What is MiFID?
Who will it affect?
What are the big issues?
When will it happen?
But will it really happen?
Is the financial services industry ready?
What will it all cost?
So where do we start?

For a detailed analysis of MiFID and the challenges ahead, you can download Hatstand’s White Paper “Meeting the MiFID Challenge” and our “MiFID Product Sheet”, or contact Ian Mouat on 020 7953 1154 or email us at mail@Hatstand-ltd.com

What is MiFID?
MiFID replaces the Investment Services Directive (ISD) implemented in 1995.  MiFID not only extends the coverage of ISD, but will also remove the obligation to deal through exchanges, enabling companies to trade directly across borders and branches.  This “passporting” of products and services will revolutionalise financial services across Europe, through increased transparency, reduced costs and enhanced accessibility.

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Who will it affect?
Almost all companies currently subject to ISD, as well as some who are not, including investment banks, portfolio managers, stockbrokers and broker dealers and some commodities firms.

In addition, many organisations falling outside the scope of MiFID may be affected to some degree, including operators of collective investment schemes, occupational pension schemes and life assurance companies and friendly societies.

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What are the big issues?
The big issues are Prove, Publish and Passport.  MiFID has some 73 articles with which to understand, comply and implement systems and controls.  These regulations affect not just the compliance and trading areas, but operations, technology and HR.

BEST EXECUTION (Article 21)
Firms must take all steps to obtain the best execution for clients, taking into account not only price, but also costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant.   Firms will be obliged to publish their execution policy. 

CLIENT ORDER HANDLING (Article 22)
Firms must execute client orders as quickly as possible and publish orders that cannot be filled immediately. 

FIRM PUBLIC QUOTES (Article 27)
One of the most onerous requirements in the set of regulations, this rule requires Systematic Internalisers to publish prices at which they would internalise quotes. The quotes must be firm at the Standard Market Size and any resulting executions cannot deviate in price. Firms in the UK will be most affected by this requirement as a high number of organisations internalize their quotes.

POST-TRADE DISCLOSURE (Article 28)
All firms must report off-exchange trades. This is not a new requirement, but under MiFID, firms are not obligated to publish to a regulated exchange; they may choose any venue they wish. This will bring a number of business opportunities for firms to sell market data rather than paying for the privilege of publishing it on a listed exchange.
MiFID improves and simplifies the operation of the single passport for investment activity and clarifies where the regulatory oversight responsibilities lie for cross-border services provided by branches in other member states. Firms will be able to establish branches in other member states and offer cross-border services under the regulation of the host country.

END OF CONCENTRATION RULES (Article 69)
The end of concentration rules will create a level playing field between regulated exchanges and non-exchange venues as firms will no longer be required to route order directly to exchanges. They can, in effect be routed to the venue of choice.
MiFID establishes a common EU framework for classifying counterparties between professional clients, market counterparties and retail clients with substantial systems implications.

The publication of the Level 2 implementing measures has clarified some of the more onerous obligations and simplified some of the structure.  But the key points remain; upon implementation, firms will be required to:

• PROVE best execution
• PUBLISH quotes, pre and post-trade
• PASSPORT investment activity
  

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When will it happen?
The FSA has issued a number of consultation papers on MiFID implementation during the first half of 2006, as well as publishing the Level 2 implementing measures.  In June 2006 the European Securities Committee (ESC) gave unanimous approval to a series of technical measures implementing MiFID.  This followed a strong endorsement from the European Parliament on 15 June 2006.

Now that the draft measures have been examined by the Parliament and voted on in the ESC, the Parliament has a one-month period to check that the limits set in the Level 1 Directive have been respected.  The measures should be finally adopted by the Commission in September 2006.

Member states must achieve Level 3 by the Transposition date of 31 January 2007.  Final implementation – and compliance with the legislation – is set for November 2007. 

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But will it really happen?
The date for implementation has slipped twice.  As the weeks pass, the current implementation date of November 2007 looks set to stay.  Gambling on more delays may leave firms racing to catch up and falling behind, losing out on developing markets and new clients.  The impact is potentially enormous; not only the strategic losses in terms of business and market share, but also the increased support and development costs, as resources reduce and the implementation time shortens. 

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Is the financial services industry ready?
It doesn’t seem to be.  Recent research indicates the gap that exists between financial service organisations’ plans and the regulations; few firms have the necessary MiFID compliance framework in place to cover the programmes needed with only a handful prepared and equipped to publish the pre and post-trade price information that will be required. 

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What will it all cost?
Analysts' estimates put the total IT price tag of compliance with MiFID at anywhere between €1 billion ($1.2 billion) and €6 billion ($7.2 billion) across the EU¹ . According to current estimates, the CIOs of investment banks could face a bill of $23m each.
A typical broker-dealer classified as an internaliser may need to spend at least $22 million to comply with MiFID, with half of that spending on technologies including: algorithmic trading; workflow; business process outsourcing; market connectivity; FIX Protocol; service-oriented architectures; and data warehousing.

The total annual savings and revenue increase for investment firms due to MiFID may be as much as €1.6 billion ($1.9 billion). Trading profits through internalisation will count for 72% of such benefits, predict analysts, who report that “within two to three years about 30% of order flow in continental Europe will be internalised.”

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So where do we start?
MiFID represents a significant business opportunity for firms that act quickly and implement the regulations effectively within their own organisation.

For many firms the decisions will be made internally and implemented from existing resources.  For others, the challenge will be in analysing the business requirements and sourcing the necessary skills to fit specific tasks. For all firms, the difficulty is tasking up to meet a challenge that is still developing and refining; dedicating sufficient time and people to a project that is evolving without over-resourcing or underfunding. 

Hatstand understands the issues involved.  Our approach to your MiFID program can be tailored to your firm’s specific requirements.  This can involve delivering an entire team to undertake all aspects of a MiFID implementation program or simply filling the resource gap upon implementation.  From impact analysis of current systems to delivery of program and integrating system solutions, Hatstand takes a partnership approach, working alongside existing personnel and within your chosen methodology.