The Impact of the Market in Financial Instruments Directive (MiFID) on the Italian Financial Market: Evidence from Bank Bonds

The adoption of the European directive for Markets in Financial Instruments (MiFID, Law n. 164/2007) introduced a break in the Italian securities laws. MiFID’s key objectives are market efficiency, integrity and fairness. The directive introduced measures to increase market integration and liquidity of secondary markets to reach efficiency and integrity goals. In turn, banks and financial firms are asked to operate according to a general duty of fairness and honesty, with particular attention paid to the identification, prevention, management and disclosure of conflicts of interest. These rules should improve investor protection in the Italian financial market, historically characterized by a lower degree of market competition and a lower level of investor education. I collected financial information from 1,283 bank bonds prospectuses issued in the period 2005–2010. I found that before MiFID adoption, bank bonds were issued at a negative spread with respect to the comparable risk-free rate, thus violating the diligence and fairness duties of the banks while acting as protective gatekeepers to their customers. After MiFID adoption, the bank bond spread became positive. However, investor protection was enhanced because of the higher competition of the bond market rather than because of the higher public surveillance of the fairness duties of the issuers.