MiFID on radar screen
In my June 2005 column I wrote that, given the immense scope of the Markets in Financial Instruments Directive (MiFID), and the extremely tight April 2007 implementation deadline set by the European commission, “burying one’s head in the sand is patently not an option”. The good news is that in the intervening eight months, the MiFID Joint Working Group - the body set up by leading securities industry associations in May of last year to address the challenges posed by the directive - has had great success in raising awareness of the directive while simultaneously building up a significant head of steam behind its own education and implementation efforts. This time last year MiFID had barely registered on the industry’s collective radar; today, few organisations are unaware of the Herculean nature of the task facing them over the coming year.
To recap, MiFID sees a major revamp of the seminal 1993 Investment Services Directive (ISD), and as such is one of the cornerstones of the European Commission’s masterplan to forge a single financial services market for Europe by 2010. In its pursuit of greater transparency for investors, intermediaries, issuers and infrastructure enablers, the Commission is broadening the scope of investment services requiring authorisation by member states under the existing ISD, and clarifying and expanding the range of financial instruments that may be traded on regulated markets and between investment firms and that fall within the ambit of regulation.
Touching as it does on best execution, client agreements, client assets, client classification, compliance, conflicts of interest, execution only services, information disclosure, internal systems, outsourcing, pre- and post-trade transparency and record keeping, MiFID will impact on the way exchanges, investment firms, and information and software vendors do business across all asset classes. Indeed, the Joint Working Group estimates that no less than 20 different industry workshops are required to cover off all the operational issues arising from MiFID. In particular, the capture, dissemination and storage of transaction data - with firms having to be able to prove they served their clients’ best interest as long as five years after the event - is a key challenge.
What is concerning the industry is not that it cannot accommodate the technological and business process changes required to ensure MiFID compliance, but that the window of opportunity to effect any action plan was always too tight, and is getting smaller with every passing day. Towards the end of last year, the Commission agreed to extend the original implementation deadline by six months, pushing it to November 2007, a decision that was universally welcomed by the industry (although some observers felt the compliance effort might have been better served by delaying the actual announcement until the middle of this year, as some firms may have seen the extension as just another reason to procrastinate about the task at hand). That said, to hit the new November deadline, firms will have to be ready to start testing systems and processes by the beginning of next year. That leaves just 12 months to put MiFID-ready solutions in place – a tall order even for firms in the UK, which is understood to be a good six months further down the road in terms of preparedness than the continental European markets.
Furthermore, the Lamfalussy Level Two consultation process – originally due to be wrapped up late last year to allow the European Parliament to ratify the Level Two text this month, at which point it is kicked over to national regulators for Level Three scrutiny and further tweaking – has dragged on longer than expected. A new draft Level Two text was due to be published in early January, but has been delayed a few weeks; approval by the European Parliament is now looking unlikely before March. This new draft has been eagerly anticipated, as it is expected to nail down once and for all a number of key areas within the directive which up until now have been frustratingly unclear or just plain contentious – notably how the much-vaunted ‘systematic internaliser’ concept introduced by MiFID will actually function. This lack of clarity at the micro level has been a big drag on the industry’s compliance efforts in recent months, and this uncertainty cannot be dispelled too soon.
And it is not just the industry itself that is struggling. Word on the street is that the deadline for national regulators to be ready to exchange transaction reports with one another, and thus ensure MiFID is properly policed, has unofficially been pushed from November 2007 until early 2009. The reason – the regulators simply do not have the necessary funds, and will have to go cap in hand to their respective finance ministries for financial assistance.
The cost of MiFID compliance for the European industry remains a source of much debate, with estimates starting at E1bn and rising to E5bn and beyond. However, as one observer wryly noted: “It is reckoned that 3,000 people in the City of London are set to receive a bonus of £1m (E1.5m) this year - that is a total of £3bn, or E5-6bn. That is the total cost of implementing Europe-wide MiFID compliance right there - and that is even before you take into account all the other bonuses being paid out here in the City.”