Memorandum submitted by peterevans
SUMMARY
1. MiFID has elicited a positive response
from financial practitioners in the UK who view the establishment
of an open, competitive and thriving pan-European Capital market
as an opportunity for the continent to compete globally with the
US and Asian markets.
2. Naturally, compliance with the Directive presents
numerous IT and infrastructure challenges which many UK institutions
are facing head-on in an increasingly regulatory-heavy business
arena.
3. A chief aim of MiFID is to provide greater
protection to the investor, through transparency of pre- and post-trade
information and the formalisation of a best execution policy.
This is critical to sustaining a harmonised market where all participants
play by the same rules.
4. There is likely to be significant consolidation
over the next five years as major financial houses compete to
provide the best all-round services at the best price, with the
major banks establishing themselves as "markets" in
their own right. This is likely to lead to the emergence of a
"top tier" of institutions competing at a global level,
powered by an EU-wide home market free from the constraints of
country-by-country barriers.
Is the UK financial services sector (and technology
firms in particular) prepared for the domestic implementation
of MiFID?
5. Resilient, effective technology infrastructures
will be at the heart of successful MiFID compliance, and major
investment houses are generally responding well to the challenge—with
many viewing the opportunities post-MiFID as a driving force in
ensuring suitable levels of data transparency, management and
best execution policy when the new regulations are implemented
in November 2007.
6. The introduction of systematic internalisers
will be a noticeable difference under the new regulatory set-up.
Firms will become "concentrators" of their own liquidity—and
those who are able to reach a critical mass will be able to compete
with traditional exchanges without the burden of fees under the
current regime. From this standpoint, the timetable for compliance
is challenging but realistic—putting this infrastructure
in place is a fairly straightforward process as long as the industry
is able to cooperate efficiently using defined standards; firms
are looking to technology vendors to take a lead and a lot of
work has already been done in this area.
7. What firms will have to consider within the
existing time frame is their strategy to prove best execution
retrospectively on behalf of their clients. Obviously these methods
will vary by instrument type and it's a likely prospect that some
of these processes go through a number of iterations in the post-MiFID
environment. The most sensible thing firms can do at this point
is review their existing commitments to data storage and retrieval,
and ensure that a clear pathway can be seen through each trade.
Those responsible for enforcement of the new directive should
be in a position to request the details of a random clutch of
trades—and receive a clear, concise breakdown of how the
firm went about ensuring best execution.
8. Firms taking the systematic internaliser route
are the ones who are most impacted by MiFID's myriad rules and
regulations. They will be required to publish a firm quote accessible
to the market on the publicly traded shares that they internalise.
On top of this, they must—like all firms—keep records
five years on the full process of transaction.
9. Another consequence of financial institutions
becoming "markets" in their own right is likely to be
a high number of mergers and acquisitions as major players in
the new market emerge. A high number of traditional exchanges
(currently approximately 40) competing with the new "pseudo-exchanges"
across Europe is ultimately not tenable.
10. However, the process of "preparation"
for MiFID has been hampered to some extent by the "moving
goalposts" of the legal and regulatory deadlines.
11. It's generally held that about 80% of the
full content of MiFID was available by mid-2005. However, re-drafts
and amendments were published during the latter portion of 2005—largely
as a result of the ongoing consultation process with the industry
sector, and this may have led some institutions to delay their
strategic planning for compliance.
12. A final level 2 draft was published in February
2006—and it's now widely accepted that this represents what
the final Directive will look like.
Is the proposed MiFID implementation timetable
is realistic for UK firms?
13. It's likely, from a technology standpoint,
that implementation programmes to ensure compliance will spill
into 2008 and beyond. This is a natural consequence of such a
complex bureaucratic change, and to be expected. Those in a regulatory
role should be prepared to understand this and work in a constructive
capacity with financial houses to iron out any compliance problems.
Firms need to show a willingness to comply—but the mechanisms
are likely to be iterative for a period post November 2007.
14. It's also important for regulators to understand
that "best execution" doesn't simply mean "best
price". It involves a combination of factors—the speed
of the transaction, its total cost including fees to the financial
institution, and the efficiency of the way it is settled.
15. Another key factor is the split between and
"regulatory" and "directive" measures contained
in the EU's proposal. The number of "regulatory" measures—those
which are unwavering and must be adopted into national law in
each of the participating member states, are clear-cut and will
hopefully establish the much-sought-after "level playing
field" where all market operators are working under the same
legislative regime.
16. The rest of MiFID—which can be described
as a series of "directive" measures—are left open
to interpretation by the competent authority in each country.
This may have an effect on market practices and cause a degree
of confusion in the short term. It's possible that policy will
vary from country to country, with room for interpretation as
to whether or not a firm has met the required standard.
ABOUT PETEREVANS
peterevans is a leading independent provider of front
to back office systems to the financial services sector, providing
both global solutions to major institutions and highly-focused
technology to smaller organisations.
The Company's creative, high-end solutions integrate
seamlessly with existing infrastructures to ensure business performance
is optimised. A flexible approach to implementation allows software
configurations to meet specific requirements—either as a
series of modules or as a full, standalone system.
peterevans' flagship products TRACS and Axim support
end-to-end straight through processing for the full range of automation
and transaction requirements, including SWIFT ISO 15022 messaging.
Tira, the company's front to middle office system, links effortlessly
with the back office, providing fund and investment managers with
one of the most comprehensive tools on the market.
March 2006
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