MiFID

Recently when I was reading Economic Times, I came across this abbreviation related to the financial directives in the european countries. Now one area which is getting tremendous amount of attention is the area of corporate governance and regulatory compliance in the financial services industry. The area of compliance has gained a lot of importance because of the number of accounting scandals happening in various large firms in USA. Notably the historic legislature called as Sarbanes Oxley is one of the best examples of this type of regulatory norm. MiFID is one of the close cousins of Sarbanes Oxley.

MiFID stands for Markets in Financial Instruments Directive. MiFID is being considered to be the most far reaching directive in the financial markets of Europe akin to what Sarbanes Oxley is to the companies in US.

MiFID will replace the existing Investment Services Directive (ISD), the most significant European Union legislation for investment intermediaries and financial markets since 1995. MiFID extends the coverage of the current ISD regime and introduces new and more extensive requirements to which firms will have to adapt, in particular in relation to their conduct of business and internal organisation.

MiFID is a major part of the European Union’s Financial Services Action Plan (FSAP), which is designed to create a single market in financial services. FSA is very popular in the world because of its FSA 133 standard for derivatives accounting. MiFID comprises two levels of European legislation. ‘Level 1’, the Directive itself, was adopted in April 2004. In several places, however, it makes provision for its requirements to be supplemented by ‘technical implementing measures’, so-called ‘Level 2’ legislation.

The aim of the ISD was to set out some basic high-level provisions governing the organisational and conduct of business requirements that should apply to firms. It also aimed to harmonise certain conditions governing the operation of regulated markets. MiFID has the same basic purpose. But it makes significant changes to the regulatory framework to reflect developments in financial services and markets since the ISD was implemented.

MiFID is going to have a huge impact on firms involved in investment services in the European region. In general MiFID will cover most if not all firms currently subject to the ISD, plus some that currently are not.

This will include:

• Investment banks;
• Portfolio managers;
• Stockbrokers and broker dealers;
• Corporate finance firms;
• Many futures and options firms; and some commodities firms.

In some areas, the position for firms will be less clear-cut. For instance, Retail banks and building societies will be subject to MiFID for some parts of their business – for example, selling securities, or investment products which contain securities, to customers - but not others.

Proposals for implementing MiFID will be carried in three CPs:

• The main MiFID CP: this will cover all necessary changes to FSA rules and guidance – except the organisational and financial promotions requirements of MiFID
• The systems and controls CP: this will cover the organisational and systems and controls requirements arising both from MiFID and the CRD (which is to be implemented by 1 January 2007), setting out proposals for a single set of requirements (a ‘common platform’) for all firms subject to either or both of these directives;
• The financial promotions CP: this will cover the MiFID provisions on marketing communications, within wider changes flowing from our financial promotions review, and will be relevant to all firms.