A Guide to Financial Regulation for Fintech Entrepreneurs

SHEET 15Markets in Financial Instruments Directive

Markets in Financial Instruments Directive—The regulation establishing the requirements in respect of selling, making markets in, and advising on, financial instruments in the EU

Summary

This directive defines investment firms, which are most firms whose business relates to the sales, trading, and advice in relation to financial instruments. This includes wholesale players like broker‐dealers and investment banks that choose to not apply for a banking licence, infrastructure players such as exchanges, and players providing execution and advice in the retail space. All those firms require authorisation in their home Member State, and they can then passport across the entire Single Market.

The two biggest sections in this regulation deal with investor protection and the functioning of markets respectively. On the investor protection side, the rules distinguish between retail clients, professional clients, and eligible counterparties, in increasing order of sophistication. The applicable rules are very detailed, and a lot of focus is on ensuring that the incentives are aligned, eg by forbidding kick‐back payments. On the markets side, the rules distinguish between regulated exchanges, MTFs, and OTFs which serve different customer segments. A strong emphasis here is on transparency and reporting, in particular also granular position reporting to the regulators to help them identify systemic risks.

Relevance for Fintech Companies ...