What Are the Markets in Financial Instruments Directive (MiFID)?

The markets in financial instruments directive (MiFID) is a regulation that increases the transparency across the European Union's financial markets and standardizes the regulatory disclosures required for particular markets. The MiFID implemented new measures, such as pre- and post-trade transparency requirements, and set out the conduct standards for financial firms. The directive has been in force across the European Union (EU) since 2007. MiFID has a defined scope that primarily focuses on over the counter (OTC) transactions.

Understanding Markets in Financial Instruments Directive (MiFID)

The stated aim of the MiFID is for all EU members to share a common, robust regulatory framework that protects investors. MiFID came into effect a year before the 2008 financial crisis, but changes were made in light of the crisis. One issue in the original drafts is that the regulatory approach to third-country firms was left up to each member state. This meant some firms outside the EU could have a competitive advantage over firms inside the union because of the easier regulatory oversight.

The stated aim of the MiFID is for all EU members to share a common, robust regulatory framework that protects investors.

This issue was addressed through MiFID II, which was implemented in January 2018 and harmonized the rules for all firms with EU clients. The Markets in Financial Instruments Regulation (MiFIR) works in conjunction with MiFID and MiFID II to extend the codes of conduct beyond shares to other types of assets, including contract-based assets and structured finance products.

EU Regulatory Harmonization

MiFID is just one part of the regulatory changes sweeping the EU and impacting the compliance departments of all the financial firms—e.g., insurers, mutual fund providers, banks—operating there. Taken together with other regulatory initiatives like the General Data Protection Regulation (GDPR) and Markets in Financial Instruments Regulation (MiFIR), the EU is following through on its vision of a transparent market with clear rights and protections for EU citizens. 

Key Takeaways

  • The markets in financial instruments directive (MiFID) has been in force across the European Union since 2007.
  • The goal of MiFID is to increase transparency across EU financial markets and standardize regulatory disclosures for particular markets.
  • MiFID is part of the regulatory changes sweeping the EU and impacting the compliance departments of all financial firms that operate there.

As with any regulatory framework, many of the rules are tweaks to existing regulations, such as the requirements for disclosure where a conflict of interest exists. However, several best practices, like the appointment of a single officer to protect client interests from inside the firm, are now explicit requirements for firms that want to access the EU market.