MiFID aims
to increase competition among exchanges, multilateral trading
facilities (MTFs) and investment firms, giving them a 'single
passport' to operate throughout the EU on the basis of
authorisation in their home Member State. Investors will have
access to a greater number of trading venues and high levels of
protection.
The European Commission issued a warning today to the member
states that have not yet transposed the Directive. Internal Market
Commissioner Charlie McCreevy said: "I would like to urge those
Member States who have not transposed to hurry up – such lack of
action will damage their own firms."
Only the UK, Ireland and Romania met the Directive's
implementation deadline of 31st January 2007. Most other EU member
states have since implemented the Directive. Finland is among a few
states that anticipate achieving compliance this month, while Spain
has advised the Commission that it will be only partially compliant
this month. Poland has reported to the Commission that it is
"impossible to estimate" when it will implement the law.
Background to MiFID
The following is an edited version of the European
Commission's FAQ about MiFID
MiFID sets out a comprehensive regulatory regime covering
investment services and financial markets in Europe. It replaces
the Investment Services Directive (ISD) of 1993 and is a
cornerstone of the Commission's Financial Services Action Plan
(FSAP).
It contains measures which aim to change and improve the
organisation and functioning of investment firms, facilitate
cross-border trading and thereby encourage the integration of EU
capital markets.
The levels of MiFID
MiFID is being adopted using a legislative approach known as
'the Lamfalussy Process,' named after the former Head of the
European Monetary Institute, Baron Alexander Lamfalussy. Lamfalussy
Directives are split into two levels: the Level 1 Directive which
establishes the guiding principles of the legislation agreed in
co-decision by the European Parliament and European Council; and
the Level 2 implementing measures. The advantage of this approach
is that it allows the Council and Parliament to focus on the key
political decisions, while technical implementing details are
worked through afterwards. This flexibility is intended to allow
for more rapid and frequent adaptation of the legislation so that
it can keep pace with market and technological developments.
Since April 2004, Member States have been transposing the Level
1 Directive and preparing the transposition of the Level 2
Directive into their national legislation.
The provisions of the Level 1 Directive
The Level 1 Directive abolishes the so called ‘concentration
rule’ (in other words, Member States can no longer require
investment firms to route orders only to stock exchanges). This
means that, in many Member States, exchanges will be exposed to
competition from multilateral trading facilities (MTFs), i.e.
non-exchange trading platforms and ‘systematic internalisers’, i.e.
banks or investment firms who systematically execute client orders
internally on own account (rather than sending them to
exchanges).
MTFs and 'systematic internalisers' will be subject to similar
pre- and post-trade transparency requirements as the exchanges.
This will ensure a level playing field between the exchanges and
their new competitors – and full information on trading activity to
the market.
The Level 1 Directive also updates the ‘single passport’ for
investment firms, which was first introduced in the ISD. It extends
the list of services and financial instruments covered to bring it
into line with the new market realities. For example, investment
advice is covered for the first time. This reflects modern trends
since more and more retail customers are investing in securities
and seeking advice from their bank or their broker. This will allow
investment firms to provide services across the EU on the basis of
a single authorisation from their "home" Member State.
At the same time, investor protection rules are strengthened and
harmonised at a high level to make investors feel confident in
using the services of investment firms, wherever those firms
originate from in the EU.
The provisions of the Level 2 Directive
The Commission can only adopt Level 2 measures in those areas
where the Level 1 Directive specifically gives it the power to do
so. This applies to just 18 out of 73 provisions in the Level 1
Directive.
The main areas covered are:
- conduct of business requirements for firms, e.g. their
obligation to divide their clients into different categories
("eligible counterparties", "professional" and "retail"), their
obligations towards each category of client, their obligation to
assess whether the products and services which they provide are
"suitable" or "appropriate" for their client and their obligation
to secure "best execution" for their clients (i.e. the best
possible result with the emphasis on best price for retail
investors).
- organisational requirements for firms and markets, e.g.
compliance, risk management and internal audit functions that
operate independently, identification and management of conflicts
of interest and limitations on out-sourcing, especially to third
countries;
- transaction reporting to relevant competent authorities of buy
and sell transactions in all financial instruments;
- transparency requirements for the trading of shares (i.e. pre
and post trade transparency for regulated markets, MTFs and
'systematic internalisers') to ensure a level playing field between
exchanges, MTFs and systematic internalisers for the trading of the
most liquid shares in Europe.
