MiFID. It's the biggest thing to hit the Continent's investment firms since the Euro, and it's looming ahead in 2007 in the way that Y2K did six years ago."It is going to change, quite dramatically, the way European markets work," says Andrew Douglas, director, securities industry market reforms, SWIFT (La Hulpe, Belgium).
The Markets in Financial Instruments Directive, or MiFID, is part of a broad-based effort by the European Commission (EC) to increase the relative attractiveness and performance of the EU financial markets in the global economy. Under MiFID, securities firms will be obliged to execute orders on the best possible terms, and maintain extensive records in order to prove that this was done. Also, firms will have to make public its quotes and post-trade data for equities trades. "MiFID forces you [as a broker] to prove that you're giving the best deal," explains Douglas. "MiFID is trying to make the trading process as transparent as possible, so that the end investor is able to ensure that they are getting the best deal, whether that's best execution, best price or lowest risk."
Even firms that regularly trade from their own proprietary books, known as systematic internalizers, will have to be able to prove that their trades were executed at the most favorable terms possible for the investor. This will require the ability to gain real-time insight into market activity from several different sources, which will require perhaps several times the volume of market data as had been common practice in the past. Furthermore, trades that had occurred "off the books" will have to be disclosed for the first time.
The implications are profound, starting with the global firms that have to adjust to the new operating environment. "There is an awful lot of change being foreseen and implemented in a very short period of time, which is causing some issues for the people who have to make the changes," says Douglas.
Should everything proceed as the EC envisions, MiFID would create powerful incentives for the purchasers of securities to route their orders through European Union financial institutions. Consequently, MiFID would affect the listing decision by companies seeking access to the capital markets. "People in the U.S. and Asia are seeing this as an indication that Europe is getting its act together," observes Douglas.
Firms that succeed in adapting to the requirements of the European financial markets will be in an excellent position should similar directives take effect elsewhere in the world. Conversely, those firms that cannot adjust in a competitive manner may find themselves losing out.
SWIFT intends to provide a part of the solution for handling the increased data traffic requirements. "We've just completed a draft recommendation for a common communication protocol for settlement and clearing in the EU," says Douglas. "The final version will be published in March 2006, and we're looking for infrastructure to be compliant with the terms of that protocol within two years."
"There's still a fair bit of work to do," adds Douglas. "The understanding of what MiFID means is increasing all the time. There are more and more people aware of what needs to be done, and people are working on solutions."