MiFID

Published under Risk Management

MiFID or Markets in Financial Instruments Directive is a European Union law, which provides a regulatory regime for investment services. It came into effect on November 2007 thus replacing the Investment Services Directive.
The goals of MiFID are:

  • Increasing transparency
  • Providing protection for retail consumers
  • Increasing competition in investment services

This framework is mostly relevant for companies offering investment services that operate within the European Economic Area (EEA).

MiFID focuses on following areas:

  • Avoiding conflict of interest
  • Providing customers with necessary information in a timely manner
  • Best execution of the customer orders
  • Ensuring compliance

Avoiding conflict of interest refers to creating rules aimed at preventing conflicts of interest that could adversely affect customers.

Providing customer with necessary information in a timely manner embraces transparency of information about costs, risk warnings and customer categorisation (retail, professional, eligible counterparties). For each category suitable procedures should be implemented.

Best execution of the customer orders aims to guarantee that each customer is offered the best possible product, according to the client category and other relevant factors. Important part of best execution is providing client with the best attainable price.

Ensuring compliance focuses on creating a system that guarantees conformance with MiFID obligations including internal audit, Enterprise Risk Management and compliance functions. It also covers outsourcing in order to guarantee that important processes will not be handled outside the EEA without agreement of authority.
The influence of MiFID implementations on IT mainly relates to performance, extended analytics and storage. Focus areas are:

  • Processing of client and market data in a timely manner
  • Analytics that ensure best execution of orders
  • Analysis of risks and conflicts of interest
  • Recording trading data and storing them
  • Providing additional types of reports

MiFID needs to be implemented on a country level but it should be noted that "Maximum harmonisation" does not allow states to change regulations in a way that would harm competition. This practice - also known as "gold-plating" - refers to exceeding requirements of the European Community directives while incorporating them into local law in a way that may limit competitiveness of a certain groups of companies.

 

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