ESMA Regulation - Markets in Financial Instruments Directive

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Gavel.png MiFID UPDATE: This page refers to the initial Markets in Financial Instruments Directive of 2004. To view the second Markets in Financial Instruments Directive and Regulation (2014) (MiFID II/MiFIR), CLICK HERE.
Timeline, MiFID II
MiFID Effective MiFID II/MiFIR Proposal Entered into Force Rules Applicable
November 1, 2007 October 20, 2011 July 2, 2014 January 2017

The Markets in Financial Instruments Directive (MiFID) is a plan, created in 2004 and effective in 2007, to introduce changes to the regulatory framework in Europe.<ref>Markets in Financial Instruments Directive (MiFID). FSA. Retrieved on August 12, 2011.</ref> Among its provisions were pre-and post-trade transparency through multi-lateral trading facilities and greater regulatory capital requirements. It replaced the existing Investment Services Directive (ISD).<ref>Markets in Financial Instruments Directive (MiFID). FSA. Retrieved on August 12, 2011.</ref> 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.

View MiFID II Page[edit]


MiFID was adopted in April 2004 as a replacement to the 1993 Investment Services Directive. It two main objectives are:

  • to protect investors and safeguard market integrity by establishing harmonised requirements governing the activities of authorised intermediaries;
  • to promote fair, transparent, efficient and integrated financial markets.

MiFID is a "directive," which means it requires the Member States to harmonize investment rules. Firms authorized under MiFID must be registered and the register must be accessible to the public. Each authorization is notified to the European Securities and Markets Authority (ESMA).

Under MiFID, ESMA may develop draft regulatory technical standards.

The Directive is intended "to align national rules governing the provision of investment services and the operation of stock exchanges, with the ultimate aim of creating a single European 'securities rule book.'

Major Provisions[edit]

Prudential assessment

The consists of investor investor protection rules such as:

  • setting business of conduct rules for providing investment services to clients;
  • setting minimum standards for the mandate and powers that national competent authorities must have;
  • establishing effective mechanisms for real-time cooperation in investigating and prosecuting breaches of the rules.

Transparency and market integrity

The Directive it established a pre-trade transparency obligation requiring "internalisers" (i.e. firms dealing on own account by executing client orders outside regulated markets or multilateral trading facilities) to disclose the prices at which they will be willing to buy from and/or sell to their clients. However, it limits this disclosure obligation to transactions not above standard market size, defined as the average size of orders executed in the market.

Each Member State is responsible for establishing a list of regulated markets and communicating this to the other Member States and ESMA.

This means that European wholesale markets will not be subject to the pre-trade transparency rule and that wholesale broker-dealers will not be exposed to significant risks in their role as market makers.

Operator protection

The Directive includes a set of protective measures for internalisers on quoting obligations. It also attempted to create a fair market for retail investors by preventing financial institutions from discriminating between investors, e.g. by offering some of them improvements to publicly quoted prices.

Appointing competent authorities

Competent authorities are appointed by member states and act as a point of contact in the Member States. ESMA keeps a list of these authorities up-to-date. These authorities are required to cooperate closely with ESMA.

Member States and ESMA may conclude cooperation agreements concerning:

the supervision of credit institutions; the procedures of liquidation and bankruptcy of firms; the procedures for statutory audits of the accounts of investment firms; the supervision of bodies involved in the procedures of liquidation and bankruptcy of investment firms; the supervision of persons charged with carrying out statutory audits of the accounts of insurance undertakings, credit institutions, investment firms and other financial institutions.

MiFID II/MiFIR[edit]

On October 20, 2011, the European Commission released the final proposal for an updated version of MiFID, commonly referred to as "MiFID II." For more information on the second directive and new regulation, click HERE.


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