU implemented the " Markets in Financial Instruments Directive II" ...
*
UK company law The United Kingdom company law regulates corporations formed under the Companies Act 2006. Also governed by the Insolvency Act 1986, the UK Corporate Governance Code, European Union Directives and court cases, the company is the primary legal ...
*
Undertakings for Collective Investment in Transferable Securities Directives The Undertakings for Collective Investment in Transferable Securities Directive (UCITS2009/65/ECis a consolidated EU directive that allows collective investment schemes to operate freely throughout the EU on the basis of a single authorisation f ...


Citations


General references


MiFID 2.0. Casting New Light on Europe's Capital Markets – Centre for European Policy Studies


External links


Text of directive

EU legislation summary

European Commission pages

CESR guidelines and recommendations

FCA pages



European Commission Press Release posted 10/2/2016
{{Legislation of the European Union 2004 in law 2004 in the European Union Financial markets Financial regulation Systemic risk European Union directives