MiFID support high, despite the costs

In the first of a new series of articles surveys exploring in more detail the inner workings of the op risk and compliance disciplines, Georgina Kenyon examines the results of a recent survey into the controversial MiFID directive

The Markets in Financial Instruments Directive (MiFID) has overwhelming industry support despite inherent costs, according to a new survey conducted by OpRisk & Compliance magazine. Alan Jenkins, head of MiFID at management and technology consulting firm BearingPoint, says the biggest surprise of the results was "the more than two-to-one net balance of people who see benefits outweighing costs".

However, firms are concerned about being able to implement the wide range of changes within the implementation date set by the EU law of end-October 2007.

The survey – conducted in conjunction BearingPoint – is the first in our new monthly series of studies to help our readership community better understand the way the operational risk and compliance industries are approaching various regulatory initiatives and implementation challenges. The actual research is conducted by a sister division of OpRisk & Compliance, called IncisiveResearch.

This new study included 173 companies, mostly from the EU (41%), where 14% of companies oversaw US$1 billion in total assets.

However, despite the newfound optimism about the overall impact of MiFID, only 35% of firms believe October 2007 is a realistic implementation date for their own firm across all business lines. Respondents were asked to consider the business, organisational and IT challenges of MiFID in formulating their answer. Even more distressingly, respondents indicated that they thought that only 15% of firms in general would be ready by the implementation date across all business lines (see table A).

But firms seem willing to engage in the process of implementing MiFID – 19% of respondents said there were significant business opportunities, while 24% felt that opportunities would outweigh the obligations/costs. Overall, 39% felt the impact would be neutral, while 17% felt the obligations/costs would outweigh the benefits. Just 2% felt the legislation would create significant obligations/costs (see figure 1).

Jenkins says there are some positive implications of the results – where 73% of respondents assert their boards of directors are now at least 'aware' of MiFID. "We're on the right track," he says. However, this percentage when broken down into exact voting numbers shows that 27% of board directors are not really aware, or not aware at all. Among senior executives, awareness is even higher, with 85% at least 'aware' of the directive (see table B).

This recent turn-around in opinion on MiFID is a bit of a surprise. For months, much of the industry has focused on the fact that it seemed to have little input into the creation of the European Union directive. This fact is borne out by our respondents, 77% of whom said they had no personal input into the directive during the process of drafting the original Level 1 text, or in the creation of the implementing measures Level 2 text. Only 52% said others at their firm had had some input into the legislative process at either of these two levels.

The lack of wide consultation meant that many in the industry felt that MiFID had been 'sprung' on them – some 54% of our respondents first became aware of MiFID in 2005, despite the fact that the original legislation was finalised in April 2004. Of that total, 22% didn't become aware of the directive until the third quarter of 2005.

However, Jenkins says firms may be waking up to the opportunities that the directive presents. For instance, it does allow for the free sale of financial data, beyond the present obligation to report sales to exchanges. The current status quo allows exchanges, via on-selling, to derive a key portion of their revenue from reference data sales.

"Market data is presently owned by people who create it," says Kevin Bourne, managing director, global head of execution trading at HSBC. "But, under MiFID, traders could sell their trading data to a multilateral trading facility, or to whoever they liked, who then had the obligation to report it to the venue-of-deepest-liquidity for the stock in question."

Pablo Garmon, managing director of GL Trade in Spain, said MiFID would provide for four avenues for professional and retail investors to trade European-listed financial instruments: via existing, regulated markets such as the London Stock Exchange; brokers on an OTC basis; systematic internalisers such as investment banks trading on their own account, between clients and in-house positions; and multilateral trading facilities (MTF), a new category for market players such as crossing networks and other alternative trading platforms. Multilateral trading facilities may be defined as 'micro exchanges', and will be akin to their US counterparts, electronic communication networks.

"Today, it is mainly about regulated exchanges. Tomorrow there will be three more with specificities impacting the routing of the orders," Garmon says.

While having more trading points on offer may also decrease the trading volume at each, having more trading points to access will bring its advantages. "Maybe liquidity will not be as great outside regulated markets, but I will be able to trade outside regulated markets' hours," Garmon says, for example.

However, in the OpRisk & Compliance survey, the 'abolition of concentration of securities trading, and creation of systematic internalisers' received a relatively low rating when respondents were asked about the impact various parts of the directive would have on their firms. Instead, respondents seem to be concentrating on the increased focus on business continuity, operational risk and outsourcing, as well as the requirement to prove best execution of trades to regulators. The third most important element was the requirement to publish prices and other data for transactions

According to Ian Hunt, DSTi's head of global product strategy, MiFID specifies a wide range of new requirements for business conduct. It is anticipated that MiFID will result in change to over 50% of the conduct of business rules for money managers. As a part of this, MiFID specifies requirements for conflicts of interest, disaster recovery and business continuity, and dictates the manager's responsibility for oversight of outsourcers and third-party administrators. The results of the survey may in part also reflect the audience that responded – composed primarily of compliance and operational risk executives whose jobs would naturally focus first on these aspects.

Overall, Jenkins is concerned about the lack of focus on preparations for MiFID implementation – benefits recognised or not. He states that "the key issue is that the latest delay, from April to October 2007, was absolutely needed, to give the industry enough time to prepare. It should not be used as an excuse for delaying or de-prioritising any MiFID related projects," he says.

"There is quite a way to go as only 24% of respondents have completed impact assessments," he adds (see figure 2), although he notes that this is a much higher figure than was noted at three recent industry events, in UK and Luxembourg, where never more than 10% made this claim.

"The next steps are to identify the specific business requirements, before most firms even begin to think about appropriate technology deployment," Jenkins adds. "Later, problems will surround the issues of maintaining co-ordination across multiple projects, scarcity of skilled resources and dependencies on key software vendors to make the necessary system changes in time for adequate testing," he says. OR&C

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