Member Article

By January 2007 all EU members are supposed to adopt MiFID, including its implementation measures published in June 2006. Firms carrying out investment services will then have to comply with it by November 2007. MiFID should greatly facilitate EU cross-border activities since passported firms will no longer be subject to prudential regulation in each country where they provide services but only by their home country. However to convince member states to renounce national supervision, EU regulation has become much more detailed and harmonised. Although the new regulation might be partly covered by existing national rules or firms’ practices, firms need to audit their internal policies and organisational structures in order to ensure compliance with MiFID. They will need new documentation, notably to ensure that they: • know their clients sufficiently well to classify them under MiFID's three categories (retail client, professional client and eligible counterparty) and implement corresponding investor protection measures; • comply with the "best execution" rule when executing clients orders, establish order execution policies and review them annually; • manage conflicts of interests and, where such management may be insufficient to prevent damage, disclose them to clients before undertaking business; • publish pre-trade quotes and post-trade details of transactions in listed shares concluded outside regulated markets or MTF; have internal compliance and risk control functions, including risk management, outsourcing critical functions and business continuity. MiFID has a wider scope than the current Investment Services Directive (ISD) it replaces. It also covers for instance investment advice and commodities business. Pure investment advisors and commodity dealers will thus benefit from EU passporting but need to be MiFID compliant.