What is the Markets in Financial Instruments Directive (MiFID)?
The Markets in Financial Instruments Directive (MiFID) is a European regulation that increases the transparency across the European Union’s financial markets and standardizes the regulatory disclosures required for firms operating in the European Union.
MiFID implemented new measures, such as pre- and post-trade transparency requirements, and set out the standards of conduct to be followed by financial firms. MiFID has a defined scope that primarily focuses on stocks. The directive was drafted in 2004 and has been in force across the European Union (EU) since 2007. MiFID was replaced by MiFID II in 2018.
The Effects of MiFID
Although MiFID did achieve one of its major goals—increasing the transparency of the investment market—its regulations have spurred some unexpected results in the financial sector. Previously, investment firms were only able to gather information from one or two different exchanges that were made public.
Now, they are able (and sometimes even required) to gather information from all outlets that have publicly released their prices and details. This adds a fair amount of unexpected work, especially if a firm wishes to benefit as much as possible from the new transparency they are afforded.
In order to deal with this issue, financial data vendors have become quite popular. They help financial institutions deal with the fragmentation of information and enable them to have access to as many details as possible.
Client Classifications under the Markets in Financial Instruments Directive (MiFID)
One of the key aspects of MiFID is the classification of clients into specific client types. There are three types of client types: professional clients, retail clients, and eligible counterparties. The goal for the classifications is that the regulatory protection for the clients should reflect the different levels of risks for each client type.
The idea is that different types of clients, or investors, will have different levels of financial knowledge, and so should be given different levels of protection when dealing with a financial body, such as a bank. Eligible counterparties are provided the least protection and retail clients are provided the highest.