Markets in Financial Instruments Directive

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White Paper - International Swaps and Derivatives Association & Clifford Chance: Regulation of OTC derivatives markets A comparison of EU and US initiatives

European Swaps Regulation - Comment Letter - European Central Bank - January 11, 2011

ESMA Regulation - White Paper - Guidelines on systems and controls in a highly automated trading environment for trading platforms, investment firms and competent authorities

The Markets in Financial Instruments Directive (MiFID), which took effect on Nov. 1, 2007, is a plan created to introduce significant changes to Europe’s regulatory framework with the goal of integrating Europe’s national markets. It replaced the existing Investment Services Directive (ISD).

Included in the directives are new pre- and post-trade transparency requirements and reporting requirements for equity markets, new capital requirements and other provisions intended to facilitate cross-border business.

MiFID eliminated the "concentration rules," formerly prevailed in Europe, that required that stocks be traded through local markets. It paved the way for electronic trading platforms to compete with the established stock exchanges and introduced the concept of a multilateral trading facility (MTF).

The main types of venue under MiFID's regulation are: Regulated markets, Lit cash equity MTFs, Dark pool MTFs, Multi-dealer MTF platforms, and Sls Systematic Internalizers.

Also, under MiFID, buy- and sell-side firms must prove they have provided their customers with "best execution" - including not only the price of the security but also implicit costs related to liquidity and market impact.

Background

Research released late in October 2007 from Greenwich Associates reveals that a majority of European institutional investors believe that new financial market rules have a good chance of achieving regulators’ stated goals of increasing market transparency and further integrating Europe’s capital markets.

More than half the institutions participating in Greenwich Associates’ 2007 European Equity Investors Study believe that MiFID will increase the transparency and depth of European equity markets, while slightly less than a quarter expect reductions. Thirty-five percent of the institutions participating in Greenwich Associates’ 2007 research program expect MiFID to increase liquidity in European equity markets, while 20 percent expect it to reduce liquidity.

“Half the institutions we interviewed say MiFID will increase clients’ ability to measure and achieve best execution, while only 17 percent think the rules will make it harder for clients to assess best execution,” says Greenwich Associates consultant John Colon.

However, more than three-quarters of the institutions believe that MiFID will place mid-sized and regional brokers at a disadvantage, and 55 percent think the new rules favor major broker-dealers. “Our research suggests that the benefits of the new regulations will not be evenly distributed,” says Greenwich Associates consultant Jay Bennett. “Europe ’s institutions expect that there will be winners, including the institutions themselves, large broker-dealers and electronic trading venues — which will benefit from the integration of markets and new requirements governing best execution and transparency. They also believe there will be losers, including smaller broker-dealers and exchanges.”

SIFMA Opening-day Statement On Nov. 1, Karsten Moller, senior managing director and head of The Securities Industry and Financial Markets Association (SIFMA) Europe and Asia, remarked in regard to the Markets in Financial Instruments Directive becoming law in Europe, “We and our members are confident in the ability of MiFID to deliver on its important objectives of fostering a competitive and integrated market that adequately protects investors,”..."Clearly there will be teething problems with implementation. However, we will do all we can to make to make the legislation work and we will monitor its implementation."

In February 2010, Timothy Binning, an officer in the securities market at the European Commission's internal markets directorate, said that the MiFID 2010 review take into account the impact high frequency trading has on the markets. High-frequency trading volume has grown to 30-40% at European execution venues.

MiFID II

See the MiFID II page for more.

In December 2010, the European Commission introduced its proposals to update MiFID. The updates will cover these seven areas:

• development in market structures;
• OTC derivatives and commodities;
• investor protection;
• transparency;
• supervisory provisions;
• authorization and organizational requirements; and
• miscellaneous reforms.

Resources

• Public Consultation REVIEW OF THE MARKETS IN FINANCIAL INSTRUMENTS DIRECTIVE (MIFID)