Banking

Cheat Sheet: MiFID

Update: Banks get miffed at new regulation

What have giant killer plants got to do with technology?
You're thinking of Triffids. MiFID stands for the Markets in Financial Instruments Directive. Having said that, the way some companies are reacting, you'd think they were being chased by roving mutant vegetables. But if they aren't careful, some businesses might feel its sting.

So what's the problem?
MiFID is Europe trying to update the regulations around investment banks. They tried to do it before with something called the Investment Services Directive (ISD) which is why MiFID is sometimes known as ISD2. But ISD didn't work very well so they're having another crack.

What's the big idea?
The directive will allow companies to provide services across borders and establish branches in other European states. It also does away with the idea that all share trading had to be done through exchanges. Many banks deal 'off-book' which means they shift shares they are already holding between the customers that want to buy and sell, which is easier than going through the exchanges.

Who is it going to affect?
Most companies that are involved in trading in financial instruments and businesses that deal in advisory services. All enterprises covered by ISD will be affected - which broadly covers investment banks, market data companies, trading platforms and exchanges.

Sounds okay so far. Where does the IT come into this?
Businesses will have to be able to prove 'best execution' on deals - which is likely to have to take into account issues such as price, venue, cost and speed. And they will have to keep records for five years.

Lots of the companies that currently trade off-book just don't have the systems to record and store this information and prove that they are providing best execution.

Algorithmic trading will be increasingly used as well, as automated systems can work out the best trading venues and provide a clear audit trail.

Companies will also have to publish much more information than before, which will mean new communications infrastructure. And they'll have to build new business processes to deal with all this. Analysts are predicting £10m for IT and £12m for new processes - costing the industry around £1bn.

Ouch.
Yup. And many players - including the Financial Services Authority (FSA) in the UK - have warned the costs of compliance may well outweigh the benefits. It could also lead to a wave of mergers of the smaller players in Europe. And as the deadline is pretty soon, we could see an outbreak of poaching as banks get desperate to have the best workers in place.

Sounds like a pain. When do I have to start worrying about all this?
MiFID was due to come into force in April 2006 but earlier this year the European Commission announced that implementation would be delayed by a year to give businesses a better chance of complying. The deadline is 1 November 2007 but it's not entirely clear what will happen to companies that aren't ready in time.

For those that are affected by the regulations the best thing to do is get cracking now - analysts are already warning companies that hide their heads in the sand will lose out on opportunities for new business and even worse could end up writing blank cheques to their IT suppliers in the last-minute scramble to get ready.

Some analysts are estimating it might take two years to get the work done. But many companies actually put off their preparation, preferring a wait and see approach. Some businesses didn't really start serious work until the beginning of 2007.

Having said that, big players such as Barclays Capital have been extremely busy working towards compliance, with senior management making delivery a top priority.

So what's the situation right now?
Well it seems to be pretty confused at the moment and with many countries having still not transposed MiFID into national law, the 1 November deadline looks increasingly optimistic.

The exact requirements of the regulations and the implications of non-compliance remain unclear.

As for the legal situation if companies are not compliant by November it seems to be up in the air whether national financial regulators or the European Commission would be responsible.

But analysts agree that as long as organisations can prove they are working towards MiFID compliance, there will be little in the way of punishment.

In general though, it seems the UK financial industry is looking good to hit the November deadline as it is one of the few to have transposed MiFID to national law.

Is this all going to work then?
Well in the long term it probably will but some analysts suggest that because only a few countries have transposed MiFID to law its effects might be watered down due to a lack of regulatory harmony.

I'd still rather fight some killer plants instead
Many investment banks would agree.

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