Markets in Financial Instruments Directive (MiFID)

The European Union has improved the Markets in Financial Instruments Directive (MiFID) to increase transparency in the financial markets and achieve sustainable economic growth. The European Union has run MiFID since 2007. Also, in 2018, MiFID was replaced by MiFID II, an updated legal regulation.


What Does The Markets in Financial Instruments Directive (MiFID) Mean?


The Markets in Financial Instruments Directive (MiFID) is a European regulation that enhances transparency in financial markets and standardizes regulatory disclosures for companies operating in the European Union in order to achieve sustainable economic growth in Europe. MiFID has taken new measures, such as businesses' transparency requirements when trading, and financial firms have set the standards of behavior to follow.The Directive was prepared in 2004 and came into force in 2007. MiFID has generally revealed the following; execution of business and organization requirements for investment firms, authorization for regulated markets, regulatory reporting to prevent market misuse, rules on transparency for commercial shares, and the acceptance of financial instruments to trade.


When it came into force, it could not meet adequate regulations in the field of investment, after which a new arrangement called MiFID II, which is compatible with the latest technologies, emerged in 2018. MiFID II closed the gaps in the arrangement. MiFID II aims to become a more powerful version than the previous law. It focuses on transaction reporting and transaction reporting requirements, and also focus on enhancing the client's protection, managing portfolios properly, and making trading platforms more open. The Markets in Financial Instruments Regulation (MiFIR) works with MiFID and MiFID II to extend the conduct rules to other types of assets.


Who Is Affected by MiFID II?


MiFID II affects all investment services, including banks and non-banks. In other words, it briefly covers all kinds of financial services. This Directive does not directly regulate private investors but instead regulates firms that operate on behalf of individuals. MiFID II promotes infrastructure improvement while helping them provide the most transparent and useful service to their customers. In addition to these, fixed income markets, derivative markets, treasury transactions, accounting are also affected by MiFID II.


Before MiFID II, investment companies could only collect information from one or two public exchanges. Together with MiFID II, they can collect information from all sales points as long as they publicly disclose their prices and details. Thus, financial institutions can access as much information as possible.


What are the MiFID Requirements?


Companies within the scope of MiFID can be organized in their own country. After a company is issued, it can use the MiFID passport to provide services to customers in other EU member states. MiFID requires companies to classify customers as professional customers or retail customers. Clear procedures should be available to categorize customers and evaluate regulations that are appropriate for each investment product. MiFID recommends that a firm act in the customer's interests regarding the information to be received when you accept custom orders.


In MiFID II, asset managers' ability to conduct investment research with customer commissions is severely restricted, so this issue is often discussed. MiFID II requires firms to take all necessary steps to achieve the best possible result in fulfilling a customer's order. The best possible outcome is not limited to the execution price, but also includes cost, speed, probability of execution and resolution, and other relevant factors. Also, MiFID treats Systematic Internalizers as mini-exchanges.


Elements Forming MiFID


Transparency

With MiFID II, transparency in the stock market has been significantly increased. Commercial data and public disclosure of the market have become mandatory, and new regulations for non-equity products have entered into force, including pre and post-trade regulations. 


Market Structure

In MiFID II, an improved market structure has been designed mainly to close the previous regulation gaps. Trade has shifted to regulated platforms. With this arrangement, when Investment firms place customer orders over the systems, their transactions should be registered as Multilateral Trade Facility (MTF). In addition, an Organized Trade Facility (OTF) has been created as a multilateral trading platform to synchronize MTFs with Regulated Markets (RMs). 


Investor Protection

New requirements for the protection of customer assets and monitoring of products have occurred. The marketing and distribution of financial products have become prohibited or restricted by the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA). With the regulation, new and improved codes of conduct regarding customer information developed. Finally, the Insurance Mediation Directive (IMD) has been amended to provide new regulations for insurance-based investment products.


Reporting Requirement

Reporting of all transactions has now become mandatory. The degree of required details in the report is also more extensive. Firms need to regularly check their reporting framework using a test system to ensure that reporting is done correctly. Reporting requirements have become essential for regulators and risk managers. 




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