Markets in Financial Instruments Directive MiFID

From 3 January 2018, the provisions of Directive 2014/65/EU of the European Parliament and of the Council on markets in financial instruments (hereinafter referred to as MiFID) are applicable. Directive 2014/65/EU superseded the initial MiFID Directive 2004/39/EC, the provisions of which were applicable from 1 November 2007.

Objective of MiFID is to establish integrated financial market, ensuring efficient protection for investors and general effectiveness and integrity of the market. MiFID requirements are implemented in Latvian legal system via respective amendments to the Financial Instrument Market Law and to the ensuing normative acts.

MiFID regulates rendering of services by investment brokerage companies and credit institutions that provide investment services (hereinafter referred to as investment service providers).

One of the major principles of MiFID is classification of clients. Pursuant to MiFID, before rendering of investment services, investment service providers have to assign each client one of the following statuses: retail client, professional client, or eligible counterparty. The status is assigned on the basis of the client's previous experience and knowledge of financial instruments, as well as peculiarities of the client's operations. The client’s status determines specific details of rendering investment services, including conditions of executing the client’s orders, applicable information disclosure, conditions of custody, and appropriate client protection. All clients performing transactions in financial instruments are informed about the status assigned to them by the investment service provider. Pursuant to the normative acts of the Republic of Latvia, clients assigned the status of retail clients are ensured the highest protection of their interests, since retail clients are considered to have less experience and knowledge of the investment area.

The client may demand that investment service provider assigns another status to the client. The status of retail client can be changed to the status of professional client. Before assigning the professional client status, the investment service provider will supply the client with written notification on losing the rights to investor protection. The status of professional client can be assigned with regard to investment services in general or with regard to particular transaction or financial instrument. Professional clients can have their status changed to that of retail client or eligible counterparty. The status of eligible counterparty can be changed to the professional or retail client status.

Additional requirements introduced from 3 January 2018

The new requirements neither cancel nor considerably amend the investor protection requirements set forth in the normative acts effective from 1 November 2007. The additional requirements introduced in MiFID are aimed at improving the efficiency of the functioning of financial markets, including in terms of their transparency and system stability.

One of the newly introduced requirements of MiFID for legal entities, regardless of their country of residence, is the availability of a unique international code — the LEI code (Legal Entity Identifier). The LEI code will be required for the legal entity to make any transactions with any type of financial instruments, incl. shares, bonds, etc.

The LEI code is a unique 20-character alphanumeric code that identifies each legal entity participating in financial markets as one of the parties to a transaction. It is possible to obtain the LEI code from particular registration authorities. The current list of endorsed authorities for registration of the LEI codes is available here: www.leiroc.org.

The LEI code registration procedure may take up to two weeks. A charge may be collected for registration and maintenance of the LEI code. We are ready to assist our clients in obtaining the LEI code as well as in meeting other EMIR requirements.

Besides provisions on using LEI, the following innovations should be mentioned, although these do not largely concern the particular services rendered to the investors but are related to the general functioning of the financial instruments market: the obligation of the market players to make transactions in stocks and derivative financial instruments at registered trading facilities, the obligation to publish the information about over-the-counter transactions in financial instruments, and the restrictions on derivative positions that may be accumulated by a particular market player.