Eligible counterparty

If investors were ranked by how much the law protects them, the eligible counterparty would sit at the lowest-protection end. These are the most sophisticated players in the market: large banks, investment firms and governments.

Because they are presumed to know exactly what they are doing, when they simply place or execute buy and sell orders, fewer formalities apply to them than to any other client. It is, in essence, dealing between professionals operating on an equal footing.

An eligible counterparty is the client category with the lowest level of protection under MiFID II. It is defined in Directive 2014/65/EU and covers the most sophisticated players: credit institutions, investment firms, insurers, collective investment undertakings and their management companies, pension funds, other authorised financial institutions, and governments and public bodies such as central banks or the Spanish Official Credit Institute (ICO). In Spain the category is set out in Law 6/2023 (LMVSI, BOE-A-2023-7053).

It is a subset of professional clients, not a separate category. Eligible-counterparty treatment only applies to certain investment services: the reception and transmission of orders, the execution of orders on behalf of clients and dealing on own account, together with directly related ancillary services. For other services, such as advice or portfolio management, the same entity is treated as a professional client, with the protection attaching to that category.

In that dealing between professionals on an equal footing, much of the conduct-of-business and information rules designed to protect less experienced investors fall away, without this exempting the firm from the general best-execution regime where applicable. Like the other categories, it is relevant to the marketing of security tokens which, being financial instruments, are governed by MiFID II and the LMVSI, not MiCA. We cover this in retail vs professional investors in security tokens.