Internal Market Commissioner Charlie
McCreevy is quoted as saying about MiFID: “This is not some fearsome man-eating
plant. It is simply Brussels shorthand for the Markets in Financial Instruments
Directive”. And while the landmark law that came into effect on the 1 of November
2007 across the 27 EU member states and the 3 EEA states certainly isn’t as threatening
as that, it significantly reworks financial trading and intermediation in Europe.
Predictably, such an initiative does present more than a few challenges to transitioning
With the unification of
the EU gathering momentum, the low levels of harmonization and the prevalence of
the concentration rule within the Investment Services Directive (ISD) of 1993 clearly
needed rethinking. MiFID replaces the ISD and the European Commission expects it
to play a central role in creating
a robust, common regulatory framework for Europe's
The regulatory philosophy
that underlies MiFID is a principle based approach that seeks to use regulation
rather than directives whenever possible. It proposes to limit reliance on disclosure
and instead lays out strong rules on inducements, conflicts and best execution.
also attempts to make trading more secure, efficient and transparent by calibrating
rules to match firm and client characteristics.
MiFID affects both the organization
and business conduct of the institutions subsumed by it. Here are some key aspects
of the legislation.
Firms covered by MiFID will
be authorized and regulated in their ‘home state’ (broadly, the country in which
they have their registered office). A ‘passport’ will let them provide services
to customers in other EU member states.
MiFID requires firms to
categorize clients as "eligible counterparties", professional clients or retail
clients (with increasing levels of protection). Clear procedures must govern client
categorization and assessment of suitability for each type of investment product.
It has stringent requirements
relating to the information that needs to be captured when accepting client orders,
to ensure that a firm is acting in a client's best interests and is able to show
how orders from different clients may be aggregated.
According to MiFID, operators
of continuous order-matching systems must make aggregated order information on "liquid
shares" available at the five best price levels on the buy and sell side; for quote-driven
markets, the best bids and offers of market makers must be made available.
It requires firms to publish
the price, volume and time of all trades in listed shares, even if executed outside
of a regulated market, unless certain requirements are met to allow for deferred
MiFID requires that firms
take all reasonable steps to obtain the best possible result in the execution of
an order for a client.
MiFID will treat systematic
internalizers as mini-exchanges and hence they will be subject to pre-trade and
post-trade transparency requirements.
MiFID should increase competition
among exchanges, multilateral trading facilities (MTFs) and investment firms by
giving them a ‘single passport’ to operate throughout the EU on the basis of authorization
in their home Member State. This means investors will have access to a greater number
of trading venues, as well as a more robust and comprehensive framework that ensures
high levels of investor protection. The market has already responded favorably to
the promise of this new, more competitive environment.
Persisting IT Challenges
Though MiFID is intended
to increase transparency for trading in financial instruments and does promise better
consumer protection in this market, it presents IT groups in affected firms with
a large, high-risk project of board-level interest and tricky external compliance
challenges. And the bad news for institutions that failed to allocate resources to MiFID is that they may have made life in their IT departments especially difficult.
Recent surveys indicate that most are struggling with the directive's enormous record-keeping
duties, which appear even more onerous considering financial institutions and markets
are, in the words of PJ Di Giammarino, " … already the most information-intensive
industry on the planet."
Article 51 of MiFID demands
the retention of certain records by financial firms for at least five years. Others
must be kept for the duration of the relationship with a client. A firm's retention
must be in a manner that allows national regulators "to access them readily and
to reconstitute each key stage of the processing of each transaction". This is a
huge problem for firms, according to the independent think tank JWG-IT, which claims
that 64% of financial firms say they cannot reconstruct events after the fact in
reasonable timeframes or cost levels.
Also the MiFID mandates
like pre- and post-trade transparency and "best execution" mean firms have to collect
a lot more information on orders and how they were executed for clients - and that
means way more IT systems and data storage.
Technology solutions that can
Though a number of MiFID
tools are now on offer, any meaningful IT engagement must begin with a clear view
of what MiFID is and how your firm and national regulators are interpreting it.
Specifically, a useful IT
solution for MiFID will be able to:
- Store large volumes of real-time
data going back over five years in a time sequence and process this time series
data with near-real-time perfection. This will function like a subatomic data warehouse
from which questions concerning past "best execution" and the like can be answered
- Distil actual directives
into a more readable, structured form that can easily be navigated by compliance
officers and maintain hyperlinks back to the directives themselves
- Map an organization's own processes and compliance progress with a appropriate level of client customization
- Use smart order routing systems to handle the extra workload (pre-trade data requirements could quadruple)
as a result of the MiFID rule that financial service providers must transparently
scan markets for the best share prices
- Improve the user interface to financial systems, making supply of more information to customers and other stakeholders
- Provide for an easy to comprehend
disclosure approach on “best execution”, both in display and print form
In the end analysis, MiFID
compliance may well be as much about process management and improvement as it is
with technology. Both will have to synergize if firms are to maintain transparency,
good record keeping, and operate on a level playing field with European competitors.
Still, estimates suggest
implementation of MiFID will cost the UK financial services industry alone, up to £1 billion. “You have to automate your processes and get your act together,” says
Deutsche Bank head of advisory, IT, Stefan Sutter. “If you do not your cost base
will increase hugely.”
So it may not be a man-eating
plant, but without the IT component, it might still be a lot of bad news.