Background

 

MIFID or Markets in Financial Instrument Directive is the EU's legislation that regulates firms who provide services to clients involved with 'financial instruments, such as shares, bonds, units in collective investment schemes and derivatives, and the venues such instruments are traded. MIFID II came into force on 3 January 2018. 

 

MiFID replaces the Markets in Financial Instruments Directive 2004/39/EC (MiFID 1), which in turn replaced the Investment Services Directive (ISD). MiFID is complemented by Regulation (EU) No. 600/2014 on markets in financial instruments (‘MiFIR’).

 

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Investment licence categories

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(1) Dealing on own account (Dealer Licence) - This licence is equivalent to "market-making" and involves position-taking which includes the conclusion of the transaction in financial instruments.

 

(2) Matched Principle (Intermediary Licence) - also known as STP/straight-through processing involves client trades being hedged with an equal transaction with a liquidity provider.

 

(3) Restricted Broker licence - This is an introducer or referral type of licence, permitting firms to conduct sales and marketing but not being able to hold client funds.

 

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Initial Capital Requirement

 

1. Dealing on own account licence (dealer licence) - EUR 730,000

 

2. Matched Principle licence - EUR 125,000

 

3. Restricted Broker licence - EUR 50,000

 

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Investment services and activities

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The following is the list of nine investment services and activities:

 

(1) Reception and transmission of orders in relation to one or more financial instruments

This will only apply if you are both receiving and transmitting orders. For example, this would be the case if you transmit subscription or redemption orders received from a client to the operator of a collective investment undertaking or transmit buy or sell orders to agency brokers. This service also extends to include arrangements that bring together two or more investors, thereby bringing about a transaction between those investors e.g. corporate finance firms.

 

(2) Execution of orders on behalf of clients

This activity will apply if you are acting to conclude agreements to buy or sell one or more MiFID financial instruments on behalf of clients. You will be providing this investment service if you participate in the execution of an order on behalf of a client, as opposed to simply arranging the relevant deal. For example, you can execute orders on behalf of clients either when dealing in investments as an agent (by entering into an agreement in the name of your client or in your own name, but on behalf of your client) or, in some cases, by dealing in investments as principal (for example by back-to-back or riskless principal trading). This activity includes issuing financial instruments by an investment firm.

 

(3) Dealing on own account

Dealing on your own account involves trading against proprietary capital. Dealing on own account involves position-taking which includes proprietary trading and positions arising from market-making. Dealing on your own account may be relevant to firms dealing in investments as principal permission in relation to MiFID financial instruments, but only where they trade financial instruments on a regular basis for their own account, as part of their MiFID business. Where a firm executes client orders by standing between clients on a matched principal basis (back-to-back trading), it is both dealing on your own account and executing orders on behalf of clients.

 

(4) Portfolio management

This permission involves managing portfolios in accordance with mandates given by clients on a discretionary client-by-client basis where such portfolios include one or more MiFID financial instruments.

 

(5) Investment advice

Investment advice would entail providing personal recommendations to a client, either at their request or on your own initiative, in respect of one or more transactions relating to financial instruments.

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(6) Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis

Underwriting involves taking up financial instruments where others do not acquire them. For example, finding investors for securities on behalf of a seller may involve a commitment to take up those securities where others do not acquire them. This may also involve a company raising capital for commercial purposes.

 

(7) Placing of financial instruments without a firm commitment basis

 

(8) Operation of a multilateral trading facility (MTF)

A multilateral trading facility, or an MTF for short, involves a multilateral trading system e.g. a platform, operated by an investment firm or a market operator which brings together multiple buyers and sellers of financial instruments. In order to form an MTF, the trading i.e. the buying or selling of the MiFID financial instrument must be governed by a non-discretionary rule resulting in the formulation of contracts.

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(9) Operation of an organised trading facility (OTF)

This is a multilateral system that is neither a regulated market nor an MTF, in which multiple third-party buying and selling parties are able to interact in the system in a way that results in a contract.  Equity instruments may not be traded on an OTF. Order execution must be carried out on an OTF on a discretionary basis.

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List of investment service financial instruments

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(a) transferable securities - including, shares in companies, bonds and other forms of securitised debt, depositary receipts; securities giving the right to acquire or sell transferable securities (for example, warrants, options, futures and convertible bonds); and securitised cash-settled derivatives, including certain futures, options, swaps and other contracts for differences relating to transferable securities, currencies, interest rates or yields, commodities or other indices or measures.

(b) money-market instruments – for example, treasury bills, certificates of deposit and commercial papers. A money market instrument excludes instruments of payment.

(c) units in collective investment undertakings;

(d) options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, emission allowances, or other derivative instruments, financial indices or financial measures which may be settled physically or in cash;

(e) options, futures, swaps, forwards and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties other than by reason of a default or other termination event;

(f) options, futures, swaps, and any other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market, an MTF, or an OTF, except for wholesale energy products

(g) options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be physically settled:

(h) derivative instruments for the transfer of credit risk;

(i) financial contracts for differences;

(j) options, futures, swaps, forward rate agreements and any other derivative contracts; and,

(k) emission allowances consisting of any units recognised for compliance with the Emission Allowance Trading Directive.