Preparing for Mifid

AS THE transposition on Mifid occurred on January 31, and the deadlines for regulations such as SEPA and Mifid are looming, many organisations are turning their attention to the future of Mifid compliance and what this will really mean for them and the market forces affecting their environment. Further to the Graham Bishop report we sponsored in October 2006 (see link below to request a copy), we commissioned this survey to explore the views of Mifid and the resources required for it.

The results were generally in line with our expectations, but did raise a few interesting points and anomalies. Focusing on the question of the future shape of the market, very few people think there will be many systematic internalisers (SI), but conversely there will be many multilateral trading facilities. This complements the view that there will be significant exchange consolidation.

There has been a great deal of debate around the subject of systematic internalisers. LogicaCMG has estimated that the incremental costs of technology to support being a systematic internaliser (above the rest of Mifid compliance) is less than £1 million. Hence it is surprising so few banks have declared the intent to become an SI. Instead the focus of attention has shifted to projects Boat and Turquoise, and the question of their success. This boosts the argument that multilateral trading facilities (MTF) will be the more popular model. The rationale for this appears to be that an MTF allows the pooling of liquidity without putting capital at risk. Compare this to the SI model, where an organisation's own capital is at risk, and it becomes easier to understand why the market appears to be opting for the less risky way of realising transaction cost reduction.

Of our respondents, most organisations appear to have a neutral-to-positive view of Mifid as a significant piece of regulation. Given the volume of regulatory change in recent years, many firms are now looking to exploit this necessary change for business advantage. Certainly LogicaCMG has worked with Tier 1 clients in recent months that have been implementing business process change over and above the level required to simply meet regulation. But how widespread are actual plans for benefits realisation?

Something that really surprised us was the lower emphasis on the impact of Mifid on operational data and operational systems. Most respondents put the greatest emphasis on its regulatory systems. If "regulatory systems" are defined as separate systems to meet the supervisory requirements of the regulator, this is a surprising result. Mifid is a wide-ranging piece of regulation that we see affecting operational systems and processes where the compliance actually needs to be achieved. Given that Mifid means organisations will need to store more information about customers to assess suitability and appropriateness of transactions, we find it surprising that so few people have estimated a larger change in operational data and management systems.

Turning to the level of investment in Mifid, we found that many of our respondents didn't have an awareness of what proportion of the cost of Mifid was intended for operational improvement. If you don't know what you've invested, then it's difficult to quantify what you can realise by way of benefit!

From the results, on average people were looking at about 25% of the costs being geared towards operational improvement. This statistic becomes more interesting when turned on its head. Should we conclude that 75% of what organisations are spending on Mifid will not result in any operational improvement to their business? Given the sums of money being spent in terms of systems and resources, both internal and external, what improvements are being gained from this massive investment – and why are more businesses seemingly not interested in monitoring or taking advantage of this? To quote one of our respondents, "Mifid is mostly seen as a cost of doing business – minimal benefits have been driven out through our internal analysis and participation in industry groups".

Lastly, we wanted to find out about how organisations are choosing to tackle Mifid in practical terms. Is it one big programme or not? One third of our respondents have the Mifid programme split into multiple projects, some with more than seven workstreams.

This is consistent with the experience we have had working with clients in the Financial Services arena. From all of this the question remains: Are organisations really making the most of huge regulatory programmes such as Mifid to gain business benefits from the investment made? This seems especially poignant when you consider the intended effect of Mifid on the European market and the scope for business opportunity. OR&C