The Markets in Financial Instrument Directive: Reflections on European Union
Abstract: The Markets in Financial Instruments Directive (MiFID) is introduced by the European Union on 1st November 2007. The fundamental policies of MiFID are market regulations such as Surveillance and Management. This article aims to capture the potential ramifications of surveillance, potential utility, influence on the behavior of issuers and market middlemen and regulatory aspects of MiFID.
To replace the Investment Services Directive (ISD), the European Union introduced the Markets in Financial Instruments Directive (MiFID) on November 1, 2007. The Financial Services Authority announced to its Internet audience that, “MiFID will extend its beneficiary services to the coverage of the current ISD and initiates new supplementary and superficial requirements that the firms will adopt into their conduct of business and internal organization”. The execution of MiFID will considerably alter financial services regulation in the businesses, how firms will operate their regular operations and the way they interact with their clients.
The main objective to introduce MiFID is to accomplish various goals. One of the most significant objectives is to extend the market for financial services across the territories of European Union. The implementation of MiFID in the Member States by expanding the range of core financial services is subject to “passporting” rules, mainly by introducing the Multilateral Trading Facility (MTF) as a core cluster of services. The obligations of the Capital Requirements Directive will be comprehensive to firms that fall within the extent of MiFID. Apart from these beneficiary activities, it has also a greater degree of transparency in the operations of financial markets in American principles of market regulation. This consists of the generation of pre and post trade data, the conservatory of transparency and reporting prerequisites for a Systematic Internalisers (SI) and it should be obedient to a “best execution” standard for all investment firms.
MiFID is one of the consignments of harmonizing legislation, growing out of the Financial Services Action Plan (FSAP) and associated with “Lamfalussy process”. The progression requires significant framework, legislation and should be followed by in-detailed implementation of legislation based on the adopted framework. Ultimately, it is a dynamic procedure in-between regulators and strengthening enforcement. The principles of framework in MiFID are related to financial services integration and constituting in level 1, level 2 is continuing with the implemented regulatory aspects and also playing a major role as an additional directive. Level 3 involves the implementation of level 1 and 2 through supervisory convergence between the Member States’ regulatory authorities and the primary activities of the EU’s Financial Services Committee.
With the reporting and supervisory aspects of MiFID, this article pictures about the most fascinating implications of MiFID raised within the context of the broader issues with respect to which MiFID appears to be largely concerned. These implications are divided into seven interrelated and expansive themes that MiFID elevates and will be worth sustained review to regulate the financial markets where MiFID is implemented. In this concern, these themes have recommended both power and boundaries to the regulatory attempts, private monitoring, redirecting the benefits of political community, achieve broader policy goals, reinforce the state system in the context of behaviour, predominantly criminal enforcement and control of political activity.
II. INSIGHTS OF MiFID:
MiFID delivers institutionally composite set of adaptations to the Financial Services Directive. In a regulatory manuscript, MiFID is separated into five foremost components. The first component determines to forward fundamental definitions and the regulatory scope of MiFID. The second component sets out the essential requirements for authorization and operational conditions. The third component throws light on the rules which govern the regulated markets. The fourth component presents the public institutional regulatory framework within the multi-tiered structure of the European Union and the fifth component consists of a diverse, significant and housekeeping provisions.
- The Regulatory Framework of MiFID
MiFID enforces, in particular, “investment firms” and “regulated markets” to which separate but related authorization regimes are applied which are partially applicable to credit institutions. Inadequately, the essential scope of MiFID leads to the regulation of investment advice and the function of multilateral trading facilities as a particular component of “regulated market.” The MiFID implemented investment firms are conditional on regulation with respect to their investment services and activities. As per the MiFID, the investment services and activities are subjected to their extent of provision, investment advice, operations of multilateral trading facilities etc.
The framework of MiFID was captured from the good practices and regulatory framework of (Investment Services Directive) ISD. In accordance with this, the specific framework and essential components of MiFID includes in each and every Member State’s legislative activities, regulatory aspects and authority on investment services etc. The significant provisions need to protect the investors by preserving harmonized good governing standards, organizational requirements, initial capital endowment and qualifications of owner and operator of investment firm. The chief governing provision of MiFID depends on the conduct of business of regulated firms. While comparing to old rules and regulations, the conflict of interest rules have a significant expansion on investment protection. It covers numerous important areas such as conduct of business rules, best execution policies, tied agents, the provision of services through another investment firm, client order handling rules and eligible counterparty rules.
The vital set of innovations occupied with pre-trade transparency rules. Among these, one set is applicable only to business transactions in shares by Systematic Internalizers (SIs) and engage them to distribute the firm’s quotation in their shares which are accepted for trading in a regulated and liquidity market. Similarly, the regulatory framework of investment firms is welcoming a harmonized approach to principles of regulating markets and permitting the measure of flexibility in the implementation of MiFID principles. MiFID renders for public registration of regulated markets and forbids the functioning of unauthorized markets. The implementation and transparency rules of MiFID compels the access to regulated markets and financial instruments for trading; the implementation of monitoring systems and conditions for pre & post trade transparency etc.
The implementation of regulations under MiFID’s complex rules are subject to the information provided by pre and post trading, publication and accessibility to the transparency requirements of regulated markets, MTFs and SIs. If the investor located within the community, the implementation of regulation allows public propagation within the meaning of applicable conditions such as the facilities of the regulated market of MTF, (2) facilities of third party and (3) other proprietary arrangements.
- The Framework of Regulatory Justification
The European Union has described the MiFID as a multi-objective invention in the statutory law. Mr. Charlie McCreevy opines that “the MiFID is a ground-breaking piece of legislation. It will transit the landscape for the trading of securities and commenced the required competition and efficiency. Its virtues for investors remained on the provision of greater security for investors and greater choice. All these preferences and safety measures produced an additional benefit such as degrading the cost of capital, generate growth and boost our competitiveness.”
The EU commission has indicated the following seven reasons to introduce MiFID as a necessary replacement to the Investment Services Directive (ISD).
- ISD failed to afford adequate harmonization to avoid dual/multiple regulation of firms’ performance in cross-border business
- Guaranteed modest consumer protection in accordance with business models and market structures which implemented after the acceptance of ISD.
- Aborted to manage the entire investment services.
- Failed to furnish an acceptable framework for competition among exchanges and other marketplaces.
- Fragmented the liquidity and formulated barriers to cross border transactions through its breakdown to provide an effective harmonization of the regulated exchanges and other market places.
- Failed to offer an adequate level of managerial co-operation within and among the member states.
- It is out of date and inflexible.
The necessities of MiFID on transaction reporting are aimed to make sure that firms reporting aspects of transactions in any financial instruments accepted to trading on a regulated market rapidly and accurately to appropriate competent authority. There are particular concerns which are apparent to control and harmonize the regulated alternative markets in particular to MTF (Multilateral Trading Facilities) and SIs (Systematic Internalisers). MTFs present that MiFID is authorized the Member States to expect financial services intermediaries from the coverage of MiFID and endow with an investment advice. Similarly, SIs present a unique regulatory prospect from which MiFID does not shy. Therefore, MiFID is introduced to provide benefits to both market creating and market regulating vehicles.
The MiFID is focusing on the association of Member States and regulatory services of the markets to strengthen the policy of functional differentiation in between the segments of the financial markets or trading activities in various forms of securities dissimilarity in regulatory frameworks. Within the scope and regulatory reach, MiFID imposes and focuses more on regulatory regime’s directing to the generation of information and improve the power in Member States to get involved in the management of covered markets. The essential objective of MiFID is to expand and strengthen the legislative powers to directly intervene in the functional areas of capital markets through the standard of transactions in shares.
III. THE CONSEQUENCES OF MiFID:
The framework of MiFID with its complexity, comity, order and direction in an appropriate legal substantive policy of transparency and equality of possibility for all participants in the regulated market are aimed to expand, oversee, implement, monitor and evaluate these regulatory frameworks. However, MiFID is outstanding from its consequences and apparent for a bit of worth exploration. The powers and limitations of these regulatory markets and their attempts are into MiFID’s activities such as controlling the markets, monitoring and redirecting for the benefit of political community, achieving the broader policy goals, reinforcing the state system in the context of behavior beyond borders, predominately criminal enforcement and control of political activity. There are seven consequences of MiFID. They are as follows,
1. The capability of the private sector to systematize markets beyond the regulatory powers of the state will always outpace the ability of the regulating entity (the state/EU/etc.) to extend its regulatory matrix. The regulation of securities will remain incomplete as long as the markets operate their regulatory activities subject to its framework. Market regulations are essential and have a tendency to serve as a temporary intervention in the area of economic activity. The behavior of regulation and market create a synergy in which regulation plays an important role as a catalyst for innovation. The temporary and partial nature of MiFID is performing in three aspects. Firstly, MiFID is partially structured and unable to maintain and regulate the entire field, in which the market comprehends its operations. Secondly, MiFID is failed to regulate and maintain in the areas of market activities and thirdly, it is originally partial and can not reach to the market related activity in the enforcement territory of the European Union.
2. The regulatory systems of Government remain inefficient and incapable of a comprehensive extension of their control/coercion frameworks as long as regulation is limited by the territorial principle—however broadly applied . MiFID is mainly based on various forms of regulatory justifications and are intended to solve the problems of individual Member States. The nature of MiFID is expansive among the significance of its regulatory authorization. Apart from these, MiFID’s principles which are stated in their regulatory framework are considerably reducing the scope in the application of its technical prerequisites and prominently, the limitations for protection is based on the regulatory issues may generate certain perverse incentives. To protect the Markets in Financial Instruments Directive (MiFID), regulatory implications have to include fluctuations in either downward or upward direction. This may improve the regulatory competitiveness but the market transactional efficiency may fall into dark.
3. MiFID is figured out in a certain tension between the conventional regulatory approach, which focuses on the transactions and the policy focuses on the regulatory framework and consumers. The main intention behind MiFID is to replace the old regulatory aspects that failed to solve the complexities in traditional regulatory aspects. MiFID may recommend another step in the formation of an innovative form of feudalism which is based on the dependencies of regulatory power and complexity.
4. The transaction cost of regulation generates a great incentive to avoid the capital and seek the most effective modality on a global basis. MiFID has a large scope in terms of transaction costs, fundamentals of policies and regulations etc. The most important effect of MiFID is “leakages”. This predominantly works to give assistant to middlemen as well as cast of characters (information purveyors, lawyers and consulting firms). In this case, the institutional procedures of MiFID serve the regulatory aspects to market. But the leakages are widening within the operations of MiFID beyond its obligatory scope.
5. The greatest effect of MiFID is the creation (potentially at least) of robust markets in information. According to the modern legislative attempts, MiFID brings into being regulatory unexpected consequences. The legislative necessities of MiFID are effective to produce innovative and possible involvement into dynamic market information. Particularly, MiFID provides the market information and legislation to strengthen the market. The original regime of MiFID provides the momentous competition on fundamental information sources in the regulatory market. According to Gabaix and Laibson, “informational shrouding flourishes even in highly competitive markets, even in markets with costless advertising, and even where the shrouding generates allocational inefficiencies ”.
6. MiFID compounds on the supervisory culture in the creation of governance institutions. MiFID is continuing towards global procedure and focusing on the privatizing surveillance. This clearly shows that the MiFID is not only a regulator undertaking but also guaranteed the benefits of the policy authority of the Member States.
7. MiFID contributes an additional feature to the global efforts to supervise the conflict and crime. It is important not only in its own right, but also in its role as an element in the global efforts to manage conflict and crime. One of the leading objectives of MiFID is to assist the consumers and the marker in terms of competitiveness, efficiency, protection etc.
MiFID demonstrates a fascinating picture. It connects with contemporary familiar understandings of the most suitable communal approaches to the regulation of securities markets. This familiar perception is increasing, emphasizing the surveillance and monitoring both the enforcement technique and substantive objective. But it also admits, to some extent, the imperfect quality of regulation. As a result, MiFID inclines the focus on regulation and problem management rather than control or eradication. This article analyzes the possible consequences of MiFID in the regulatory context. It has recommended that the MiFID may be more imperative for the markets in information that it engenders than for the defects of market seeks to manage.
- MiFID – the regulatory framework for European Financial Markets
- MiFID in a pan-European market
- European Directive on Markets in Financial Instruments (MiFID)
- MiFID: Helping to Create a Pan-European Financial Market
- Monitor and Manage: MiFID and Power in the Regulation of EU Financial Markets
Mr. Jean-Bertrand Casseus
Editor ( The CEO Insights Team)