MiFID stands for the Markets in Financial Instruments Directive. It is a European Union (EU) regulatory framework that was introduced to regulate financial markets and investment services within the European Economic Area (EEA).
The goal of MiFID is to enhance investor protection, promote transparency, and increase competition in the financial markets.
MiFID was initially introduced in 2007 as MiFID I, and it underwent a significant revision in 2018, leading to the creation of MiFID II. MiFID II aimed to address some of the shortcomings of the original directive and to adapt to changes in the financial landscape following the 2008 financial crisis.
Key aspects of MiFID II include:
Transparency: MiFID II mandates greater transparency in financial markets by requiring pre- and post-trade transparency for various types of financial instruments. This ensures that investors have access to more information about trades and prices.
Investor Protection: The directive places a strong emphasis on investor protection, imposing stricter requirements on investment firms to assess the suitability of financial products for their clients and to provide adequate information about risks.
Trading Platforms: MiFID II introduces new rules for trading venues, including more stringent requirements for trading on organised platforms like stock exchanges and multilateral trading facilities (MTFs).
Market Structure: The directive addresses high-frequency trading (HFT) and algorithmic trading, aiming to mitigate potential risks associated with these practices.
Commodities Markets: MiFID II extends its regulatory scope to include certain commodity derivatives and introduces position limits to prevent excessive speculation.
Reporting: The directive mandates increased reporting requirements for investment firms, ensuring that regulators have access to relevant data for market monitoring and supervision.
Research and Inducements: MiFID II introduces rules related to the separation of research costs from trading commissions, aiming to mitigate conflicts of interest and improve transparency in research funding.
Third-Country Firms: The directive outlines the conditions under which firms from non-EU countries can provide investment services in the EU.
MiFID II has had a significant impact on the financial industry by reshaping how financial instruments are traded, regulated, and reported. It has contributed to greater transparency, increased investor protection, and improved market integrity within the EU and EEA financial markets.