The Markets in Financial Instruments Directive (MiFID) 

February, 2007 - Kenneth Mullen

The countdown towards implementation of the Markets in Financial Instruments Directive (MiFID) is well underway. The Directive, which replaces the existing Investment Services Directive, is due to come into force across the European Union by 1 November 2007. Member States are required to have the necessary enabling legislation and regulatory rules in final form by 31 January.

The underlying aim of the regime is to make it easier for firms to provide their services into other parts of the EU and increase cross-border competition by harmonising European financial regulation..

In the UK, the Financial Services Authority (FSA) has been particularly busy recentlymaking necessary changes to its Handbook to meet requirements imposed by the new regime as well as other regulatory requirements under the Capital Adequacy Directive and Unfair Commercial Practice Directive.

MiFID is a core element of the European Union's Financial Services Action Plan (FSAP) drawn up by the Commission in 2000. The FSAP aims to create a single market in European financial services and capital markets.
The new rules will impact firms operating in the investment services sector; retail banks and building societies in relation to certain parts of their business such as selling shares or investment products containing securities and financial advisers holding assets on behalf of clients or seeking to do business in Europe. Organisations that do not come within the scope of MiFID will also still be affected by changes to conduct of business rules.

In general, MiFID modifies regulations governing firms' organisational systems and controls and amends conduct of business rules. It also introduces new operational requirements for equity markets such as regulated stock exchanges, multilateral trading facilities (MTFs) and a new category of "systematic internaliser". Major areas to note are:

Organisational Requirements: Firms and markets will need to adhere to new compliance, risk management and internal audit rules. New requirements apply in relation to the outsourcing of "critical" operational functions, which will affect existing contracts and new arrangements. Firms also need to comply with extensive record keeping requirements in relation to transactions undertaken for clients.

Conduct of Business Rules: UK firms will be required to reclassify their clients in the categories set out in the new Directive ("retail", "professional" or "eligible counterparties"). Obligations will vary towards each category such as determining whether products are "suitable" or "appropriate" or securing "best execution" in relation to client orders.

Transparency Requirements: Equity markets will be subject to new pre and post trade transparency requirements for share trades. Post trade transaction reporting requirements will also apply to share trades by firms, whether conducted over the counter or through a regulated market. Firms are generally obliged to ensure data is accurate, reported as close to real time as possible and made available on reasonable, commercial terms.

Not surprisingly, many firms are in the process of upgrading information systems to comply with MiFID requirements. The FSA recently estimated the one-off implementation cost to UK firms of around £1 billion. While some parts of the industry may adopt a "wait and see" approach, there is no doubt that the UK is intent on meeting the timetable for MiFID implementation meaning seismic shifts in the financial regulatory landscape over the next ten months.


Kenneth Mullen is a partner with commercial law firm Shepherd and Wedderburn. +44(0)20 7429 4910


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