What is MiFID?
Introduction
The Markets in Financial Instruments Directive (MiFID) has been in force since 2007 and provides a comprehensive framework for investment firms offering services in relation to financial instruments, as well as rules to protect investors. Recent technological advances which have changed the way trading is carried out, coupled with the financial crisis, led the European Commission to propose a review of MiFID.
A consultation paper was issued in December 2010, providing industry stakeholders and members of the public with the opportunity to send their responses to the Commission. More than 4200 responses were received, and the Commission is currently working through the responses and making changes to their draft proposal accordingly.
Key elements of the MiFID review
Developments in market structures and practices:
Financial markets are increasingly complex. There are now many more trading venues, participants and products available. The European framework needs to keep pace with changes to methods of trading and technological developments. The consultation asked how MiFID should be updated to provide a robust regulatory framework covering all investment services and activities in an appropriate manner to avoid risks linked to activities not covered.
Transparency of markets:
Transparency of market data, both pre- and post-trade, will be a key point of debate in the review. Transparency facilitates price formation and promotes liquidity, though some financial services stakeholders warn of the adverse effect of investors losing anonymity. The consultation looked at how to limit derogations from the current framework (i.e. the issue of dark pools) and asked whether other financial products, such as bonds and OTC (over-the-counter) derivatives should also be subject to similar rules. Measures to improve the availability, quality and consolidation of trading data are also proposed.
Commodity derivative markets:
The consultation asked what measures should be taken to address concerns relating to the functioning of commodity derivative markets and their impact on commodity price volatility. It raised the issue of how to improve the flow of information, what reporting requirements might be needed and whether position limits should be considered. The MiFID review will complement other Commission initiatives in this field, such as the review of the Market Abuse Directive.
Investor protection:
The consultation discussed possible measures to strengthen investor protection, so that investment firms treat all investors appropriately in light of their specific profiles.
Supervision:
The consultation asked where changes to the supervision of the various activities and participants may be needed, and in particular the precise role for the newly created European Securities and Markets Authority (ESMA) to ensure better supervision of these markets.